Corporate social responsibility and firm efficiency: a latent class stochastic frontier analysis

Abstract

The nexus between corporate social responsibility and corporate performance is of fundamental importance to understand if the former can be a sustainable strategy in the competitive race. In this paper we test this relationship on a sample of firms observed in a 13-year interval by focusing on a performance indicator (productive efficiency) seldom explored in this literature with a novel approach (latent class stochastic frontiers). Our empirical findings show that firms included in the Domini 400 index (a CSR stock market index) do not appear to be more distant from the production frontier than firms in the control sample after controlling for the heterogeneity of production structure.

Appendix: Criteria of KLD social ratings

1.1 Social issue ratings community

1.1.1 Strengths

• Charitable giving The company has consistently given over 1.5% of trailing three-year net earnings before taxes (NEBT) to charity, or has otherwise been notably generous in its giving.

• Innovative giving The company has a notably innovative giving program that supports nonprofit organizations, particularly those promoting self-sufficiency among the economically disadvantaged. Companies that permit nontraditional federated charitable giving drives in the workplace are often noted in this section as well.

• Non-US charitable giving The company has made a substantial effort to make charitable contributions abroad, as well as in the US To qualify, a company must make at least 20% of its giving, or have taken notably innovative initiatives in its giving program, outside the US Support for Housing. The company is a prominent participant in public/private partnerships that support housing initiatives for the economically disadvantaged, e.g., the National Equity Fund or the Enterprise Foundation.

• Support for education The company has either been notably innovative in its support for primary or secondary school education, particularly for those programs that benefit the economically disadvantaged, or the company has prominently supported job-training programs for youth. Other Strength. The company has either an exceptionally strong volunteer program, in-kind giving program, or engages in other notably positive community activities.

1.1.2 Concerns

• Investment controversies The company is a financial institution whose lending or investment practices have led to controversies, particularly ones related to the Community Reinvestment Act.

• Negative economic impact The company’s actions have resulted in major controversies concerning its economic impact on the community. These controversies can include issues related to environmental contamination, water rights disputes, plant closings, “put-or-pay” contracts with trash incinerators, or other company actions that adversely affect the quality of life, tax base, or property values in the community.

• Other concern The company is involved with a controversy that has mobilized community opposition, or is engaged in other noteworthy community controversies.

1.2 Corporate Governance

1.2.1 Strengths

• Limited compensation The company has recently awarded notably low levels of compensation to its top management or its board members. The limit for a rating is total compensation of less than 500,000 per year for a CEO or 30,000 per year for outside directors.

• Ownership strength The company owns between 20% and 50% of another company KLD has cited as having an area of social strength, or is more than 20% owned by a firm that KLD has rated as having social strengths. When a company owns more than 50% of another firm, it has a controlling interest, and KLD treats the second firm as if it is a division of the first.

• Other strength The company has an innovative compensation plan for its board or executives, a unique and positive corporate culture, or some other initiative not covered by other KLD ratings.

1.2.2 Concerns

• High compensation The company has recently awarded notably high levels of compensation to its top management or its board members. The limit for a rating is total compensation of more than 10 million per year for a CEO or 100,000 per year for outside directors.

• Tax disputes The company has recently been involved in major tax disputes involving more than 100 million with the Federal, state, or local authorities.

• Ownership concern The company owns between 20% and 50% of a company KLD has cited as having an area of social concern, or is more than 20% owned by a firm KLD has rated as having areas of concern. When a company owns more than 50% of another firm, it has a controlling interest, and KLD treats the second firm as if it is a division of the first.

• Other concern The company restated its earnings over an accounting controversy, has other accounting problems, or is involved with some other controversy not covered by other KLD ratings.

1.3 Diversity

1.3.1 Strengths

• CEO The company’s chief executive officer is a woman or a member of a minority group.

• Promotion The company has made notable progress in the promotion of women and minorities, particularly to line positions with profit-and-loss responsibilities in the corporation.

• Board of directors Women, minorities, and/or the disabled hold four seats or more (with no double counting) on the board of directors, or one-third or more of the board seats if the board numbers less than 12.

