Corporate governance, social responsibility and capital markets: exploring the institutional investor mental model

Henry Petersen and Harrie Vredenburg

Henry Petersen is based at the Marshall Goldsmith School of Management, Alliant International University, San Diego, California, USA. Harrie Vredenburg is based at the Haskayne School of Business, University of Calgary, Calgary, Canada.

Abstract Purpose The purpose of this paper is to extend our understanding of corporate governance, social issues and capital markets by distinguishing between the socially responsible investing phenomenon and mainstream investing with respect to social issues. It attempts to clarify the domain by casting it in the theoretical frame of prospect theory and mental modeling. With a qualitative study done among large institutional investors in the Canadian securities industry, the article derives a proposed mental model of these institutional investors cognitive model of social issues as they impact investments. Findings The institutional investors in this study know exactly where value is derived from social investments suggesting that there may be more alignment between directors, investors and societal expectations than has been previously suggested. Research limitations/implications The limited number of organizations in the study reduces the generalizability of the ndings. Practical implications Managers and directors must have an understanding of how shareholder value and responsibilities intersect. In our research, we have found that these executives positioned their rms as leaders on the social responsibility front. Interestingly, their major shareholders also understood how responsibility and shareholder value intersected and as a result, nancial performance was not sacriced. Originality/value The ndings from this research shed light on previous scholars questions regarding the alignment of interests between managers, directors and social expectations. The rms analyzed make strategic investments that are considered to meet social expectations but that are also perceived to add value to the organization making the rm more attractive to institutional investors. Keywords Corporate governance, Corporate social responsibility, Capital markets Paper type Research paper

Received 7 February 2008 Revised 29 November 2008 Accepted 5 December 2008

ncreasingly corporate boards of directors nd themselves in a position to assess the impact of social issues on shareholder value. Strebel (2004) has dened social issues as matters of concern to society that have not yet been recognized through government regulation. Although government regulations must be complied with, social issues may or may not be addressed. There are denite immediate nancial costs for the company associated with addressing social issues and there are possible but not conrmed benets to the rm of dealing with them. Companies may realize serious losses if they ignore these issues or fail to recognize opportunities for signicant gains. In some industries a narrow denition of governance may be appropriate but in many industries, particularly in those dealing with emerging economies, or where there are many and powerful activist groups or even those working with new technologies or an environment of deregulation, social issues must be considered carefully as part of good corporate governance. Downsides of failing to take account of social issues include such events as being targeted in the media by activist groups (Jones and Rubin, 2001), having regulatory approvals delayed, failing to win bids to

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VOL. 9 NO. 5 2009, pp. 610-622, Q Emerald Group Publishing Limited, ISSN 1472-0701

