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Electronic copy available at: http://ssrn.com/abstract=1864827

Mitigating the Unintended Effect of Corporate Social Responsibility Performance on Investors’ Estimates of Fundamental Value

W. Brooke Elliott Kevin E. Jackson Mark E. Peecher†

Brian J. White

Department of Accountancy College of Business

University of Illinois at Urbana-Champaign

March 2012

We thank Joy Begley, Gary Biddle, Brian Bratten, Monika Causholi, Matt DeAngelis, Jon Grenier, Max Hewitt, Steve Glover, Erin Hamilton, Frank Hodge, Jane Kennedy, Marsha Keune, Todd Kravet, Ken Lo, Russell Lundholm, Linda McDaniel, Linda Quick, Robert Ramsay, Shiva Rajgopal, Kristi Rennekamp, D. Shores, Scott Vandervelde, Carolyn Westfall, Jennifer Winchel, David Ziebart, Aaron Zimbelman, participants at the 2011 UBC, Oregon, Washington PhD-Faculty Alumni Accounting Conference and the 2012 FARS midyear meeting, as well as at workshops at the Universities of Kentucky, South Carolina and Notre Dame for helpful comments. We also thank Billy Brewster, Tracy Henn, Yoon Ju Kang and Jajah Wu for their assistance. †Corresponding author: University of Illinois at Urbana-Champaign, 361 Wohlers Hall, 1206 S. Sixth Street, Champaign IL 61820. E-mail: [email protected].

Electronic copy available at: http://ssrn.com/abstract=1864827

Mitigating the Unintended Effect of Corporate Social Responsibility Performance on Investors’ Estimates of Fundamental Value

ABSTRACT We examine how investors’ estimates of fundamental value are causally influenced by a firm’s corporate social responsibility (CSR) performance. We also examine how investor assessment of CSR performance moderates its influence over their fundamental-value estimates. Consistent with psychology theory, we find that when investors are exposed to, but do not explicitly assess, CSR performance, better CSR performance increases their estimates of fundamental value. Explicit investor assessment of CSR performance, however, significantly diminishes this increase. In addition, findings suggest that the increase among investors who do not assess CSR performance occurs subconsciously, i.e., they boost estimated fundamental value with poor self-insight. Supplemental findings shed light on consequences of this poor self-insight: investors who do not assess CSR performance rely on subconsciously boosted estimates of fundamental value to increase the price they are willing to pay to invest in the firm’s stock. Overall, our theory and findings contribute to the self-insight, affect, and CSR literatures in accounting by revealing the contingent nature of how and to what extent CSR performance influences investors’ estimates of fundamental value. Keywords: fundamental value, corporate social responsibility, investor, self-insight, affect as information Data availability: Contact the authors.

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I. INTRODUCTION

The Corporate Social Responsibility (CSR) disclosure movement has rapidly expanded

the set of nonfinancial performance measures falling under the accounting-information umbrella

(see, e.g., Moser and Martin 2012). Firms are increasingly expending resources to further some

social good, such as environmental protection, community support, fair labor, etc. (Stanford

2011, IFAC 2012).1 Firms also are voluntarily disclosing CSR performance measures on

websites and in annual reports (as an example, Figure 1 reproduces the front page of Apple’s

investor relations website). Consistent with growing stakeholder demand, an increasing number

of independent organizations, such as the Fair Labor Association (Bartley 2003), are reporting on

firm CSR performance – also see, e.g., Green Rankings Business Report (Newsweek 2011).

Many investors now regularly consider firms’ CSR performance measures along with

traditional financial performance measures. The Social Investment Forum (2009) estimates that

$3 trillion, or 12 percent, of the $25 trillion in managed investment capital in the US during 2009

followed some socially responsible investing strategy. The Forum also notes, however, that 71

percent of top US investment consultant firms (e.g., Goldman Sachs) are reticent to use CSR

performance in an investment strategy unless their client prompts them to do so. Thus, while

many investors become familiar with the CSR performance of firms they follow (IFAC 2012),

there is considerable variation in terms of whether and how explicitly they assess CSR

performance.

These developments raise at least four related research questions. Does better CSR

performance increase, not change, or decrease investors’ estimates of fundamental value? Do

investors have self-insight about how CSR performance influences their estimates of

1 Following McWilliams and Siegel (2001), we define a CSR disclosure as any presentation of this type of information whether by the firm itself, in an analyst report, in a popular press article, etc…

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fundamental value?2 Does investor assessment of CSR performance amplify, not change, or

attenuate the influence of CSR performance on their estimates of fundamental value?3 And, does

investor assessment of CSR performance improve, not change, or reduce investors’ self-insight?

Herein, we conduct the first empirical examination of these questions, using psychological

theory as a guide and an experimental approach with graduate business students as participants.

We argue that CSR disclosures likely cause affective responses in investors because of

their imagery-provoking and value-laden nature.4 When the source of affect has a salient target,

affect has little influence on people’s subsequent judgments, but without a salient target,

affective responses subconsciously influence people’s subsequent judgments (e.g., Schwarz and

Clore 1983, 2003). Thus, we hypothesize that, absent CSR performance assessment, investors

subconsciously will use affect generated by positive (negative) CSR performance to increase

(decrease) estimates of fundamental value. Because of the subconscious nature of this influence,

investors will have poor self-insight about their fundamental-value estimates.

We expect investor assessment of CSR performance, by providing a salient target for

their affect, to diminish the subconscious influence of their affective reactions to CSR

performance on their estimates of fundamental value. The affect-as-information hypothesis

(Schwarz and Clore 1983, 2003) predicts that attributing affect to its source (here CSR

performance) reduces its subconscious influence on subsequent judgments (here fundamental-

value estimates), although it does not change the degree to which affect is experienced. As a

result, compared to assessment-condition investors, we expect investors who do not explicitly

2 Self-insight is awareness of one’s own mental processes and how various factors influence one’s judgment as well as an established indicator of higher-quality judgment in the accounting literature (e.g., Libby and Lewis 1982, Evans 2005). 3 We label as “investor assessment” an explicit or deliberate evaluation of a firm’s CSR performance as, e.g., good, bad, or neutral. 4 Affect is a term originating in the psychology literature and refers to a range of related phenomena including emotion, feelings and moods (e.g., Wyer and Srull 1986, Fiske and Taylor 1996, Frijda 2006).

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assess CSR performance to derive fundamental-value estimates that reflect a greater influence of

CSR performance and to have worse self-insight about their judgment processes. Thus, a likely

benefit of assessing CSR performance is improved investor self-insight about the extent to which

it influences their judgments. That is, better self-insight would be helpful whether or not an

investor plans or wants to weight CSR performance in deriving fundamental-value estimates.

To test our predictions, we conduct an experiment that uses a 2 x 2 + control design.

Graduate business students in a financial statement analysis course take on the role of investors

who estimate the fundamental value of a firm. They receive CSR reports that are either

relatively positive or negative (or neutral in our control condition). Moreover, participants are

either prompted to assess the firm’s CSR performance in addition to conducting traditional

financial statement analysis, or are asked to conduct traditional financial analysis without being

prompted to assess CSR performance.

Results of our experiment support our predictions. We find that positive (negative) CSR

performance significantly increases (decreases) investors’ estimates of fundamental value, but

also that a prompt to assess CSR performance significantly diminishes this effect. Further, post-

test responses of investors not prompted to assess CSR performance indicate that they lack self-

insight about the effect of CSR performance on their estimates of fundamental value. Taken

together, these findings provide theory-driven support for our prediction that investor assessment

of CSR performance significantly moderates the degree to which such performance has a

subconscious influence on their subsequent estimates of fundamental value.