• Work/life benefits The company has outstanding employee benefits or other programs addressing work/life concerns, e.g., childcare, elder care, or flextime.

• Women and minority contracting The company does at least 5% of its subcontracting, or otherwise has a demonstrably strong record on purchasing or contracting, with women- and/or minority-owned businesses.

• Employment of the disabled. The company has implemented innovative hiring programs, other innovative human resource programs for the disabled, or otherwise has a superior reputation as an employer of the disabled.

• Gay and lesbian policies The company has implemented notably progressive policies toward its gay and lesbian employees. In particular, it provides benefits to the domestic partners of its employees. Other Strength. The company has made a notable commitment to diversity that is not covered by other KLD ratings.

1.3.2 Concerns

• Controversies The company has either paid substantial fines or civil penalties as a result of affirmative action controversies, or has otherwise been involved in major controversies related to affirmative action issues.

• Non-representation The company has no women on its board of directors or among its senior line managers.

• Other concern The company is involved in diversity controversies not covered by other KLD ratings.

1.4 Employee relations

1.4.1 Strengths

• Cash profit sharing The company has a cash profit-sharing program through which it has recently made distributions to a majority of its workforce.

• Employee involvement The company strongly encourages worker involvement and/or ownership through stock options available to a majority of its employees, gain sharing, stock ownership, sharing of financial information, or participation in management decision-making.

• Health and safety strength The company is noted by the US Occupational Health and Safety Administration for its safety programs.

• Retirement benefits strength The company has a notably strong retirement benefits program.

• Union relations The company has a history of notably strong union relations.

• Other strength The company has strong employee relations initiatives not covered by other KLD ratings.

1.4.2 Concern

• Union relations The company has a history of notably poor union relations.

• Health and safety concern The company recently has either paid substantial fines or civil penalties for willful violations of employee health and safety standards, or has been otherwise involved in major health and safety controversies.

• Workforce reductions The company has reduced its workforce by 15% in the most recent year or by 25% during the past two years, or it has announced plans for such reductions.

• Retirement benefits concern The company has either a substantially underfunded defined benefit pension plan, or an inadequate retirement benefits program.

• Other concern The company is involved in an employee relations controversy that is not covered by other KLD ratings.

1.5 Environment

1.5.1 Strengths

• Beneficial products and services The company derives substantial revenues from innovative remediation products, environmental services, or products that promote the efficient use of energy [costa], or it has developed innovative products with environmental benefits. (The term “environmental service” does not include services with questionable environmental effects, such as landfills, incinerators, waste-to-energy plants, and deep injection wells.)

• Clean energy The company has taken significant measures to reduce its impact on climate change and air pollution through use of renewable energy and clean fuels or through energy efficiency. The company has demonstrated a commitment to promoting climate-friendly policies and practices outside its own operations.

• Communications The company is a signatory to the CERES Principles, publishes a notably substantive environmental report, or has notably effective internal communications systems in place for environmental best practices.

• Pollution prevention The company has notably strong pollution prevention programs including both emissions reductions and toxic-use reduction programs.

• Recycling The company either is a substantial user of recycled materials as raw materials in its manufacturing processes, or a major factor in the recycling industry.

• Other strength. The company has demonstrated a superior commitment to management systems, voluntary programs, or other environmentally proactive activities.

1.5.2 Concerns

• Hazardous waste The company’s liabilities for hazardous waste sites exceed 50 million, or the company has recently paid substantial fines or civil penalties for waste management violations.

• Regulatory problems The company has recently paid substantial fines or civil penalties for violations of air, water, or other environmental regulations, or it has a pattern of regulatory controversies under the Clean Air Act, Clean Water Act or other major environmental regulations.

• Ozone depleting chemicals The company is among the top manufacturers of ozone depleting chemicals such as HCFCs, methyl chloroform, methylene chloride, or bromines.

• Substantial emissions The company’s legal emissions of toxic chemicals (as defined by and reported to the EPA) from individual plants into the air and water are among the highest of the companies followed by KLD. Agricultural Chemicals. The company is a substantial producer of agricultural chemicals, i.e., pesticides or chemical fertilizers.