DOI 10.1108/14720700910998175

develop resources in foreign jurisdictions while upsides include such things as being seen as a socially responsible or a green company by customers and shareholders (Jones and Murrel, 2001), getting favourable resource access and timely regulatory approvals and preferred access to young and enthusiastic employees. Each of these favourable and unfavourable events can lead to short-term as well as lasting impacts on corporate share price, one of the key concerns of boards of directors (Frooman, 1997; Waddock and Graves, 1997; Knight and Pretty, 1998). Recently Richard Tudway and Ana-Maria Pascal (2006) concluded from their study on corporate governance, shareholder value and societal expectations that there is evidence of little effective communication between shareholders and directors on how best shareholder value can be maximized in this increasingly important area. They argue that there is a lack of clarity on the question of what is expected of directors in meeting their duciary and broader directors duties as expressed in the objective of maximizing shareholder value. Moir et al. (2007) set out a detailed approach to linking corporate responsibility and business value in a practical way from a detailed examination of one company. They conclude from their study that much of the difculty of trading off corporate responsibility with nancial performance is due to a lack of detailed understanding of how corporate responsibility issues can affect drivers of shareholder value. This article attempts to extend our understanding of corporate governance, social issues and capital markets by rst distinguishing between the socially responsible investing phenomenon and mainstream investing with respect to social issues. It then attempts to clarify the domain by casting it in the theoretical frame of prospect theory (Kahneman and Tversky, 1979) and the mental modeling approach used in the cognitive psychology and public risk communication literature. The article argues that the major movers of capital markets are not the small retail investors but the large institutional investors such as pension funds (Ryan and Schneider, 2003). It then seeks to contribute to our understanding by reporting on a qualitative study done among large institutional investors in the Canadian securities industry and derives a proposed mental model of institutional investors cognitive map of social issues as they impact investments. Socially responsible investing (SRI) has been suggested to be a result of investor interests extending well beyond simply nancial performance (Heinkel et al., 2001) and that people are applying an ethical or social test to their investment choices (Hickman et al., 1999; Robins, 2002). The impact of this ethical dimension may be illustrated in the growth of SRI mutual funds which have grown approximately 40 percent from 1995 to 2003, making up approximately 11 percent of assets under professional management (Hayes, 2005) or 2.16 trillion dollars. However, a reasonably strong case has been made for the positive correlation between an organizations social and nancial performance (Orlitzky et al., 2003). The signicance of this correlation suggests that we are observing not only investors ethical investment choices in the rise of corporate social responsibility but also that socially responsible rms may be invested in because they are nancially superior or, at the least, equal. This apparent corporate social responsibility-nancial performance link then calls into question whether socially responsible investing is indeed only about ethical decision making (Hillman and Keim, 2001). We explore in this article not the ethical screen type of socially responsible investing practiced by ethically-focused mutual funds, but rather how signicant players in capital markets, namely institutional investors such as large pension funds, interpret corporate social responsibility information when making investment decisions. Building on the work of Graves and Waddock (1994), Johnson and Greening (1999) and Cox et al. (2004), we researched the cognitive processes of investor decision making for large stock owners of socially responsible rms. The investigation examined institutional shareholders perceptions of social responsibility and organizational social strategies undertaken by rms they were investing in. Prospect theory (Kahneman and Tversky, 1979) was employed to frame our research.

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Prospect theory
Prospect theory is a risk and investment decision making model that suggests that under conditions of uncertainty, people will incorporate basic psychological principles of judgment and perception (Kahneman and Tversky, 1979). Three basic principles underlie the theory: certainty, reection and isolation. The certainty effect is a condition whereby when the decision maker is confronted with two options, one with a certain outcome and one with an uncertain outcome, the decision for positive gains is often skewed towards those outcomes that are certain over those that are only probable. This occurs even when the uncertain outcome poses to be much better than the certain. This over-weighting of certainty is suggested to contribute to risk aversive behavior. The second effect, reection, is based on how the outcome is framed or stated to the decision maker. By mirroring negative and positive prospects opposite each other, the responding risk behavior becomes negatively correlated. Hence, when confronted with a potential positive outcome, people will try to protect the gain and behave in a risk aversive manner whereas if they were confronted with a negative outcome, they become risk seeking to avoid the loss. The third effect, isolation, applies to the ltering of information. In order to simplify choices between alternatives, the theory predicts that when making decisions, people will tend to disregard components that the alternatives share and focus in on only the differences that distinguish them from one another. We argue here that these three effects proposed by prospect theory underlie institutional investor decision making for investments involving social responsibility. Lastly, according to prospect theory, the decision maker undergoes two distinct phases in making a decision. The rst phase, editing, involves a simplication of the choices that are available and as would be expected, improper editing can result in aberrations or inconsistencies with respect to preferences (Finkelstein and Hambrick, 1996). The second phase however, the evaluation phase, is where the value of the expected outcome is determined and is dependent on the changes in wealth, health or prestige of the decision maker (Van Schie and Van der Pligt, 1995). Here the value associated with an expected outcome is compared to some initial starting point or state. This comparative analysis is foundational (Shoham and Fiegenbaum, 1999).Consider a rm that has below average earnings. There is an assumption that this performance is considered a loss however, if investors were told that under the current conditions, survival of the corporation is threatened then potentially any performance above bankruptcy will be viewed as a gain. Conversely, expectations of above average earnings will make average earnings be perceived as a loss (Bowman et al., 1999). The impact on how the future is framed is pivotal. For decisions with a negative outcome, people become risk seeking in an attempt to try to avoid the losses. They may not be risk averse but they are loss averse (Bernstein, 1996) and individuals tend to prefer options that avoid losses altogether (Wiseman and Gomez-Mejia, 1998). Hence, frames of reference are an integral component for determining behavioral responses (Kuhberger et al., 1999; Fagley and Miller, 1997) and as we are reporting, integral for predicting decision making behavior associated with investments and social responsibility.

