Money and Morals:
An Engine of Superior Performance

Megatrends 2010:
The Rise of Conscious Capitalism

Before we continue the discussion of Conscious Capitalism, I’d like to expand on one critical point—the relationship between morals and money.

Most of us, no matter how spiritual we think we are, harbor the belief that old-fashioned capitalists — those who invest to make money with no regard for moral considerations—actually earn the highest returns. In other words, if you want to go in for social justice, prepare to suffer financially.

“Socially concerned investors,” write Marshall Glickman and Marjorie Kelly in E Magazine, were often considered “good-hearted saps, destined for sub-par returns.”

Well, decades of research later, it turns out that theory is just plain wrong.

Socially responsible firms repeatedly achieve first-rate financial returns that meet and often beat the market and their peers, proving morals and money may be curiously compatible, after all. For example, Governance Metrics International rated public firms on governance, labor, environmental and litigation policies. Top-ranked firms substantially outperformed the market, while poorly rated firms significantly trailed it. When Morningstar, the revered fund rater, examined socially responsible stock funds over a three-year period, it found that 21 percent had earned its top five-star rating.

That’s twice the rate of all mutual funds.

Consider these additional intriguing findings:

• A 2002 DePaul University study found that the Business Ethics 100 Best Citizens (the 2001 list) outperformed the mean of the rest of the S&P 500 by ten percentile points. The DePaul study tracked total returns, sales growth and profit growth.
• When researchers studied firms that honor stakeholders, not just shareholders, the results were particularly striking. Tower Perrin studied 25 firms that excel in relationships with stakeholders—investors, customers, employees, suppliers and communities. From 1984 to 1999 the “stakeholder superstars” beat the S&P 500 by 126 percent. The “superstars,” including firms such as Coca Cola, Cisco, P&G and Southwest Airlines, showed a 43 percent return in total shareholder value versus 19 percent in total shareholder return for the S&P 500.
• Employees are clearly stakeholders. Does it pay to keep them happy? A Watson Wyatt Worldwide survey of 400 public firms found those with the most employee-friendly practices, such as flextime and good training, delivered shareholders a 103 percent return (over 5 years), while those with the fewest gained 53 percent in the same time frame.

What’s the simple truth behind these studies? Why do moral companies perform so well financially? The answer, say many experts, is that corporate responsibility is a proxy for good management—and good management is the prime indicator of superior financial performance.

Dan Boone, who runs Calvert’s Social Investment Equity Portfolio, puts it this way: There’s a “huge overlap” between socially screened investments and companies he calls just plain “high-quality.”

I will end this section with one last example, a real eye-opener. For the past seven years, the public firms on Fortune’s “100 Best Companies to Work For” list earned more than three times the returns of the broader market, says a 2005 study by Great Place to Work Institute (which compiles the Fortune “100 Best” list cited above) and Russell Investment Group. Between 1998 and 2004, the public companies on the “100 Best” list returned 176 percent compared to 42 percent for the Russell 3000 and 39 percent for the S&P 500.

If these examples do not convince you that the marriage of morals and money was meant to be, hold on—I’ve saved my best evidence for chapter seven, “The Socially Responsible Investment Boom.”

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