Activism on Corporate Social Responsibility

1. Activism on Corporate Social Responsibility Elroy Dimson LBS and Cambridge Judge Business School co-authored with Oğuzhan Karakaş and Xi Li Boston College and Temple University respectively 26 March 2012 – Inquire Europe, Budapest

2. Activism • Which firms do CSR activists target in the US? • What determines the success of CSR activism? • How does the market react to CSR engagements? • Do activists succeed in implementing their objectives? • How do CSR activities impact firm performance?

3. Responsibility • What is Socially Responsible Investing? • A recognition that CSR is a part of investment decision making • Screening, shareholder activism, investing according to ESG* criteria • Who are SRI investors? • Universities, pensions, non-profits, faiths, foundations, HNWs • How large is SRI marketplace? • 1 in 8 dollars managed in US (12.2% of $25 trillion) * Environmental, social and governance Source: US SIF

4. Literature • Shareholder Activism (Institutional vs. Hedge Fund) • Smith (1996), Wahal (1996), Carleton, Nelson, and Weisbach (1998), Barber (2007), Brav, Jiang, Partnoy, and Thomas (2008), Becht, Franks, Mayer, and Rossi (2009), Klein and Zur (2009) • CSR/SRI • Fisman, Heal, and Nair (2005), Besley and Ghatak (2007), Margolis, Elfenbein, and Walsh (2007), Baron (2008), Hong and Kacperczyk (2009), Benabou and Tirole (2010), Edmans (2010), Gollier and Pouget (2011), Statman and Glushkov (2011), Cheng, Hong, and Shue (2012), Di Giuli and Kostovetsky (2012), Borgers, Derwall, Koedijk, and Ter Horst (2012)

5. Views 1. Win-win (“Doing well by doing good”)(+) Long-term perspective to maximize intertemporal profits 2. Delegated philanthropy(+) Firm as an efficient channel for expressing citizens’ values 3. Insider-initiated corporate philanthropy (−) Milton Friedman (1970) 1 & 2: Profit maximization and CSR are consistent 2 & 3: Build on individual social responsibility Source: Benabou and Tirole (2010)

6. Data • A step towards overcoming endogeneity • Unique and extensive dataset of CSR engagements • Point-in-time record of engagements and outcomes • 2,152 engagement sequences • 613 public firms in the US over period 1999 to 2009 • Engagement on ESG issues • Illustration of a successful engagement sequence: Milestone Raising Awareness Request for Change t0 t1 t2 time

7. Themes % of sequences 42 10 7 7 4 10 1 9 10 100 % successful 24 14 9 10 10 18 7 10 17 18 Horizon(days) 525 647 284 521 512 386 622 591 410 503 • Governance • Corporate governance • Business ethics • Sustainability management/reporting • Environmental • Climate change • Ecosystem services • Environmental management • Social • Public health • Human rights • Labour standards Source: Table 1, Panel A

8. Targeting Probit: 1=targeted, 0=otherwise Probit coefficients Size (market cap) Firm age (years) Growth in sales (% per year) Advertising expenditure (% of assets) Institutional holding by Manager Institutional holding by others Illiquidity (Amihud measure) Analyst following (number on IBES) Governance index (Gompers et al) Eight other variables Year Fixed Effects Number of observations Pseudo R2 .008*** .001** − .146*** .702** 20.953*** .091*** −1.365** .005*** .009*** n.s. Yes 2218 .542 .008*** .001** − .146*** .702** 20.953*** .091*** −1.365** .005*** .009*** n.s. Yes 2218 .542 .008*** .001** − .146*** .702** 20.953*** .091*** −1.365** .005*** .009*** n.s. Yes 2218 .542 .008*** .001** − .146*** .702** 20.953*** .091*** −1.365** .005*** .009*** n.s. Yes 2218 .542 .008*** .001** − .146*** .702** 20.953*** .091*** −1.365** .005*** .009*** n.s. Yes 2218 .542 Source: Table 3

9. Success Probit: 1=success, 0=otherwise Probit coefficients Size (market cap) Cash holdings (% of assets) Capital expenditure (% of assets) R&D (% of assets) Advertising expenditure (% of assets) Illiquidity (Amihud measure) Analyst following (number on IBES) Governance index (Gompers et al) Ten other variables Year Fixed Effects Number of observations Pseudo R2 .000** .402** − .716* − 1.174*** 1.328** − 7.933** .010*** .005*** n.s. Yes 1109 .198 .000** .402** − .716* − 1.174*** 1.328** − 7.933** .010*** .005*** n.s. Yes 1109 .198 .000** .402** − .716* − 1.174*** 1.328** − 7.933** .010*** .005*** n.s. Yes 1109 .198 .000** .402** − .716* − 1.174*** 1.328** − 7.933** .010*** .005*** n.s. Yes 1109 .198 Source: Table 4

10. Performance

11. Alpha Source: Table 6

12. Buy-and-hold Annualized return from engagement to milestone Source: Table 7

13. Impact Source: Table 8, Panel A

14. Governance Annualized return in excess of matched sample Source: Table 8, Panel B

15. Alternative Explanations • Stock picking? • Abnormal returns for successful engagements • Management filtering? • No impact of governance indices on abnormal returns • Performance causes success? • Buy-and-hold returns do not explain success • Significant reaction in the event month • Improved governance • Why don’t firms engage in CSR themselves? • Agency issues (bad governance) • Directional guidance from the investor

16. Conclusions • 4% yearly abnormal return for successful engagements • No market reaction to unsuccessful engagements • Positive reaction to corporate-governance and climate-change engagements • Firms that are targeted reveal • Greater reputational concerns, inferior governance, superior capacity to improve • Determinants of successful CSR change • Reputation, economies of scale, scope for improvement • Outcome from CSR change • Improved operating performance, profitability, efficiency, and governance