ADIAC-00245; No of Pages 6

Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

Contents lists available at ScienceDirect

Advances in Accounting, incorporating Advances in

International Accounting

Tone at the top: CEO environmental rhetoric and

environmental performance
Yu Cong a,1, Martin Freedman b,⁎, Jin Dong Park b,2
a
Department of Accounting and Finance, Graves School of Business and Management, Morgan State University, 1700 East Cold Spring Lane, Baltimore, MD 21251, United States
b
Department of Accounting, College of Business and Economics, Towson University, 8000 York Rd., Towson, MD 21252, United States

a r t i c l e i n f o a b s t r a c t

Available online xxxx In this study we attempted to ascertain the environmental leadership and commitment of the CEO as evidence of
“tone at the top” in the belief that this would lead to enhanced environmental performance. We measure “tone at
Keywords: the top” by the environmental disclosure score which is collected from a content analysis of CEO letters to share-
Environmental disclosure holders. We adopt the two environmental performance measures: (1) Environmental Impact Score (EIS) from
Environmental performance Newsweek Green Ranking and (2) Modeled Hazard Population Results (MHPR) based on Risk-Screening Environ-
CEO environmental rhetoric
mental Indicator (RSEI) models built by EPA. The results indicate that the environmental disclosure score from
Corporate social responsibility
the CEO letter is inversely correlated with environmental performance. The overall findings support legitimacy
theory in that CEOs essentially “spin” firms' environmental performance so it looks better than it actually is.
© 2014 Elsevier Ltd. All rights reserved.

The impact of climate change, air pollution, water pollution, toxins in
the land, water and air and nuclear meltdowns have all affected millions
of lives throughout the world. Corporations and their executives have
contributed to both environmental degradation and in trying to reduce
its impact. In a sense corporations in environmentally sensitive indus-
tries can either be leaders or laggards in dealing with environmental
issues.
The CEO of a corporation can set a tone for her/his organization by de-
manding that the organization be a leader in supporting the environment.
This tone can permeate the corporate environment and result in an orga-
nization which considers environmental factors to be key components in
decision-making. Consequently, this can lead to superior environmental
performance within the industry.
In this study the relationship between CEO environmental leadership
as evidenced by CEO rhetoric on the environment and environmental
performance is examined. CEO environmental leadership is determined
through an examination of the CEO letter to shareholders. Environmental
performance is assessed using the Environmental Impact Score (EIS)
from Newsweek's green ranking and the Modeled Hazard Population
Results (MHPR) based on Risk-Screening Environmental Indicators
(RSEI) models.
The results indicate that the environmental emphasis in the CEO
letter is inversely correlated with environmental performance. Thus,
what was believed to be tone and the top seems to lend itself to a green-
washing perspective. Furthermore, the results support legitimacy theory
⁎ Corresponding author. Tel.: +1 410 704 4143; fax: +1 410 704 3641.
E-mail addresses: Yu.cong@morgan.edu (Y. Cong), mfreedman@towson.edu
(M. Freedman).
1
Tel.: +1 443 885 1692; fax: +1 443 885 8251.
2
Tel.: +1 410 704 3704; fax: +1 410 704 3641
and the results of the study on environmental reputation reported by
Cho, Guidry, Hageman, and Patten (2012) and Freedman and Stagliano
(2010).
The remainder of this study is structured as follows. In the next
section the background leading to the hypothesis tested is provided. The
methodology including the sample, years studied, content analysis and
research model is presented. Results, analysis and conclusions are in the
last section.
1. Background
CEO leadership can provide a direction for an organization. The
management literature is replete with studies on the use of strategic
management by CEOs (see, for example, Waldman, Siegel, and Javidan
(2006) and House and Aditya (1997)). In terms of the environment,
they may engage in environmental leadership because of moral and
ethical reasons which is consistent with the view of what constitutes
an effective leader (Jones, 1995). From a strategic perspective they
may support environmental initiatives because they believe that it is a
more profitable approach. Furthermore they may believe that a positive
environmental reputation can enhance their status and that of their firm.
Leadership in this area can take many forms. Sharma and
Vrendenburg (1998) describe a number of strategies that managers
and firms can utilize to enhance their environmental leadership and per-
formance. They may include creating a culture of environmental aware-
ness and innovativeness, pursuing community engagements concerning
the environment, preempting regulations and being a first mover in the
industry in terms of the environment (Sharma & Vrendenburg, 1998). A
CEO who provides this type of leadership and creates a culture where

http://dx.doi.org/10.1016/j.adiac.2014.09.007
0882-6110/© 2014 Elsevier Ltd. All rights reserved.

