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The impact of CSR on corporate behaviour and performance – by London Business School Professor Ioannis Ioannou
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The impact of CSR on corporate behaviour and performance – by London Business School Professor Ioannis Ioannou

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How to achieve Corporate Social Responsibility? Professor Ioannis Ioannou’s research includes a very practical list of what sustainable organisations are doing different.

How to achieve Corporate Social Responsibility? Professor Ioannis Ioannou’s research includes a very practical list of what sustainable organisations are doing different.

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    The impact of CSR on corporate behaviour and performance – by London Business School Professor Ioannis Ioannou The impact of CSR on corporate behaviour and performance – by London Business School Professor Ioannis Ioannou Presentation Transcript

    • Dr. Ioannis IoannouStrategy and Entrepreneurship AreaLondon Business School
    • An important problemEconomist Joseph Stiglitz recently announcedthat he believes climate change is the mostimportant issue facing the U.S. economy Joseph Stiglitz, Economisttoday. Certainly, climate change is a seriousglobal issue, but how exactly will it affect theU.S. economy? What follows are somestatistics on climate change’s impact on theU.S. economy, gathered primarily from non-governmental organizations that deal withclimate change issues. http://www.huffingtonpost.com/2013/01/08/joe-stiglitz-climate-change-economy_n_2432744.html
    • Statistics• Climate change is projected to cost the average U.S. household $1,250 per year by 2020, $1,800 per year by 2040 and $2,750 per year by 2080.• Climate change will likely cost the U.S. economy $3.8 billion per year by 2020, $6.5 billion per year by 2040 and $12.9 billion by 2080.• The U.S economy may be held back by 2% of GDP over the next 20 years because of climate change.• Failure to act on climate change already costs the world economy 1.2 trillion dollars in lost prosperity each year, according to one study.• Lost prosperity associated with rising temperatures and carbon-related pollution could double costs to 3.2% of world GDP by 2030. http://www.huffingtonpost.com/2013/01/08/joe-stiglitz-climate-change-economy_n_2432744.html
    • Statistics• Climate change is a leading global cause of death, responsible for an estimated 5 million deaths each year.• From 1980 through 2011, U.S. weather disasters caused losses of $1.06 trillion.• In 2011, the United States broke the record for the most billion-dollar weather disasters in a year.• Due to climate change, the timber industry is expected to suffer from an increased prevalence of pests, slower growth rates for trees and more frequent wildfires, resulting in a decrease in revenue of $1 billion to $2 billions per year. http://www.huffingtonpost.com/2013/01/08/joe-stiglitz-climate-change-economy_n_2432744.html
    • Why Sustainability? Strategy: superior sustainable performance Increasing pressures for Expectations for companies to companies to be perform not only in terms od sustainable not only in profitability (i.e. shareholderterms of capacity to produce returns), but also in terms of profits but also within their social and environmental social and environmental performance… context…
    • RESEARCH AGENDA CAPITAL MARKETS ANTECEDENTS LONG-TERMAND DETERMINANTS SUSTAINABILITY VALUE CREATION
    • “The impact of CSR on Investment Recommendations”, with G.Serafeim (HBS), working paper CAPITAL MARKETS“CSR and Access to Finance”, with B. Cheng (HBS) and G.Serafeim (HBS) Strategic Management Journal, forthcoming“Do Actions Speak Louder than Words? The case of CSR”, with O.Hawn (Duke, working paper“Understanding the Cognitive Gap Between Companies andInvestment Analysts”, with D. Crilly (LBS), working paper
    • “What drives Corporate Social Performance? The Role of National- level Institutions”, with G. Serafeim (HBS), Journal of International Business Studies, forthcoming “The consequences of Mandatory Corporate Sustainability Reporting”, with G. Serafeim (HBS), working paper “The consequences of a Culture of Sustainability Reporting”, with R. Eccles (HBS) and G. Serafeim (HBS), working paper “Pay for Environmental Performance: The effect of Incentive ANTECEDENTS Provision on Reducing Carbon Emissions”, with R. Eccles (HBS),AND DETERMINANTS X. Li (HBS) and G. Serafeim (HBS), working paper “Understanding the Cognitive Gap Between Companies and Investment Analysts”, with D. Crilly (LBS), working paper
    • The impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance with George Serafeim (HBS) and Robert Eccles (HBS) MOTIVATION METHODS FINDINDS IMPLICATIONS
    • MOTIVATIONThe Role of the Corporation in SocietyNeo-classical view: To maximize profits subject to capacity constraintsThis is equivalent to maximizing the market value of all claims of capital providers in theabsence of market failures (Jensen 2001)However, firms, as far as neoclassical economics is concerned are ‘black’ boxesIn reality they differ significantly in how they are trying to achieve this objective:  Stakeholder vs. shareholder focus  Inter-temporal trade-offs  Externalities  Ethics
