Raising Finance

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In need of investment? Then take good care of your staff

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In one of our studies which looked at 1,585 businesses and 47 socially responsible investment (SRI) funds, we found that bosses who treated their employees best had the most money poured into their firms by SRI funds.

We looked at a host of indicators as to why SRI funds invest in different firms and found employee relations as the most important. It was especially noticeable in the construction, transportation, financial sector and personal services industries – which covers anything providing a service for people from law and accounting to cleaners and beauty shops.

This increased investment makes sense as firms investing in employees signal high corporate social responsibility (CSR), which in turn potentially enhances a firm’s reputation and prestige. Firms can improve employee relations in a number of ways: for example by improving the working conditions for employees, fair wages and even by organising social events.

A good example is Pride Transport, a trucking company. It uses employee engagement as a competitive advantage to keep good drivers. Not only is the pay competitive, but it finds accommodation for them while they are on the road and helps their families while the truckers are away.

How to engage workers:

Improvements in this area of CSR have been known to boost loyalty, employee contribution, and motivation through which productivity, firm performance and firm value increase. Naturally, this would draw funds’ investment. My research also shows firms in specific sectors can benefit more from increased CSR efforts, but on the whole CSR investment is a worthwhile endeavour for any firm looking to attract SRI funds.

I used the Kinder, Lydenberg and Domini Index (KLD) to measure the companies’ CSR scores in employee relations, society, governance and environment. And to look at the sensitivity of SRI funds towards CSR, I measured the responses of 47 funds to the changes in firms’ CSR strategy.

A one standard deviation point increase in employee relations saw the SRI funds whose criteria centred on CSR invest 17.2 per cent more, while a one point rise in society realised a 16.6 per cent increase in SRI investment, for environment it was ten per cent and governance 10.4 per cent. SRI funds sensitive to the changes in firms’ CSR increased ownership in firms by 15 per cent when those companies had a higher CSR score in all areas by one standard deviation point.

I found strong evidence that SRI funds increase ownership in firms that increase CSR policies. Specifically, my results indicate SRI mutual funds with high CSR sensitivity have distinctively higher ownership in firms when those companies improve CSR in employee relations. Plus a one point increase in the employee relations area of CSR in firms resulted in 35 per cent more investment by SRI funds that concentrated its investing criteria on employee relations, which was the most of any of the criteria.

Increases in society CSR, such as improving housing in a bad neighbourhood by a construction company or covering education fees for local children, also sees firms gain a significant growth in investment. McDonald’s is a good example, it has a society focus CSR. Ronald McDonald House Charities provides free “home away from home” accommodation to families while their child is in hospital.

To make sure it is SRI funds responding to changes in firms’ CSR strategy and not the other way, I examined what new SRI funds did when looking at which firms to invest in. The results showed the new funds responded to higher employee relations scores as well, so the causal relationship must be that way round.

The research also showed SRI Mutual Funds performed better than the Nasdaq in 2007, 2008, and 2011. These results indicate that SRI portfolios had higher returns than the market around the financial crisis. This may be useful for investors seeking reliable investment options during times of financial instability and high uncertainty.

The importance of being social was echoed by Steve Wilkins, HR manager at FedEx Express, who previously explained SMEs shouldn’t think that CSR is the preserve of larger companies.

Onur Tosun is a professor at Warwick Business School.

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