In supplemental analyses, we report evidence that investors who do not assess CSR

performance are willing to pay a higher price to invest in the common stock of a firm with better

CSR performance, and that this effect is fully mediated by their subconsciously influenced

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estimates of fundamental value. Investor assessment of positive CSR performance, however,

significantly decreases the maximum price they are willing to pay. This overall pattern of

findings suggests that a lack of self-insight regarding the influence of CSR performance on

estimates of fundamental value has consequences for bids investors are likely to make in an

equity market.

This study makes several contributions. First, its theory and findings complement the

recent archival examinations of the association between CSR performance and firm value (e.g.,

Plumlee et al. 2010, Dhaliwal et al. 2011, Matsumura et al. 2011, Izzo and Magnanelli 2012).

Our study is in the vein of Moser and Martin’s (2012, 10) recent call for experimental research to

“address important CSR issues that are difficult to address effectively in archival studies.”

Specifically, our experiment provides strong evidence of a causal relation between better CSR

performance and increases in investors’ estimates of fundamental value, and provides evidence

that this increase occurs subconsciously unless investors first assess CSR performance.

Second, we contribute to self-insight literature in accounting. Prior research has

concluded that, in a departure from the general finding that people have poor self-insight,

investors have a “relatively encouraging degree of self-insight” (Wright 1977, 1979). This

optimistic conclusion about investor self-insight, however, reflects an awareness of how

financial performance measures, such as earnings, dividends, long-term debt, a firm’s beta, etc.,

influence their judgments (future market prices). Financial performance measures are less likely

than CSR performance measures to generate affective responses in investors, which can

subconsciously influence investor judgments. Thus, our study provides theory and evidence that

establishes a new boundary condition for the conclusion in prior research that investors have

relatively good self-insight.

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Third, and related, in identifying CSR performance as a determinant of investors’

affective reactions, we provide a robustness test of prior accounting literature documenting that

affective reactions can influence subsequent judgments in accounting contexts (e.g., employee

loss of retirement savings and jobs influence jurors’ judgments, as in Kadous 2001; a

supervisor’s arrogant personality influences managers’ judgments, as in Moreno et al. 2002). A

distinction for our setting is that participants’ affective reactions subconsciously influence

judgments germane to their own wealth. Fourth, we provide evidence that investor assessment

of CSR performance has a likely benefit, even for investors who do not plan to use a CSR

investment strategy. Specifically, investor assessment of CSR performance improves their self-

insight, which is likely to help them reach investment decisions without “confusing beliefs and

preferences” (Bonner 1999, 385).

The remainder of our paper is organized as follows: Section 2 discusses background,

while Section 3 develops our hypothesis. Section 4 describes our experiment. Section 5 discusses

the results of our hypothesis test and additional evidence of our underlying theory. Section 6

discusses supplemental analyses. We summarize our study and conclude in Section 7.

II. BACKGROUND

Demand for and Archival Studies on CSR Performance and Self-Insight Research

There is widespread recognition of investors’ growing demand for information about

firms’ CSR performance, including the development of new integrated reporting frameworks

(e.g., Eccles and Krzus 2010; Global Reporting Initiative 2011), the growth of mutual funds that

include only firms with preferred CSR performance characteristics (e.g., KLD funds), the

prevalence of CSR performance measures now included in annual reports, and the trend towards

third party organizations generating independent CSR ratings and attest reports (Ballou et al.

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2011). The large scale of CSR reporting also is evident in Francis (2011), which reports that the

International Organization for Standardization’s (ISO’s) 2009 revenues were approximately

US$41 billion, greater than the combined total 2009 revenues of KPMG and Ernst & Young

(also see, e.g., discussions of ISO 14000 and 26000 certifications as in Castka and Balzarova

2007).

Despite the growing demand for CSR disclosures, it is an open empirical question as to

whether better CSR performance systematically has positive implications for future financial

performance and fundamental value (Bénabou and Tirole 2010, Moser and Martin 2012). It is an

empirical question in part because the normative question about the conditions under which, if

any, investors should believe that better CSR performance changes a firm’s fundamental value is

itself a matter of significant debate. McWilliams and Siegel (2001) point out that, although

positive CSR performance likely has direct costs, the demand of consumers and other

stakeholders for better CSR performance means that positive CSR performance also has benefits

for some firms. Although the authors conclude that the costs and benefits of an optimal level of

CSR performance are exactly offsetting, a sub-optimal level of CSR performance is likely costly.

Empirically, most archival studies provide evidence of a small positive relation between CSR

performance and firm value (see e.g., Margolis et al. 2009 for a review, see also, e.g.,

Matsumura et al. 2011, Dhaliwal et al. 2011, Plumlee et al. 2010). Most recently, however, Izzo

and Magnanelli (2012) find that better CSR performance is associated with a higher cost of debt,

which they note is consistent with investment in CSR performance tending to be “a waste of

resources.” This finding is consistent with recent conjecture that at least some CSR activities are

undertaken “at the expense of shareholders” (Moser and Martin 2012, 3). Our study

complements these primarily archival studies by experimentally examining how better CSR

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performance (unintentionally and/or intentionally) influences investors’ estimates of fundamental

value, along with how much self-insight investors have about any such influence.

Self-insight is defined as one’s awareness of the mental processes underlying and factors

influencing one’s judgments and decisions (Evans 2005). It is thought that the same cognitive

abilities that enable self-insight also help people make more accurate judgments (Wright 1977).

In addition, better self-insight indicates higher judgment quality because it aids in developing

veridical justifications and accounts of how one (actually) reached a judgment, and facilitates

learning how to change one’s judgment process should normative or prescriptive theory clarify

more reasonable or optimal processes. As Kruger and Dunning (1999) argue, it is one thing to

be unskilled but a worse thing to be unskilled and unaware of this deficiency. Last, it stands to

reason that having good self-insight about whether and how a particular factor influenced one’s

judgments is particularly helpful when there are differences of opinion about the directional

influence, if any, the factor should have on one’s judgments. That is precisely the case regarding

how better CSR performance maps into a firm’s fundamental value, as noted above.

Early experimental studies used a policy-capturing approach to measure self-insight.

Results, generally, suggested humans have poor self-insight about factors that influenced their

judgments (e.g., Nisbett and Wilson 1977, Evans 2005).5 An interesting exception to the typical

finding of poor self-insight in the early literature, however, pertains to investors. In particular,

Wright (1977, 329) reports evidence indicating that investors’ subjective cue weights reflect an

“encouraging degree of self-insight” about how factors such as prior year earnings per share,

closing stock price, debt to equity ratios, and dividends affect their market-price judgments.

Financial measures such as those in Wright (1977, 1979), however, are less likely than the CSR

5 The finding that humans generally have poor self-insight also appears in studies that use between-subject approaches (e.g., Nisbett and Wilson 1977). It is unclear whether humans appear to have better or worse self-insight using between- or within-subjects approaches (for discussion see Doherty and Reilly 2001, 323).

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performance measures we use to trigger investor affective responses. It is this affective response

that we hypothesize will subconsciously influence investors’ fundamental-value estimates and

reduce their self-insight.

III. HYPOTHESIS DEVELOPMENT

CSR performance, affective responses, and low self-insight estimates of fundamental value

CSR disclosures are likely to evoke affective reactions in investors. Specifically, CSR

disclosures are often imagery-provoking (i.e., vivid), and research in consumer behavior suggests

that vivid information elicits affective reactions (e.g., Keller and Block 1997). For example,

CSR disclosures of sweatshop labor practices or sustainable coffee bean harvesting likely create

related images in an investor’s mind. Furthermore, they are likely to be more vivid than the

related financial disclosures of wage expense and cost of sales. While CSR disclosures about

sweatshop labor practices are likely to evoke negative affective reactions, those related to

sustainable coffee bean harvesting are likely to evoke positive affective reactions. In addition,

CSR disclosures can reveal corporate values in a credible way. When these disclosures indicate

that a firm’s values are aligned (misaligned or in conflict) with the investors’ values about how

firms ‘should’ behave, we expect a positive (negative) affective reaction.

