THE EVOLUTION OF BUSINESS SUSTAINABILITY:

HISTORICAL TRAJECTORY AND STRUCTURAL

RELATIONSHIPS

(Spine title: The Evolution of Business Sustainability)

(Thesis format: Integrated-Article)

by

Jijun Gao

Graduate Program in Business Administration

A thesis submitted in partial fulfillment

of the requirements for the degree of
Doctor of Philosophy

School of Graduate and Postdoctoral Studies

The University of Western Ontario
London, Ontario, Canada

©Jijun Gao 2008

•
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 THE UNIVERSITY OF WESTERN ONTARIO
SCHOOL OF GRADUATE AND POSTDOCTORAL STUDIES

CERTIFICATE OF EXAMINATION

Supervisor Examiners

Dr. Pratima Bansal Dr. Mary Crossan

Supervisory Committee Dr. Oana Branzei

Dr. Robert Klassen Dr. Rajulton Fernando

Dr. Amy Hillman

The thesis by

Jijun Gao
entitled:

The Evolution of Business Sustainability: Historical Trajectory and

Structural Relationships
is accepted in partial fulfillment of the
requirements for the degree of

Doctor of Philosophy

Date
Chair of the Thesis Examination Board

ii
 THE EVOLUTION OF BUSINESS SUSTAINABILITY: HISTORICAL

TRAJECTORY AND STRUCTURAL RELATIONSHIPS

ABSTRACT

Proponents of sustainable development advocate that economic development is

intimately tied to environmental integrity and social equity. Social, environmental and

financial aspects of society together form a mutually reinforcing system. Sustainability

also assumes a historical and future perspective, in the sense that it takes time to improve

sustainability and that sustained commitment over time is required. Extant knowledge of

business sustainability, however, is based on oversimplified, binary linkages between

variables. Further, few business researchers have examined sustainability over time.

In an effort to address these gaps, I develop three different but tightly connected

papers. Each paper challenges an assumption that sustainability scholars have held dear.

First, scholars in this field have assumed that an overall evaluation of a firm's

sustainability commitment can be formed by aggregating the firm's performance in

managing social issues and environmental issues. However, through interviews with

managers in sustainability, I find that corporate social performance and environmental

performance are distinct constructs, which makes it quite problematic to simply combine

the two.

Second, sustainability scholars have implicitly assumed that sustainability

management and evaluation is primarily about the levels of the three performance

measures (social, environmental and financial) at certain points in time. This approach

has ignored the change or growth of sustainability phenomena. In the second paper, I

iii
examine the growth trajectory of business sustainability, and find that the three pillars of

sustainability coalesce over time.

Third, by attempting to build a business case for corporate sustainability,

researchers have a long tradition of investigating "does sustainability pay". However,

such a causal relationship is not consistent with the sustainability paradigm, a paradigm

that is based on a systems world view and suggests simultaneous, time enduring

relationships among the three pillars of business sustainability. Therefore, I propose, and

find support for, that there is a simultaneous relationship among the three pillars that has

been ignored by conventional causal thinking.

The theory development of this thesis is based on institutional theory and the

resource-based view. I use qualitative data in the first study, and large scale longitudinal

firm-level data in all three studies to investigate the identified assumptions.

Keywords: business sustainability, corporate social performance, environmental

performance, financial performance, resources and capabilities, institutional theory,

simultaneous effects, trajectory, longitudinal, latent growth modeling

IV
ACKNOWLEDGMENTS
First of all, I would like to thank my supervisor, Dr. Pratima Bansal. This

dissertation could not have been written without her extensive support. I feel truly blessed

to have worked with her in the past four years, not only because she cultivates and

sharpens my thinking and she stands behind all of my accomplishments during my study

at Ivey School, but also because her genuine care and constructive advice have walked

me through the hard times when I felt weak and lost. Few advisors give their students

more trust and support than Tima has given me and for that I am exceptionally grateful.

The way she behaves, as a researcher, a teacher and a person, will continue to serve as

guidelines for my future career.

I am also grateful to the members of my thesis proposal committee, including Dr.

Paul Beamish, Dr. Robert Klassen, and Dr. Charlene Zietsma, for their incisive critiques

and insightful suggestions. When I look back, it becomes clear to me that the bar they

raised for me at that time definitely helped me later to improve my research design and

finally come this far. I wish to express my deepest gratitude to Dr. Jean-Philippe Bonardi

here. Although he did not serve in my committee, his comments and advice had been

instrumental as I was trying to break through the theory development. His generous

financial support joined Dr. Bansal's effort to allow me to continue my study in the fifth

year.

The faculty and staff at the Ivey School have been very supportive to the students.

I wish to particularly thank Dr. Glenn Rowe for spending so much time discussing

methods-related questions with me. The two kind ladies working in our program office,

Linda Dittmer-Pino and Mahillah Rafek, deserve a special note of praise, for they have

v
been dedicated to their job and served us very well. I must also thank the business

librarians and staff, and the information technology staff for their kindness and assistance.

I would also like to thank Dr. Mary Crossan, Dr. Oana Branzei, Dr. Rajulton

Fernando and Dr. Amy Hillman, who agreed to participate in the examining committee. I

have to specially mention Dr. Fernando for his course of longitudinal analysis helped me

to resolve many of the problems that I encountered during my data analysis.

I am proud to be a member of the Ivey PhD-students family, and I thank all my

fellow students for creating a friendly, supportive and inspiring atmosphere. Laura

Guerrero brought a lot of fun to the PhD wing, while Phoebe Tsai kept our kitchen always

clean. It was pleasure to share office with Bharat Sud, Kevin Boeh and Eric Dolansky in

my first year, with Chetan Josh and Jianyun Tang for the following three years, and with

Yang Yang in my last year. I am grateful to Vanessa Strike, Israr Qureshi, and Natalie

Slawinski, with whom I feel honored to have collaborated. The Chinese community in

our program deserves my sincerest thanks, particularly Hui Zhang, Guoren Zhang and

Yinglei Wang. Their friendship and help has meant more to me than I could ever express.

Finally, I wish to thank my family and friends. My father, Shaoqin Gao, has

always been supporting me to reach my goals, and I wish I could show him just how

much I love him. I would like to dedicate this work to my lost mother, Wenying Wang,

who left me when I was young. I hope that this work makes you proud. I want to give a

heartfelt "thanks" to Jianxiang Liu, my wife, for her patience, love and support have

upheld me, particularly in those many days in which I spent more time with my computer

than with her. I also owe several individuals, including Wei Wu, Xilin Cui, Chen Chen

and Li Li, my deep appreciation for the memorable and warm feelings they have brought

to me.
vi
TABLE OF CONTENTS
CERTIFICATE OF EXAMINATION ii
ABSTRACT iii
Acknowledgments v
Table of Contents vii
List of Tables xi
List of Figures xii
Chapter 1: General Introduction 2
REFERENCES 9
Chapter 2: The Distinction Between Corporate Social Performance and
Environmental Performance 12
INTRODUCTION 12
PRIOR CONCEPTUALIZATION OF CSP AND CEP 15
CSP and CEP are Dimensions of the Same Construct 15
CSP and CEP are Different Constructs 19
QUANTITATIVE COMPARISON OF CSP AND CEP 20
Methods for Quantitative Analysis 20
Data and sample 20
Analysis of Quantitative Data 23
Plotting the temporal differences 23
The within dynamics of CSP and CEP 27
DISCRIMINATING ATTRIBUTES BETWEEN CEP AND CSP 28
Methods for Qualitative Analysis 28
Data and sample 28
Generating conceptual themes 30
Analysis of the Qualitative Data 31
Nature of foci and elements 32
Internal consistency 36
Regulative discretion 36
Managerial approach 37

vn
 Influence along the value chain 39
Financial Impact 40
DISCUSSION 42
Primary Subject Relationships 43
Stakeholder Composition 45
Temporal Focus 46
Objectives 46
Focus Along the Value Chain 47
Definitions 47
Corporate social performance (CSP) 47
Corporate environmental performance (CEP) 48
CONCLUSION 49
REFERENCES 52
Chapter 3: The Growth Trajectory of Business Sustainability: 1991-2003 in the U.S.
59
INTRODUCTION 59
THEORY DEVELOPMENT 62
1. Changes to the Institutional Context Concerning Business Sustainability 63
2. Valuable Resources and Capabilities are Identified on the Basis of the Institutional
Valuation 67
Signaling and publicizing 67
Information disclosure 69
Regulations 70
Factor market valuation 71
3. Integrative Resources and Capabilities are Created That Permit Strategic
Integration 71
4. Resources and Capabilities That are Created and Acquired Further Shape the
Institutional Environment 75
An Assumption and its Implications 78
METHODS 79
Data and Sample 79

viii
 Business Sustainability Variables 80
Corporate financial performance 80
Corporate social and environmental performance 80
Control Variables 82
DATA ANALYSIS 82
Analytical Model 82
Results 87
DISCUSSION 95
CONCLUSION 99
REFERENCES 101
Chapter 4: Dual Mechanism of Business Sustainability: Unique Effects and
Simultaneous Effects 112
INTRODUCTION 112
BUSINESS SUSTAINABILITY 114
The Principles of Sustainable Development and Business Sustainability 114
Corporate Financial Performance 117
Corporate Social Performance 117
Corporate Environmental Performance 118
Discriminating Between Corporate Social and Environmental Performance 119
CAUSAL RELATIONSHIPS: THE DOMINANT APPROACH TO BUSINESS
SUSTAINABILITY 122
SIMULTANEOUS RELATIONSHIPS: A SYSTEMS APPROACH TO BUSINESS
SUSTAINABILITY 125
METHODS 128
Data and Sample 128
Business Sustainability Variables 129
Corporate financial performance 129
Corporate social and environmental performance 130
Control Variables 133
Data Analysis 135
RESULTS 138

IX
 DISCUSSION 146
CONCLUSION 153
REFERENCES 155
Chapter 5: General Conclusions 164
Appendices 170
Curriculum Vitae 172

x
LIST OF TABLES
Table 2.1 Measurement of CSP and CEP 18
Table 2.2 Empirically Identified CSP and CEP Attributes in Contrast 33-34
Table 2.3 Conceptual Attributes of CSP and CEP in Contrast 44
Table 3.1 Industry Composition 83
Table 3.2 Estimated Variances and Covariances of Latent Intercepts and Slopes -
MVA Model 91
Table 3.3 Estimated Variances and Covariances of Latent Intercepts and Slopes -
ROE Model 92
Table 4.1 CSP and CEP Attributes In Contrast 120
Table 4.2 Industry Composition and Description of Industry Level Variables 136
Table 4.3 Descriptive Statistics and Correlation Matrix 139
Table 4.4 Descriptive Statistics and Correlation Matrix (Cont.) 140
Table 4.5 Hausman-Taylor Test with MVA, Negative CSP and Negative CEP 142
Table 4.6 Hausman-Taylor Test with ROA, Negative CSP and Negative CEP 143
Table 4.7 Correlation Test of Simultaneity 145

xi
LIST OF FIGURES
Figure 2.1 Mean Changes in CSP and CEP Over Year 24
Figure 2.2 Standardized Changes in CSP and CEP Over Year 25
Figure 2.3 Standardized Changes in Negative CSP and Negative CEP Over Year 26
Figure 3.1 The Relationship Between Firm Resources and the Institutional
Environment. 64
Figure 3.2 Conceptual Within-Variable Covariance Model for CSP, CEP and MVA
85
Figure 3.3 Conceptual Cross-Variable Covariance Model for CSP, CEP and MVA...86
Figure 3.4a Mean Changes in CSP Over Year 88
Figure 3.4b Mean Changes in CEP Over Year 88
Figure 3.5a Mean Changes in ROA and ROE Over Year 89
Figure 3.5b Mean Changes in MVA Over Year 89
Figure 3.6 The Co-evolving Trajectories of CSP, CEP, ROE and MVA 94

XII
 CHAPTER 1
GENERAL INTRODUCTION
 2

Chapter 1: General Introduction

The days are long gone in which social and environmental investments by

corporations were considered to be an unreasonable burden to business, namely resource

malfunction and misappropriation (Frederick, 1994; Friedman, 1970; Porter & van der

Linde, 1995; Walley & Whitehead, 1994). While discussions do continue with respect to

how far corporations should go in fulfilling their social and environmental responsibilities,

in terms of balancing profitability and societal expectations, the need for business to be

sustainable has already become widely recognized (Economist, 2006; McKinsey &

Company, 2007; Savitz & Weber, 2006). Topics around sustainability have become more

salient than ever, both in governmental policies and in business agendas. Having

acknowledged this fact as an intrinsic part of conducting business, executives have begun

to actively seek out examples and guidelines of "best practices" for managing social and

environmental issues (Bendheim, Waddock, & Graves, 1998; Christmann, 2000; Porter &

Kramer, 2002, 2006). In response to this societal movement, and perhaps also with a view

to promoting it, the Academy of Management adopted the theme of "Doing well by doing

good" for its annual meeting in 2007, and has just declared that the theme for its 2009

meeting will be "Green management matters."

In order to effectively manage business sustainability, however, both corporations

and policy-makers need to have a clear view of the sustainability process. What is

sustainability? How do the major components of sustainability work together as a system?

Where do we stand in the evolutionary process of business sustainability, and where are

we going in terms of the pattern of sustainability? This thesis research aims to answer

these questions. Such an overview of sustainability will permit specific policy

 3

arrangements and business programs that will be more effective in advancing corporate

progress toward a sustainable future. It will also allow scholars to develop a more holistic

and historical view of this important phenomenon.

There are various conceptions of sustainability or sustainable development, but

primarily, "sustainability" has been expressed as a hopeful vision that society seeks to

achieve (Lee, 1993). For example, Hawken (1993) defined sustainability as an economic

state where the needs of commerce do not reduce environmental capacity for future

generations. Costanza, Daly and Bartholomew (1991) viewed sustainability as a

conditional relationship between human economic systems and larger ecological systems.

Offering an integrative definition of sustainable development, Gladwin, Kennelly and

Krause conceptualized sustainable development as "a process of achieving human

development in an inclusive, connected, prudent, equitable, and secure manner" (1995:

878).

Based on these conceptions, I believe that we can evaluate only the degree to

which firms achieve sustainability, in terms of how well they integrate business demands

and social and environmental considerations. That is, we cannot simply state whether a

firm has achieved sustainability or not. From the notion of a triple bottom line, business

sustainability refers to how well firms have systematically managed corporate financial

performance (CFP), corporate social performance (CSP), and corporate environmental

performance (CEP). These three performance measures have come to be considered as

the three pillars of business sustainability (Bansal, 2005; Blackburn, 2007; Elkington,

1998).

I have devoted Chapter 2 of this thesis research, entitled "The distinction between

corporate social performance and environmental performance," to the development of the

 4

two constructs of CSP and CEP in relation to each other. It must be pointed out that

discriminating between CSP and CEP is not a natural direction to take. In fact, most past

studies have not made such a distinction. Rather, CEP has previously been subsumed into

CSP as though environmental issues were nothing more than a specific domain of social

issues. There are, of course, obvious commonalities between these two concepts, which

explains why people have tended to put them together in one category. For example, they

are both largely voluntary corporate initiatives by nature, although certain regulations are

often attached to some issues. Both social and environmental issues are considered to be

part of corporate responsibility to society that arises because of various interpretations,

such as social contract (Donaldson & Dunfee, 1994) and institutional legitimacy (Wood,

1991). As well, CSP and CEP have similar antecedents in terms of driving societal forces,

and they have similar consequences on business in terms of reputation.

There are, however, significant differences between CSP and CEP, differences

that reveal them as two distinct constructs with different foci, elements and dynamics. In

light of these differences, research in this field must seek to clarify the conceptual

confusion and develop a richer understanding of business sustainability. More

importantly, previous blurring of these two constructs may have caused inaccurate

conclusions to be drawn in prior studies on business and society, especially regarding the

relationship that exists between CSP and CFP. It is important, therefore, for us to

systematically develop the two constructs before diving into empirical studies.

Chapter 3 of this thesis, entitled "The growth trajectory of business sustainability:

1991-2003 in the U.S.," demonstrates the long-term nature of the sustainability

phenomena. Among the five attributes of sustainable development that Gladwin and

colleagues proposed (Gladwin et al., 1995: 878), I believe that inclusiveness and
 5

connectivity are the most critical premises. The former emphasizes "human development

over time and space" that considers intergenerational, intragenerational and interspecies

equity, while the latter asserts the interdependence between ecological, social and

economic systems. These attributes imply that both a systems view and a longitudinal

approach are most appropriate in an examination of sustainability phenomena. This is

especially important when one is concerned about the financial impact of social and

environmental investment, as these investments are arguably often associated with long-

term value-building, instead of with immediate consequences.

Conventional research, however, has relied on snapshot views of pertinent

relationships, and has not paid enough attention to the inherent long-term nature of

sustainability. Such an approach has actually encouraged short-termism in management

practices (Laverty, 1996), where managers trade off future benefits in favor of seeking

more immediate gains. Further, the underlying processes that are associated with

sustainability, such as evolving relationships and decision-making, are overlooked owing

to the lack of an historical view. For example, how do the three pillars of business

sustainability evolve in relation to one another? How do institutional expectations

concerning sustainability translate into competitive opportunities that firms can explore

strategically? What kind of accommodating mechanisms can firms use to effectively

integrate institutional logic and strategic logic, two fundamentally different and very often

conflicting systems of reasoning? These questions cannot be answered well without

challenging conventional theory and methodology. I have attempted to address these

questions using a trajectory approach in the Chapter 3. The core argument in this study is

that CSP, CEP and CFP coalesce over time.

 6

Embracing a systems view of the pillars of business sustainability, I have

examined the structural relationships among the three pillars in Chapter 4 of this thesis,

entitled "Dual mechanism of business sustainability: Unique effects and simultaneous

effects." The major proposition in this chapter is that both mechanisms are present in

linking the three pillars. This is, in part, an effort to reorient research on business

sustainability so that the interdependence between the social systems, the ecological

systems and the economic systems is fully modeled. Conventional research has primarily

examined binary relationships between CSP and CFP and between CEP and CFP, without

tapping into the simultaneous interactions among these closely connected systems. This

study also seeks to identify the two distinct working mechanisms that underpin the

sustainability process. We name the two mechanisms unique effects and simultaneous

effects.

As illustrated in Chapter 4, organizations approach social and environmental

issues with different beliefs, i.e., those focusing on immediate cause-effect feedback and

those believing in strategic integration. Organizations in the former group look for

positive performance feedback in the local landscape and adjust their level of

commitment to social and environmental issues based on that feedback (Branzei, Ursacki-

Bryant, Vertinsky, & Zhang, 2004). They respond to sustainability-related expectations

on an issue-specific basis, often relying on technical and instrumental calculations. As a

result, there might be causal linkages between CSP, CEP and CFP, leading to the unique

effects. In contrast, organizations in the latter group look for creative ways of integrating

social and environmental demands with business strategies. They pay close attention to

the global consequences of local changes in any element of a system, and they make

sound, intertemporal choices. These organizations often develop integrative resources and
 7

capabilities that allow them to arrive at a sustainable business model, leading to the

simultaneous determination of the three aspects of sustainability. These two mechanisms

jointly bridge the three pillars of business sustainability.

I firmly ground this thesis research on institutional theory and the resource-based

view (RBV) because these are the most relevant to the interface of business and society.

A framework outlining the interplay between institutional forces and firms' resource

development has been developed in Chapter 3, which then leads our efforts to examine

the institutional processes that are involved in firm-level strategic decision-making. In

other words, this study shows how institutional arguments, which have primarily been

applied at the organizational field level, can be truly integrated with the strategic

management literature. This research also contributes to the RBV literature by offering

insights into how the value of resources is shaped by institutional preference, and how the

competitive landscape is changed as a result.

In order to test the hypotheses regarding the distinction between CSP and CEP

(Chapter 2), the co-evolution of CSP, CEP and CFP (Chapter 3), as well as the structural

relationships among them (Chapter 4), both primary data and archival data were collected.

For the purpose of developing conceptual attributes that discriminate between CSP and

CEP, I conducted nine interviews with sustainability managers from major North

American companies, and I also researched and developed a case study, under the

supervision of Professor Pratima Bansal, on a large oil production company. Inductive

analysis was then applied to these data.

I used quantitative data to test the other hypotheses. The dataset I compiled

includes 738 firms across 13 years, from 1991 to 2003, with 9,594 observations. The data

for this dataset were drawn from archival sources. Compustat was used for company
 8

financial information, CRSP for company market performance, and KLD social ratings

index for social performance measures. I used latent growth modeling to test the co-

evolution hypothesis, and Hausman-Taylor error component analysis to test the structural

relationships between CSP, CEP and CFP.

This dissertation is structured as follows. Chapter 1 serves as the general

introduction for this thesis. Chapters 2, 3 and 4 compose the major body of the

dissertation. Each of the three chapters is an independent paper that is presented in a

publication style, with its own introduction, theory, methods, conclusion and bibliography.

Following these chapters, I wrap up the dissertation with a general conclusion chapter,

Chapter 5.
 9

REFERENCES

Bansal, P. 2005. Evolving sustainability: A longitudinal study of corporate sustainable

development. Strategic Management Journal, 26(3): 197-218.

Bendheim, C. L., Waddock, S. A., & Graves, S. B. 1998. Determining best practice in
corporate-stakeholder relations using Data Envelopment Analysis: An industry-
level study. Business and Society, 37(3): 306-338.

Blackburn, W. R. 2007. The sustainability handbook: The complete management guide to

achieving social, economic and environmental responsibility. Washington, DC:
Earthscan Publications.

Branzei, O., Ursacki-Bryant, T. J., Vertinsky, I., & Zhang, W. 2004. The formation of
green strategies in Chinese firms: Matching corporate environmental responses
and individual principles. Strategic Management Journal, 25(11): 1075-1095.

Christmann, P. 2000. Effects of "best practices" of environmental management on cost

advantage: The role of complementary assets. Academy of Management Journal,
43(4): 663-680.

Costanza, R., Daly, H. E., & Bartholomew, J. A. 1991. Goals, agenda and policy
recommendations for ecological economics. In R. Costanza (Ed.), Ecological
economics: The science and management of sustainability: 1-20. New York:
Columbia University Press.

Donaldson, T., & Dunfee, T. 1994. Toward a unified conception of business ethics:
Integrative social contracts theory. Academy of Management Review, 19(2): 252-
284.

Economist. 2006. Companies and climate change: Can business be cool? The Economist,
Vol. 379: 70-79.

Elkington, J. 1998. Cannibals with folks: the triple bottom line of 21st century business.
Stony Creek, CT: New Society Publishers.

Frederick, W. C. 1994. From CSR1 to CSR2. Business and Society, 33(2): 150-164.

Friedman, M. 1970. The social responsibility of business is to increase its profits, New
York Times Magazine: Sept. 13. Reprinted in Donaldson T and Werhane P (1983),
Ethical issues in business: A philosophical approach, second Edition, Englewood
Cliffs, NJ: Prentice Hall.
 10

Gladwin, T. N., Kennelly, J. J., & Krause, T.-S. 1995. Shifting paradigms for sustainable
development: Implications for management theory and research. Academy of
Management Review, 20(4): 874-907.

Hawken, P. 1993. The ecology of commerce: A declaration of sustainability. New York:

HarperBusiness.

