Do Woke Firms Go Broke? Part 2

Do Woke Firms Go Broke? Part 2

 

In this episode of 'Questions in Finance,' university professors Kate Holland and Veljko Fotak delve into the 'S' (social) aspect of ESG (Environmental, Social, and Governance) in corporate social responsibility. They discuss the concept of 'double bottom line' companies that care about both operating profits and social responsibility, highlighting various facets of social responsibility including gender equality, parental leave policies, and worker safety. The hosts review academic studies on these topics, explore the impact of corporate scandals on reputation and valuation, and debate the performance of anti-woke funds. The episode concludes with a hopeful message that socially responsible firms do not underperform, illustrating that firms can be good corporate citizens without sacrificing profitability.

 

 

 

Timeline:

 

00:00 Do Double-Bottom-Line Firms Bottom Out?

01:36 Welcome

02:14 Defining "Social"

03:18 Labor-Friendly Policies, Equity, and Firm Value

09:58 Causality and the Maslow-Fotak-Holland Hierarchy of Corporate Needs

25:33 Corporate Scandals and Social Reputation

31:54 The Cost of Murder

44:42 Anti-Woke Funds

53:43 Not all Customers and Investors are Alike

57:54 Wrapping Up - A Note of Optimism

 

 

 

Bibliography:

 

Ahern, Kenneth R., and Amy K. Dittmar. "The changing of the boards: The impact on firm valuation of mandated female board representation." The Quarterly Journal of Economics 127, no. 1 (2012): 137-197.

 

Cohn, Jonathan, B. and Malcom I. Wardlaw. "Financing constraints and workplace safety." The Journal of Finance 71, no. 5 (2016); 2017-2058.

 

.css-j9qmi7{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-flex-direction:row;-ms-flex-direction:row;flex-direction:row;font-weight:700;margin-bottom:1rem;margin-top:2.8rem;width:100%;-webkit-box-pack:start;-ms-flex-pack:start;-webkit-justify-content:start;justify-content:start;padding-left:5rem;}@media only screen and (max-width: 599px){.css-j9qmi7{padding-left:0;-webkit-box-pack:center;-ms-flex-pack:center;-webkit-justify-content:center;justify-content:center;}}.css-j9qmi7 svg{fill:#27292D;}.css-j9qmi7 .eagfbvw0{-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;color:#27292D;}

Episode Transcript

Kate (00:00):
Welcome to Questions in Finance.
This is part two of our episode oncorporate social responsibility.
And in the first part, we haveunpacked some concepts related to the
environment, the E, governance, theG, and we're leaving out the S of ESG,
environmental, social, and governanceof corporate social responsibility.

(00:21):
And, we started the episode,titling it "Do Woke Firms Go Broke?"
And I expressed my dislike for thiswoke definition of firms, but I
just recently heard another jargonyway to refer to companies that
care about social responsibility.
Apparently they're called"double bottom line companies."

(00:42):
Usually there's this line recognizedin finance and you can be above
the line and below the line.
And the line we're talking aboutis the EBITDA line and EBITDA is
earnings before interest, taxes,depreciation, and amortization.
So you're basically looking atthe firm's operating profit that's
above the line, and everything belowthe line includes like interest,

(01:02):
taxes, and things like that.
Double bottom line means that the companycares about its operating profits.
That's the first bottom line.
And they also care aboutsocial responsibility.
That's a double bottom line.
So I guess we can retitle thepodcast into: do double bottom
line bottom line firms bottom out?

(01:24):
So, do double bottomline firms bottom out?
And, in this part, we are going to betalking about the S, the social aspect
of corporate social responsibility.

Veljko (01:47):
Welcome to Questions in Finance,

Kate (01:50):
a podcast where we translate academic mumbo jumbo to answer
interesting questions in finance.
I'm Kate Holland.

Veljko (01:58):
And I'm Veljko Fotak.
Kate and I met when we were PhDstudents at the University of Oklahoma.

Kate (02:04):
Today we're university professors and we spend our days
teaching and researching companies,markets, and all things related.
Let's, let's take a little bit of timeand talk about S, which is the most
difficult of the three letters, so to say.
So social responsibility,caring about social values.

(02:27):
Hardest one to measure, most subjective.
I would say is that,

Veljko (02:33):
I'd say hardest one to even define, right.

Kate (02:37):
What does this, what does this dimension include in itself?
Well, I think that E is a partof this dimension, but it's been
broken out separately from S.
We've looked at it separately.
Another dimension of S or the socialaspect is related to labor and how
you treat your employees, workersafety and the literature on that.

Veljko (02:57):
The level of impact positive or negative that a
firm has on society, right?
I mean, it's hard to define, but asyou're saying, it's hard to measure.
The, the impact on labor is almostthe easiest part to measure here,
and that's why it's probably whata lot of literature is focused on.

Kate (03:18):
Right.
And I guess since we're, since we'repausing on this and we'll talk about
what else belongs in S in just amoment, you know, so yeah, with labor,
we're going to look at, worker safety,everybody's gonna agree that it's
not a good idea to kill your workers.
But how good of working conditions doyou want to provide to your workers?
Whether you know you have an equalityin pay across genders and across

(03:44):
other dimensions, whether you have,executive gender equality, all of
these questions kind of linger inthis labor category of "social."
And there's several papers that havelooked at it from very interesting
perspective, including the "MeToo," Weinstein movement, the
events that kind of were spiking it.
That's a paper by AntonMayo and Henry Survey.

(04:07):
And they show that firms with a largerproportion of female executives,
not female board members, but femaleexecutives see a positive stock price
or an increase in stock price around the"Me Too" events or Weinstein court case.
So this suggests that those events bringto everybody's minds, the importance of

(04:32):
gender equality in corporations and thatcompanies that have more women who are
in top executive roles get highlightedand more shareholders want to own
shares and be a part of those companies.

Veljko (04:45):
In the back of my head, I was thinking...
you know, the "S" is a mess, right?
And it's a mess in the sensethat, it's all hard to define
in an objective manner, right?
And perhaps it's a function of thesociety we live in nowadays, right?
Especially here in the U S it feelslike we are politicizing everything.
And, you know, look at us here with thepodcast trying to stay away from politics

(05:08):
and constantly falling back into it.
The question is, is there anythinghere that the firm can do that
has an impact on society that wecan measure as being objectively
good or objectively bad, right?
I mean, the firm helps employeesget access to abortion.
Some people are going to rate that as asocial good, other people are going to

(05:32):
rate that as a social negative, right?
And how are we to come up with anobjective measure of social good?
What I'm wondering is there in thisliterature anything that we can all
agree on that's actually objective.
I mean i'm thinking, you know,you said jokingly earlier I mean
perhaps we can all agree thatkilling our workers is a bad idea.