In the absence of a salient target for this affect, the “affect-as-information” hypothesis

predicts that investors will subconsciously use their affective reactions to CSR performance in

making subsequent judgments (Schwarz and Clore 1983, 2003). Specifically, in our setting,

investors will subconsciously interpret the affect generated by the positive or negative valence of

the CSR performance as informative about the firm’s fundamental value, and will

unintentionally use it to inform their subsequent financial analysis. Thus we expect investors’

affective reactions to CSR performance to influence their analysis of the firm such that investors

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who experience positive (negative) affect will derive a higher (lower) estimate of fundamental

value. We also expect that better CSR performance will influence investors’ estimates of

fundamental value without the investors having much self-insight.

Reducing the unintended influence of affective reactions on estimates of fundamental value

The affect-as-information hypothesis also indicates that attributing affect to its source

reduces its subconscious influence on subsequent judgments. Attributing affect to its source

does not change the degree to which affect is experienced, but does change how the experienced

affect is interpreted and used in subsequent judgments. For example, Schwarz and Clore (1983,

2003) find that individuals who are reminded about the state of the weather (i.e., the source of

the affect) no longer use their weather-related affect as an indicator of general life satisfaction

(i.e., the subsequent judgment). Similarly, Kadous (2001) finds that providing jurors with an

instruction effectively discrediting the use of negative affect as an indicator of auditor

blameworthiness reduces the influence of negative outcome information on their auditor

negligence judgments. In our setting, we expect that assessing CSR performance as part of an

overall investment analysis will reduce the unintended influence of CSR performance on

investors’ estimates of fundamental value.6

In fact, recent reports indicate that investors use a variety of investment strategies that

range from a purely traditional financial statement analysis approach to an approach that

prominently features assessment of CSR performance (Social Investment Forum 2009). We

abstract from the range of variation in investors’ strategies by recognizing that one key

distinction among investors is that some assess CSR performance while others do not.

Regardless of whether or not investors plan to use a CSR-based investment strategy (i.e.,

6 We operationalize this approach to investment analysis as a prompt to assess the firm’s CSR performance prior to estimating the fundamental value of the firm’s stock. We recognize that investors in our no assessment conditions may spontaneously assess CSR performance, but if so that would bias against our hypothesis.

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favoring or only investing in socially and environmentally responsible firms), we conjecture

there is a likely benefit of investor assessment of CSR performance, particularly as investors gain

access to more CSR performance information. Specifically, investor assessment of CSR

performance is likely to increase their self-insight about how CSR performance is influencing

their estimates of fundamental value. Enhanced self-insight is also likely to help investors more

cleanly partition their beliefs and preferences in thinking of implications of better CSR

performance.

To summarize, the affect as information hypothesis predicts that attributing the affective

reaction to its source (i.e., a firm’s CSR performance) will not necessarily impact the degree of

affect investors experience, but will reduce its unintended, subconscious influence in subsequent

estimates of fundamental value. As a result, compared to investors who do not explicitly assess

CSR performance, we expect CSR performance to have a smaller effect on the fundamental

value estimates of investors who do assess CSR performance as part of their investment analysis.

In addition, investors’ self-insight as to the influence of CSR performance on their estimates of

fundamental value will be relatively poor without assessment of such performance. We

formalize our prediction in the following hypothesis (see Panel A of Figure 2 for a graphical

depiction):

Hypothesis: When CSR performance is positive (negative), investors who do not explicitly assess CSR performance will estimate the firm’s fundamental value to be higher (lower), but the influence of CSR performance will diminish with investor assessment of CSR performance.

IV. EXPERIMENTAL METHOD

Participants

Eighty-eight graduate business students enrolled in a financial statement analysis course

at a large state university participated in the experiment as a proxy for reasonably informed

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investors.7 These participants had taken on average 8 accounting courses and 3 finance courses.

All participants reported that they had used financial statements to evaluate a firm’s performance

at least once. In addition, 36 percent of participants stated that they had purchased common stock

or debt securities, while 86 percent said they planned to do so in the next five years.8 Participants

completed the experiment during a normally scheduled class, with the instructor giving

participants extra credit in the course upon completing the experiment.

Experimental Design and Procedures

Participants received materials in three envelopes (labeled Envelope 1, 2, and 3), and

were asked to read and complete the contents of each envelope in sequential order. Envelope 1

included background information about a hypothetical firm and its retail industry. Participants

then observed two analyst reports: one displaying the firm’s social performance; the other

displaying the firm’s environmental performance; i.e., collectively the CSR performance of the

firm.9 We manipulated whether the analyst reports depicted positive performance or negative

performance (or neutral performance for our control condition).10 Appendix A reproduces these

analyst reports.

The materials then asked assessment condition participants to evaluate the firm’s social

and environmental performance by responding to five questions about social performance and

five similar questions about environmental performance, reproduced in Appendix B. Participants

7 In the analyses in Section 5, we exclude one participant who provided an estimate of fundamental value that was more than six times greater than the average of all other participants’ responses and more than eight standard deviations greater than the mean. Results are inferentially identical if we include this participant in our analyses. 8 Because investors’ general political attitudes and attitudes about social and environmental issues might influence their reactions to CSR performance, we measured these attitudes with post-task questions. The results reported in Section 5 are inferentially identical when we include these measures as covariates in our analyses. 9 These analyst reports were adapted from Newsweek’s 2010-2011 Green Rankings Business Report (Newsweek 2011). Background and financial information was loosely based on a composite of two retail firms: Kohl’s and Ross Stores. We use analyst reports as the disclosure venue as opposed to an unfiltered management disclosure venue to avoid concerns about the credibility and/or reliability of the reported performance measures. 10 To ensure that our results were not an artifact of the order of the two analyst reports, we counterbalanced presentation order. We do not detect any significant order effect in our analyses.

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in the other conditions observed the analyst reports but were not asked to evaluate social and

environmental performance. After reviewing the information in Envelope 1, participants

proceeded to Envelope 2. Participants received a press release containing summary financial

statement information for the same hypothetical firm. All participants then were asked to

evaluate the firm’s current financial performance by responding to five questions about the

firm’s recent financial statements and to derive an estimate of the fundamental value of the

firm’s stock.11

In deriving an estimate of the fundamental value of the firm’s stock, participants were

asked to provide the estimates necessary to complete a residual earnings valuation model.

Participants completed the experiment in a computer lab and were seated in front of computers

that displayed a residual earnings valuation template in a spreadsheet. Participants provided

forecasts of earnings for each of the four subsequent years, a cost of capital estimate, and an

estimate of the rate at which they expected residual earnings to grow after the fourth year

(Penman 2009). The template then calculated and displayed the resulting estimate of

fundamental value, which participants recorded on their pencil and paper materials. Appendix C

reproduces one participant’s completed template.

Next, to measure willingness to invest in the firm’s stock (examined in supplemental

analyses), participants were asked to assume that they had received an inheritance of $10,000

from a distant relative; they then identified the maximum price per share at which they would be

willing to invest 25%, 50%, 75% and 100% of their inheritance in the firm’s stock. After

11 We asked all participants to evaluate current financial performance in order to provide a consistent investment analysis approach for CSR and financial performance for those in the assessment conditions. To the extent that the assessment of current financial performance provided a target for participants’ affective reactions to CSR performance in the no assessment conditions, this design choice had the potential to weaken the unintended effect of participants’ affective reactions on estimates of fundamental value, thus biasing against our hypothesized result.

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completing the materials in Envelope 2, participants proceeded to Envelope 3 where they

completed manipulation checks and other post-task questions before leaving the lab.

V. RESULTS

Manipulation checks

To assess the effectiveness of our manipulation of CSR performance we asked

participants in a post-test questionnaire whether the firm’s social responsibility was “above the

industry average”, “about at the industry average”, or “below the industry average”. Ninety-

three percent of participants correctly answered this question. Ninety-one percent of participants

correctly answered a similar question about the firm’s environmental performance.