Laverty, K. J. 1996. Economic "short-termism": The debate, the unresolved issues, and
the implications for management practice and research. Academy of Management
Review, 21(3): 825-860.

Lee, K. N. 1993. Greed, scale mismatch and learning. Ecological Applications, 3(4): 560-
564.

McKinsey & Company. 2007. Assessing the impact of societal issues: A McKinsey
Global Survey. The McKinsey Quarterly, November 2007.

Porter, M. E., & Kramer, M. R. 2002. The competitive advantage of corporate

philanthropy. Harvard Business Review, 80(12): 56-68.

Porter, M. E., & Kramer, M. R. 2006. Strategy & society: The link between competitive
advantage and corporate social responsibility. Harvard Business Review, 84(12):
78-92.

Porter, M. E., & van der Linde, C. 1995. Toward a new conception of the environment-
competitiveness relationship. Journal of Economic Perspectives, 9(4): 97-118.

Savitz, A. W., & Weber, K. 2006. The triple bottom line: How today's best-run
companies are achieving economic, social, and environmental success — and how
you can too (2006 ed.). San Francisco, CA: Jossey-Bass.

Walley, N., & Whitehead, B. 1994. It's not easy being green. Harvard Business Review,
72(3): 46-52.

Wood, D. J. 1991. Corporate social performance revisited. Academy of Management

Review, 16(4): 691-718.
 11

CHAPTER 2

THE DISTINCTION BETWEEN CORPORATE

SOCIAL PERFORMANCE AND ENVIRONMENTAL
PERFORMANCE
 12

Chapter 2: The Distinction Between Corporate Social Performance and

Environmental Performance

INTRODUCTION

Conventional business and society research often does not discriminate between

social issues and environmental issues. For example, early conceptions of corporate social

responsibility (CSR) have often assumed that social issues subsume environmental issues.

From the CSR perspective, corporations are assumed to have obligations to society (Boal

& Peery, 1986; Keim, 1978), and business policy should, therefore, incorporate corporate

social impact as one additional dimension of organizational decision-making (Jones,

1980). Further, the conceptual development of corporate social performance (CSP), a

construct closely related to CSR, has focused on corporate responsiveness to a variety of

"social issues," of which environmental issues are a component (Carroll, 1979; Wartick &

Cochran, 1985). Such an approach has been widely accepted in empirical studies, where

CSP often covers a range of specific issues such as women and minorities, work safety,

and community support, as well as environmental protection (Griffin & Mahon, 1997;

Turban & Greening, 1997). That is, environmental issues are treated as merely one type

of social issue.

More recently, a group of scholars have begun to focus their attention specifically

on environmental issues in an attempt to understand corporate environmental

performance (CEP) in relation to other important variables. The motivation to do so was

primarily driven by the increasingly serious impact of business operations on the

environment and by the public's growing expectations for sustainable development.

Probably owing to the wide implications and unique focus of environmental issues,
 13

research on CEP has become a field independent to CSP. This trend has been further

demonstrated through the creation of two separate divisions in the Academy of

Management, the largest scholarly management organization in the world. The Social

Issues in Management (SIM) division corresponds to CSP, while the Organization and

Natural Environment (ONE) division corresponds to CEP.

The distinction between CSP and CEP is further highlighted in both governmental

policy frameworks and organizational structures. On the policy side, in contrast to the

relatively dispersive expressions of concern for social issues, many countries, developing

or developed, have established independent regulatory agencies to manage environmental

issues. Environmental policy has become an important factor in political agendas and

election campaigns, and in the business world, where many companies have established

independent departments for dealing with environmental issues. As well, the manner in

which corporations publicize their concern for social and environmental issues, either in

print or on their websites, very often reflects a clear distinction between these two aspects.

Researchers therefore must acknowledge this new reality and must, in turn, generate

knowledge that is able to constructively guide practice.

In addition, sustainability scholars have suggested the notion of a triple bottom

line, in which CSP, CEP and corporate financial performance (CFP) are the three pillars

of sustainable human development (Elkington, 1998; WCED, 1987). That is, CSP, CEP

and CFP contribute to the social system, the ecological system and the economic system,

respectively, and these systems collectively form the foundation of human society.

Although the distinction and mutual consistency among the three systems are widely

accepted at the societal level, we are not clear as to whether it makes sense to make a

distinction between CSP and CEP at the firm level.

 14

Despite the parallel developments in the two seemingly related fields, researchers

do not appear to have analyzed the conceptual relationship between CSP and CEP. Does

CEP represent a set of issues that can be subsumed into social issues, like community

support, and included in the bigger bucket of CSP? Or are CSP and CEP two separate

constructs with significantly distinctive foci, elements and dynamics?

If the former is the case, it would suggest that scholars are unnecessarily, and

possibly inaccurately, decomposing a larger construct into its various dimensions and

treating them as different constructs. If the latter is the case, however, we will need to

discover the structural relationships between the two, such as how one may be nested into

the other and how they may stand at the same level of conceptualization. More

importantly, we will need to reconsider the conclusions of past studies with regard to CSP,

as the practice of blurring CEP into CSP might have led to misleading observations of

relevant relationships, in particular, the relationship between CSP and CEP and their

financial impact.

In the present study, we aim to find out whether CSP and CEP are distinct

constructs, with a suspicion that there are sufficient commonalities among CSP

dimensions that would make CEP an outsider. After explaining how CSP and CEP have

been blurred in current research practices, we first demonstrate the differences between

CSP and CEP using descriptive statistics based on large-sample firm-level data. Based on

our interviews with senior managers, we then derive a series of attributes that contrast

CSP and CEP. The insights obtained from the interviews allow us to identify a number of

conceptual attributes that theoretically differentiate CEP from CSP, which in turn helps us

to develop definitions of CSP and CEP that clarify the conceptual confusion in the extant
 15

literature. We conclude the study by discussing the importance of our clarification to

future research and policy-making.

PRIOR CONCEPTUALIZATION OF CSP AND CEP

CSP and CEP are Dimensions of the Same Construct

Since early attempts toward understanding CSR (Ackerman & Bauer, 1976;

Bowen, 1953; Preston, 1978; Sethi, 1979), the theoretical framework of CSP has emerged

and evolved significantly. Carroll's (1979) three-dimensional CSP model provided a

conceptual foundation; the three dimensions include the philosophy of social

responsibility, the social responsibility categories, and the social issues involved.

Building on the conceptual work by Wartick and Cochran (1985), Wood developed a

widely accepted CSP model (Wood, 1991).

Integrating a firm's social initiative motive, managerial process of commitment,

and social outcome, Wood defines CSP as "a business organization's configuration of

principle of social responsibility, process of social responsiveness, and policies,

programs, and observable outcomes as they relate to the firm's societal

relationships'''(1991: 693). In this definition, the principles include institutional

legitimacy, public responsibility of organizations, and managerial discretion. The

responsiveness process goes from environmental assessment, to stakeholder management,

to issues management; the outcomes cover social impacts, social programs, and social

policies. Swanson further refines Wood's model to incorporate managerial decision-

making and to extend the principle of social responsibility (Swanson, 1995). It is clear

from these conceptions of CSP that CEP is included as a constituent social issue.
 16

The stakeholder approach to conceptualizing CSP (e.g., Clarkson, 1995;

Donaldson & Preston, 1995a; Waddock & Graves, 1997b) also does not differentiate

between social and environmental issues. From the stakeholder perspective, CSP is a

measure of corporate performance in managing the relationship between a firm and its

stakeholders (Evan & Freeman, 1988), where the stakeholders are concerned with both

social and environmental issues. For example, Hillman and Keim (2001) developed a

construct of stakeholder management that covered environmental issues as well as four

other primary types of social issues such as employees relations, community support,

diversity, and product issues.

The fact that CSP and CEP have been blurred may be seen more clearly in

empirical measurement. For example, Johnson & Greening (1999) chose five primary

social dimensions that were employed in the KLD database and classified them into two

groups: people-oriented CSP, which is composed of employee relations, community

relations, and women and minority issues; and product-oriented CSP, which consists of

environmental performance and product liability. In this classification scheme, CEP is

treated as nothing more than a social issue domain that can be easily grouped with other

issues. In an attempt to discover a taxonomy among KLD social rating indicators that

cover a range of social and environmental issues, Mattingly and Berman (2006) identified

a conceptual scheme through factor analysis, including institutional strengths and

weaknesses and technical strengths and weaknesses. None of these approaches of

classification, however, treated CSP and CEP as two distinctive constructs. In other

words, researchers have assumed that CEP is no more discriminant from other social

issues than are any two particular social issues included in the conceptualization of CSP.
 17

The conceptual confusion between CSP and CEP is also reflected in the types of

data that researchers use to measure these constructs. In previous research, CSP

researchers often base their measurement of social performance on certain social

reputation ratings, such as Fortune reputation ranking (Brown, 1997), and KLD (Kinder,

Lydenberg, Domini) index (Berman, Wicks, Kotha, & Jones, 1999; Waddock & Graves,

1997a), as well as surveys on CSR principles (Aupperle, Carroll, & Hatfield, 1985;

Berman et al., 1999). Such reputation-based data often risk blending a firm's

environment-related reputation and its reputation on other issues.

In contrast, CEP researchers often measure environmental performance using self-

reported survey and data collected by governmental agencies. The focus of the

measurement is "how successful a firm is in reducing and minimizing its impact on the

environment, often relative to some industry average or peer group" (1996: 1199). The

measurement items reflect firms' environmental practices (King & Lenox, 2000;

Lounsbury, 2001), environmental events announcement (Hamilton, 1995; Klassen et al.,

1996), pollution reduction records (Fogler & Nutt, 1975; Jaggi & Freedman, 1992), as

well as record in toxic release (e.g., Cormier & Magnan, 1997; Hamilton, 1995; Jaggi et

al., 1992).

We have provided a list of measurement approaches to both CSP and CEP in

Table 2.1. Given traditional CSP measurement that combines CEP, the conclusions drawn

on CSP in relation to other variables in prior research may need to be reconsidered if CSP

and CEP have different dynamics, especially if they interact.


TABLE 2.1
Measurement of CSP and CEP
Measurement Operationalization of CSP
Approach
Third party KLD: seven major categories
ratings including Community Relations,
Employee Relations, Women and
Minority Diversity, Environmental
Issues, Product Liability, Human
Rights, and Corporate Governance;
e.g., Waddock & Graves, 1997;
Survey Fortune Reputation Survey (Brown,
1997);
Questionnaire focused on CSR
orientation (Aupperle, Carroll &
Hatfield, 1985);
Survey to CEOs concerning
stakeholder attributes, salience, CEO
values and CSP (Agle, Mitchell &
Sonnenfeld, 1999)
Interviews & Interviews and observations on
observations corporate illegal actions (Elsbach, K.
D., & Sutton, R. I. 1992)
Self report Annual reports, e.g., discourse about
social equity in Bansal, 2005;
Annual report of sustainability and
CSR
Media reports N/A
Specific practices Product recall announcement
/programs /events (Davidson & Worrell, 1992)
/operations
Corporate philanthropy and crime
(Wokutch, & Spencer, 1987)
18
Operationalization of CEP
KLD;
Investor Research Responsibility;
Center (IRRC) corporate profile (e.g.,
Hart &Ahuja, 1994);
Franklin Research and Development
Center (FRDC) ratings (e.g., Russo &
Fours, 1997);
Council of Economic Priorities (CEP)
environmental reputation ratings (White,
1995)
Survey to U.S. chemical companies
focused on pollution prevention and cost
management (Christmann, 2000);
Survey about environmental technology
sent to manufacturing plants in the U.S.
furniture industry (Klassen and
Whybark, 1999)
Interviews about motivations with
managers from U.K. and Japan (Bansal,
2000)
Toxic Release Inventory (TRI) (Griffin
&Mahon, 1997);
Annual reports, e.g., discourse about
environmental integrity in Bansal, 2005;
Annual report of sustainability and CSR
Environmental awards and crises
(Klassen & McLaughlin, 1996)
Oil spills/chemical leaks, announcement
of environmental initiatives (e.g., Gilley,
Worrell, Davidson III & El-Jelly, 2000);
Operational standards (Dowell, Hart &
Yeung, 2000);
Regulatory enforcement actions
(Kassinis & Vafeas, 2002)
 19

CSP and CEP are Different Constructs

In spite of the dominant anthropocentric paradigm on human development in

society, a call for organizations to move from technocentrism (e.g., Beckerman, 1994,

2003; Taylor, 1994) to an ecologically sustainable model has long been made (Gladwin et

al., 1995; Hirsch, Friedman, & Mitchell, 1990; Purser & Montuori, 1996; Shrivastava,

1995a). Such a call and the accompanying social movement has highlighted the unique

nature of environmental issues, issues that deeply relate to the way we live in our world

and the way business seeks growth in particular (Hawken, 2007). As a result, research on

CEP has developed its own paradigm, language and nomological models.

Researchers in this field acknowledge the fact that natural resources serve as the

ultimate sources of humane value, and they share concerns about the ignorance of nature

that exists in organizational theories. However, they fall into two main paradigmatic

camps: sustainacentrism (Gladwin et al., 1995), and ecocentrism (Prasad & Elmes, 2005;

Purser, Park, & Montuori, 1995; Shrivastava, 1995a, c). The former emphasizes the

interaction between organizations and the natural environment and promotes integration

of the two in business operations. The latter emphasizes the reliance of the human system

on the ecological system and tries to position environmental conservation as the top of

priority in human development. In both cases, CEP is treated as a domain that is distinctly

different from other social issues, such as product liability and human rights.

In the next two sections, we explore the differences and similarities of CSP and

CEP to see whether they warrant the same or different constructs. When no existing

theory is available to support a theoretical expectation, a distinction between CSP and

CEP in this case, an inductive methodology is appropriate to draw inferences based on

empirical data (Glaser & Strauss. 1967; Yin, 1989). Grounded theory approach, as
 20

opposed to analytic induction approach, became our obvious choice because it would

allow us to fully embrace the data, while not requiring an a priori theoretical framework.

In collecting data for this study, we sought to obtain information that was both

broad and deep enough to allow us to obtain a consistent yet reliable message from the

data with respect to our primary inquiry, i.e., the distinction between CSP and CEP. To

this end, we collected data from multiple sources, including archival data, semi-structured

interviews, case study, and corporate documents. In selecting the target companies for in-

depth qualitative information, we adopted theoretical sampling, where samples were

selected that highlighted theoretical issues so that a support or challenge of the expected

relationship could be relatively clearly identified (Eisenhardt, 1989; Glaser & Strauss,

1967; Pettigrew, 1990). At the same time, we intentionally chose companies from

different industries to ensure diversity of practices and contexts and thus increase the

robustness of the inferences that were drawn from the results.

We started with an inductive analysis of quantitative data, using KLD database,

followed by an inductive analysis of the qualitative data, using interviews. We found that

the distinction between CSP and CEP was well demonstrated in KLD data. Interview

analysis provided further insights into how these two concepts differ from each other

conceptually. These insights gave us the confidence to suggest that there are good reasons

to separate CEP from CSP in future research.

QUANTITATIVE COMPARISON OF CSP AND CEP

Methods for Quantitative Analysis

Data and sample. In choosing the data to quantitatively analyze the distinction

between CSP and CEP, we have several criteria. First, the data must have a separate
 21

category for CEP evaluation, so we can compare CEP with other categories of

performance. Second, the data should be reliable and widely accepted. This will make the

findings more relevant to extant literature. Third, it is better to have a longitudinal record

to ensure that the observed differences are not transitory. Based on these three criteria, we

chose KLD data to examine the potential differences between CSP and CEP (Kinder,

Lydenberg, and Domini & Co.). KLD has 13 categories, including environmental

performance, and has been used extensively by CSP researchers (Barnett, 2007;

McWilliams & Siegel, 2000; Waddock et al., 1997a). KLD data are also longitudinal,

consistently evaluating the social performance of approximately 650 large U.S. firms

each year since 1991. Our sample includes a total of 738 firms with KLD ratings from

1991 to 2003.

There are some concerns about the validity of KLD social ratings, such as the lack

of theoretical basis, investor-oriented evaluations, and an ideologically constructed notion

of social responsibility (Entine, 2003). However, the validity of KLD data has been

largely established by several researchers (Griffin et al., 1997; Sharfman, 1996) and has

become increasingly accepted. The KLD process for evaluating firms is rigorous. KLD

relies on five distinct data sources, including direct communication with company officers,

continuous review of 14,000 global news sources, research partners across the world,

major public documents (such as annual reports), and government and non-government

organizations (KLD, 2008). Hence, the resulting data possess greater reliability than do

most scholarly datasets. As well, these wide-ranging data permit considerable depth and

accuracy of corporate profiles of important social responsibility attributes. Further, the

KLD team rating the corporations consists of multiple experienced analysts who are not

affiliated with any of the rated companies (Graves & Waddock, 1994). The team's size
 22

and impartiality ensures that a group of researchers have agreed to the ratings and helps

reduce personal biases and agendas from entering the ratings. Finally, the analysts

specialize by sector and follow a well-developed evaluation procedure and internal

review process. This ensures consistency in the ratings across companies and over the

years.

The 13 criteria that KLD uses to assess firms include seven qualitative dimensions

that are rated on both strengths and concerns, and six exclusionary categories that are

rated only as concerns. The strengths and concerns of the qualitative criteria are assigned

either " 1 " or "0", depending on whether or not a firm meets set criteria. The seven

qualitative dimensions are Community Relations, Employee Relations, Women and

Minority Diversity, Environmental Issues, Product Liability, Human Rights ("Non-U. S.

involvement" prior to 2002), and Corporate Governance ("Other" prior to 2002). The first

five dimensions have been most frequently used in prior studies (Hillman et al., 2001;

Johnson et al., 1999). The exclusionary criteria are centered on whether a firm is involved

in controversial businesses such as Alcohol, Gambling, Tobacco, Firearms, Military, and

Nuclear Power. We chose the five primary dimensions as our starting point for

constructing CSP and CEP measures, consistent with prior studies using KLD data.

The CEP measure was constructed from the items in the "Environmental Issues"

dimension; the CSP measure was constructed from the items in the other four dimensions.

Following Strike, Gao and Bansal (2006) and Mattingly and Berman (2006), we

conceptualize CSP and CEP as having a positive side and a negative side that do not

necessarily covary. Therefore, we created two different measures of CSP and CEP using

strengths and weaknesses separately. Positive CSP and positive CEP were measured by

adding up the strengths in each category, which we will refer to as simply CSP and CEP
 23

respectively. Negative CSP and negative CEP were measured by adding up the

weaknesses in each category, which we will reference with their full labels. We

normalized these measures to make them comparable between firms and across years

(Mattingly et a l , 2006).

Analysis of Quantitative Data

Plotting the temporal differences. Since the management of social issues and

environmental issues is more of a long-term phenomenon than a transitory practice, we

plotted the year-wise grand means of CSP and CEP, shown in Figure 2.1, for all the

sampled firms against the calendar year. CSP seems to follow a linear path of growth,

indicating that the number of positive firm actions toward stakeholders has been

increasing steadily. In contrast, CEP presents a nonlinear curve, climbing up and then

falling down since 1999. This suggests that firms have been reducing the number of

positive actions in environmental management in the past several years. Such a contrast

can be seen more clearly in the mean plot, Figure 2.2, using the standardized value of

CSP and CEP. A similar pattern of different temporal changes was observed in Figure 2.3,

where the standardized values of negative CSP and negative CEP were plotted.

At this point, we can only suspect that some underlying factor has driven these

variables to evolve in the way we observed. The steadily improving CSP may reflect

society's general expectation for more responsible business. The curve observed in CEP

perhaps reflects the limited elasticity of environmental investment, in particular the

technical infrastructure that is often required in environmental management. It is likely

that the roaring growth of CEP from 1995 to 1999 arose because of strong regulative

pressure in that time period or because of large-scale initial investment, given the sensiti-
 24

FIGURE 2.1
Mean Changes in CSP and CEP Over Year

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Q.
LU
O

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
 25

FIGURE 2.2
Standardized Changes in CSP and CEP Over Year

-a *"•
CO i
c
3

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

o_
LU
o
CD

£°
k_
CO
T3
C
3 I
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
 26

FIGURE 2.3
Standardized Changes in Negative CSP and Negative CEP Over Year

.-.-IBS'. '69.

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

I
I III " II" II
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
 27

-vity of environmental management to regulations. Firms returned, relatively

smoothly, back to their normal path after that time. In fact, as Figure 2.3 shows, firms

improved CEP primarily through reducing negative environmental activities after the

rapid growth period was over.

The within dynamics of CSP and CEP. Prior studies have always combined

positive and negative measures of CSP in order to form an overall evaluation. This

approach may be problematic if the positive and negative measures do not represent two

ends of a continuum in the sense that the more positive things a firm does, the less

negative things it does. Figure 2.2 and Figure 2.3 have shown this clearly: while CEP and

negative CEP appear to negatively correlate over the years, suggesting a continuum

possibility, CSP and negative CSP positively covary. This means that both responsible

social activities and irresponsible social activities by firms increase over time. This is

consistent with the conclusion drawn by Strike, Gao and Bansal (2007), i.e., that firms

can be increasingly responsible while being irresponsible at the same time.

Part of the reason for this finding might be that CSP covers a range of different

issues associated with different stakeholders, and these stakeholders might conflict with

one another in some cases. Firms often have the discretion to attend to certain stakeholder

expectations while ignoring others, depending on the stakeholders' salient attributes such

as power, urgency and legitimacy (Mitchell, Agle, & Wood, 1997). By taking advantage

of the inconsistency among stakeholder interests, the overall CSP might be manipulated

in favor of the firms' reputation. The negative correlation between the measures of CEP

and negative CEP is likely owed to the fact that environmental management covers one

single domain of issues and that the in-place environmental system reduces the amount of
 28

environmental concerns and crises. Figure 2.3 clearly shows the quick reduction of

negative environmental activities since 1996.

DISCRIMINATING ATTRIBUTES BETWEEN CEP AND CSP

The quantitative analysis above provides some evidence that CSP and CEP are

distinctly different from each other. However, we still fall short of a conceptual basis that

allows us to clearly identify important attributes that adduce the distinction. We needed to

understand the attributes in order to systematically define the two constructs. Therefore,

we collected qualitative data primarily using semi-structured interviews, with a goal of

obtaining rich insights into the potential differences between CSP and CEP. To gain deep

insights into the phenomena, we also conducted a case study with an oil production

company.

Methods for Qualitative Analysis

Data and sample. The sampling frame was generated from a contact list of

companies that had demonstrated an interest in social and environmental issues and that

were known to the researchers. This ensured that the chosen companies would have

sufficient knowledge and experience in managing social and environmental issues. After

we approached them, nine out of the 14 listed companies agreed to participate in our

study. These nine companies came from the following industries: wood, pulp and paper

(2), chemical (2), oil production (1), nuclear power (1), banking (1), telecommunication

(1), and mining (1). The informants from the companies were in positions closely

associated with the management of social and environmental issues, such as vice-

president for corporate affairs and social responsibility, director for sustainability and

corporate relations, and senior manager for corporate environmental affairs, government
 29

and community relations. We identified these positions because the goal of our research

required that we select key informants who had sufficient knowledge about their

respective companies' initiatives and practices with respect to the social and

environmental issues.

