Received: 20 November 2017 Revised: 29 August 2018 Accepted: 12 September 2018

DOI: 10.1002/csr.1687

RESEARCH ARTICLE

Corporate governance and sustainable business conduct—

Effects of board monitoring effectiveness and stakeholder
engagement on corporate sustainability performance and
disclosure choices
Bart Manning | Geert Braam | Daniel Reimsbach

Institute for Management Research and

Department of Economics, Radboud
University, Nijmegen, The Netherlands
Correspondence
Daniel Reimsbach, Institute for Management
Research and Department of Economics,
Radboud University, P.O. Box 9108, Nijmegen
6500 HK, The Netherlands.
Email: d.reimsbach@fm.ru.nl
Abstract
This study posits that, in the absence of extensive mandatory regulation and auditing,
differences in internal and external corporate governance (CG) mechanisms will
explain variations in choices concerning corporate sustainability reporting and the
interrelated and underlying corporate sustainability performance (CSP). Specifically,
we explore whether board monitoring effectiveness as a major internal CG mecha-
nism and stakeholder engagement as a key external CG mechanism are positively
associated with sustainability reporting quality (SRQ), compliance with generally
accepted sustainability reporting standards (SRC) and guidelines, and CSP for a sample
of Dutch firms that have voluntarily disclosed sustainability reports during the years
2012–2016. In addition to these direct effects, we also investigate the potential indi-
rect effects of the CG mechanisms on SRQ and SRC via CSP and distinguish between
nonlagged and lag effects. Using structural equation modeling, our results show that,
in the short term, monitoring effectiveness positively affects SRQ and SRC. Stake-
holder engagement positively affects SRQ and SRC in the short term and is positively
related to SRQ via CSP in the longer term, indicating that active stakeholders, over
time, may drive companies toward more sustainable business conduct. Finally, the
findings that CSP is positively related to SRQ but negatively related to SRC provide
further support for signaling and legitimacy theory, respectively. Companies with
superior CSP disclose high‐quality information on CSP to signal the firm's superior
sustainability performance, whereas poor performing companies legitimize their infe-
rior CSP by complying with more reporting standards, rather than by directly improv-
ing their underlying CSP.

KEY W ORDS

board monitoring, corporate governance, corporate social responsibility, stakeholder engagement,

sustainability performance, sustainability reporting quality

1 | I N T RO D U CT I O N accountable for the impacts of their decisions and activities on the

environment and society. However, in the absence of extensive man-
In response to environmental and social pressures, such as climate datory regulation of sustainability reporting, companies voluntarily
change, social inequality, and extreme poverty, investors and other decide whether or not to publish information on corporate sustainabil-
stakeholders are increasingly urging companies to become more ity performance (CSP) in designated sustainability reports and whether

