Business Ethics 100 Best Corporate Citizens 2006

The Seventh Annual list of the best-managed U.S. firms.

Celebrating companies that serve a variety of stakeholders well.

Click here to get the full list.

by David Raths 

"We take them coffee picking, and they do some hand sorting of beans in the hot sun," says Winston Rost, Green Mountain Coffee Roaster's director of coffee appreciation, describing the annual trip he leads of a dozen employees, visiting coffee-growing cooperatives in Vera Cruz and Oaxaca, Mexico. With a newfound appreciation for how hard the work is, some roasters say they'll never spill another bean again, Rost adds. This kind of attention to the human element of business offers a hint at why Green Mountain Coffee of Waterbury, Vt., is No. 1 this year on the list of the 100 Best Corporate Citizens.

Since its founding in 1981, the company has been socially and environmentally active, "but it wasn't all that extensive or organized at first," recalls CEO Bob Stiller. Green Mountain upped the ante in 1989 when it formed an environmental committee and created a rainforest nut coffee to support the Rainforest Alliance, a non-profit dedicated to protecting ecosystems. The company has grown increasingly active in the countries where coffee is grown and has been a pioneer in the fair trade movement, which pays coffee growers stable, fair prices. But the biggest change came in the early 1990s when the company began sending its employees on trips to see where the coffee is grown. Many employees "said it changed their lives," Stiller adds.

Green Mountain, with 600 employees, saw 2005 revenue of $161.5 million with net income of $9 million, a 15 percent increase over the year prior. Since 1988, it has donated more than $500,000 to Coffee Kids, an international nonprofit seeking to improve the quality of life for children and families in coffee-growing communities. Through the Coffee Kids program, the company supports a micro-lending facility in Huatusco, Mexico and a sustainable sanitation system in Cosaulan, Mexico. It also has provided financial support to the FomCafe cooperative's quality control training program, which helps farmers earn higher profits for coffee.

In 2006 Green Mountain will release its first corporate responsibility report. "We are focusing on measurement so we can understand the economic and social impact of the company and create indices so we can better focus those efforts," Stiller says. "Just the process of getting all that information in one place is valuable," notes Michael Dupee, vice president of corporate social responsibility. "It makes you think about and gain insight into what's working and what's not, so even if you never published anything, it's worthwhile."

In 2004 the company expanded from one executive in social responsibility to three. Besides Dupee's position, there is a director of sustainable coffee and a vice president of environmental affairs. Some 45 percent of Green Mountain's coffee is purchased farmer-direct, which cuts out the share middle men take. And 20 percent of coffee sold is certified fair trade, which incorporates principles of environmental sustainability and respect for cultural identity, while guaranteeing growers minimums of $1.26 per pound when commodity prices might be far lower. Consumer interest in fair trade is growing, Stiller says, "because through their purchases they are wanting to make a difference in the lives of growers."

Efforts like these have earned Green Mountain a spot in the top 10 on Business Ethics' list for four years running. Its meticulous attention to corporate social responsibility conveys well what the 100 Best Corporate Citizens list is about. The best-managed firms today -- in this era when societal expectations of business are rising -- can no longer focus solely on stockholder return. Companies that aim to prosper over the long term also emphasize good jobs for employees, environmental sustainability, healthy community relations, and great products for customers.

Seeking to put numerical ratings on service to these various stakeholder groups, the 100 Best Corporate Citizens list uses data provided by KLD Research & Analytics of Boston. It employs statistical analysis to identify those major public U.S. companies that excel at serving a variety of stakeholders well, using eight measures of service: stockholders, community, governance, diversity, employees, environment, human rights, and product (see "How the list is put together," page 28.)

High-tech Invasion

Now in it's seventh year, the list for 2006 is striking because of the dominance of technology firms among the top 10. Hewlett-Packard (No. 2) is enjoying its seventh time in the top 10, while Advanced Micro Devices (No. 3) makes its first appearance on the list. Motorola (No. 4) is enjoying its third time in the top 10, and Agilent Technologies (No. 5) its second time.

Others in the top 10 are list newcomers Salesforce.com (No. 7) and Cisco Systems (No. 8). Dell (No. 9) leaped from No. 71 last year, and Texas Instruments (No. 10) moved up from No. 50.

Why the strong showing by tech? Surprisingly, it's not due to financial out-performance -- none of the top tech companies ranked in the top 10 in financial returns. Most top tech companies do well on environmental issues, with Motorola ranking second overall in this category. They also tend to be active in their communities and score high in employee relations. For instance, Intel Corp. (No. 11) earned the highest score of any company in employee relations. Some tech companies face human rights questions about working conditions in supplier factories overseas, but many have sought to address this issue. In general, these companies understand that to attract highly educated workers in a knowledge-based economy, its pays to be progressive. Technology seems to be a genuinely socially responsible sector.