First, we conducted our case study on the oil company, which involved multiple

rounds of communications and information exchange. Such deep exploration of relevant

corporate practices facilitated our understanding of the focal issue and permitted better

execution of the interviews that followed. We conducted interviews with all the

remaining eight companies, either face-to-face or by telephone. We also collected each

company's sustainability report, CSR report and similar reports prior to the interview.

This information served to ensure the reliability of the interviewees' responses, in terms

of comparing what they said to what they actually did and achieved. It also facilitated

probing throughout the interviews. We did not code the archival documents because the

objective was to identify a consistent understanding and interpretation of CSP and CEP.

We started each interview by asking what were the major social and

environmental issues in the company and then asked the respondent to speculate whether

there were reasons to separate CEP from CSP, and how they saw these differences, if any.

In addition, respondents were asked about the approaches their companies took in

managing social and environmental issues. To further probe their understanding and

collect data for another project, we also asked the respondents to compare CSP and CEP

as they related to the bottom-line effect.

The interviews lasted about 45 minutes each. All interviews were tape-recorded

and then transcribed for use in the data analysis. We took key notes during the interviews
 30

that helped us to better manage subsequent interviews, making our questions more

focused and less ambiguous.

Generating conceptual themes. Across the interview process, the goal of our

study was to identify consistent themes or conceptual nodes that differentiated between

CSP and CEP. We coded the interview transcripts by assigning relevant statements to

certain nodes. The software we used to code and analyze the data was QSR NVivo 7.0.

We started our coding by using some potential conceptual categories that we had

identified, based on existing literature and our own speculations. Such a pre-developed

framework proved to be very useful in identifying themes and categories more efficiently,

while also avoiding the pitfall of ignoring important messages. Theoretically tighter

categories were developed as data collection and analysis proceeded. Even if some of the

original categories were kept, their labels were changed to more accurately reflect the

theoretical meanings.

It is not unusual that some statements were assigned to multiple nodes. When

pertinent statements and articulations - i.e., those relevant to contrasting CSP and CEP -

did not fall easily within the exiting categories, we created new categories to

accommodate the new themes. These new categories were often ascribed very vague

labels, such as "management" and "institutional," as we were not sure how to define the

exact themes. As similar messages came up repeatedly, we were able to understand the

themes more clearly and name the categories more accurately. During this process, some

original categories were dropped because they did not capture distinctive themes or

because they represented a serious overlap between two categories.

After the coding was completed, we obtained a total of eight categories, including

nature of foci and elements, internal consistency, regulative discretion, managerial

 31

approach, financial impact, mechanism of financial influence, determinants of

performance, and time-related changes. The NVivo software helped us to pull together all

the statements in the same group. We then went through each statement by group, pulling

out appropriate quotes for each category in a summary table that showcased the

distinction between CSP and CEP. As we read through all the identified statements again,

we found that three categories - mechanism of financial influence, determinants of

performance, and time-related changes - did not differentiate between CSP and CEP. As

a result, we dropped these three categories. At the same time, we added one new category,

i.e., influence along the value chain. Ultimately, we were able to discriminate between

CSP and CEP through six different categories.

Analysis of the Qualitative Data

For the oil company that we studied in depth, we found that in practice, CSP was

quite distinct from CEP. The company reported CSP and CEP separately in its annual

sustainability report. CSP included four major issues: community support, health and

safely, stakeholder relations, and aboriginal relations. The issues included in CEP were

policy, climate change, air, water, land and biodiversity. Interestingly, these categories

correspond well with the KLD framework of ratings. Further, owing to the heavy

environmental impact of its operations, the company tied CEP closely to its business

strategy in its strategic management. Because of the recognition of the strategic

importance of CEP, this company had actually been taking quite a proactive approach to

environmental management, such as spearheading the extensive carbon-capture and

storage project in Canada. CSP, to this company, was more of a relationship-building

effort, which carried less strategic importance.

 32

Consistent with what we discovered from the company case study, our interviews

supported a view that there was a conceptual distinction between CSP and CEP, which

means that these two constructs do not lend themselves to easy combination. In six

categories, Table 2.2 reports a summary of the insights gained from the interviews. We

have provided details for each identified category below.

Nature of foci and elements. By their natures, CSP and CEP have different foci

and elements. Social issues focus on relationship-building with stakeholders, and the

specific elements involved, such as contract, interest, welfare, trust and support, are

defined in terms of ethics, justice, fairness, norms and transaction-based interest

exchanges. For example, when we asked a manager to give some examples of social

issues, she listed things such as "fair work practices, fair hiring practices, fair purchasing

practices, abstaining from participating in child labor, being ethical in our decision-

making, both within the company and within our business relationships with others, all of

those things." In contrast, environmental issues focus on natural preservation where the

elements, such as emissions, waste and depletion, are defined in terms of scientific

observations and natural law. Because of these differences in their natures, CSP is harder

than CEP to quantify, and its management involves a lot of symbolic activities that aim to

change stakeholders' perception and interpretation in a desirable direction.

CEP, on the other hand, is often associated with quantifiable measures, and

environmental management aims to improve the objective indicators of performance in a

substantive manner. This can be reflected in the following statement, which was made by

one of the managers we interviewed.

 TABLE 2.2
Empirically Identified CSP and CEP Attributes in Contrast

Differential CSP CEP Quotes

Attributes
Nature of Focused on ethics, morality,
foci and norms, symbols, and
elements subjective interpretations;
people-focused relationships;
often unquantifiable
Focused on objective facts,
substance, technology, and
science; ultimate resources of
human development; often
having quantified criteria and
assessment
"We look at the social issues as being people and community. It essentially is the
people side of the business. It's health and safety; it's community relations; it's
our engagement with stakeholders. You know, it's the health of our relationships,
I guess."
"[Environmental issues are] quantitative .... We could actually measure the
monies you put into [environmental programs] and the return that you can get.
[But] on social responsibility, you give a lot out; your return is not necessarily a
quantitative number."

Internal Multiple stakeholders with
consistency often conflicting demands
and reactions; less internal
consistency
Regulative Less defined thus open to
discretion interpretation; no single and
clear policy and regulations,
though having some legal
constraints
Sensitive and coherent
stakeholder reactions, due to
clearer standards and
relatively unidimensional
concerns
More rules and regulations
available; greater government
supervision; global
standardization in some cases;
less discretion
"So, the social side seems to be more fractured, put into different aspects. The
environmental side tends to be more, as I said before, more specific and little bit
more cut and dried, but it's also because it's somewhat more narrowly framed, if
you look at your fence lines and your emissions."
"You'll have more data systems and more measurement, etc, related to your
environmental aspects because there's more of that legislative requirement. You
probably need as much effort on some of the social elements. But because they're
not required, you don't have that drive or impetus yet to put that in place, so you
don't have AIDS awareness programs .. .or community conditions around your
operations or, you know, measures of poverty and so forth. You'll do them in
select and special circumstances."

Empirically Identified CSP and CEP Attributes in Contrast
Managerial Managed across different
approach departments such as Human
Resources, Public
Relations/External Affairs;
ad hoc approach with issue-
specific responses; often less
integrated with business, less
systemic and less depth in
organizing
Influence Primarily managed within
along the organizations; present
value chain influence beyond firm
boundary in some cases, such
as banks.
Financial Probably has a greater impact
impact on the bottom line, from a
long-term perspective; both
upside and downside can be
important to the
sustainability of a firm
TABLE 2.2 (continued)
Independent environmental
management system or
department; more systemic in
management involving wide
co-ordination; greater
integration with strategy
The influence can be spread
beyond the firm boundary to
reach the whole value chain,
such as suppliers.
Greater immediate financial
impact; downside may be
more important than its
upside, but not as important as
the overall downside of CSP.
"We're in the process of working towards certification of our environmental
management system, whereas, within HR, that management system is voluntary.
While we do have obvious rules and regulations that we have to adhere to, they're
very different than the ones that we have in HR. So you're always going to see a
difference, I think, on how these things are managed. From a communities
perspective, that's probably, within the social domain, the one that's most [often]
done in the most ad hoc way."
"There's also the opportunity for a company like us to influence others within the
supply chain. So we do have, I think, an obligation to push back into the supply
chain, to encourage our suppliers to be more efficient and to also protect the
environment, as required, depending on the type of business or service that they're
providing."
"We don't have diversity training in the organization. Who cares? Wal-Mart
doesn't ask the question. Do you have a diversity training program in your
organization? But they do ask the question: do you have product with this
detergent? We don't want it. So now, everybody [is responding]."
"In the long term, the social issues are more problematic and have the potential to
be of greater risk to the business, because they involve people that live in the
vicinity of the facility, represent a workforce, represent stakeholders or interested
[parties] and your access to the resource. [They] can influence customers and
sustain potential media attention, for example. [Environmental issues] .. .are more
measurable activities, [so] you can put action plans in place, you can address those
issues quite directly and, over a period of time, effect changes.
-1^
 35

[Environmental issues are] quantitative ... We could actually measure the

monies you put into [environmental programs] and the return that you can get.
[But] on social responsibility, you give a lot out; your return is not necessarily a
quantitative number.

In addition, CSP is people-focused, especially those people that are directly

associated with focal organizations, while CEP is more technical in terms of its

components. Some companies have simply separated social issues into two main

categories: "those in the workplace " and "those in the community." As a manager from a

paper producing company put it:

We look at the social issues as being people and community. It essentially is the
people side of the business. It's health and safety; it's community relations; it's
our engagement with stakeholders. You know, it's the health of our relationships,
I guess.

One manager highlighted the technical nature of CEP from a capacity-building

perspective by pointing out the need to build scientific and technological awareness

around environmental issues. Another manager clearly articulated the technical

characteristics of environmental management:

The management of environmental issues is generally more technical. ...Well I

mean a design of your development, the controls that you put into place in an
area where you're doing business, are all technical. The ongoing management of
environmental impacts from your areas of activity is technical. And the social
side is sort of how you communicate it, how you involve people; that's softer.
That's got communication and involvement; it's not technical.

Some managers commented on the scope of CSP and CEP, and argued that CEP is

a larger concept than CSP. Their rationale is that everything on the earth is ultimately

affected by the natural environment, while human development is only one part of a

larger ecological system. While someone may argue for the opposite - i.e., that CEP is

smaller than CSP in scope - the point is that these two concepts are believed to be

separate and distinct in spite of inherent connections between them. One manager

expressed his opinion on the scope of issues:

 36

I think the social ones, while they're probably more important to human beings in
general, because they affect us directly and immediately; environmental
consideration is probably much larger in scope ... just because of the way
everything is linked to the environment.

Internal consistency. CSP involves diverse issues associated with different

stakeholders, such as employees and customers, and it is not unusual that these issues pull

the organizations in different directions. As such, the internal consistency within the

domain of social issues is believed to be lower than that within the environmental domain,

where the objectives are relatively homogeneous and consistent. As one of our

interviewees put it:

The social side seems to be more fractured, put into different aspects. The
environmental side tends to be more, as I said before, more specific and little bit
more cut and dried, but it's also because it's somewhat more narrowly framed, if
you look at your fence lines and your emissions.

Regulative discretion. The most frequently repeated point in the interviews is that

"environmental responsibility is more regulatory" than social-issues responsibility. That

is, the degree of governmental supervision and monitoring with regard to environmental

issues is greater than that regarding social issues. Due to the subjective or "soft" nature of

social issues, CSP is less defined in terms of available regulations and standards, and thus

is open to interpretation in practice. This is probably why many companies adopt a

globally standardized environmental management system, yet they manage social issues

in a less systematic way. We have quoted two statements below that illustrate this point

well.

They [environmental issues] tend to, I think, have more defined government
requirements and regulations on certain types of environmental-related matters
than you do on some social aspects. For instance, you don't have the same kind
of requirements you do in dealing with stakeholders and a community, as you
would on dealing with your water outfall that might flow into that community. I
think the regulatory frameworks are somewhat different as well.
 37

How well the rule and regulations are established to guide social and

environmental issues management has implications on managerial discretion in practice.

According to the interviewees, managers have less discretion in managing environmental

issues compared to social issues, because environmental regulations are clearer and the

associated compliance pressure is higher. Such influence on managerial discretion is

strengthened by the fact that CSP covers a range of distinctive issues and is regulated by

rules and norms from different domains, such as human rights and product safety. As a

result, there is greater leeway for managers to manipulate perceived CSP or to shirk their

responsibilities. Below, one manager has clearly articulated the way that different

regulative practices can affect managerial discretion.

You'll have more data systems and more measurement, etc., related to your
environmental aspects because there's more of that legislative requirement. You
probably need as much effort on some of the social elements. But because
they're not required, you don't have that drive or impetus yet to put that in place,
so you don't have AIDS awareness programs ... or community conditions around
your operations ... or, you know, measures of poverty and so forth. You'll do
them in select and special circumstances.

Managerial approach. The fact that CSP covers a wider range of issues than does

CEP implies that CSP is less cohesive in its focus. This difference in cohesiveness has

been reflected, as disclosed by the interviewees, in the differential managerial approach

that organizations have taken in dealing with social and environmental issues.

Specifically, different types of social issues are managed separately by relevant

departments within organizations, such as human resource management (HR) and public

relations. In contrast, environmental issues are primarily managed within a particular

department, whether it be the engineering division or some department specially designed

for such managerial needs, although the improvement in CEP certainly needs
 38

commitment and collaboration by each and all departments. A chemical manager

articulated their managerial approach this way:

Clearly today, [our] chemical (company) manages its environmental impacts and
responsibilities in a different context than it manages its social responsibilities.
We don't have [social responsibility] collected under one senior officer. We don't
have a committee as a board that manages or that actually governs all the policy
framework around that entire thing. I think we're going to evolve there eventually
where we will have a much more coordinated and integrated approach.

The great cohesiveness of environmental issues also allows organizations to take a

systemic approach in management by building organization-wide environmental

management systems. In contrast, organizations often take an ad hoc approach in

managing social issues, where the typical procedure is issue-specific responses, in which

case the management of social issues is less integrated with business strategies, as it is

less deeply involved in implementation and less systemic in cross-functional coordination.

One manager made this distinction clear when talking about the approach his organization

has taken. Note that he also made a link between managerial approach and regulative

discretion, suggesting that an organization's chosen approach often reflects part of the

reality with regard to how the issues have been regulated.

We're in the process of working towards certification of our environmental

management system, whereas, within HR, that management system is voluntary.
While we do have obvious rules and regulations that we have to adhere to,
they're very different than the ones that we have in HR. So you're always going
to see a difference, I think, on how these things are managed. From a
communities perspective, that's probably, within the social domain, the one that's
most [often] done in the most ad hoc way.

Other managers further explained how CSP is managed in a discursive and issue-

specific way, as shown in the quote below. The bank manager talked about how

ambiguous issues were brought to a Reputation Risk Committee, while the manager from

a chemical company emphasized the superficial style of CSP management in her

organization. While acknowledging the separation of CSP and CEP in management, most
 39

managers expressed a hope that a "more co-ordinated and integrated approach" would be

taken in the future.

There's also a Reputational Risk Committee. If there's some type of ethical issue
which is ambiguous, or which is not dealt with per se by the law, but which could
have an impact on the reputation of the bank, or is ethically questionable, it's
elevated to the Reputational Risk Committee, which the senior executives of the
bank sit on, and they have this reputational risk policy with the definition of
trigger-events.

Some (social) initiatives come out of that related to engagement, employee

engagement and leadership issues. And then it dies out. And then - there's
nothing ... I mean, this is just real within the XX(company name) context, that
they've no clear objective and achievement of that objective.

Influence along the value chain. Organizations can be committed to social and

environmental responsibility, not only through their own operations but also by

influencing other organizations along the value chain. As one interviewee stated:

Through our business conduct guidelines, we ensure that a number of ethical and
social factors are considered in everything from who we buy our supplies from, to
who we do business with, to employees who are accepting bribes, that kind of
thing. So, all that type of conduct is reviewed by our compliance department.

One important way of influencing other organizations is to adopt responsible

buying policy, by which the organizations evaluate their suppliers against some indicators

of societal responsibility, and then choose not to make purchases from the suppliers that

are considered irresponsible. One manager from the chemical industry called it "the chain

of custody." Another interviewee stated that:

There's also the opportunity for a company like us to influence others within the
supply chain. So we do have, I think, an obligation to push back into the supply
chain, to encourage our suppliers to be more efficient and to also protect the
environment, as required, depending on the types of business or service that
they're providing.

CSP and CEP diverge again because such influencing behavior along the value

chain relies more on CEP than on CSP. That is, firms often make judgment about a

supplier's responsibility to society based on the supplier's performance in environmental

 40

management; that is, firms may care less about social issues. A chemical manager made

this clear when talking about a detergent:

We don't have diversity training in the organization. Who cares? Wal-Mart
doesn't ask the question: do you have a diversity training program in your
organization? But they do ask the question, do you have product using this
detergent? We don't want it. So now, everybody [is responding].

At the same time, there are cases where CSP is used in exerting value chain

influence. A bank manager gave an example of how the bank manages project finance

activities by ensuring that its customers "engage in a community consultation process."

This way, not only is the local community assured of good care, but also the potential risk

minimized. However, the most typical criteria in responsible buying decisions are still

closely associated with the natural environment.

Financial Impact. Both CSP and CEP are perceived to have an impact on

corporate financial performance. The primary mechanism for such an impact is argued to

be a good relationship with stakeholders, which means greater support and fewer conflicts.

Interestingly, the interviewees did not mention the potential cost reduction that may arise

directly from good environmental management, such as reduced waste. We have quoted

two interviewees below, from the social side and the environmental side, respectively, to

show how they view the financial impact of CSP and CEP.

If you have an engaged community, if you do your social engagement well, if

you're well regarded, if you're honest and honorable and maintain an ongoing
relationship with local and global communities of importance to the business, then
something as simple as a permit amendment should be obtainable, without
potential appeals to that permit.

It's preventing money being spent on cleanup and litigation and all of those kinds
of things. ... And of course, good environmental management generally starts to
indicate that there is good overall management, and so if that's the case, then
that may follow that the company being well managed will make more money.

The difference between CSP and CEP in terms of financial impact, according to

the interviewee, is not the mechanisms through which the effects take place, such as risk
 41

reduction, costs cutback, and greater support. Rather, the difference lies in the pattern of

financial impact. Specifically, CEP tends to have an immediate and direct bottom-line

effect, while CSP presents its effect over a long period of time.

One manager used the Wal-Mart example given earlier to explain why CEP might

have an immediate financial impact through the product market. Other managers

articulated, as quoted below, that CSP is more important in the long run because of its

people-base, while environmental problems are relatively easier to deal with because they

are measureable and tangible activities. One of the important implications of such

temporal characteristics is that CSP's financial impact, once it begins to slide, is harder to

reverse than is CEP's impact, because it takes longer to experience the CSP effects. Note

that what these managers believe or do not believe is not the issue here, Rather, it is how

they perceive the potential differential impact that carries theoretical meaning and

practical consequences, because their perceptions will determine how they approach these

issues in management practice.

In the long term, the social issues are more problematic and have the potential to
be of greater risk to the business, because they involve people that live in the
vicinity of the facility, represent a workforce, represent stakeholders or interested
[parties] and your access to the resource. [They] can influence customers and
sustain potential media attention, for example. [Environmental issues] ... are
more measurable activities, [so] you can put action plans in place, you can
address those issues quite directly and, over a period of time, effect changes.

The second major difference between CSP and CEP with respect to financial

impact is that negative activities on social issues cause more trouble to firms than do the

negative activities on environmental issues. In other words, the downside of social issues

is more detrimental than that of environmental issues, as quoted below. The reason for

this seems to be that firms have a better idea of the magnitude of environmental effects,

yet the social stakeholders can be very vocal and influential.

 42

I think you are more negatively affected financially if you are unable to maintain or
influence, in a positive way, the social aspects around your operations. The
environment issues, unless they're sustained ... individual or somewhat unique
environmental performance infractions or problems can be managed and
addressed in a way that financial performance is not negatively impacted more
easily.

There was one manager from the mining company who did not believe in a simple

statement that one of CSP and CEP is more important than the other in terms of long-term

financial impact. Instead, he asserted that CSP and CEP have equal significance, at least

in the mining industry. He did admit, however, that there may be times when one is more

important than the other.

I think that they certainly are going to carry equal significance in terms of a long-
term financial sustainability of the company, in my opinion. You know, at any
point in time ... there might be some variability in terms of their importance. But I
think overall you're going to find, at least in our industry, the long-term
sustainability of our business is fundamentally tied to both our environmental
performance and our social performance. At any point in time, one makes one
slightly more important than the other one, but overall, it's almost equal as far as
we're concerned.

DISCUSSION

The analysis of our interviews disclosed significant differences between CSP and

CEP along six major categories, including nature of foci and elements, internal

consistency, regulative discretion, managerial approach, influence along the value chain,

and financial impact. Specifically, social issues are largely defined by societal norms,

ethical considerations and transaction-based interest exchange relationships, while

environmental issues are primarily defined in terms of depleted or destroyed natural

resources and generated waste and emissions. As a result, social issue management faces

a greater challenge in managing the ambiguity, and thus faces higher managerial

discretion. Management of social issues is also less clearly regulated than is

environmental management. The latter has a relatively established framework in terms of

standards and rules. These managers also perceived that there were higher incidents of
 43

conflicts among social stakeholders than among environmental stakeholders. In addition,

companies take different approaches in managing social issues versus environmental

issues. In fact, each of these companies' annual sustainability reports discriminated

between social and environmental performance.

Such empirically identified differential attributes allow us to better understand the

underlying distinction between CSP and CEP, a distinction that has previously been

overlooked. For example, the observed pattern of difference in quantitative data, that is,

the contrast between the close-to-linear growth of CSP and the nonlinear curve of CEP,

may be attributed to their different degrees of internal consistency and regulative

discretion, as well as to the technical nature of CEP in particular. In order to theoretically

differentiate between CSP and CEP, however, we need to see through these perceived

distinctions and distill some conceptual attributes, which will then guide theory

development in future research.

Based on the insights obtained from the interviews presented in the earlier section,

we delineate five major conceptual attributes of CSP and CEP in the following

paragraphs. A summary of these attributes and several others has been provided in Table

2.3. We will then give formal definitions of CSP and CEP, drawing upon prior research

and the conceptual attributes.