• Climate change The company derives substantial revenues from the sale of coal or oil and its derivative fuel products, or the company derives substantial revenues indirectly from the combustion of coal or oil and its derivative fuel products. Such companies include electric utilities, transportation companies with fleets of vehicles, auto and truck manufacturers, and other transportation equipment companies.

• Other concern. The company has been involved in an environmental controversy that is not covered by other KLD ratings.

1.6 Human rights

1.6.1 Strengths

• Indigenous peoples relations strength The company has established relations with indigenous peoples near its proposed or current operations (either in or outside the US) that respect the sovereignty, land, culture, human rights, and intellectual property of the indigenous peoples.

• Labor rights strength The company has outstanding transparency on overseas sourcing disclosure and monitoring, or has particularly good union relations outside the US

• Other strength The company has undertaken exceptional human rights initiatives, including outstanding transparency or disclosure on human rights issues, or has otherwise shown industry leadership on human rights issues not covered by other KLD human rights ratings.

• Quality The company has a long-term, well-developed, company-wide quality program, or it has a quality program recognized as exceptional in US industry.

• R&D/innovation The company is a leader in its industry for research and development (R&D), particularly by bringing notably innovative products to market.

• Benefits to economically disadvantaged The company has as part of its basic mission the provision of products or services for the economically disadvantaged. Other Strength. The company’s products have notable social benefits that are highly unusual or unique for its industry.

1.6.2 Concerns

• Burma concern The company has operations or investment in, or sourcing from, Burma.

• Labor rights concern The company’s operations outside the US have had major recent controversies related to employee relations and labor standards or its US operations have had major recent controversies involving sweatshop conditions or child labor.

• Indigenous peoples relations concern The company has been involved in serious controversies with indigenous peoples (either in or outside the US) that indicate the company has not respected the sovereignty, land, culture, human rights, and intellectual property of indigenous peoples.

• Other concern The company’s operations outside the US have been the subject of major recent human rights controversies not covered by other KLD ratings.

• Product safety The company has recently paid substantial fines or civil penalties, or is involved in major recent controversies or regulatory actions, relating to the safety of its products and services.

• Marketing/contracting controversy The company has recently been involved in major marketing or contracting controversies, or has paid substantial fines or civil penalties relating to advertising practices, consumer fraud, or government contracting.

• Antitrust The company has recently paid substantial fines or civil penalties for antitrust violations such as price fixing, collusion, or predatory pricing, or is involved in recent major controversies or regulatory actions relating to antitrust allegations.

• Other concern The company has major controversies with its franchises, is an electric utility with nuclear safety problems, defective product issues, or is involved in other product-related controversies not covered by other KLD ratings.

1.7 Controversial business issues adult entertainment

• 1. Distributors The report includes publicly traded US companies that derive 15% or more of total revenues from the rental, sale, or distribution (wholesale or retail) of adult entertainment media products.

• 2. Owners and operators The report includes publicly traded US companies that own and/or operate adult entertainment establishment. Producers. The report includes publicly traded US companies that produce adult media products including movies, magazines, books, calendars, and websites.

• 3. Providers The report includes publicly traded US companies that offer pay-per-view adult entertainment.

• 4. Ownership of an adult entertainment company The company owns more than 20% of another company with adult entertainment involvement. (When a company owns more than 50% of company with adult entertainment involvement, KLD treats the adult entertainment company as a consolidated subsidiary.)

• 5. Ownership by an Adult Entertainment Company. The company is more than 50% owned by a company with adult entertainment involvement.

1.8 Alcohol

• 1. Licensing The company licenses its company or brand name to alcohol products.

• 2. Manufacturers Companies that are involved in the manufacture alcoholic beverages including beer, distilled spirits, or wine.

• 3. Manufacturers of products necessary for production of alcoholic beverages Companies that derive 15% or more of total revenues from the supply of raw materials and other products necessary for the production of alcoholic beverages.

