Does voluntary corporate citizenship pay? An examination of the UN Global Compact

Abstract

Purpose

The UN Global Compact (GC) is the world's largest voluntary corporate social responsibility (CSR) initiative. Signatory companies voluntarily agree to abide by the GC ten principles and explicitly declare compliance with social and human rights, environmental protection, and anti‐corruption practices. Participants commit to CSR and are required to publish a yearly report called Communication on Progress (COP). If firms fail to provide a COP for one year they are labeled “non‐communicating”, and for two years they are “delisted” from the GC. In 2006, the first list of non‐communicating and delisted firms was announced. The purpose of this paper is to investigate the extent by which being a signatory company – that reports COP – reduces information risk, and thus leads to better market returns, lower cost of debt, and lower cost of equity.

Design/methodology/approach

The authors studied the period from the launch of the GC until the first list of non‐communicating firms was made public, investigating the extent by which being a signatory company – that reports COP – reduces information risk, and thus leads to better market returns, lower cost of debt, and lower cost of equity.

Findings

The results suggest that communicating (reporting) firms have statistically significant higher market valuation – lower book to market – than companies that initially agree to participate in the GC but that do not comply with the reporting requirement. Communicating firms also have statistically significant higher ROA, lower cost of debt, lower cost of equity, and lower beta indicating better performance and less risk. The authors also find some evidence that non‐communicating firms might be “free riding” and could have joined the GC to improve their corporate image.

Originality/value

The paper provides evidence of the value of CSR reporting. It is not enough to disclose compliance with CSR, but it is also necessary to account for this through some sort of formal mechanism such as a CSR report. Voluntary disclosures and narrative statements in annual reports will continue to have questionable information content, but standards of environmental reporting, such as the Global Reporting Initiative, not only improve the way in which social and environmental performance is measured, but they also provide evidence of compliance. This paper also presents evidence of the value of voluntary initiatives such as the GC when these initiatives are supported by formal reporting and when accountability/enforcement measures are in place.

Citation

Barros Kimbro, M. and Cao, Z. (2011), "Does voluntary corporate citizenship pay? An examination of the UN Global Compact", International Journal of Accounting & Information Management, Vol. 19 No. 3, pp. 288-303. https://doi.org/10.1108/18347641111169278