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Abstract
INTRODUCTION
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CSR (Corporate Social Responsibility), a term used in reference to volitional business operations
that embrace social and environmental responsibilities (Marrewijk and Were 2003), has rapidly
gained a “moral majority” among academia as well as among industry executives. According to
NY Times (2009), over 130 Fortune 500 companies had recruited various sustainability
executives to oversee SC operations and inculcate sustainability values. Additionally, consumers,
shareholders and regulators have been particularly active in monitoring firm-level operations and
their negative impacts on the environment including ecological damage caused by the various
industrial processes and using up of world’s natural resources. This leads to revamping of
operational practices, where sustainable operational performance has become a subject of
substantial interest to organizational and management scholars (Zhu and Sarkis 2006; Rao
2002). There have been several efforts afoot: the establishment of ISO (International Standards
Organization) 14000 for voluntary environmental management and green productivity standards
for increasing overall production while concurrently reducing negative impacts on the
environment.
Yet, while there is an unequivocal “moral majority” in tune with environmental governance and
operations, there is little evidence (e.g. McGuire et al 1988; Montabon et al. 2000) that
empirically ties sustainability efforts to firm-level financial performance. In light of the tension
between investing in sustainable governance and operational practices in an economic downturn
versus the growing awareness and activism for sustainable practices, our study empirically
examines the impact of sustainable governance, operations, and transparency in reporting on
business performance. This study examines these hypothesized relationships based on data
across the Fortune top-100 sustainable global firms highlighting best practices in environmental
governance and SC operations. The study draws from multiple public and proprietary sources
based on support provided by Farris Family Research Innovation Grants.
Theoretical Underpinnings
Institutional theory, first forwarded by DiMaggio and Powell (1983), looks at how practices are
incorporated by organizations into the organizational rubric. Shortell and Kaluzny (2000, pg. 24)
describe institutional theory as a premise that incorporates “external or societal norms, rules, and
requirements that an organizations must conform to, in order to receive legitimacy and support”.
This process of incorporation is an institutionalization mechanism that allows the creation of a
homogenized, aggregated set of best practices as standard operating procedures (SOPs).
Understanding that the institutional environment drives formal structures, institutional theory
provides guidelines on how fragmented operations can be transformed into accepted principles
within an organization.
Formalization is also practiced via establishing formal reporting standards. In trying to identify
how sustainability practices should be outlined in operations, guidelines and certifications from
organizations such as ISO (e.g. 14001) and Business for Social Responsibility (a non-profit
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sustainability organization), organizations have hinged on the establishment of two particular
mechanisms: (i) sustainability governance in various de facto executive positions to champion
sustainability projects and operational practices furthered by (ii) sustainable reporting
transparency and sustainable SC operational practices to various organizational stakeholders
(Maitland 2002; Snider et al 2003). As Kolk (2008) notes, multinationals have started to direct
their attention to corporate governance of sustainability in terms of board supervision and
structuring of sustainability responsibilities as well as the growing trend towards reporting and
disclosing sustainable practices in compliance with various internally or externally-mandated
standards.
Institutional theory deals with two major aspects of implementation: the creation of formal
structures and the incorporation of institutionalized practices. These aspects provide appropriate
foundations for our study where we consider governance as the formal structure for institutional
command and control, which is the foundation for the rules and belief systems that underpin
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policy (DiMaggio and Powell 1991). While governance symbolizes structure, sustainable SC
operations symbolize the institutionalization of practice.
When organizations adopt structures to support sustainable practices, they strive to comply with
rules, requirements and norms (Shortell and Kaluzny 2000; DiMaggio and Powell, 1983; Meyer
and Rowan, 1977). Requirements are often driven by environmental regulations from external
stakeholders. Rules are often driven by similar practices by rivals or competitors within the same
industry segment or sector. Norms are relatively more volitional, driven by deliberate internal
organizational choices to embody, edify and practice sustainability throughout its operations,
policies and value chains. Together, requirements, rules and norms constitute the elemental
pressures that impact an institutional environment.
Hirsch (1975) and DiMaggio and Powell (1983) noted that organizations respond to and adopt
practices based on pressures, both internal and external, namely coercive, mimetic and normative
pressures.