• 4. Retailers Companies that derive 15% or more of total revenues from the distribution (wholesale or retail) of alcoholic beverages.

• 5. Ownership of an alcohol company The company owns more than 20% of another company with alcohol involvement. (When a company owns more than 50% of company with alcohol involvement, KLD treats the alcohol company as a consolidated subsidiary.)

• 6. Ownership by an alcohol company The company is more than 50% owned by a company with alcohol involvement.

1.9 Firearms

• 1. Manufacturers The company is engaged in the production of small arms ammunition or firearms, including, pistols, revolvers, rifles, shotguns, or sub-machine guns.

• 2. Retailers The company derives 15% or more of total revenues from the distribution (wholesale or retail) of firearms and small arms ammunition.

• 3. Ownership of a firearms company The company owns more than 20% of another company with firearms involvement. (When a company owns more than 50% of company with firearms involvement, KLD treats the firearms company as a consolidated subsidiary.)

• 4. Ownership by a firearms company. The company is more than 50% owned by a company with firearms involvement.

1.10 Gambling

• 1. Licensing The company licenses its company or brand name to gambling products.

• 2. Manufacturers Companies that produce goods used exclusively for gambling, such as slot machines, roulette wheels, or lottery terminals.

• 3. Owners and operators Companies that own and/or operate casinos, racetracks, bingo parlors, or other betting establishments, including casinos; horse, dog, or other race tracks that permit wagering; lottery operations; on-line gambling; pari-mutuel wagering facilities; bingo; Jai-alai; and other sporting events that permit wagering.

• 4. Supporting products or services Companies that provide services in casinos that are fundamental to gambling operations, such as credit lines, consulting services, or gambling technology and technology support.

• 5. Ownership of a gambling company. The company owns more than 20% of another company with gambling involvement. (When a company owns more than 50% of company with gambling involvement, KLD treats the gambling company as a consolidated subsidiary.)

• 6. Ownership by a gambling company. The company is more than 50% owned by a company with gambling involvement.

1.11 Military

• 1. Manufacturers of weapons or weapons systems Companies that derive more than 2% of revenues from the sale of conventional weapons or weapons systems, or earned 50 million or more from the sale of conventional weapons or weapons systems, or earned 10 million or more from the sale of nuclear weapons or weapons systems.

• 2. Manufacturers of components for weapons or weapons systems Companies that derive more than 2% of revenues from the sale of customized components for conventional weapons or weapons systems, or earned 50 million or more from the sale of customized components for conventional weapons or weapons systems, or earned 10 million or more from the sale of customized components for nuclear weapons or weapons systems.

• 3. Ownership of a military company The company owns more than 20% of another company with military involvement. (When a company owns more than 50% of company with military involvement, KLD treats the military company as a consolidated subsidiary.)

• 4. Ownership by a military company The company is more than 50% owned by a company with military involvement.

1.12 Nuclear power

• 1. Ownership of nuclear power plants Companies that own nuclear power plants. Ownership of a Nuclear Power Company. The company owns more than 20% of another company with nuclear power involvement. (When a company owns more than 50% of company with nuclear power involvement, KLD treats the nuclear power company as a consolidated subsidiary.)

• 2. Ownership by a nuclear power company The company is more than 50% owned by a company with nuclear power involvement.

1.13 Tobacco

• 1. Licensing The company licenses its company name or brand name to tobacco products.

• 2. Manufacturers The company produces tobacco products, including cigarettes, cigars, pipe tobacco, and smokeless tobacco products.

• 3. Manufacturers of products necessary for production of tobacco products The company derives 15% or more of total revenues from the production and supply of raw materials and other products necessary for the production of tobacco products.

• 4. Retailers The company derives 15% or more of total revenues from the distribution (wholesale or retail) of tobacco products.

• 5. Ownership of a tobacco company The company owns more than 20% of another company with tobacco involvement. (When a company owns more than 50% of company with tobacco involvement, KLD treats the tobacco company as a consolidated subsidiary.)

• 6. Ownership by a tobacco company. The company is more than 50% owned by a company with tobacco involvement.