Primary Subject Relationships

Based on the interviews, particularly the insights we summarized under the

category "Nature of foci and elements," we find that CSP focuses on the socially

constructed transactional relations between corporations and the people associated with

them in various forms, such as employees; the interactions between the two parties take
 TABLE 2.3
Conceptual Attributes of CSP and CEP in Contrast

Differential Attributes CSP CEP

Definitions An organization's commitment and contribution to creating An organization's commitment and contribution to
and fairly distributing value among its stakeholders with reducing the negative impact that its operation may have
intrinsic claims, as well as ameliorating societal problems. on the biophysical environment, or facilitating any effort
by others toward environmental protection.
Components a. Ethical treatment a. Reduce pollution
b. Business integrity b. Zero footprint
c. Mitigating social problems c. Preserve resources
d. Efficient production
Primary subject Interests-based relationships generated due to social Public good, natural resources as they relate to business
relationships organization and transactions; social construction plays a operations; natural law or science plays a critical role in
critical role in determining the nature of the relevant determining the relevant relationships and impact;
relationships and impact; relationships occur among the relationships occur among the parts of the ecological
parties of the human society system
Stakeholder composition Stakeholders can be easily divided into different groups, Relatively homogeneous stakeholder population;
based on the issues they represent; involving interest primarily involving external interest groups.
groups both internal and external to the focal business.
Temporal focus Present generation Future generations
Objectives Social equity and integrity; to avoid jeopardizing existing Zero footprint
welfare
Focus along the value Constraints on value distribution due to conflicting Constraints on value creation due to limited natural
chain interests demands resources
hi relation to sustainable Contributes to the people dimension of sustainable Contributes to the environment dimension of sustainable
development development development

4^
 45

place within the human societal system. In contrast, CEP speaks to relatively

evident technological relations between business operations and nature based on

scientific observations; the interactions take place within the ecological system. Further,

in a lot of cases, the nature of social relationships and the associated expectations are

subject to ongoing construction and interpretations, thus falling short of clear policy

specifications. In contrast, CEP is relatively well defined and often consolidated through a

regulatory system, reducing managerial discretion.

Stakeholder Composition

The conceptual differences between CSP and CEP can also be understood from a

stakeholder perspective. First, the structure of the stakeholders associated with CSP and

CEP is rather different, although sometimes the two camps of stakeholders overlap.

Social stakeholders can be easily divided into different groups based on their individual

issues, such as community support and employee benefits. In contrast, environmental

stakeholders are relatively homogeneous, in the sense that the whole society stands for a

common nature. Second, social stakeholders can make claims by themselves, but nature

requires some media, i.e. environmental stakeholders, to realize its claims. Consequently,

the strength of environmental claims depends on societal recognition of the issues, as well

as on society-wide organized efforts, including regulations. In addition, social

stakeholders are both internal and external to the focal business, such as customers and

employees, while environmental interest groups are primarily external to the organization,

such as governments and non-governmental organizations (NGOs). These differences not

only explain why internal consistency is greater for CSP than for CEP, but also provide a

deep rationale for different managerial approaches and differential financial impact.
 46

Temporal Focus

The core concern for CSP is intergroup and international development problems,

whereas CEP is intended to address more of intergenerational equity than the

environmental damage to the present world. That means, CSP requires an immediate and

direct social impact, while CEP aims to ensure a healthy future. Interestingly, the

financial impact of CSP was expected to be released over a relatively long time period,

whereas the impact of CEP was believed to be "immediate and direct." Therefore,

managers may tend to ignore social issues unless there are strong voices out there. As

long as policy-making is effective, however, organizations are motivated to manage CEP

well.

Objectives

It comes up naturally from the interviews and from our analysis that the objective

of social issue management is to enhance social equity and integrity, while the objective

of environmental management is to achieve a minimum footprint for public good. The

connection between the two is that they both play a part in advancing societal welfare.

However, these are ultimate objectives, not operational ones. In practice, organizations

invest in social and environmental initiatives for different reasons, very often for

instrumental goals (Bansal & Roth, 2000). The instrumental value of CSP often comes

from rapport-building with stakeholders, which results in greater support and a reduced

chance of experiencing the otherwise implicit risks. In contrast, the value of CEP is often

realized in the form of operational costs reduction, such as better production efficiency. It

may also turn into competitive advantage in a product market where the environmentally

friendly feature of the products is appreciated by customers.

 47

Focus Along the Value Chain

CSP and CEP also have a different focus along the value chain. CSP is about

creating and fairly distributing value for stakeholders, whereas CEP is about reducing the

negative impact on the earth, with interests in this area being represented by a broad base

of stakeholders. The former requires active commitment and positive influence, while the

latter demands minimized impact. This implies that organizations must exchange interests

with social stakeholders in a reciprocal way in order to improve CSP, while they need to

minimize their negative environmental impact within a set policy framework in order to

improve CEP.

Definitions

Based on these conceptual attributes and drawing from prior conceptions of the

constructs, we systematically define CSP and CEP below.

Corporate social performance (CSP). We define CSP as: an organization's

commitment and contribution, beyond its profit-generating role for shareholders, to

creating and fairly distributing value among its stakeholders with intrinsic claims, and

ameliorating societal problems. This definition pays less attention to the philosophical

principles of CSR and stresses the behavioral (commitment) and outcome (contribution)

components of social performance (Wartick et al., 1985; Wood, 1991). Consistent with

most CSP researchers, this definition also emphasizes the non-economic characteristics

of CSP (Frederick, 1994; Margolis & Walsh, 2001). By "beyond," we mean that such

CSP commitment by firms is not intended for profit-generating in the first place, but for

some other considerations such as pressure from activists.

 48

To further clarify the conceptual boundary, we offer the following list of social

issues included in our definition of CSP:

a. Ethical treatment: Improving the economic, social and emotional condition,

beyond contractual requirements, of the people directly associated with the

focal organization, such as strong retirement compensation and job richness

arrangements for employees, safe products for customers, and goodwill and

respect for local inhabitants.

b. Business integrity: Honoring business ethics in the trade or marketing process,

such as honest business practices.

c. Support for social movements: Facilitating social change in the economic,

political, cultural, and other aspects of the society such as women's rights and

democracy.

d. Mitigating social problems: Alleviating social misfortunes or enhancing

social equity through policies, programs or economic support, such as

donation to AIDS and poverty.

Corporate environmental performance (CEP). We define CSP as: an

organization's commitment and contribution to reducing the negative impact that its

operation may have on the biophysical environment, and/or facilitating any efforts by

others toward environmental protection. That is, firms are not only expected to address

the environmental burden to which they contribute, but may also be credited when

promoting environmentalism in business in ways such as environmentally responsible

buying (Drumwright, 1994). By clearly defining CEP, we may enhance the consistency

and comparativeness of previous conclusions regarding the antecedents and consequences

 49

of CEP, which have been impeded due to the lack of consensus regarding its meaning

(Gilley, Worrell, Davidson III, & El-Jelly, 2000).

CONCLUSION

Through our quantitative and qualitative analyses, we have shown that there are

significant differences between CSP and CEP. These differences suggest that it is

inappropriate to combine CSP and CEP into one construct. The distinctive attributes

between them dictate that each has its own dynamics and conceptual domain, and that

simply aggregating the two constructs would risk masking important variances with

respect to firms' social and environmental practices. A bucket concept of CSP also makes

it more difficult to design effective policies that could be targeted at more specific goals.

Systematically differentiating between CSP and CEP and formally defining them

contributes to the field of CSR research and business sustainability by developing two

constructs whose uniqueness from each other has previously been overlooked. While

prior research built a rich understanding of the antecedents and consequences of CSP,

conceptual clarification and development such as we have performed is needed to further

our theoretical depth. Because of such depth, we may have to reconsider some of the

conclusions that were obtained from studies in which CSP and CEP were combined. In

addition, separating CSP and CEP brings these constructs in parallel to corporate

financial performance (CFP), which corresponds well to the triple-bottom-line view of the

business operations.

The differences between CSP and CEP also have important implications for

strategic management because the types of resources and capabilities required to integrate

CSP and CEP with business strategy are often different. When firms are motivated by

institutional demands and societal expectations to invest in CSP and CEP, they utilize and
 50

develop resources and capabilities in order to capitalize on the competitive opportunities

that arise because of institutional preferences, such as demand for green products.

However, the types and natures of the resources and capabilities required for CSP and

CEP integration are quite distinctive. The resources and capabilities for the purpose of

CSP integration focus mostly on relationship-building, which features a set of 'soft' skills

such as rapport-building, stakeholder engagement, and embracing some value-laden

principles. In contrast, 'hard' skills in the form of technological solutions, e.g., end-of-

pipe pollution reduction and green products, are required to achieve higher levels of

integration between CEP and strategic decisions. Such divergence in the types of requisite

resources and capabilities has implications on the sustainability of the values that these

resources and capabilities may create. Arguably, the resources and capabilities associated

with CSP tend to be more tacit and thus less imitable, while the resources and capabilities

associated with CEP are relatively more explicit and thus more vulnerable to competitive

imitation. This implies that the relationship between CSP and CEP to other constructs

may differ.

Future research could build distinctive nomological networks around the two

constructs. It will be interesting to see how the narrowly defined CSP, with CEP removed,

relates to the already-familiar variables. Even more interesting would be an examination

of the way CSP and CEP may interact during a firm's decision-making process and the

subsequent financial impact of the interaction. Ideally, researchers could investigate the

interrelationships among the three corporate performance measures - CSP, CEP and CFP

- from a system perspective. In addition, given the distinction between the two constructs,

we need to build our knowledge of efficient strategies in managing the two types of issues
 51

in order to provide a benchmark that will help firms to achieve their specific goals at

various stages of their social and environmental investment.

 52

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 58

CHAPTER 3

THE GROWTH TRAJECTORY OF BUSINESS

SUSTAINABILITY: 1991-2003 IN THE U.S.
 59

Chapter 3: The Growth Trajectory of Business Sustainability: 1991-

2003 in the U.S.

INTRODUCTION

Sustainable competitive advantage has been a core concept in the strategic

management literature, as it gives directions for strategy formulation and implies superior

corporate financial performance (Barney, 2002). The social and environmental issues

around business have, however, become increasingly important and have started to drive

a shift in the model of strategic management: from a conventional, unidimensional model

that focuses on task environment to a multifaceted model that incorporates the

stakeholder and institutional environments (Freeman, 1984; Oliver, 1997). Reflecting that

shift, the concept of business sustainability has emerged; it refers to sustained business

development in an inclusive and connected manner (Bansal, 2005; Gladwin et al., 1995).

Business sustainability represents a new model of business development that

balances stakeholder interests, distributes social and organizational value among various

stakeholders, and integrates business needs with societal expectations. Specifically, the

achievement of business sustainability is based on the simultaneous consideration of three

major performance measures - corporate financial performance (CFP), corporate social

performance (CSP) and corporate environmental performance (CEP) - during the course

of firm growth (Elkington, 1998). Although the volume of research explicitly focused on

business sustainability is not remarkable, there is already a considerable amount of

research that contributes to this line of enquiry. Past research in this area has primarily

examined the binary relationship between CSP and CFP (Margolis & Walsh, 2003;

McGuire, Sundgren, & Schneeweis, 1988; Waddock et al., 1997a), and between CEP and
 60

CFP (Hart & Ahuja, 1996; Russo & Fouts, 1997). What has been overlooked is the

simultaneous interrelationship among the three performance measures as a dynamic

system.

Further, conventional research on business sustainability and broad social issues

focuses on the level of performance at certain points in time. One typical premise is that

the level of CSP will be positively correlated with the level of CFP in a particular period.

Such an approach, however, ignores potential mediators and moderators that could

eliminate the direct relationship (Barnett, 2007; Barnett & Salomon, 2006). Furthermore,

by its very nature, sustainability is a long-term phenomenon and significant relationship

patterns may take years to surface. It might, therefore, be difficult to identify an

immediate impact on the level of performance. Even if the time lag is modeled, deciding

on a proper lag structure is virtually impossible, especially given the possibility that such

an impact might essentially be a gradual process rather than a clear-cut, stimuli-response

relationship. It is on the basis of these considerations that we choose to focus on the

trajectory of sustainability variables, which allows us to identify the underlying pattern of

relationships; a conceptualization that challenges conventional theory and methodology.

Ironically, cross-sectional studies have been primarily used in prior research

despite the long-term nature of business sustainability phenomena, with a few exceptions

(Bansal, 2005; Barnett et al., 2006; David, Bloom, & Hillman, 2007; Shropshire &

Hillman, 2007). Because period effects may adduce different pictures of the same

relationships at different points in time, we have limited confidence in the conclusions

that have been drawn from prior studies based on a one- or two-year time-frame. In fact,

researchers have already reported inconsistent results when examining CSP-CFP and

CEP-CFP relationships (Margolis et al., 2001; Orlitzky, Schmidt, & Rynes, 2003). More
 61

seriously, we fall short of understanding the dynamic processes and evolutionary patterns

as firms seek to sustain continued growth and above-average financial performance; such

knowledge offers direct guidance to strategic management in a new age.

In this study, we aim to identify the growth trajectory of business sustainability

based on a sample of large public firms over 13 years. In particular, we look at how the

three performance measures, CSP, CEP and CFP, evolve as they relate to one another.

Such a growth-focused approach speaks directly to the heart of business sustainability,

while shedding further light on the relevant conclusions reached in previous research. Of

particular interest is the fact that the growth approach allows us to understand how the

trajectory of one pillar of sustainability is influenced by those of other pillars, which

offers insights into the process of achieving business sustainability. In addition, this

approach will allow us to investigate the potential of social and environmental

investments in building long-term sustainable value. Such an argument has long been put

forward, yet it has never been fully tested. Examining business sustainability from a

growth perspective therefore has the potential to contribute to this field considerably, in

terms of both theory and methodology.

We argue that the behaviour of firms evolves in such a way that their performance

growth in three major domains - CSP, CEP and CFP - will increasingly coalesce over

time. The reason for this is that two types of processes interact at the firm level:

institutional processes, with respect to the expectation of sustainability; and firm decision-

making processes, in terms of competitive strategy-building. The former is based on

institutional theory, while the latter is grounded on a resource-based view (RBV). Such

interaction eventually finds common ground for both logics through integrative resources

and capabilities. That is, some resources and capabilities emerge that integrate both
 62

business demands and social considerations. This relationship between firm resources

and the institutional environment has been little explored at the firm level, yet it explains

not only how the three pillars are mutually consistent, but also how they will become

increasingly aligned over time.

This study may also advance institutional theory by generating insights into

institutional processes that occur in parallel with strategy formulation and that have been

comparatively overlooked. The area of business sustainability presents an ongoing

process of active institutionalization, involving contested meanings and values and

organizational responses to emerging values. There is a remarkable presence of

"institutional contradictions" in the field, such as efficiency-legitimacy contradiction, and

misalignment between existing institutional arrangements and less powerful actors whose

interests are not well accommodated (Seo & Creed, 2002). Such contradictions permit

rich description of the underlying interplay process.

In the following section, we develop a framework that explains the process by

which institutional logics and business strategic logics interact and enable changes on the

part of both firms and the institutional environment. We present a hypothesis on the co-

evolution of CSP, CEP and CFP based on the framework. We then describe the methods

we use, and we provide the results. In the subsequent section, we discuss the findings and

implications, including those specific to the research on business sustainability and those

more broadly related to enriching institutional theory. We then conclude our study.

THEORY DEVELOPMENT

Institutional theory has been widely applied to the understanding of business

sustainability. The key questions addressed include the institutional pressures that

influence organizational adoption of sustainability practices (Bansal et al., 2000; Sharma

 63

& Henriques, 2005) and the diffusion and institutionalization of such practices within

organizational fields (Hoffman, 1999; Jennings & Zandbergen, 1995). The resource-based

view (RBV) has also garnered considerable attention, as researchers investigate the

resources and capabilities associated with business sustainability (Hart, 1995; Russo et al.,

1997). Few studies, however, integrate institutional theory and the resource-based view

(Bansal, 2005; Oliver, 1997 being exceptions). It is, however, their integration that

probably reveals some of the deepest insights into the trends in the three pillars of

sustainability.

In this section, we integrate institutional theory and the RBV through the

processes that occur over time. The process follows four stages, with no clear start or end:

(1) changes to the institutional context; (2) the opportunity to acquire rent-earning

resources and capabilities; (3) the acquisition of unique resources and capabilities (R&C)

that integrate organizational resources and institutional demands; (4) the shaping of the

institutional environment through these new R&C. The process that we describe is

illustrated in Figure 3.1.

1. Changes to the Institutional Context Concerning Business Sustainability

Institutional forces, often attached to specific stakeholders or actors, add to the

purely economic and technological elements that characterize the traditional task

environment of business (Freeman, 1984; Scott, 1987, 1991). With their rule-like status in

relation to organizations, these institutions determine and change the structure of inter-

organizational resource dependence, operational uncertainty, issue awareness and

acceptance by the public, as well as legitimacy pressure; thus they set up a context to

which organizations must strategically adapt (Scott, 2001; Zucker, 1987).

 64

FIGURE 3.1
The Relationship Between Firm Resources and the Institutional Environment

1: Institutional 2: Valuable firm

environment imposes resources and capabilities
expectations are identified on the basis
of institutional valuation

4: Newly acquired 3: Integrative resources and

resources further shape capabilities are created that
the institutional permit strategic integration
environment

There is evidence of institutional adaptation in the field of business sustainability

(e.g., Bansal et al, 2000; McKay, 2001). For instance, institutional forces are found to

influence corporate strategy (Rugman & Verbeke, 1998), corporate social policy (Strike

et al., 2006), and corporate environmental strategy (Child & Tsai, 2005; Christmann,

2004; Sharfman, Shaft, & Tihanyi, 2004). Further, such contextual constraints have

become increasingly important to business, as reflected by greater perceived public

concern and regulatory pressure (Banerjee, 2001; Banerjee, Iyer, & Kashyap, 2003) and

the change in stakeholder management commitment (Shropshire et al., 2007). Meanwhile,

more and more business research models and business plans have started to incorporate

institutional considerations, which is an indication of how seriously the business

 65

community treats such an environment (Guler, Guillen, & Macpherson, 2002; Lounsbury,

1999; Oliver, 1997).

There seems to be extensive influence of this increasing institutional pressure on

organizations with respect to business sustainability. On the social side, corporate

charitable donations have increased with improved economic prosperity (Adams &

Hardwick, 1998; Brammer & Millington, 2004), and better occupational safety has been

realized, even in relatively dangerous industries (Smith & Tombs, 1995). More

importantly, as Brammer and Millington have shown (2004), the prerequisite role of

profits for donations has weakened in the last decade, and corporate visibility and societal

impacts have become major drivers behind such social commitment. In addition, concerns

with labor ethics and other social dimensions of operations in the process of

internationalization have gained increased attention (Doh, 2005; Strike et al., 2006), and

various institutional arrangements have been suggested to address these problems (Amba-

Rao, 1993; Doh, 2005; Frederick, 1991; Windsor & Getz, 1999).

On the environmental side, the sweeping changes in the institutional climate have

been experienced by all members of society, especially profit-seeking corporations. Some

of the most salient signals of this change include the establishment of regulatory agencies

such as the EPA (Environmental Protection Agency) in the United States, the increased

power of environmental NGOs (Non-governmental Organizations), and extremely

sensitive public attention, among others. Hoffman (1999) has clearly illustrated how

corporate environmentalism had undergone four major stages of evolution at the

organizational field level, from challenging to existing beliefs, to regulation and

enforcement, then to normative recognition, until finally, corporate environmentalism

became a cognitive assumption that was almost unquestioned. During this process,
 66

organizational fields around environmental issues have constantly changed their own

content and form, representing the change in power and relationships in the fields.

Hoffman's study also demonstrates that sustainability-related institutions do not

come about naturally, but rather emerge as a result of "institutional war" (White, 1992).

With respect to both the content and the form of "desirable institutions," there are always

competing notions and suggestions that reside both outside and within an organizational

field. A dominant message of expectation will, however, be delivered to relevant parties

to guide their behaviors, once various institutional actors, such as government, media and

companies, reach an overall consensus through compromise and accommodation. The

present climate of acceptance around sustainability is the result of a societal paradigmatic

shift from technocentrism to econocentrism and then to sustainable development

(Gladwin et al., 1995). In the past, many believed that the social and environmental

aspects of investment represented resource malfunction and misappropriation (Frederick,

1994; Friedman, 1970), bringing extra burdens to firms (Friedman, 2002; Walley et al.,

1994). In line with the three pillars of sustainability, firms now devote much greater effort

to reducing the negative environmental impacts of their operations (resulting in better

CEP), to enhancing the wellbeing of stakeholders (toward greater CSP) and to promoting

shareholder value (improved CFP).

A web of institutions on sustainable development has also come into being that

enhances the diffusion of this norm. In addition to governmental regulation and

organizational social issues management, we have seen the development in society of

fields and networks of sustainable organizations (Jennings et al., 1995), the illustrative

practice of "institutional entrepreneurs" (DiMaggio, 1988; Zucker, 1987), the interplay of

multilevel and cross-sector social systems (Selsky & Parker, 2005; Starik & Rands, 1995),
 67

as well as a greater supply of clean technologies (Shrivastava, 1995c). These institutions

not only provide a contextual structure in which firms are led towards sustainability, but

they also enhance the acceptability - and thus the power - of such a norm, both within

and outside organizations through improved cultural and political support (Oliver, 1997).

Consequently, as a "legitimatized element" (Zucker, 1987: 443), business sustainability

has begun to promote and even demand the creation and flow of resources and

capabilities towards such initiatives.

2. Valuable Resources and Capabilities are Identified on the Basis of the

Institutional Valuation

An important tenet in RBV is that the value of resources changes with a changing

environment (Barney, 1986; Collis, 1994). Some business objectives may be more or less

desirable as the institutional environment evolves, and hence, the resources and

capabilities associated with those objectives become more or less valuable. This implies

that firm resources and capabilities will become differentiated in light of their value

potential for sustainable competitive advantage, based on what the institutional

environment dictates is valuable. This differentiating role of the institutional environment

is achieved through the four major institutional mechanisms delineated below.

Signaling and publicizing. Institutions are able to deliver an explicit signal of

preference regarding business activities, thereby generating normative pressure. The

accompanying policies and regulations, campaigns and discussions will increase public

awareness and create concern for issues that may have been previously ignored. For

instance, the propaganda campaigns and legal cases associated with the Clean Air Act,
 68

Affirmative Action, and other regulations on labor rights and human rights have made

society sufficiently sensitive to these issues.

When people become aware of their rights, they fight, and the physical and

intellectual firm resources associated with the issues at hand are, consequently,

differentiated. This can be observed in the product market where, for example, ever-

increasing concern over global warming, high levels of waste and other environmental

deterioration phenomena has resulted in environmental issues emerging as an important

criterion against which customers make purchases (Rosewicz, 1990). The same can be

seen with social issues. Customers may even protest against certain products owing to

concerns about the company. This has led to the idea that green products provide a new

opportunity for market growth through product differentiation (Murray & Montanari,

1986; Porter, 1980).

Further, the increased public attention on social responsibility has made social

reputation, which is a valuable resource for companies, even more important for

competition (Fombrun & Shanley, 1990; McGuire et al., 1988). For example,

multinational corporations often face scrutiny by the public, local governments and

worldwide customers concerning how they deal with issues of labor exploitation, cross-

national differences in product quality standards, environmental impact of operations,

cultural hegemony and local autonomy. A company may be rewarded in various ways

when it meets the expectations of those stakeholders and thus builds a good social

reputation. A variety of reputational advantages for firms, other than customer loyalty,

have been offered and tested, such as better ability to obtain and keep high-caliber

employees (Backhaus, Stone, & Heiner, 2002; Dechant & Altman, 1994), to attract

investors (Paul, Brammer, & Millington, 2004) and to set premium product prices
 69

(Klassen et al., 1996; Milgrom & Roberts, 1986). It is clear then that the signaled

preference of institutions and the resulting increased public awareness regarding social

and environmental issues have offered opportunities for firms to exploit and build some

unique resources and capabilities.