HP a Long-term Performer

While 16 companies have made the list all seven years, Palo Alto, Calif.-based HP is the only company that has made the top ten each year. Its greatest strengths are in community and diversity. Sid Reel, vice president of global inclusion and diversity at HP heads up a team that works with country managers on multiple diversity dimensions, including disabled employees. "We have 60 employee resource groups involving race, gender, and sexual orientation that air professional development and raise awareness of diversity issues," she says. "Our employees also help us make sure our own products are accessible."

In 2000, HP launched its Digital Village program, to establish computer centers in villages in Africa, Asia, and Latin America. "In many cases they end up becoming community centers where kids and seniors both come in and learn about the technology and tutor the children," Reel says. On the environmental front, HP is reducing greenhouse gas emissions by cutting employee travel and using renewable energy. A bigger focus is what David Lear, vice president of corporate, social and environmental responsibility, calls "materiality assessments" of product designs, backed up by HP's Planet Partners recycling service for computer equipment and HP printing supplies. "We've tried to set a model recycling standard, and we've shared it with our competitors," Lear says.

Another tech company scoring high for environmental efforts was Advanced Micro Devices (No. 3), which recently made the U.S. Environmental Protection Agency's "Green Power Top 25 List" of organizations that voluntarily buy the most renewable energy. Three others among the 100 Best Corporate Citizens made the EPA's list: Whole Foods Market (No. 47), Johnson & Johnson (No. 12), and Starbucks (No. 17).

In contrast to the tech sector, another knowledge-based industry -- banking and finance -- did not score as highly. There are more than 20 financial institutions on the list, yet Wells Fargo & Co. at No. 16 is the highest rated. Despite its strong human rights and diversity policies, Wells Fargo, along with other large banks, has been the target of housing advocacy groups citing unfair lending practices to low-income customers. While asserting its practices are fair and legal, Wells Fargo in 2004 laid out a five-point plan for improved lending policies. And in 2005 it told KLD it was implementing a systematic review of all sub-prime mortgages, to evaluate whether or not borrowers qualified for better rates. Wells Fargo also created a foundation to address low-income housing needs.

Another financial institution high on the list is Boston-based Wainwright Bank & Trust Co. (No. 18), which over the years has provided more than $400 million in loans to development projects such as affordable housing and homeless shelters.

New to the List

The list saw quite a bit of turnover from 2005, with 33 companies appearing for the first time. Newcomer Johnson & Johnson (No. 12) receives particularly high marks in diversity. In September 2005, it was one of 101 companies to receive a perfect score on the Corporate Equality Index released by the Human Rights Campaign, which rates companies on factors relating to gay, lesbian, bisexual, and transgender issues.

Also new this year is McGraw-Hill (No. 57) which scores high in diversity, with women accounting for more than 40 percent of managers. Newcomer Milwaukee-based Johnson Controls (No. 73) rates high marks because of products that help conserve energy. Through the "Buildings for a Livable Future" initiative, the company offers seminars designed to increase customer awareness of the positive environmental and financial impact of green buildings. The company's Brengel Technology Center in Milwaukee was one of the first 12 buildings certified by the Leadership in Energy and Environment Design (LEED) program.

Boise, Idaho-based semiconductor maker Micron Technology (No. 82), also new to the list, wins plaudits for its innovative employee compensation plan, which CEO Steven Appleton instituted in part to avoid layoffs. Employees accept lower base pay than at similar companies, but share in a quarterly profit-sharing cash bonus of 10 percent of after-tax profits. By limited fixed payroll, the company can theoretically limit layoffs in bad times, while employees benefit substantially during good times. Among other newcomers are Office Depot (No. 45), United Parcel Service (No. 48), Student Loan Corp. (No. 52), and Citigroup (No. 62).

Moving up the List

After years of bad press over sweatshop controversies, Nike made the list last year at No. 31 and this year climbed to No. 13 -- based largely on the strength of its community and environmental programs. The Beaverton, Ore.-based shoe and apparel company had 2005 revenue of #13.7 billion, with earnings of $1.2 billion. Its increasing emphasis on environmental programs earned it the No. 1 ranking in that category this year. With its "Nike Considered" sustainable design approach, the company is seeking to eliminate waste and toxic substances from production processes. It has developed a sustainability index to assess progress.