Kate (05:54):
So the paper by Paige Oyumat, for example, examines workplace leave
policies for new parents and, sheshows, along with her co authors, that
companies that provide better parentalleave policies are more profitable.
So, firms that treat the employees betterfrom perspective of parental leave, do

(06:15):
end up winning, so to say, and beingbetter for shareholders, providing
better returns and being more profitable.

Veljko (06:21):
And here I'm wondering in the back of my head, if parental leave is you
know, universally recognized as a goodacross the political spectrum, right?
Nowadays I hope it is.
Certainly hope it is.

Kate (06:30):
No, I think, yeah, parental leave involves, everybody, it involves a family.
It involves, males and females,and there's a lot of, that's a
whole other episode there, right?
Because it actually talks abouthow parental leave, ends up
hurting females, but helping males.
For example, in our profession in finance,when men go on parental leave, they
publish more papers, but when women go onparental leave, they publish less papers.

(06:55):
So this points out a few cracks in thesystem, but hey, we'll take Pages, overall
And, you know, the better parentalleave policies line up with
higher profitability for firms.

Veljko (07:11):
I actually do have a paper that has findings related
to parental leave that I found.
This is a paper published in theJournal of Corporate Finance in 2018.
And the authors are Larry Fauver,Michael McDonald, and Alvaro Taboada.

The title of the paper (07:29):
Does it pay to treat employees well?
It's a cross border paper.
They are actually looking at, whatthey classify as employee-friendly
cultures with the assumption thatin employee-friendly cultures,
firms are more employee friendlyin their policies and they look at
almost 3,500 firms in 43 countries,in a period spanning 2003 to 2014.

(07:55):
And they find that firms from countrieswith more employee-friendly cultures
have higher stock price valuations,and also perform better in terms of
return on assets and returns on equity.
But where this is relevantto, to our conversation...
when they dig into how do thesefirms actually differ in terms
of policies from firms from lessemployee friendly countries they

(08:19):
actually find that the big differenceis better parental leave policies.
So they here seemed to be linking parentalleave policies to a firm level performance
in a large cross country setting.
So we have, some external confirmationfor this link between parental
leave and firm performance.

(08:40):
And perhaps you are right, inlooking at these equity and,
gender justice papers, if you will.
At the end of the day, we areasking how to woke firms perform.
And yet, I've always been hopingfor the objective measures
that we can all agree on.
And in that sense, thereis a paper by Alex Edmans.

(09:02):
This was an Academy ofManagement Perspective.
Published in a 2012.
And this looks at companies thatmade the "a hundred best companies
to work for in America" list.
So he identifies the companies that ratethe highest in terms of how satisfied

(09:23):
the employees are with the workplace.
And then he looks at theperformance of those.
And he finds that these companiesdo produce abnormal returns.
In his findings, he finds,between 1984 and 2011.
These firms produce abnormal returnsat the rate of 2.3 to 3.8% per year.

(09:45):
And again, I like it because it feelslike it's a little bit less controversial,
or a little bit less controversial of away to identify good companies, this "a
hundred best companies to work for" list.

Kate (09:58):
This brings about a point about what we call endogeneity.
It's hard to say whether thesefirms that are highly ranked start
generating good returns, or if, youknow, a firm keeps being a good firm,
has good returns, it ends up joiningthis list of best firms, so to say.
So this endogeneity exists, or these,difficulties in identifying causation

(10:21):
exists in this literature, One paperby Jonathan Cohn and Malcolm Warldlaw,
it's a Journal of Finance 2016 paper.
They look at worker safety,which would fall under this S
category, the social category.
And, what they find is that, how you treatyour employees depends on your cash flow.

(10:44):
Companies that are more financiallyconstrained have more worker accidents.
Why?
Because they cannot, or they donot install enough safety features
in their work environments.
So, this is pointing to thiskind of endogenous nature.
If you are a company in good standing,then you're going to provide a safer
environment and be more social, so to say.

(11:08):
So just pointing out the difficulty ofseparating here, what's causing what.

Veljko (11:13):
Yeah.
I mean, this part of the conversationkeeps rearing back its head.
Because the story is so plausible, right.
It almost feels like there's a Maslow'shierarchy of corporate needs, right?

Kate (11:24):
Oh, I like that I like that the Maslow hierarchy
of corporate social needs.
Yeah, excellent.

Veljko (11:29):
Maybe it can be the Maslow-Fotak-Holland hierarchy
of corporate social need.
The point is if you are on theverge of bankruptcy and struggling
to pay wages, you're probably notstaying up at night thinking about
your level of emissions, right?
And the other thing that once you'vefulfilled your basic business survival.

Kate (11:54):
Fall into the best list of companies, right?
The top 100 list in Alex Edmonds paper.

Veljko (12:01):
Correct.

Kate (12:02):
Then you're going to care about the social rights.

Veljko (12:05):
Yes.
And of course.
maybe I'm being a bit cynical here.
There is a large literature herethat tells us that the companies
that do really good are the ones thathave their social mission at heart.
This is the Ben and Jerry's of thisworld that start from "let's do good.

(12:29):
And let's make a little bitof ice cream on the side."
or again, Patagonias that seem to putsome socially responsible behavior,
some environmentally friendly behaviorfront and center to their mission.

Kate (12:42):
Well, yeah.
Yes and no, because I think somecompanies can tell you stories that
they're doing good, but in reality, I'mnot so sure that they are doing good.
So what is marketing here for companiesin terms of "S" and what do they actually
do is also very difficult to disentangle.

Veljko (13:00):
Of course.
And yet Kate, I think it is importantto recognize that this literature,
If I may say on social equity, socialjustice, gender equality, and firm
performance, specifically, it is notentirely uncontroversial, and the

(13:21):
results are not entirely one sided.

Kate (13:23):
Oh, yeah, I think, we've been showing that basically this
non one sided set of results.

Veljko (13:29):
And yet I do not think we should move through this topic without
mentioning a paper that made a lotof noise a couple of years ago.
And I guess I'm looking at my notes now.
It's more than a decade.

Kate (13:42):
A little dated.

Veljko (13:44):
Yeah, well...
this is a paper that was published byKenneth Ahern and Amy Dittmar in the
Quarterly Journal of Economics in 2012,and the title was: "The Changing of the
Boards, the Impact on Firm Valuation ofMandated Female Board Representation."

Kate (14:02):
What they're trying to say is when there's a mandate to add
females to the boards, what happens?

Veljko (14:08):
So the authors here are looking at Norway, and the year is 2003, when
Norway passes a fairly aggressive newlaw that mandates that 40 percent of
firm directors be female from there on.
And at the time, only 9percent of directors of
Norwegian companies are female.