Information disclosure. Supplementing the role of the institutional environment

for signaling and publicizing, there are established institutions that require or guide

information disclosure on the part of corporations. The consequent information

transparency will facilitate the differentiation in value among the firm resources and

capabilities that are associated with sustainability. Such institutions typically involve

mandatory self-reporting, along with penalties and investigations when necessary. These

arrangements allow the public to have access to transparent and precise information on

business activities, i.e., information on which they base their reactions. Some examples of

such institutions include public reporting by governments like the U.S. EPA's Toxic

Releases Inventory, sustainability or CSR reports released by a growing number of

companies, contaminated land registries, as well as self-regulation such as ISO 14000

certification. Certain norms and standards for reporting - for example, the Global

Reporting Initiative - have also been established. In addition to disclosing important

information and creating pressure on firms, these types of institutions have also made it

convenient for firms to contribute to sustainability. By associating themselves with some

of these signals, firms can demonstrate their ecological commitment through procedural

and structural improvements in a more visible way (Suchman, 1995).

Through participating in certain forms of information disclosure, firms create

greater transparency around social and environmental issues. Along with this
 70

transparency, opportunities for building stakeholder loyalty and legitimacy also emerge,

and this may have a considerable impact on firms in the form of "long-term sustainability,

survival, license to operate, avoiding fines and penalties, lessening risks, and employee

satisfaction" (Bansal et al., 2000: 727). Researchers have long emphasized the importance

of legitimacy as a strategically operational resource (Ashforth & Gibbs, 1990; Pfeffer,

1981; Suchman, 1995). In line with this view, not just resources and capabilities but also

firms themselves are classified according to institutional preference.

Regulations. Not only do regulations and rules clearly state what is defined as

acceptable and desirable, but they also make sure that relevant parties behave as expected

through the use of strong tools and instruments for enforcement. This type of institution is,

therefore, arguably the most effective and powerful kind. Consequently, resources and

capabilities can be clearly differentiated in terms of their ability to help firms meet and go

beyond regulations. These resources may flow towards some firms rather than towards

others, as guided by a particular institutional set-up - in this case, business sustainability.

If a firm honors these regulations, it obtains social legitimacy; otherwise, stakeholders

will revoke their investment, be it physical, political or psychological. The threat of loss

of investment and support provides a deterrent effect that motivates firms to be legally, if

not ethically, responsible.

Responsible firms do receive pay-back. For example, despite infrequent

inspections and negligible penalties, as measured by fines for violations (Russell, 1990),

researchers have pointed out a fairly high rate of compliance with statutory regulations

among constrained firms (Decker, 2003; Harrington, 1988; Magat & Viscusi, 1990).

Addressing this "Harrington paradox," Decker (2003) found that a solid record of

compliance helped firms to obtain permits for new plant construction more quickly;
 71

delays in permission have been associated with tremendous costs such as expected

revenue and loss of critical strategic opportunity (Robinson, 1999).

Factor market valuation. Either through government or self-regulated association,

certain factor markets have been created within the current institutional environment.

Some examples of factor markets include fair-trade coffee and carbon-emission trade.

When carbon emissions are taxed or traded because of markets, firms have incentives to

reduce carbon emissions because they gain direct financial benefits or offset credits. The

resources and capabilities that may contribute to the firms' factor market performance

thus become more valuable than others.

It is in these four ways that the institutional environment makes its hand visible,

differentiating resources and capabilities in value according to their fit with the

institutional prescription. Opportunities are thus created for firms to exploit - or to build,

if they do not already possess them - some valuable resources and capabilities. For the

purpose of seeking sustainable competitive advantage, these resources and capabilities

will be the ones that firms seek. Oliver (1997) has analyzed the importance of

institutional capital in this respect.

3. Integrative Resources and Capabilities are Created That Permit Strategic

Integration

The already-explained institutional mechanisms create an institutional market that

values and prices firm resources and capabilities, indicating what kinds of activities are

more desirable within the institutional environment. Such external expectations, however,

have to be translated into firm-level strategies, and in turn, into the associated practices

and programs so that these institutional preferences are consolidated through routines, i.e.,
 72

institutionalized. Otherwise, they are nothing more than societal voices that suggest

alternative institutional arrangements.

It should be pointed out that organizations never conform to institutional

prescriptions automatically and easily. Instead, there is natural resistance on the part of

existing powerful actors to emerging institutions (Hannan & Freeman, 1984; Powell,

1991). The reason for this resistance is not only the path dependency, organizational

inertia and institutional lock-in, but also that it is very challenging to integrate

institutional logics and strategic logics, two fundamentally different logics. The former

centers on socially defined legitimacy, a collective notion of social appropriateness and

desirability, while the latter focuses on functional efficiency and applies strongly to

competitive strategy formulation and implementation. Technical efficiency is often

undermined when organizations seek institutional legitimacy (Meyer & Rowan, 1977;

Zucker, 1987).

Seo and Creed (2002) have identified such an efficiency gap as one of the four

sources of institutional contradictions. The institutional rigidity mentioned above is

analogous to what they label as "the nonadaptability problem." The other two sources of

institutional contradictions include: interinstitutional incompatibilities across different

levels and societal sectors; and unsatisfied actors, often less powerful, with respect to

existing institutional arrangements (Seo et al., 2002). Until these institutional

contradictions are resolved, the pressure for institutional change, and thus organizational

adaptation, will intensify. Consequently, organizational survival is at stake.

In order for the institutional preferences to be imprinted into firm-level strategies

and operations, some accommodating mechanisms must be created that permit integration

between institutional logics and strategic logics, be they symbolic or substantial. One
 73

mechanism is the decoupling, or loose coupling, between ritualized formal structure and

operational technical activities (Meyer et al., 1977). For example, Elsbach & Sutton (1992)

demonstrated how social movement organizations can shift public attention away from

their controversial and even unlawful actions by decoupling legitimate structure from

illegitimate activities, eventually obtaining social endorsement and support. Scholars have

pointed out, however, that such loose coupling or decoupling may not, in the long run, be

effective in protecting organizations from the penetrating external pressure unless

continuous efforts are made to pursue optimal solutions (Seo et al., 2002).

The other approach to accommodate both efficiency and legitimacy is to truly

integrate institutional logics and strategic logics. By using the adaptive approach of

bridging institutional processes and firm decision-making processes, firms can address

both the efficiency gap and the misaligned interests between powerful and less powerful

actors in the field. Depending on management commitment, both the decoupling

approach and the integrative approach can be adopted in organizations (Weaver, Trevino,

& Cochran, 1999).

The challenge for deep integration is to identify and develop special resources and

capabilities (R&C) inside organizations that allow firms to exploit both the institutional

value and efficiency value. We define such R&C as integrative R&C, which are valuable

in the sense that they have the best capacity to reflect both institutional demands and

competitive considerations. When applied in strategies, these R&C will serve to translate

institutional expectations into firm-level routines. Note that the institutional valuation

process has put price labels on the R&C, based on their potential to achieve institutional

goals; the integrative R&C we define here, therefore, will be among those highly valued

by the institutional market. In other words, the process of institutional differentiation has
 74

pointed out the types of R&C that firms should pursue as they strive to develop

competitive advantages.

Prior researchers in the area of sustainability have already identified some R&C of

high integrative value, such as stakeholder integration, continuous innovation and higher-

order learning (Chan, 2005; Sharma & Vredenburg, 1998). Attempting to build a natural

RBV, Hart (1995) has presented the distinctive capabilities required to implement

different environmental strategies, such as total quality management, cross-functional

management and establishing shared vision. Building on Hart's work, Buysse and

Verbeke (2003) classified five resource domains with respect to three types of

environmental approaches, from reactive posture to environmental leadership. In addition,

Christmann (2000) emphasized the importance of process innovation and implementation

capabilities as complementary assets in the process of realizing the cost advantages of

best environmental practices. These identified resources and capabilities contribute to

improved performance across financial, social and environmental aspects of operations,

driving the integration of the three types of performance.

Furthermore, Russo and Fouts (1997) delineated some capabilities that would

certainly be part of a proactive environmental policy, including the acquisition of new

technology, creative ways of using physical assets, advanced employee skills, intense

cross-functional coordination, company-wide commitment and participation and

sophisticated internal management. These organizational and technological capabilities,

once developed or enhanced during firms' implementation of sustainability programs, are

sources of sustained competitive advantage in the modern competitive environment

(Barney, 1991; Dierickx & Cool, 1989; Reed & DeFillippi, 1990). In the meantime,

during the process of executing an active environmental initiative that is usually

 75

complicated, organizational learning abilities are promoted as well (Bonifant, Arnold, &

Long, 1995).

Apart from these studies focusing on CEP, some scholars emphasize important

resources for CSP. For example, Strike, Gao and Bansal (2006) explained how learning

and knowledge transfer capabilities are needed in order for multinational companies to

manage CSP better. Waddock & Graves (1997b) found that, in terms of stakeholder

relations, CSP influences the quality of management. In both cases, the associated

resources and capabilities are not only instrumental in implementing sustainable practices,

but are effective in generating competitive advantages for some over others, according to

RBV. Hence, these integrative R&C allow institutional values and expectations to be

well reflected in firm level strategies and operational activities.

4. Resources and Capabilities That are Created and Acquired Further Shape the
Institutional Environment

Organizational level activities that exploit and develop integrative R&C are

initially an adaptation process. When, however, the scope and depth of such activities

increase, a focal sector or field may present changes in practices that are increasingly

incompatible with institutions in other sectors or fields at different levels. This poses the

contradiction of "interinstitutional incompatibility" (Seo et al., 2002). In other words,

locally initiated changes may conflict with the values and practices in other institutional

sectors or levels that are interconnected with the focal sector or level in a larger societal

system. Over time, either the newly initiated changes are deracinated or are further

diffused. In either case, the initial institutional environment will be reshaped, resulting in

changes to the relative power of its actors, and thus the content and structure of
 76

organizational constituencies. Given that sustainability commitment represents an

institutional call of growing influence, we expect that the broader institutional

environmental will be reshaped in such a way that integrative R&C are actively pursued

and applied.

It should be noted that such institutional change with regard to business

sustainability is primarily driven by endogenous sources of institutional contradictions

rather than by exogenous jolts such as technological revolutions or regulatory changes

(Rowan, 1982; Tushman & Anderson, 1986). It is true that, as we described in the first

section about an increasingly demanding institutional environment, new regulations are

being enacted that push firms to develop a more sustainable model of business. Such

regulations, however, have never been so strong that they become the dominant driver

behind the sustainability movement. Rather, the major driver has been one type of

institutional contradiction, the misaligned interests between shareholders and other

corporate stakeholders. The interests of the latter group have not been adequately

accommodated, yet the existing institutional arrangements do not have enough space for

corporations to adapt to societal expectations in this regard. Institutional changes are

therefore required to resolve the contradiction.

The implication of such a structure in driving forces is that institutional

entrepreneurship will play an important role in determining how and where corporations

evolve toward sustainability. In other words, there will be diversified and innovative ways

of doing sustainable business, and the dominant pattern will be customization rather than

direct conformity (Westphal, Gulati, & Shortell, 1997). This also means that CSP, CEP

and CFP, although largely co-evolving as we expect, will converge and diverge at

different points in time. That is, we will not expect a simple, perfect, virtuous circle. This
 77

is even truer when one considers the compounding effects of disruptive events that may

occasionally occur.

A typical mechanism of the institutionalization on sustainability will be

isomorphism through competitive imitation and normative compliance. Those firms that

possess integrative R&C often play the role of "institutional entrepreneurs," serving as

agents of institutional change and reproduction (DiMaggio, 1988; Zucker, 1987). The

professionalization and structuration among organizations that arrive subsequently

(DiMaggio & Powell, 1983) provide extra normative pressure for isomorphic processes.

Accordingly, firms that do not embark on CSP and CEP at the outset often find

themselves following proactive firms later on, either because they attribute the

competitive advantage of leading firms to such a strategy, or because the same norm is

shared by an increasing number of peers.

The positive interplay between firm resources and the institutional environment

that we have developed so far suggests that CSP, CEP and CFP will generally co-evolve

over time. Specifically, we expect that, when the institutional environment values firms'

R&C based on its preferences, firms will be motivated to develop and apply integrative

R&C that allow the integration of institutional logics and efficiency logics. The broader

institutional environment will evolve to reflect such integration. As the interaction

between firms' R&C and the institutional environment deepens over time, it is likely that

the three pillars of sustainability will coalesce, in the sense that those pillars are closely

tied to one another. During this process, corporations maximize long-term firm value and

eventually realize business sustainability.

 78

Hypothesis 1: Corporate social performance (CSP), environmental

performance (CEP) and financial performance (CFP) become
increasingly aligned over time, such that the growth rate (i.e., the slope) of
one performance measure will be positively influenced by that of others.
An Assumption and its Implications

Although we did not state it explicitly in the earlier part of this section, we have

implicitly suggested that integrative R&C rely on positive or "good" things that firms do

in order to incorporate institutional factors into their strategic decision-making. That is,

the integration process involves only the activities that are aimed at accommodating,

rather than resisting, institutional expectations. The hypothesized co-evolution

relationship may therefore not apply to negative activities that pertain to sustainability

issues. In fact, we do not expect that the three performance measures will strongly

coalesce when CSP and CEP are measured as the extent to which firms are irresponsible.

We have this suspicion even though we acknowledge that negative CSP and negative

CEP may systematically influence CFP, given a strong stakeholder response to such

incidents. For the parsimony of the research model, in this study, we focus on positive

things, i.e., responsible activities only.

There is actually empirical support that distinguishes positive performance from

negative performance with regard to social and environmental issues. These recent

suggestions contradict the conventional research approach that maintains that a firm's

responsible activities and irresponsible activities can be assumed to covary negatively,

and thus are appropriate to be aggregated in order to give an overall evaluation of the

firm's CSP and CEP. For example, those who use KLD data often construct the CSP and

CEP measures as the sum of the relevant strength items minus the concern items (e.g.,

Berman et al., 1999; Waddock et al., 1997a). Strike, Gao and Bansal (2006) have
 79

demonstrated, however, both theoretically and empirically, that strengths and concerns

represent two distinctive constructs: corporate social responsibility and corporate social

irresponsibility. Mattingly and Berman (2006) also argue that strengths and concerns may

not represent two ends of a continuum, but rather two independent constructs. They

support their argument with factor analysis. Furthermore, adding the positive scores and

negative scores will reduce variance and mask important information.

METHODS

Data and Sample

The sample of firms used for empirical analysis in this study was extracted from

social ratings data published by Kinder, Lydenberg, Domini & Co. (KLD), which has

been used extensively by CSP researchers (McWilliams et al., 2000; Waddock et al.,

1997a). Since 1991, KLD has published summary spreadsheets evaluating the social

performance of approximately 650 publicly listed U.S. firms each year, including S&P

500 firms.

Our goal was to examine the evolving pattern of relationships between CSP, CEP

and CFP. We therefore developed a longitudinal dataset through two screens. First, we

excluded firms that did not have consistent social ratings across the 13 years from 1991 to

2003. We had two reasons for this screening decision: to reach the maximum available

temporal observations and to avoid missing values that may raise methodological issues.

We did, however, include the excluded firms in a robust test and did not find a significant

change in our results. Second, we included only those firms for which there were

matching financial data and market data from the Compustat and CRSP (the Center for

Research in Security Prices) databases, respectively. Our final sample included 300 firms
 80

with data from 1991 to 2003. Approximately 60% of the sampled firms were in the

manufacturing sectors. (A detailed industry composition is provided later in this paper.)

Business Sustainability Variables

Corporate financial performance. Our financial measures reflect the value

created for shareholders, consistent with our definition of CFP. This value can be in the

form of market value, as shown in share price, or book value, as shown in accounting

measures. We therefore included three separate CFP measures in the analysis: market

value added (MVA), return on equity (ROE), and return on assets (ROA). MVA indicates

improvement in a firm's overall market value; ROE measures a firm's ability to

contribute to shareholder returns; ROA reflects operational efficiency, an indicator of

firm profitability.

ROE and ROA have been widely used in strategy research and social issues

research (Agle, Mitchell, & Sonnenfeld, 1999; Hart et al., 1996; Johnson et al., 1999).

MVA is calculated as the market value of the firm less its book value (Hillman et al.,

2001; Wallace, 2003). Hillman and Keim (2001) have indicated that MVA may be a

better measure of long-term value creation than other market performance measures such

as shareholder returns and Tobin's Q.

Corporate social and environmental performance. Prior research has often

blurred the boundaries between social and environmental performance. It is therefore

important to carefully develop and validate the CSP and CEP constructs. As a first step,

we reviewed prior definitions in this area and developed two definitions that were

believed to discriminate between the two constructs. We asked a panel of six experts in

this research area to comment on the definitions. From their feedback, we further refined
 81

the construct definitions. With these pre-developed definitions in mind, we conducted

semi-structured interviews with nine executives who managed social and environmental

issues, asking them questions about how they discriminated between social and

environmental issues in terms of both interpretation and managerial approach. The

managers were drawn from nine North American companies in a range of industries.

Systematic analysis of these interviews provided further support for a distinction between

CSP and CEP. The details of the interviews and the analysis are presented in a separate

study.

We used KLD data to build measures of CSP and CEP. In the KLD database, a

firm is assessed on 13 criteria: seven qualitative dimensions that are rated on both

strengths and concerns and six exclusionary categories that are rated only on concerns.

The strengths and concerns of the qualitative criteria are assigned either " 1 " or "0,"

depending on whether or not a firm meets the set criteria. The seven qualitative

dimensions are Community Relations, Employee Relations, Women and Minority

Diversity, Environmental Issues, Product Liability, Human Rights ("Non-U.S.

involvement" prior to 2002) and Corporate Governance ("Other" prior to 2002). The

exclusionary criteria are whether a firm is involved in Alcohol, Gambling, Tobacco,

Firearms, Military and Nuclear Power. We chose the seven former dimensions as our

starting point for constructing CSP and CEP measures (Strike et al, 2006). We also used

the five most-frequently used dimensions for a robustness test, excluding Human Rights

and Corporate Governance, which is more consistent with most prior studies using KLD

data (Hillman et al., 2001; Johnson et al., 1999).

The CEP measure was constructed from the items in the Environmental Issues

dimension; the CSP measure was constructed from the items in the other six dimensions.
 82

As mentioned in the theory section, we focused on the positive side of CSP in this study.

We therefore created measures of CSP and CEP by adding up the strength items only in

respective dimensions. We normalized these measures to make them comparable between

firms and across years (Mattingly et al., 2006).

Control Variables

The sample included firms from eight industries, as shown in Table 3.1, and was

identified by the two-digit North American Industry Classification System (NAICS). We

controlled for industry differences by including industry dummies in the model. Firm size

has been the most frequently selected control variable in studies that have attempted to

explain firm performance (Bansal & Clelland, 2004; Russo et al., 1997). We used the

logarithm of total assets to proxy firm size. We also controlled for firm risk because prior

studies have found that the level of risk affects all the major types of performance

(Bromiley, 1991; Miller & Leiblein, 1996; Orlitzky & Benjamin, 2001). We measured

firm risk in two ways. We calculated firm accounting risk as the ratio of long-term debt to

total assets, and we measured firm market risk as the coefficient of variation of the daily

stock price for each year and each firm. These three variables were used as time-varying

covariates.

DATA ANALYSIS

Analytical Model

We predicted that the three pillars of business sustainability, CSP, CEP and CFP,

would be increasingly aligned. In other words, the growth paths of these three

performance measures would coalesce over time. Such an argument requires application

of latent curve models, or growth curve modeling (Duncan et al., 1997). In latent curve
 83

TABLE 3.1
Industry Composition

N Percentage
Industry Name
(observations)
Agriculture, forestry and mining; construction 13 4.33

Utilities 14 4.67
Manufacturing - food, beverage and apparel;
32 10.67
Accommodation and food services
Manufacturing - wood, pulp, printing, plastic
55 18.33
and basic chemical
Manufacturing - metal, machinery, electric
93 31
equipment and furniture
Retail trade; Wholesale trade; Transportation
41 13.67
and warehousing
Services: Information; Professional, scientific
and technical services; Administrative and
support, Waste management, and Remediation 30 10
services; Health care and social assistance
Finance and insurance 22 7.33

Total 300 100

models, the observable time-specific values of one variable - CSP, CEP or CFP in

this case - is conceptualized as determined by an underlying path. The growth pattern of

each variable is reflected in two parameters of the growth curve: intercept and slope. The

intercept represents the initial level of the growth trajectory, and the slope represents the

rate of change (Curran & Willoughby, 2003). Multivariate growth curve models can then

be estimated by drawing covariance paths between the latent intercepts and slopes of

different variables, so that the evolving relationships between these variables can be

identified (Li, Duncan, Duncan, & Acock, 2001; MacCallum, Kim, Malarkey, & Kiecolt-

Glaser, 1997). We used AMOS 7.0 package to execute the analysis.

 84

The basic function of individual trajectory estimation is as follows, assuming a

linear growth path. The hypothesized relationship can thus be tested by examining the

way that the slopes (P,) of CSP, CEP and CFP covary with one another.

yit = a, + PA* + eit (1)

a,- = |x« + tfti (2)

ft = H* + Qw (3)

where yu denotes the observations of variable y for firm i at time t. Xt is a metric of time and
reflects equally spaced linear change, often in the form of 0, 1,2, ... t. a, and pi are the intercept
and linear slope, respectively, of the underlying trajectory of firm i. zit is the error term. \ia and \yp
are the mean intercept and mean slope pooling over all firms in the sample and £& and ^g, are the
deviations of each firm from the group means.

Following the instructions of Bollen and Curran (2006), we went through three

major steps of analysis to test the hypothesis. The objective of each step must be met

before moving to the next step. First, we checked the measurement model, where no

covariance paths were included, to see whether there were significant intercepts and

slopes for a particular performance measure, e.g. CSP. The measurement model is similar

to confirmatory factor analysis and its role is to confirm that there is indeed an underlying

trajectory that can be identified from the yearly observations that serve as indicators.

Second, we turned to a within-variable covariance model, where only the covariance

between the intercept and slope of the same variable was modeled. We have given an

example of the within-variable covariance model, as shown in Figure 3.2, which used

MVA as the CFP measure. At this step, a good fit of the model must be reached, and at

least some covariance must be significant. Otherwise, it is meaningless to move on and

test the cross-variable covariance. Third, we examined the cross-variable covariance that
 85

FIGURE 3.2
Conceptual Within-Variable Covariance Model for CSP, CEP and MVA

1991 1992 1993 2002 2003

20 02 2003
2^

D
-s lopeZ)

Note:
1. The cells represent the year-specific observations from 1991 -2003 of a particular variable,
such as CSP.
2. The single-headed arrows connect the latent variables with the year-specific observations
that serve as reflective indicators.
3. The double-headed arrows connecting the latent variables represent the covariance
between the variables.
 86

directly tested our hypothesis, as illustrated in Figure 3.3. As part of the robustness test,

we also introduced time-invariant and time-varying control variables, such as industry,

size and risk, to make sure the covariance pattern was stable.

