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Not an 'Either-Or' Choice

Thursday, January 31, 2008
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Beyond exploring the link between employee satisfaction and financial performance, the paper may have other implications, Edmans suggests.

First, the research could help inform socially responsible investing, which Edmans notes has become increasingly popular in the past 10 years. In this form of investing, ethical and social considerations are factored in along with expected financial returns when investors make decisions about taking stakes in companies.

"The traditional view of socially responsible investing is that it is an 'either-or' situation. For example, companies that endeavor to reduce their impact on climate change may offer lower shareholder returns, since such efforts often involve significant expenditures," says Edmans.

However, if the firm's treatment of its own employees is one of the criteria investors use to determine whether a company is socially responsible, the study indicates that socially responsible investors may not need to sacrifice strong returns. This consideration could be especially important for fund managers investing on behalf of union pension plans or other employee benefit programs.

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While the study has generated significant interest among socially responsible investing practitioners, Edmans cautions that the research so far applies only to socially responsible investment that is focused on employees. The study does not address other screens investors may use to target socially responsible companies, such as environmental standards or religious philosophy.

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