Please cite this article as: Cong, Y., et al., Tone at the top: CEO environmental rhetoric and environmental performance, Advances in Accounting,
incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.007
2 Y. Cong et al. / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx
the environment is a key variable to decision-making can be said to be
demonstrating “tone at the top” in terms of the environment.
A CEO who is providing environmental leadership should be able to
create a firm whose environmental performance is better than the aver-
age firm in a given industry. In this study we will examine firms from
environmentally sensitive industries to determine if their environmen-
tal performance is related to CEO environmental leadership. A positive
relationship between these variables would support this notion.
If there is a significant positive relationship between what the CEO
says and what the company does in terms of the environment then
this would help to support that “tone at the top” can make a difference
in environmental performance. As the environmental management
literature indicates a good leader is a moral leader (Jones, 1995) and
by using strategic environmental leadership (Sharma & Vrendenburg,
1998) environmental performance can be enhanced.
In contrast with the above perspective, there is another view that a
leader who seems to be embracing an environmental perspective, but
is really engaged in public relations. Instead of creating a real environ-
mental culture the CEO is creating a façade so that it appears that the
firm is a good environmental actor when in fact it is just an actor.
They may pursue this policy to improve or create an image to look
favorable to the stakeholders. The major problem with this approach
is that it is really a short term strategy. Just like what happened with
BP, at some point the firm's true nature will materialize and the firm
and its stakeholders will suffer the consequences. However, if the CEO
leaves before anything bad is discovered the CEO will reap some unde-
served rewards.
If there is a significant negative relationship this would support legit-
imacy theory in that the CEO is “talking the talk,” but not “walking the
walk.” Legitimacy theory has been utilized by a number of environmental
accounting researchers (see, for example, Cho and Patten, 2007; Deegan,
2002; Patten, 2002) to explain the inverse relationship between environ-
mental disclosure and environmental performance. Firms, in a sense, are
trying to enhance their environmental reputation by spin. They empha-
size the positive and limit the negative. Since the CEO letter is a volun-
tary reporting document trying to make the company and its CEO look
good this should not be surprising. However, as was stated earlier, the
truth of this lack of congruence between the contents of the letter and
environmental performance will sometime become evident. If justice
is served, both the CEO and the company will reap their appropriate
reward.
From the two opposite perspectives discussed above, it is an
empirical question whether there is a positive or negative relationship
between what the CEO says and what the company does in terms of
the environment.
1.1. CEO environmental leadership/reputation
Attempting to ascertain whether CEOs are environmental leaders or
whether they have earned good environmental reputations is a difficult
task. Sharma and Vrendenburg (1998) utilized a case study approach
with unstructured interviews to ascertain top management views
about environmental matters. Only seven companies were analyzed so
this approach is not effective where larger samples are being utilized.
Waldman et al. (2006) surveyed top managers (but not necessarily
the CEO) and received responses from 112 US and Canadian firms.
What the researchers were attempting to discover was the relationship
between transformational leadership and corporate social performance.
Environmental performance is one component of corporate social
performance.
In the environmental accounting literature, Cho et al. (2012) ex-
amined the perception of the firm's environmental reputation with
environmental performance and disclosure. To ascertain the environmen-
tal reputation they utilized membership in the Dow Jones Sustainability
Index (DJSI) and Newsweek's reputation scores. The authors found that
there was a significant negative association between environmental
Please cite this article as: Cong, Y., et al., Tone at the top: CEO environmental rhetoric and environmental performance, Advances in Accounting,
incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.007
reputation and environmental performance thus supporting legitimacy
theory.
The 2010 study by Freedman and Stagliano examined firms with
good reputations for sustainability and matched them with firms that
were not included on any of the lists the researchers utilized for as-
certaining sustainable reputations. The researchers combined three
sources for sustainable reputations: DJSI, the Global 100 list and the
Globescan survey of environmental experts. There was no difference
in the environmental performance between the ones with a sustainable
reputation and those without one.
None of the prior approaches specifically focuses on the role of the
CEO in terms of the environment. Although Sharma and Vrendenburg
(1998) focused on top management they did not concern themselves
with the role of just the CEO. Waldman et al. (2006) were examining