Coercive pressure is based on requirements, especially driven by laws and regulations. From
HIPAA requirements for healthcare, SOX requirements for publicly traded firms and cap-and-
trade requirements for all US production, industries and companies are coerced to follow
required operational guidelines mandated by variety of external agencies (e.g. ISO) including the
government (e.g EPA). Jennings and Zandbergen (1995) studied the effect of sustainable
operational practices due to external pressures, whose work pioneered the research on
environmental practices as a response to laws and regulations. Rivera (2004) pointed out that
sustainable practice requirements are triggered by coercive pressures from governmental
agencies with explicit authority to impose fines or other sanctions for non-compliant
organizations.
Often, such coercive pressures and requirements are warranted. On occasions, environmental
abuses trigger legal changes to supply chain practices or liability for the damage regardless of
fault. In 1967, when the Torrey Tanker spilled 117,000 tons of crude oil into the North Sea due
to an accident, the massive pollution triggered the change of law, which held ship owners liable
for all oil spills.
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Coercive pressure has a spillover into both governance and operational practices (Kilbourne et
al., 2002). Fortune 500 companies are required by law to disclose some aspects of their
operational practices and claims on sustainability, with disclosures on carbon emissions. The
need for transparency has thereafter propelled companies to institute formal lines of control and
reporting as a structuring of governance focusing on environmentally-sustainable policies and
processes.
Other non-mandated coercive pressures arise from consumer activism. Such activism and
consumer sensibilities can often lead to future mandates in terms of upcoming legislations.
Increasing and influential protests against large corporations’ operational and supply chain
practices, from BP’s Deepwater Horizon oil spill to the Keystone XL pipeline, offer increasingly
coercive pressures, requiring companies and industries to rethink their policies and practices.
Mimetic pressure is based on the “rules of the game” (North 1990, pg.3). Rules are often created
and defined by and within boundaries of industry. Consider how the “rules of the game” for
sustainable practices differ between the financial services versus the oil exploration industry.
Over time, specific industries create rules of operations that govern their policies and practices.
In times of high uncertainty and economic downturns, mimetic pressures can serve as a primary
institutionalization mechanism where companies adopt best practices from other organizations in
the marketplace (March and Olsen, 1976). When the competition adopts sustainable policies and
operational practices to entice consumers and markets, a company may find it worthwhile to
institutionalize similar policies and operational practices as a way of ensuring its legitimacy in
the industry. For example, sustainable operations and production is widely promoted by Nestle
and Coca-Cola.
In 2009, Nestle’s major competitor, Unilever announced that they suspend all future palm oil
purchases from the firm known to be associated with having plantations that contribute to the
destruction of forests under protective status. In response, Nestle announced its commitment to
fight against deforestation in 2010, and indirectly, against rising carbon-dioxide emission. They
partnered with the Forest Trust fund, which they invited to audit their supply chain, and
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committed to the use of sustainably farmed palm oil and cocoa. They are also devoted to increase
transparency among their suppliers.
Coca-Cola’s director of global water stewardship, Greg Koch, indicated that in Latin-America
alone, his company engages with other stakeholders and helps to establish funds in 32 cities to
mitigate local water problems and to protect natural water-replenishing ecosystem. As Koch said
“For us, water is a strategic business imperative”…”Water quality, quantity and our ability to
access it are material risks to all aspects of our business – including our supply chain, products
and manufacturing – but also to the health of the communities in which we operate.” Securing
the firm’s operation by minimizing risk, while promoting the company’s environmental
commitment is a double success in Coca-Cola’s operation and practices. In 2004, Coca-Cola has
set a 20% water reduction commitment by 2012. In response to Coca-Cola’s goal, PepsiCo
committed to reduce their water consumption by 20% by 2015, which they pledged in
2007.These examples trigger other corporations to implement green practices as a response to the
mimetic pressure (Aerts et al., 2006).
Normative pressures are based on internal norms. Large corporations conform to normative
pressure in order to be viewed as legitimate organizations. For example, when the reputation of
being green drives consumer preference, companies need to align the internal values of their
business in that perspective. Carter et al. (2000) found that 75% of consumers in the United
States consciously based their purchase decision on the manufacturer’s environmental reputation,
while an even higher percentage (80%) is willing to pay more for a product that is either
environmentally friendly or produced by a “green” company. Study conducted by Gomes et al.
(2011) concluded that the company's international success and high degree of competitiveness
highly depends on their innovative technology solutions that is committed to the environmental
sustainability. These findings support the importance of normative pressure in institutionalizing
sustainable SC practices.