(14:30):
So this is quite a big, big shock.
To quote the results verbatim fromtheir abstract, they say that: "We
find that the constraint imposed by thequota caused a significant drop in the
stock price at the announcement of thelaw and a large decline in Tobin's Q."

And they continue (14:48):
"Over the following years, consistent with the idea that
firms choose board members to maximizevalue, the quota led to younger and
less experienced boards, increasesin leverage and acquisitions and
deterioration in operating performance."

Kate (15:05):
They basically show that, in Norway, when boards were mandated to add female
directors, the stock price dropped,when this announcement was made and they
also find some lower outcomes in termsof actual firm performance as well.

Veljko (15:23):
Correct.
Maybe we can just take a moment, Tobin'sQ here is a metric that not everybody
will be familiar with, but it's ofteninterpreted as a measure of the growth
prospects of the firm, and it's alsointerpreted as a measure of the quality
of management, quality of the board here.
As they claim, they find a declinein this forward looking metric.

(15:47):
The interpretation here iswhat really matters, right?
And as they're hinting here in theabstract, what they're claiming is that,
that these findings are coming fromthe lack of a sufficient talent pool.
Effectively, Norway is imposingto elect a lot of female
directors all at the same time.

(16:08):
And simply put the pipeline, thecorporate pipeline is not there.

Kate (16:13):
A very plausible explanation.
I'm going to quote one moreexplanation here in a moment.

Veljko (16:18):
Okay.
Fair enough.
But effectively that's where they'recoming from in saying that after
this, the new board ends up beingyounger and with a lower skill set.
And I just want to mention, Ithink that, on one side, this
is a paper about a very specificimplementation of this policy, right?
Just because perhaps Norway pushedthis law a little bit too far, perhaps

(16:43):
a little bit too fast, that does notinvalidate the broader idea of "let's
get a little bit higher levels offemale representation on boards."
I think this is just a well meaning,but poorly designed perhaps set of
regulations and I will just mention,there is also a paper, published
in Management Science in 2021.

(17:04):
This is by Espen Eckboand his set of coauthors.
They're actually criticizing thispaper by Kenneth Ahern and Amy Dittmar.
They're saying that they actually madesome technical mistakes, estimating
standard errors, effectively.
So it's a fairly technical objection,but what they're saying is, yes,
the mean effects are negative.

(17:27):
And yet, if you conduct your statisticalsignificance testing in a proper
manner, the results are mostly noise,it's not statistically significant,
or at least that's according to thismore recent Management Science paper.

Kate (17:42):
I see.
Well, there's another paper by MichaelaPagel and her co authors Marina
Gertsberg and Johanna Mollerstrom.
And what they look at is a changein gender quotas for boards in
California that occurred in 2018.
All publicly traded firms thatwere headquarters in California
needed to add at least one femaledirector by the end of 2019.

(18:07):
By 2021, they needed to add at leasttwo, if the board had five members
and at least three is a board had sixor more members and typical boards
that, you know, 10 to 12 people.
So it was really trying to say by2021, there should be three female
directors on boards of companiesheadquartered in California.

Veljko (18:27):
But it's interesting in some sense, they seem to have learned
from the Norwegian experience.
They're trying to do it in aslightly more gradual manner, right?
Yeah,

Kate (18:37):
Yeah.
So, so they find, they find thenegative announcement reaction to
this quota imposition consistentwith the previous literature, but
they asked an interesting question.
They asked, why is this reaction negative?
Is it negative because, as you weresaying, perhaps there's not a big enough
pool of female directors, or perhapsthe quality of female directors coming

(18:59):
in is different, or is it maybe becausethere's some strange changes that are
happening on the board to allow forthese female directors to come in?
And what they find is the negativereaction is specific to those
companies that let go of good maledirectors and keep bad male directors.
Let me explain.

(19:20):
So, obviously to add new femaledirectors and to keep the board in
a stable size, you need to let goof some of the existing directors.
So the ones that they let go of, orfire, so to say, the good male directors.
What is good or bad male director?
A good director is the ones thatgets a lot of shareholder support and

(19:42):
various recommendation firms votingto keep this director on board.
So those are actually let go and theones who stay are those that have
gained lower shareholder supportin previous director elections.
So now these new females are coming inon the board and they are united with
these, connected but not very goodmale directors at the left and this

(20:06):
negative reaction is specific to thesetup when the good current directors
are let go off and the bad ones stay.

Veljko (20:14):
I guess I'm, I'm still trying to wrap my head around this.
So on one side, this sounds like some sortof agency cost slash adverse selection,

Kate (20:22):
right?
Yeah, definitely.
Yes.

Veljko (20:24):
But so what you're saying, the negative reaction...
it's not because we are electingfemale directors to the board.
It's because when making room forthe female directors, we are letting
go of the wrong male directors.

Kate (20:39):
Of the good ones.
Yes.

Veljko (20:40):
So the only thing that I'm still missing here is what is it
specifically about electing femaledirectors on the board that leads
to firing the good male ones.

Kate (20:53):
The board needs to stay within a certain size, right?
Either 10 to 12 people.
So if you want to add new femaledirectors and keep the board of the
same size, you need to fire or letgo of some of the current directors.
The question is, whichdirectors do you let go off?
And it turns out that firms let go of thebetter directors and keep the ones that

(21:16):
don't get a lot of shareholder support.
And they kind of show that thesedirectors are more connected longer term.
So yeah, it's a bit of a corruptionslash agency story there.

Veljko (21:27):
So you have to replace a large portion of your board and that
gives you an excuse to shuffle things.
And in the shuffling thingsare not always proper.
That sounds like a very interesting paper.
Has this been published yet?

Kate (21:41):
This is still a working paper.
It has been presented at multipleconferences, but it's still
in the working paper stage.

Veljko (21:46):
All right.
So this is the cuttingedge of science, right?
Well, I hope our listenerswill appreciate that
science is evolving, right?
And this is how it is in action.
We still have a little bitof an open debate here.
What explains some ofthese negative reactions?
, But I think this is, this iswhere our profession is fun.

(22:07):
And now.
When we are summarizing this overallrelationship between corporate and social
performance and firm profitability, Idon't want to leave our listeners with the
impression that all of this is unsettled.
Yes, there are results on either sideof this equation, but ultimately I think
that the bulk of the evidence does seem tobreak on one side rather than the other.

Kate (22:31):
That's an interesting point.
Okay.
Yeah.
I'm interested to hear whereyou're going with that.