    • MOTIVATIONA Corporate Culture of SustainabilityEnvironmental and social performance are important, in addition to financial performance.Some organizations are voluntarily integrating social and environmental issues into theirbusiness model and strategy.Typically, values, preferences and beliefs are coded in corporate policies.Culture is “the specific collection of values and norms that are shared by people andgroups in an organization and that control the way they interact with each other and withstakeholders outside the organization” (Hills and Jones, 2001)
    • MOTIVATIONIncreasing Interest in Corporate SustainabilityCorporations UN Global Compact – Accenture CEO study (2010): 93% of the 766 participant SEOs worldwide, declared sustainability as an “important” or “very important” factor for their organizations’ future success (Ioannou and Serafeim, 2011)Employees A BT study in the UK found that 44% of young professionals said they would discount an employer with a bad reputation. 80% of respondents would prefer working for a company that has a good reputation for environmental responsibility (Insync surveys, 2008) ESG performance is the third most important driver of employee engagement overall, and an organization’s reputation for social responsibility is an important driver for both engagement and retention (Towers Perrin, Global Workforce Study 2007-2008)
    • MOTIVATIONIncreasing Interest in Corporate SustainabilityCustomers A recent 5,000 people survey by Edelman revealed that nearly two thirds of those interviewed cited “transparent and honest business practices” as the most important driver of a firm’ reputation (Cheng, Ioannou and Serafeim 2011)Investors Global Socially Responsible Investing (SRI) market grew at an annual rate of 22% since 2003. The SRI sector would grow to $26.5 trillion AUM by 2015, representing 15% of the global total (Eccles, Serafeim and Andrews, 2011) In recent years, investment recommendations are more optimistic for companies with good ESG performance (Ioannou and Serafeim, 2010) Large market interest in the level of a company’s degree of transparency around ESG performance (Eccles, Krzus and Serafeim, 2011)
    • MOTIVATIONIncreasing Interest in Corporate Sustainability CorporateRegister.com – External reporting on sustainability performance (Eccles, Serafeim and Andrews, 2011)
    • MOTIVATIONResearch QuestionsCharacteristics of Sustainable Organizations  Does the governance structure of sustainable organizations differ from traditional firms and, if yes, in what ways?  Do sustainable organizations have better stakeholder engagement?  Do sustainable organizations have longer time horizons?  How do their information collection and dissemination systems for nonfinancial data differ, if at all?Performance implications  Could meeting other stakeholders’ expectations come at the cost of creating shareholder value?  In general, what are the performance implications for sustainable organizations characterized by the above structural elements
    • METHODSBack to 1993In 1993, Firm A and Firm B were statistically identical interms of:  Industry membership  Total Assets  Return on Assets  Leverage  Turnover  Market to Book
    • METHODSCorporate policiesExcept that firm A had an explicit emphasis on employees,customers, products, the community and the environment aspart of their business model.In other words, Form A had adopted several corporatepolicies that reflected an integration of social andenvironmental issues whereas Firm B had not.Sample constructionMatch each firm A with another firm B that has adoptedalmost no environmental and social policies throughout the1990s and 2000s.Exact matching on subsector and matching with closestneighbor on Size, ROA, MTB, Asset Turnover and Leveragein 1993.
    • METHODSSample construction
    • METHODSSample constructionFirms with an explicit emphasis on employees, customers, products, the community andthe environment as part of their business model.Adopted policies for many years to allow for such policies, in turn, to reinforce the normsand values upon which a sustainability culture and integration are based.Adopted policies prior to CSR becoming widespread, less likely to have measurementerror by including firms that are either ‘green-washing’ or adopting these policies for PR.Introduce a long lag between our independent and dependent variables – mitigate thelikelihood or biases that could arise from reverse causality.
    • METHODSFast forward to 2009We chose 90 such pairs from the United States,representing in total 180 of the largest US corporations.Key question: What happened in 2009?Remember: in 1993, these pairs of companies lookedalmost identical on everything except corporate policiesrelating to Sustainability.
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Corporate GovernanceBoards of directors perform a monitoring and advising role and ensure that managementis making decision ins a way that is consistent with organizational objectives.Top management compensation plans align managerial incentives with the goals of theorganization by linking executive compensation to key performance indicators that areused for measuring corporate performance.Prediction 1a: High Sustainability forms are more likely to havea board review the sustainability performance of theorganization.Prediction 1b: High Sustainability firms are more likely to linkexecutive compensation to sustainability metrics.