In June 1992, United Nations held a conference on environment and development at Rio de
Janeiro, Brazil, to discuss on the environment and sustainable development. This is informally
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known as “the Earth Summit”. During the summit, members came up with Agenda 21 as a
compilation of best practices in environmental-sustainability. Agenda 21 included the Rio
declaration on environment and development, the Forest principles, United Nations framework
convention on climate change and the Convention on biological diversity. The convention
formalized the need for environmental governance as a core part of sustainability and corporate
social responsibility (CSR), paving the way for others.
Following this summit, Asian Productivity Organization (APO) introduced its Green
Productivity program in 1994. Inspired by the 1992 earth summit, Asian Productivity
Organization also organized the first World Conference on Green Productivity in 1996. In 2002,
World Summit on Sustainable Development (WSSD) was held at Johannesburg which was soon
followed by the second world conference on green productivity by Asian productivity
organization at Manila, Philippines. These global initiatives converged on three dimensions that
we address in this research. First, there was a distinct need for ensuring macroeconomic (e.g. the
EPA in the US) and corporate (e.g. Chief Sustainability Officer (CSO)) governance. Elementally,
the impetus was on instituting a governance structure and an incentive scheme that would help
punctuate the operational “business as usual” status quo. While macroeconomic governance
provides regulations and incentives, corporate or organizational governance provides policies via
“champions” and remuneration. Second, changing the operational basis for environmental
sustainability to manage resources to reduce their environmental footprint from operations
emerged as a necessity. Globalization has extended the supply chain and geographical
distribution and product complexity has increased carbon footprint from operations (Following
the footprints, The Economist, 2011) Governance needs to embody better resource utilization
(e.g. waste reduction) aimed at improving sustainable practices. Third, it is essential for
organizations to translate sustainable practices into financial performance to maintain
sustainability efforts. Needless to say, unless an organization can make business sense out of
sustainable practices, it will cease to exist as a going concern.
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Sustainability is a global issue and companies are taking a leading role in ensuring that their
sustainable practices are in line with environmental initiatives. Sustainable practices comprise of
organizational and macroeconomic initiatives aimed at managing and reducing carbon, waste,
water and energy use in supply chain operations.
Several initiatives have been afoot in measuring sustainable supply chain operations. UNEP
(United Nations Environmental Programme) launched D4S (Design for Sustainability)
methodology in 2007 for designing products taking into account economic, social and ecological
perspectives, also known as the Triple-Bottom-Line. D4S requires conducting Life Cycle
Assessment (LCA) of products which focuses on checking their environmental impacts from
sourcing to disposal (Blengini & Garbarino, 2011).While an ethical pronouncement, LCA
methods are time consuming and require extensive collection of material data, production
information, conditions of use and disposal. This makes D4S an invasive and time-consuming
activity that is difficult to record and therefore discarded by most organizations (Lobendahn et al,
2010). In fact, because LCA requires continuous self-reported measures, companies often find it
burdensome and fail to consistently provide information over time, leading to inaccuracies from
dropouts or missing data (Lobendahn et al (2010).
In light of the inherent problems associated with LCA, this research argues that the World
Summit on Sustainable Development (WSSD) offers a better and more feasible set of sustainable
SC operational measures comprising of carbon, waste, water and energy management.
Carbon management requires increasing carbon productivity nearly ten-fold by 2050. Currently a
Gross Domestic Product (GDP) output of $740 (GDP) requires 1 ton of CO2-equivalent
emissions. The objective is to raise carbon productivity to a GDP output of $7,300 requiring the
same amount of CO2 emission by 2050 (McKinsey & Co. 2008). In order to achieve this
objective, companies need to make deliberate strides towards carbon management. Therefore
companies seek renewable energy alternatives and conduct fleet and logistics re-engineering or
limit their existence within their ‘pocket markets’ to have less energy intensive distribution
method (Newman et.al., 2013) as a part of their sustainable practices and hence reduce their
carbon footprint
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Waste management deals with waste reduction at source, proper treatment and recycling. For
example, Coca-Cola produces and uses bottles made from up to 30% plant-based material that
are 100% recyclable.