Veljko (22:36):
Our usual friends.
Friede, Busch, and Bassen, theyhave a large scale literature survey,
which we mentioned in part one ofthis discussion when talking about
the relationship between environmentalperformance and firm profitability.
They actually do something very similarwhen looking at the relationship between

(22:57):
social performance and firm profitability.
So, again, this is a paperpublished in 2015 in the Journal of
Sustainable Finance and Investment.
And they look at over 2000 studiesand summarize their findings.
And what they find is that in 55% of thesestudies, there is a positive relationship

(23:17):
between the social performanceof firms and their profitability.
Some of the studies usestock price performance.
Some of the studies look atoperating performance metrics.
But again, 55% find a positiverelationship, 5% find a negative
one and approximately 40% of studiesfind no relationship between social

(23:38):
performance and profitability.
So again, the bulk of the evidenceseems to point to at the very least
positive correlations between socialperformance and profitability.
But let's not forget that, only 55%of the studies that look at this
find this positive correlation.
40% of the studies don't findanything, 5% find a negative one.

(24:01):
Among the three dimensions in whichwe usually break corporate social
performance, E, S, and, G, thislarge literature review finds that
the link, the correlation betweenthe social dimension and performance
is the weakest of the three.
The environmental performance hasa stronger link to profitability.

(24:22):
Governance has the strongestlink to profitability.
The social dimension has theweakest positive correlation,
nevertheless a positive correlationin 55% of 2000 plus studies.

Kate (24:36):
Let's summarize, you know, we've been talking a lot about
what fits into the social partand what we have covered so far is
everything that's related to labor.
We have also mentioned a couple of thingsabout how companies maybe can market their
products as social, but in reality, theydon't follow through with the actual,

(24:57):
it's like they don't walk the talk.
You know what I mean?
Which brings us, I guess, to this.
As a category, like what is leftin the social category after you've
taken out the environmental and afteryou've taken out the, labor, parts.
So what's left in the social atthat point are factors relating to
community, are factors relating tocorporate culture, and like really

(25:20):
moral objectives, I think, of firms.
And that covers a wide ground.
So let's kind of dive into thatsubsection of social right that looks
at these more moral, dimensions there.

Veljko (25:33):
It's obvious that we are struggling to even define what's left
over here in the S or social dimension.
And that struggle comes withdifficulty of definition, it comes
with difficulty of measurement, right?
It's very hard to measure somethingthat you're having a hard time even
defining, which is, I think, partiallywhy some of the literature here that

(25:56):
tries to look at the relationshipbetween firm valuation and social
behavior, does not rely so much on, onscores or some metric of how socially
well-behaved the firm is, but tries torely on shocks to social reputation.
And shocks to social reputationare what we generally think

(26:18):
of as corporate scandals.
Right?
Then they make four fun stories.
And they're interesting to write about.
There is a well-defined stream of theliterature that looks at the impact of
scandals and, effectively hit at thesocial reputation of firms and how those
affect firm valuation and performance.

(26:40):
Some of that literature.
It looks at the financial performanceof companies, but a lot of these studies
are actually coming from marketing folks.
Marketing people are used to looking ata firm's social capital as part of their
analysis of a brand value, if you will.
But there is an interesting paper thatlooks at some social reputation shocks

(27:04):
of firms, that we have dug out here.
This was published in managementscience in 2014, and it's a paper by
Christopher Knittel and Victor Stangoand the title "Celebrity Endorsements
Firm Value and Reputation Risk.
Evidence from the Tiger Woods Scandal."
This, I think this isan interesting paper.

(27:26):
It looks at firms that had Tiger Woods asa celebrity spokesperson or in other ways,
affiliated with their marketing efforts.
And they're looking specificallywhen it was revealed that Tier
Woods was having an affair.
Which here is taken as a hit to the socialreputation of Woods and it transfers

(27:50):
over, let's say it's a hit to the socialcapital of the firms associated with him.
And well, they're actually showing,in this paper, and here I quote the

abstract (28:00):
"In the 10 to 15 trading days after the onset of the scandal, the full
portfolio sponsors lost more than 2% ofmarket value with losses concentrated
among the core three sponsors,electronic arts, Nike, and PepsiCo."
And they specify the Gatorade divisionof PepsiCo and they actually do something

(28:23):
else that I think is pretty cool.

The next sentence in the abstract says: "Sponsors day-to-day losses correlate (28:24):
undefined
strongly with Google search intensity."
in other words, they're lookingat how often do people Google
the company and Tiger Woods.
And they find the more often peoplesearch these terms, the worst the
stock price performance of the firmis, around these days, when the

(28:48):
cheating behavior was revealed.
So, this is evidence of firmsbeing punished for associations
with an individual that at leasta part of the population finds
morally, undesirable, if you will.
Or that displays behaviorthat's morally undesirable.
There is another paper that peoplein finance will be citing a lot.

(29:09):
Even though, I believe it'sstill in a working paper status.
This is a paper by Pat Akey and,his co-authors and, the title:
"Hacking Corporate Reputations."
The idea here is the exploit that thebreaches at companies and how these data
breaches affect corporate reputations.

(29:32):
And they find that corporate reputationlosses that arise from these accidents
where firms are found to not havesafeguarded customer data properly,
lead to a decrease in equity andbrand value, increased customer churn.
Customers are leaving.
And prompt negative media coverage.

(29:53):
Now, what I think is interesting here inthis paper, they actually find that firms
try to repair the reputation, as they putit, by increasing charitable donations.
Which seems to try tocompensate for the moral hit.
They actually find other things,they find that the same firms
increase political contributions.

(30:14):
The inclease employee wages.
And they invest more in IT, subsequently.
Another paper that seems tofind that reputation hits do
effect the performance of firms.
Now the reputation here has acertain technical element to it

(30:34):
in the sense, the authors areinterpreting this as being moral.
I do wonder if there is a certain elementof loss of firm value here not because
the firm is found to be immoral in somesense, or lacking in social concern,
but because the firm is incompetent.
And yet, most of the interpretationhere seems to be on the moral and

(30:55):
social capital dimensions of findings.
There are many other studies thatlook at these scandals and reputation
shocks because they provide somedegree of sharp identification.
In my opinion, thereis a small issue here.
I do believe that the way marketsreact to social, social behavioral

(31:19):
firms is very asymmetric.
In a sense.
We do have at this time evidencethat markets don't necessarily really
reward firms from behaving well.
But there does seem to be strongevidence for market reacting pretty
strongly when firms behave poorly.
And because of that, this reputationpapers are kind of looking at the left

(31:44):
tail of social behavior, they can tell yousomething about firms doing bad things.
They can't tell you much about whathappens to firms doing good things.
And...yet.
We also have a paper wherewe do something very similar.
We are looking at a shock thatcomes from revelation of unethical
behavior from the geopolitics arena.