FIGURE 3.3
Conceptual Cross-variable Covariance Model for CSP, CEP and MVA
 87

Part of growth-model building is to decide on the nature of the paths in terms of

linearity or nonlinearity. Although there is no strong theory to predict the nature of such

temporal paths for CSP, CEP and CFP, we suspect that a nonlinear model makes more

sense since any corporate performance measure will hardly follow a simple linear

trajectory, which might be even truer of CSP and CEP. A rough exploration of the data

also supported this preference for a nonlinear model. Specifically, we plotted the year-

wise grand means of CSP, CEP, MVA, ROA and ROE for all the sampled firms against

the calendar year, as shown in Figures 3.4a, 3.4b, 3.5a and 3.5b. It is clear from the

graphs that all of these performance measures follow a nonlinear path. Although the CSP

measure may seem to suggest a linear path, a closer look through other types of graphs

supports a nonlinear pattern of temporal changes.

We decided to model the three paths as nonlinear, not just based on the descriptive

graphs only, of course. We also confirmed our suspicion though a log-likelihood test.

Specifically, we built both linear and nonlinear measurement models, and we found that

the Chi-squares were significantly different between the two models, in favor of the

nonlinear model. We also tested a plausible model in which CSP was operationalized as

linear growth; results, however, were consistent with the non-linear model.

Results

We first tested the analytical model using CSP, CEP and MVA. The estimated

variances of all the intercepts and slopes were significant, suggesting a good model of

measurement in the sense that a trajectory was identifiable for all three variables. Further,

the within-variable covariance model reached a good fit; CFI=0.953 (>0.09),

RMSEA=0.075 (<0.08). We therefore went on to test the hypothesis that the linear slopes
 88

FIGURE 3.4a
Mean Changes in CSP Over Year

^
O^

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

FIGURE 3.4b
Mean Changes in CEP Over Year

Q.
LU
O

c
CO
CD

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
 89

FIGURE 3.5a
Mean Changes in ROA and ROE Over Year

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

H H I Mean of ROA ^^^H Mean of newROE

Note: The left bar represents mean changes in ROA.

FIGURE 3.5b
Mean Changes in MVA Over Year

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
 90

of CSP, CEP and MVA are correlated. In order to save space, we decided not to

report the test results of the measurement model and of the within-variable model. The

individual variances and within-variable covariances have, however, been provided in

Table 3.2, where the results of the hypothesis test, the cross-variable covariance, were

given. Note that only significant cross-variable covariances were included in the table,

although we initially drew all possible paths among the intercepts and the slopes across

variables, as already illustrated in Figure 3.3.

We expected that CSP-slope, CEP-slope and MVA-slope would be positively

correlated. As indicated in Table 3.2, this hypothesis was partially supported. The CSP-

slope and CEP-slope were positively and significantly correlated with each other,

suggesting that they do co-evolve over time. Only one of them, however, the CSP-slope,

was significantly and positively correlated with the MVA-slope. In other words, the rate

of change in CSP was positively associated with the rate of change in MVA. Such a

relationship stayed the same when the time-invariant control variable (i.e., industry) and

time-varying controls (i.e., size and risk) were included stepwise.

There are some other interesting findings in Table 3.2. For example, both CEP and

MVA showed significant influence of founding state, that is, the initial level or the

intercept of one performance affected that performance's slope of growth later. This was

not true, however, of CSP, which suggests that the initial level of CSP did not predict

future patterns of growth. Further, the initial levels of the three variables, i.e., the three

intercepts, all covaried. The reason for this finding could be constrained resources and
1
We could also have included the nonlinear slope terms as part of the hypothesis test, that is, the cross-
variable covariance between all slope parameters. The nonlinear terms, however, represent the changes in
slope, which are hard to interpret. In addition, drawing cross-variable covariance paths to and from the
nonlinear slope terms would hugely increase the complexity of the structural model, while not adding much
value. In the interests of parsimony, we used the nonlinear slope terms for the purpose of properly
conceptualizing individual paths only.
 91

capabilities that are shared by all three aspects of corporate management; it could also be

that managers simultaneously determine the level of the three.

TABLE 3.2
Estimated Variances and Covariances of Latent Intercepts and Slopes - MVA
Model

Goodness of Model Fit

CMIN NFI RFI IFI TLI
CFI RMSEA
/DF Delta 1 rhol Delta2 rho2
2.547 .932 .926 .958 .954 .958 .072

Variances and Covariances

I-CSP S-CSP S2-CSP I-CEP S-CEP S2- I-MVA S-MVA S2-

CEP MVA
I-CSP 523***
S-CSP -.003 0 25***
S2-CSP .001 -.001*** o***
I-CEP .086** .008* 445***
S-CEP .ooi1. -.034** .053***
S2-CEP .001 -.004*** o***
I-MVA 293*** .043*** .112* 1.772***
S-MVA .001*** -.031* .028***
S2-MVA .001T -.002*** o***

Note:
1. tP<0.10 *p<.05 **p<.01 ***p<.001
2. Variances are in the diagonal cells, and covariances are in the off-diagonal cells.
3. Only significant cross-variable covariances are reported; the insignificant covariance paths were
dropped at the final stage of estimation.
4. As indicated in the methods section, no cross-variable covariance paths were drawn to and from
the nonlinear slope terms, i.e., S2-CSP, S2-CEP and S2-MVA.

More importantly, we observed a significant influence of the intercept of CEP on

the slope of CSP. That means that the higher the initial level of CEP, the higher the slope

of the growth in CSP, probably because a firm's initial environmental policy reflects the

firm's fundamental philosophies and principles regarding social responsibility and

 92

business ethics. We also found that the initial level of MVA had significant positive

influence on the slope of CSP, which seems to confirm a slack resource argument.

The results of the hypothesis test using ROE, CSP and CEP are shown in Table

3.3. In this model, the hypothesis was fully supported. That is, the slopes of all three

variables positively and significantly covaried. Meanwhile, the initial level of CEP

consistently predicted the slope of CSP, as in the MVA model. Unlike the MVA model,

TABLE 3.3
Estimated Variances and Covariances of Latent Intercepts and Slopes - ROE Model

Goodness of Model Fit

NFI RFI IFI TLI

CMIN/DF CFI RMSEA
Deltal rhol Delta2 rho2
2.059 .905 .896 .949 .944 .949 .060

Variances and Covariances

I-CSP S-CSP S2-CSP I-CEP S-CEP S2- I-ROE S-ROE S2-

CEP ROE
I-CSP ci^***

S-CSP -.003 .024***

S2-CSP .001 -.001*** o**#
I-CEP .089** .007* 437***
S-CEP .001* -.028* .050***
S2-CEP .001 -.003*** o***
I-ROE -.002** 0.010***
S-ROE .003** .000* .ooot -.002f .030***
S2-ROE .000 .000*** o***
Note:
1. |P<0.10 *p<.05 **p<.01 ***p<.001
2. Variances are in the diagonal cells, and covariances are in the off-diagonal cells.
3. Only significant cross-variable covariances are reported; the insignificant covariance paths were
dropped at the final stage of estimation.
4. As indicated in the methods section, no cross-variable covariance paths were drawn to and from
the nonlinear slope terms, i.e., S2-CSP, S2-CEP and S2-MVA.
 93

however, the initial level of ROE did not covary with the initial level measures of

CSP and CEP, although the latter two remained covarying. Surprisingly, the initial level

of ROE negatively predicted the slope of CEP, which appears to suggest that the higher

the initial level of ROE, the lower the rate of growth in CEP. The significance of

founding state with respect to growth capacity was present with both ROE and CEP, but

not with CSP, which was consistent with the respective MVA model. Furthermore, the

initial level of CSP positively covaried with the slope of ROE, which supports the view

that CSP helps build long-term financial value.

The model with ROA, CSP and CEP did not show significant co-evolution

between the three, although CSP and CEP continued to covary in slope. Our hypothesis

was thus weakly supported with this model. We decided not to report the detailed results

of this model in order to save space in this paper, but the results output is available upon

request. One interesting finding from the ROA model, though, was that the intercept of

CSP was positively associated with the slope of ROA, which again suggests a story of

long-term value building.

Overall, the hypothesis of co-evolution among CFP, CSP and CEP was strongly

supported in the ROE and MVA models, but weakly supported in the ROA models. To

illustrate the picture of co-evolution, we have plotted the trajectories of these performance

measures in Figure 3.6. Three other major observations emerged from these models. First,

the initial level of CEP always positively anticipated the slope of CSP. Second, the

intercepts of all three variables covaried. Third, the founding state was important for CEP,

but not for CSP, in terms of influencing rate of growth. We decided not to further discuss

these observations about initial levels since co-evolution is the focus of this study.
 94

FIGURE 3.6
The Co-evolving Trajectories of CSP, CEP, ROE and MVA

0.3

0.2

5 ^ * * 3P*
^-w^ p^ ••~ CSP
'*§ 4 5* 6 7 8 9 10 11 12 13
TO -0.1 CEP

« "°-2
> " " ~ ROE

-0.3 •
-0.4
Time

15.5

wi 15
<U
mm
14.5
>m
14
0)
A3 13.5
£ •MVA
•!••*
13
v>
txl 12.5

12
1 2 3 4 5 6 7 8 9 10 11 12 13 14

Time
 95

DISCUSSION

This research proposed a theoretical framework of strategic integration in which

firms' R&C development incorporates institutional preferences and reshapes institutional

environment. We argued that, by being committed to responsible activities, firms would

develop and apply integrative resources and capabilities that would allow them to

integrate principles of sustainability in business strategies. During this continuous process

of stakeholder engagement and strategic integration, institutional expectations are

increasingly embedded in firms' resources and capabilities. As a result, the management

of social and environmental issues comes to be closely tied to the management of

traditional strategic issues. The growth in corporate financial performance thus tends to

correspond to the growth in corporate social and environmental performance.

Consequently, the temporal trajectories of these sustainability variables become tied to

one another, leading to co-evolution among them.

On the basis of this theoretical reasoning, we hypothesized that CSP, CEP and

CFP would coalesce over time. Statistically, this means that each of these three variables

would follow an identifiable temporal trajectory, and the slopes of their trajectories would

be positively related. In other words, an increase or decrease in one slope would be

mirrored by the other slopes. This hypothesis was largely supported. Specifically, we

found that both CSP and CEP strongly coalesced with ROE over time, while only CSP

covaried with MVA in growth. Neither CSP nor CEP co-evolved with ROA, however. In

all the models, the CSP measure and the CEP measure always positively covaried in

growth.

These findings have tremendous implications for the way we think about doing

business. Too long have we believed that the only relationship between business and
 96

society is a trade-off wherein one has to be sacrificed to some extent to meet the needs of

the other. We never stop to consider the possibility that the two sides can be integrated.

Consequently, in business, the typical attitude toward social and environmental

responsibilities has been resistant and reluctant, to a greater or lesser degree. This study,

however, shows that the three major facets of business operations have been gradually co-

evolving toward increased mutual consistency and systematic integration. It is to the

benefit of business, therefore, to recognize such an underlying trend and reflect it in

models of strategic management. Our findings also send a strong signal to those firms that

believe in short-term cause-effect, suggesting that they need to formulate strategies from

a long-run perspective; otherwise they may not be able to sustain their success.

The weak support of the hypothesis in the ROA model leaves us to speculate as to

why the proposed co-evolution pattern worked with MVA and ROE only, the two CFP

measures that are closely tied to the stock market. As we articulated earlier in the

measurement section, market measures look forward while accounting measures are

based on history. It is likely that market measures can capture the emerged capabilities

more accurately, owing to great information availability and forward-looking orientation,

while accounting measures suffer from much contingency in strategy implementation and

intermediate factors. We do, however, expect that ROA will join the co-evolution picture

if a longer period of time is used and the interaction between business and society

deepens further. By that time, the somewhat perceptual value of CSR commitment, as

reflected in MVA and ROE, will be realized and materialized in actual operations and

accounting records.

This study sheds new light on the debate around whether social and environmental

investments by firms will improve their financial performance, a debate that has
 97

generated a great number of studies (Margolis et al., 2003). Rather than looking at simple

direct relationships, we focused on whether these pillars become tied to one another

gradually, which suggests the potential of long-term competitive value. The results assure

practitioners that their endeavors towards business sustainability will be rewarded in

terms of long-term value-building. In addition, the differential impact of CSP and CEP on

accounting performance and stock market performance suggests a new area of strategic

management, as managers can take advantage of such differences and become more

effective with respect to their strategic goals.

The findings of our study also allow us to answer some of the questions that have

important implications for institutional theory. For example, how are institutional

expectations translated into firm-level competitive opportunities by pricing firm resources

and capabilities? How do firms find a common ground between institutional expectations

and competitive strategic considerations? And how is institutional environment reshaped

by both exogenous and endogenous sources of driving forces? By answering these

questions, we not only develop a general framework on business sustainability that helps

guide future research with a process orientation, but we also integrate institutional logics

with principles of strategic management, a pairing that has been long overdue.

Part of the reason why institutional logics have not been well integrated with

strategic management is that institutional theory, as it is applied to explaining

organizational phenomena, often centers on organizational fields or on population, the

core element of the theory (e.g., Carroll & Hannan, 1989; Greenwood, Suddaby, &

Hinings, 2002; Lounsbury, 2002; Russo, 2001). Studies based at the organizational level

typically look at the adoption of an organizational form and functional structure (e.g.,

Davis, Diekmann, & Tinsley, 1994; Ingram, 1996; Rowan, 1982) or a particular
 98

organizational practice and program (e..g, MaGuire, Hardy, & Lawrence, 2004; Westphal

et al., 1997). Much less attention, however, has been paid to institutional processes

occurring inside organizations, especially those closely associated with strategic decision-

making in firms.

Some researchers do attempt to incorporate institutional factors into their models

of organizational performance prediction and behavior explanation (Campbell, 2007; Lu,

2002; Oliver, 1991). The typical approach, however, is merely to introduce a list of broad

institutional factors that arguably have potential strategic implications (e.g., Christmann,

2004; Sharfman et al., 2004). The processes in which those factors play a role, however,

have largely been overlooked. As a result, we know little about the underlying processes

that bring about observed institutionalization at the firm level, yet this information is

critical to understanding why some institutional meanings and values are enacted and

operationalized while others are not. In this study, we approach organizational adaptation

and performance prediction from a decision-process perspective. In this way, we firmly

ground our analysis at the organizational level as opposed to the institutional field level,

yet we are able to outline the institutional processes associated with a resource-based

view of strategic decision-making.

In addition, we have illustrated the way in which the institutional environment

may be shaped by both exogenous pressure, such as social movement, and endogenous

initiatives, such as creative and proactive CSR programs adopted by leading firms in a

field. This bridges two streams of literature about institutional change, which attracts

growing attention with the rise of new institutionalism (Dacin, Goodstein, & Scott, 2002;

Greenwood & Hinings, 1996). One stream, so far the primary one, follows the

conventional orientation of organizational conformity. It focuses on organizational

 99

adaptation to exogenous "jolts" that disrupt existing field-level rules and distribution in

resources and power (Fox-Wolfgramm, Boal, & Hunt, 1998; Rowan, 1982). The other

stream, recently emerging as institutional entrepreneurship, focuses on endogenous

sources of institutional change (DiMaggio, 1988; Greenwood & Suddaby, 2006; Scott,

2001), where organizations initiate deliberate changes to the field in which they are

embedded, with the goal of influencing the external context in their favor. The

institutional processes around business sustainability that we have presented in this study

demonstrate the potential for the two streams or two types of processes to be brought

together, which might generate insights that may never emerge if the two are treated

separately.

CONCLUSION

Previous research on business sustainability has paid much attention to the

snapshot level of performance and has, as a result, overlooked the underlying trajectory

and evolution process. It also lacks a systems view, primarily examining direct binary

relationships between interested variables. Fully recognizing the long-term nature of

business sustainability phenomena, we developed a framework of interaction between

institutional environment and firm development in resources and capabilities. We

proposed that three pillars of business sustainability - CSP, CEP and CFP - would

coalesce over time because of that interaction. We tested this proposition using large-

scale, firm-level data across 13 years, and found strong support. That is, the growth in one

pillar of sustainability will be positively mirrored in other pillars.

This study contributes to the research on business sustainability in a number of

ways. The most important contribution is the unique theoretical explanation of the

evolution of business sustainability, in which RBV and institutional theory interact.

 100

Future research can build theoretical models drawing upon this integrative framework.

Another important contribution comes from the fact that we have taken the first step

towards discovering the growth trajectory of business sustainability using longitudinal

analysis. The identification of separate growth trajectories for the three pillars of business

sustainability, as well as the interaction among those trajectories as the three pillars co-

evolve, gives us deep insights with respect to where we are presently and where we are

going in the future. It captures important information that has been missed in prior studies

that primarily examine the issues within a narrow time-frame.

As we discussed earlier, business sustainability is a rich area in terms of

advancing institutional theory. Future research on institutional theory can extend the

process orientation that we advance in this study. Some potentially interesting questions

include: How are institutional values around business sustainability instilled into firms

and solidified through operational practices? What specific attributes make emerging

institutional expectations eventually align with the dominant logic of business operations,

and then become widely accepted by firms? Is this process primarily driven by peer

pressure or normative and regulative forces? How do exogenous and endogenous

pressures work together? Which kinds of organizations, central or peripheral to a

particular field, are pioneers in integrating institutional logics in their routines? In

pursuing the answers to these questions, we will come closer to a deep understanding of

the dynamic processes around business sustainability, a new model of strategic

management.
 101

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13: 443-644.
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CHAPTER 4

DUAL MECHANISM OF BUSINESS

SUSTAINABILITY: UNIQUE EFFECTS AND
SIMULTANEOUS EFFECTS
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Chapter 4: Dual Mechanism of Business Sustainability: Unique Effects

and Simultaneous Effects

INTRODUCTION

Sustainable development is necessary for society's survival. Some of the greatest

challenges facing society today, such as poverty and climate change, are a result of

development that is not sustainable. Part of the problem has been attributed to the

primacy of economic logic—firms only address human misery if they can profit from

addressing it (Ferraro, Pfeffer, & Sutton, 2005; Margolis et al., 2003).

Such causal thinking has blinded researchers to the sustainability paradigm, which

argues that organizations are part of an environmental, economic, and social system

(Elkington, 1998; Zadek, 2001). A change in one of these elements will result in changes

throughout the tightly woven interconnected system (Shrivastava, 1995a; Starik et al.,

1995).

Management researchers flirted with a systems view of industrial development in

the mid-1990s, but much of it was theoretical and the courtship was brief (Gladwin et al.,

1995; Shrivastava, 1995a). Researchers quickly retreated to the theoretical safety and

empirical comfort of causal arguments, focusing primarily on the impact of a firm's social

and environmental performance on economic performance (Bansal & Gao, 2006;

Margolis et al., 2001). The consequence has been a rather impoverished view of the

relationship among the various aspects of a firm's social, environmental, and economic

performance. The richness and complexity offered by arguments suggesting simultaneous

and recursive relationships has been displaced by the simplicity of causal relationships

(Bansal, 2005; McGuire et al., 1988; Waddock et al., 1997a).

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This paper aims to amplify the earlier contributions to sustainable development by

recognizing the interconnectedness of social, environmental, and economic elements in

industrial systems. We extend this systems thinking to the firm level of analysis by

arguing that firms may be systems nested within societal systems (Holling, 2001),

resulting in a simultaneous relationship between the three pillars of business

sustainability: social, environmental, and financial performance.

We contrast the causal arguments between these three variables, which create

unique effects, with the systems-based arguments, which create simultaneous effects. Our

theoretical contribution is to demonstrate the difference in these two effects and their

impact on sustainability. These two effects are tested on data from 738 companies over 13

years with the Hausman-Taylor estimator for error component models.

This research offers two major contributions. First, we contribute to the area of

sustainability and social responsibility by illustrating that social and environmental

performance are distinct constructs that result in different empirical outcomes. Without

revealing the full set of results here, it is clear from our analysis that social and

environmental performance are different constructs and have differential impacts. Prior

research often fuses these constructs under one label of corporate social performance.

Second, we contribute to the development of the notion of business sustainability

by theorizing and testing the simultaneous relationship between social, environmental,

and financial performance. This is an important development because social and

environmental performance are viewed not as instruments of financial performance, but

as part of an intimately connected system of economic, social, and environmental

2
Throughout this paper, we use the word 'between' to describe the relationship among the three types of
performance, rather than the word 'among'. The latter is often assumed to be the correct English form;
however, the former signals the possibility of binary relationships.
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elements, which is a departure from the pervasive causal arguments. If corporations are

only motivated to do good in order to gain profit, they will often choose to ignore their

social and environmental performance (Laverty, 1996). In other words, sustainable

development may be more a hopeful vision than an organizational fact. Our planet and

society are, therefore, at risk from corporate excesses. This research provides the

foundation on which we can conceptualize a set of relationships that may simultaneously

generate social, environmental, and financial outcomes.

BUSINESS SUSTAINABILITY

The Principles of Sustainable Development and Business Sustainability

Definitions of sustainable development have proliferated, but the one advanced by

the World Commission on Environment and Development (WCED) has proved the most

enduring. The WCED (1987: 8) defined sustainable development as "development which

meets the needs of the present without compromising the ability of future generations to

meet their own needs." Development is only sustainable if the three principles of social

equity, environmental integrity, and economic prosperity are maintained. Environmental

integrity acknowledges the value and limits of natural resources, social equity distributes

this value equitably across people and societies in order to meet basic needs, and

economic prosperity converts and distributes the value locked in natural resources.

Sustainable development emphasizes the interconnectedness of societal (as

opposed to social) systems. Social equity, environmental integrity, and economic

prosperity are connected to each other; the failure of one could compromise the others,

and developing one may not develop the others. Barbier (1987) supports this systems

view by stating that the purpose of sustainable development is to "maximize

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simultaneously the biological system goals (genetic diversity, resilience, biological

productivity), economic system goals (satisfaction of basic needs, enhancement of equity,

increasing useful goods and services), and social system goals (cultural diversity,

institutional sustainability, social justice, participation)" (1987: 103).

Many researchers have attempted to apply such principles to business, and have

suggested that there are at least two common paradigms (Gladwin et al., 1995; Prasad et

al., 2005; Purser et al., 1995; Shrivastava, 1995a, c). The dominant paradigm assumes an

anthropocentric orientation in which elements in systems can be identified, isolated, and

technologically controlled. A sustainability paradigm, on the other hand, assumes

interconnectedness, inclusiveness, and interdependence among the elements within a

system. Gladwin, Kennelly, and Krause (1995: 878) articulated this view well.

"Sustainable development is a process of achieving human development ... in an

inclusive, connected, equitable, prudent, and secure manner. Inclusiveness implies
human development over time and space. Connectivity entails an embrace of
ecological, social, and economic interdependence. Equity suggests intergenerational,
intragenerational, and interspecies fairness. Prudence connotes duties of care and
prevention: technologically, scientifically, and politically. Security demands safety
from chronic threats and protection from harmful disruption (Gladwin et al., 1995:
878).

Other writers have also stressed the importance of examining the

interrelationships and interdependence among the social, environmental, and economic

spheres (Elkington, 1998; Zadek, 2001). These relationships have also been reinforced

through the many United Nations summits, from the 1992 UN Conference on

Environment and Development in Rio de Janeiro, to the 1997 Earth Summit+5 in New

York, and the 2002 World Summit on Sustainable development in Johannesburg. These

statements explicitly conceptualize the pillars of economic prosperity, social equity, and

environmental integrity as "interdependent and mutually reinforcing."