In addition, to ensure that our positive and negative CSR performance measures elicited

affect in our participants, we included post-task questions that asked about the extent to which

they were “happy”, “angry”, “disappointed”, and “pleased” with the firm’s environmental and

social performance.12 To create a single measure of participants’ affective reactions to the firm’s

CSR performance, we perform a factor analysis on responses to these eight questions. All

questions load in the expected direction, and a single factor explains 85% of the variance in

responses (eigenvalue = 6.77); we use this factor as an “affect score”, with higher (lower) scores

indicating a greater positive (negative) affective reaction. A comparison of means across

conditions reveals that, on average, affect scores for participants in positive CSR performance

conditions (mean = 0.97, standard deviation = 0.44) are significantly greater than those of

participants in negative CSR performance conditions (mean = -1.04, standard deviation = 0.47; t

= -17.96, p < 0.01, two-tailed). Furthermore, compared to affect scores when CSR performance 12 We purposely elicited these measures as post-task questions instead of eliciting them right after presenting CSR performance information. We did so because the affect-as-information theory underlying our hypotheses predicts that calling attention to CSR performance-related affect would reduce its subconscious influence on subsequent judgments, undermining our assessment manipulation by effectively prompting all participants to assess CSR performance.

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is neutral (mean = 0.17, standard deviation = 0.44), participants’ affect scores are significantly

higher when CSR performance is positive (t = 6.46; p < 0.01, two-tailed), and significantly lower

when CSR performance is negative (t = 9.31; p < 0.01, two-tailed).13 Thus, it appears that our

manipulation of CSR performance successfully elicited affect.14

Because of the active nature of our assessment manipulation, we did not ask a specific

manipulation check question; however, all assessment-condition participants except one

responded to questions eliciting evaluations of the firm’s CSR performance. Results reported

below are inferentially identical if we classify the one participant who failed to respond to these

questions as a no-assessment condition participant.

Test of our hypothesis

We hypothesize that when CSR performance is positive (negative), investors who do not

assess CSR performance will estimate a firm’s fundamental value to be higher (lower), but that

assessment of CSR performance will diminish its influence on investors’ fundamental value

estimates. Descriptive statistics for participants’ fundamental value estimates across our four

treatment conditions and the neutral (control) condition are tabulated in Panel A of Table 1. To

test our hypothesis, we first compare no-assessment condition investors’ estimates of

fundamental value when CSR performance is positive, neutral (control), and negative. This

comparison tests whether CSR performance has the hypothesized influence on investors’

fundamental value estimates. Establishing this influence sets the stage for testing whether CSR

assessment diminishes the influence of CSR performance.

13 To ensure that our results were not driven by affect toward the firm’s financial performance, we used similar questions to elicit participants’ affective reactions to the firm’s financial performance. Tests of these measures reveal no significant differences between any of our experimental conditions (all p-values > 0.19, two-tailed). 14 Similar to previous studies examining the use of affect as information (e.g., Kadous 2001), we do not expect our assessment manipulation to alter the degree to which participants experience affect, but rather the way in which affect is interpreted and used in subsequent judgments. As expected, we do not observe a significant CSR performance by assessment interaction for our affect factor (p > 0.32).

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An untabulated one-way analysis of variance (ANOVA) reveals significant differences in

fundamental-value estimates across positive, neutral, negative CSR performance conditions (F =

4.65, p = 0.01, two-tailed). Pairwise comparisons show that estimates in the no assessment,

positive condition are significantly higher than those in the neutral condition ($25.92 > $20.72, p

= 0.04, one-tailed), while those in the no assessment, negative condition are significantly lower

($19.14 < $20.72, p = 0.09, one-tailed). Consistent with our hypothesis, CSR performance

significantly influences investors’ estimates of fundamental value.

Next, as tabulated in Panel B of Table 1, we use a two-way ANOVA to test the predicted

interaction across our treatment conditions. Consistent with our hypothesis, results reveal a

significant CSR performance x assessment interaction (p = 0.02, one-tailed).15 This result is

presented graphically in Panel B of Figure 2. In further support of our hypothesized interaction,

the manipulated factor representing negative versus positive CSR performance explains 15.4% of

the variation in no-assessment condition investors’ estimates of fundamental value, but only

0.1% of the same variation for assessment-condition investors.

For completeness, we present follow-up simple effects tests in Panel C of Table 1.

Results show that participants who do not assess CSR performance estimate fundamental value

to be an average of 24.5% higher (9.4% lower) than those who do assess CSR performance when

CSR performance is positive (negative). This difference is statistically significant when CSR

performance is positive ($25.92 > $20.82, p = 0.05, one-tailed) and directionally consistent but

not significant at conventional levels when CSR performance is negative ($19.14 < $21.12, p =

0.12, one-tailed). Further, the average fundamental-value estimates of participants who do not

15 Additional analyses (not tabulated) suggest that it is predominantly differences in the numerator (i.e., estimates of future earnings), not the denominator (i.e., estimates of discount rates) of the residual earnings model that drive differences in participants’ estimates of fundamental value. Specifically, an ANOVA reveals both a significant main effect of CSR performance (all p-values < 0.05, one-tailed) and a significant CSR performance x assessment interaction (all p-values < 0.07, one-tailed) for earnings forecasts in all four years.

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assess CSR performance are 35.4% higher when CSR performance is positive than when it is

negative ($25.92 > $19.14, p = 0.02, one-tailed), while assessment-condition investors’ estimates

of fundamental value do not differ significantly ($20.82 ≈ $21.12, p = 0.85, two-tailed).16

Taken together, these results support our hypothesis, albeit with stronger support evident

when CSR performance is positive. When CSR performance is better, investors develop higher

estimates of fundamental value when they do not assess versus when they do assess CSR

performance. We next provide corroborative evidence that CSR performance significantly

diminishes the unintended influence of subconscious, affective reactions to CSR performance on

investors’ estimates of fundamental value.

Additional Support for our Hypothesis – Investor Self-Insight

Our hypothesis stems from the idea that investors who do not assess CSR performance

will lack self-insight about how better CSR performance boosts their estimates of fundamental

value. We examined self-insight by asking investors to retrospectively report how much the

CSR performance dimensions affected their judgments (for a similar approach see, e.g., Weitz

and Wright 1979). Specifically, we asked all participants to evaluate the extent to which the

firm’s social and environmental performance explained their inputs into the residual earnings

model used to generate estimates of fundamental value. For example, we asked, “To what extent

did XYZ’s environmental performance explain your estimate of XYZ’s cost of capital?”

Participants responded on 7-point Likert scales with endpoints 1 (Not at all) and 7 (Completely),

with the midpoint of each scale labeled 4 (Moderately). We asked similar questions about the

extent to which environmental and social responsibility performance explained estimates of

16 In addition, consistent with the affect-as-information hypothesis, investors’ affect scores are significantly correlated with estimates of fundamental value in the no-assessment conditions (r = 0.32, p = 0.07, two-tailed), but not in the assessment conditions (r = -0.10, p = 0.55, two-tailed).

17

future earnings and the long-term growth rate in residual earnings. We average these responses

to develop an “awareness score”.17

A higher awareness score indicates stronger investor perceptions that CSR performance

consciously affected their estimates of fundamental value. While our hypothesis predicts better

CSR performance to have a subconscious, affect-driven, and directional influence on investors’

estimates of fundamental value, there is no a priori basis to posit the same directional influence

among investors who only consciously think about the firm-value implications of better CSR

performance. Upon reflection, investors just as easily could reason that positive CSR

performance decreases, does not change, or increases the firm’s fundamental value, consistent

with the ongoing debate and mixed archival findings about CSR performance and firm value

(e.g., McWilliams and Siegel 2001, Margolis et al. 2009, Moser and Martin 2012).