Method
In order to determine the cognitive effect that social responsibility has on institutional investor decision making, mental modeling was used to depict institutional investors cognitive perceptions of corporate social responsibility (Morgan et al., 2002; Palmer and Pickett, 1999). Mental modeling is a research approach that captures a snapshot of a persons belief or understanding of a concept (Morgan et al., 2002). What has been very useful for researchers using mental models have been the combination of several snapshots to create a single description that allows them to summarize the

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knowledge people hold of a particular topic (Morgan et al., 2002). For this case, we sought to understand what selected institutional investors and their analysts perceived of organizations that declared themselves to be socially responsible. We focused on the Canadian securities industry and concentrated on those investing in the energy industry, which is the largest industry by market capitalization on the Toronto Stock Exchange. Our study was focused on investors in three selected large independent upstream Canadian energy rms listed on the Toronto Stock Exchange. The energy rms on which we concentrated declared themselves to be socially responsible and communicated this through their investor relations ofces and in annual reports. Cognitive maps were generated for institutional investors. The institutional investing organizations were chosen based on their holding a signicant portion of shares of the energy companies on whom we were focusing. Selection was based on their being in the top ten, with respect to ownership and volume of our focus rms shares, and availability to participate in the study. Three institutional investment organizations were selected for each of the energy corporations in our study and one representative from each rm was solicited to participate, resulting in a total number of interviewees of 18. Given the low number and non-random selection of respondents, the ndings reported here are exploratory in nature and cannot be assumed to be statistically generalizeable to all institutional investors in all industries. Identities of individuals and corporations are not reported here as a condition of their candid participation in this study. Each interview was transcribed and coded. The codes were developed based on individual associations that interviewees made with respect to social responsibility. We increased the face validity of the associations made in the mental maps drawn from the interviews by triangulating (Yin, 1993) these with references to documents and data gathered from the focal organizations, in the media and through an internet investment chat room.

Results
Each of the institutional investor respondents comments related to social responsibility and corporate performance were categorized. Below is a description of the associations that investors had for corporate social responsibility accompanied by a sample comment. A complete graphic cognitive map was constructed from the associations and is found in Figure 1. Whereas senior managers of the energy companies we focused on believed that there were capital market payoffs for rms being socially responsible, and those payoffs were a result of attracting a diversity of investors that led to a decrease in stock volatility, this was not specically afrmed by the institutional investor group we interviewed, although institutional investors articulated a payoff in different terms. What the institutional investor group indicated was that corporate social responsibility (CSR) was not considered a large variable in their decision making for investment purposes unless there were specic outcomes that demonstrated added value. As one put it,
There are a million variables that can affect the outlook for a stock and [CSR] is one of them. The fact that it has a socially responsible connotation is neither here nor there; to us its just one more variable (Investor/Analyst)[1]

The cognitive map shown in Figure 1 demonstrates the mind map of the institutional investors for social responsibility in the context of adding value to the corporation. Decision-making that involved social responsibility was only made if there were specic cited outcomes that were identied as adding value. Activities or claims that were not associated to value added outcomes were generally dismissed or declared philanthropic in which case the activity was tolerated but had little bearing on the investment. Specically, the cognitive associations that were considered value adding were categorized as follows: risk mitigation, market opportunities, and quality management.

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Figure 1 Institutional investors/analysis cognitive map displaying the mental associations of investors with respect to corporate social responsibility strategies