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In spite of the broad acceptance of the nature of the relationship among the three

pillars of sustainable development, this perspective has been virtually ignored within

organizational theory. Most research compartmentalizes variables and explores causal

relationships in isolation from the systems in which they are embedded. The consequence

is the over-simplification of the influence of one variable on another and the under-

theorizing of the nature of the effects of an action on the systems of relationships.

The sustainability paradigm offers a lens by which to view the social,

environmental and economic pillars at the firm level of analysis. Holling (2001) coined

the term panarchy to describe the complex adaptive systems that define sustainability.

Applied primarily to the study of biological and ecological systems, Holling (2001)

argues is that these systems occur within a hierarchical structure of ecological (e.g. forests

and grasslands) and social systems (e.g. settlements and cultures). Each system can

operate semi-autonomously. However, smaller systems are nested within and connected

to larger systems through the cycles of growth, accumulation, restructuring and renewal.

We define business sustainability as the degree to which firms achieve financial,

social, and environmental performance in a balanced and systematic manner.3 With a

sustainability lens, in which firms and societies are complex adaptive systems operating

as a panarchy, it is possible to argue that the three corporate performance measures are

intimately related. Below, we first define these three pillars of firm performance and then

describe the theoretical apparatus that will lead to a causal and a simultaneous

relationship between the three pillars.

3 We realize that there is normative prejudice in defining business sustainability this way, and that there are different views of this concept (e.g., Beckerman, W.
1994. Sustainable development—Is it a useful concept? Environmental Values, 3: 191-209.) This definition assumes the presence of an ideal state of sustainability that
firms can approximate but never fully achieve, which suggests a postmodernist posture. However, the philosophy reflected in this definition is most consistent with
what has been accepted and consolidated in current policy making, business agendas, and management texts.
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Corporate Financial Performance

We define corporate financial performance (CFP) as the value that firms provide

to shareholders. This value is created through accounting returns and stock market

performance. Accounting-based measures convey information about the firm's ability to

pay its bills, reinvest in the business, and distribute profits. Accounting returns look

backwards and are relatively certain. Stock market measures, on the other hand, look

forward and provide insights into investors' confidence in the ability of the firm to

generate profits. Stock prices are dynamic and volatile. They are determined by investors

who react to systematic and unsystematic risks and are likely to engage in herding

behaviors (Starbuck, 2005). For a more thorough review, Orlitzky and his colleagues

offer arguments and evidence that discriminate between accounting and market measures

for testing their relationship with social and environmental performance (Orlitzky, 2006;

Orlitzky et al., 2003).

Corporate Social Performance

For the purposes of this article, we define corporate social performance (CSP) as

an organization's commitment and contribution to creating and fairly distributing value

among its stakeholders with intrinsic claims, as well as ameliorating societal problems.

This definition stresses both the behavioral (commitment) and outcome (contribution)

components of social performance (Wartick et al., 1985; Wood, 1991). Intrinsic claims

means that stakeholders hold independent stakes and do not have to represent others and

rely on some medium party to claim their interests (Freeman, 1984). Consequently, the

natural environment is not considered a stakeholder with respect to CSP; environmental

issues are addressed through corporate environmental performance that we will be

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defining later. We share the spirit of Starik's (1995) argument that the natural

environment is different from the social environment, but we do not assign the natural

environment stakeholder status.

CSP is a multidimensional construct, involving a range of social issues in

management (Carroll, 1979). The following major components illuminate CSP's

conceptual boundary.

e. Ethical treatment: improving the economic, social, and emotional condition

of people directly associated with the focal organization, beyond contractual

requirements. Examples of ethical treatment include the provision of safe,

satisfying, and fairly-paid work, quality products, and respect for neighboring

communities.

f. Business integrity: honoring business ethics in trade and marketing; for

example, by adhering to honest business practices.

g. Mitigating social problems: alleviating social misfortunes or enhancing

social equity through policies, programs, or economic support; for example,

through philanthropy and charitable donations.

Corporate Environmental Performance

For the purposes of this article, we define corporate environmental performance

(CEP) as an organization's commitment and contribution to reducing the negative impact

of its operations on the biophysical environment, or facilitating the efforts of others to

protect the environment. In this definition, firms are credited for either mitigating their

own environmental burden or promoting environmental responsibility in others; for

example, through environmentally responsible purchasing behaviors (Drumwright, 1994).

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To date, it has been difficult to draw consistent and comparable conclusions about the

antecedents and consequences of CEP because there is little consensus on what it means

(Gilley et al., 2000).

Discriminating Between Corporate Social and Environmental Performance

Definitions of CSP and CEP abound. We developed our own definitions because

we needed to discriminate between social and environmental performance, which has not

been the purpose of prior definitions. In fact, much prior research has blurred the

boundaries between CSP and CEP. Social issues researchers often incorporate CEP in

their definitions and measures of CSP (e.g. Griffin et al., 1997; Turban et al., 1997), yet

environmental issues researchers often treat CSP as distinct from CEP. In the several

studies that attempted to tease these two constructs apart (e.g., Barnett et al., 2006;

Berman et al., 1999; Hillman et al., 2001), the focus was on specific CSP dimensions

such as community and employee relations; CSP was not treated as a single construct in

parallel to CEP. We maintain that research on social issues in general, and business

sustainability in particular, can benefit from discriminating between CSP and CEP, for

four main reasons. Our insights are drawn from prior research and interviews with

managers, which we describe in the methods section of this paper.

First and foremost, there are important conceptual differences between CSP and

CEP. Table 4.1 lists some of the important contrasting attributes of CSP and CEP, which

are drawn from extant literature and from interviews with senior managers. The

interviews are described in the methods section of this paper. CSP focuses on the socially

constructed transactional relations between corporations and their associated people,

which occur within a human system. In contrast, CEP addresses technological relations

Differential Attributes
Definitions
Components
1. Direct subjects
2. Relationship of interest
3. Objectives
4. Nature of elements
5. Working mechanisms
6. Status determinants
7. Exchange pattern
8. Perceptual pattern in
society
9. Impact pattern on
financial performance
10. Management system
11. In relation to
sustainable development
12. Approach to improve
TABLE 4.1
CSP and CEP Attributes in Contrast
CSP
An organization's commitment and contribution to creating and
fairly distributing value among its stakeholders with intrinsic
claims, as well as ameliorating societal problems.
a. Ethical treatment
b. Business integrity
c. Mitigating social problems
Stakes generated due to social organization and transaction
Among the parties of the human society
Social equity and integrity, primarily for the present generation
Morality, rules, symbols, interpretations, self-interests
Socially constructed relationships, subject to redefinitions
Stakeholder power, social movements, and managerial discretion
Reciprocal
Multiple and probably conflicting judgments and reactions, due to
the variety of stakeholders involved, each with their own concerns
and expectations
Unclear in systemic nature; firms save costs through improved
morale, fewer conflicts and legal actions, and better internal and
external support
Public relations/external affairs department in big companies, no
single and clear policy and regulations, some legal constraints
Contributes to the people dimension of sustainable development
Reciprocal interest exchange, avoid to jeopardize existing welfare
CEP
An organization's commitment and contribution to reducing the
negative impact that its operation may have on the biophysical
environment, or facilitating any effort by others toward
environmental protection.
a. Reduce pollution
b. Zero footprint
c. Preserve resources
d. Efficient production
Public good, nature
Among the parts of the ecological system
Zero footprint, primarily for future generations
Truth, facts, substance, technology, and science
Regulations, natural law
Biological evolution and human intervention
Generally reciprocal in a cycle
Sensitive and coherent judgments and reactions, due to clearer
standard and better available information
More systemic; save costs through improved efficiency and
reduced waste
Independent environmental management system, global
standardization, government supervision
Contributes to the environment dimension of sustainable
development
Substantive criteria of measuring environmental outcomes,
signaling manipulation
o
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between business operations and nature based on scientific observations, which

occur within an ecological system. Further, CSP is more open to interpretation because it

is often socially constructed and not guided by public policy, whereas CEP is often

rooted in science and signaled through a regulatory system. In addition, the reference

point for CSP is intergroup equity, whereas the reference point for CEP is on

intergenerational equity.

Second, we found that the conceptual distinction between CSP and CEP has not

only been validated by the governmental policy framework but also substantiated in

corporate cognitive mapping and managerial practices. On the policy side, concerns

about social issues tend to be expressed through discourse. By contrast, concerns about

environmental issues are often guided by established independent regulatory agencies in

both developing and developed countries. In the business world, a large portion of

companies have independent departments dealing with environmental challenges,

whereas social issues can lie in different departments including human resources, public

affairs, and marketing. As well, firms often discriminate between their social and

environmental issue responses when they communicate their commitment to

sustainability, often providing different tables, targets, and performance outcomes based

on whether it is social or environmental aspect of their business.

Third, the unique system view inherent in the notion of sustainable development

will be lost if CSP and CEP are blended together. The concept of sustainable

development sets up a systems structure that goes beyond CSP or CEP, either alone or

combined with financial performance. It is paramount to simultaneously consider the

three spheres (human, economic, and ecological) and, in particular, the interdependence
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between them. At the firm level, business sustainability provides a new view of business

operations that integrates the need for economic prosperity, social equity and

environmental integrity; it allows us to theorize the dynamic interaction among different

systems, rather than a static causal system. Blending CSP and CEP into a single construct

diminishes the opportunity to build theoretical richness between these two constructs and

their interaction with others.

CAUSAL RELATIONSHIPS: THE DOMINANT APPROACH TO BUSINESS

SUSTAINABILITY

A remarkable body of research has accumulated that investigates the relationship

between social and financial performance and between environmental and financial

performance. Margolis and Walsh (2001) uncovered 109 studies between 1972 to 2000

that analyzed the relationship between CSP and CFP. Orlitzky, Schmidt, and Rynes

(2003) undertook a similar systematic review of 52 studies published before 2003.

However, all of these studies assume that relationships are binary and causal; one

variable influences the other, often directly and positively. We label these causal

relationships as unique effects.

Numerous arguments have been advanced supporting the positive influence of

CSP and CEP on CFP (see Orlitzky, 2006 for a review). The primary argument is that

firms' commitment to social and environmental responsibility generates valuable rent-

earning resources and capabilities, which include reputation (Fombrun et al., 1990), high

quality employees (Turban et al., 1997), strong stakeholder relations (Bansal et al., 2004;

Hillman et al., 2001; Orlitzky et al., 2001), management skills (Russo et al., 1997;

Sharma et al., 1998), and customer loyalty (Brown & Dacin, 1997). Only a few of these
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studies propose a recursive relationship, which is based on the need for organizational

slack in order to invest in socially and environmentally responsible initiatives (Bowen,

2002; McGuire et al., 1988; Orlitzky et al., 2003; Waddock et al., 1997a).

Unique effects assume that organizational activities and their outcomes are locally

isolated, issue specific, and stakeholder oriented. They do not offer a global, systematic,

and holistic vision. Activities are disconnected and often independent, so actions can be

distinguished from their outcomes, and distinctly modeled. Unique effects also often

disregard time. Although there is an assumed action-reaction, the space of time over

which this occurs could be immediate or lengthy. When a lagged effect is acknowledged,

it often assumes economic short-termism (Laverty, 1996), which heavily discounts long-

run consequences, especially the intergenerational aspects. These unique effects often

involve technical and instrumental calculations (Jones, 1995), as opposed to long-term

optimal outcomes involving intertemporal choices. Consequently, the financial benefits

derived from social and environmental performance take the form of impression or

legitimacy management, emphasizing exchange-based pragmatic legitimacy (Suchman,

1995).

Causal analysis of the elements of business sustainability has been accused of

creating managerial opportunism, flawed management practices, and myopic learning

(Laverty, 1996; Levinthal & March, 1993), but it is easy to understand why this type of

analysis has dominated this discourse. Firms are embedded in cognitive, normative, and

regulatory institutions, resulting in organizational inertia and routines (Hannan et al.,

1984; Nelson & Winter, 1982). Managers often have difficulty seeing interconnections

among the complex elements of a system and fail to recognize the opportunities found in
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integrating business and society. These opportunities are embodied in the relationships

among the principles of social, environmental, and financial performance. It is easier to

change single activities and easier to analyze causal relationships. Consequently, causal

analyses permit managers to more easily accommodate society in business practices.

Despite the preponderance of causal analysis, unique effects are likely weak.

There are two reasons. First, unique effects require stakeholder support and such support

does not come easily. Suchman (1995) distinguished active stakeholder support and

passive acquiescence. Stakeholders who offer active support evaluate a firm's

performance along a scale and discriminate between positive and negative performance.

Stakeholders who passively acquiesce are often only sensitive to negative information.

The unique effects between CSP, CEP, and CFP are more easily identified with strong

active support. Yet, stakeholders are less likely to react when firms' social and

environmental practices do not cause serious concerns. In most issue domains,

stakeholders are unaware of relatively small improvements in a firm's social and

environmental performance, partly because the firm's operations are not completely

transparent and partly because such small improvements are difficult to measure. In

addition, insufficient demand for certain types of social responsibility activities reduces

the responsiveness of stakeholders, making active stakeholder support difficult to achieve

(Mackey, Mackey, & Barney, 2007; McWilliams & Siegel, 2001). Therefore, unless

firms carefully communicate improvements in their social and environmental

performance, unique effects will be weak.

Second, firms that integrate business with society often have to choose between

conflicting stakeholder demands. For instance, one stakeholder group may want a firm to
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shut down its operations because of its labor practices, whereas another may want it to

continue to operate and offer employment opportunities. These opposing orientations can

dilute the size of unique effects.

In sum, causal arguments suggest the presence of unique effects, although their

size may be limited. Therefore, we predict that:

Hypothesis 1: There exist unique effects between CSP, CEP, and CFP,
such that these performance measures are positively related to one
another.

SIMULTANEOUS RELATIONSHIPS: A SYSTEMS APPROACH TO BUSINESS

SUSTAINABILITY

In this section, we propose that the three types of performance are simultaneously

related, in addition to being causally related. Business sustainability assumes open

systems: organizations operate in an environment where business, society, and the natural

environment are connected and interact. Changes in one element within the system affect

other elements. The complexity of the system increases with positive and negative

feedback loops among the elements, making it difficult to predict the outcomes of such

changes. Causal analysis, therefore, conveys only part of the story. Not only are there

actions and reactions, there are interactions. As well, causality is possible to predict over

local landscapes, however, an open systems model recognizes the global implications of

local changes. Since it is impossible to predict the outcomes of changes within a complex

system, researchers look for patterns of relationships. These appear as simultaneous

relationships, which we refer to as simultaneous effects.

Business sustainability will exhibit simultaneous effects for two reasons: the

presence of integrative capabilities and the wide reaching performance implications of

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strategic decisions. Firms that possess integrative capabilities can build relationships and

transfer knowledge across functions, enterprises, and contexts. Integrative capabilities

embody the principles of inclusiveness, connectivity, and equity. Such capabilities are

needed in an open system, in which successfully managing the various elements within

the system. Not all firms possess these capabilities; however, those that do, achieve high

performance across social, environmental, and financial domains.

Prior researchers have already identified some of these integrative capabilities,

but have not embedded their arguments within a systems-based logic. These capabilities

include total quality management (Corbett, Montes-Sancho, & Kirsch, 2005; Hart, 1995;

Powell, 1995; Shrivastava, 1995c), product stewardship and shared vision (Hart, 1995),

management vision (Shrivastava, 1995b), stakeholder integration, continuous innovation,

and higher order learning (Chan, 2005; Sharma et al., 1998). Firms that foster these

capabilities can simultaneously achieve high social, environmental, and financial

performance. In fact, research as early as Aupperle, Carroll, and Hatfield (1985) pointed

to a recursive and simultaneous relationship between social responsibility and

profitability, and argued that research that tested for causal relationships may have

generated spurious findings.

Not all firms possess integrative capabilities, and those that do will possess them

in different degrees. In part, this is because integrative capabilities, like other resources

and capabilities, are path-dependent (Dierickx et al., 1989). Barnett (2007) argues that the

flow of socially responsible activities forms the stock over time. In other words, the

sustainability activities in which firms engage are influenced by their previous history of

managing those activities. Consequently, the stock of sustainability activities influences

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their flow, which creates a path-dependency. Ultimately, these integrative capabilities

will vary across firms and over time.

Other factors, such as social movements, new scientific evidence, and

technological advances may also change the firm's ability to integrate its functions and

activities, and thus its sustainability. Disruptive events or social change may dramatically

alter the relative value of different dynamic capabilities. A firm's business sustainability

is always assessed by the stakeholders and institutions in its environment. Consequently,

firms that possess strong integrative capabilities and that have made good progress

towards business sustainability may find themselves out of step at some future time.

The second reason for the presence of simultaneous effects is the wide-reaching

social, environmental, and financial performance outcomes associated with most strategic

decisions. Strategic decisions include new product or service offerings, mergers and

acquisitions, alliances, downsizing, and geographic expansions. All of these decisions

influence social, environmental, and financial performance simultaneously because their

effects are so wide reaching. For example, mergers and acquisitions often involve plant

closures and geographical relocation, both of which affect employees and local

communities. Even decisions that appear to be strictly financial, such as CEO

compensation and top management team incentive plans (Westphal & Zajac, 1994),

impact a firm's social performance.

Many firms make strategic decisions on the basis of their social, environmental,

and financial impacts. As a result, these performance measures are endogenous to

strategic decision making (Hamilton & Nickerson, 2003; Shaver, 1998). For example, an

oil and gas company may decide to move into alternative energies in order to diversify
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the risk associated with peak oil. Consequently, higher social, environmental, and

financial performance are achieved simultaneously. Growing public attention on

sustainability issues and improved business transparency mean that such endogeneity is

becoming more pronounced, leading to increasingly stronger simultaneous effects.

It is worth noting that, although all three performance measures are influenced by

strategic decisions, the effect may not always be positive, as in the case of integrative

resources and capabilities. Some organizations may choose one type of performance,

often financial, over the others. As a result, improving one type of performance may

diminish another type of performance. Therefore, we anticipate that there may be

simultaneous effects between social, environmental, and financial performance, but they

may not necessarily be positive.

Hypothesis 2: There exist simultaneous effects between CSP, CEP, and

CFP, such that they are simultaneously determined.

METHODS

Data and Sample

The sample of firms used for empirical analysis in this study was extracted from

social ratings data published by Kinder, Lydenberg, and Domini & Co. (KLD), which has

been used extensively by CSP researchers (McWilliams et al., 2000; Waddock et al.,

1997a). Since 1991, KLD has published summary spreadsheets evaluating the social

performance of approximately 650 publicly listed US firms, including S&P 500 and

Domini 400 social index firms. We used time series cross-sectional data to control for the

many difficult-to-measure enduring firm effects, such as organizational culture.

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To develop the sample, we imposed two screens. First, we excluded firms with

less than four years of data, because changes in firm effects cannot be detected reliably

over a short period of time. Second, we only included firms for which there were

matching financial data and market data from the Compustat and CRSP (the Center for

Research in Security Prices) databases, respectively.

Our final sample included 738 firms with data from 1991 through 2003, resulting

in 9,594 observations. Approximately 46% of the sampled firms were in the

manufacturing sectors (detailed industry composition is discussed later). Average firm

revenues were US$7533 million, of which the largest is Wal-Mart at $257 billion in 2003.

On average, the total assets of these firms were $17 billion, and the firm with the largest

assets was Citigroup Inc., $1264 billion.

Business Sustainability Variables

Corporate financial performance. Our financial measures reflect the value

created for shareholders, consistent with our definition of CFP. This value can be in the

form of market value, shown in share price, or book value, shown in accounting measures.

Therefore, we included three separate CFP measures in the analysis: market value added

(MVA), return on equity (ROE), and return on assets (ROA). MVA indicates

improvement in a firm's overall market value; ROE measures a firm's ability to

contribute to shareholder returns; ROA reflects operational efficiency, an indicator of

firm profitability.

ROE and ROA have been widely used in strategy research and social issues

research (Agle et al., 1999; Hart et al., 1996; Johnson et al., 1999). MVA is calculated as

the market value of the firm less its book value (Hillman et al., 2001; Wallace, 2003).
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Hillman and Keim (2001) have indicated that MVA might be a better measure of long-

term value creation than other market performance measures such as shareholder returns

and Tobin's Q.

Corporate social and environmental performance. Prior research has often

blurred the boundaries between social and environmental performance. Therefore, it is

important to carefully develop and validate the CSP and CEP constructs. As a first step,

we reviewed prior definitions in this area and developed two definitions that

discriminated between the two constructs. We asked a panel of six experts in this

research area to comment on the definitions. Based on their feedback, we further refined

the construct definitions.

In addition, we asked nine executives who managed social and environmental

issues whether they discriminated between social and environmental performance. The

managers were drawn from nine North American companies in a range of industries.

Each of the companies was active in sustainability and published annual sustainability

reports. The interviews lasted about 45 minutes each. The interview questions had three

themes: 1) the distinction between CSP and CEP, both conceptually and managerially; 2)

the interdependence among the three pillars of sustainability; 3) the persuasiveness of the

simultaneity argument.

The interviewees supported a distinction between CSP and CEP. One interviewee

used terms such as "three pillars", "balanced", and "strategic" management of these

pillars. Each manager seemed to favor either social or environmental issues, depending

on their firm's industry and orientation, but all of the interviewees said compliance

pressures were highest with environmental issues. Finally, each of their annual
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sustainability reports discriminated between social and environmental performance. The

insights gained from these interviews contributed to the development of Table 4.1.

We used KLD data to build measures of CSP and CEP. In the KLD database, a

firm is assessed on 13 criteria: seven qualitative dimensions that are rated on both

strengths and concerns and six exclusionary categories that are rated only as concerns.

The strengths and concerns of the qualitative criteria are assigned either a " 1 " or "0",

depending on whether or not a firm meets set criteria. The seven qualitative dimensions

are Community Relations, Employee Relations, Women and Minority Diversity,

Environmental Issues, Product Liability, Human Rights ("Non-US involvement" prior to

2002), and Corporate Governance ("Other" prior to 2002). The exclusionary criteria are

whether a firm is involved in Alcohol, Gambling, Tobacco, Firearms, Military, and

Nuclear Power. We chose the seven former dimensions as our starting point for

constructing CSP and CEP measures, consistent with prior studies using KLD data

(Hillman et al., 2001; Johnson et al., 1999).

The CEP measure was constructed from the items in the Environmental Issues

dimension; the CSP measure was constructed from the items in the other six dimensions.

Researchers conventionally construct the CSP and CEP measures as the sum of the

relevant strength items minus the concern items in KLD data (Berman et al., 1999;

Waddock et al., 1997a). However, Strike, Gao, and Bansal (2006) have demonstrated,

both theoretically and empirically, that strengths and concerns represent two distinctive

constructs: corporate social responsibility and corporate social irresponsibility. Mattingly

and Berman (2006) also argued that strengths and concerns may not represent two ends

of a continuum, but rather, two independent constructs. They supported their argument
 132

with factor analysis. As a further reason for separating positive and negative performance,

adding the positive scores and negative scores will reduce variance and mask important

information.

We, therefore, created two different measures of CSP and CEP using strengths

and weaknesses separately. Positive CSP and CEP were measured by adding up the

strengths in each category, and negative CSP and CEP were measured by adding up the

weaknesses in each category. We normalized these measures to make them comparable

between firms and across years (Mattingly et al., 2006).