To examine the degree to which the firm’s CSR performance consciously affected

investors’ estimates of fundamental value, we compare their responses to the six questions

described above to the midpoint “4 - Moderately” of the scale. The responses of participants

who do not assess CSR performance are significantly lower than the midpoint on average and for

each of the six questions (i.e., mean 2.62 with a range from 2.32 to 2.77, all p-values < 0.01,

two-tailed). Their relatively low awareness scores suggest that participants who do not assess

CSR performance think it had little influence on their fundamental-value estimates. Since we

already established that better CSR performance, in fact, systematically boosts their

fundamental-value estimates, their self-insight is relatively poor.

Next, we use a between-subjects test to examine investors’ conscious awareness of the

influence of CSR performance on their estimates of fundamental value. In particular, we find 17 We also perform a factor analysis on responses to these six questions and, as expected, find that a single factor explains 83.4% of the variance in responses (eigenvalue = 5.01). The same inferences obtain using the factor score as the measure of awareness. We report findings using the simple average for ease in mapping to the Likert scales.

18

that investors’ awareness scores are significantly lower in the no assessment conditions than in

the assessment conditions (2.62 < 3.35; p = 0.04, two-tailed). Thus, although CSR performance

actually has a greater directional influence on investors’ fundamental-value estimates in the no

assessment conditions than in the assessment conditions, investors in the no assessment

conditions think that CSR performance has a smaller influence on their estimates of fundamental

value. This, again, is consistent with investors in the no assessment conditions having relatively

low self-insight about the directional influence of better CSR performance on the estimates of

fundamental value.

VI. SUPPLEMENTAL ANALYSIS – WILLINGNESS-TO-PAY PRICES

Thus far, we have reported findings that support our hypothesis that better CSR

performance causes investors to subconsciously boost their estimates of the fundamental value,

unless they explicitly assess CSR performance. These findings are stronger for positive CSR

performance than for negative CSR performance. In our supplemental analysis, we examine

whether the stronger effect of positive CSR performance on investors’ estimates of fundamental

value has implications for their willingness-to-pay for XYZ company’s common stock. It is

helpful to examine such price effects because fundamental value may play a less influential role

in determining the maximum price investors will pay for a firm’s stock in contexts in which

investors’ affective reactions (to, e.g., CSR performance) also influence their investment

decisions (see, e.g., Aspara and Tikkanen 2009). In addition, documenting whether pricing

effects are evident serves as a robustness check for our primary analyses.

A post-test portion of our case materials elicited investors’ willingness-to-pay prices by

presenting them with the following: “Assume that you have received an inheritance of $10,000

from a distant relative. Please indicate the maximum price per share at which you would be

19

willing to invest the following amounts in XYZ stock.” To better control for participant-specific

variation in prices, we elicited four prices per participant instead of one, asking for the maximum

price they would pay to allocate “$10,000, or 100%, of your inheritance”, “$7,500, or 75%, of

your inheritance”, “$5,000 or 50% of your inheritance”, and “$2,500 or 25% of your inheritance”

to Firm XYZ’s common stock.

Using these prices, we create a Percentage of Inheritance Invested price profile for each

participant and estimate a repeated-measures ANOVA that also includes one three-level,

between-subjects factor that we call CSR Performance/Assessment. The three between-subjects

levels are the conditions featuring neutral CSR performance with no assessment (i.e., control),

positive CSR performance with no assessment, and positive CSR performance with assessment.

The resulting (4 x 3) mixed design enables us to test whether better CSR performance increases

the price investors are willing to pay unless they also assess the better CSR performance.18

Figure 3 separately plots investors’ price profiles for each of the three levels of CSR

Performance/Assessment, while Table 2 provides additional descriptive statistics (Panel A) and

the repeated measures ANOVA (Panel B). The price profiles are upward sloping, indicating that

investors quite reasonably would pay a higher price per share to invest smaller portions of their

inheritance in one firm’s stock. This effect corresponds to the Percentage of Inheritance

Invested within-subjects effect in the ANOVA presented in Panel B of Table 2 (F3, 141 = 87.67, p

< 0.01). The effect of greater relevance for our robustness check, however, is the Percentage of

Inheritance Invested x CSR Performance/Assessment interaction (F6,141 = 2.25, p = 0.04). This

interaction obtains because better CSR performance causes the investors’ price profiles to be

18 For our supplemental analysis, we exclude two additional participants: one participant whose willingness-to-pay response was nearly eighty times greater than the average of all other responses and more than eight standard deviations greater than the mean response, and another participant who did not respond to our willingness-to-pay measures.

20

significantly steeper, with increasingly larger price differentials going from higher to lower

percentages of inheritance invested (see especially 25% level in Figure 3), unless investors do

not explicitly assess the better level of CSR performance. This is exactly as we would expect if

findings in support of our hypothesis have implications for the prices investors are willing to pay.

We next conduct a more pointed supplemental test by combining the two conditions that,

as expected, have relatively similar price profiles, i.e., the neutral CSR performance/no-

assessment condition and the positive CSR performance/assessment condition, effectively

yielding a (4 x 2) mixed design. The findings once again indicate that price profile for investors

in the positive CSR performance/no-assessment condition is significantly steeper, but

Percentage of Inheritance Invested x CSR Performance/Assessment interaction is significant at a

lower alpha level (F3, 144 = 4.27, p < 0.01).

Last, we apply the regression approach to mediation analysis and find that investors’

fundamental value estimates fully mediate the influence of positive CSR performance on the

maximum price investors report being willing to pay. When added as a covariate, investors’

estimate of fundamental value is significant both on a between-subjects basis (F1, 47 = 40.26, p <

0.01) and on a within-subjects basis (F3, 144 = 3.35, p = 0.02), and the Percentage of Inheritance

Invested x CSR Performance/Assessment interaction is no longer significant (F3, 144 = 1.86, p =

0.14). 19

Together, our primary and supplemental findings suggest that better CSR performance

can subconsciously boost investors’ estimates of fundamental value as well as the price they are

willing to pay for a firm’s common stock. They also suggest, however, that explicitly assessing

19 Our main 2 x 2 + 1 between-subjects design is not fully crossed, so we cannot simply use one model to test the overall patterns suggested by our hypothesis. We did separately look at negative CSR performance with analyses analogous to those reported here. Results go the expected direction but are not significant at conventional levels.

21

better CSR performance improves investors’ self-insight into their judgment processes and

reduces this subconscious boost to estimated fundamental values.

VII. CONCLUSION

We present theory and experimental-empirical evidence suggesting that investors’

estimates of fundamental value depend jointly on a firm’s corporate social responsibility (CSR)

performance and on investor assessment of such performance during their investment analysis.

Our results are consistent with investors subconsciously using their affective reactions to positive

CSR performance to unintentionally increase their estimates of fundamental value, and with

investor assessment of CSR performance significantly diminishing this subconscious influence.

An important implication of the latter is that investor assessment of CSR performance increases

their self-insight. Better self-insight would be particularly helpful to investors because there are

different normative perspectives and mixed archival evidence about the conditions under which

better CSR performance increases, does not change, or decreases firms’ fundamental value (e.g.,

McWilliams and Siegel 2001, Margolis et al. 2009, Matsumura et al. 2011, Dhaliwal et al. 2011,

Plumlee et al. 2010, Izzo and Magnanelli 2012, Moser and Martin 2012).

Supplemental analyses also suggest that no-assessment condition investors’ lack of self-

insight has consequences for the maximum price they are willing to pay to invest in a firm’s

common stock. These analyses indicate that no-assessment condition investors are more willing

to invest in a firm with positive CSR performance, and that the effect of CSR performance on

willingness to invest is completely mediated by their (subconsciously-influenced) estimates of

fundamental value.

