Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, April 10, 1994 TAG: 9404060123
SECTION: BUSINESS PAGE: F-1 EDITION: METRO
SOURCE: John Levin
DATELINE: LENGTH: Medium
Virginia Tech finance professor Janine Hiller, along with professors at the University of Missouri, the University of Texas at Tyler and Memphis State University, has co-authored a study to document the impact on companies' stock values of news about charges of discrimination and affirmative-action employment programs.
They tracked stock market data between 1986 and 1992, looking specifically at trading on days immediately following public announcements about employment practices. None of the work sites involved was in Western Virginia, but the companies are major U.S. corporations.
For 46 companies that were reported by news services as having settled lawsuits alleging discrimination against minorities and women, the rate of return on their stock values fell 0.3 percent below what a mathematical model said was investors' expected return. They include some firms with local operations or affiliations, including IBM, Shoney's Inc., General Electric Co., DuPont, Goodyear Tire & Rubber and United Airlines.
At 34 other companies, subjects of reports about Department of Labor recognition for quality affirmative-action programs, the stocks' rates of return were 0.7 percent above the anticipated norm. Companies on that lists with local connections include Marriott Corp. and Philip Morris Cos.
The effects are more significant than those numbers suggest, Hiller said, because they reflect complex mathematical adjustments, rather than raw stock prices. The formula is based on the standard business assumption that investors are rewarded for taking larger risks.
What's more important, Hiller said, is that the market reacted. "If the news had no value, then you'd see no effect. Anything that has value to investors will have an impact."
The conclusion, Hiller said, is that the stock market feels a company is well-managed if it has an effective program to provide a diverse work force. And conversely, settlement of discrimination lawsuits is a proxy for ineffective management.
The same may be said of a widening range of social issues facing corporations: environmental and health concerns, South African investment policies, gay rights and local tests of corporate citizenship. Still, many annual shareholder meetings are marked by contentious debate between management and special-interest groups of stockholders.
That may be because doing the right thing comes at a price. Affirmative-action programs for hiring and promotion can be costly, Hiller said, but her study suggests that the objective and unemotional marketplace rewards companies for taking those actions.
"Certainly there are costs involved," she said. "But what began as a legal imperative has developed into being the right thing to do, and now executives are saying it's beneficial to their business."
Sales, returns on investment, earnings and dividends are still the bottom-line factors that drive shareholders to buy or keep stock, said Michael Smith, president of Ferguson Andrews & Associates Inc., a Roanoke-based securities brokerage. But "I do believe you get some positive feedback from these soft issues," he said.
He noted that Dibrell Bros. Inc., a Danville tobacco and fresh-flower trader, and Philip Morris Cos., whose roots are in cigarette manufacturing, have suffered the impacts of the continuing controversy about smoking.
But, First Union Corp. has picked up the goodwill of Roanoke-area investors by maintaining the innovative day-care center for employees' children begun by predecessor Dominion Bankshares Corp., he said.
"When a company gets a special accolade, it bespeaks . . . a pretty happy company where things are doing well," Smith said. When the news is negative, investors "worry there's another shoe to drop."
Hiller noted that her study doesn't pinpoint exactly why the stock market rewards or penalizes companies.
But on the issue of minority hiring alone, she said investors might assume a company cited for affirmative action has lower absenteeism and turnover, higher degrees of job satisfaction and the ability to lure talented workers.
Also, with shifts in the population predicted to make white males a work-force minority, companies that are reluctant to hire and promote women and blacks now could have trouble filling jobs in the future, she noted.
And finally, workplace diversity could give American companies an edge over international competitors, especially those in Japan and Europe, where homogeneous societies and custom have failed to address discrimination, she said.
"We believe it could provide a competitive advantage as the marketplace becomes more global," Hiller said.
John Levin is business editor of the Roanoke Times & World-News.
by CNB