Risk The institutional investors in our study believed that CSR had an impact on investor perceptions and consequently on their decision making with respect to risks. If certain activities or potential outcomes were considered a risk to the rms earnings and or share price, then investors said they were denitely interested. Consequently, such risky activities and the CSR strategies developed to mitigate these risks were taken into consideration and they did weigh into the investment decision-making process. Although this is unremarkable, that investors should take rm risks into consideration regarding their investment behavior, the interesting aspect is that the investors cited specic events surrounding social and environmental initiatives and correlated them to specic risks that were mitigated. For instance, one organization, operating in a volatile region of the world, attributed its CSR performance to enhanced community relations that allowed them to avoid having to purchase expensive kidnap and ransom insurance. This corporations inter-connectedness and involvement with the community resulted in protection of their people and assets. Examples like this, which were company specic, focused on risks that had the potential to impede growth or threaten the organizations sustainability. As stated by another respondent:
[This company], which, has had a spotty record from a corporate citizenship standpoint. . .has a lot of issues regarding social policy and corporate ethics and what kind of government youre supporting there. That stock, because of that, trades at a signicant discount to all of its peers. It trades at what we call 4.3 times net adjusted cash ow whereas its peer group would be trading at almost a point higher than that like 5.2 or 5.3. That is a lot, 20 percent of your market value is being discounted off because of what youre mucking around with in [that country]. It is more . . . , the analysts could really give a rats ass as to whether being in the [country]is a right or wrong decision from an ethical standpoint, theyre just trying to gure out if youre going to be forced to sell at a huge loss and what that means to your share price (Investor/Analyst)

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Thus CSR is perceived to be risk based and value adding in the form of risk mitigation. As articulated by another respondent:
I think the things that you are talking about in this context we wouldnt begin to look at them until they start to impact potentially impact the operations or nancial results. We dont see them as these issues until they have operational and nancial results (Investor/Analyst)

For an organization to garnish recognition and perhaps a positive valuation from investors then, CSR strategies were shown to mitigate specic risks; actions with corresponding outcomes. Philanthropy as in giving or providing general nancial support to social causes or the community was tolerated but not supported as these initiatives were seen as squandering shareholders money. Importantly, with respect to the investor-executive relationship and the valuation of a corporations shares, investors indicated that one-on-one meetings with executives contributed signicantly to decision-making. This is one component that may be exploited by business leaders in establishing what prospect theory refers to as legitimacy. On these occasions, executives have the opportunity to connect many of their CSR activities to potential risks, communicate to investors both the intangible and tangible outcomes and draw associations that otherwise might not be made. The investor/analyst then determines the validity and weight that such activities have in the valuation of the companys shares. In the words of several of our respondents:
Bottom-line I think its something that you expect at a certain level and it might give you warm fuzzies if it really is a great thing but I think as a day-to-day investor you dont really spend a lot of time thinking about most of that. When you become interested is when maybe an industry is being targeted by changing regulations or a company specically is being targeted for whatever its been perceived to be doing somewhere or something is going wrong (Investor/Analyst). . . . one of the big changes that we have seen here in the last seven or eight months . . . is . . . more and more companies being investigated. Our industry, the investment industry, is now being investigated by all the States on the role of analysts. With all that, I think there is certainly a change from when we used to talk to clients. People then just wanted a ve second or 5 minute analysis of how good the earnings could be and that was it. Now, people have started opening up this can of worms and saying that they want to know everything. They want to know the hidden liabilities in whatever forms those might take (Investor/Analyst)

Hence, there is a sense of safety for having CSR and this is coupled with the sense of doing good which in these cases, appears to be successful in building investor condence. With respect to CSR, the risk mitigating nature of CSR was seen to have the greatest emphasis. In a sense, these rms declared that they were a better investment because of their reduced shareholder risk. Quality management Senior management of the corporations whose largest institutional investors we studied were perceived by the institutional investors as having specic qualitative characteristics. Those characteristics mentioned were seen to be an indicator of quality management. Competent management would entail the management of risks that could potentially harm shareholder earnings and/or the viability of the corporation. That management is perceived as competent if they managed such risks is not necessarily remarkable except for the fact that CSR strategies were seen as the indicator of quality of management. Senior management of these companies were aware of this association and consciously communicated with the investment community in this vein:
I know one thing builds on another and leadership has got a lot to do with it. For me, its not rocket science. It doesnt matter whether you are doing business here or you better have a really strong one if youre going to do business internationally because you will nd from culture to culture you will get prodded pushed touched tested reinforced, all of that (Senior executive). My sense is values drive everything. Values are somewhat innate, its not avor of the month. The point is that having that kind of values based culture allows us to be able to operate around the world and allow our local managers to understand what the right thing to do is and how to do it and when to do it. You know one thing builds on another and leadership has got a lot to do with it (Senior executive).