Our theory and findings extend the accounting literature by providing evidence of a

causal relation between CSR performance and investors’ estimates of fundamental value that

22

reflects a subconscious, unintended influence of CSR. We also identify a new boundary

condition for the conclusion reached in prior accounting literature that investors tend to have

reasonably good self-insight (e.g., Wright 1977, 1979). Our investors lack self-insight about

how CSR performance boosts their estimates of fundamental value unless they assess CSR

performance. At the same time, our study provides evidence of the robustness of affect’s role in

subconsciously influencing judgments in accounting settings. While prior work examines juror

and employee judgments in contexts unlikely to affect participants’ wealth (e.g., Kadous 2001,

Moreno et al. 2002), our study confirms affect’s subconscious influence and substantial effect

size in a context highly relevant to participants’ wealth, i.e., fundamental value estimation.

Finally, we show that positive CSR performance causally increases investors’ willingness to

invest via subconsciously-influenced fundamental value estimates. If widely sustained, this

ironically could decrease the firm’s empirical cost of equity capital. In this respect, our study

complements prior archival research that documents an association between enhanced CSR

performance/disclosure and cost of capital at the market level (e.g., Plumlee et al. 2010,

Dhaliwal et al. 2011).

In sum, this study shows that CSR performance subconsciously influences investor

judgments but that investor assessment of CSR performance reduces this influence, thereby

improving investors’ self-insight. While future research may profitably examine alternative CSR

assessment methods as well as potential costs or other benefits of investor assessment of CSR

performance, the current study demonstrates how, without CSR assessment, CSR performance

can undermine investors’ self-insight, lead to subconscious boosts in their estimates of

fundamental value and, via this unintentional boost, increase how much they are willing to pay

for the firm’s stock. Overall, the theory-consistent findings herein provide new reason to

23

hearken back to Paul Slovic’s opening quotation in his 1972 thought piece about how

psychology theories about human judgment can be applied to help us better understand

investment decision making, i.e., by quoting Adam Smith’s The Money Game, “You are—face

it—a bunch of emotions, prejudices, and twitches, and this is all very well as long as you know it

…. If you don’t know who you are, this is an expensive place to find out.” (Slovic 1972, 779).

24

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28

FIGURE 1

Apple’s Investor Relations Website

29

FIGURE 2 The Joint Effects of Corporate Social Responsibility (CSR) Performance and Investor

Assessment of CSR Performance on Estimates of Fundamental Value

Panel A: Predicted Effects

Panel B: Observed Effects

Panel A depicts the pattern consistent with the hypothesized interaction of corporate social responsibility performance (positive or negative) and an investor assessment of CSR performance (absent or present) on investors’ estimates of fundamental value. Panel B depicts the observed pattern of cell means for participants’ estimates of fundamental value (see Table 1, Panel A). This pattern is tested using the ANOVA presented in Panel B of Table 1.

0"

1"

2"

3"

4"

5"

6"

Negative Positive

Fund

amen

tal V

alue

Corporate Social Responsibility Performance

No

Yes

$19.14

$25.92

$21.12 $20.82

$18 $19 $20 $21 $22 $23 $24 $25 $26 $27

Negative Positive

Fund

amen

tal V

alue

per

Sha

re

Corporate Social Responsibility Performance

No

Yes "Control"

$20.72

Assessment:

Assessment:

30

FIGURE 3 Positive CSR Performance Causes an Increased Willingness to Invest Inheritance in Firm

XYZ Stock Unless Investors’ Explicitly Assess CSR Performance

A post-test question asked investors to assume they had inherited $10,000 and to specify maximum prices at which they would invest 25%, 50%, 75% or 100% of their inheritance in firm’s XYZ’s stock (i.e., x-axis). The y-axis is willingness to invest prices (in $). See Table 2 for additional descriptive and inferential statistics.

"$14.49""

"$17.74""

"$20.43""

"$23.76""

"$13.95""

"$15.86""

"$18.14""

"$20.33""

"$14.19""

"$16.04""

"$17.75""

"$19.71""

"$13.00""

"$15.00""

"$17.00""

"$19.00""

"$21.00""

"$23.00""

100%" 75%" 50%" 25%"

Willingness(to(In

vest-Pric

e-

Percentage-of-Inheritance-Invested-in-XYZ-Firm's-Common-Stock-

Posi3ve"6"No"Assessment"

Posi3ve"6"Assessment"

Neutral"6"No"Assessment"

31

TABLE 1 Descriptive Statistics and Test of Hypothesis

Panel A: Descriptive Statistics – Fundamental Value per Share mean [standard deviation]

CSR Performance

Condition n Negative n Neutral n Positive

No assessment 16 $19.14 [$4.25] 20 $20.72

[$2.66] 16 $25.92 [$10.80]

Assessment 18 $21.12 [$5.15] 17 $20.82

[$3.77]

Panel B: ANOVA Model of Fundamental Value per Share (excluding control condition)

Source of Variation SS df MS F-stat p-value CSR performance 175.40 1 175.40 4.10 0.02*

Assessment condition 40.68 1 40.68 0.95 0.33**

CSR performance x Assessment condition 209.49 1 209.49 4.89 0.02*

Error 2696.54 63 42.80

Panel C: Follow-up Tests of Simple Effects

Source of Variation df F-stat p-value Effect of CSR performance given No assessment 1 5.47† 0.02*

Effect of CSR performance given Assessment 1 0.04 0.85**

Effect of assessment given positive CSR performance 1 3.20† 0.05* Effect of assessment given negative CSR performance 1 1.47 0.12*

Participants estimated fundamental value by providing the following inputs to a residual earnings model template: earnings forecasts for four subsequent years, cost of capital, and a long-term growth rate for residual earnings. Figure 2, Panel B provides an illustration of these results.

* Reported p-values are one-tailed, given our directional predictions ** Two-tailed equivalent † Reported F-statistics are adjusted for heterogeneous variances.

32

TABLE 2 Supplementary Analyses of Whether Positive CSR Performance Increases Price Investors are

Willingness to Pay for Firm XYZ Stock Unless They Explicitly Assess CSR Performance

Panel A: Descriptive Statistics – Fundamental Value per Share mean [standard deviation]

Percentage of Inheritance Invested in XYZ Stock

CSR Performance/Assessment Condition n 100% 75% 50% 25% Mean

Positive CSR Performance – No Assessment 16 $14.49 [$6.80]

$17.74 [$6.44]

$20.43 [$6.12]

$23.76 [$6.44]

$19.10 [$6.45]

Positive CSR Performance – Assessment 15 $13.95 [$6.82]

$15.86 [$6.43]

$18.14 [$6.12]

$20.33 [$6.43]

$17.07 [$6.45]

Neutral CSR Performance – No Assessment 19

$14.19 [$6.80]

$16.04 [$6.45]

$17.75 [$6.15]

$19.71 [$6.45]

$16.92 [$6.47]

Panel B: Repeated Measures ANOVA Model of Willingness to Invest

Between Subjects Source of Variation SS df MS F-stat p-value CSR Performance/Assessment Condition 196.06 2 98.03 0.65 0.53

Error 7105.49 47 151.18

Within Subjects Source of Variation

Percentage of Inheritance Invested 1355.43 3 451.81 87.67 <0.01

CSR Performance/Assessment Condition x Percentage of Inheritance Invested 2696.54 6 42.80 2.25 0.04#

Error 726.73 141

Participants were asked to imagine that they had inherited $10,000 from a distant relative and to report the maximum prices at which the would invest 100%, 75%, 50%, and 25% of their inheritance in Firm XYZ’s common stock. These percentages are the within-subjects factor in the Repeated Measures ANOVA, and the between-subjects factor examines three levels: neutral CSR performance with no assessment of CSR performance (i.e., control condition), positive CSR performance (also) with no assessment of CSR performance, and positive CSR performance but with explicit assessment of CSR performance. This design enables us to examine directly whether more positive CSR performance increases the price investors are willing to pay but also whether explicit assessment of more positive CSR performance mitigates any such increase. Figure 3 provides an illustration of these results. # Despite our directional hypothesis, we report a standard p-value as one cannot simply divide a p-value by 2 in light of a directional prediction for an F-stat having 2 or more degrees of freedom in the numerator even though doing so is fine for F-stats with 1 degree of freedom in the numerator.

