CSR and Financial Performance Linked, Moskowitz Prize-Winning Scholar Reveals

By Deborah Fleischer and Christina Meinberg

Winning the prestigious Moskowitz Prize—the only global award that recognizes outstanding quantitative research in socially responsible investing (SRI)—is no small feat. It recognizes scholars who are at the forefront of academic research on SRI, including such topics such as shareholder activism, socially responsible mutual funds and how SRI impacts financial performance.

Caroline Flammer, assistant professor in general management at Ivey Business School at Western University (London, Ontario), was recently named the 2013 Moskowitz Prize winner. Her paper, "Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach," competed with a record number of 49 other submissions. Her complex research makes a bold and clear conclusion--that the adoption of corporate social responsibility (CSR) shareholder resolutions (e.g., which tackle environmental issues such as reduction of CO2 emissions or social issues such as the implementation of non-discrimination policies) leads to an increase in shareholder value and enhances long-term operating performance. We recently had the pleasure of speaking with Dr. Flammer on the implications of her work. The take-home messages, discussed in more detail below, include:

• There is empirical evidence to show that companies that adopt CSR proposals see financial benefits (0.92 percent increase in shareholder value, as measured by the stock market reaction on the day of the vote), supporting the conclusion that CSR initiatives lead to better financial performance.


• Pensions and SRI funds have the most success in getting resolutions approved (although a resolution provides positive financial performance regardless of who sponsored it).


• CSR programs improve operating performance (e.g., return on assets, net profit margin) as well as labor productivity and sales growth. This suggests that CSR programs improve employee satisfaction and boost productivity while helping companies cater to customers that are responsive to sustainable practices.

Lloyd Kurtz, chief investment officer at Nelson Capital Management, lecturer at Berkeley-Haas and faculty co-chair of the Moskowitz Prize, described Caroline’s work as "one of the most important studies of CSR because it makes the strongest argument for a causal relationship between CSR and financial outcomes that has ever been made.”

“It’s methodologically innovative and very, very good," he adds. Nadja Guenster (visiting professor at Berkeley-Haas, faculty co-chair of the Moskowitz Prize and former Moskowitz winner, herself), agrees. “Dr. Flammer's study is an outstanding and unique contribution to the large amount of literature on the link between CSR and financial performance,” explains Dr. Guenster.

The chicken and egg problem resolved: Shareholder value improves in wake of shareholder-sponsored CSR resolutions

Do companies that adopt CSR activities become richer, or it is that richer companies can afford to take on more CSR initiatives?

“It is very difficult to test the causal relationship between CSR and financial performance,” explains Dr. Flemmer when asked why there have been very few strong academic studies of CSR resolutions to date. According to her, it’s a “chicken and egg problem."
New CSR activities proposed by a firm’s shareholders are often put to a shareholder vote. Dr. Flammer looked at more than 2,500 CSR proposals in U.S. publicly traded companies between 1997 and 2012, covering both social responsibility and environmental performance. Environmental proposals request that a company issue a CSR report or adopt policies to minimize the company’s negative impact on the environment. Social proposals cover a range of issues, including animal rights, human health, labor conditions or discrimination.

In her winning paper, Dr. Flammer found that corporate financial performance improved sharply in the immediate wake of shareholder-sponsored CSR proposals that were “close calls”–those passing by a small margin of votes. Studying close-call proposals is appealing since the outcome of the vote is as good as randomized and cannot be anticipated prior to the vote. Specifically, Dr. Flammer’s results show that the stock market reacts positively to the passage of close-call CSR. Flammer further documents an increase in long-term financial performance based on various indicators. According to Dr. Flammer, “In the four years following the vote, the companies’ return on assets, net profit margin and firm value significantly increased” for companies that passed CSR resolutions.

What are the implications for shareholders?

As articulated in the study’s executive summary, “This study provides the first empirical evidence of a casual link between CSR and financial performance. The results indicate that implementing CSR leads to higher shareholder value, along with improved operating performance, happier employees and strengthened shareholder interest.” Should institutional investors be more “active owners," given these findings? Dr. Flammer’s findings suggest that the answer to this question is yes. “The findings suggest that there is some value of active ownership with respect to CSR.”

She points out three key implications for shareholders:

• CSR Programs Improve Operating Performance: One implication for managers, according to Dr. Flammer, is that “CSR is unlikely to be a cost, but rather a valuable resource. Accordingly, managers may find it worthwhile to invest in CSR programs.” Dr. Flammer found that increased shareholder value and operating performance happen because of improved labor productivity and sales growth.


• Resolution Sponsor: Two groups were most effective: public pension funds and SRI funds. However, if a resolution passes, “on average, financial performance goes up, regardless of who sponsors it.”


• CSR has Diminishing Marginal Returns: “If you have very few social initiatives, it is fairly easy to pick the low hanging fruits,” Flammer states. “However, once you have many more initiatives in place, it gets harder, more difficult, and probably more costly to implement even more. Therefore, we can expect that the financial return is lower (albeit still positive) the higher we get.”

Deborah Fleischer is a Communications Consultant with CRB, and Christina Meinberg is its Associate Director. CRB has just launched a crowdfunding campaign to support the Haas SRI Fund. Learn more here.