Evaluating Corporate Performance: A Comparison of the Fortune Reputation Survey and the Socrates Social Rating Database

Organizational efficacy, effectiveness, and efficiency are perhaps the most compelling and important topics in strategic management and organization theory. In the world of business, these issues are embodied in the concept of corporate performance, which includes both financial and social characteristics. Evaluating a firm's performance is a continual internal process, of course, but it is generally accepted today that the most meaningful of such assessments are external (Waddock and Mahon, 1991). Today, empirical research on corporate social performance is increasingly based on the ratings of the Fortune Reputation Survey or the SOCRATES database, or both. This study evaluates the validity and reliability of these databases from a variety of perspectives. Such testing is necessary because neither database was originally constructed as a source for empirical analysis. Managers need to know that the conclusions drawn from investigations using these data are conceptually and statistically sound so that they may have confidence in the behavioral prescriptions that result. We define reputation as the "net present value" placed on a company's accomplishments and its prospects. Such a definition implicitly acknowledges that reputation is multi-dimensional. It is society's counterpart of the stock market return or share price, except that all firms have reputations, not just those traded on the exchanges. Reputation and the corporate performance it measures are as important to customers, regulators, and all other stakeholders as they are to investors and the firm's management. In a capitalistic economy information is the key to progress. The more accurate the measurement of performance, the better our understanding of the state of the company, the industry, and the economy. That leads in turn to posing better questions and discovering better answers through research. In January of 1983, Fortune Magazine published its first annual survey of corporate reputations. Shortly thereafter, social issues researchers began using the ratings from these surveys in their empirical research, primarily to examine the relationship, if any, between the social performance and financial performance of major corporations. Since the beginning of this decade, however, some scholars (for example, Fombrun and Shanley, 1990; Brown and Perry, 1994; Fryxell and Wang, 1994) have seriously questioned the validity, of the Fortune Reputation Survey (FRS) or even suggested that it be abandoned as a data source entirely (Baucus, 1995; Wood, 1995). Szwajkowski and Figlewicz (1997) demonstrated that the conceptual logic and empirical evidence arrayed against FRS are flawed. However, they admittedly offered little affirmative support of the validity of the survey as a database for corporate social performance (CSP) research. Therefore, this article, utilizing newly available data, evaluates FRS in terms of both validity and reliability. Much of our analysis draws upon comparisons of FRS versus SOCRATES, the social ratings system of Kinder, Lydenberg, Domini & Co., Inc. (KLD), a social investment advisory firm. The latter source has recently been described as "the best available database on overall CSP" (Wood, 1995: 197), but its own validity and reliability, which are also examined here, have been virtually untested. We begin with a brief description of each database, particularly the methodological debate focusing on FRS. Next we discuss the multitrait, multimethod approach to validity testing and its application to this project. The following sections treat the specifics of the methods (factor analysis and multiple regression) employed in our empirical analyses and the results obtained. Finally, we provide a discussion and conclusions regarding our findings, including implications for research and, especially, management. THE FORTUNE REPUTATION SURVEY AND SOCRATES DATABASE FRS and SOCRATES are particularly useful to researchers in that both evaluate hundreds of the largest companies in the U. …