top management in terms of social responsibility and not focusing on
the environment. Neither Cho et al. (2012) nor Freedman and Stagliano
(2010) were concerned with the CEOs leadership, but rather with the
reputation of the firm as a whole.
The CEO letter which is an integral part of the annual report to share-
holders (ARS) reflects what the CEO considers are the important issues
confronting the firm. In the Global Reporting Initiative (GRI) it is a place
that the CEO is expected to provide information about the firm's
environmental policy (GRI, 2012). However, the ARS does not need to
conform or include what is required by the GRI. In a sense what is in-
cluded in the letter is voluntary. If the CEO has a focus on environmental
policy and performance in the letter then that is providing a measure of
her/his environmental leadership. For that reason we will utilize the
CEO letter as a basis for determining environmental leadership and/or
environmental commitment by the CEO. The letter in a sense represents
our view of “tone at the top.”
Based on the above discussions, the null hypothesis to be tested in
this study is as follows:
H1. There is no relationship between the environmental disclosures in
the CEO letter to shareholders and environmental performance.
2. Methodology
2.1. Sample
Large firms tend to produce more emissions than small firms. In this
study we focus on large US firms in the industrial sectors that have sig-
nificant environmental impacts. Measuring environmental impacts is a
demanding task. Researchers have used various metrics from several
perspectives to measure them. Recently, composite scores that account
for greenhouse emission, toxic releases and a wide range of pollution
releases to air, water and land are utilized in academia and media.
Arguably the most recent attempt of this type is the Newsweek Green
Ranking, particularly its Environmental Impact Score (EIS). Although
the accuracy and comprehensiveness of this score have not been
established, earlier evidence (e.g., Cong & Freedman, 2011, 2013) in-
dicates that the score captures some critical aspects of firms' envi-
ronmental impacts. Hence we use the EIS score of Newsweek Green
Ranking US 500 in Year 2009 (GR2009 hereafter) as a main proxy for
firm's environmental performance.
GR2009 assigns environmental impact scores to the largest 500 US
firms. More than two thirds of the firms in GR2009 are not in heavily
polluting industrial sectors. We selected only the firms in four heavily
polluting industries: Oil & Gas, chemical, paper, and utilities industries.
The industries include SIC codes 1311, 2911, 2611, 2621, 2800, 4911,
4924, 4931, and 4991. We also require that all firms in our sample
be public companies because the ARS filed with the SEC is one of the
main data sources for this study.
Basically, the EIS score in GR2009 relies on data sources from the US
EPA. Typically there is a two years' time lag between the pollution
 Y. Cong et al. / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx
reporting period and the period when the data is accessible to the public
(Freedman & Stagliano, 2008). Consequently, the EIS score in GR2009 is
prepared on the basis of the pollution data for years 2007 and 2008. On
the other hand, firms issue annual reports subsequent to the end of the
fiscal year. Hence a firm's 2008 annual report is based on the data that is
used in GR2009. This is a small chance that EPA makes the pollution data
available one year after the reporting period and therefore the firm's
2009 annual report can be based on the data that is used in GR2009.
We thus collect the 2008 and 2009 annual reports from SEC's EDGAR
system to match GR2009.
Having all the requirements met, our sample includes 83 and 75
firms for the years 2008 and 2009 respectively.
2.2. Newsweek Green Ranking
The primary metric we employ to measure firm's environmental
performance is Environmental Impact Score (EIS) from Newsweek
Green Ranking. As indicated in the preceding section, EIS is more com-
prehensive than most other measures that have been used in existent
literature and provides reasonable accuracy.
GR2009 provides two additional scores that measure other dimen-
sions of how green a firm is: Green Policy Score (GPS) and Reputation
Survey Score (RSS). Thus, we attempt to control for these two environ-
mental dimensions.
According to Newsweek, the Green Policy Score (GPS) consists of
more than 70 individual indicators divided into 5 major areas: climate
change policies and performance, pollution policies and performance,
product impact, environmental stewardship and management of envi-
ronmental issues. Many of the indicators concern regulatory compli-
ance, lawsuits and controversies. These indicators are likely related to
financial performance and overall risks of a firm and can be relevant
to what CEOs say in annual reports.
The Reputation Survey Score (RSS) is based on a survey which is
completed by users of CorporateRegister.com. On average it is an edu-
cated opinion which may be mostly driven by public relations. Although
we think there is no sufficient justification for including it in the overall
GR2009 score especially since the index already includes actual perfor-
mance measures, the measure partially captures a firm's environmental
reputation as perceived by public. Since we measure whether CEOs
mention environmental reputation in annual reports, RSS can be used
as a “mirror” image to test whether there is a relationship between
the two.
