Methodology: Transparency, Policy, Performance Weighed Heavily in the Rankings
Climate Change, Environment did much to settle scores
In determining CRO’s 100 Best Corporate Citizens 2008, CRO evolved the 9-year-old process in four significant ways.
First, CRO required that the data used in rankings be only from publicly available sources on the theory that transparency is a basic principle of the Corporate Responsibility profession.
Second, CRO ranked only Russell 1000 companies, while in the past the rankings also included members of the Domini 400. (Note: In 2008’s July/Aug edition, CRO intends to rank the 100 Best Corporate Citizens among small- and mid-cap Companies, which will capture many of the previously included Domini 400 firms.)
Third, CRO switched ranking providers from KLD Analytics to IW Financial, the leader in ESG (environment, social and governance) ratings, and the only company CRO knows of in the segment that holds a patent on its processes. In its role as the media voice of the professional Corporate Responsibility Officer, CRO’s two goals with 100 Best are to recognize excellence and send the message that corporate responsibility is a competitive imperative—and requires attention to all eight areas included in the rankings.
And fourth, CRO added, combined, dropped or renamed some of the categories. For example, the Diversity and Employee Relations categories in 2007 have been combined into Employee Relations, which includes diversity metrics. Among other changes, CRO added a Lobbying category, although it was given the least weight of any category because lobbying in itself isn’t necessarily “good” or “bad.”
IW Financial uses a standardized process for the 100 Best list. CRO’s methodology for 100 Best Corporate Citizens 2008 builds on the methodology of the CRO’s 10 Best Corporate Citizens by Industry 2007 lists that CRO first published in the Fall. As you can see from the tables, each of these U.S.-headquartered companies was evaluated, primarily using data through Aug. 31, in eight categories: Environment, Climate Change, Human Rights, Employee Relations, Governance, Philanthropy, Financial and Lobbying. Since the goal is a comparative determination of “best,” IW Financial ranked the companies in each category. CRO determined the final ranking as a weighted average of these eight categories. In addition, CRO did a final review to eliminate those companies which had been involved in a recent (during the past three years) major public scandal (involving a government or regulator-imposed fine, admission of guilt, conviction or other comparable infraction).
CRO and IW Financial worked together to remove as much subjectivity as possible from the evaluations. One of the potential pitfalls in doing this kind of research and evaluation is that prior impressions can color the evaluation. By designing an evaluation methodology that relies on the actual comparisons of companies within categories and based on predefined criteria, we have removed the possibility of a pre-conceived notion tainting the final list. The result is a “data-driven” evaluation of companies, which some might find too coldly rational. CRO and IW, however, hold that this data-driven approach goes to great lengths to eliminate subjectivity, bias and risk of misinterpretation. In the 10 Best by Industry lists 2007 and in this 100 Best 2008 list, CRO was confident enough of the objectivity and thoroughness of IW Financial’s process to go straight to publication without allowing a time-consuming company review of the data prior to publication. While CRO remains highly confident in the integrity of the IW Financial data-collection efforts, in the future, CRO will allow company review in an effort to provide continuous improvement in the process.
Mark Bateman, Director of Research at IW Financial, commented, “While I might be able to guess which companies were going to make it onto the list, I didn’t know for sure. It is interesting to watch a company emerge as its score accumulates in the various categories. There may be some surprises for people on these lists, but the data speaks for itself. Based on the data and categories included in these evaluations, this is an unbiased evaluation of corporate citizenship.”
IW Financial relies on data from a number of sources. IW Financial reviews company financial disclosures, sustainability/environment/citizenship reports, websites, EPA databases, and a number of other sources as part of its standard research processes.
CRO and IW Financial established the starting universe as U.S.-headquartered publicly traded large-cap companies, those in the Russell 1000. IW Financial analyzes about 150 data elements to complete a “score” within each category. Scores then determine the rankings within a category. The category rankings are then weighted to average into the total score. Environment and Climate Change were weighted at 16.5 percent of the total each; Employee Relations, Human Rights, Financial, Philanthropy and Governance were weighted at 13 percent each; Lobbying was weighted at 2 percent.