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The senior management of the energy companies expressed the need for strong personal values and strong corporate values and that by having strategically adopted corporate social responsibility this was their indicator of superior personal and corporate values which in turn was an indicator of integrity and a superior ethic. As stated by one of the executives:
The fact that there are people out there that are going to be less than forthright and less than honest is not a new concept, they have been out there for a million years. I think the landscape is changing a little bit to where, if youre talking big I investor of the broad spectrum of investors as opposed to the individual shareholders I think credibility and some sort of value system are going to become much more important as we go forward (Senior executive).

Institutional investors in turn articulated the concept as follows:

If you get enough unethical behavior, which seems systemic inside the company as opposed to one executive doing something for his own personal gain, then you lose faith . . .and there is no way to ascertain a value. People assume that a value could as easily be zero because in equity markets there is still a large component of a value that is taken up by debt rst. So, whatever is left over goes to shareholders and so its not like a company itself is worthless but you dont have to lose too much until theres nothing left over for shareholders (Investor/Analyst).

Competitively advantageous The last association was that of greater market opportunities. Institutional investors in our study did have a perception that the socially responsible corporation would have a competitive advantage due to specic upside consequences for their actions. A corporations consideration of a communitys needs and implementing specic programs to meet them creates the potential to access markets that may be closed to competitors without such strategies. Because of its ethical or social activities the organization becomes a preferred supplier or as it is sometimes portrayed in resource industries, a neighbour of choice to communities. This aspect is discussed by our institutional investor respondents:
As long as you are meeting the bar and not creating any problems for yourself to the extent that you could show that by behaving particularly well in some fashion and that was opening up new opportunities for you . . . then I guess you might have some positive effect on your share price (Investor/Analyst). The answer is complicated. I would say in the most straightforward way it is to their advantage to both be, and be perceived to be, socially responsible (Investor/Analyst).

Employee satisfaction and retention were also perceived as a consequence of CSR which in turn relayed into greater market presence and opportunities. One rm believed that its turnover was the lowest in the industry and this was a consequence of their CSR strategies. They went on to suggest that when a position in their rm is posted, they receive exceptional applicants and that they are choosing from the best in the industry. As our institutional investors observed from various perspectives:
Their turn-around would be lower because of the ethical responsibility and employees respond positively to environments which are overly positive (Investor/Analyst). An example is [Company ABC], their senior management have a policy that strongly encourages community involvement and support for their employees to be involved in community organizations and to volunteer with the United Way campaign and so on. Wel l. . . people come back with more energy and knowledge and more connections and they become leaders. The benets to the company far outweigh the dollars that go out the door. Those are tangible benets of social responsibility to the bottom line (Investor/Analyst).

Lastly, social responsibility was also perceived to enhance government, community and public relations in a positive manner. The positive effect from CSR meant that the rms social and environmental activities augmented the rms relations with other stakeholders so much so that not only was the rm accepted but that the organization was also a recipient of opportunities that otherwise would not be available. Increased business opportunities were perceived as a strategic advantage gleaned from social responsibility. Senior management of the energy companies we studied believed that

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their companies were more desirable than their competitors and that by aligning themselves with moral and upright standards with social investments, their acceptability provided them with a greater breadth of business opportunities. Some quotes from senior energy company managers follow:
Things that happen to you around the world get back to where ever they need to go. So, if you are trying to break into a new country, and you can show them you have a good track record . . . you probably are going to be more welcome than someone who has got a little bit of hair on them (Senior executive). I think there is a cost to it but I dont see that it makes us less competitive. In fact, in many instances it makes us more competitive . . . it gives us a leading edge. Lets say youre the Government of Rwanda and I walk in and they dont know who this company is at all . . . but as soon as I can prove that Im a reputable company that is a good investment risk, they are much more likely to allow me in to look for and exploit resources than if I am Joe Schmoe with a horrible record and didnt pay any attention to that sort of thing (Senior executive).

Clearly these executives see that they are recipients of greater market breadth or market opportunities stemming directly from their activities associated with CSR. This concept of having access to more markets or a greater number of market opportunities over rms that were not considered socially responsible was afrmed by the institutional investors/analysts in our study:
The answer is complicated. I would say in the most straightforward way it is to their advantage to both be and be perceived to be socially responsible because if they are known to be that then it makes it easier for them to be in territories that they want to be in and nd easier access to markets (Investor/Analyst).