Kate (32:08):
And yeah, let's talk about our paper, together with, Vishal Sharma.
We look at the murder ofJamal Khashoggi back in 2018.

Veljko (32:18):
We've been working on this for a couple of years, right?
And the idea here is to see whetherfirms are effectively punished by
investors, by their shareholders

Kate (32:32):
Who are socially conscious

Veljko (32:35):
Correct.
When it is revealed that they'reassociated with a disreputable
regime, if you will, right?
. Kate: So let's break it down a bit more.
We're looking at firms thatare non Saudi Arabian firms.
Western firms.
So you know, like U.
S.
firms, European firms that are connectedto Saudi Arabia at the time of the murder.

(32:59):
What does it mean connected?
These are firms that have Saudi shareholders.
Or firms that have subsidiaries inSaudi Arabia or firms that receive
loans from Saudi Arabia and banks orfirms that have otherwise directors
linked to the kingdom of Saudi Arabia.

Kate (33:19):
And "Davos in the desert" participation, right?
We also looked at that there.

Veljko (33:23):
Oh, yes.
The so-called "Davos inthe desert" conference.
This was, a conference that, aimsto be a Middle-Eastern counterpart
to the Davos conference, right?
And this was meant to attract foreigndignitaries, but also attract foreign

(33:44):
firms that are looking to investin the Kingdom of Saudi Arabia.
And, in this last edition, rightbefore this gruesome murder, the Trump
administration was a big participant.
And firms were effectivelytraveling or planning to travel
with big photo-op operations.
The reason why we like this set offirms for our analysis is because these

(34:06):
are firms that have effectively linkedthe reputation to, to the regime.
And yet don't necessarily haveyet an economic exposure to
what's happening in Saudi Arabia.
So when you're seeing their stock pricesreact, you can really draw the conclusion
that this is reputation driven rather thansome mechanical effects due to economic

(34:31):
links, that effectively do not yet exist.
So, we really liked thesub-sample of firms that are
participants in this confidence.
And there are some interestinganecdotes right around it.
Firms were trying to cancel theirparticipation at the last moment,
right after this murder happened.
There's some really interesting picturesof CEOs of big firms actually, on one

(34:55):
side, not wanting to cancel, but veryvisibly hiding name tags in group photos.
Which I thought was always a veryemblematic image of how controversial
this whole confidence had become.

Kate (35:07):
This is very important because finding like an exogenous shock to
social rights and social values isextremely difficult and a lot of, you
know, a lot of causation checks in ourliterature are done through finding
some big change, which shocks a certain,in this case, social rights values.

(35:28):
And if you think about,

Veljko (35:29):
or the perception of,

Kate (35:31):
right, the, in this case, the perception of,

Veljko (35:34):
So full story, up until that point, the Kingdom of Saudi Arabia has
seen a relatively recent new ruler,

Kate (35:41):
Mohammed bin Salman

Veljko (35:42):
Correct?
Known as M-B-S

Kate (35:44):
M-B-S.

Veljko (35:45):
MBS is perceived as this relatively young, new ruler.

Kate (35:48):
When he started out extremely pro western, developing a tech
city, women were going to drive.

Veljko (35:57):
Opening cinemas in the country.

Kate (35:58):
This, you know, I have to point out, that this is very different from
some other leaders of other countries.
Our listeners, again, they see my biashere because I'm originally from Ukraine.
So I would have to say that, you know,the behavior of Mohammed bin Salman was
very different from the behavior of otherleaders like, for example, Vladimir Putin.
Vladimir Putin doesn't hide thefact that he kills people and he's

(36:21):
going to continue killing people.
So if you're investing in companies inRussia, it's kind of like this reputation
associated with Vladimir Putin, kind of akiller reputation, but when Mohammed bin
Salman came to power, he did not have thiskiller's reputation associated with him.
And then, you know, this murder goeswrong and it's all over the press.

Veljko (36:44):
The murder we are talking about is Jamal Khashoggi.
He was a journalist writing forthe Washington Post and a green
card holder in the United States.
He showed up at, a Saudiconsulate in Turkey, right?

Kate (37:00):
And never left.

Veljko (37:01):
Yes.
He was actually looking forpaperwork, a birth certificate, right?
Because he wanted to get marriedor remarried and so walks into this
consulate, never leaves, right?
And some days later, Turkish authoritiesthat were actually apparently
spying on the Saudi consulate....

Kate (37:20):
how fun, how fun.

Veljko (37:22):
Oh, yeah, this, this is a story of international intrigue, right?
Right.

Kate (37:26):
Definitely.
How can you get this so wrong, right?
I'm sure these type of events occurprobably quite often, they just
don't end up being in press so widelycovered by press as this one ended up.

Veljko (37:37):
Correct.

Kate (37:38):
That was a kind of a direct link to MBS right there, right?
So that was the first reputation.
It was a big reputational shock.
And because Saudi Arabia is sucha close kingdom, the shock to MBS
was really a shock to Saudi Arabiaand how people thought about the
direction of this country at the time.
And then, you know, the question is, whatif you are a shareholder who cares about

(37:59):
social rights violations and you look inyour portfolio and you see that you have
firms that are connected to Saudi Arabia.
Would you want to divest yourselffrom this murderous regime?
Okay.
Let me soften it.
From a regime that has beenrevealed to be undesirable?

Veljko (38:18):
And then, you know, we are one step removed, right?
In some sense, because, we are asking,do the investors divest from firms
that are somehow connected, right?
So, so in some sense, it's areflected reputation, right?
It's an inherited reputation.
And, indeed we do findsome pretty strong results.
These firms do suffer abig drop in valuation.

Kate (38:39):
This means somebody is selling their shares.

Veljko (38:42):
The core finding is that investors do care, or at least some investors
cared enough to sell their shares.
Firms that are shown to beassociated with this dubious
regime are punished by markets.
They lose approximately two percentagepoints in market valuation in our
sample, which is actually the same numberdocumented in that Management of Science

(39:05):
paper, firms were losing two percentagepoints in market valuation when found
to be associated with Tiger Woods whenhe was revealed to be having an affair.
Let's dissect for a moment how strongsome of these findings actually are.
Our average reaction per firm aroundthe days of the revelation that

(39:28):
the murder was associated withthe highest levels of politics
within the kingdom of Saudi Arabia.
The market reaction of these firmsis, an abnormal two percentage
points negative, that is.
So these firms lose 2% of marketvalue in three days effectively.

(39:50):
That's equivalent to approximately$400 million in lost firm
valuation for firm in our sample.
And when you multiply that by the totalnumber of firms we have around 900
firms overall, you get an aggregateloss of market capitalization
of over 300 billion US dollars.

