Evidence of a link between corporate social and financial performance is decidedly mixed. While some studies find that investments by firms in social responsibility translate into quantifiable financial benefits, other studies do not.  Such conflicting results have not given values-centered executives the evidence they need to convince skeptical peers, boards, and investors that doing good may contribute to a firm’s doing well.
There are many reasons for the inconsistent evidence of social responsibility/financial performance link. Perhaps most importantly (and as any manager with responsibility for profits and losses knows), it is extremely difficult to isolate the effects of investments in corporate social responsibility on a company’s bottom line, especially since so many variables simultaneously influence financial performance.
Additionally, most empirical studies have examined the financial upside of social responsibility, or whether a good reputation for social responsibility leads to increases in financial performance. What about the proverbial flip side of the social responsibility coin? Specifically, is there a “crisis” value to a firm’s reputation for social responsibility, in which the benefit of social responsibility comes not from increases in financial performance, but rather from insulation from negative financial performance? Some research suggests that firms having reputations for social responsibility may better withstand crises and experience fewer economic losses than will firms lacking such good reputations. For example, Johnson and Johnson (J & J) was relatively unharmed financially by the Tylenol tampering cases in the 1980s. Some observers suggest this was due to the goodwill J & J had built up as an honorable corporate citizen. On the other hand, Nike, which was not rated as a particularly socially responsible firm, appeared to suffer as a result of the publicity and boycotts in the late 1990s over its use of foreign sweatshops. If Nike had developed a strong reputation for social responsibility, perhaps the boycotts over its labor practices would have had no impact.
With one rare exception, to date there has been no empirical support for the proposition that this paper tests: Does a reputation for corporate social responsibility protect a firm from financial harm in times of “crisis?” We explore this question using data from the stock market reactions to the Fortune 500 firms following the failure of the 1999 World Trade Organization’s (WTO) ministers to set an agenda during the organization’s Seattle meeting.
The 1999 Seattle WTO Meetings
The 1999 WTO meeting is uniquely suited to measuring the economic effect of a firm’s reputation for social responsibility. WTO ministers gathered in Seattle to launch the ninth round of global trade negotiations, originally begun under the General Agreement on Trade and Tariffs (GATT) in 1947. For the first time in GATT-WTO history, a trade round set to commence failed. The meeting collapsed in less than a week with no action taken on the agenda for the anticipated Millennial Trade Round and no prospects for resuming talks.
Two events contributed to the meeting’s failure. First, internal conflict between developed and developing nation members’ goals, especially on the issue of multilateral harmonization of labor and environmental standards, prevented the WTO delegates from agreeing on an agenda. The second pre-emption was the massive, often violent demonstrations by tens of thousands of protesters against the allegedly environmental and labor abusing practices of multinational firms. These practices would presumably be furthered by expanded global trade and investment liberalization if the Millennial Round were successful. At the 1999 WTO meeting, trade issues consequently became intertwined as never before with issues of corporate social responsibility. In fact, trade issues were overshadowed by the debate over labor and environmental issues, a debate which had not even been a serious agenda item in previous GATT/WTO rounds.
The meeting was scheduled to begin on Tuesday, November 30th. On Friday, November 26th, protesters converged in Seattle in numbers far greater than had been predicted, and the press began speculating whether or not the protests would disrupt the meeting. The outlook for a successful meeting grew increasingly bleak over the weekend. On Monday the 29th, a bomb threat closed the Convention Center.
We have used stock data on this particular Friday and Monday to calculate investor reaction to the WTO’s failure, since on those days investors could have first accurately predicted that the meeting would be unsuccessful. (See Table 1.) Was there financial value in having a reputation for corporate social responsibility when irresponsible corporate environmental and labor practices gained as much publicity as they did during the Seattle WTO meetings? Such evidence would enhance our understanding of the value of a reputation for corporate social responsibility.