Corp Soc Resp Env Ma. 2019;26:351–366. wileyonlinelibrary.com/journal/csr © 2018 John Wiley & Sons, Ltd and ERP Environment 351
352
and to what extent these reports comply with generally accepted
sustainability reporting standards and guidelines.1 Signaling theory
suggests that managers decide to disclose information on CSP to
signal the firm's superior sustainability performance to its shareholders
to gain competitive advantages, such as better access to finance
(Cheng, Green, & Ko, 2014) and a reduced cost of equity capital
(Dhaliwal, Li, Tsang, & Yang, 2011). Compliance with sustainability
reporting standards (SRC) may further increase shareholders' and
other stakeholders' confidence in the reliability and accuracy of the
firm's voluntary sustainability disclosures, by emphasizing that the firm
takes sustainable development seriously, thus enhancing corporate
reputation (Hahn & Kühnen, 2013). On the other hand, legitimacy
theory suggests that voluntary sustainability reporting may also be
beneficial for companies with an inferior CSP that are subject to public
pressures and legitimacy threats.2 In this case, the company's manage-
ment utilizes sustainability reporting as a tool to proactively manage
investors' and other stakeholders' perceptions and expectations to
reduce the negative effects of poor CSP on their legitimacy and corpo-
rate reputation (Brammer & Pavelin, 2006; Freedman & Patten, 2004).
However, masking or not showing poor CSP will reduce sustainability
reporting quality (SRQ) because CSP is not fairly presented in all mate-
rial respects (Boiral, 2013; Cho, Guidry, Hageman, & Patten, 2012;
Reimsbach & Hahn, 2015). In this case, the management of companies
with an inferior CSP may also opt to voluntarily comply with generally
accepted reporting standards because they often leave room for inter-
pretation. This enables managers to proactively signal the credibility of
their sustainability practices, thus increasing stakeholder's trust and
organizational legitimacy, while still decoupling revealed CSP from
their actual CSP (Braam, de Weerd, Hauck, & Huijbregts, 2016; Perego
& Kolk, 2012).
Previous literature suggests that pressures arising from corporate
governance (CG) mechanisms limit the likelihood of short‐term oppor-
tunistic behavior, resulting in improvements in CSP, but also in a
higher SRQ, by preventing managers from using those reports to sim-
ply legitimize poor CSP (Brammer & Pavelin, 2006; Hahn & Kühnen,
2013; Jo & Harjoto, 2011). Furthermore, CG pressures may affect
the level of compliance with generally accepted reporting standards
that are designed to enhance the quality of the sustainability informa-
tion disclosed while, in reality, still leaving open a lot of room for inter-
pretation (Boiral, 2013; Cho et al., 2012; Michelon, Pilonato, & Ricceri,
2015). This study posits that, in the absence of extensive mandatory
regulation and auditing, differences in internal and external CG mech-
anisms will explain variations in SRQ, SRC, and the underlying CSP.
More specifically, the aim of this study is to investigate whether board
monitoring effectiveness as a major internal CG mechanism and stake-
holder engagement as a key external CG mechanism are positively
1
In this study, we use the term sustainability reporting as synonymous with cor-
porate social responsibility (CSR) reporting or similar terms. See, for example,
Hahn and Kühnen (2013).
2 toring in their interrelatedness and using a structural equation model.
According to legitimacy theory, corporate legitimacy is required for organiza-
tional survival. A company will achieve legitimacy when it is perceived to oper-
ate within a socially constructed system of norms, values, and bounds of which
the entity is a part. When companies do not satisfy public expectations and
requirements, they must cope with increased public pressure, scrutiny, and
monitoring, as well as with greater risks to legitimacy (Deegan, 2002; Gray
et al., 1995).
MANNING ET AL.
associated with SRQ, SRC, and CSP. Because sustainability reporting
and the underlying performance are interrelated, we also explore the
potential indirect effects of these CG mechanisms on SRQ and SRC
via CSP and make a distinction between nonlagged and lag effects.
This study uses a unique panel data set of 91 Dutch firms cover-
ing the period of 2012–2016. Using data from the so called Transpar-
ency Benchmark that is commissioned by the Dutch Ministry of
Economic Affairs and Climate Policy (2017) and conducted by EY
allows us for the first time to holistically address issues related to
SRQ and stakeholder engagement in a standardized way, whereas pre-
vious research on those issues faces comparability problems due to
the regular use of self‐constructed (quality) indices (e.g., Clarkson, Li,
Richardson, & Vasvari, 2008; Hummel & Schlick, 2016; Manetti,
2011). Our results show that, in the short term, monitoring effective-
ness and stakeholder engagement positively affect SRQ and SRC
whereas CSP is positively related to SRQ but negatively related to
SRC. The former findings indicate that monitoring effectiveness and
higher levels of stakeholder engagement may incentivize managers
to become more accountable for the firm's sustainability performance
by issuing high‐quality sustainability information and adhering to
reporting standards and guidelines. In addition, the positive relation-
ship between CSP and SRQ provides further support for signaling the-
ory, indicating that companies with superior CSP, compared with
companies with inferior CSP, disclose information on CSP to signal
the firm's superior sustainability performance. At the same time, how-
ever, the negative relationship between CSP and SRC provides sup-
port for legitimacy theory, suggesting that companies with inferior
CSP adjust their reporting behavior by adhering to more reporting
standards, rather than directly improve their underlying CSP. The
results, however, do not indicate that board monitoring effectiveness
and stakeholder engagement also affect CSP in the short term. Addi-
tional results of lag analyses also show that more effective board mon-
itoring does not increase CSP in the longer term. Stakeholder
engagement, however, is positively related to CSP in the longer term,
indicating that active stakeholders, over time, may drive companies
toward more sustainable business conduct.
This paper contributes to the ongoing research related to CSP,
SRQ, and SRC in several ways. First, this study is among the first to
systematically explore the (inter)relation among CG mechanisms,
CSP, SRQ, and SRC. Although previous research acknowledges that
board monitoring effectiveness and stakeholder engagement may
influence CSP, SRQ, and SRC, the underlying effects are still empiri-
cally underexplored (Amran, Lee, & Devi, 2014; Dal Maso, Liberatore,
& Mazzi, 2017; Hahn & Kühnen, 2013; Helfaya & Moussa, 2017).
This is particularly true for the CG effects on CSP, which have only
recently received some initial scholarly attention (Shaukat, Qiu, &
Trojanowski, 2016). Second, in addition to studies that investigate
factors associated with either CSP, SRQ, or SRC, we examine the
effects of determinants of SRQ, SRC, and CSP at the same time, fac-
In doing so, we enrich the literature by unravelling the potential indi-
rect effects of the CG mechanisms on SRQ and SRC via CSP. Third,
previous research that examines the effect of CG mechanisms on sus-
tainability reporting (e.g., Chiu & Wang, 2015; Manetti, 2011) often
uses content analysis to quantify SRQ and SRC, but also stakeholder
MANNING ET AL.
engagement with complex, self‐constructed indices that are difficult to
apply in other studies. This study uses more verifiable and comparable
measures from the Transparency Benchmark that are based on inde-
pendent research assessing the quality of sustainability reports and
levels of stakeholder engagement. For the indicators of the firms' com-
pliance with standards on sustainability reporting, we retrieved data
from the Global Reporting Initiative's (GRI) Sustainability Disclosure
Database. Finally, most studies on determinants of CSP and SRQ
are cross‐sectional (Clarkson et al., 2008; Hummel & Schlick, 2016;
Patten, 2002), which is problematic in terms of addressing causality.
For our analysis, we use panel data that allow us to make causal
inferences.
The next section provides a literature overview and develops
hypotheses on the relationship among CG mechanisms, CSP, SRQ,
and SRC. Section 3 describes the research method, followed by the
presentation of the results in Section 4. Finally, in Section 5, we
discuss the limitations of our study and draw conclusions.
2 | T HE O R E T I C A L F R A M E W O R K A N D
HYPOTHESES
Sustainability reports, in which companies account for their CSP, are
tools for communicating socially responsible behavior and a potential
means to reducing information asymmetries between the firm's man-
agement and its shareholders and other stakeholders (Brammer &
Pavelin, 2006; Fernandez‐Feijoo, Romero, & Ruiz, 2014). However,
in settings in which there is a separation of ownership and control
and sustainability reporting practices are mainly voluntary, agency the-
ory suggests that management may behave opportunistically and dis-
close CSP information that is not reliable and accurate (Bebbington,
Unerman, & O'Dwyer, 2014; Cho, Lee, & Pfeiffer Jr, 2013; Friedman,
2007; Luo & Tang, 2014).3 Due to managerial capture, which refers
to management's control over the processes of sustainability reporting
(O'Dwyer, 2003; O'Dwyer & Owen, 2005; Smith, Haniffa, & Fairbrass,
2011), management can strategically use its discretion to decide what
CSP information to disclose, whether and to what extent sustainability
reports comply with reporting standards and whether or not to have
this information assured by an external party. In particular, the man-
agement of companies that are subject to public pressure and legiti-
macy threats may self‐servingly prefer to selectively disclose mostly
good CSP in sustainability reports that comply with reporting stan-
dards to reduce legitimacy risks and confer greater confidence among
stakeholders, rather than reveal both good and bad CSP aspects in a
balanced report (Bebbington et al., 2014; Cho et al., 2012; Gürtürk &
Hahn, 2016; O'Dwyer, Owen, & Unerman, 2011; Perego & Kolk,
2012). Internal and external CG mechanisms are potential means of
decreasing such managerial opportunism and make it more difficult
to manage and mask bad CSP. More specifically, more effective board
3
For example, Friedman (2007) argues that engaging in corporate social respon-
sibility is symptomatic of an agency problem. Managers often use corporate
social responsibility to further their own social, political, or career agendas at
the expense of stakeholders who want to obtain a reliable representation of a
firm's sustainability performance.
353
monitoring as a major internal CG mechanism and higher levels of
stakeholder engagement as a key external CG mechanism may urge
and incentivize managers to become more accountable for the firm's
sustainability‐related activities.
As an internal CG mechanism, the board of directors has to mon-
itor the relationship between the management and investors and
other stakeholders and reduce the information asymmetry that exists
in this principal–agent relationship (Fama & Jensen, 1983; Hillman &
Dalziel, 2003; Jensen & Meckling, 1976). Voluntary disclosure of
high‐quality corporate sustainability information can reduce this asym-
metry and enhance CSP. However, to monitor the principal–agent
relationship effectively, the board of directors must have sufficient
competencies and expertise to ensure that the information on CSP,
in all material respects, is presented fairly in sustainability reports. Pre-
vious literature on the relationships between board composition and
oversight quality suggests that SRQ and CSP are positively related
with the board attributes independence, sustainability expertise, and
diversity (Amran et al., 2014; Helfaya & Moussa, 2017; Liao, Luo, &