Rahman (2011) studied how the perceived fear of losing control over shared water sources can
even lead to war among riparian nations and concluded the extreme importance of water
management.. Importance of water management can easily be appreciated from the predictions
of wars based on water by the world leaders. Former Vice President of World bank, Ismail
Serageldin predicted that “The wars on this century have been on oil, and the wars of the next
century would be on water” (Serageldin, 2009, p.163). Retired former commander of US Central
Command, General Anthony Zinni, stated that “We have seen fuel wars, we are about to see
water wars” (US Foreign Relations Committee, 2011, p.11). Water management focuses mainly
on water conservation. Not only nations, but also corporates are required to have proper water
management system. For example, Coca-Cola Company and WWF are combining their
international strengths and resources to help conserve and protect freshwater resources
throughout the world.
Finally, energy management encompasses increasing renewable resource use to improve energy
efficiency. For example, Walmart, the world’s largest retailer, has adopted energy efficiency
initiatives by changing the physical structure and décor of Walmart stores. Walmart stores
changed their physical structure and décor to increase their natural lighting and replaced
incandescent lamps with compact fluorescent lamp (CFL) to reduce energy consumption and
heat emissions. Together, carbon, waste, water and energy management form a rubric of
sustainable practices in accordance with WSSD standards.
Companies have already recognized the economic benefits from adopting environmentally
responsible policies (Tyteca 1996). It is well established that environmental governance plays a
key role in policy formulation. Paavola (2007) explains environmental governance as “the
establishment, reaffirmation or change of institutions to resolve conflicts over environmental
resources”. Adapting various research view points, we define environmental governance as
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formulation and implementation of environmentally friendly policies. Given that the practice and
implementation of policies are commonly translated into operational initiatives, it can be
contended that the establishment of environmental governance precedes the practice of policies
through sustainable supply chain operations.
This research argues that effective environmental governance requires an established leadership
structure as an “environmental steward” as well as extrinsic reward mechanisms. Conyon and
Peck (1998) confirm that remuneration is a measure of governance mechanism present within
firms. Leadership structure is yet another measure of governance in place within a firm (Brickley
et al. 1997). In accordance with existing research, we used sustainability leadership and
sustainability remuneration to reflect environmental governance measures in companies.
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Note that 100 percent transparency is not only impossible but may also erode a company’s competitive advantage
by exposing mission-critical supply chain operational information.
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In agreement with OECD (Organisation for Economic Cooperation and Development, 1998) that
transparency is an element of effective governance and building on previous research (e.g.
Bushman et al.2004) that finds that better governance lead to increased transparency, we
hypothesize:
H1a: Better environmental governance will lead to increased sustainable reporting transparency.
Although in many cases the link between corporate governance and sustainability is rather
general, some companies have established specific board committees that ensure the link
between environmental governance and sustainable practices. For example, BP has an ‘ethics
and environment assurance’ committee that is responsible for monitoring the non-financial
aspects of executive management activities with regard to sustainability issues. Post-Deepwater
Horizon oil spill, BP’s environmental governance team heightened the need for the development
of environmentally-safe drilling rigs. Subsequently, BP’s Houston Advanced Research Center
prototyped a low-environmental-footprint drilling rig promoting sustainable operational practices
in its upstream supply chain. Similar examples abound in global firms, indicating deliberate
strides in monitoring and practicing sustainability operations as a part of their environmental
governance measures. For example, Konrad et.al. (2008) emphasized the importance of well-
established governance at different levels as a precondition for ensuring sustainable practices.
We argue that companies need to translate policies into sustainable practices in order to
financially profit from institutionalizing environmental governance (Klassen and McLaughlin
1996).. Hence we posit:
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the importance of sustainability reporting and acknowledge the impact of sustainable reporting
transparency on firm performance.
The present intellectual climate and business environment encourages openness about beliefs in
sustainability possibilities (Gray 1992). However, if sustainable reporting transparency fails to
eventually increase financial performance and enhance shareholder value, it will remain
economically infeasible. Sustainable reporting transparency is a firm’s mode of communicating
its environmentally-friendly operational best practices to existing and potential consumers to
shore up consumer confidence in its products and services while defraying operational costs
through better resource and waste management practices. As consumers actively seek sustainable
operational information from firms prior to making purchasing decisions, it is often prudent for
the incumbent firm to ensure the transparent reporting of sustainable practices demanded by the
market. Because sustainable reporting transparency aids awareness of the firm’s sustainable
practices among employees, suppliers and customers, it creates a premise for better internal cost-
control (e.g. recycling and reuse) as well as a greater demand for its environmentally-friendly
products and services. Taken together, internal operational excellence along with a more loyal
consumer base adds to the firm’s financial bottom-line. Therefore, we hypothesize:
H2: Higher sustainable reporting transparency is likely to have a positive impact on business
performance.