Seattle WTO Ministerial Talks Events Timeline
November 23, 1999
|WTO delegates in Geneva abandon efforts to set the agenda for the Seattle ministerial meeting prior to the meeting; delegates decide instead to work on agenda during Seattle meeting.|
November 24, 1999
|Despite predictions of large-scale protests, the press reports mostly optimistic expectations that, at minimum, the agenda for the Millennial Round will be set during next week’s meeting.|
November 26, 1999
|The number of protesters converging in Seattle is much larger than anticipated. The press begins active speculation that the scale of protests may prevent many delegates from getting inside the meeting hall, and may thus thwart the ability of the WTO ministers to set an agenda for the Millennial Round.|
November 29, 1999
|Opening activities are delayed four hours due to a bomb threat in the Seattle Convention Center. Downtown MacDonald’s, Nordstrom’s, Gap, and Nike are vandalized.|
November 30, 1999
|Formal sessions are set to convene, but are delayed. An estimated 25,000 protesters gather downtown and clog traffic. Many more downtown stores are vandalized. Most WTO dignitaries are unable to get out of their hotels. Opening ceremonies are cancelled. The National Guard is called in. Seattle mayor imposes a city curfew.|
December 1, 1999
|Police arrest over 500 protesters. President Clinton arrives and states that future trade negotiations should include trade sanctions for child labor abuses. Delegates from the 77 developing nations threaten to walk out on the meetings if Clinton, and leaders of other developed nations, insist on including labor or environmental standards in the WTO agenda.|
December 2, 1999
|Protesters claim that they successfully scuttled the meeting. News reports indicate that the meeting is likely to end with no firm commitment on an agenda or a timetable.|
December 3, 1999
|Kick-off Millennial Round meeting ends with no agreement on an agenda. All efforts for putting together a new round of talks are postponed indefinitely.|
Linking the Seattle WTO’s Failure with Corporate Social Responsibility
There are at least two reasons that investors may not have “penalized” socially responsible firms as severely as they did firms lacking reputations for social responsibility. First, the Seattle WTO failure signaled an increased likelihood of significant regulatory changes in the future. Such changes would make future compliance costs of firms having labor and environmental practices that already exceeded legal requirements (one of the signs of social responsibility) lower than the future compliance costs of firms that were merely meeting minimum standards. After all, disputes among member nations on environmental and labor issues and protests by activist groups on the same issues had successfully just derailed a global trade round in Seattle for the first time in the GATT-WTO’s then 52-year history. Moreover, the demands made by the Seattle activists for multinational trade agreements could easily be made in the future for domestic regulations.
Second, the Seattle protests suggested an increased risk of future consumer boycotts of firms known for environmentally damaging or labor abusing operations. Consumers formerly ignorant of many corporate labor and environmental “abuses” were likely to have been educated as a result of the highly visible Seattle protests. Investors may thus have believed that firms having reputations for social responsibility were less likely to face potential future consumer boycotts and consequent decreased future revenues than were firms that either lacked reputations for social responsibility or that were actually associated with the irresponsible practices. After all, in Seattle, specific apparel firms, such as Nike and the Gap, and specific energy firms, such as Exxon, were the named targets of protests and vandalism.
Evidence of a Link
To measure investors’ valuation of the WTO failure on the 1999 Fortune 500, we used event study methodology, a long recognized approach to this type of research. Our total usable sample of 416 firms was segmented into two samples: firms having a reputation for social responsibility and firms lacking such a reputation. Table 2 provides descriptive statistics for the two samples.