Tang, 2015; Rao & Tilt, 2016; Shaukat et al., 2016).
Companies with more independent, nonexecutive board members
find themselves in a better position than executive board members to
protect the interests and monitor on behalf of the firm's shareholders
and other stakeholders (Cheng & Courtenay, 2006; Ibrahim, Howard,
& Angelidis, 2003; Johnson & Greening, 1999; Khan, 2010; Prado‐
Lorenzo & Garcia‐Sanchez, 2010). In addition, nonexecutive board
members are, on average, more sensitive and responsive to environ-
mental and social demands (De Villiers, Naiker, & Van Staden, 2011;
Frias‐Aceituno, Rodriguez‐Ariza, & Garcia‐Sanchez, 2013; Hussain,
Rigoni, & Orij, 2018; Ibrahim & Angelidis, 1995). Previous literature
also shows that more board expertise on sustainability issues may pos-
itively affect the implementation of companies' sustainability strategy
and enhance CSP (Shaukat et al., 2016). Moreover, sustainability
expertise, for example, in the form of a sustainability committee,
may also positively affect SRQ (Cucari, Esposito De Falco, & Orlando,
2018; Hahn & Kühnen, 2013; Helfaya & Moussa, 2017; Liao et al.,
2015; Michelon & Parbonetti, 2012). Finally, previous literature sup-
ports the notion that board diversity and, in particular, gender diver-
sity are positively associated with CSP and SRQ. Diversity of board
members is assumed to add broad and heterogeneous perspectives
to the boards' decision‐making processes, which may improve CSP
and enhance firms' ability to meet the needs of broader stakeholder
groups (Landry, Bernardi, & Bosco, 2016; Li et al., 2017; Liao et al.,
2015; Prado‐Lorenzo & Garcia‐Sanchez, 2010; Rao & Tilt, 2016). For
these reasons, more independent boards with more sustainability
expertise and more diversity are expected to better monitor and influ-
ence companies' management to become more responsible and
accountable for their SRQ and the underlying CSP. Furthermore, the
board may also choose to comply with generally accepted SRC to
increase monitoring effectiveness. Compliance with SRC should help
to reduce information asymmetry, may increase shareholders' and
other stakeholders' confidence in the reliability and accuracy of their
voluntary sustainability disclosures, and reduce monitoring costs
(Dhaliwal, Radhakrishnan, Tsang, & Yang, 2012). Accordingly, we
hypothesize the following direct effects from the internal CG mecha-
nism board monitoring effectiveness:
354
H1a. Board monitoring effectiveness is positively related
to SRQ.
H1b. Board monitoring effectiveness is positively related
to SRC.
H1c. Board monitoring effectiveness is positively related
to CSP.
In addition to internal pressures, firms may also improve their
CSP, SRQ, and SRC in response to external pressures from engaged
stakeholders. Increasingly, firms receive requests from investors, cus-
tomers, nongovernmental organizations, and other interested parties
to become more transparent about and accountable for their sustain-
ability activities (Mitchell, Agle, & Wood, 1997). In this context, stake-
holder theory suggests that companies have to manage the complex
network of relations with their different stakeholder groups and inter-
act and engage with stakeholders (Manetti, 2011; Svendsen, 1998;
4
Waddock, 2002). Stakeholder engagement can be defined as the
“process used by an organization to […] involve stakeholders in identi-
fying, understanding and responding to sustainability issues and con-
cerns, and to report, explain and answer to stakeholders for
decisions, actions and performance” (AccountAbility 1000, 2015). A
company's management will use its managerial capture to balance its
stakeholders' positions and then decide to what extent it will meet
their expectations and requirements. However, the exposure to and
the perception of the amount of pressure from stakeholder groups
may affect managers' responsiveness to stakeholders' requests
(Herremans, Nazari, & Mahmoudian, 2016; Johnson, Redlbacher, &
Schaltegger, 2018). In particular, when powerful stakeholders actively
try to interfere with the actions of a company, their pressures can
affect CSP, and their engagement may influence the choices of a
company's management whether or not to report on specific issues
and whether or not to comply with reporting standards (Fordham &
Robinson, 2018). High levels of engagement of key stakeholders with
legitimate interests, for instance, may influence the management to
disclose sustainability‐related “bad news” in addition to “good news,”
leading to sustainability reports of higher quality (Hahn & Kühnen,
2013; Prado‐Lorenzo, Gallego‐Alvarez, & Garcia‐Sanchez, 2009; Wolf,
2014). Inclusivity of such stakeholders may drive sustainable value
creation and affect a company management's decisions to disclose
material sustainability information and to prepare the sustainability
report in accordance with SRC and guidelines (Global Reporting Initia-
tive, 2013; Moratis & Brandt, 2017). Thus, processes in which stake-
holders actively pressure a firm to operate more sustainable, and
which influence management's choices concerning corporate sustain-
ability reporting may reduce the information asymmetry between
4 H4a. Stakeholder engagement is indirectly positively
Stakeholder theory focuses on particular groups of stakeholders who can affect
and/or are affected by the achievement of an organization's objectives (Free-
man, 1984; Gray, Owen, & Adams, 1996). Stakeholders, however, cannot be
seen as a homogenous group with similar interests but rather as a diverse group
with often conflicting views, power, and interests. The extent to which these
stakeholders are engaged with and actively interfere with the sustainability
and reporting activities of firms depends, in turn, on the extent to which the
stakeholders perceive the current existing sustainability actions as inadequate
and/or question the credibility and reliability of the performance information
disclosed, and this differs greatly among firms and industries (Cowen, Ferreri,
& Parker, 1987; Deegan & Gordon, 1996).
MANNING ET AL.
the company and its stakeholders (Dal Maso et al., 2017) but also pos-
itively influence the companies' competitive position (Lozano &
Huisingh, 2011). For these reasons, we expect that high levels of
stakeholder engagement positively affect SRQ, SRC, and CSP. Hence,
we propose the following direct effects resulting from the external
CG mechanism stakeholder engagement:
H2a. Stakeholder engagement is positively related to SRQ.
H2b. Stakeholder engagement is positively related to SRC.
H2c. Stakeholder engagement is positively related to CSP.
In addition to these direct effects, there may also be indirect
effects of board monitoring effectiveness and stakeholder engage-
ment on SRQ and SRC via CSP. More effective board monitoring
and higher levels of stakeholder engagement might pressure firms to
become more responsible for sustainability concerns, thus improving
the firms' CSP. Signaling theory suggests that this, in turn, raises the
incentives for the management to increase the disclosure quality and
truthfully report the (improved) CSP to differentiate the firm from its
inferior performing peers (Braam et al., 2016). On the other hand, fol-
lowing the reasoning of legitimacy theory, more effective board mon-
itoring and higher levels of stakeholder engagement may urge
companies to become more accountable for their environmental and
societal impacts. However, rather than improving their CSP, compa-
nies that face greater threats to legitimacy and public pressures may
simply increase the compliance with SRC and guidelines. In particular,
the management of inferior performing firms may use proactive com-
pliance with more generally accepted reporting standards as a risk
management tool to enhance investors' and other stakeholders' confi-
dence in the perceived accuracy and reliability of the information
disclosed, thus enhancing corporate reputation and perceived legiti-
macy (Cho & Patten, 2007; Hahn & Lülfs, 2014; Hrasky, 2011). How-
ever, as argued, monitoring effectiveness and stakeholder engagement
are expected to reduce this opportunistic use and make it more diffi-
cult to manage and mask bad CSP. Hence, board monitoring effective-
ness and stakeholder engagement may indirectly positively affect SRC
via CSP. Concluding, in addition to their direct affects, we expect that
more effective board monitoring and higher levels of stakeholder
engagement also indirectly affect SRQ and SRC via CSP. Thus, we for-
mulate the following:
H3a. Board monitoring effectiveness is indirectly posi-
tively related to SRQ via CSP.
H3b. Board monitoring effectiveness is indirectly posi-
tively related to SRC via CSP.
related to SRQ via CSP.
H4b. Stakeholder engagement is indirectly positively
related to SRC via CSP.
Figure 1 shows an overview of the CG mechanisms that we
expect to affect CSP, SRQ, and SRC. As argued above, board monitor-
ing effectiveness and stakeholder engagement are expected to posi-
tively influence CSP, SRQ, and SRC, both directly and indirectly.
MANNING ET AL.
FIGURE 1 Determinants of CSP, SRQ, and
SRC. ROE: return on equity
Other CG mechanisms that previous literature shows can affect CSP,
SRQ, and SRC, such as independent third‐party assurance on corpo-
rate sustainability reports, media exposure, and analysts following
the company (Brammer & Pavelin, 2006; Clarkson et al., 2008; Hahn
& Kühnen, 2013), are included as control variables and will be
explained in the next section.
3 | RESEARCH METHOD
3.1 | Sample
To test the hypotheses, a unique panel data set was compiled covering
a 5‐year period (2012–2016) for Dutch companies that voluntarily
disclosed corporate sustainability reports, which were included in both
the Transparency Benchmark (https://www.transparantiebenchmark.
nl) and the Sustainability Disclosure Database (http://database.
globalreporting.org). The Transparency Benchmark is an annual
research on the content and quality of CSR reports of Dutch compa-
nies, which is commissioned by the Dutch Ministry of Economic
Affairs and Climate Policy (2017) and conducted by EY.5 The aim of
the Transparency Benchmark is to make it possible for stakeholders
5
The Netherlands is a relevant geographical area because this internationally
oriented country has a CSR leadership role; for example, the GRI and
Greenpeace are based in Amsterdam. In addition, large international companies
are located in the Netherlands, such as Unilever and Royal Dutch Shell, which
have leading roles in the realm of CSR worldwide.
355
to form a view about CSP and to start a dialogue on this matter. The
Sustainability Disclosure Database, which is owned and operated by
the GRI, aims at facilitating interactions between the reporting organi-
zations and their multitude of stakeholders and for this reason pro-
vides access to sustainability reports. In addition, this database also
includes data on the extent to which these reports meet different
SRC. Data on SRQ and SRC were thus retrieved from the Transpar-
ency Benchmark and the GRI's Sustainability Disclosure Database,
respectively. To assess CSP, we used data from companies' sustain-
ability reports and Thomson Reuters ASSET4. Data on board charac-
teristics were extracted from annual reports and standalone
sustainability reports. To measure stakeholder engagement and exter-
nal assurance, data were retrieved from the Transparency Benchmark.
Moreover, data on media coverage were retrieved from LexisNexis,
and the number of analysts following and financial information were
extracted from Thomson Reuters I/B/E/S and Thomson ONE, respec-
tively. For inclusion in our sample, all financial and nonfinancial infor-
mation had to be available. After we omitted the missing
observations, the remaining unbalanced panel data set included data
for 91 companies, comprising 152 firm‐year observations.
3.2 | Variables
3.2.1 | Dependent variables
To test our hypotheses, we used CSP, SRQ, and SRC as dependent
variables. To assess companies' CSP, consistent with Hummel and
Schlick (2016), we used a comprehensive performance measure
356 MANNING ET AL.

