Aloy Soppe

A FRAMEWORK FOR MANAGING A PORTFOLIO OF SOCIALLY RESPONSIBLE INVESTMENTS

In this paper we present and illustrate using real-life data a framework for managing an investment portfolio in which the investment opportunities are described in terms of a set of attributes and part of this set is intended to capture the effects on society. Here we link with the emerging literature on SRI: socially responsible investment. Given the multi-attribute descriptions of the individual investment opportunities we show how these can be combined into portfolios with the same attributes at the portfolio level. Also we show how a manager can systematically be supported in the choice between different portfolio profiles. As part of the framework we use multi-criteria decision tools.

Sustainable Corporate Finance

This paper presents and illustrates the concept of sustainable corporate finance. Sustainability is a well-established concept in the disciplines of environmental economics and business ethics. The paper uses a broader definition of what is called “the firm” to pinpoint sustainability to the finance literature. The concept of sustainable finance is compared to traditional and behavioral finance. Four criteria are used to systematically analyze the basic differences. First on the order is the theory of the firm: the definition of the firm is reconsidered by integrating behavioral aspects and by expanding financial analysis to a three-dimensional goal setting. Secondly, a closer look is taken at the assumed behavior of economic agents and its consequences for the applied methodology. The shareholders paradigm is discussed against the background of growing stakeholder importance. Finally, the fourth criterion deals with the different ethical framework and its implication for financial behavior.

Corporate Governance, Ethics and Sustainable Development

In English and American finance literature, the “good governance” question basically comes down to the discipline of “market of corporate control” (external control). In that perspective, it is the threat of international market competition and takeovers (whether hostile or friendly) that primarily disciplines the management of a company. The European approach clearly has a more institutional character. In that model, which can be classified as a network model, the historical and sociological ownership structure dominates the empirical landscape. Germany, France, Italy and the Netherlands, for example, clearly have specific corporate governance structures where internal control is more important than external control. Corporate democracy and stakeholder values are key paradigms in these corporate structures. The problem, however, is that the stakeholder society is hindered by three key problems: dearth of pledgeable income, deadlocks in decision-making, and lack of clear mission for management (Tirole 2001). Departing from the need for governance and sustainability (Petschow, Rosenau and Weizsacker 2005) and stewardship-based economics (Wy Kao 2007), this paper will elaborate on corporate governance as a key element in corporate democracy, stakeholder politics and sustainable development.

Sustainability and Long-Term Growth in the Financial Market System

The paper discusses the implications of the unequal rate of growth of the international financial market on the one hand and the growth of the real economy on the other. Based on viewing balance sheet equilibrium as a prerequisite for sustainable economic growth, a discussion is presented about the optimal interest rate, which depends on the natural and real economic growth of the economy. In the final section, two propositions are presented. The first proposition is that the average interest rate should vary with the rate of growth of the real economy which is a proxy for organic growth in economic processes. Lower interest rates are not desirable because of their impact on economic opportunities. Higher interest rates should be rejected because of the implicit additional positive time preference that they entail. The second proposition concerns the accumulation of wealth. Under the assumption of the existence of a positive interest rate, the absence of a financial tax and the absence of bankruptcies, financial capital grows exponentially and therefore needs to be managed institutionally, in a positive way. A structural imbalance between the monetary sector on the one hand, and the real economy on the other, leads to the illusion of purchasing power in the hands of the public.

Corporate Social Responsibility and Downside Equity Tail Risk

This paper assesses the relationship between Corporate Social Responsibility and downside equity tail risk – a field of research that has so far been neglected - using world wide data for the period 2003-2011. Tail risk is estimated using Extreme Value Theory. Corporate Social Responsibility is approached using stakeholder theory. The results show that there are significant relationships between CSR and tail risk. These relationships are tested for robustness using a heterogeneous and homogeneous tail index, raw returns and idiosyncratic returns, and various values for the tail threshold. The relationships we found are sequential, which makes a causal relationship between CSR and tail risk plausible.

Institutional Country Factors and Corporate Social Responsibility

Inspired by the LaPorta et al. (1997, 1998) work on comparative corporate governance, we tested the Matten & Moon (2008) framework to analyze differences in cross-national CSR performance. A model was built that questions whether different social, environmental and governance issues are more effectively and efficiently addressed by implicit or by explicit CSR countries. Data on corporate social responsibility of corporations in 22 large economies around the world was related to data on country-specific institutional factors to identify national differences among countries. Based on a multifactor regression model, it was found that variation in CSR performance can be explained positively by the influence of nationally-related environmental and social factors. CSR performance is negatively related to a national governance factor. This paper cannot reject the hypothesis based on the Chapple and Moon (2005) suggestion that national factors determine to some extent the variation in cross-country CSR performance. The empirical findings enabled us to further develop the conceptual work of Matten and Moon (2008). Our main conclusion is that national– institutional factors do play a prominent role in explaining the CSR behavior of firms.

Board Transparency, CEO Monitoring and Firms’ Financial Performance

This international empirical study analyses the relation between board transparency, CEO monitoring policy and financial performance. A unique dataset of, on average, 1211 companies from 25 different countries, as provided by international SiRi analysts over the years 2003-2007, enables us to quantify relations between reported corporate governance attributes and financial performance. This paper applies the Fama and French (1993) and Carhart (1997) methodology to estimate the influence of ‘good governance’ on financial performance. Quintile top and bottom portfolios are selected and compared financially. Controlling for size, risk, book-to-market value and a momentum factor, it is concluded that the top transparent companies show significant better financial performance statistically (7.8% per year) than compared with less transparent companies. A second conclusion shows there is evidence that a more intense CEO monitoring policy by a company’s board does lead to a statistically higher financial performance in countries with the German legal origin but a negative return in those with the French legal origin. Despite the increasing influence of stewardship theory, these results indicate that the opposing agency theory still dominates the international capital markets.

Stakeholders and Stocks; Assessing the Interaction between International Companies’ Stakeholder Performance and Their Stock Market Returns

In this paper, we assess the interaction between international firms’ stakeholder performance and their stock market returns. Using data from more than 2,000 firms from 24 countries and 15 industries for the period 2003-2007, we analyze stakeholder performance for firms in different countries/regions and industries. We measure stakeholder performance as firms’ community involvement, their management, customer relations, employee relations, environmental management, and their relationship with contractors and suppliers. We establish that the interaction differs per stakeholder, per country/region, and per industry. Moreover, we conclude that the stakeholders ‘environment’ and ‘community’ are priced factors in the international business environment.