(All values in $ millions unless noted)
|Fortune 500 Firms|
Having a Reputation
for Social Responsibility (n = 155)
|Fortune 500 Firms|
Lacking a Reputation for Social Responsibility (n = 261)
|Range||$3,037 (Reliastar Financial) to|
|$429 (Kinder Morgan) to|
$189,058 (General Motors)
|Median||$7,620 (Suntrust Banks)||$6,423 (Saks Corporation)|
|Range||$1,034 (Kelly Services) to|
$328,071 (Merrill Lynch)
|$293 (Adams Resources) to|
$405,200 (General Electric)
|Median||$7,423 (Colgate-Palmolive)||$8,400 (Ingersoll-Rand)|
|1999 Market Capitalization|
|Range||$409 (Yellow Truck Corporation) to|
|$36 (Adams Resources) to|
$417,175 (General Electric)
|Median||$8,485 (Staples)||$4,320 (Florida Progress)|
|1999 % Foreign Assets|
|Range||0% (44 firms) to|
|0% (84 firms) to|
99% (CHS Electronics)
|Median||5.2% (3Com)||5.9% (Oracle)|
|1999 % Foreign Sales|
|Range||0 % (46 firms) to|
|0% (93 firms) to|
99% (CHS Electronics)
|Median||12.7% (Household International)||11.3% (Edison International)|
Effect of firm reputation
The portfolio of Fortune 500 firms having a reputation for social responsibility (DSI–included firms) declined by slightly more than one percent between Friday, November 26th, and Monday, November 29th, although this decline was not statistically significant. In contrast, the portfolio of Fortune 500 firms lacking a reputation for social responsibility (DSI-excluded firms) declined by 2.36 percent over this period — a decline that was statistically significant — constituting a $378 million loss of shareholder value for the average firm in this sample. (See Table 3.)
Main Investor Reaction to 1999 WTO Failure
Segmented by Reputation for Corporate Social Responsibility
|Stock Portfolio||Change in Portfolio Value1|
|Firms having Reputation for Social Responsibility (n = 155)||– 1.10%|
|Firms lacking Reputation for Social Responsibility (n = 261)||– 2.36% ***|
*** Statistically significant at the .001 level or lower
1 2-day cumulative investor reaction on Friday, November 26th and Monday, November 29th.
Effect of industry reputation
It is possible, however, that these results were driven not by investor reaction to a firm’s reputation for social responsibility, but rather by industry or trade effects. We tested for both possibilities. First, if investors intended to penalize firms in industries that were protest targets rather than to reward socially responsible firms, then any firm in an allegedly labor or environmentally abusing industry should have experienced a decline in shareholder value, regardless of reputation for social responsibility. However, that was not the case.
Using the classifications adopted in other similar empirical studies, we divided the Fortune 500 firms into those firms in industries having reputations for “irresponsible” environmental or labor practices and those in the remaining “responsible” industries. Industries included in the environmentally “irresponsible” sample are all industries involved in mining, oil and gas, paper, chemicals, steel, and utilities. Industries in the labor “irresponsible” sample are apparel, footwear and toy manufactures. The two groups were further sub-divided into a portfolio of firms having reputations for social responsibility (DSI-included) and a portfolio of firms lacking reputations for social responsibility (DSI-excluded).
In both samples, the firms having a reputation for social responsibility suffered smaller declines than did those firms without such a reputation, and the declines were statistically insignificant. More importantly, in the portfolio of firms from “irresponsible” industries, the sample of firms having a reputation for social responsibility did not experience a significant decline, while the sample of firms lacking a reputation for social responsibility experienced a statistically significant cumulative negative return of slightly more than three percent (Table 4). This decline translates into a $418 million loss of shareholder value for the average firm in the sample. A reputation for social responsibility thus appears to have held particular value for firms in the industries that are allegedly the most labor abusing and environmentally damaging.