TABLE 1 Environmental and social indicators of corporate sustainability performance (CSP)

CSP indicatorsa, b
Measurement Unit
b
Environmental dimension
Greenhouse gas emissions Total greenhouse gas and greenhouse gas equivalents emission Tonnes of kg
Energy consumption Total direct and indirect energy consumption Gigajoules
Total weight of waste Total amount of waste produced Tonnes of kg
Water withdrawal Total water withdrawal Cubic meter
Social dimensionb
Employee training Total training hours performed by all employees Number (hours)
Lost time injury rate Total number of injuries that caused the employees and contractors to lose Number (injuries)
at least a working day relative to one million hours worked
Employee turnover Percentage of employee turnover Percent
Absenteeism rate Percentage of absenteeism Percent
a
To limit the influence of outliers, the scores on the CSP indicators were winsorized within each industry group at the top and bottom tails at a 10% level. In
addition, company observations with more than two missing values per dimension per year were excluded from the dataset, whereas missing values for
companies with less than two missing values per dimension were replaced by the mean of the other values in the respective dimension.
b
We applied the CSP indicators used by Hummel and Schlick (2016), except for the social CSP indicator “share of women in the highest corporate bodies,”
which, in this study, was used to assess board monitoring effectiveness (see Table 3). We replaced this social indicator by the average rate of absenteeism
(Muller & Kolk, 2009).

including both environmental and social indicators of sustainability
performance, which are presented in Table 1. Because larger compa-
nies are expected to have higher scores on the various indicators,
we applied size‐adjusted indicators of CSP, that is, the ratios of perfor-
mance indicator values to the natural logarithm of a firm's year‐end
total assets. This method is similar to that applied in prior studies that
employed scaled measures of CSP (Al‐Tuwaijri, Christensen, & Hughes
Ii, 2004; Cho & Patten, 2007; Clarkson et al., 2008). Subsequently, to
account for industry competition and consistent with Hummel and
Schlick (2016), for each company per industry group, each indicator
was converted into a standardized score on a continuous [0, 1] scale,
with “0” and “1” indicating, respectively, the worst and the best perfor-
mance score for the indicator in the industry group. For each sample
firm, we used the sum of all environmental indicator values as a proxy
for environmental performance and the sum of all social indicator
values as a proxy for social performance. Finally, we calculated a
company's CSP score as the mean of the performance scores for the
environmental and social dimensions, thus assigning equal importance
to each dimension (Waddock & Graves, 1997).
To examine SRQ, we used the total score of companies' SRQ in
the Transparency Benchmark, which examines the quality of sustain-
ability reports issued by Dutch firms, using a comprehensive set of
content‐ and quality‐related disclosure criteria.6 The maximum score
on the Transparency Benchmark is 200 points, and higher scores indi-
cate a higher quality of corporate sustainability reporting.7
To assess SRC, we used information on the firms' compliance with
generally accepted SRC and guidelines issued by the GRI, the Carbon
6
The scoring criteria of the Transparency Benchmark “are in line with the latest
international guidelines and developments, such as the Global Reporting Initia-
tive (GRI), the framework for integrated reporting of the International Integrated
Reporting Council (IIRC), […] and the EU directive concerning reporting on non‐
financial information and diversity for PIEs (Public Interest Entity) with more
than 500 employees.” (Ministry of Economic Affairs and Climate Policy, 2017).
7
Because the measures for stakeholder engagement and assurance were also
included in this total score, we subtracted the scores of the stakeholder engage-
ment and assurance indicators from the total SRQ score in this model.
Disclosure Project, the International Finance Corporation, the Organi-
zation for Economic Corporation and Development, and the United
Nations Global Compact, as described in Table 2. These reporting stan-
dards represent global best practices to be used by organizations for
publicly reporting on the impacts of the firms' business on the envi-
ronment, society, and the economy (Global Reporting Initiative,
2016). For each company, we assessed the extent to which it reported
in accordance with these reporting standards. Because the standards
are interrelated and based on a similar underlying construct, consistent
with Prado‐Lorenzo et al. (2009), we used principal component analy-
sis (PCA) to construct a comprehensive measure of sustainability
reporting compliance (SRC).8 Higher scores on SRC indicate more
compliance with generally accepted reporting standards.
3.2.2 | Independent variables
To capture the effectiveness of board monitoring, consistent with pre-
vious literature, we used a composite measure that is based on the fol-
lowing three board attributes: board independence, sustainability
expertise, and diversity (e.g., Dhaliwal, Naiker, & Navissi, 2006;
Hoitash, Hoitash, & Bedard, 2009; Dilling, 2010; Prado‐Lorenzo &
García‐Sánchez, 2010; De Villiers et al., 2011; Khan, 2010; Frias‐
Aceituno et al., 2013; Helfaya & Moussa, 2017; García‐Meca &
Pucheta‐Martínez, 2018). Board independence was measured by the
ratio of nonexecutive directors to total board size (Hussain et al.,
2018; Lim, Matolcsy, & Chow, 2007). The proxy for sustainability
expertise is a dummy variable that was equal to 1 if the respective firm
had a sustainability committee or a CSR expert, and 0 otherwise
(Cucari et al., 2018; Liao et al., 2015). Board diversity was measured
by the ratio of female board members to total board size (Liao et al.,
8
The results of a Kaiser–Meyer–Olkin test showed that the sufficiency mea-
surement of the general sampling falls within the range of acceptance (>0.5),
indicating that there was an adequate basis for principal component analysis.
In addition, because the GRI included reference to the standards of the UN
Sustainable Development Goals (SDGs) only since 2016, the PCA was run with-
out this standard.
MANNING ET AL. 357

TABLE 2 Definitions of the generally accepted global sustainability reporting standards and guidelines

Sustainability reporting
standarda, b Definition (Global Reporting Initiative, 2016)