For example, the Environment category includes an evaluation of disclosure, policy and performance measures. All three of these areas significantly influence a company’s ranking. Ford ranked 36th in the 100 Best, but within Environment, Ford ranked even better: 24th. (The lower the score, the higher the ranking.) On environmental disclosure, a metric within the Environment category, Ford had the 12th best score.
You may notice that the first ranked company in only three of the categories (Climate Change, Governance and Human Rights) made the 100 Best. Another company in the Penalty Box
(see p. 41) was ranked first in Philanthropy.)For the other four categories, the top-ranked company was very good in that area, but other scores dragged down the average to put them out of the 100 Best.
Category Definitions:
Climate Change. Climate Change is given its own category because it is simply the most dominant environmental topic in the world today, with many companies now starting to completely revamp their operations, products, services and value propositions to address the issue. This category in the CRO ratings incorporates climate change disclosure (including to the Carbon Disclosure Project, as well as company websites and sustainability reports) and climate change policies (including offsets and reduction goals). Within these areas, the criteria evaluate 22 distinct attributes. While every company should be concerned about this issue, some industries need be more concerned than others. The scores in this category were adjusted within some key industries to provide a better basis for comparison across industries.
Governance. The scores related to corporate strategy and policy flow from the board of directors and the basic governance structures within a company. This category in the CRO ratings includes the one standard for inclusion on the Best lists: board independence. A majority of a board must be independent and key committees of the board must also be fully independent. In addition, ratings include general board accountability and demographics (board tenure, age of directors, over-commitment of directors to multiple boards, and annual election of all directors). The ratings also include executive compensation in the form of the percentage of CEO pay that is incentive based.
Employee Relations. Companies have a significant impact on the lives of their employees and the workforce affects the ability of companies to thrive in the marketplace. This category in the CRO ratings incorporates unionization rates, publicly disclosed employee benefits and Equal Employmet Opportunity Commission complaints.
Environment. Every company has an environmental impact. Certainly some industries have more impact than others, but the presence of economic activity involves an impact on the environment. This category in the CRO ratings incorporates an evaluation of environmental disclosure (including sustainability reporting criteria and disclosure within the 10-K), environmental policies (including management systems), and environmental performance (including toxic emissions, waste management, evidence of chemical and oil spills and environmental fines). Within the disclosure and policy evaluations, the criteria evaluate dozens of attributes.
Financial. Investors demand financial performance from companies, so any evaluation of corporate citizenship must include a company’s ability to meet this most basic of corporate purposes. This category in the CRO ratings evaluates the three-year return on investment in the company stock, based on Morningstar rankings. Companies without a three-year return to shareholders were not considered for the ranking. The list is intended as an evaluation of citizenship of large-cap, publicly traded, U.S.-headquartered companies. A three-year history with shareholders is a prerequisite for consideration.
Human Rights. The international operations of companies are rife with opportunities to do the wrong thing, or the right thing. This category in the CRO ratings incorporates disclosure (including current controversies within the company’s overseas operations), policy (including codes of conduct and performance goals), and exposure to 45 countries of concern. Companies with higher level exposure need to earn higher scores in disclosure and policy to do well.
Lobbying. Corporate influence in the political environment is an increasingly controversial topic. Certain industries are more involved than others, so an industry comparison is helpful in evaluating this topic. This category in the CRO ratings evaluates a size-adjusted, three-year lobbying total at the federal level. Information for this category came from www.opensecrets.org and the Center for Responsive Politics.
Philanthropy. One of the criticisms of “corporate social responsibility” is that companies just give money away to improve their image. While such philanthropy should not be a ticket to “corporate citizen of the year,” corporate giving can have a substantial and positive impact on society, so should not be ignored. This category in the CRO ratings evaluates giving levels and policies (including employee match programs).
For more information about IW Financial and its research, visit www.iwfinancial.com .