2.3. Modeled Hazard Population Results (MHPR)
As another metric to assess environmental performance, we employ
the Modeled Hazard Population Results (MHPR) as used in Cong and
Freedman (2011). This metric is basically an extension of Hazard-
Based Results (HBR) which is one of the environmental performance
measures based on the Risk-Screening Environmental Indicators (RSEI)
models built by EPA. HBR incorporates the total pound of chemicals
released by a plant and the toxicity of a chemical release by “multiplying
the pounds released by the appropriate chemical-specific toxicity”
(U.S. EPA, 2009). However, it still overlooks the population that is
exposed to the release. Thus, MHPR multiplies of HBR by the population
that is exposed to the release.
2.4. Content analysis of CEO letter to shareholders
We examined the CEO letter to shareholders to evaluate CEO envi-
ronmental leadership. The CEO letter is a standardized part of the annu-
al report (Bettman & Weitz, 1983). In this letter, a CEO often oversees
the company's past activities and performance during the year and
also provides guidance on short and long-term corporate strategies. In
addition, a CEO expresses her/his own tone as a top manager in terms
of corporate strategies. Thus, the CEO letter to shareholders can be a
Please cite this article as: Cong, Y., et al., Tone at the top: CEO environmental rhetoric and environmental performance, Advances in Accounting,
incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.007
3
useful research tool to capture the CEO's leadership. Furthermore, the
CEO's letter is generally unaudited so the CEO potentially tends to
engage in impression management in a discretionary and voluntary
manner through statements made in this letter (Clatworthy & Jones,
2006).
Electronic versions of annual reports for all sample firms were
downloaded from the SEC's Edgar System. Almost all CEO letters are
placed at the beginning of annual reports. Clarkson, Li, Richardson,
and Vasvari (2008) also used the CEO letter as one source of environ-
mental disclosure, but they examined only whether the CEO's letter
includes statement(s) of environmental performance using an indicator
variable (0 or 1). Thus, they did not fully capture the relative extent
of the CEO's environmental leadership expressed in the CEO letter. In
this study, we conduct a content analysis of CEO letter in order to
measure the relative extent of CEO environmental leadership (Table 1).
We identified the disclosure items for content analysis of the CEO's
letter, as follows. First, we randomly obtained 100 sample CEO letters
and selected 10 sample letters which are detailed and comprehensive
in terms of environmental issues. Based on what was included in these
letters we determined the disclosure items. In the middle of conducting
the content analysis with the full sample of CEO letters we revised these
disclosure items in order to ensure that the final disclosure items would
include all environmental disclosures in the CEO letters of our full
sample. The final disclosure items for the content analysis are as follows.
1. Mention environmental issues (MEI)
2. Statement of specific environmental issues (SSEI)
3. Discussion of risks (uncertainties) or challenges due to environ-
mental issues (DRC)
Table 1
Variable descriptions.
Variable Description
MEI 1 if CEO's letter mentions environmental issues, 0 otherwise.
SSEI 1 if CEO's letter states specific environmental issues, 0 otherwise.
DRC 1 if CEO's letter discusses risks (uncertainties) or challenges due to
environmental issues, 0 otherwise.
PESPV 1 if CEO's letter presents environmental strategic plan or vision,
0 otherwise.
SER 1 if CEO's letter states environmental responsibility, 0 otherwise.
SERP 1 if CEO's letter states environmental reputation, 0 otherwise.
SPPEP 1 if CEO's letter states past or present environmental performance,
0 otherwise.
SPPEE 1 if CEO's letter states past or present environmental expenditures,
0 otherwise.
SPPRDNT 1 if CEO's letter states past or present research and development of
new technology, 0 otherwise.
SFPEP 1 if CEO's letter states future plans related to environmental
performance, 0 otherwise.
SFEE 1 if CEO's letter states future environmental expenditures, 0 otherwise.
SFRDNT 1 if CEO's letter states future research and development of
new technology, 0 otherwise.
TOTAL Sum of all above 12 variables: the range is from 0 to 12.
ISSUE Sum of the variables of MEI, DRC and SSEI: this disclosure element
denotes environmental issues and challenges: the range is from 0 to 3.
ATT Sum of the variables of PESPV, SER and SERP: this disclosure element
denotes overall attitude and position to tackle the environmental
issues and challenges: the range is from 0 to 3.
PAST Sum of the variables of SPPEP, SPPEE and SPPRDNT: this disclosure
element denotes past environmental achievement: the range is
from 0 to 3.
FUTURE Sum of the variables of SFPEP, SFEE and SFRDNT: this disclosure
element denotes future environmental achievement: the range is
from 0 to 3.
EIS Environmental impact score from Newsweek Green Ranking US 500.
GPS Green policy score from Newsweek Green Ranking US 500.
RSS Reputation survey score from Newsweek Green Ranking US 500.
MHPR Total pounds of chemicals * Toxicity of a chemical release * Population
that is exposed to the release
SIZE Natural log of total assets.
UTIL 1 for a firm is in Utilities industry, 0 otherwise
4 Y. Cong et al. / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