GRI Indicates explicit reference to the organization responding to the Global Reporting Initiative (GRI) Standards. The GRI is a
network‐based organization that produces a comprehensive sustainability reporting framework that is widely used around
the world. GRI's core goals include the mainstreaming of disclosure on sustainability performance.
CDP Indicates explicit reference to the organization responding to one of the annual Carbon Disclosure Project (CDP)
questionnaires, or participating in an associated CDP project. The CDP is an organization that works with shareholders and
corporations to disclose the greenhouse gas emissions of major corporations.
IFC Indicates explicit reference to/use of the International Finance Corporation (IFC) Performance Standards in the report. These
performance standards are (a) assessment and management of environmental and social risks and impacts; (b) labor and
working conditions; (c) resource efficiency and pollution prevention; (d) community health, safety, and security; (e) land
acquisition and involuntary resettlement; (f) biodiversity conservation and sustainable management of living natural
resources; (g) indigenous peoples; and (h) cultural heritage.
OECD Indicates explicit reference to/use of the Organization for Economic Corporation and Development (OECD) Guidelines for
Multinational Enterprises in the report. These guidelines are classified in the following groups: (a) concepts and principles; (b)
general policies; (c) disclosure; (d) human rights; (e) employment and industrial relations; (f) environment; (g) combating
bribery, bribe solicitation, and extortion; (h) consumer interests; (i) science and technology; (j) competition; and (k) taxation.
UNGC Indicates explicit reference to/use of the United Nations Global Compact (UNGC) and its principles in the report. The four
UNGC principles are (a) human rights, (b) labor, (c) environment, and (d) anticorruption.
a
Since 2016, the GRI's Sustainability Disclosure Database also includes a reference to the UN Sustainable Development Goals (SDGs) in the sustainability
report. Due to data limitations, the principal component analysis (PCA) was run without this standard.
b
To test the robustness of the results, we also used PCA to construct a comprehensive measure of sustainability reporting compliance which, in addition to
CDP, IFC, OECD, and UNGC standards, also comprises reference to the ISO 26000 standard. ISO 26000 focuses on guidance and implementation of CSR
to assist organizations in contributing to sustainable development, including disclosure issues. The results of the additional tests (unreported) show that
different measures of SRC do not change the results qualitatively, suggesting that the results are robust to different measures of sustainability reporting
compliance.

2015). The dummy variables for board independence and diversity
were equal to 1 if the respective original variables were greater than
the median, and 0 otherwise. Subsequently, to capture monitoring
effectiveness, a comprehensive measure was constructed by taking
the sum of the dummy variables on independence, sustainability
expertise, and diversity.
To measure stakeholder engagement, we used the sum of the
standardized scores of two indicators extracted from the Transparency
Benchmark. The first indicator assesses to what extent the company
reports on the involvement of stakeholders in policies and activities
and on how it takes stakeholders' interests and expectations into
account (10‐point scale). The second indicator measures to what
extent the company used stakeholders' information needs when pro-
ducing the sustainability report (3‐point scale; Ministry of Economic
Affairs and Climate Policy, 2017).
3.2.3 | Control variables
Because we have repeated measurements at the firm level, we
included several control variables at the firm and industry levels, as
well as year dummies to control for time effects. At the firm level, in
addition to board monitoring and stakeholder engagement, we con-
trolled for other CG mechanisms that previous literature shows can
affect CSP, SRQ, and SRC (Brammer & Pavelin, 2006; Clarkson et al.,
2008; Hahn & Kühnen, 2013). Specifically, we controlled for voluntary,
independent third‐party assurance on corporate sustainability reports
(Braam & Peeters, 2018; Fonseca, 2010; Sierra‐García, Zorio‐Grima,
& García‐Benau, 2015; Simnett, Vanstraelen, & Chua, 2009), and for
media exposure and analyst coverage (Hahn & Kühnen, 2013). For this
reason, we used an indicator of the Transparency Benchmark (Assur-
ance) which assesses whether and to what extent a company's
sustainability report is externally assured by an independent third party
that has verified the contents of the information and has assured the
reliability of the information and meets auditing standards (e.g., Braam
& Peeters, 2018; Casey & Grenier, 2014; Simnett et al., 2009). Consis-
tent with measures in previous studies (Braam et al., 2016; Brown &
Deegan, 1998; Reverte, 2009), media coverage (Media Coverage)
was measured by the number of articles per year published in the lead-
ing Dutch national, financial, and business newspapers that referred to
the specific company. A dummy variable was created, which was equal
to 1 if the number of articles was higher than the median, and 0 other-
wise. Analysts was a dummy variable that was equal to 1 if there were
any analysts following the company, and 0 otherwise.9
As further control variables at firm level, and consistent with pre-
vious literature (Braam et al., 2016; Clarkson et al., 2008; Clarkson,
Overell, & Chapple, 2011; Hahn & Kühnen, 2013), we also included
company size measured by the natural log of total assets (Size), lever-
age (Leverage), the return on assets (ROA), and listing status (Listing).
Listing was a dummy variable that was equal to 1 if a firm was listed
on the Euronext Amsterdam Stock Exchange and 0 if the firm was
not listed. To control for sector‐specific effects, we included industry
dummies based on the two‐digit standard industrial classification
codes. Finally, we included the year dummies to control for omitted
variables that vary over time but are constant among the firms.
Table 3 summarizes the definitions of the dependent, independent,
9
As a robustness check, we also used analyst coverage as a proxy for monitoring
by analysts. Analyst coverage was measured by the 12‐month total number of
analysts following public companies as estimated by Thomson Reuters I/B/E/S
(Jo & Harjoto, 2014). The results of the additional sensitivity tests show that
the different measures of monitoring by analysts have qualitatively similar
effects on our dependent variables.
358 MANNING ET AL.

TABLE 3 Variable definitions

Variable Definition Data source

SRQ Sustainability reporting quality (SRQ) is measured by taking Transparency Benchmark
the Transparency Benchmark's total quality score of a
company's sustainability report, adjusted for the scores on
Stakeholder engagement and Assurance.
SRC Comprehensive measure of sustainability reporting GRI's Sustainability Disclosure Database
compliance (SRC) constructed via PCA and based on
companies' sustainability reporting in compliance with the
generally accepted reporting standards that are included in
the Sustainability Disclosure Database (see Table 2 for an
overview of the reporting standards).
CSP A company's corporate sustainability performance (CSP) is Thomson Reuters ASSET4 and companies'
calculated as the mean of the environmental and social sustainability reports
performance scores.
EP A company's environmental performance (EP) is proxied by
the sum of four standardized size‐ and industry‐adjusted
indicators of environmental performance (see Table 2).
SP A company's social performance (SP) is proxied by the sum of
four standardized size‐ and industry‐adjusted indicators of
social performance (see Table 2).
Board monitoring Board monitoring effectiveness is a composite score Companies' sustainability and financial reports
effectiveness calculated as the sum of the scores on the dummy variables
board independence, sustainability expertise, and diversity.
Board independence is a dummy variable that is equal to 1
if the ratio of nonexecutive directors to total board size is
greater than the median and 0 otherwise. Sustainability
expertise is a dummy variable that is equal to 1 if there is a
corporate social responsibility expert, committee, or
council on the firm, and 0 otherwise. Diversity is a dummy
variable that is equal to 1 if the ratio of female directors to
total board size is greater than the median, and 0
otherwise.
Stakeholder engagement Stakeholder engagement is measured by using the sum of the Transparency Benchmark
standardized scores of two indicators in the Transparency
Benchmark, assessing to what extent the company reports
on the involvement of stakeholders in policies and
activities and on how it takes stakeholders' interests and
expectations into account, and to what extent the
company used stakeholders' information needs when
producing the sustainability report.
Assurance Assurance is measured by the indicator in the Transparency Transparency Benchmark
Benchmark which assesses whether and to what extent an
independent third party has verified the contents of the
sustainability information and assured the reliability of the
information and meets auditing standards.
Media coverage Media coverage is a dummy variable that is equal to 1 if the LexisNexis
number of articles in the national leading financial and
business newspaper that refer to a specific company is
greater than the median, and 0 otherwise.
Analysts Analysts is a dummy variable that is equal to 1 if there are Thomson Reuters I/B/E/S
analysts following the company, and 0 otherwise.
Size Size is the natural logarithm of the firm's year‐end total Thomson Reuters' ThomsonOne
assets.
ROE Return on equity (ROE) is measured by the firm's year‐end ThomsonOne
net income divided by year‐end total equity.
Leverage Leverage is measured as total noncurrent debt divided by ThomsonOne
year‐end total assets.
Industry A vector of dummy variables based on classification of ThomsonOne
sample firms in five main industry groups (based on the
two‐digit standard industrial classification).
Listing Listing is a dummy variable that is equal to one if a firm is ThomsonOne
listed on the Euronext Amsterdam Stock Exchange, and 0
otherwise.
Year A vector of year dummies.
MANNING ET AL. 359

