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1 April 2015 CFA Institute Journal Review

Corporate Socially Responsible Investments: CEO Altruism, Reputation, and Shareholder Interests (Digest Summary)

  1. Marc L. Ross, CFA

Corporate managers may invest in socially responsible endeavors for various reasons. The authors review the evidence.

What’s Inside?

The authors examine corporate social responsibility data and develop a process to investigate and understand the motivation behind management’s commitment to social responsibility. The decision to engage in such activity may occur for such reasons as altruism, the alignment of financial interests with those of the company, and the betterment of professional stature or personal reputation. A company’s industry, as well as financial condition, may influence the decision to do so as well.

How Is This Research Useful to Practitioners?

The drivers of socially responsible investment are numerous. The authors look for factors that motivate the decision to invest in socially responsible endeavors.

Socially responsible investment may benefit a firm’s business and reputation but not always its shareholders. Having gathered extensive data on a large number of firms over a 14-year period, the authors develop for each firm its propensity to invest in a socially responsible manner across various criteria and subcategories. The data include such items as firm size and profitability along with advertising expenditures relative to sales. Other data items considered are a firm’s corporate governance process, CEO traits, the effect of political affiliations on this type of investment, and the effect of media exposure.

Larger, more profitable firms with robust advertising budgets tend to invest more in socially responsible endeavors. Younger CEOs and female CEOs also do so, as do those subject to greater media scrutiny and those who donate to both political parties. Firms with higher institutional and insider ownership concerned with the impact of such investment on shareholder value tend not to engage in socially responsible investing.

Students of behavioral finance and corporate governance as well as business media analysts will gain important insight from the authors’ conclusions on the mechanics of corporate social responsibility and the various drivers of socially responsible investing.

How Did the Authors Conduct This Research?

This work contributes to a large body of literature on corporate social responsibility. Specifically, it adds to the discussions on the causes and effects of socially responsible investing, the influence of managerial traits on business decisions in this area, the impact of political donations and affiliations on a firm’s propensity to engage in socially responsible investment, and how the media influences the decision to make these types of investments.

The authors collect data from KLD Research & Analytics for the period of 1992–2006. The final dataset includes 11,711 firm years. KLD’s proprietary research tool assigns social responsibility scores across six primary categories—community, diversity, employee, environment, humanitarian, and product—each of which, in turn, contains numerous subcategories that measure the degree of socially responsible investment.

The authors construct a Corporate Social Responsibility Index (CSRIndex) for each firm in the study. The index is the sum of the six primary category scores. A primary category score is the sum of the firm’s strong subcategory dummy variable terms (a dummy variable has a value of 1 or 0) minus the sum of its weak subcategory dummy variable terms within the primary category. The authors control for industry and time-fixed effects.

The data are parsed for such firm characteristics as size, age, profitability, and capital structure. In addition, the authors consider corporate governance as measured by the Governance Index along with insider and institutional ownership, CEO characteristics, degree of political involvement (measured several ways using data on contributions to major political parties taken from the Federal Election Committee website), and CEO media exposure (considering both a narrow and a more robust list of publications). Finally, they adjust for firm size to control for exposure.

From the collection and review of data, the authors seek to understand why firms may or may not be inclined to engage in corporate social responsibility. The following are some of their findings.

  • The level of corporate social responsibility positively correlates with firm size, profitability, higher advertising relative to sales, and focus on fewer business lines.
  • There is no correlation between the Governance Index and a firm’s likelihood to engage in corporate social responsibility, but there is a negative correlation between such investment and institutional and insider share ownership.
  • Conclusions on CEO propensity to invest in corporate social responsibility are that a CEO’s age affects his or her willingness to invest and that female CEOs are far more likely to invest. Additionally, greater media coverage tends to motivate a CEO’s decision to make socially responsible investments either for reasons of personal or professional reputational enhancement or possibly for stakeholders. These results are robust to controls for endogeneity effects.
  • CEOs who donate to both political parties are more likely to invest in socially responsible investments than those with allegiance to a specific party.

Abstractor’s Viewpoint

Corporate social responsibility may be an exercise not only in doing well while doing good but also in personal and professional enhancement for the managers and the companies that undertake it. The authors’ research contributes to a growing body of literature on this topic. Although this analysis considers the practice of socially responsible investment in the United States, it would be interesting to consider how private industry addresses the issue in other large, developed economies. The challenge would be to determine where such activity is prevalent and then gather the relevant data for examination.

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