4.
Presentation of environmental strategic plan or vision (PESPV) 2.5. Research model
5.
Statement of environmental responsibility (SER)
6.
Statement of environmental reputation (SERP) We hypothesize that the disclosure index scores from CEO letters are
7.
Statement of past or present environmental performance (SPPEP) related to environmental performance. First, the total disclosure score
8.
Statement of past or present environmental expenditures (SPPEE) (TOTAL) and the four disclosure elements (ISSUE, ATT, PAST and
9.
Statement of past or present research and development of new FUTURE) are expected to be related to the Newsweek environmental
technology (SPPRDNT) impact score (EIS) after controlling for the green policy score (GPS)
10. Statement of future plans related to environmental performance and the reputation survey score (RSS). Also, the disclosure variables
(SFPEP) are expected to be related to Modeled Hazard Population Results
11. Statement of future environmental expenditures (SFEE) (MHPR) which is another proxy of environmental performance, after
12. Statement of future research and development of new technology controlling for firm size (SIZE). Also, we include the industry dummy
(SFRDNT) variable (UTIL)7 to control for the industry effect. The above expecta-
tions are specified in the following OLS regression models.
An equal weighting scheme is utilized where each item of disclosure
receives one point. Thus, the maximum total score for each firm (TOTAL) Disclosure ElementsðTOTAL; ISSUE; ATT; PAST or FUTUREÞ
is 12. The high (low) total score can be interpreted that the CEO presents ¼ Alpha þ Beta1  EIS þ Beta2  GPS
or discusses environmental issues in her/his letter to shareholders at a þBeta3  RSS þ Beta4  UTIL þ Error
relatively strong (weak) tone. The above disclosure items encompass
the following four elements: 1) environmental issues and challenges
(ISSUE: items 1 to 3); 2) overall attitude and position to tackle the envi- Disclosure ElementsðTOTAL; ISSUE; ATT; PAST or FUTUREÞ
ronmental issues and challenges (ATT: items 4 to 6); 3) past environ- ¼ Alpha þ Beta1  MHPR þ Beta2  SIZE
mental achievement (PAST: item 7 to 9) and 4) future environmental þBeta4  UTIL þ Error
plans (FUTURE: items 10 to 12). Each element takes the sum of the
items under its umbrella so the maximum score of each element is 3.
In detail, item 1 indicates whether the CEO mentions environmental
3. Results and analysis
issues even though it does not state the specific environmental issue
(for example, air/water/land pollution or climate change).3 Some other
Table 2 presents the descriptive statistics of the variables including
firms in the sample indicated the specific environmental issues in the
the total disclosure scores (TOTAL), the four disclosure elements (ISSUE,
CEO letter. Thus, we attempt to assign a higher score for more extensive
ATT, PAST and FUTURE) and the Newsweek environmental measures
disclosure by adding item 2 to item 1. The logic for the inclusion of items
(EIS, GPS and RSS). Overall the difference of the statistics between the
4 and 10 would be similar to those for items 1 and 2. Item 4 indicates
two years of 2008 and 2009 is negligible. In an untabulated analysis, we
whether the CEO presents the environmental strategic plan or vision
found no statistically significant difference of the two years except the
without stating the specific future plan to improve environmental
variable FUTURE. The average TOTAL in 2008 and 2009 is around four
performance.4
(4), suggesting CEOs present or discuss four environmental items on
Also item 10 indicates the general idea or current condition or
average out of the total twelve items included in our content analysis.
currently existing (rather than future) technology to improve future
The mean value of the variable ISSUE, around 1.5 for both years is higher
environmental performance with no indication of specific future envi-
than those of the other three disclosure elements such as ATT, PAST and
ronmental expenditure or future R&D for new technology.5 We attempt
FUTURE, indicating that CEOs often just mention environmental issues
to differentiate this case from future environmental expenditure or R&D
or related challenges in their letters to shareholders without presenting
for new technology, by adding item 10 in addition to items 11 and 12.
their positions to them or detailing past performance and future plans.
Some firms specifically indicate future environmental expenditure or
Table 3 presents the Pearson's (upper half) and Spearman's (lower
indicate their plan for R&D. Items 11 and 12 appear to be similar but
half) correlations between the variables. The results of the two years
we attempt to differentiate the R&D for new technology from the envi-
are consistent. The four elements of our content analysis scores are
ronmental expenditure such as purchasing of environmentally friendly
highly and positively correlated as measured in both correlations
facilities.6 In sum, we attempt to grant a higher score for more extensive
(p-value b.001). The significance indicates that if the CEOs mention
disclosure by including more detail items in the content analysis.
environmental issues, they are also likely to address their firms' envi-
ronmental strategy, reputation and responsibility.
It is interesting to see that the total disclosure score (TOTAL) of all the
3
For instance, in the CEO letter in 2009 annual report by Mosaic company, we find this four disclosure elements (ISSUE, ATT, PAST, FUTURE) are highly signifi-
sentence. “Mosaic is committed to making responsible choices about stewardship of the cantly negatively correlated with Newsweek environmental impact score
environment ……” However, the CEO does not state the specific environmental issue or (EIS). Intuitively the result indicates that a CEO of a poorer environmental
problem the company is facing now or it will be expected to face in the future.
4
For instance, in the CEO letter in 2009 annual report by Lubrizol corp., we find this
performing firm is more likely to use stronger tones to discuss environ-
sentence. “Lubrizol continues to place a high level of importance on health, safety, security mental issues and the responses to these issues. Also, the reputation
and environmental impact.” It includes the environmental strategic plan, but the CEO does score (RSS) is positively correlated with PAST and FUTURE, indicating
not show its specific future plans on how to implement this strategic plan.
5
that the CEO of a firm with a better reputation is more likely to discuss
In the CEO letter in 2009 annual report by Joy Global, we find this sentence. “Coal must
what has and will be done. Another interesting point is that the correla-
be viewed as a critical, indispensable global fuel resource and the deployment of carbon
capture and storage must be supported as an enabling technology for the achievement tion between EIS and RSS is negative and marginally significant indicating
of climate change objectives.” Even though it indicates that ‘coal’ will be a fuel resource that the corporate reputation determined by Newsweek's reputation
to improve future environmental performance, it is not considered future environmental index is inversely correlated with environmental performance.
expenditure or R&D for new technology.
6
The example for future environmental expenditure is in the CEO letter in 2009 annual
report by Dominion. “By 2015, Dominion expects to have spent $3.7 billion on environ-
7
mental improvements at its merchant and utility generating fleet.” But, the CEO does The industry dummy, UTIL, has 1 for Utilities sector and 0 for otherwise. We also
not specifically describe the future R&D for new technology. The example for future R&D added one more industry dummy variable, OILGAS, which has 1 for Oil & Gas sector and
for new technology is in the CEO letter in 2009 annual report by Exxon Mobil. “In 2009, 0 for otherwise, so that two industry dummy variables were included in the model. But,
we launched a multimillion dollar research initiative with Synthetic Genomics Inc. to the results are qualitatively unchanged compared to that with one industry dummy,
explore the development and commercialization of algae-based biofuels.” UTIL, in the model.

