What's the relationship between stock performance and corporate ethics? Based on an analysis of the public companies that made it onto this year's list of the World's Most Ethical Companies, there's very little.
One-year stock returns among the companies that made the 2012 list ranged from more than 47% to a loss of nearly 72%.
While many investors like the idea of socially responsible investing, the results show that ethics alone are no guarantee of strong financial performance. And they make suggestions that "doing the right thing is actually good for business" -- as says the head of the New York City think tank that has been compiling the annual list for the past six years -- somewhat harder to believe.
The Ethisphere Institute selected a record 145 companies -- public, private, and not-for-profit -- from nearly 5,000 entries. Ethisphere Executive Director Alex Brigham said more companies are participating in the competition because they realize ethics offer an important competitive advantage in the global economy.
Ethisphere, which reviewed nominations from companies in more than 100 countries and 36 industries, uses a proprietary rating system it calls the Ethics Quotient. The system, based on a series of multiple-choice questions in a survey, is designed to capture a company’s performance in an objective and standardized way, the organization explained.
It includes reviewing codes of ethics and litigation and regulatory infraction histories, evaluating investment in innovation and sustainable business practices, looking at activities designed to improve corporate citizenship, and studying nominations from senior executives, industry peers, suppliers, and customers.
Brigham characterizes it as a mix of easily verifiable public data along with non-public information that companies send on request to support their applications, including training policies and internal communications.
The semi-finalists are crosschecked against governance lists from organizations including GovernanceMetrics International and FTSE for Good, and companies that have histories of significant legal troubles in the past five years are eliminated. Companies in certain industries, such as those that focus on alcohol, tobacco, and firearms, are also eliminated.
This year's winners include 37 newcomers, including Hasbro (Nasdaq: HAS) and Henry Schein (NASDAQ:HSIC). It also includes 23 companies that have made the list all six years, including Aflac Inc. (NYSE: AFL), American Express (NYSE: AXP), Fluor Corp. (NYSE: FLR), General Electric (NYSE: GE), and Starbucks Coffee Co. (Nasdaq: SBUX).
You can see the full list of the World's Most Ethical Companies on the next page.