The link between sustainable practices and business performance is well established (Hart and
Ahuja 1996, Cordeiro and Sarkis 1997; Butz and Plattner 1999; Thomas 2001,Konar and Cohen
2001; King and Lenox 2001; Hibiki et al. 2003). As mentioned earlier, this study investigates the
financial after-effects of sustainable practices. Therefore, we specifically focus on measures that
contribute to internal operational and external profitability bottom lines. For example, while
Klassen (2001) traced how sustainable operations reduced productivity costs, Kassinis and
Soteriou (2003) found that sustainable practices contributed to increased profitability and
business performance from improved customer satisfaction and loyalty.
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A central theme in sustainable practices is resource recycling and reuse. Consider that recycling
and reuse contribute towards overall asset productivity, where fewer asset inputs are required to
garner revenues. Therefore, better resource management, as a part of sustainable practices, can
positively impact companies’ Returns on Asset (ROA) ratios (Hart and Ahuja 1996; Russo and
Fouts 1997).
As a way to measure resource productivity and returns as a part of financial performance from
sustainable practices, we operationalize the return using Return on Average Asset (ROAA). We
argue that ROAA is more appropriate for gauging asset returns from sustainable practices. Asset
averaging is a multi-period measure that takes into account general asset performance trends
rather than being subject to large periodic deviations in resource productivity and returns. If
resource management is institutionalized as a part of sustainable practices, it is important to
investigate the return on average assets.
Operating margin is another important measure for financial performance from sustainable
practices. Operating margin is defined as the annual operating income divided by revenue.
Companies practicing sustainable practices should be able to benefit from better cost control
through resource management via recycling, reuse and re-utilization. This automatically reduces
the costs of goods sold (COGS), increasing business performance through increased operating
income using fewer resources.
Complementing internal business performance through better operational cost control, we use net
profit margin as the overall measure for the financial bottom line. Net profit margin is measured
as a profitability ratio of net income divided by revenues. Net profit margin serves as an
appropriate acid test for overall business performance from sustainable practices because
sustainable practices and transparent reporting of best practices can increase revenues from
customer demand (Delmas, 2001) as well as reduce operational SC costs from lower
productivity costs (Klassen, 2001).. Hence we posit:
H3a: Companies with better sustainable practices will lead to higher business performance.
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With rapid growth and popularity of sustainability reporting and disclosure initiatives, e.g., GRI
and Carbon Disclosure, companies have realized the benefits of reporting their sustainable
practices. Moreover, with regulatory pressures on carbon emissions, cap-and-trade agreements
and environmental protection legislation, companies have led the charge on highlighting their
sustainable SC operational achievements. Nearly five times as many ‘sustainability’ stories was
printed by the end of 2007 alone than in the five-year period from 2000 through 2004 (Reynolds
2007). Headlines such as “Wal-Mart lends buying power to cities for green technology” or
“FedEx shows off its green side with hybrid trucks” confirm the importance of transparent
reporting of sustainable practices. Therefore, we hypothesize:
H3b: Companies with better sustainable practices will lead to higher sustainable reporting
transparency.
Even two decades ago, a study by Rosewicz (1990) found that customers showed strong
willingness to pay more for products that help save the environment by a ratio of six to one. The
ratio has rapidly grown since, implying how customers’ and stakeholders’ value sustainable
reporting transparency in a company, thereby leading to better business performance. As markets
recognize the strategic importance of sustainable practices, the importance of sustainable
reporting transparency is expected to increase over time. Given our focus on the critical
“moderating” role of sustainable reporting transparency in providing a supportive context for
improving business performance from sustainable practices measures, we hypothesize:
H3c: Sustainable reporting transparency moderates the relationship between sustainable practices
and business performance
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METHODS
The sample frame for this study includes the top “Fortune 100” global companies noted for their
environmentally sustainable initiatives. The choice of the top “Fortune 100” global companies is
particularly appropriate for our study because: (i) the size of the companies afford them the
ability to institute formal environmental governance, (ii) the global nature of these large-cap
companies require more concerted management of sustainable operations, (iii) the global
operational presence requires them to be more adept at reporting measures on a regular basis, (iv)
these companies have to disclose financial and operational information as publicly available data
and (v) Because the sample frame covers multiple industries, it factors in variations in
sustainable practices across several industries and firms, increasing generalizabilty of our
findings.
