Measuring Corporate Social Performance

Measuring Corporate Social Performance
TOMS Shoes’ commitment to donating a pair of shoes for every shoe sold illustrates the concept of social
entrepreneurship, in which a business is created with a goal of bettering both business and society (Schectman,
2010). Firms such as TOMS exemplify a desire to improve corporate social performance (CSP) in which a
commitment to individuals, communities, and the natural environment is valued alongside the goal of creating
economic value. Although determining the level of a firm’s social responsibility is subjective, this challenge has
been addressed in detail by Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based firm that rates firms
on a number of stakeholder-related issues with the goal of measuring CSP. KLD conducts ongoing research on
social, governance, and environmental performance metrics of publicly traded firms and reports such statistics to
institutional investors. The KLD database provides ratings on numerous “strengths” and “concerns” for each firm
along a number of dimensions associated with corporate social performance (Table 10.7 “Measuring Corporate
Social Performance”). The results of their assessment are used to develop the Domini social investments fund,
which has performed at levels roughly equivalent to the S&P 500.
Table 10.7 Measuring Corporate Social Performance
Corporate social performance is defined as the degree to which a firm’s actions honor ethical values that respect
individuals, communities, and the natural environment. Determining whether a firm is socially responsible is
somewhat subjective, but one popular approach has been developed by KLD Research & Analytics. Their work
tracks “strengths” and “concerns” for hundreds of firms over time. KLD’s findings are used by investors to screen
socially responsible firms and by scholars who are interested in explaining corporate social performance. We
illustrate the six key dimensions tracked by KLD below.
Community strengths include
engagement in charitable
giving, while involvement in
tax controversies exemplifies a
community concern.
Product quality/safety strengths include
actions such as the establishment of a
well-developed quality program, while
concerns arise if a firm receives fines related
to product quality and/or safety.
Diversity strengths include progressive programs for
the employment of the disabled, whereas fines or civil
penalties that result from an affirmative action
constitute a concern.
A no-layoff policy is a strength
in regard to employee
relations, while poor union
relations are a concern.
Environmental strengths include engaging in
recycling, while concerns arise when penalties
for air or water violations are documented.
Corporate governance strengths include equitable
levels of compensation for top management and board
members, while concerns are raised if controversies
related to accounting, transparency, or political
accountability are discovered.
Assessing the community dimension of CSP is accomplished by assessing community strengths, such as
charitable or innovative giving that supports housing, education, or relations with indigenous peoples, as well as
charitable efforts worldwide, such as volunteer efforts or in-kind giving. A firm’s CSP rating is lowered when a
firm is involved in tax controversies or other negative actions that affect the community, such as plant closings
that can negatively affect property values.
Chick-fil-A encourages education through their program that has provided more than $25 million in
financial aid to more than twenty-five thousand employees since 1973.
Ann Larie Valentine – Chik-fil-A – CC BY-SA 2.0.
CSP diversity strengths are scored positively when the company is known for promoting women and minorities,
especially for board membership and the CEO position. Employment of the disabled and the presence of
family benefits such as child or elder care would also result in a positive score by KLD. Diversity concerns
include fines or civil penalties in conjunction with an affirmative action or other diversity-related controversy.
Lack of representation by women on top management positions—suggesting that a glass ceiling is present at a
company—would also negatively impact scoring on this dimension.
The employee relations dimension of CSP gauges potential strengths such as notable union relations, profit
sharing and employee stock-option plans, favorable retirement benefits, and positive health and safety programs
noted by the US Occupational Health and Safety Administration. Employee relations concerns would be evident
in poor union relations, as well as fines paid due to violations of health and safety standards. Substantial workforce
reductions as well as concerns about adequate funding of pension plans also warrant concern for this dimension.
The environmental dimension records strengths by examining engagement in recycling, preventing pollution, or
using alternative energies. KLD would also score a firm positively if profits derived from environmental products
or services were a part of the company’s business. Environmental concerns such as penalties for hazardous waste,
air, water, or other violations or actions such as the production of goods or services that could negatively impact
the environment would reduce a firm’s CSP score.
Product quality/safety strengths exist when a firm has an established and/or recognized quality program; product
quality safety concerns are evident when fines related to product quality and/or safety have been discovered or
when a firm has been engaged in questionable marketing practices or paid fines related to antitrust practices or
price fixing.
Corporate governance strengths are evident when lower levels of compensation for top management and board
members exist, or when the firm owns considerable interest in another company rated favorably by KLD;
corporate governance concerns arise when executive compensation is high or when controversies related to
accounting, transparency, or political accountability exist.
Strategy at the Movies
Thank You for Smoking
Does smoking cigarettes cause lung cancer? Not necessarily, according to a fictitious lobbying group called
the Academy of Tobacco Studies (ATS) depicted in Thank You for Smoking (2005). The ATS’s ability to
rebuff the critics of smoking was provided by a three-headed monster of disinformation: scientist Erhardt
Von Grupten Mundt who had been able to delay finding conclusive evidence of the harms of tobacco for
thirty years, lawyers drafted from Ivy League institutions to fight against tobacco legislation, and a spin
control division led by the smooth-talking Nick Naylor.
The ATS was a promotional powerhouse. In just one week, the ATS and its spin doctor Naylor distracted
the American public by proposing a $50 million campaign against teen smoking, brokered a deal with
a major motion picture producer to feature actors and actresses smoking after sex, and bribed a cancerstricken
advertising spokesman to keep quiet. But after the ATS’s transgressions were revealed and
cigarette companies were forced to settle a long-standing class-action lawsuit for $246 billion, the ATS
was shut down. Although few organizations promote a product as harmful as cigarettes, the lessons offered
in Thank You for Smoking have wide application. In particular, the film highlights that choosing between
ethical and unethical business practices is not only a moral issue, but it can also determine whether an
organization prospers or dies.
In Thank You for Smoking, lobbyist Nick Naylor faces the difficult task of making smoking sexy in an era
when the health hazards of this practice are well known.
Marco – Clef de Peau – Smoke – CC BY-NC-ND 2.0.
Key Takeaway
• The work of Lawrence Kohlberg examines how individuals can progress in their stages of moral
development. Lack of such development by many CEOs led to a number of scandals, as well as
legislation such as the Sarbanes-Oxley Act of 2002 that was enacted with the hope of deterring
scandalous behavior in the future. Firms such as KLD provide objective measures of both positive
and negative actions related to corporate social performance.
1. How would your college or university fare if rated on the dimensions used by KLD?
2. Do you believe that executives will become more ethical based on legislation such as Sarbanes-
Kohlberg, L. 1981. Essays in moral development: Vol. 1. The philosophy of moral development. New York, NY:
Harper & Row.
Schectman, J. 2010. Good business. Newsweek, 156, 50.

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