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Corporate Governance
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Stakeholder engagementEngagement is necessary for understanding these stakeholders’ needs and expectationsin order to make decision about how best to address them (Freeman, 1984; Freeman,Harrison, and Wicks, 2007).Prediction 2: High Sustainability firms have better stakeholderengagement practices.
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Stakeholder engagement
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Time HorizonIntegrating environmental and social policies in the business model and operationsrequires a long-term perspective.Incurring short-term costs while expecting long-term benefits  Providing positive externalities and internalizing negative externalities  Building good stakeholder relations as part of a corporation’s’ strategy takes time to materialize, is idiosyncratic to each corporation, and depends on its history; such relationships are based on mutual respect, trust and cooperation and such tied take time to develop (Choi and Wang, 2010)Prediction 3: High Sustainability firms are more long-termoriented.
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Long Term Time Horizon
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Measurement of Non-Financial InformationPerformance measurement is essential for management to determine how well it isexecuting on its strategy and to make whatever corrections are necessary (Kaplan andNorton, 2008)Reporting on performance measures to the board is an essential element of corporategovernance, so that the board can form an opinion about whether the management isexecuting the strategy of the organization well.Quality, comparability and credibility of information is enhance by internal and externalaudit procedures which verify the accuracy of this information or the extent to whichstandards are being followed.Prediction 4: High Sustainability firms are more likely to collectnon-financial data.
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Supplier Standards
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Supplier Standards
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Supplier Standards
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Supplier Standards
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Disclosure of Non-Financial InformationExternal reporting of performance is how the company communicates to shareholdersand other stakeholders how productively it is using the capital and other resources theyhave provided to the corporation.Prediction 4: High Sustainability firms are more likely todisclose non-financial data.
    • FINDINGS: ARE HIGH SUSTAINABILITY ORGANIZATIONS DIFFERENT?Disclosure of Non-Financial Information
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Implications for Financial Performance High Sustainability firms might underperform because they:  Experience high labor costs by providing excessive benefits to their employees  Pass valuable business opportunities that do not fit their values and norms such as selling products with adverse environmental consequences  Deny paying bribes to gain business in corrupt countries where bribe payments are the norm High Sustainability firms might outperform because they:  Are able to attract better human capital  Establish more reliable supply chains  Avoid conflicts and costly controversies with nearby communities  Engage in more product and process innovations
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Buy-and-Hold Stock Returns, Value-weighted Portfolio
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Buy-and-Hold Returns, Return on Equity (ROE)
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Buy-and-Hold Returns, Return on Assets (ROA)
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Buy-and-Hold Returns, Return on Assets (ROA)
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Abnormal Stock Returns Four-factor model based on Fama-French (1992) and Carchart (1997)Annual abnormal performance is higher for the High Sustainability group compared to the Low Sustainability group by 4.8%(significant at less than 5% level) on a value-weighted based and by 2.3% (significant at less that n 10% level) on an equalweighted-base.
    • IMPLICATIONS: WHAT ARE THE PERFORMANCE IMPLICATIONS FOR HIGH SUSTAINABILITY ORGANIZATIONS? Performance and Sectoral Membership
    • ConclusionHigh Sustainability firms are characterized by:  Distinct governance mechanisms which directly involve the board in sustainability issues and link executive compensation to sustainability objectives;  A much higher level of and deeper stakeholder engagement, coupled with mechanisms for making it as effective as possible, including reporting;  A longer-term time horizon in their external communications, which is matched by a larger proportion of a long-term investors;  Greater attention to nonfinancial measures regarding employees; a greater emphasis on external environmental and social standards for selecting, monitoring and measuring the performance of their suppliers;  A higher level of transparency in their disclosure of nonfinancial information and  Superior accounting and stock market performance in the long-term.
    • ConclusionGiven changing societal expectations (Paine, 2004), we believe hatincreasingly more and more firms will integrate environmental and socialissues in their strategy and business model.Significant opportunities for future research:  Conditions under which companies adopt a culture of sustainability?  Mechanisms by which such cultures get created?  Can sustainability destroy shareholder value under certain conditions?  Are sustainable firms less likely to cut back on R&D investments, lay off employees and consolidate suppliers in down economic cycles? Are they less likely to provide quarterly earnings guidance?  What determines materiality?
    • Thank you!Questions and Feedback much appreciated@iioannoulbswww.ioannou.us