Good Corporate Governance Correlates to Higher CSR Performance and Shareholder Wealth

2014 Moskowitz Prize Awarded to Study Supporting Corporate Social Responsibility’s Positive Impact on Shareholder Value

UNIVERSITY OF CALIFORNIA, BERKELEY’S HAAS SCHOOL OF BUSINESS – Berkeley-Haas’ Center for Responsible Business has awarded its 2014 Moskowitz Prize to the authors of a study suggesting good corporate governance correlates with higher CSR initiatives. And in turn, these increased CSR practices contribute to shareholder wealth.

Presented by the Center for Responsible Business at Berkeley-Haas since 1996, the Moskowitz Prize is the only global award that recognizes outstanding quantitative research in socially responsible investing.

The winning authors of the study, “Socially Responsible Firms,” Allen Ferrell, Harvard Law School, and Hao Liang and Luc Renneboog, both from Tilburg University, Netherlands, were awarded the Moskowitz Prize at the 25th annual Socially Responsible Investing (SRI) Conference in Colorado Springs, Colo. on November 10.

The costs and benefits of corporate social responsibility (CSR) to shareholders continue to be debated. The paper’s findings –that higher CSR performance is closely related to how much firms retain in cash holdings and higher pay-for-performance returns –support the view that CSR increases shareholder value.

“We’ve known for some time that corporate investment in social responsibility can pay off,” says Lloyd Kurtz, faculty co-chair of the Moskowitz Prize selection committee, “But there have also been legitimate concerns that shareholder money might be diverted to vanity projects or other inappropriate uses in the name of CSR. This study really moves us forward in understanding how companies are investing in CSR, and how that relates to shareholder value creation.”

The authors sought to test two widely acknowledged views concerning CSR. The first view is that firms that practice CSR maximize shareholder wealth in addition to providing societal good. The second view, known as the agency view, argues that CSR can be detrimental by distracting managers from their core responsibilities.

In order to test the validity of both views, the researchers used two independent rating systems, the MSCI’s Intangible Value Assessment (IVA) and Vigeo’s ESG Ratings Database. The systems measure a corporation’s environmental and social risks and opportunities as well as CSR compliance to national and international guidelines, respectively.

While previous research focuses on shareholder reaction to ex post or the actual effects of CSR (such as abnormal stock returns, the cost of capital, and ownership changes), the winning paper considers the ex ante, or future implications, of managerial incentives. By examining the relationship between CSR and managerial pay-for-performance (when managers are given monetary incentives to improve CSR), the study found that CSR can counterbalance the negative effects of managerial entrenchment –when managerial interests outweigh that of their shareholders –and lead to higher shareholder value.

In short, CSR enhances a company’s value.

“This study looks at companies using established corporate governance metrics.  If the agency view (that a corporate’s only social responsibility is to make money) were correct, we would see companies with bad corporate governance having high corporate social responsibility. But we see the opposite,“ says Kurtz, “This is an association, not a specified causal effect, but it is strong evidence that the agency view is less appropriate than the value creation view that promotes societal good.”

The judges from both academic and investment circles reviewed 40 papers. Papers are judged on the practical significance to practitioners of socially responsible investing; appropriateness and rigor of quantitative methods; and, novelty of results.

The 2014 Moskowitz committee also recognized two outstanding papers with Honorable Mentions:

“Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World” by Alex Edmans, University of Pennsylvania, The Wharton School, and Lucius Li and Chendi Zhang, Warwick Business School.

“Corporate Social Responsibility and Stock Price Crash Risk” by Yongtae Kim, Haidan Li, and Siqi Li, Santa Clara University, Leavey School of Business.

The Prize is named for Milton Moskowitz, one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios, including “The 100 Best Companies to Work for in America.” Sponsors for the Prize include Calvert Group, First Affirmative Financial Network, Nelson Capital Management, Neuberger Berman, Rockefeller and Co., and Trillium Asset Management.

The Center for Responsible Business is an “action tank” that builds on the Haas School of Business’ culture of innovation and UC Berkeley’s tradition to run–not–walk towards social progress. Building on a decade of research, teaching and industry engagement, the Center for Responsible Business brings together students, company leaders, and forward-thinking faculty to redefine business for a sustainable future and resides within the Berkeley-Haas’ Institute for Business and Social Impact.

See summary of the winning study.

See the full paper.

Pamela Tom | Berkeley-Haas Media Relations | (510)642-2734 | [email protected]

Lloyd Kurtz |(650) 307-5753 | [email protected]
Robert Strand | (510) 643-0341 | rstrand@