The study uses archival data and measures from various well-established and credible sources as
a prelude to analysis. Business performance measures were taken from Google finance and from
financial reports (10 K reports) of the global Fortune 100 companies selected for the research.
Operationalization of Measures
Measures used for sustainable practices included water productivity, waste productivity, energy
productivity and carbon productivity. These measures are selected in concordance with the
World Summit on Sustainable Development (WSSD) objectives.
For this study, we measure sustainable reporting transparency as the percentage of sustainable
operational information disclosed based on a Global Reporting Initiative (GRI) disclosure
benchmark (where 100 percent means complete disclosure). Global Reporting Initiative is well-
established, credible sustainability reporting framework which lays out the principles and
indicators for measuring organizational environmental, economic and social performance.
Overall business performance was measured in terms of return on average assets, net profit
margin and operating profit margin. Given that there is a temporal lag between institutionalizing
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governance and sustainable SC operational initiatives and financial performance, we use 1-year
lagged financial measures.
Data Analysis
In this study, the constructs are measured primarily by formative indicators as explained in the
framework development section. Jarvis, MacKenzie, and Podsakoff (2003) noted that managerial
constructs are better reflected by formative than by reflective indicators. Covariance based
structural equation modeling (SEM) will not be a good choice as predominance of formative
indicators shall result in identification issues and implies covariance of zero among some
indicators (MacCallum and Browne 1993). Partial least square (PLS), in contrast, does not have
any issues in analyzing formative indicators and can be used for models with either reflective,
formative, or both types of indicators (Fornell & Cha, 1994). For covariance-based SEM, it is
generally advisable that the “sample size should exceed 100 observations regardless of other data
characteristics to avoid problematic solutions and obtain acceptable fit concurrently” (Nasser &
Wisenbaker, 2003, p. 754). Some researchers even recommend a minimum sample size of 200
cases (Marsh et al., 1998). PLS, in contrast, can be used for studies with very small sample sizes
(Chin and Newsted (1999) ,Chin, Marcolin, & Newsted, 2003, Appendix A, p. 5). Therefore, we
used partial least squares (PLS) for empirical validation of the model. Moreover, PLS factors are
determined to maximize a covariance criterion while obeying certain orthogonality and
normalization restrictions (de Jong 2003); and can be used in cases where there is existence of
multicollinearity among construct values (Eriksson et al. 1995., Tenenhaus et.al. 2005).
According to Eriksson et al. (1995), “One way to circumvent the dilemma of multicollinearity is
to take benefit from it, by employing multivariate projection methods, such as partial least
squares projections to latent structures, PLS” (p. 220).
Of the four constructs used to build the framework, namely environmental governance,
sustainable practices, sustainable reporting transparency and business performance, sustainable
reporting transparency is the only unidimensional construct; the other three constructs in the
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structural model have multiple indicators. All indicators are assumed to be reflective because
these variables serve a sample space of factors that define the construct.
The construct of sustainable practices is reflected using the four indicators, namely carbon
productivity, energy productivity, and waste productivity and water productivity. The business
performance of the selected firms is reflected using three indicative variables, including net
profit margin, operating margin and return on average assets. Environmental governance
indicators considered for this study include sustainability remuneration and sustainability
leadership.
Results from the PLS analysis used to derive path coefficients for the structural model are
depicted in figure 1.
Sustainability Sustainability
Leadership Remuneration
0.659 0.899
Environmental Governance
Carbon
0.198 Operating
Productivity H1b, +
Margin
H1a, + -0.172
Sustainable Reporting
0.919 Transparency H2, + 0.426
Energy
Productivity 0.149
H3b, + H3c, + Net
-0.197 0.326 0.451 Profit
0.768
Business Performance Margin
Sustainable Practices
H3a, +
0.482 0.999
0.097
Waste Return on
Productivity Average
0.877 Assets
Water
Productivity
DISCUSSION OF RESULTS
Sustainable Practices
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Sustainable practices indicators are operational indicators that offer comparable benchmarks with
respect to certain environmental characteristics (Tyteca 1996). In our study, we used the
indicators which are compliant to WSSD objectives. The sustainable practices construct is
reflected by four measures including carbon productivity, energy productivity, waste
productivity, and water productivity. The path coefficients for the relationship between
sustainable practices and these four measures are 0.919, 0.768, 0.482 and 0.877, respectively,
meaning that carbon productivity is the most significant reflective indicator variable of the
construct, sustainable practices. This is in accordance with the expectations because all publicly
traded companies receive a Carbon Disclosure Rating, which appears under the company
summary’s key stats and ratios. This combined rating is driven by the Carbon Disclosure Project,
which has a rigorous scoring methodology, broken down by management, risk and opportunities,
and emissions.
