'Best Corporate Citizen' Is a Dubious Distinction
Engine manufacturer Cummins Incorporated is Business Ethics magazine's "best corporate citizen" for 2005. At first glance, it's tempting to ask, What is Cummins doing that's so right?
"We've reduced diesel engine emissions by 90 percent—and within 10 years, we believe we'll be at zero or close to zero emissions," said Cummins's CEO Tim Solso in Business Ethics's announcement of the award.
"Cummins is the best in the world when it comes to air-emissions reduction research. Plus, over the last decade, Cummins has spent more than half its in-house research and development dollars on emission-reduction technologies," added Mr. Solso.
"The environmental commitment has left the company well-positioned to meet more stringent EPA emission standards slated to take effect in 2007," added Business Ethics.
But there's a serious disconnect between Mr. Solso's and Business Ethics's puffery and the magazine's actual evaluation of Cummins.
While Mr. Solso trumpets Cummins' environmental achievements, Business Ethics' ranked the company in a three-way tie for last place in the environment category among the "Top 100," alongside agricultural equipment manufacturer Deere & Company and chemical company Rohm and Haas. Moreover, the three companies had significant negative scores, indicating they rated far worse than average among the 650 firms evaluated by Business Ethics.
The "Top 100 Corporate Citizens" are determined based on performance in nine categories, including financial return, community contributions, corporate governance, diversity, labor relations, environmental impact, human rights, and nature of products sold.
But Business Ethics's evaluations of those nine categories are subjective—and one could argue that an invisible "10th" category might have had some effect on the magazine's calculus. As it turns out, Cummins provided major financial support to Business Ethics for its "Business Ethics Summit" and "100 Best Corporate Citizens" magazine issue.
And there's more evidence that corporate support for, and a high ranking from Business Ethics may not be entirely independent of one another.
Xerox, Business Ethics's top financial supporter, finished 10th among the "Top 100"—even though it placed dead last in corporate governance. Hewlett-Packard, a peer of Cummins' in the second-tier of Business Ethics' funders, finished seventh even though it had the second-worst corporate-governance rating.
Third-tier supporters Procter & Gamble and Genentech finished eighth and 24th, respectively, among the top 100. Fourth tier supporters Green Mountain Coffee Roasters, Ecolab, and Dell finished 2nd, 23rd, and 71st respectively.
Fully one-half of the top 10 Business Ethics's companies were major financial supporters of this dubious "corporate social responsibility" (CSR) beauty contest.
The questionable nature of Business Ethics's ratings is underscored by the case of Fannie Mae, last year's no. 1 "corporate citizen." Although federal regulators discovered in 2004 that the company had improperly reported financial results, inadequate regulatory capital, poor quality management supervision, and other significant ethical shortcomings, Fannie Mae again finished in first place. It took a special review by the Business Ethics review panel to boot Fannie Mae from the "top 100" list altogether.
Fannie Mae was one of 10 companies removed from the list for "financial and social misdeeds"—which raises serious questions about whether some image conscious companies simply use highly visible CSR measures as "window dressing" and as a distraction while committing misdeeds under the radar. The revolving-door nature of the list is also notable—only 19 companies have been on the list for all six years that it has been compiled. Being a "top corporate citizen" is either very difficult to do consistently or Business Ethics's rating system needs serious overhaul.
Perhaps the last word on the Business Ethics list will come (again) later this year from economist Arthur Laffer.
Corporate social responsibility advocates often try to sell managements on CSR by telling them that it increases profits. When Mr. Laffer conducted an empirical analysis of the 2004 list—a study that used Business Ethics' own data for the years 2000-04—he reported no association between so-called CSR initiatives and business profitability.
Business Ethics's response to the Laffer study—also just published—was to label Mr. Laffer an "ex-Reaganite" and then to claim that his analysis was a "tiny study" contradicted by two non-empirical, subjective studies.
We'll have to wait and see whether Mr. Laffer chooses to answer this attack. But were I Business Ethics, I would hope he doesn't.