(40:14):
The tongue in cheek title of our paperhas always been "The Cost of Murder."
We are quantifying this murderhaving cost over $300 billion
in market capitalization,quite a strong, strong finding.
There are some interesting wealthtransfer effects here as well.
When you start digging into who is sellingand who is buying the same stakes, you

(40:40):
find that there are some very sociallyresponsible investors that are the first
ones to sell and they do so at a discount.
They're trying to get out quickly beforethe news are hitting the mainstream media
and less socially conscious investors areactually picking up stakes at a discount

(41:01):
and that's kind of the price of being goodon the investment side of the equation.
But there are some veryinteresting and nuanced.
and very strong economically results here.
It was interesting to listen to you makethis parallel between Saudi and Russia.
There's actually a workingpaper that I was going to cite

Kate (41:22):
You mean the result similar to what we found with firm share prices dropping
for firms connected to Saudi Arabia atthe announcement of Jamal Khashoggi's
murder and the connection to MBS?

Veljko (41:33):
Correct.
I was actually leafing, through mynotes and having a hard time finding it.
But here it is.
This is a working paper titled "itPays for Companies to Leave russia."
And what the authors are actuallylooking at is Western companies
that have subsidiaries or othercommercial activities, other commercial

(41:57):
links with Russia, at the time ofRussia's invasion of the Ukraine.
And what they find is thatmarkets react very selectively.
Firms that decide to leave or otherwisesaver their ties with Russia, see
their stock prices rising value.
Companies that make the decision tostay, actually see their valuations

(42:22):
drop quite, quite significantly.
What they find most interesting inthis analysis is that the mechanical
effects on the assets of thesefirms are quite the opposite.
The companies that are leaving theyactually take huge hi ts to the book
values of assets because well, they'releaving these assets stranded behind

(42:47):
and often flat out expropriated.
They're living buildings, they'reliving equipment that they're not
being compensated or at least they'renot being compensated properly for.

Kate (42:58):
It's a huge, you know, that's a huge repossession of
businesses by the Russian state.
Right.

Veljko (43:05):
But interestingly, even though they're being expropriated, the stock
price goes up, showing you that.

Kate (43:14):
The shareholders appreciate them divesting.
Yeah.
And doing the social, the moral thing.
Yeah.
Right.

Veljko (43:20):
Yeah.
Now, it's interesting...
some of the points youwere making earlier.
In some sense, this settingdoesn't quite have the same shock
value that, that our has, right?
I think that Kashoggi's murder wasbigger surprise than, oh, Putin
is doing something evil, right?
We've seen that movie before,and yet, they do find some
interesting results here.

Kate (43:39):
Yep.
Well, so, let's get back a littlebit to what we were talking
about with Jamal Khashoggi.
And what we find there is that, companieswith shareholders who care more about
social rights end up experiencing abigger decline in their share prices at
the announcement of the murder, meaningthat these shareholders that care

(44:05):
about social rights sells their stakes.
And so firms that are connectedkind of suffers the consequences.

Veljko (44:12):
I was thinking for a second about the implications of
what you were just saying, right?
Because on one side, there's alot of evidence here that investors
care and reward you for doing rightin the social dimension, right?
But there is this paradox then, whenyou do right in the social dimension,
you attract a lot of socially consciousinvestors, and then to some extent

(44:36):
you almost become hostage of them.
Because, I mean, at that point youhave to keep doing right, otherwise
the market really punishes you.

Kate (44:43):
Are we ready to summarize the social of ESG?

Veljko (44:47):
Okay, fair enough, fair enough, because one interesting side branch
would have been, we have some of theseanti-woke funds that we have some
evidence have not been doing very well.
Right.
But, okay.
Okay.

Kate (45:02):
Okay.
Yeah.
Okay.
Maybe, maybe that's worth mentioning.
Let's talk about Vivek.

Veljko (45:06):
I did manage to bait you there.

Kate (45:09):
Let's talk about Vivek.
Vivek deserves a mention here, a skilled,what is it called as a smooth operator.
So we are talking here about

Veljko (45:19):
Anti-woke funds

Kate (45:21):
Yeah, and Vivek is known to be running some

Veljko (45:27):
can I just interrupt you for a second?

Kate (45:29):
Please.

Veljko (45:29):
Vivek Ramaswamy.

Kate (45:33):
Ramaswamy.

Veljko (45:34):
I can't say it either.
I can't say it either.
Right.
Yeah.
So, but let's say it.

Kate (45:40):
Ramaswamy.
Vivek Ramaswamy.

Veljko (45:42):
Vivek Ramaswamy.
Yeah.
Okay.
Wow.
I, I, I, I sound so Italian.
Okay.
Please.
You, you were I interrupted.
Yeah.

Kate (45:49):
And, you know, I think that if I were to explain his policy in a few
words he's telling investors thathe will make sure that the firms in
which he invests when he goes to theshareholder meetings and communicates
with firms, that he urges these firmsto concentrate on profitability and to

(46:11):
not put their efforts into environmentaldisclosures into, you know, better
social settings or anything like that.
And so the way that it's sold islike, we want firms to be profitable.

Veljko (46:25):
I wasn't even aware of, how exactly this fund worked, I always assumed
that An anti woke fund would be a fundthat would be avoiding certain companies.
And instead, he actuallyis an activist, right?
He's trying to changethe way firms operate.

Kate (46:42):
Well, so this is an article that, I've seen, in the Wall Street
Journal, actually, which describes, aninitial fund that Vivek has started.
It actually verbatim copiedBlackRock's energy fund.
He looked at the holdings ofBlackRock, and if he was allocating
the money that you've given himto manage, he would allocate them

(47:04):
in exactly the same proportions tothe same companies as BlackRock.
So his holdings were the same, but whathe was saying is that, when I go to the
shareholder meetings of these companies,I am going to make my voice loud and
clear and I'm going to push the managementto concentrate on profitability and

(47:25):
to not spend additional money on anyenvironmental or social factors because
we don't want firms to be "woke.".
We want them to be profitable.
You know, one thing that like reallypuzzled me in that article was that
BlackRock is gonna hold like a largestake in these companies because
they're throwing so much money.

(47:47):
And what is Vivek's stake in there?
We're going to compare like anelephant to, I don't know, a spider.
So, you know, he can go and talk to thecompanies in their shareholder meetings,
but who will Exxon Mobil listen to?
Companies that hold 10 percent ofthe firm or a fund that holds a 0.

(48:08):
00000000001%?

Veljko (48:09):
I mean, in some sense, you can't, I mean, I was going to say you
can't blame the guy for trying, right?
You gotta start somewhere.
Oh, I mean, I'm But on theother side, yeah, perhaps you
can blame the guy for trying.