One of the most impressive advances on the list was made by Timberland, which jumped from No. 74 last year to No. 6 this year. Timberland has one of the strongest employee volunteer programs in the country, with its decade-old "Path of Service" program giving employees 40 hours of paid time to contribute to the community during working hours. Now the Stratham, N.H., footwear and apparel company, with $1.6 billion in sales, is placing greater emphasis on environmental programs. In early 2006 Timberland announced a new shoebox "nutritional label," detailing where the product was made, how it was produced, and its impact on the environment and communities.

"We thought about how closely consumers read nutritional labels on food products and thought, why doesn't this happen in our space?" recalls Dave Aznavorian, a senior global brand manager at Timberland. "We want to create a broad awareness among consumers,: Aznavorian says, "so that perhaps eventually they will expect all manufacturers to rise up to this level of detail on how and where a product is made."

That type of consumer empowerment is the goal at Green Mountain Coffee, too. CEO Bob Stiller says the CSR movement is starting to develop tools to measure a company's social and environmental impact, much like the tools used to assess financial performance. But metrics -- event the best of the lot -- are only the yardstick measuring social impact. The impact itself happens on the ground, in real lives -- like the Green Mountain workers visiting Mexico to get their fingers into how their product is made, and see how it affects of lives of the growers. The company is helped immeasurably, Stiller says, because employees come back more engaged. "They really form a connection to the farms," he says. That, in the end, is what responsible management is about: not just numbers in charts, but positive impact on real lives. David Raths is a freelance writer based in Portland, Maine.

How the List is Put Together
The methodology behind the 100 Best Corporate Citizens rankings.
By Marjorie Kelly

Traditionally, firms have been judged on how well they serve stockholders. But in the 21st century -- a new era of ecological limits, corporate ethics crises, and rising societal expectations -- this traditional focus offers too narrow a definition of success. Firms rely upon healthy relations with many stock-holders. That means not only creating healthy returns for shareholders but emphasizing good jobs for employees, a clean environment, responsible relations with the community, and reliable products for consumers.

The 100 Best Corporate Citizens list -- now in its seventh year -- puts a numberical rating on service to these various stakeholders. It uses data from SocratesTM, the online social research database created by KLD Research & Analytics in Boston, an independent research firm serving invest-ment professionals.

The universe of firms for the list encompasses U.S. firms in the Russell 1000, the S&P 500, and the Domini 400 Social Index. These firms are ranked on performance in eight stakeholder categories: share-holders, community, gover-nance, diversity, employees, environment, human rights, and product. Social scores use KLD's assessment of "strengths" and "concerns" demonstrated in each category. The shareholder score is based on three-year average total return (stock appreciation plus dividends) through 2005. This marks a significant advance this year. Our ratings are fully up-to-date with the immediately prior year-end.

In the community category, firms receive a strength rating for charitable giving over 1.5 percent a year, innovative giving, support for housing and education, and volunteer pro-grams. On the negative side, a firm could receive community concerns for lending contro-versies, negative economic impact, or tax disputes.

In the environment category, strengths include pollution prevention, clean energy, major use of recycled materials, and beneficial products. Concerns include hazardous waste sites, substantial penalties for environmental violations, or contributing significantly to climate change. In the category of governance, firms receive strengths for transparency in political contributions and effective social reporting. Concerns include excessive CEO pay and accounting controversies. Companies thus have a number of strengths and concerns in each category. In the employee category, for example, a firm might get three strengths for profit sharing, strong retirement benefits, and employee involvement -- with two concerns for poor union relations and significant workforce reductions. To arrive at a net score here, we add three strengths and subtract two concerns. The same is done in each category. We standardize scores by determining standard deviation from the mean -- which indicates performance relative to peers. The chart shows the number of standard deviations firms fall above or below the mean in each category. To arrive at a single score per company, we take an unweighted average of all eight measures. In a final step, a selection committee does additional research to determine whether firms should be pulled. Business Ethics does not release names of firms removed. Companies on the List All Seven Years

• Brady Corporation
• Cisco Systems, Inc.
• Cummins, Inc.
• Ecolab Inc. Graco Inc.
• Herman Miller, Inc.
• Hewlett-Packard Company
• Intel Corporation
• Modine Manufacturing Co.
• Pitney Bowes, Inc.
• Procter & Gamble Company
• St. Paul Travelers Companies
• Southwest Airlines Company
• Starbucks Corporation 
• Timberland Company
• Whirlpool Corporation

Project Director Marjorie Kelly Article by David Raths Statistical Analysis Designed by Sandra Waddock & Samuel Graves, Boston College Social Data from KLD Research & Analytics Published in Business Ethics Magazine, Spring 2006, Vol. 20 #1.