Investor Reaction to 1999 WTO Failure (Industry Effect)
Segmented by Responsible or Irresponsible Industry
|Stock Portfolio||Change in|
|Firms in Labor & Environmentally “Irresponsible” Industries||– 1.23%|
– 3.41% ***
|Firms in Labor & Environmentally “Responsible” Industries||– 0.94%|
– 2.46% **
** Statistically significant at the .01 level or lower.
*** Statistically significant at the .001 level or lower.
Effect of trade status
Finally, to test for the possibility of a trade effect, we conducted a third analysis on the 124 firms in the 1999 Fortune 500 that had no foreign sales or assets in 1999. If investors were responding only to the signal of diminished future trade liberalization that the Seattle WTO failure sent and not to whether or not a firm had a reputation for social responsibility, then there should have been no stock price penalty among firms having no foreign sales or assets (and thus no reliance on foreign markets). However, that is not what we found. Forty-one of the firms in the 1999 Fortune 500 with no foreign sales had a reputation for social responsibility (DSI-included), and they did not experience a statistically significant decline in shareholder value. Conversely, the 83 firms having no foreign sales and lacking a reputation for social responsibility (DSI-excluded) experienced a significant decline of 1.77 percent (Table 5). This decline translated into an $85 million market capitalization loss for the average firm. This result is particularly notable since losses occurred within the portfolio of firms that should not have been penalized at all for anticipated trade effects of the failed Seattle WTO meeting.
Investor Reaction to the 1999 WTO Failure (Trade Effect)
Segmented into Firms with No Foreign Sales or Assets
|Stock Portfolio||Change in|
|Having Reputations for Social Responsibility (n = 41)|
Lacking Reputations for Social Responsibility (n = 83)
– 2.37% **
** Statistically significant at the .01 level or lower.
We have provided a measure of the economic benefit associated with a company’s reputation for corporate social responsibility and have added to the empirical support for the proposition that investments by a firm in corporate responsibility yield tangible financial benefits. Strategic managers now have one more indication that devoting firm resources to social responsibility provides value. In the case of the Seattle WTO failure, firms in industries that were the target of protest – the allegedly environmentally damaging and labor abusing industries – suffered a decline in market capitalization of over three percent if the firms were not known for social responsibility. However, firms in these same industries suffered no statistically significant decline if they were also perceived by investors to be socially responsible firms.
In Seattle, there appears to have been a strong “crisis” value of a reputation for social responsibility. It is impossible to predict the nature or timing of the next crisis, but these findings suggest that firms that are reputed to place a value on being socially responsible and that communicate that value to the public may be better positioned to ride out the storms centering on socially responsible business practices than are firms that do not.
 J. Griffin and J.Mahon, “The Corporate Social Performance and Corporate Financial Performance Debate, Business & Society (1997) 36: 5-31; J. Margolis and J. Walsh, “People and Profits? The Search for a Link Between a Company’s Social and Financial Performance (Mahwah, NJ: Laurence Erlbaum Associates, 2001).
 R. Knight and D. Pretty, “Corporate Catastrophes, Stock Returns and Trading Volume,” Corporate Reputation Review, 2 (1999): 363-378.
 G. Jones, B. Jones, and P. Little, “Reputation As Reservoir: Buffering Against Loss in Times of Economic Crisis,” Corporate Reputation Review , 3(2000): 21-29.
 S. Brown, S. and J. Warner, “Measuring Security Price Performance,” Journal of Financial Economics, 8 (1980): 205-258.
 The former group consisted of the 155 Fortune 500 firms that were also traded in the Domini Social Index (DSI) in November 1999. The DSI is one of the oldest and largest socially screened stock index funds and had $1.3 billion in assets under management in 400 firms selected on the basis of high performance in seven social dimensions: community relations, employee relations, product quality/safety, women & minorities, environmental performance and involvement with nuclear power (www.domini.com/). The second sample of firms, those lacking a reputation for social responsibility, consisted of the 271 remaining Fortune 500 firms that were not in the DSI in 1999.
 M. Russo and P. Fouts, “A Resource-based Perspective on Corporate Environmental Performance and Profitability, Academy of Management Journal, 40 (1997): 534-559; S. Waddock and S. Graves, “The Corporate Social Performance-Financial Performance Link, Strategic Management Journal, 18 (1997): 303-319.