Please cite this article as: Cong, Y., et al., Tone at the top: CEO environmental rhetoric and environmental performance, Advances in Accounting,
incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.007
 Y. Cong et al. / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx 5

Table 2 of EIS suggest that CEOs of poor environmental performers tend to talk
Descriptive statistics. more about the environmental issues or their responses in their letter
Year Variable N Mean Std. dev. Minimum Median Maximum to shareholders, supporting legitimacy theory. The multivariate results
2008 TOTAL 83 4.12 3.43 0 4 12
after controlling for other factors are consistent with the univariate
ISSUE 83 1.65 1.15 0 2 3 results from the correlation analyses in Table 3. The findings are similar
ATT 83 0.77 0.93 0 1 3 between in 2008 and 2009 year, but the findings from the year 2008 are
PAST 83 0.95 1.05 0 1 3 stronger than those from the year 2009. The estimated coefficients of
FUTURE 83 0.75 1.01 0 0 3
the industry dummy variable, UTIL, are very significant at 1% level for
EIS 83 28.36 22.54 0.6 24.1 93.1
GPS 83 38.68 14.78 9.95 37.1 72.35 all models, indicating that CEOs in Utilities firms tend to discuss more
RSS 83 35.13 10.06 8.86 33.27 67.57 about environmental issues or their responses than CEOs in other
2009 TOTAL 75 3.92 3.29 0 4 11 industries.
ISSUE 75 1.56 1.17 0 2 3 The OLS regression results with the MHPR environmental perfor-
ATT 75 0.91 0.96 0 1 3
PAST 75 0.87 1 0 1 3
mance measure are presented in Table 5. As noted earlier, the MHPR
FUTURE 75 0.59 0.95 0 0 3 measure is the interaction term of three factors: chemical release (in
EIS 75 30.2 21.76 0.8 26.4 86.2 pounds), toxicity of each chemical and the exposed population. So, the
GPS 75 38.33 15.02 9.95 38.16 72.35 high (low) MHPR denotes the poor (good) environmental performance.
RSS 75 35.27 11.61 8.86 33.27 94.3
Although the significance of estimated coefficients of MHPR is relatively
low compared to those of EIS in Table 4, we find that there is a signifi-
cantly positive relation between MHPR and ISSUE (or FUTURE) in
The OLS regression results reinforce the findings from the univariate 2008 after controlling for firm size and the industry utility, reinforcing
analyses. Tables 4 and 5 show the results from the regression models the findings from the above analyses in Table 4 and supporting legitima-
with each of the disclosure scores as a dependent variable and each of cy theory. In particular, the significantly positive correlation between
the environmental performance measures as an independent variable. MHPR and FUTUE implies that CEOs in poor environmental performers
After controlling for the other two Newsweek scores, firm size and the are more likely to address future plans including future environmental
industry effect, we find that there is a significantly negative relation expenditures or R&D investments.
between tone at the top and environmental performance, consistent
with the legitimacy theory.
Specifically, in Table 4, the estimated coefficient of EIS is negative 4. Conclusions
and statistically significant at conventional levels in the model spec-
ification with TOTAL, ISSUE or ATT as a dependent variable. EIS is the In an American society where much of what we hear is a distortion
Newsweek Environmental Impact Score. So the high (low) EIS denotes the of what is actually occurring, the portion of the CEO letter to share-
good (poor) environmental performance. Thus the negative coefficients holders that is devoted to environmental matters falls under that rubric.