Kate (48:18):
I know, I'm totally jealous.
I mean, he racked on like two milliondollars in fund fees in the first
month that he started his fund.
So I think this is like a creativemarketing campaign on his side.

Veljko (48:31):
But okay, but if you're talking about the performance of this kind of
fund, then he's gonna perform well, right?
Because, I mean, he's justreplicating what BlackRock
does, and BlackRock is probably

Kate (48:39):
Right.
If the energy industry is doingwell, you know, he'll do well.
And if it's not, then he wouldn't.
And this is one specific fund that'sreferenced in the article, which we'll
include in our bibliography, there couldbe other funds that Vivek has started.

Veljko (48:53):
I was doing a little bit of research and I found, there is a MAGA
fund apparently, floating out there.

Kate (48:59):
What is MAGA?
Can you decode?

Veljko (49:01):
This is, a Make America Great Again fund.
And they self describe asan anti woke fund, right?
It's an ETF.
Actually, it's an exchange traded fund.

Kate (49:13):
Makes it easier for people to trade in and out.

Veljko (49:16):
Yes.
Yes.
And, the interesting thing is theydescribe themselves as an anti woke
fund, but then what they're actuallydoing is quite different because,
they are, Investing in companies thatdonate money to Republican candidates.
And, right, I mean, it's avery cynical way to, well,

Kate (49:41):
But you know, that, that is very interesting.
Yeah.

Veljko (49:45):
What I found interesting, and the reason why I was mentioning
them here is because they selfdescribe as an "anti-woke" fund.
And in reality, they are not.
They are a political fund.
A fairly cynical politicalfund,I would say.
The allocations are based onpolitical donations of firms.

(50:07):
There was actually an interestingarticle, I saw these in Forbes,
written by, Shivaram Rajogpal.
He's at the Columbia Business School.
About the performance andnature of these anti-woke funds.
And he was actually looking atthe holdings of these MAGA fund
and found that the companies thatthese MAGA fund holds actually they

(50:32):
actually rate very high on both the E,environmental and S, social dimensions.
Despite being in this MAGA list.

Kate (50:44):
I see.
So they're actually like goodenvironmental and social company.
So it comes down to like....
woke is a bunch of marketing.
Like that's just a bunch, it soundsto me, just a bunch of political
marketing that's being tied into it.
And not, what is my favorite sayingall hat and no cowboy, right?

Veljko (51:02):
That is spoken like a true Oklahoma girl.

Kate (51:05):
All right, let's wrap up.

Veljko (51:08):
You're giving away your Ukrainian origins and Oklahoma

Kate (51:12):
Connections.

Veljko (51:13):
Growing up, right?

Kate (51:14):
Yeah, so we've talked about the funds, yes?
Anything else there?

Veljko (51:18):
No, not really, but I just wanted to emphasize.
One of the reasons why lookingat these anti-woke funds is so
interesting is because we do have astream of the literature in finance
that looks at vice funds, right?
So these are the funds that are buyingall the stuff that at least some

(51:39):
segments of the market find immoral.
So energy.
Brown firms.
They buy pharmaceuticals orspecific types of pharmaceuticals.
They buy weapons manufacturers,they buy alcohol and tobacco.
And generally this vice funds in thisliterature have been found to have a

(52:00):
really strong stock price performance.
And some of the findings are mechanical.
There are two main originsfor this outperformance.
One is, the prices of these vice a ssetsare often depressed because of course, if
there's a portion of the market that staysaway demand for these assets is lower.

(52:24):
And then of course, if you're buyinga stock with a lower price and your
dividend is still unaffected, right?
Same dividend divided by a lower purchaseprice creates mechanically higher returns.
And yet, there is an exit problem, right?
Is the price going to be depressedon your exit side as well?

(52:47):
And there is also of course someproblems in really attributing causality
to these vice funds when so much ofthe superior performance that was
documented for these vice funds wasreally coming from oil and energy.
If you invested in brown assetsover the last two decades, you
probably did very well becauseagain the energy industry did well.

(53:11):
A little bit less so in more recent times.
But again, I'm not sure I wouldattribute the outperformance then,
to, to the sinful nature of thesefunds as much as this energy bias.
But that's what led me to start thinkingabout some of these anti-woke funds.
And it was somehow surprising and perhapssomehow disappointing in some sense to

(53:34):
find that they're not really vice funds.
They, they are, as you put it,they seem to be more, marketing
gimmicks than anything else.
There was something else that I wantedto bring up, Kate, when we're looking
at this relationship between levelof social responsibility of firms and

(53:56):
their profitability, I think we'releaving out an important moderator.
I think that the nature of your activity,the nature of your customer base matters.

Kate (54:07):
That's an interesting point.
Okay.
Yeah.
I'm interested to hear whereyou're going with that.
Obviously your customers are theones who are buying your product.
You want to keep your customers happy.
This makes me think aboutthe Budweiser example.
I don't know what, that's what youwere thinking about, but right.
Budweiser decided to drastically changethe target audiences that they addressed

(54:27):
and that backfired on them in terms ofproduct sales and stock price performance.
So there might be otherthings you're thinking about.

Veljko (54:34):
No, I think Budweiser is a nice example.
The point is how strong the relationshipbetween your corporate social
activities and your profitability willbe depends at least in part on how
much do your customers care, right?
If your customer base is well, and Iguess the important part that we are
living out or giving for granted is that

Kate (54:55):
everybody cares about ESG and CSR equally across all ages,
but maybe that's not the case.
Obviously, it's not the case.
Well,

Veljko (55:03):
yeah, I was going to say exactly the opposite, right?
We know that's not the case, right?
We have a lot of evidence thatthe younger generations care
more than us, older people.

Kate (55:13):
There's even older people than us out there.

Veljko (55:15):
Okay, fair enough.
My apologies, but point being, if you'reNike and your customer base is young kids,
teenagers buying sneakers, they probably

Kate (55:26):
Or those who want to be like teenagers.

Veljko (55:30):
Or wanna be teenagers.
They certainly seem to care a littlebit more about social issues, about
the environment, about social causes.
And perhaps if you are Cadillac andyour target market is 60 plus, then
perhaps you don't have the same levelof concern for some of these causes.
And importantly, you don't havethe same level of return for

(55:53):
socially responsible activities.

Kate (55:54):
That is an interesting way to think about it, about
the age of your customer base.

Veljko (56:01):
Oh, yes.
And again, I think we've seen a lot ofevidence that It's not just about age.
There are all sorts of customercharacteristics that matter from
political orientation, as we'veseen age , income, et cetera.
There is a large stream of theliterature here on the determinants
of socially responsible behaviorof firms and demand for socially

(56:24):
responsible behavior that finds bothinstitutional and cultural factors matter.
Kate, we've actually left out that wholepart of the conversation on our paper, but
of course, some of our findings were thatcountries that are more feminine care more
about corporate social responsibility.