Discussion
Rao and Sivakumars (1999) work on investor relations ofces demonstrate that management will communicate to the capital markets in response to a request for information and at times, provide information that might inuence investor decision-making. From the institutional investors viewpoint, we found in our study that the communication and consequent perception of institutional investors of socially responsible organizations is in response to risk inquiries. However it is in a fashion that emphasizes CSR. The emphasis on risk and risk mitigation was important as was the necessity of senior management correlating for the investment community evidence to back up any claims of risks mitigated or value created. While decision makers are expected to maximize shareholder wealth they do not always base their risk decisions on strict statistical probabilities or objective measures but often base their decisions on their subjective understanding of the risks that they encounter (Krimsky and Golding, 1992; Slovic, 2000). This perception without objective reinforcement, coined intuition (Slovic et al., 2000), has been seen to occur within the capital markets (Shefrin, 2000; Shiller, 2000) and appears to be occurring here with respect to CSR. Through the lens of prospect theory, decision-making for both social and nancial investments have multiple outcomes. Figure 2 simplies this as follows: monetary gain with a loss in CSR, monetary loss with a gain in CSR, CSR and monetary gains, or losses for both. Importantly, the impact these outcomes will have on institutional investor decision making will hinge on the frame of reference, whether the outcome is framed as a loss or gain and certain or probable. Quadrant 4 is a double negative and there is a potential loss for both monetary and social outcomes. According to prospect theory, when prospects are framed as losses, we would expect to see more risk seeking decisions regarding both issues in order to minimize the losses. Which arena will take precedence is dependent on the individuals risk propensity and on what they perceive is most important. Based on our study results we suggest that under conditions of negative frame for both social and nancial performance the monetary dimension takes precedence. Persistent nancial losses will result in declining earnings, share price, and eventually corporate insolvency. Negative economic performance is a

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Figure 2 Decision matrix assessing a monetary gain or loss with corporate social responsibility gain or loss

signicant moderator for determining what the CEO will focus on concerning stakeholder expectations (Dooley and Lerner, 1994). When earnings are poor fewer resources are expended to comply with regulatory requirements (Osborn and Jackson, 1988) let alone activities surrounding health, environment and social responsibility and risk seeking behavior would be observed to stem the nancial losses. Quadrant 3 positions nancial gains against social loss. Financial outcomes framed as gains would be expected to produce risk aversive behavior that protects the gains. However, social performance loss in the negative frame would suggest risk seeking behavior to avoid such losses. If improving social performance was perceived as a cost then this may conict with risk aversive behavior elicited for monetary gains. Three potential scenarios branch from here. The rst is what we have described earlier with the investor or manager behaving in a risk aversive manner to maintain his or her nancial gains and allow for the losses in social performance. In this case, a positive relationship has been found for pollution and protability in Dooley and Lerners (1994) study in which pollution and protability were correlated. Conversely, Osborn and Jackson (1988) demonstrated that executives of companies with dangerous technologies took more risks to stem health and environmental outcomes if they had higher than expected earnings. More resources enabled the rm to manage more health and environmental issues. The second possibility is that social issues were considered equal to nancial performance, leading to decisions that both protect the nancial gain but also attempts to minimize social losses. Finally, the last option might place social outcomes above monetary outcomes and the loss associated with the social outcomes elicit riskier behavior to not only stem the losses but also risk nancial gains. Perhaps it is in this situation that we might better view values or ethical standards in decision making taking precedence over nancial outcomes. However, the research to date, and what we have found, suggests that the utility of social outcomes will be contingent and dependent on nancial outcomes and that this relationship is positively correlated. Having gains elicits investment behavior that will seek to protect the gains and this is increasingly important amid social or environmental risks that threaten those gains. Our assessment suggests that the corporate investments into social and environmental activities protected the rm from such risks and that their expenditures were insignicant to the gains they protected.