Water productivity is the second most significant reflector indicator variable (0.877) and it
illustrates the attention water efficient business operations receive. This includes the increased
water use efficiency and decreased water quality threat. Similarly, energy productivity is closely
behind water productivity in terms of significance with a path coefficient of 0.768. Sustainable
operation, such as reduced energy consumption is one of the most visible and easily quantifiable
measure. Using energy efficient lightning or using renewable energy sources are strategies that
companies often deploy to showcase their sustainability commitments.
The lowest path coefficient between sustainable practices and waste productivity (0.482)
illustrates that waste management is an overlooked area in terms of sustainable business
practices. The generation and disposal of waste associated with the entire product life cycle
creates a disregarded opportunity to companies. Implementing processes and infrastructure to
decrease and properly dispose waste requires a considerable amount of upfront investment.
Companies often chose to outsource waste management, which seldom result in a sustainably
conscious disposal. For example, electric products might be sent to Asia or Africa for
“recycling” by waste-brokers, but most of the waste ends up as landfill in the ocean. Most of the
products are uneconomical to repair or disassemble, therefore, with all its toxic components, will
be part of the “digital dump” sites of third world countries. Hence, companies put added effort
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into reducing raw material needs and limiting waste but it is still the least progressed indicator of
sustainable business practice.
Business Performance
Business Performance is a construct that is related to a firm’s performance and is reflected in
three measures, including operating profit margin, net profit margin and average return on assets.
The path coefficients for the relationship between business performance and net profit margin,
operating margin, and return on average assets are 0.451, 0.426 and 0.999 respectively. This
finding shows that return on average assets is the strongest reflective indicator measure for
business performance of the companies. ROAA is undeniably a strong indicator of firm
profitability of its assets, since it measures efficiency and financial strength, which clearly
suggests the level of business performance. Net profit margin and operating margin also indicate
profitability, but focuses on cost control through sustainable practices, such as resource
management.
Environmental Governance
Environmental Governance is related to sustainability governance measures and is reflected by
two measures, including sustainability remuneration and sustainability leadership. The path
coefficients for the relationship between environmental governance and sustainability
remuneration and sustainability leadership are 0.899, and 0.659 respectively. This finding shows
that sustainability remuneration is the measure that strongly reflects the environmental
governance of the companies. The relationship between indicator variables and the constructs
and the respective path coefficient estimates are given in a tabular form in the table 2 given
below.
Often times, in response to mimetic pressures from rivals and competitive trends within the
industry, companies establish and formalize environmental governance structures, evidenced by
a growing number of “C-level” environmental executives (e.g. Chief Sustainability Officer). For
example, in a study by Willard (2005), nearly all of the 150 largest companies in the world had a
sustainability officer with the rank of vice president or higher. In particular, institutionalizing
environmental governance creates legitimacy of structure within an organization. Companies
implement an environmental governance structure with formal mechanisms for leadership and
extrinsic rewards. In 2010, Alcoa, one of the leading aluminum providers announced their newly
created position of chief sustainability officer, which is responsible for developing a
comprehensive strategy that integrates all of the company’s sustainability efforts. They also saw
this proactive sustainability approach as an opportunity for competitive advantage.
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Sustainability reporting is often an institutionalization mechanism as a response to coercive
pressures from regulators and consumers. All publicly traded Fortune 500 companies are
mandated to report on their sustainability practices. The growing demand for transparency of
sustainable initiatives and operations has been central to a slew of legislation and mandates
where companies are expected, if not required, to disclose their environmental footprints and
remedial operational initiatives.
