Our latest Freakonomics Radio on Marketplace podcast is called “Is Good Corporate Citizenship Also Good for the Bottom Line?” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.)
The short answer: yes. That’s the finding of Robert G. Eccles, Ioannis Ioannou and George Serafeim from their recent paper “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance” :
“We show that there is significant variation in future accounting and stock market performance across the two groups of firms. We track corporate performance for 18 years and find that sustainable firms outperform traditional firms in terms of both stock market and accounting performance.”
You’ll hear Serafeim explain his findings and you’ll also hear from Georg Kell, executive director of the UN Global Compact. Its mission is to help companies around the world adopt the behaviors of Corporate Social Responsibility (CSR) — which include not only good environmental stewardship but also fighting corruption and the ethical treatment of employees and customers. All of this is, alas, easier said than done:
KELL: “Well, if you were to ask me for the Global 1,000 corporations, how many of them are sincere and serious about sustainability and long-term value creation? Our own implementation survey and others done by other leading think tanks will probably suggest we are probably at 15 percent.”
You can search here for companies that participate in the Compact. And, perhaps more interestingly, you can look up which companies the Compact has expelled for non-compliance (and here’s an update of the expelled list).
One key component of a “high-sustainability” company is thoughtful long-term planning. One interesting example is Dow Chemical, an upstanding member of the UN Global Compact since 2007 and the focus of an HBS case study by Robert Eccles. Dow has gone through two cycles of 10-year goal-setting and is now debating whether to set goals for the next 100 years. Here’s what David Kepler, Dow’s chief sustainability officer, told us:
KEPLER: “What our first set of goals were that were 10-year goals started in 1996. Energy efficiency was a big part of that. In that period of time, we saved almost $5 billion around energy efficiencies. So there’s an economic story, but there’s also an environmental story in that.”
Unfortunately, we didn’t have space in our Marketplace piece for the Kepler conversation, nor for our conversation with Intel’s chief operating officer Brian Krzanich, (who may be the firm’s next CEO). Intel has been issuing corporate responsibility reports since 2001, and keeps a running CSR blog:
KRZANICH: “I think those things come hand in hand — they’re properties of what makes a company great. It’s just being exemplified in a different arenas. It takes good strategic thinking to think far enough out in advance and say, ‘I’m going to get a return on investing in the communities and the education systems so that my workers five, seven, eight, ten years out are going to be stronger and better and the kind of workers I want.’ That same kind of strategic thinking delivers better products and better product road maps.”
Kai Ryssdal: Time now for a little Freakonomics Radio. It's that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog of the same name, it's the hidden side of -- wait, what is it? Yes -- everything. Dubner, good to have you back.
Stephen Dubner: Hey Kai, good to be back. I bring to you today the topic of good citizenship -- good corporate citizenship, to be precise. I bet you have heard this kind of thing a million times before.
Promotional video: My particular job is find out the biggest impact in terms of reduction in greenhouse gases. And so I get to think of places that have nothing to do with Google's core business, but where we can really have a big impact in reducing greenhouse gases.
Ryssdal: Yeah OK, not really, haven't heard that, but OK.
Dubner: Well, that's a Google promotional video, that kind of thing you see more and more these days. And where firms talk about their high level of corporate social responsibility, or CSR, which I'm guessing you have heard of, yeah?
Ryssdal: Oh yes, sustainability! Come on, that's what we do.
Dubner: Here we go. So I'm here to tell you today, Kai, that some companies who tout their high CSR are not being 100 percent sincere all the time.
Ryssdal: I am shocked, shocked to find out there's gambling going.
Dubner: I want you to listen to Georg Kell, who's the executive director of the United Nations Global Compact, which promotes good corporate citizenship -- particularly sustainability.
Georg Kell: Well, if you were to ask me the global 1,000 corporations, you know, how many of them are sincere and seriously about sustainability and long-term value creation, our own implementation survey and other leading think tanks would probably suggest we are probably at 15 percent.
Ryssdal: Nuh-uh, come on. That's scandalous, 15 percent.
Dubner: It's not a high number. So the way it works, Kell's group signed up about 7,000 companies, and the U.N.'s list of good corporate behaviors includes not only sustainability but practicing good human rights and fighting corruption. Here's Kell again.
Kell: It's by and large working except that roughly half of our participants who joined actually don't live up to that. So they either lose the focus or they don't have the dedication to continue that path. And unfortunately, we have to expel them.
Ryssdal: Wow, they throw them out?
Dubner: They expel them. Now, you can get back on. And to be fair, sticking to your CSR promise a little bit reminds me of sticking to a diet: Even if the spirit is willing, the flesh can be weak. It is a lot of work. So getting a high CSR score means that you have to not only pollute less, but you also have to treat your employees and your customers ethically; you have to set long-term goals that may not necessarily help your quarterly earnings, which is what the Street cares about; and of course you have to take time to constantly report your progress to places like the U.N.
Ryssdal: But wait a second: What does that all that do for your bottom line, right? Because companies are in the business to make money and you know, shareholder value and all that stuff. Does this pay off?
Dubner: It sounds like it'd be a bad bet for the bottom line, doesn't it, Kai? Isn't that what you're thinking?
Ryssdal: That's where I'm going, yeah.
Dubner: Unfortunately, you're a little bit off on this. The good news is that --
Ryssdal: Again, I'm wrong with Stephen Dubner!
Dubner: The good news is that there is an upside apparently. So George Serafeim at the Harvard Business School has just finished an analysis of 180 U.S. companies over the course of 20 years to measure the effect, if any, that being a good corporate citizen has on a company's bottom line. Now, he did this by comparing the financial performance of firms that exhibited high sustainability behavior versus low sustainability firms.
George Serafeim: We found that the high sustainability group out-performs the low sustainability group in terms of stock market performance. And also we found that the high sustainability group out-performs the low sustainability group in terms of operating performance as well. Whether you look at in term of assets or in terms of equity, you find stronger performance.
Ryssdal: All right, you spend the money, you make more money. So is the lesson here that all you've got to do is hire a chief sustainability person and bang, you're going to do it?
Dubner: No. No more than if I buy a scale, I start to lose weight automatically, right? In fact, you have to be careful interpreting the findings of Serafeim's study. It may be that being a good corporate citizen is good for business in the long run -- or it may be that the kind of company that's more likely to be a good citizen in the first place is also more likely to be a profitable company. Whichever direction the arrow was pointing, however, which we don't really know yet, it does look like at least one truism in the business world is actually true, which is that you really can do well by doing good.
Ryssdal: There you go. Stephen Dubner, Freakonomics.com is the website. We'll see you in a couple of weeks.
Dubner: Thanks Kai.