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Quadrant 2 places the monetary outcome into a negative frame and health and environmental outcomes in a positive frame. With respect to utility and the value function, nancial losses would be suggested to have precedence over health and environmental outcomes. Financial losses are an overwhelming motivator. Poor nancial performance can lead to corporate insolvency. However, the principle of self-preservation would be a rational, expected behavioral goal since self-preservation is basically a decision to maximize the probability of survival (Karni and Schmeidler, 1986). If the executive or investor is measured against his or her ultimate nancial performance then the executive will take nancial loss aversive action over protecting social gains. For this reason, the negative association between risk and return (Lee, 1997), as predicted by prospect theory, is preserved. As earnings fall, riskier decisions are made to avert the losses regardless of the social outcome. Quadrant 1 places both nancial and social outcomes in the positive frame as gains. Preferences for nancial outcomes have been shown to be legitimate with respect to protecting gains (Lee, 1997; Jegers, 1991; Currim and Sarin, 1989). Combined with positive social outcomes, prospect theory predicts risk aversive behavior for both social and nancial decisions. In this study the corporations and the institutional investors fall into this category. Financially, all of the rms were seen in the positive frame. Senior managers framed positive messages for nancial and social performance describing the potential risks that CSR mitigated. Perhaps this component of the message plays to the ethical or socially responsible investor that makes his or her decision based on values. However, we observed a different phenomenon. First the outcomes were framed as a gain, positive social and nancial performance. The community and those stakeholders external to the rm beneted and nancial performance of the rm was superior. Second, the outcomes were framed as certain. That many of the social and environmental initiatives were described for how they mitigated so many risks reinforced the security and safety for protecting the nancial gains from litigation, terrorism and so forth. This certainty effect described by prospect theory, makes investment in these corporations that much more attractive. Our institutional investors knew exactly where value was derived from social investments suggesting that there may be more alignment between directors, investors and societal expectations than that suggested by Richard Tudway and Ana-Maria Pascal (2006). In fact, the executives and institutional investors in this study considered their social and environmental efforts as strategic and instrumental in their organizations long term performance. This resonates with Porter and Kramers (2006) recommendation for a strategic investment that reaps both social and nancial results. As Moir et al. (2007) pointed out, and reafrmed here, managers and their directors must have an understanding of how shareholder value and responsibilities intersect. In our research, we have found that these executives positioned their rms as leaders on the social responsibility front. Interestingly, their major shareholders, the institutional investing rms in this study, also understood how responsibility and shareholder value intersected and as a result, nancial performance was not sacriced. Lastly, this study has shown that good corporate governance involves a strategic plan that interconnects social issues in management with nancial performance. This is no small task but requires not only innovation but also a keen understanding of the business activities at the business and society interface. Simply put, investments of this nature are not easy. Are earnings expectations being met? Our study found that CSR was communicated as a means of not only protecting the organizations gains but also of creating new business opportunities. The institutional investors in this study made investments into these rms based on a long-term horizon that resonated with taking a risk averse perspective re-enforced by CSR. The challenge to todays executive is where to invest. However, that is not unlike most situations of strategic management. The future is largely unpredictable and any investment that is going to put your rm into the drivers position regarding performance will take risk, especially for decisions that make the most economic sense but also make the greatest societal contribution.

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Note
1. Investor/analyst are grouped together in this article in order to preserve respondent anonymity in this study with relatively small respondent numbers. It is acknowledged that some critics of the investment industry seriously question the credibility of the analyst community as compared to the institutional investment community. We thank an anonymous reviewer for highlighting this for us.

References
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About the authors

Henry Petersen is an Assistant Professor of Management with Seattle Pacic Universitys School of Business and Economics and teaches undergraduate and graduate courses in strategy and social responsibility. He researches and consults in the areas of executive management, corporate governance, social responsibility and strategy. Henry Petersen is the corresponding author and can be contacted at: hpetersen@alliant.edu Harrie Vredenburg is Professor of Strategic Management at the University of Calgarys Haskayne School of Business and is the Suncor Energy Chair in Competitive Strategy and Sustainable Development, a Haskayne Research Chair afliated with the Universitys Institute for Sustainable Energy, Environment and Economy (ISEEE). He is certied as a corporate director (ICD.D) by the Institute for Corporate Directors in Canada and serves as a Director of public and private companies and not-for-prot organizations.

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