Magazine article The CPA Journal

Measuring Corporate Social Responsibility

Magazine article The CPA Journal

Measuring Corporate Social Responsibility

Article excerpt

A Survey of Recent Research

Recent financial crises and a growing call for sustainability reporting guidelines like those from the Global Reporting Initiative (GRI) have placed pressure on corporate executives to provide the public with information that goes beyond a company's standard financial reports. These nonfinancial performance measures are more important than a company's current economic performance in creating long-term shareholder value, according to a survey of top executives ("Management Barometer Survey," PricewaterhouseCoopers, 2002). These reports are often evaluated, and a company's performance of corporate social responsibility (CSR) is generally quantified by rating agencies. For example, MSCI ESG Research provides in-depth analyses of the environmental, social, and governance-related business practices of companies worldwide.

Accordingly, researchers and business professionals have begun to focus on this new kind of nonfinancial measurement The availability of quantified CSR measures has prompted several researchers to explore their usefulness. The following sections will introduce the elements of CSR reports and, through a discussion of recent accounting studies, will explore the effects of CSR on financial reporting and financial performance issues, as well as the role of assurance providers - such as CPAs - in the CSR reporting process.

CSR Reporting and Performance

CSR reporting is a new type of nonfinancial reporting that multinational companies have increasingly used (Ambrose Jones UI and Gregory A. Jonas, "Corporate Social Responsibility Reporting: The Growing Need for Input from the Accounting Profession," The CPA Journal, February 2011, pp. 65-71). CSR covers various nonfinancial issues, such as the environment or community relations, and companies are increasingly beginning to create separate CSR reports detailing their environmental concerns or social relations. Due to the qualitative nature of the data in these reports, it is difficult to compare companies based on CSR. As a result, several rating agencies (e.g., Calvert Investments, Dow Jones Sustainability Index, FTSE4Good, Innovest, KLD Research & Analytics Inc., and MSCI ESG) have created their own rating systems for investors and the general public to rely on as a measure of a company's CSR performance. Considering the popularity of KLD data in accounting research, this article's authors will analyze CSR performance in KLD data.

The Boston-based KLD introduced its CSR performance-rating system in 1991, with about 300 companies; since 2003, it has expanded its coverage tenfold. Exhibit 1 describes the progression of this performance rating system. KLD gathers data through exclusive research processes and provides a full report on each company' s CSR performance within six categories: community, corporate governance, environment, employee relations, diversity, and product The environmental category, for example, focuses on specific environmental issues, such as clean energy or pollution prevention. KLD assigns a rating that indicates whether a company has a positive indicator (strengths) or negative indicator (concerns) relating to CSR performance in each category; more detailed subcategories are shown in Exhibit 2. Exhibit 3 shows the annual mean scores of strengths and concerns relating to CSR performance, as covered by KLD. As more companies implemented CSR reporting in 2003, the mean score of strengths and concerns declined temporarily. At the industry level, from 1995 to 2010 - as shown in Exhibit 4 and Exhibit 5 - the pharmaceutical industry topped the CSR strength list, while the petroleum industry had the highest overall concern scores. Thus, industry-wide concerns, such as environmental or health issues, are well reflected through the CSR scores.

Although the mean score of all companies included in KLD is extremely low (e.g., two of 38 for concerns in 2007), prior studies provide a meaningful variation across sample companies. …

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