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:
“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.
“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.
She points out three key implications for shareholders: