the best 100 Corporate Citizens

100 Best Corporate Citizens 2005

Companies that serve a variety of stakeholders with excellence and integrity.

The Sixth Annual list of the best-managed U.S. firms. See the pdf of the full list here.

Highlights of the List

"We've reduced diesel engine emissions by 90 percent — and within 10 years, we believe we’ll be at zero or close to zero emissions,” said Tim Solso, chairman and CEO of Cummins, Inc., the Columbus, Ind.-based engine maker in the No. 1 spot this year among the 100 Best Corporate Citizens. “Cummins is the best in the world when it comes to air-emissions reduction research,” Solso added. Plus, over the last decade, Cummins has spent more than half its in-house research and development dollars on emission-reduction technologies.

This environmental commitment has left the company well-positioned to meet more stringent EPA emission standards slated to take effect in 2007. And it’s the kind of forward thinking that helps Cummins achieve stellar financial performance. For 2004, Cummins sales increased an impressive 34 percent, to $8.44 billion — while earnings tripled to $545 million.
Cummins has been on the 100 Best Corporate Citizens list all six years, debuting at the No. 62 slot in 2000. Its mission is “Making people’s lives better by unleashing the power of Cummins” — a power that comes from 24,000 employees, who enjoy perks like employee ownership and profit-sharing. “A company’s top stakeholder is its own employees,” Solso emphasized. “If they are worried about pay or working conditions, how are they going to take care of customers?”

This engine maker, you might say, is a company firing on all cylinders. It publishes a sustainability report, underwrites the development of schools in China and India, is purchasing biodiverse forest land in Mexico, and funds great architecture in its local community. Its commitment to excellence embraces stockholders, employees, the community, and the environment. That makes Cummins a compelling example of good corporate citizenship.

Repeat Excellence

The 100 Best Corporate Citizens List is designed to recognize Russell 1000 firms that perform to a higher standard, serving a variety of stakeholders with excellence and integrity.
Nineteen corporations have made the cut each of the list’s six years. Most impressive are Hewlett-Packard (No. 7) and Procter & Gamble (No. 8), who consistently place in the top ten.

Still, even exemplary corporate citizens are, like human beings, imperfect. Last year’s No. 1 spot was held by Fannie Mae, the government-chartered home mortgage lender known for helping Americans become home owners — and for having its CEO shown the door for accounting irregularities. When this year’s initial data analysis was done, Fannie Mae again emerged No. 1, based on 2003 social and financial performance (the lag is due to the time required for data gathering and analysis). When we followed up with our standard review of recent problems firms encountered, our panel concurred Fannie Mae had to be pulled. It was one of 10 companies pulled for financial or social misdeeds.

Our panel’s policy is that removal lasts one year, if the situation has been resolved. Then firms can make it back on — as did Stamford, Ct.-based Xerox (No. 10) this year. Xerox made an impressive debut among the 100 Best Corporate Citizens in 2000, at No. 6, but it was subsequently dropped for accounting scandals that culminated in a Securities and Exchange Commission fine for misconduct. In 2002, Xerox announced a settlement and began instituting governance reforms — creating an ethics hotline; and hiring a new chief financial officer, controller, and treasurer. The company’s dark cloud has passed, as its recent stellar financial performance shows, with twelve straight quarters of meeting or beating earnings growth targets.

With 58,000 employees and $15.7 billion in annual revenues, Xerox is a multinational company that values the local community. “One of Xerox’s most cherished community involvement traditions is our Social Service Leave,” said David Frishkorn, director of Xerox’s Business Ethics and Compliance office. Selected employees can take a year off with full pay and work for a community nonprofit of their choice. “Since the program was started in 1971, more than 460 employees have been granted leave, which translates into roughly a half-million volunteer service hours with this program alone,” he said.

Xerox also wins kudos on the diversity front from organizations such as the National Association for Female Executives (NAFE), which placed Xerox No. 8 in its ranking of companies based on treatment of female executives. “Women make up approximately a third of their work force; and their number of women managers matches that, with many of those women exercising profit-and-loss responsibility,” said NAFE president Betty Spence. “They are a stand-out.”

New Focus on Governance

A new category of stakeholder service added this year is governance, which means firms are now rated on eight categories. The other categories are total return to shareholders, community, diversity, employees, environment, human rights, and customers. In the wake of ethics scandals, KLD Research & Analytics in Boston — the social data provider for this list — began rating firms on governance practices. It marks companies negatively for issues such as accounting restatements or excessive CEO pay, and positively for paying CEOs less than $500,000 per year. On the 100 Best list, 16 companies tied for the highest ranking in governance, including firms like Bright Horizons Family Solutions (No. 27), Men’s Wearhouse (No. 30), Gaiam Inc. (No. 57), and MGE Energy (No. 87).

In the category of total return to shareholders, four firms posted extremely high scores: Avaya, Inc. (No. 37), the seller of phone systems spun out of Lucent in 2000; Rambus, Inc. (No. 48), a semiconductor firm; and two satellite radio firms, Sirius Satellite Radio (No. 21) and XM Satellite Radio Holdings (No. 44). All are newcomers who enjoyed out-sized shareholder returns in 2003, helping to pull up their average overall score and bring them onto the list.

Other high-tech firms new this year include Genentech, Inc. (No. 24), Cypress Semiconductor (No. 38), and Nextel Communications (No. 64). Also notable is the debut of Nike, Inc. (No. 31), the footwear company once plagued by the sweatshop controversy, which has since reinvigorated its commitment to CSR. All told, 33 companies are new to the list this year.

One of the most impressive showings over time has been Green Mountain Coffee Roasters (No. 2) of Waterbury, Vt., a pioneer in helping struggling coffee growers by paying them fair trade prices. The company also supports micro-loans to coffee-growing families, to underwrite business ventures that diversify agricultural economies. The firm first showed up at No. 8 in 2003, climbing to No. 2 this year.

St. Paul Travelers (No. 3) has stepped up from No. 4 last year. Representing the recent merger between St. Paul Companies of St. Paul, Minn. and Travelers Property Casualty Corp. of Hartford, Ct., this firm with $303 million in 2004 revenues seems to be proving bigger can be better. St. Paul Companies has been on the 100 Best Corporate Citizens list all six years, but this is its best showing yet.

The company scored extremely high — better than 99 percent of its peers — in service to the community. “Being in the insurance business, our goal is the creation of a civil society,” said Chuck Foura, regional executive for the upper Midwest region. “We want to reduce risks, save lives, and prevent losses before they occur. These concerns reflect our ‘loss mitigation’ approach to community affairs.” The company also focuses on education funding as a way to aid community development. “We work with neighborhood organizations to fund financial literacy programs in low-income areas, so that these consumers can realize the dream of home ownership,” Foura explained. “And we have a large number of our executives — 70 in the St. Paul region — who take board positions on local nonprofits.” Foura himself serves on the board of the American Indian Neighborhood Development Center of Minneapolis (on which Marjorie Kelly, editor of Business Ethics, also serves).

Also noteworthy in the top ten is San Francisco-based Wells Fargo & Co. (No. 6), which donated over $93 million in 2004 to 15,000 different organizations. Intriguingly, Wells Fargo ranked higher than any other company in the category of human rights. It helped finance the construction of affordable single-family homes on or near Native American reservations in seven states, bringing private mortgage capital to those historically denied access. No other bank has as many retail locations on Native American reservations.

The company’s commitment to diversity has deep roots. “We were serving immigrants such as the Chinese right after the gold rush,” said Pat Callahan, executive vice president for human resources. “Now we have a separate Border Banking group set up to meet the special needs of customers of Mexican origin.”

Loyal Employees, Loyal Customers

In the troubled airline industry, a stand-out performer is Southwest Airlines (No. 11), the Dallas, Tex.-based firm that recently announced its 32nd quarter of consecutive profitability. For 2004, its net income was $313 million on revenues of $6.53 billion. And that was in a year when jet fuel costs increased by more than 20 percent. “We have been able to offer the low fares our customers demand while sustaining our profitability, and growing our route system, during these difficult airline industry times,” said CEO Gary C. Kelly, largely because of “ongoing efforts to improve productivity.” Productivity means hard-working employees. Thus it’s no surprise that Southwest ranked high in the category of employees.

"I’ve been here 28 years, and from the beginning we’ve felt that employees are our greatest assets,” said Donna Conover, executive vice president of customer service. Unlike other airlines, Southwest has never dictated pay cuts to employees. Yet employees voluntarily reduced pay under the “Fuel from the Heart” program, launched by employees during the Gulf War of 1991-1992, when fuel costs skyrocketed. After 9/11, employees again took voluntary cuts so the airline did not have to cut back on its flying schedule, as did other airlines. That loyalty has been rewarded. “In the last three years, we’ve negotiated five union contracts and fresh pay raises for all of our employees,” Conover said.

A notable firm in the No. 18 slot is Whirlpool of Benton Harbor, Mich., the world’s leading supplier of major home appliances. Founded in 1911, the firm now has 68,000 employees, and 2004 revenues of $13 billion. How does a firm make a good profit when its products are the most durable purchased by consumers? “We believe our long-term success depends upon creating customers who remain loyal to our brands,” said Steve Willis, director of Whirlpool’s global environment, health, and safety programs. “The zillion dollar question for us has always been: What does it take to create loyal customers?”

Whirlpool has invested in global market research to find out why consumers in many cultures choose Whirlpool among the “sea of white boxes” of look-like appliances. “We discovered there is a strong correlation between a company’s performance in appliance markets and their social response to issues such as energy efficiency and pollution,” said Willis. Whirlpool has set itself apart with its Duet Series of washers and dryers, the most energy-efficient on the market, partially because the machine operates on a horizontal instead of the traditional vertical axis. This allows gravity to displace electricity, reducing energy consumption. Serendipitously, the horizontal axis allow this washer/dryer combo to look much different than the combo to look much different than the competition, a plus in marketing.

Taking its environmental commitment even deeper, Whirlpool recently agreed to engage in The Natural Step, a rigorous sustainability improvement process. Do- ing so was one of the conditions of a new corporate alliance with IKEA, a popular Swedish furniture retailer with an ad- vanced environmental program.

Also deserving mention is Interface, Inc. (No. 65), the modular carpet man- ufacturer that has long been the darling of sustainability advocates, but which has struggled fi nancially. The 32-year old company has not turned a profi t since this list was fi rst compiled in 2000. This stark fact has some questioning the company’s uncompromising ethical approach to ad- dressing environmental challenges.

CEO Ray Anderson offered several reasons for his company’s struggles. “First, there was Y2K. Resources were diverted from offi ce furnishings to once-in-a-lifetime computer upgrades. Then came the dot.com collapse, and 9/11. These events represented a 40 percent decline in office furnishing purchases, from peak to trough,” said Anderson. Sustainability initiatives did not contribute to problems — they saved the company from bankruptcy, he said. “We might not have made it if it were not for our EcoSense programs. Our products are the best ever and helped us survive the worst office furnishing market in history,” said Anderson. “Our costs are down, not up. Sustainability doesn’t cost more, it saves.”

Interface received a top score in the environment (tying with Baxter International at No. 40), as well as in governance. “Since 1997, our board has bought into long-term thinking and has not been caught up in the quarter-to-quarter performance pressure game,” Anderson said.

Interface’s fi nancial diffi culties offer a reminder that the fi rms on this list often fall short of “ideal” in many ways. General Mills (No. 15) was pulled from the list last year for “channel-stuffi ng” to infl ate revenues; it’s back on the list this year, at a lower spot because of a new black mark in governance. Lucent Technologies (No. 17) was under federal investigation last year for possible bribes paid to former Saudi offi cials. Cincinnati Life Insurance — a subsidiary of Cincinnati Financial Corp. (No. 34) — recently settled a lawsuit alleging it charged higher insurance premiums to African-Americans.

The list of problems doesn’t stop there. But on balance, the social evaluations done by KLD show that the good deeds of the firms on this list far outweigh their misdeeds. They’re not perfect. But they do — in measurable ways — meet the test of good corporate citizenship.

By Peter Asmus, a freelance writer in Stinson Beach, Calif. pthfind@earthlink.net

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How the List Is Put Together

The methodology behind the corporate citizenship rankings

By Samuel P. Graves, Sandra Waddock and Marjorie Kelly

The aim of this listing is to identify fi rms that excel at serv- ing a variety of stakeholders with excellence and integrity. The 2005 list marks its sixth anniversary. Over that time, KLD Research & Analytics in Boston has been the consistent source of social data, while methodology has evolved slightly.

Initially, the list was drawn from 650 fi rms used in the socially screened Domini Index: the S&P 500, plus 150 other fi rms selected for industry balance and social excellence. In 2003 we expanded to cover the Russell 1000, the 1,000 largest publicly traded U.S. fi rms (for consistency we included the 150 Domini fi rms). We also switched in 2003 from three-year average scores to one-year scores. Last year ratings involved seven stakeholder groups: shareholders, community, minorities and women, employees, environment, human rights, and customers. For 2005, we added an eighth category, governance, a new rating now offered by KLD.

In each category, KLD notes where companies have “strengths” and “concerns.” In the employee category, a fi rm might hypothetically get three strengths for profit sharing, retirement benefi ts, and employee involvement, plus two concerns for union relations and workforce reductions. To arrive at a net score in this category, we take three strengths and subtract two concerns. The same is done in each category. Environmental strengths might include beneficial products, pollution prevention, and recycling, while concerns would include emissions, climate change, and regulatory problems. Governance strengths include paying a CEO less than $500,000, while concerns include SEC actions and excessive CEO pay.

Since all eight variables have different scales, we standardize them to determine a standard deviation from the mean — which indicates performance relative to peers. The chart scores show the number of standard deviations a fi rm fell above or below the mean. For shareholder performance, we use one-year total return to shareholders (stock appreciation plus dividends), standardized in the same way.

Next we take an unweighted average of all eight stakeholder measures, to arrive at a single score per company. The fact that the scale is unweighted means that all stakeholders are accorded equal status. In a final step, a selection committee does additional research on social scandals, or other issues possibly missed, and recommends firms to be pulled. For this year, firms were removed primarily for accounting fraud

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Social data provided by

KLD Research & Analytics, Inc.
250 Summer St. 4th Floor
Boston MA 02210
Phone: 617/426-5270; fax: 617/426-5299 Email: researchinfo@kld.com

Social performance data for the 100 Best Corporate Citizens list comes from Socrates, the comprehensive online social research database created by KLD Research & Analytics. KLD is an independent research firm providing tools to investment management professionals, which they use to serve clients who require investment strategies based on social responsibility, responsive governance, and corporate integrity.

Thank You to our Sponsors of the Business Ethics Summit & 100 Best Corporate Citizens Issue
Underwriter
Xerox Corporation

Benefactor
Cummins Inc.
Hewlett-Packard Company

Supporter
Genentech Inc.
Procter & Gamble Company

Sponsor
Dell Inc.
Ecolab Inc.
Green Mountain Coffee Roasters Inc.

Media Partners
CSRWire
GreenBiz.com

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