TABLE 4 Summary statistics of the variables employed in the analyses

Variable n Mean Std. Dev. Min Max

SRQ 152 138.80 31.20 21.00 182.00
SRC 152 0.00 1.42 −1.33 3.64
CSP 152 2.59 0.60 0.62 4.00
EP 152 3.11 1.10 0.00 4.00
SP 152 2.08 0.99 0.00 4.00
Board monitoring effectiveness 152 1.57 0.94 0.00 3.00
Stakeholder engagement 152 3.51 1.72 0.00 5.27
Assurance 152 2.45 1.47 0.00 5.19
Media coverage 152 0.26 0.44 0.00 1.00
Analysts 152 0.57 0.50 0.00 1.00
Size 152 22.31 2.20 17.94 27.81
ROE 152 0.04 0.57 −3.67 5.13
Leverage 152 0.21 0.19 0.00 1.32
Industry 152 2.81 1.19 1.00 4.00
Listing 152 0.62 0.49 0.00 1.00

Note. CSP: corporate sustainability performance; EP: environmental performance; ROE: return on equity; SP: social performance; SRC: sustainability
reporting compliance; SRQ: sustainability reporting quality. See Table 3 for the definitions of the variables.

and control variables employed in the analyses. Table 4 reports the considered a proxy for corporate visibility. The variance inflation fac-
summary statistics for these variables. tors also indicate collinearity between the variables Analysts and List-
ing, Size and Media Coverage, and Size and Analysts. In the main
3.3 | Econometric model analysis, we used the variables Analysts and Media coverage.10

To test our hypotheses, we used the following structural equation

model, where board monitoring effectiveness and stakeholder engage-
ment are the CG mechanisms that explain variation in SRQ, SRC, and
CSP, while controlling for variations in SRQ, SRC, and CSP related to
the other factors specified in the model:
SRQit ; SRCit ¼ β0 þ β1 CSPit
þ β2 BOARD MONITORING EFFECTIVENESSit
þ β3 STAKEHOLDER ENGAGEMENTit
þ β4 ASSURANCEit þ β5 MEDIA COVERAGEit
þ β6 ANALYSTSi þ β7 FIRMCONTROL;it
þ β8 INDUSTRYCONTROL;i þ β9 YEARCONTROL;t þ εit ;
and where board monitoring effectiveness and stakeholder engage-
ment affect SRQ and SRC via CSP:
CSPit ¼ β0 þ β1 BOARD MONITORING EFFECTIVENESSit
þ β2 STAKEHOLDER ENGAGEMENTit
þ β3 MEDIA COVERAGEit þ β4 FIRMCONTROL;it
þ β5 INDUSTRYCONTROL;i þ β6 YEARCONTROL;t þ εit :
In an additional specification of this model, we also used lag
effects for the independent variables.
The assumptions underlying the regression model were tested for
multicollinearity based on Pearson's correlation coefficient and the
variance inflation factors. Table 5 reports the Pearson correlation
coefficients for the independent variables included in the study and
shows that the variables Analysts and Listing are highly correlated.
These high correlations can be explained by the fact that the variable
Analysts could only be equal to 1 for listed companies. Furthermore,
high correlations between the variables Size and Media Coverage,
and Size and Analysts indicate that the company size variable can be
4 | RESULTS
Table 6 shows the results of the structural equation model used to
test H1–H4, which predicted direct and indirect effects of board mon-
itoring effectiveness and stakeholder engagement on CSP, SRQ, and
SRC. Models 1 and 2 in Table 6 use CSP and SRQ, and CSP and
SRC, respectively, as dependent variables. Model 1 shows that board
monitoring effectiveness and stakeholder engagement are significantly
positively related to SRQ, after having controlled for variations in the
sustainability reporting practices related to CSP and the other factors
specified in the model. These results provide support for H1a and
H2a, indicating that pressures arising from internal and external CG
mechanisms positively affect the quality of sustainability reporting.
Furthermore, Model 2 indicates that board monitoring effectiveness
and stakeholder engagement are significantly positively related to
SRC. These results provide support for H1b and H2b. However,
Models 1 and 2 show statistically insignificant relations between
board monitoring effectiveness and CSP, and between stakeholder
engagement and CSP. These results, thus, do not provide support for
H1c and H2c, which predicted positive effects of the internal and
external CG mechanisms on CSP. In addition, Model 1 shows that
CSP is significantly positively related to SRQ, whereas Model 2 indi-
cates that CSP is significantly negatively related to SRC. Because the
10
As robustness checks, we assessed whether our results were sensitive to the
use of the variables Size or Media Coverage and Analysts or Listing. The results
of the additional sensitivity tests (untabulated) indicated that the alternative var-
iables have qualitatively similar effects to CSP, SRQ, and SRC. Because we
already used Size to create the comprehensive CSP measures, we excluded
the variable Size from the main analysis.
360 MANNING ET AL.

TABLE 5 Pearson correlations

1 2 3 4 5 6 7
1 SRQ 1.000
2 SRC 0.344*** 1.000
3 CSP 0.032 −0.236*** 1.000
4 EP −0.111 −0.497*** 0.633*** 1.000
5 SP 0.163** 0.267*** 0.510*** −0.343*** 1.000
6 Board monitoring 0.071 0.329*** −0.076 −0.107 0.028 1.000
7 Stakeholder engagement 0.687*** 0.226*** −0.002 −0.087 0.094 0.011 1.000
8 Assurance 0.500*** 0.180** −0.088 −0.144* 0.054 0.140* 0.420***
9 Media coverage 0.285*** 0.434*** −0.150* −0.340*** 0.196** 0.252*** 0.178**
10 Analysts 0.115 0.481*** −0.147* −0.289*** 0.142* 0.358*** 0.069
11 Size 0.403*** 0.580*** −0.020 −0.522*** 0.555*** 0.337*** 0.302***
12 ROE −0.047 −0.076 0.077 −0.065 0.166** −0.098 −0.051
13 Leverage 0.037 −0.083 −0.055 −0.049 −0.012 0.182** 0.040
14 Industry −0.027 0.008 −0.125 0.013 −0.166** 0.039 −0.032
15 Listing 0.113 0.564*** −0.127 −0.278*** 0.155* 0.379*** 0.063
8 9 10 11 12 13 14 15
8 Assurance 1.000
9 Media coverage 0.254*** 1.000
10 Analysts 0.060 0.082 1.000
11 Size 0.195** 0.471*** 0.399*** 1.000
12 ROE −0.099 0.026 −0.014 0.060 1.000
13 Leverage 0.135* 0.315** 0.024 0.141* −0.032 1.000
14 Industry 0.087 0.056 −0.173** −0.098 −0.066 −0.020 1.000
15 Listing 0.048 0.089 0.909*** 0.413*** −0.013 −0.040 −0.092 1.000

Note. CSP: corporate sustainability performance; EP: environmental performance; ROE: return on equity; SP: social performance; SRC: sustainability
reporting compliance; SRQ: sustainability reporting quality. See Table 3 for the definitions of the variables.
***Statistical significance at 1% level.
**Statistical significance at 5% level.
*Statistical significance at 10% level.