33

APPENDIX A Manipulation of CSR Performance

Part 1: Positive CSR Performance

SOCIAL'RESPONSIBILITY'!

OVERALL!SOCIAL!RESPONSIBILITY!RATING!(Industry!Average:!57.12)'

RETAIL''

XYZ'Stores'Sells!discounted!retail!apparel,!footwear,!home!decorations,!jewelry!and!other!accessories!through!its!XYZ!retail!stores.!

87.30!'

KEY'ISSUES'! !SUPPLY!CHAIN! !XYZ!has!been!a! leader! in! combating! labor! rights! abuses! in! its!overseas! supply! chain,! and!NGOs!have!praised!the!company!for!its!proactive!approach!to!working!with!foreign!suppliers!to!pay!workers!a!living!wage!and!to!provide!access!to!affordable!housing!and!health!care.!!In!addition,!XYZ!stands!out!from!its!peers!as!the!first!in!the!industry!to!disclose!its!supplier!list.!! !PRODUCT!QUALITY!AND!SAFETY!!A! substantial! portion! of! XYZ’s! operations! is! ISO! 9001! certified.! ! XYZ! has! been! praised! by! consumer!groups! for! the! quality! of! its! products,! and! recently! received! a! product! safety! award! from! the!Home!Safety!Council!for!a!new!line!of!own^label!nursery!bedding.!! !EMPLOYEE!SAFETY!XYZ! implemented! a! comprehensive,! enterprise^wide! employee! safety! policy! and! training! program! in!20X8,!following!a!serious!accident!in!one!of! its!stores.! !This! initiative!is!widely!admired!and!used!as!a!benchmark!within!the!industry.!!

INDUSTRY!RANK!(out!of!56!companies)!

3!!

SELECTED'COMPETITORS'How! the! company’s! overall! Social! Responsibility!Rating!compares!with!primary!competitors.!!XYZ!Stores…………………………………..…87.30!!

TJX…………………………………………………86.90!!

Kohls……………………………………………..79.42!!

Ross!Stores……………………………………59.38!!

Sears!Holdings……………………………….35.29!!

ABC!Stores…………………………………….24.62!!

COMMUNITY'&'SOCIETY'How! the! company! compares! with! its! industry;! a!measure!of! firm! impact!on!community!and!social!issues.! Individual! measures! scored! 1! to! 5;! 5! is!best.!

'SCORE'_!

!

CUSTOMERS'How!the!company!compares!with! its! industry;!all!customer^related! policies,! initiatives! and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!

'SCORE'_!

!

EMPLOYEES'&'SUPPLY'CHAIN'How!the!company!compares!with! its! industry;!all!employee!and!supply!chain!policies,!initiatives!and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!

'SCORE'_!'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''75.01.''

'Industry'average'''''''''''''''''''''''''''''''53.20.'!Philanthropy…………………………………..…..…•••••!!Impact!on!community….………………..……..•••••!!Human!rights:!civil!and!

political………………………………………….……..•••••!!

'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''88.38.''

'Industry'average'''''''''''''''''''''''''''''''59.17.'!Marketing!&!advertising……..………….……..•••••!!Product!quality!&!safety……………….……....•••••!!Anticompetitive!practices..…………….……..•••••!!Customer!relations……………..………….……..•••••!

'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''90.25.''

'Industry'average'''''''''''''''''''''''''''''''49.91.'!Labor^management!relations………..…..…•••••!

!Employee!safety…..………………………..……..•••••!!Workforce!diversity……………….……….……..•••••!!Supply!chain……………………….…………….…..•••••!

ENVIRONMENT)!

OVERALL!GREEN!SCORE!(Industry!average!56.23))

RETAIL)))

XYZ)Stores)Sells! discounted! retail! apparel,! footwear,! home! decorations,! jewelry! and! other!accessories!through!its!XYZ!retail!stores.!

86.73!!!)ENVIRONMENTAL)IMPACT)How! the! company! compares! with! its! industry;! a!measure! of! environmental! impacts! from! global!operations.!Individual!measures!scored!1!to!5;!5!is!best.!!

SCORE_.!

!))GREEN)POLICIES)How!the!company!compares!with! its! industry;!all!environmental! policies,! programs,! initiatives! and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!!

SCORE_.!

!


3!)XYZ)Stores))))))))))))))))))))))))))))))))))))))))))83.47.))

)Industry)average)))))))))))))))))))))))))))))))52.10.)!

Greenhouse!gas!emissions/revenue…..…•••••!!Water!use/revenue………………………..……..•••••!!Solid!waste!disposed/revenue……….……..•••••!!Acid!rain!emissions/revenue………….……..•••••!

)XYZ)Stores))))))))))))))))))))))))))))))))))))))))))80.92.))

)Industry)average)))))))))))))))))))))))))))))))48.59.)!Climate!change!policies!and!

performance………………………..………….…….•••••!!

Pollution!policies!and!performance……...•••••!!

Product!impact……………………………….……..•••••!!

Environmental!stewardship..………….…….•••••!!

Management!of!environmental!

issues…………………………………………………….•••••!

!

PROFILE)!Number)of)stores:!1,010!Number)of)employees:!83,000!Stock:!NYSE:!XYZ!Contact:)[email protected]!!

)

)

KEY)IMPACTS)How!the!company’s!footprint!compares!with!the!industry!average!for!the!three!factors!that!contribute!most!to!this!sector’s!environmental!impact.!Scored!from!d3!(worst)!to!+3!(best)!relative!to!average.!!

Greenhouse!gases………………………………………………………………………………………………….+2!!Waste!(landfill,!incinerated,!and!recycled)………………………………………………………….….+3!!Dust!and!particles.………………………………………………………………………………………………….+2!!)

!

SELECTED)COMPETITORS)How!the!company’s!overall!Green!Score!compares!with!primary!competitors.!

!XYZ!Stores…………………………………..…86.73!!

Kohls……………………………………………..84.63!!

TJX…………………………………………………76.04!!

Sears!Holdings……………………………….57.94!!

ABC!Stores…………………………………….36.81!!

Ross!Stores……………………………………25.53!

!

34

Part 2: Negative CSR Performance



RETAIL''


26.30!'

KEY'ISSUES'! !SUPPLY!CHAIN! !XYZ!has!done!little!to!combat!labor!rights!abuses!in!its!overseas!supply!chain,!and!NGOs!have!criticized!the!company!for!its!reaction!to!allegations!that!its!foreign!suppliers!fail!to!pay!workers!a!living!wage!or!provide!access! to!affordable! housing!and! health! care.! ! In! addition,!XYZ! stands!out! from! its!peers! for!refusing!to!disclose!its!supplier!list.!! !PRODUCT!QUALITY!AND!SAFETY!!A!small!portion!of!XYZ’s!operations!is! ISO!9001!certified.! !XYZ!has!been!criticized!by!consumer!groups!for!the!quality!of!its!products,!and!was!recently!forced!to!recall!a!new!line!of!own_label!nursery!bedding!because!of!safety!concerns!raised!by!the!Home!Safety!Council.!! !EMPLOYEE!SAFETY!XYZ!launched!a!review!of! its!employee!safety!policy!and!training!program!in!20X8,!following!a!serious!accident!in!one!of!its!stores.!!This!initiative!is!widely!seen!as!an!inadequate!response!that!falls!short!of!industry!benchmarks.!!


54!!


TJX…………………………………………………86.90!!

Kohls……………………………………………..79.42!!

Ross!Stores……………………………………59.38!!

Sears!Holdings……………………………….35.29!!