Strike, Gao, and Bansal (2006) argued that CSP and CEP are theory-based

formative constructs, based on the taxonomy of multidimensional construct developed by

Law, Wong, and Mobley (1998). That is, CSP and CEP as constructs exist at the same

level as their dimensions; they are composites formed as an algebraic function of those

dimensions. Because of this, conventional processes based on covariance analysis to test

construct validity do not apply, as "the mathematical relations between the composite and

the dimensions can be totally independent of the covariance structure of the dimensions"

(Law, Wong, & Mobley, 1998: 751). Drawing upon Diamantopoulos and Winklhoffer

(2001), Strike and her colleagues discussed the validity of using KLD data to build CSP

and CEP measurement, such as content and indicator specification.

We might have had more confidence in the validity of the constructs if some valid

criteria were available that illustrated a nomological network for CSP and CEP, much

like Sharfman's (1996) efforts. However, there are no widely accepted criterion variables

in the literature, partly because of the adolescent nature of this field. As the field matures,

the functional form of CSP and CEP and their dimensions may emerge. At this time,
 133

however, we must rely on a qualitative process for validating the constructs, as described

earlier and KLD's own careful process of developing indicators and evaluating

performance.

Control Variables

We used several control variables in this study. The logarithm of total sales

proxied firm size, which is one of the most frequently selected control variable in studies

of sustainability (Bansal et al., 2004; Russo et al., 1997). McWilliams and Siegel (2000)

also used R&D intensity (i.e., R&D expense/sales) as a control for explaining CFP. We

included this measure to control for the effect of innovation, and we standardized its

values in the analysis. We also controlled for firm risk because prior studies have found

that level of risk relates to all the major types of performance (Bromiley, 1991; Miller et

al., 1996; Orlitzky et al., 2001). We measured firm risk in two ways. We calculated firm

accounting risk as the ratio of long-term debt to total assets, and we measured firm

market risk as the coefficient of variation of daily stock price for each year and each firm.

We normalized this variable with a logarithmic transformation.

Cochran and Wood (1984) suggested controlling for asset age because of its

significant impact on CFP. We measured asset age as the ratio of the net value of

property, plant, and equipment to its gross value. We used the negative value of the

measure in the analysis so that a greater value indicates greater asset age. Following

Russo and Fouts (1997), we also controlled for the firm's growth rate, measured as the

percentage increase of firm sales from one year to the next. We took the log

transformation of this variable in order to normalize its values. In addition, we controlled

 134

for resource slack, the ratio of current assets to current liabilities, as suggested by Bansal

(2005) and Schuler (1996).

Social policies and environmental policies take time to implement and take effect.

We did not want to capture idiosyncratic changes in these policies, but rather sustained

commitment. To ensure that we were assessing a firm's sustained social and

environmental performance, we needed to control for variability in their social and

environmental policies. We measured consistency in CSP and CEP (positive and negative,

separately) as the coefficient of variation; that is, their standard deviation over the years

divided by the mean for each firm.

Competitive strategy is closely related to social strategy (Aragon-Correa, 1998;

Berman et al., 1999). Berman and his colleagues (1999) used Hambrick's (1983)

approach to develop four measures of strategy to capture two generic strategies—cost

leadership and differentiation (Porter, 1980). For parsimony, we used the three most

salient measures: cost efficiency, capital intensity, and selling intensity. The first two

measure cost leadership, and the third one measures differentiation efforts. Cost

efficiency was measured by the cost of sold goods divided by total sales, and normalized

through a square root transformation procedure. The analysis used the negative values of

this measure, so that a high value indicates a high level of cost efficiency. Capital

intensity was measured by the total assets divided by the number of employees. Selling

intensity was measured as selling, general, and administration expenses divided by total

sales, and is also used to reflect absorbed slack (Bromiley, 1991; Miller et al., 1996).

These measures were normalized through a logarithmic transformation.

 135

The sample included firms from 16 industries, identified by the two-digit North

American Industry Classification System (NAICS). We controlled for industry

differences by including industry dummies in the model. We also constructed three

industry-level variables to reflect three dimensions of firms' operational environments

(e.g. Berman et al., 1999; Boyd, 1990; Dess & Beard, 1984): industry munificence,

industry dynamism, and industry power or four-firm concentration. Industry munificence

was the coefficient of the regression of industry-level sales on calendar time. Industry

dynamism was the standard error of the same regression. The industry power or four-firm

concentration level was the percentage of the top four firm sales in an industry relative to

the total sales of that industry. We calculated these variables for three time periods,

1991-1995, 1996-1998, 1999-2003, to reflect changes in the operational environment

along these three dimensions. We used the three time period split because we did not

expect considerable variation in these three industry measures between single years. A

wider time window is typically used for such measures of the industrial environment

(Keats & Hitt, 1988). Even then, we found that there was little variation across time

windows. Table 4.2 shows the industry composition of the sample and the descriptive

statistics of these industry-level variables.

Data Analysis

We tested our hypotheses using the Hausman-Taylor estimator for error

component models, which is the xthtaylor command in Stata (StataCorp., 2003). It fits a

panel-data random effects model in which some of the covariates are correlated with the

unobserved individual-level random effects. Based on the same approach used with

instrumental variables, this estimator controls for unobservable variables, which often
 136

TABLE 4.2
Industry Composition and Description of Industry Level Variables

NAICS N Munificence Dynamism Concentration

Industry (Mean, SD)
2 digit (obs.) (Mean, SD) (Mean, SD)
Agriculture, forestry, and 1.0635 1.0010 0.4205
21 mining 286 0.0079 0.0002 0.0915
1.0743 1.0009 0.1330
22 Utilities 676 0.0691 0.0010 0.0254
1.1094 1.0008 0.4769
23 Construction 104 0.0430 0.0005 0.0678
Manuf. - food, beverage, and 1.0619 1.0003 0.3264
31 apparel 520 0.0086 0.0001 0.0404
Manuf. - wood, pulp, printing, 1.0686 1.0005 0.2739
32 plastic, and basic chemical 1456 0.0166 0.0001 0.0212
Manuf. - metal, machinery,
electric equipment, and 1.0770 1.0002 0.2180
33 2444
0.0288 0.0001 0.0228
furniture
1.0803 1.0009 0.5026
42 Wholesale trade 260
0.0676 0.0004 0.0890
1.1084 1.0004 0.2559
44 Retail trade 1 468
0.0367 0.0003 0.0154
1.1160 1.0004 0.6104
45 Retail trade 2 247
0.0439 0.0002 0.0287
Transportation and 1.0394 1.0008 0.2376
48 286
warehousing 0.0471 0.0008 0.0169
1.1333 1.0003 0.2955
51 Information 871
0.0513 0.0001 0.0948
1.1675 1.0003 0.1481
52 Finance and insurance 1300
0.1020 0.0001 0.0219
Professional, scientific and 1.1039 1.0006 0.6651
54 208
technical services 0.0613 0.0002 0.1003
Administrative and support,
1.1729 1.0014 0.4612
56 waste management, and 117
0.1274 0.0002 0.0777
remediation services
Health care and social 1.2093 1.0012 0.5133
62 117
assistance 0.1260 0.0003 0.0408
Accommodation and food 1.1194 1.0010 0.4437
72 234
services 0.0372 0.0003 0.0966
1.09 1.00 0.27
Total 9594
0.07 0.00 0.13

Note: The numbers in the columns of Munificence, Dynamism, and Concentration are their respective
means (upper level), and standard deviations from the means (lower level). To save space, the numbers
shown here are based on an average of these industry level measures across three time periods, 1991-1995,
1996-1998, and 1999-2003.
 137

strongly influence business performance estimates (Jacobson, 1990). We used this

analytical approach, as opposed to other panel data estimation techniques, because we

hypothesized that CSP, CEP, and CFP are endogenous to each other and simultaneously

determined.4 The basic estimation function of Hausman-Taylor test is shown below.

Equation 1: Yit = yiXl it + y 2 X2 it + piZlj + p2Z2j + u; + £it

Note: In the Hausman-Taylor estimation, the individual effects Uj are assumed to be

correlated with the explanatory variables X2;t and Z2j, but are uncorrected with Xlj t and
Zlj, where zl and z2 are variables constant within panel, and XI and X2 are time-varying
explanatory variables. In our case, CFP, CSP and CEP belong to X2 when they serve as
independent variables in an equation.

In order to test for unique effects (HI) and the simultaneous effects (H2), we built

three equations based on the structure of Equation 1, with each of the three performance

measures (CSP, CEP and CFP) as dependent variables. In each equation, the independent

variables included the remaining two variables as explanatory variables and the

respective control variables. For example, when MVA is the dependent variable, positive

CSP and CEP (or negative CSP and CEP) are independent variables. We built a total of

18 such equations. For each equation, the unique effects are reflected by the estimated

coefficients of the independent variables. The individual heterogeneity term, u^ captures

unobservable systematic variables such as integrative capabilities and firm conditions that

contribute to endogenous decision making. This term is predicted from each equation

when CFP is the dependent variable. We then tested the correlation between the predicted

4
Two stage least squares (xtivreg in Stata) also uses instrumental variables. However, xtivreg assume that
a subset of the explanatory variables in the model is correlated with the idiosyncratic error e[i,t], rather than
the individual-level random-effects, u[i], as we are proposing with the Hypothesis 1. In fact, the Hausman-
Taylor estimator assumes that none of the explanatory variables is correlated with the idiosyncratic error
e[i,t].
 138

|ii and the three performance measures. When m is found correlated with CFP, CSP and

CEP, we inferred simultaneous effects.

One advantage of the Hausman-Taylor test is that it is not all or nothing, as is the

case with fixed effects and random effects models that accommodate endogeneity in the

explanatory variables (Baltagi, Bresson, & Pirotte, 2003). Instead, the Hausman-Taylor

test permits some right hand covariates to be correlated with the individual effects, and

uses an instrumental variables approach to accommodate the correlations in order to

obtain consistent and efficient estimates. In addition to the three sustainability

performance measures, we assumed that six control variables were endogenous: CSP

consistency (positive and negative), CEP consistency (positive and negative), R&D

intensity, growth rate, capital intensity, and cost efficiency. Among them, the two

consistency measures were time-invariant, and the rest were time-varying. These

variables are closely related to firm-specific factors, such as integrative capabilities and

strategic decisions, therefore we control for potential endogeneity. The remaining control

variables were treated as exogenous variables. These exogenous variables, together with

the residuals of partial estimation using time-varying variables (the first step of the

Hausman-Taylor procedure), were used as instrumental variables in the second stage (see

Hausman & Taylor, 1981; StataCorp., 2003).

RESULTS

Table 4.3 and Table 4.4 show the descriptive statistics of the variables used in the

analysis. Among the three CFP measures, ROE was not correlated with any of the four

CSP and CEP measures, including positive/negative CSP and positive/negative CEP,

whereas MVA was significantly related to all four CSP/CEP measures. In contrast, ROA
 TABLE 4.3
Descriptive Statistics and Correlation Matrix

Mean S.D. 1 10 11 12 13 14
1. Positive -1.43E-09 1
1.00
CSP

2. Negative -1.69E-08 1
0.23*** 1.00
CSP

3. Positive 1.34E-09 1
0.18* 0.05* 1.00
CEP

4. Negative -3.35E-09 1
0.06*** 0.35*** 0.26*** 1.00
CEP

5. MVA 14.9 1.59 0.33*** 0.43*** 0.05** 0.26** 1.00

6. ROA 0.04 0.13 0.01 -0.10*** -0.02 -0.05* 0|3*** 1.00

7. ROE 0.12 1.06 0.01 -0.00 -0.00 -0.00 0.04* 0.07*** 1.00

8. Pos-CSP 0.03 4.82

0.08*** 0.05*** 0.03 0.01 0.08*** 0.01 -0.00 1.00
consistency

9. Neg-CSP 326
29.16 0.08*** 0.02 0.03 0.06*** 0.05** 0.01 0.00 0.02 1.00
consistency

10. Pos-CEP
0.44 6.23 0.05** 0.03 0.05*** 0.05** -0.02 -0.01 -0.01 0.00 -0.03 1.00
consistency

11. Neg-CEP 04y

6.44 0.02 0.02 0.04* 0.04 0.04' -0.02 0.00 -0.01 0.02 0.00 1.00
consistency

12. Size 7.90 1.51 0.30 0.48*** 0.09*** 0.34*** 0.79*** -0.02*** 0.02 0.07*** 0.05*** 0.00 0.07*** 1.00

13. Accounting „ ,„
0.15 -0.08*** 0.08*** 0.10*** 0.15*** 0.01 -0.13*** -0.01 -0.02 0.04 0.02 0.02 0.14*** 1.00
risk

14. Market
-2.11 0.66 0.06*** 0.05** -0.06*** -0.14*** -0.16*** -0.10*** -0.01 -0.00 0.00 -0.05** 0.00 -0.19*** -0.09*** 1.00
risk
T
p<0.10 * p < . 0 5 **p<.01 ***p<.001
 TABLE 4.4
Descriptive Statistics and Correlation Matrix (Cont.)

Mean S.D. 1 8 10 11 12 13 14

15. Asset age -0.55 0.13 0.06*** 0.03 0.01 0.04 -0.12*** -0.02 0.00 -0.08*** -0.00 0.06*** -0.01 0.02 -0.19*** 0.02

16. Resource 1.85 1.28

-0.03 -0.13*** -0.15*** -0.21*** -0.23*** 0.10*** -0.00 -0.01 0.02 -0.01 -0.03 0.44*** -0.31*** 0.21***
slack

17. Growth rate 0.09 0.22 -0.03 -0.05* -0.03 -0.07*** 0.08*** 0.15*** 0.01 0.02 -0.00 -0.06*** 0.01 0.06*** -0.04 t 0.08***

18. Selling -1.62 0.71

0.16*** -0.09*** -0.12*** -0.31*** -0.02 0.05* 0.01 0.06*** -0.00 0.03 -0.06*** -0.25*** -0.24*** 0.11***
intensity

19. Cost -0.77 0.14

0.16*** 0.00 -0.12*** -0.18*** 0.15*** 0.19*** 0.04* 0.02 0.02 0.01 -0 05*** -0 19*** -0 14*** o 07***
efficiency

20. Capital 5g5 ] 2g 0 .15*** 0.19*** 0.06*** 0.15*** 0.35*** -0.09*** 0.01 0.02 -0.02 0.01 0.02 0.18*** 0.06*** 009***
intensity
21. R&D -2.57 0.67 0.12*** 0.09*** -0.11*** -0.14*** 0.09*** -0.06*** -0.01 -0.01 -0.05*** 0.02 -0.02 -0.11*** -0.18*** 0.16***

Mean S.D. 15 16 17 18 19 20 21

15. Asset age -0.55 0.13 1.00

16. Resource 1.85 1.28

0.04 1.00
slack

17. Growth 0.09 0.22

0.12*** 1.00
rate 0.26*

18. Selling -1.62 v.l l ^ 08*** 0 24*** -0 05* 100

intensity

19. Cost -0.77 0.14

-0.01 0.28*** 0.09*** 0.68*** 1.00
efficiency

20. Capital c ,,
1 29 " 0 03 -0.04 0.17*** 1.00
• J -x_ 5.65
0.12*** 0.08***
intensity
21. R&D -2.57 0.67 0.08** 0.15*** 0.02 0.36*** 0.34*** 0.26*** 1.00
T
p<0.10 * p < . 0 5 **p<.01 ***p<.001

o
 141

related only to negative CSP and negative CEP. This suggests that negative

corporate social and environmental performance, but not the positive ones, are related to

accounting performance. Further, the positive aspects of social and environmental

performance were positively related to the negative aspects, justifying further our

decision to separate them.

As explained earlier, we tested 18 models. Half of the models used positive CSP

and positive CEP, and the other half used negative CSP and negative CEP. We found

little support for the unique effects when positive CSP and positive CEP were used; only

ROE showed significant impact on positive CEP, and no other mutual influences showed

up among the three pillars of business sustainability. No significant unique effects were

found either with negative CSP or negative CEP when ROE was the dependent variable.

To save space, we have not provided all of the results tables, but they are available from

on request.

Table 4.5 shows the results of Hausman-Taylor test with MVA, negative CSP and

negative CEP, where MVA is the measure of CFP. MVA and negative CSP negatively

influenced each other, while there were no similar unique effects between MVA and

negative CEP. As well, negative CSP and negative CEP supported each other. Therefore,

some evidence of unique effects (HI) was found: it holds with negative CSP, but not with

negative CEP. In addition, most of the control variables were significant in the model

estimating MVA (model 1). In the model estimating negative CSP (model 2), firm size,

asset age, and capital intensity were significant; firm size and asset age were also

significant in the model estimating negative CEP (model 3).

Table 4.6 shows the results of the three models with ROA as the CFP measure,

revealing a very similar pattern to the unique effects shown in Table 4.5. Specifically,
 142

TABLE 4.5
Hausman-Taylor Test with MVA, Negative CSP and Negative CEP

Independent variables Dependent variables

Model 1: MVA Model 2: Neg-CSP Model 3: Neg-CEP

-0.03* 0.06**
Negative CSP
(0.01) (0.02)
-0.01 0.11*
Negative CEP
(0.02) (0.04)
-0.07* -0.008
MVA
(0.03) (0.02)
0 Q2*** 0.31*** 0.10*
Size
(0.03) (0.05) (0.04)
_l jg*** 0.13 -0.24
Accounting risk
(0.06) (0.19) (0.15)
-0.06*** -0.01 -0.01
Market risk
(0.01) (0.02) (0.01)
-0.76*** 0.82*** -0.39*
Asset age
(0.17) (0.25) (0.17)
0.08*** 0.01 0.001
Resources slack
(0.02) (0.01) (0.009)
Selling intensity (absorbed -0.05 0.13 -0.07
slack) (0.10) (0.08) (0.07)
0.32*** 0.46*** 0.01
Capital intensity
(0.05) (0.08) (0.05)
R&D intensity -0.06 0.08 0.07
(0.04) (0.07) (0.05)
0.27*** -0.06 0.05
Growth rate
(0.04) (0.07) (0.05)
3.28*** -0.32 0.04
Cost efficiency
(0.52) (0.45) (0.33)
Neg-CEP consistency 0.02 -0.00 0.007
(0.01) (0.03) (0.01)
Neg-CEP consistency 0.06 -0.01 0.12
(0.10) (0.11) (0.08)
j 21*** -0.45 -0.38
Industry munificence
(0.24) (0.36) (0.30)
48.7 60.3 25.9
Industry dynamism
(49.5) (76.7) (41.9)
Industry concentration
-0.59* -0.82f 0.22
(0.28) (0.47) (0.20)
15 Industry dummies — — —

Sigma_u 1.99 0.83 2.13

Sigma_e 0.38 0.59 0.42

rho (fraction of variance due to
0.96 0.66 0.96
u_i)
4673.32 *** 638.11*** 471.81***
Wald Chi2
(df: 32) (df: 32) (df: 32)
1
Standard errors are in parentheses.
parentheses
t .. w* , «
* ^ /^
p<0.10 *p<.05 **p<.01 ***p<.001
 143

TABLE 4.6
Hausman-Taylor Test with ROA, Negative CSP and Negative CEP

Independent variables Dependent variables

Model 4: ROA Model 5: Neg-CSP Model 6: Neg-CEP

-0.01*** 0.06**
Negative CSP (0.002) (0.02)
-0.002 0.11*
Negative CEP (0.001) (0.05)
-0.36* -0.05
ROA (0.17) (0.08)
Size -0.01 0.24*** 0.09*
(0.01) (0.04) (0.03)
-0.13*** 0.17 -0.24*
Accounting risk (0.01) (0.21) (0.12)
-0.01** -0.01 -0.01
Market risk (0.004) (0.02) (0.01)
Asset age 0.04 Q 91*** -0.38*
(0.03) (0.22) (0.17)
0.008*** 0.01 0.001
Resources slack (0.002) (0.01) (0.007)
Selling intensity (absorbed -0.16*** 0.08 -0.08
slack) (0.01) (0.11) (0.09)
0.004 0.44*** 0.01
Capital intensity (0.01) (0.08) (0.05)
-0.02* 0.07 0.07
R&D intensity (0.008) (0.07) (0.05)
0.06*** -0.06 0.05
Growth rate (0.01) (0.05) (0.05)
0.88*** -0.24 0.06
Cost efficiency (0.12) (0.60) (0.33)
0.006t 0.00 0.007
Neg-CSP consistency (0.003) (0.01) (0.02)
-0.01 -0.02 0.12*
Neg-CEP consistency (0.02) (0.08) (0.06)
0.08f -0.49 -0.39
Industry munificence
(0.04) (0.40) (0.24)
-2.34 54.4 25.4
Industry dynamism (4.09) (71.8) (58.1)
-0.002 -0.77T 0.23
Industry concentration (0.03) (0.41) (0.25)
15 Industry dummies — — —

Sigmau 0.40 0.86 2.13

Sigma_e 0.08 0.59 0.42

rho (fraction of variance due to
0.95 0.67 0.96
u_0 600.45 *** 499 19*** 359.60***
Wald Chi2
(df: 32) (df: 32) (df: 32)
* Standard errors are in parentheses.
tp<0.10 *p<.05 **p<.01 ***p<.001
 144

ROA and negative CSP showed significant mutual unique effects, while no such

unique effects were found between ROA and negative CEP. Also, negative CSP and

negative CEP moved in the same direction. Therefore, the conventional view of the

unique effects was partially supported again, with negative CEP breaking the expected

linkages. In terms of the control variables, it is interesting to note that R&D intensity

significantly improved ROA, but was insignificant in predicting MVA; whereas capital

intensity improved MVA, but not ROA. It seems that innovation has unique effects on

accounting performance, while capital intensity is more related to the stock market. In the

model explaining negative CSP (model 5), three controls—firm size, asset age, and

capital intensity— were significant. Accounting risk, firm size, and asset age were

significant predictors of negative CEP (model 6).

In order to test for simultaneous effects among the three pillars, we first predicted

unobservable heterogeneity, (^i, from each of the six models where CFP was the

dependent variable. We chose these models over the models in which CSP or CEP was

the dependent variable because the primary task of business is to improve CFP, and

strategic decisions about CFP highlight the potential of simultaneity. We correlated these

predicted values of heterogeneity with the measures of CFP, CSP, and CEP, and the

results of the correlation test are shown in Table 4.7.

Based on the results shown in Table 4.7, the simultaneity argument held with

positive and negative CEP, but no support was found with positive and negative CSP.

Specifically, the heterogeneity terms obtained from the ROA model and ROE model were

significantly correlated with ROA and positive CEP, and with ROE and positive CEP

respectively. This indicates that CFP and positive CEP are determined simultaneously in

these cases, but positive CSP is not determined simultaneously. Further, CFP - measured
 145

TABLE 4.7
Correlation Test of Simultaneity
Ui (MVA- Uj (ROA- Uj (ROE- Uj (MVA- Ui (ROA- Ui (ROE-
positive positive positive negative negative negative
CSP/CEP) CSP/CEP) CSP/CEP) CSP/CEP) CSP/CEP) CSP/CEP)
Positive
CSP
Positive -0.06 -0.14
CEP
Negativ
eCSP
Negativ -0.04 0.06
eCEP
MVA 0.19 0.21
ROA 0.14 0.12
ROE 0.29 0.21

Note:
1. Only the correlation coefficients for those variables of our interest are shown in the table. