Study Examining Financial and Social Performance, Social Pressure Wins Moskowitz Prize

A study examining the complex relationships between corporate financial performance, corporate social performance, and social pressure has won the 2009 Moskowitz Prize for Socially Responsible Investing (SRI).

The Moskowitz Prize, awarded annually by the Haas School's Center for Responsible Business in cooperation with the Social Investment Forum, is the only global award recognizing outstanding quantitative research in the field of socially responsible investing.

The winning paper — "The Economics and Politics of Corporate Social Performance" – was written by David Baron of the Stanford Graduate School of Business, Maretno Harjoto of Pepperdine University's Graziadio School of Business and Management, and Hoje Jo of San Clara University's Leavey School of Business.

"This year's winning paper takes a more nuanced view of the firm and its interactions with society than most academic studies," says Lloyd Kurtz, Moskowitz Prize administrator and senior portfolio manager at Nelson Capital Management, an investment advisory affiliate of Wells Fargo. "Rather than view a firm as simply a profit-maximizing engine — a common assumption of academic research — Baron and his colleagues hypothesize that firms attempt to meet demands not only for financial performance, but also for social performance in general and for specific social action."

"Until now there had not been an explicit attempt to model all of these relationships simultaneously within the context of a unifying theory of the firm," adds Kurtz, a Haas School lecturer who teaches social investing in the Center for Responsible Business.

In their paper, Baron, Harjoto, and Jo analyze data on the finances and social activities of 3,000 firms during the last four years of the Clinton administration and first four years of the Bush administration. Their findings include :

  • Corporate financial performance and corporate social performance are largely unrelated, but that does not imply there is no causal relationship between the two for individual firms.
  • Greater social pressure is associated with worse financial performance, which could reflect the effects of pressure on firms’ reputations, brand equities, or productivity.
  • Greater social pressure also results in greater corporate social performance.
  • Consumer-facing companies tend to benefit financially from good social performance, while industrial companies do not.
  • Companies facing significant social pressure from activists and NGOs tend to have sub-par financial performance.

"In short, the paper challenges academics and social investors alike to appreciate the complexity of firms' relationships with society, and demonstrates quantitative techniques that can help make sense of them," Kurtz says.

The winning paper was selected among more than 30 entries by a panel of eight judges from academia and the investment industry. It was announced at the 20th annual SRI in the Rockies Conference held from Oct. 25 to Oct. 28.

The winners received $5,000 in prize money.

The sponsors of the Moskowitz Prize are Calvert Group; First Affirmative Financial Network; Nelson Capital Management; Neuberger Berman, Rockefeller and Co.; and Trillium Asset Management.

The prize is named after Milton Moskowitz, one of the first investigators to publish comparisons of the financial performance of screened and unscreened portfolios. He authored "The 100 Best Companies to Work for in America," an annual list published in Fortune, and "The Global Marketplace: 102 of the Most Influential Companies Outside America."

For more information, visit the Moskowitz Research Program.