Table 3
Variable correlations.

Year VARIABLE TOTAL ISSUE ATT PAST FUTURE EIS GPS RSS

2008 TOTAL . 0.855 0.778 0.840 0.839 −0.447 0.042 0.178

*** *** *** *** ***
ISSUE 0.878 . 0.563 0.603 0.625 −0.437 0.064 0.087
*** *** *** *** ***
ATT 0.755 0.582 . 0.541 0.523 −0.321 0.011 0.185
*** *** *** *** **
PAST 0.820 0.606 0.525 . 0.634 −0.301 0.063 0.126
*** *** *** *** **
FUTURE 0.815 0.673 0.490 0.574 . −0.413 −0.005 0.205
*** *** *** *** ***
EIS −0.456 −0.465 −0.265 −0.351 −0.430 . −0.105 −0.261
*** *** * ** *** *
GPS 0.064 0.053 0.014 0.121 0.014 −0.161 . 0.360
***
RSS 0.211 0.129 0.199 0.151 0.221 −0.226 0.308 .
* * **
2009 TOTAL . 0.844 0.776 0.844 0.750 −0.456 0.125 0.128
*** *** *** *** ***
ISSUE 0.851 . 0.578 0.584 0.495 −0.515 0.064 0.052
*** *** *** *** ***
ATT 0.811 0.601 . 0.561 0.373 −0.299 0.040 0.093
*** *** *** *** **
PAST 0.827 0.596 0.569 . 0.581 −0.338 0.217 0.150
*** *** *** *** **
FUTURE 0.707 0.531 0.378 0.500 . −0.286 0.085 0.127
*** *** *** *** *
EIS −0.497 −0.543 −0.315 −0.377 −0.326 . −0.073 −0.129
*** *** ** *** **
GPS 0.123 0.049 0.056 0.221 0.102 −0.115 . 0.330
**
RSS 0.209 0.148 0.120 0.241 0.232 −0.226 0.354 .
* * **

The upper half shows the Pearson's and the lower half shows Spearman's correlations between the variables.
***, ** and * indicate the statistically significant level at p-value = .01, .05 and .10, respectively.

