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Research for Business in the Community on Financial Performance of CR Index Participants

Previous research for Business in the Community and Legal & General, published in October 2008, showed that those companies consistently managing and measuring their corporate responsibility outperformed the FTSE 350 on total shareholder return 2002-2007 by between 3.3% and 7.7% per year.

Since then, the downturn has had a dramatic effect on the financial returns of companies. In 2008, the FTSE all-share saw an average decrease in Total Shareholder Return (TSR) of -30%, with a +30.1%recovery observed in 2009. With companies in such serious financial instability does corporate responsibility make any difference to financial performance? Did these companies which outperformed their peers in better times fare differently now?

In fact, our updated research shows that those companies which consistently manage and measure their corporate responsibility (in this case through participating in the CR Index 2002-2009) outperform the FTSE 350 and the FTSE All-Share on total shareholder return (TSR) in seven out of the eight years. Further, the TSR of these 28 companies recovered more quickly in 2009 compared with that of their FTSE350 and FTSE All-Share peers.

For more information please contact Charlotte Turner, Research & Information Director, Business in the Community.

Research methodology

Statistical analysis was conducted on a group of 28 companies who have participated in the Business in the Community CR Index each year 2002-2009, and are also listed on the London Stock Exchange. The objective of the analysis was to compare these companies’ financial performance (looking at total shareholder return/TSR) with that of the FTSE 350 as a whole, and the FTSE All-Share. This updates the analysis we conducted in Autumn 2008 on 2002-2007 performance.

Financial performance is here measured using total shareholder return (TSR). TSR represents the sum of the change in share price and the total return through dividends for the given time period, expressed as a percentage of the share price at the start of the time period. Naturally, many factors can affect TSR either positively or negatively, and it is beyond the scope of this study to account for these innumerable factors. Here, we consider only whether the companies fall within our best practice ‘CR Index company in-group’, and assume ceteris paribus. All data were obtained from Thomson Reuters. Please note that the performance figures are not adjusted to account for sector or risk.

The results stand up alone when making a direct comparison between the two specified groups of companies. However, to generalise this across all potential companies of good governance, significance testing is necessary. Student’s T-test was employed, assuming equal variance between the two groups*. At the standard 5% significance level, companies with good governance have significantly higher TSR than all companies in 2002 and 2006. Relaxing the significance level to 10%, this difference is also found in 2004 and 2005. Note that despite the substantial difference observed in 2009, this result does not apply in the general case (i.e. the difference is not significant).

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Jenny Dawkins
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