ABC!Stores…………………………………….24.62!!


'SCORE'_!

!

CUSTOMERS'How!the!company!compares!with! its! industry;!all!customer_related! policies,! initiatives! and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!

'SCORE'_!

!

EMPLOYEES'&'SUPPLY'CHAIN'How!the!company!compares!with! its! industry;!all!employee!and!supply!chain!policies,!initiatives!and!controversies.! Individual!measures! scored!1! to!5;!5!is!best.!

'SCORE'_!'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''31.39.''


political………………………………………….……..•••••!!

'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''29.96.''


'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''''9.57.''

'Industry'average'''''''''''''''''''''''''''''''49.91.'!Labor_management!relations………..…..…•••••!


ENVIRONMENT)!


RETAIL)))


25.73!!

!)ENVIRONMENTAL)IMPACT)How! the! company! compares! with! its! industry;! a!measure! of! environmental! impacts! from! global!operations.!Individual!measures!scored!1!to!5;!5!is!best.!!

SCORE_.!

!

))GREEN)POLICIES)How!the!company!compares!with! its! industry;!all!environmental! policies,! programs,! initiatives! and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!!

SCORE_.!

!


54!)XYZ)Stores))))))))))))))))))))))))))))))))))))))))))20.73.))



)XYZ)Stores))))))))))))))))))))))))))))))))))))))))))16.26.))


Climate!change!policies!and!

performance………………………..………….…….•••••!!


Product!impact……………………………….……..•••••!!



issues…………………………………………………….•••••!

!


)

)

KEY)IMPACTS)How!the!company’s!footprint!compares!with!the!industry!average!for!the!three!factors!that!contribute!most!to!this!sector’s!environmental!impact.!Scored!from!e3!(worst)!to!+3!(best)!relative!to!average.!!

Greenhouse!gases……………………………………………………………………………………………….….e2!!Waste!(landfill,!incinerated,!and!recycled)………………………………………………………………e3!!Dust!and!particles.…………………………………………………………………………………………………..e2!!!)

!


!XYZ!Stores…………………………………..…25.73!!

Kohls……………………………………………..84.63!!

TJX…………………………………………………76.04!!

Sears!Holdings……………………………….57.94!!

ABC!Stores…………………………………….36.81!!

Ross!Stores……………………………………25.53!

!

35

Part 3: Neutral CSR Performance



RETAIL''


57.62!'

KEY'ISSUES'! !SUPPLY!CHAIN! !XYZ!has!made!a!moderate!effort!to!combat!labor!rights!abuses!in!its!overseas!supply!chain,!and!NGOs!have!called!on!the!company!to!do!more!to!ensure!that!its!foreign!suppliers!pay!workers!a!living!wage!and!provide!access!to!affordable!housing!and!health!care.!!In!addition,!XYZ!has!recently!fallen!into!line!with!standard!industry!practice!by!disclosing!its!supplier!list.!! !PRODUCT!QUALITY!AND!SAFETY!!A!moderate!portion!of!XYZ’s!operations!is!ISO!9001!certified.!!XYZ!has!received!both!praise!and!criticism!from!consumer!groups!for! the!quality!of! its!products,!and!has!recently!submitted!a!new!line!of!own]label!nursery!bedding!for!evaluation!by!the!Home!Safety!Council.!! !EMPLOYEE!SAFETY!XYZ! launched! a! comprehensive! review! of! its! employee! safety! policy! and! training! program! in! 20X8,!following! a! serious! accident! in! one! of! its! stores.! ! This! initiative! is! generally! seen! as! an! adequate!response!that!meets!industry!benchmarks.!!


28!!


TJX…………………………………………………86.90!!

Kohls……………………………………………..79.42!!

Ross!Stores……………………………………59.38!!

Sears!Holdings……………………………….35.29!!

ABC!Stores…………………………………….24.62!!


'SCORE'_!

!

CUSTOMERS'How!the!company!compares!with! its! industry;!all!customer]related! policies,! initiatives! and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!

'SCORE'_!

!

EMPLOYEES'&'SUPPLY'CHAIN'How!the!company!compares!with! its! industry;!all!employee!and!supply!chain!policies,!initiatives!and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!

'SCORE'_!'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''54.11.''


political………………………………………….……..•••••!!

'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''59.50.''


'XYZ'Stores''''''''''''''''''''''''''''''''''''''''''49.00.''

'Industry'average'''''''''''''''''''''''''''''''49.91.'!Labor]management!relations………..…..…•••••!


ENVIRONMENT)!


RETAIL)))


56.73!!

!)ENVIRONMENTAL)IMPACT)How! the! company! compares! with! its! industry;! a!measure! of! environmental! impacts! from! global!operations.!Individual!measures!scored!1!to!5;!5!is!best.!!

SCORE_.!

!

))GREEN)POLICIES)How!the!company!compares!with! its! industry;!all!environmental! policies,! programs,! initiatives! and!controversies.! Individual!measures!scored!1! to!5;!5!is!best.!!

SCORE_.!

!


28!)XYZ)Stores))))))))))))))))))))))))))))))))))))))))))50.73.))



)XYZ)Stores))))))))))))))))))))))))))))))))))))))))))49.96.))


Climate!change!policies!and!

performance………………………..………….…….•••••!!


Product!impact……………………………….……..•••••!!



issues…………………………………………………….•••••!

!


)

)

KEY)IMPACTS)How!the!company’s!footprint!compares!with!the!industry!average!for!the!three!factors!that!contribute!most!to!this!sector’s!environmental!impact.!Scored!from!d3!(worst)!to!+3!(best)!relative!to!average.!!

Greenhouse!gases……………………………………………………………………………………………….….d1!!Waste!(landfill,!incinerated,!and!recycled)………………………………………………………….……0!!Dust!and!particles.…………………………………………………………………………………………………..+1!!!)

!


!XYZ!Stores…………………………………..…56.73!!

Kohls……………………………………………..84.63!!

TJX…………………………………………………76.04!!

Sears!Holdings……………………………….57.94!!

ABC!Stores…………………………………….36.81!!

Ross!Stores……………………………………25.53!

!

36

APPENDIX B Assessment of CSR Performance

1. XYZ Stores’ stance and performance on social issues is… …very unfavorable. …moderately unfavorable …slightly unfavorable …neutral …slightly favorable …moderately favorable …very favorable.

|----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree

2. XYZ Stores is committed to providing jobs and compensation levels that contribute to improved living standards.

|----|----|----|----|----|----|

-3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree

3. XYZ Stores encourages and prefers suppliers and subcontractors whose employment policies meet best practice standards.

|----|----|----|----|----|----|


4. XYZ Stores does too little to provide working conditions that protect each employee's health and safety.

|----|----|----|----|----|----|


5. XYZ Stores is an industry leader when it comes to contributing to the social development of the communities in which it operates.

|----|----|----|----|----|----|


1. XYZ Stores’ stance and performance on environmental issues is… …very unfavorable. …moderately unfavorable …slightly unfavorable …neutral …slightly favorable …moderately favorable …very favorable.

|----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree |----|----|----|----|----|----| -3 -2 -1 0 +1 +2 +3 Strongly Neutral Strongly Disagree Agree

2. XYZ Stores is an industry leader when it comes to protecting and, where possible, improving the environment.

|----|----|----|----|----|----|


3. XYZ Stores ensures that its operations comply with best environmental management practices consistent with meeting the needs of today without compromising the needs of future generations.

|----|----|----|----|----|----|


4. XYZ Stores encourages and prefers suppliers and subcontractors whose environmental practices meet best practice standards.

|----|----|----|----|----|----|


5. XYZ Stores does too little to protect its customers and other stakeholders from harmful environmental impacts of its products and services.

|----|----|----|----|----|----|


37

APPENDIX C Residual Earnings Model Template

mitigating the unintended effect of corporate social ... · mitigating the unintended effect of...

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