relations between board monitoring effectiveness or stakeholder
engagement and CSP are not statistically significant, the results in
Table 6 do not provide support for H3a–b and H4a–b, which pre-
dicted that pressures arising from the board and external stakeholders
indirectly positively affect SRQ and SRC, via CSP.11
To further approach causality, we also used lag effects for board
monitoring effectiveness, stakeholder engagement, and CSP. Table 7
shows the additional results for the structural equation model with
lag effects. Panel A reports the results using 1‐year lag effects of
board monitoring effectiveness and stakeholder engagement, whereas
Panel B shows the results with 1‐year lag effects of CSP and 2‐year
lag effects of these CG mechanisms. The results in both Panels A
11
Additionally, we examined whether the results would differ if we used our
proxies for corporate environmental and social performance instead of the com-
bined CSP measure. The results of these additional sensitivity tests that show
qualitatively similar effects for the influence of board monitoring effectiveness
and stakeholder engagement on corporate environmental performance and
SRQ. Different from corporate environmental performance, however, the
results for corporate social performance do not show statistically significant
relations between stakeholder engagement and SRQ, and between corporate
social performance and SRQ. These findings indicate that external pressures
from stakeholders and different types of sustainability performance differently
affect SRQ.
and B indicate that board monitoring effectiveness has significant
and positive lag effects on SRC, providing additional support for
H1b. However, the results do not indicate that effective board moni-
toring has lag effects on SRQ and CSP. On the other hand, the results
in both Panels A and B indicate that stakeholder engagement has sig-
nificant and positive lag effects on SRQ and CSP, providing additional
support for H2a and support for H2c. In addition, together with the
significantly positive effect of CSP on SRQ (see Table 6), these results
provide some support for H4a, suggesting that, in the longer term,
stakeholder engagement has lag effects on CSP that indirectly posi-
tively affects SRQ. However, Panels A and B do not show significant
lag effects of stakeholder engagement on SRC. Collectively, the results
in Tables 6, 7 provide support for H1a–b, H2a–c, and H4a.
Finally, and in accordance with previous literature, the results in
both Tables 6 and 7 show further support for the influence of the
other CG mechanisms on SRQ and SRC. That is, the results consis-
tently show significant and positive relationships between indepen-
dent third‐party assurance and SRQ and between media coverage,
assurance and analyst coverage and SRC, whereas the significant
and negative effects of leverage on SRC indicate that stringent bank
monitoring of highly leveraged firms indirectly could suppress exten-
sive sustainability reporting (Casey & Grenier, 2014).
MANNING ET AL. 361

TABLE 6 Regression results for structural equation model

Model 1 Model 2
CSPt SRQta CSPt SRCtb
CSPt 4.442 (1.76)** −0.216 (−1.53)*
Board monitoringt −0.027 (−0.49) 2.353 (1.33)* −0.023 (−0.43) 0.268 (2.74)***
Stakeholder engagementt 0.016 (0.55) 9.922 (10.18)*** 0.022 (0.76) 0.076 (1.49)*
Assurancet 8.757 (6.92)*** 0.662 (3.25)***
Media coveraget −0.116 (−0.88) −0.359 (−0.09) −0.158 (−1.46) 0.397 (2.06)**
Analystst 4.133 (1.22) 1.247 (6.56)***
ROEt 0.064 (0.70) 1.689 (0.61) 0.064 (0.71) −0.136 (−0.88)
Leveraget 0.069 (0.25) −5.095 (−0.61) 0.059 (0.22) −1.630 (−3.62)***
Industryc Y Y Y Y
Yearc Y Y Y Y
N 152 152 152 152

Note. CSP: corporate sustainability performance; PCA: principal component analysis; ROE: return on equity; SRC: sustainability reporting compliance; SRQ:
sustainability reporting quality. t values in parentheses. H1–H4 are directional hypotheses and for this reason tested one tailed. See Table 3 for the defi-
nitions of the remaining variables not explained below.
***Statistical significance at 1% level.
**Statistical significance at 5% level.
*Statistical significance at 10% level.
a
SRQ is a measure of sustainability reporting quality, equal to the Transparency Benchmark's total quality score of a company's sustainability report,
adjusted for the scores on Stakeholder engagement and Assurance.
b
SRC is a comprehensive measure of sustainability reporting compliance constructed via PCA and based on companies' sustainability reporting in compli-
ance with the generally accepted reporting standards that are included in the Sustainability Disclosure Database (see Table 2 for an overview).
c
Results on industry dummies and year effects are not reported for parsimony.

5 | DISCUSSION manage investors' and other stakeholders' perceptions. By proactively

5.1 | Interpretation
Our results confirm the expected positive associations between board
monitoring effectiveness and SRQ and SRC and between stakeholder
engagement and SRQ and SRC, in the short term. This indicates that,
in the absence of extensive mandatory regulation and auditing,
increased pressures from internal and external CG mechanisms incen-
tivize managers to make their companies more accountable for their
sustainability activities by disclosing sustainability information of
higher quality and by increasing the level of compliance with generally
accepted SRC and guidelines. However, the results also show that
board monitoring effectiveness and stakeholder engagement are not
associated with an improvement of the underlying CSP in the short
term.
In addition, the positive effect of CSP on SRQ is in line with the
stream of previous literature that finds support for arguments of sig-
naling theory, suggesting that firms with superior sustainability perfor-
mance voluntary disclose high‐quality sustainability information to
signal their superior performance to investors and other stakeholders.
On the other hand, our results showing that CSP is negatively related
to SRC indicate that companies with inferior sustainability perfor-
mance are more inclined to voluntarily report sustainability informa-
tion in adherence to (more) generally accepted global SRC. These
results provide support for legitimacy theory, which suggests that
companies that face greater threats to legitimacy and public pressures
use corporate sustainability reporting as a risk management tool to
complying with more generally accepted reporting standards, in partic-
ular, the management of inferior performing firms may generate
greater stakeholder confidence in the level of responsibility taken in
relation to sustainable development, thus enhancing corporate reputa-
tion and perceived legitimacy (Cho et al., 2012; Cho & Patten, 2007;
Gray, Kouhy, & Lavers, 1995; Hahn & Lülfs, 2014; Hrasky, 2011).
However, managers in these cases probably self‐servingly comply with
corporate SRC to deflect attention from poor CSP rather than reveal
actual CSP, which raises concerns whether the CSP information is
fairly presented (Boiral, 2013; Cho et al., 2012; Hummel & Schlick,
2016; Luo, Lan, & Tang, 2012).
The results of the lag analyses, however, indicate that stakeholder
engagement is positively related to CSP in the longer term. These
results suggest that, in the longer run, external pressures from power-
ful stakeholders may urge companies' management to improve their
CSP. In addition, together with the positive effect of CSP on SRQ,
the results also suggest that stakeholder engagement may have a
potential indirect effect on SRQ via CSP. Furthermore, and in contrast
to the negative association between nonlagged CSP and SRC, the
results also show that the lag effects of CSP on SRC are not signifi-
cant. In addition, the positive lag effects of stakeholder engagement
on CSP in Table 7 combined with the negative associations between
CSP and SRC in Table 6 and Panel A of Table 7 indicate that stake-
holder engagement is indirectly negatively related to SRC, suggesting
that over time, stakeholder engagement may reduce usage of SRC as
a management tool to reduce legitimacy risks. Overall, the findings
suggest that in the longer term, high levels of stakeholder engagement
362 MANNING ET AL.

