Just making the list could cost your company millions in value
A new study by Brigham Young University business professors shows barely making a top 100 corporate ranking list may actually be worse for your company’s financial future than being left off altogether.
Marriott Business School professors Ben Lewis and Chad Carlos examined the impact on shareholder value for firms that barely made or barely missed the cut of the annual 100 Best Corporate Citizens list, a prominent ranking that evaluates corporate social responsibility performance of public corporations.
In a study published this week in the Strategic Management Journal, the business professors found the firms that just make the list experience a 1.3 percent decrease in firm value on the day of the announcement compared to firms that just missed the cut.
“Being ranked and getting on a list like this is generally a good thing for a company,” Lewis said. “But we found just barely making the list is not only NOT beneficial, it actually hurts you.”
The researchers first obtained the full list of corporations that were evaluated by Business Ethics for the inaugural 100 Best Corporate Citizens rankings — including both those who did and did not make the cut. Using only companies with stocks that were actively being traded on the day of the announcement, the authors ended with a sample of 513 corporations to analyze.
To evaluate investor response to the rankings, the researchers analyzed stock returns using a rigorous research design called regression discontinuity, a method that approximates a randomized experiment.The researchers found the 1.3 decrease in firm value translated to a median estimated loss of $83 million in value for the corporations that just made the list.
“Unranked firms actually have some flexibility in creating their own narrative that allows them to promote things that make them look good, but the firms that just barely make the cut are stuck with a position of unfavorable comparisons with higher ranked firms” Carlos said.
Corporate ranking lists that recognize firms for superior performance have proliferated in recent years, and an increasing number of corporate leaders are prioritizing efforts to be included on such lists. Authors point out the corporations’ own annual reports reveal an intense competition for inclusion on rankings such as the 100 Best Places to Work, the Dow Jones Sustainability Index and 100 Best Corporate Citizens.
That competition is likely to increase after last month’s Business Roundtable, where 200 CEOs from major companies like Apple, Walmart and Amazon issued a statement that companies should invest in employees, protect the environment and deal ethically with suppliers instead of only advancing shareholder interests.
It has been assumed that corporations that just make the list receive a major boost from being ranked, giving them separation from peer companies that are essentially equivalent, but just missed the list. Consequently, companies often seek recognition without clearly knowing whether they will derive benefits or whether recognition has potential downsides.
But authors say their findings should prompt leaders of companies to reconsider the time, money and resources they devote to pursuing rankings, especially if they are likely to end up on the margin.
“If you’re going to play the rankings game, you need to be all-in,” Carlos said. “If you’re trying to game the system, then people may see you’re devoting resources to something that you’re not actually doing well and it could backfire.”