Please cite this article as: Cong, Y., et al., Tone at the top: CEO environmental rhetoric and environmental performance, Advances in Accounting,
incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.007
6 Y. Cong et al. / Advances in Accounting, incorporating Advances in International Accounting xxx (2014) xxx–xxx

Table 4 In this study we attempted to ascertain the environmental leadership

OLS regression with EIS as an independent variable. and commitment of the CEO as evidence of “tone at the top” in the belief
Dependent variable that this would lead to enhanced environmental performance. Instead
Year TOTAL ISSUE ATT PAST FUTURE
we discovered that there is an inverse relationship between the environ-
mental content of the CEO letter and environmental performance. Further-
2008 Intercept 3.373 1.805 0.654 0.640 0.275
more, we find that CEOs of poor environmental performing firms tend to
2.19 3.38 1.39 1.23 0.63
** *** utilize linguistic schemes for legitimation. Thus, rather than supporting a
EIS −0.034 −0.014 −0.009 −0.006 −0.006 “tone at the top” perspective our study confirms legitimacy theory. The
−2.02 −2.36 −1.73 −0.99 −1.20 CEO essentially “spins” the firm's past, present and future environmental
** ** * performance to look good in the eyes of the financial statement reader.
GPS −0.003 0.004 −0.004 0.002 −0.005
−0.14 0.44 −0.55 0.27 −0.78
This study can be extended to examine those firms that report using
RSS 0.028 −0.004 0.012 0.005 0.015 GRI to see if the contents of the CEO letter in the GRI reports provide a
0.81 −0.32 1.16 0.44 1.49 similar result. If the results of this study are any indication as to how
UTIL 3.057 0.864 0.303 0.754 1.136 voluntary reporting is utilized then the GRI results may prove to be eye
3.72 3.03 1.21 2.71 4.90
opening. However, firms that choose to use the GRI model may have a
*** *** *** ***
Pr N F b.0001 b.0001 0.023 0.005 b.0001 different level of environmental commitment from the population of
Adj. R2 0.289 0.240 0.090 0.129 0.348 Fortune 500 companies that are in environmentally sensitive industries.
R2 0.324 0.277 0.134 0.172 0.379 This study has a number of limitations. We used the CEO's letter as a
2009 Intercept 2.513 1.958 0.790 0.073 −0.308 basis to assess environmental leadership and commitment. Perhaps a
1.94 3.93 1.71 0.17 −0.87
* *** *
multi-faceted approach using a number of variables would be a more
EIS −0.027 −0.020 −0.007 −0.004 0.004 complete measure of “tone at the top.” There is a reliance on Newsweek's
−1.68 −3.29 −1.22 −0.72 0.95 Greening issue to assess environmental performance. The jury is still out
* *** in determining how good a measure of environmental performance is
GPS 0.021 0.003 0.001 0.013 0.004
Newsweek's approach.
0.97 0.41 0.07 1.82 0.68
* Although we are not surprised by the findings of this study we are
RSS 0.013 −0.003 0.005 0.004 0.006 disappointed. That what is reported by the CEO in terms of the environ-
0.46 −0.25 0.47 0.47 0.85 ment is in essence just propaganda is a sad commentary on corporate
UTIL 3.915 0.715 0.577 1.059 1.564 reporting. Furthermore, we see no easy solution to the problem. Rather
4.93 2.35 2.05 4.01 7.24
*** ** ** *** ***
financial statement readers need to act like a good auditor and be skep-
Pr N F b.0001 b.0001 0.027 b.0001 b.0001 tical of what they read in a firm's annual report.
Adj. R2 0.387 0.281 0.095 0.272 0.451
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respectively.

Please cite this article as: Cong, Y., et al., Tone at the top: CEO environmental rhetoric and environmental performance, Advances in Accounting,
incorporating Advances in International Accounting (2014), http://dx.doi.org/10.1016/j.adiac.2014.09.007