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Contrary to our expectations, sustainable practices have substantial negative, direct effect on
sustainable reporting transparency. The path coefficient for the relationship between sustainable
practices and sustainable reporting transparency was found to be -0.197. Our results
demonstrated that structure forces reporting (0.198), while some practices might go unreported,
hence the negative path coefficient (-0.197). Other inference of this relationship among
governance, practice and performance is that structure does not automatically relate to practice.
For example, when a distributor claimed in 2011 that they sell extra virgin olive oil from
sustainable farms in Italy, the practice was not so ideal, low-grade olive oil from regular farms
were sold, therefore mislead consumers. These disconnect between governance and practice will
have minimal, if not negative effect on business performance. If firms focus on the sustainable
reporting transparency, they can improve the overall business performance to a great extent.
Finally, we found that a combination of a strong culture of sustainability reporting and strong
sustainable supply chain operational practices reaps the greatest financial performance benefits
for a company. Since all firms in our study are mandated to report, therefore comply with
coercive pressure. When reporting encompasses what the governance structure implies and, in
addition, the reporting consists of the sustainable supply chain operations, it exhibits the greatest
effect of business performance (0.326).It can also be seen that the magnitude of the path
coefficients strongly reinforces the hypothesis that sustainable reporting transparency along with
high sustainable practices help the companies to improve the overall business performance. The
combined construct has a path coefficient of 0.326 while sustainable reporting transparency to
business performance and sustainable practices to business performance has path coefficients of
0.149 and 0.097 respectively. This clearly indicates the need for sustainable reporting
transparency in a firm. Taken together, understanding that governance structures drive a strong
reporting culture, institutionalizing an effective structure as well as effective sustainable supply
chain operational practices become imperative for consistent financial performance.
24
In the vein of other studies, limitations in the scope of our study provide guide and fertile
grounds for future research. First, findings in this study are captive to global large-cap firms. The
size of market capitalization for these firms implies their ability to muster considerable resources
and assume costs to establish governance norms and drive sustainable practices. While
examining large-caps is important because industry practices are often commanded by their
global presence, future research may find it particularly relevant examining the same framework
in the context of mid-cap and small-cap companies. Mid-cap and small-cap companies have
considerably higher resource constraints. Yet, sustainable practices and SC operations are rapidly
becoming a grassroots phenomenon, driven by small and mid-size start-ups. Unraveling the
mechanics of governance-operations-business performance in these companies could offer us
important, yet previously unknown insights.
Second, the fact that popular green rankings have a major drawback that they do not account for
corporate lobbying and campaign contributions around environmental policy. Whether
companies are pushing to strengthen environmental regulations or lobbying to weaken them,
none of this crucial information is incorporated into green rankings. It is highly probable that
companies that are transparent on environmental issues would also be forthcoming about their
political activities. But it is not always true. We also admit the fact that the political transparency
and reporting transparency does not go hand in hand. When we talk about reporting
transparency, it does not take into account the lobbying and other political activities that go into
setting up of the environmental regulations.
Third, this study uses a one-year lagged dataset to examine causalities. While a one-year lag is a
prudent choice in a competitive environment, translating policies and various sustainable SC
operational practices may embody varying time lags. For example, companies have greater
internal control over their waste management. However, companies have longer-time third party
contracts with 3PL and 4PL logistics, requiring them to relinquish some control over carbon
productivity in their supply chains. Similarly, companies have large investments in plant
operations that contribute to their energy productivity. These fixed cost infrastructures are more
difficult to change within a short term and might require a lag longer than a year to translate
25
policies in to practices. A variable-time-lagged model might offer a more granular understanding
of the framework.
In that vein, future research might find it useful exploring the differences between pre- and post-
sustainability initiatives within firms. In that regard, future research using a panel dataset might
provide the right direction and a deeper understanding for gauging shifts in practices and
performance before and after institutionalizing sustainability governance and its subsequent SC
practices. A panel dataset would also offer a longitudinal perspective that could use robust time-
series analysis to decode patterns and trends underpinning sustainable initiatives.
Contributions
Significant awareness surrounding sustainable supply chain practices call for executive attention
in companies around the world. This study investigated whether sustainability, as an executive
priority, affects business practices and impacts business performance. In this research, we
developed a framework that depicts the inter-linkages between environmentally sustainable
governance, sustainable supply chain operations, and business performance.
Together, this study helps unravel the dynamics of the ever-growing phenomenon of
sustainability initiatives in global companies with expanding realms of operations - balancing
customer demands for sustainability as well as shareholder demands for performance and profit.
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