TABLE 7 Regression results for structural equation model with lag effects

Panel A. Regression models with 1‐year lag effects of the independent variables
Model 1 Model 2
CSPt SRQta CSPt SRCtb

CSPt −2.941 (−0.71) −0.263 (−1.28)*

Board monitoringt−1 −0.019 (−0.31) 1.121 (0.44) −0.045 (−0.73) 0.168 (1.30)*
Stakeholder engagementt−1 0.057 (1.87)** 7.979 (5.58)*** 0.055 (1.74)** 0.073 (1.14)
Assurancet−1 5.290 (2.79)*** 0.776 (2.94)***
Media coveraget−1 −0.330 (−2.34)** 1.318 (0.22) −0.155 (−1.25) 0.357 (1.34)
Analystst−1 2.706 (0.55) 1.237 (4.97)***
ROEt 0.042 (0.48) −3.236 (−0.93) 0.023 (0.26) −0.233 (−1.34)
Leveraget 0.480 (1.48) 10.292 (0.79) 0.360 (1.10) −1.800 (−2.80)***
Industryc Y Y Y Y
Yearc Y Y Y Y
N 100 100 100 100
Panel B. Regression models with 1‐year lag effects of CSP and 2‐year lag effects of board monitoring and stakeholder engagement
Model 1 Model 2
CSPt−1 SRQta CSPt−1 SRCtb

CSPt−1 4.471 (0.68) −0.000 (−0.00)

Board monitoringt−2 0.041 (0.58) −2.389 (−0.69) 0.018 (0.25) 0.235 (1.45)*
Stakeholder engagementt−2 0.087 (2.62)*** 7.712 (4.28)*** 0.082 (2.32)** 0.046 (0.60)
Assurancet−1 5.829 (2.54)** 0.862 (2.57)**
Media coveraget−1 −0.571 (−3.56)*** −5.248 (−0.62) −0.352 (−2.44)** 0.269 (0.83)
Analystst−1 16.753 (2.46)** 1.366 (4.27)***
ROEt 0.028 (0.37) −7.555 (−2.12)** −0.011 (−0.14) −0.201 (−1.23)
Leveraget 0.723 (2.07)** 28.247 (1.70)* 0.468 (1.30) −2.049 (−2.77)***
Industryc Y Y Y Y
Yearc Y Y Y Y
N 56 56 56 56

Note. CSP: corporate sustainability performance; PCA: principal component analysis; ROE: return on equity; SRC: sustainability reporting compliance; SRQ:
sustainability reporting quality. t values in parentheses. H1–H4 are directional hypotheses and for this reason tested one tailed. See Table 3 for the defi-
nitions of the remaining variables not explained below.
***Statistical significance at the 1% level.
**Statistical significance at 5% level.
*Statistical significance at 10% level.
a
SRQ is a measure of sustainability reporting quality, equal to the Transparency Benchmark's total quality score of a company's sustainability report,
adjusted for the scores on Stakeholder engagement and Assurance.
b
SRC is a comprehensive measure of sustainability reporting compliance constructed via PCA and based on companies' sustainability reporting in compli-
ance with the generally accepted reporting standards that are included in the Sustainability Disclosure Database (see Table 2 for an overview).
c
Results on industry dummies and year effects are not reported for parsimony.

may influence the choices of companies' management related to both
sustainability reporting and CSP.
Finally, the results of the lagged and the nonlagged analyses show
positive and significant relations between board monitoring effective-
ness and SRC. In addition, in the short term, board monitoring effec-
tiveness is also positively related with SRQ. These findings indicate
that board monitoring effectiveness affects companies' choices
concerning voluntary corporate sustainability reporting in general
and the choices to comply with reporting standards in particular. How-
ever, the results of the lagged and the nonlagged analyses do not
show significant relations between board monitoring effectiveness
and CSP, indicating that board monitoring effectiveness does not
affect the underlying CSP, neither in the short nor in the long run.
Consistent with prior literature (e.g., Rao & Tilt, 2016), one potential
explanation is that the board characteristics investigated in this study
are associated with and affect companies' choices related to corporate
sustainability reporting, but do not drive CSP.
5.2 | Limitations
The findings of this study must to be considered in the light of some
limitations. First, companies' sustainability reporting practices are pri-
marily of a voluntary nature. For this reason, sustainability information
is available only to the extent that companies voluntarily report this
information, which raises the issue of a potential selection bias.
Another limitation, which is related to data availability, is that the sam-
ple firms included in this study were companies from one country that,
during the years 2012–2016, were included in both the GRI's
MANNING ET AL.
Sustainability Disclosure Database and the Transparency Benchmark,
and voluntarily disclosed corporate sustainability reports in compli-
ance with generally accepted global SRC and guidelines. Inclusion in
these databases and meeting reporting standards positively affects
data comparability, reliability, and verifiability. However, the sample
selection criteria also reduced the sample size. In addition, this longitu-
dinal study on data from Dutch firms is a study in one context with
one specific culture and institutional setting, which may limit the gen-
eralizability of our findings. Once further large‐scale data on SRQ is
available, future research could include a broader and international
firm sample and use a longer time frame to increase insights into the
external validity of our findings. Finally, this study investigated the
effects of CSP on SRQ and SRC. However, improved reporting pro-
cesses and resulting disclosure of higher quality sustainability informa-
tion may also drive sustainable value creation and affect CSP (Lozano,
2015; Lozano & Huisingh, 2011). In addition, disclosure of more reli-
able and accurate sustainability information may also affect media
attention, stakeholder engagement, and analyst coverage. Future
research should further address this potential interrelatedness.
6 | C O N CL U S I O N
In the absence of extensive mandatory regulation of sustainability
reporting, this study explored the influence of board monitoring effec-
tiveness and stakeholder engagement on CSP, SRQ, and SRC for a
sample of Dutch companies that, during the period of 2012–2016,
voluntarily disclosed corporate sustainability reports. We made a dis-
tinction between direct and indirect effects of these CG mechanisms
on CSP, SRQ, and SRC and between nonlagged and lag effects. The
results show that board monitoring effectiveness and stakeholder
engagement play a significant incremental role in explaining the varia-
tion in SRQ and SRC in the short term. However, the results do not
show that the CG mechanisms affect CSP in this short‐term perspec-
tive whereas CSP is positively related to SRQ. The latter result pro-
vides further support for signaling theory, which suggests that
superior sustainability performers can gain competitive advantages
by providing information on their superior performance to investors
and other stakeholders. However, the negative association between
CSP and SRC can rather be explained by legitimacy theory, which sug-
gests that companies that are under high public pressure and legiti-
macy threats, in the short term, adjust their reporting behavior by
more compliance with SRC, rather than by directly improving the
underlying sustainability performance.
Although the results of the lag analyses also do not show incre-
mental effects of board monitoring effectiveness on CSP in the lon-
ger term, they indicate that, over time, stakeholder engagement is
positively related to CSP. In line with stakeholder theory, the latter
finding suggests that pressures from engaged stakeholders may
improve CSP in a long‐term perspective. The findings also indicate
that active stakeholders, over time, may help to reduce information
asymmetry between the company and its stakeholders and reduce
the use of corporate SRC as a risk management tool to legitimize
poor CSP, thus making it more difficult for managers to manage
and mask bad CSP.
363
Our findings have several implications for corporate sustainability
practices and research related to CSP, SRQ, and SRC. First, our find-
ings have implications for policy making. Although companies are
increasingly held accountable for the impacts of their decisions and
activities on the environment and society, our findings imply that, in
an unregulated setting, CSP information presented in sustainability
reports that even comply with generally accepted SRC and guidelines
may still not be indicative of companies' true CSP. To reduce man-
agers' opportunistic compliance with voluntary SRC and to make com-
panies more accountable for their (true) CSP, these findings signal a
need to complement corporate sustainability reporting with manda-
tory requirements, comparable with mandatory financial reporting sys-
tems. To ensure that CSP information is fairly presented and free of
material misstatements, these regulatory requirements for sustainabil-
ity reporting may have to be more concrete, that is, with no room for
interpretation so that companies can decouple revealed CSP from
their actual CSP, and the assurance requirements and legal enforce-
ment on sustainability reports may have to be stricter. Second, compa-
nies and their capital providers should consider the beneficial effect of
having engaged stakeholders, who, over time, may drive companies
toward more sustainable business conduct. Third, our results that
show significant incremental effects of board monitoring effectiveness
on SRQ and SRC, but not on CSP, have implications for future
research. They call for further in‐depth analyses on whether and
how specific board characteristics influence sustainable business con-
duct. Overall, more research is needed on both the drivers and conse-
quences of improvements of CSP and higher SRQ and SRC to advance
our understanding of conditions that facilitate or inhibit the develop-
ment of sustainable business practices and the creation of sustainable
value.
ORCID
Daniel Reimsbach http://orcid.org/0000-0002-6789-4833
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