(56:45):
That is, investors from countries withhigher levels of femininity as measured
by, cultural metrics, actually demandhigher levels of corporate social
responsibility from firms and reward firmsmore for being a socially responsible.

(57:05):
So some of that same research identifiesthe Northern European countries
as being the ones that demand mostsocially responsible activities from
their firms and reward those firmsfor being socially responsible.
So, places like Denmark, Sweden areprobably where, you're seeing the

(57:27):
highest levels of corporate socialresponsibility and the US does
not rate quite at the same levels.
But the big point here is that certainlythe nature of your activities, nature
of your products, the nature of yourcustomer base certainly matters here
for this conversation and moderates therelationship between your level of social

(57:51):
responsibility and your profitability.

Kate (57:55):
Wow.
We have looked at so manyinteresting topics here.
Let me see if I can rememberall of them or some of them.
We started out talking about double bottomline firms, as those that care about their
profitability and the social mission.

Veljko (58:07):
Do you like this better now that we are moving away from
"woke" to "double bottom line?"

Kate (58:13):
I, I am not sure how I feel about double bottom line as well.
I, I don't like that one either.

Veljko (58:20):
Okay, fair enough.
So then we spoke about the definitionof S of social responsibility.

Kate (58:29):
And then we talked about family leave policies, worker .Safety..

Veljko (58:33):
We spoke about best companies to work for.

Kate (58:36):
Gender equality on boards.

Veljko (58:38):
Indeed, and all of this under the labor side, under the employment
side of social responsibility.
Then we switched gear and we talked alittle bit about corporate scandals.

Kate (58:50):
Fun.

Veljko (58:51):
Yeah.
There was Tiger Woods and maritalinfidelities, corporate reputations that
suffer through loss of data protection.

Kate (59:00):
Our paper on the murder of Jamal Khashoggi.

Veljko (59:04):
Yes, and similar work on geopolitical reputations coming from
firms that did or did not leave Russiawhen Russia invaded the Ukraine.

Kate (59:14):
And that took us into this side note on anti-woke funds, those that
are like MAGA funds and Vivek's funds.

Veljko (59:21):
And then finally, a little bit of discussion on moderators, why
the age of your customers matters, whythe nature of your investors, matters.

Kate (59:32):
Yeah.
Wow.
That's a lot.
So what ties all of this together?
Can you summarize or create kindof a joining theme across all
of this in three main points.
How about that?

Veljko (59:45):
Oh, three is hard.
Let me try.
The first one, there's apositive correlation between
corporate social performance offirms and their profitability.
The second lesson correlation is notcausation, even though we see this

(01:00:05):
positive correlation, we don't knowwhether socially responsible firms are
performing well because they're sociallyresponsible or whether firms that are
profitable actually have extra money tospend on socially responsible activities.

Kate (01:00:22):
We definitely highlighted this endogeneity, where once a firm
is profitable, then they care moreabout doing good and being better
environmentally, being better socially.
What is that?
The Maslow, the Maslowhierarchy of the Maslow

Veljko (01:00:38):
The Fotak-Holland Maslow hierarchy of corporate needs, that's right.
Hey, you heard it first hereon Questions in Finance.

Kate (01:00:48):
All right.

Veljko (01:00:48):
And you asked me for three.
The third one, the big one, the answerto our original question, do socially
responsible firms under perform?
And the answer there is astrong and resounding no.
Whether you're talking aboutsocial responsibility in terms of
governance, whether you're talkingabout the level of concern for the

(01:01:10):
environment, whether you're talkingabout social spillover, socially
responsible firms do not under perform.
I want to add something else herebecause you are the optimist, Kate.
And in generally, well, that's not me.
And yet when they look at this literatureand at the bulk of the research I

(01:01:33):
find that this positive correlationbetween firms social responsibility
metrics and firm performance andprofitability actually uplifting.
And I feel that we get stuck indebating, is it causal or not?
And yet....
and I'm not saying that thatdebate is not important.

(01:01:54):
Of course it is.
But we tend to forget that thereis a positive interpretation even
to the positive correlations.
The firms that are doing somethingthat's socially responsible,
are not wasting money.
They're not wasting resources.
They're not being punished because of it.
And perhaps they've not tradingoff shareholder value here for the

(01:02:18):
benefit of broader stakeholders.

Kate (01:02:20):
That sounds like a very hopeful message.
I like that message.

Veljko (01:02:24):
I love the way that you're putting it, in a sense, because we
keep talking to people that work inthis area and they're coming in with
extremely rosy expectations, almostrose tinted glasses, if I, if I may say.
They are coming in with theexpectation that firms are going to
be socially responsible and rainbowsare going to pop up and unicorns

(01:02:46):
are going to be running over them.
On the other side, we do have all of thisbaggage of theory that is saying if you're
spending money and capital on thingsthat are not necessarily linked to your
profits, it is hard to stay profitable.
And I loved the fact thatyou're interpreting this as a
positive result because it kindof feels that way to me as well.

(01:03:10):
I think that the fact that we do notfind that the socially responsible firms
underperform effectively means that...
I'm looking at these and I'mreluctant to say this out loud, but,
it feels almost like a free lunch.
These firms can do socially responsiblethings, they can invest a little bit of
money and there's going to be a littlebit of more demand for their products.

(01:03:33):
Banks are going to treat thema little bit more kindly.
The market is going to have aslightly high level of demand
for their shares, which is goingto lower the cost of capital.
They're going to get intotrouble a little bit less often.
In other words, there are going tobe all these compensating effects.
So you can be good, you can spend alittle bit of money on cleaning up
your emissions, you can sacrifice alittle bit of your immediate bottom

(01:03:57):
line in order to be nicer and morehumane to your employees and markets are
actually not going to punish you for it.
You don't have to give up yourhumanity for being a corporate citizen
. Kate: Excellent.
I think we can finish it up at that point.
Awesome.

Kate (01:04:15):
All right.
I hope you enjoyed thisepisode on wok e firms.
We've talked about ESG and how wokeis not the best title for firms that
rank highly on these ESG factors andabout the profitability of such firms.

Veljko (01:04:33):
So once more to our listeners, like us, click on subscribe, subscribe
to questions in finance, and westill don't really know how, but,
sooner or later we'll be able to,figure it out and explain it to you.
But, again, please, like us,love us, hug us, and stay

(01:04:53):
tuned for our future episodes.

Kate (01:04:56):
Goodbye.

Veljko (01:04:57):
Cheers.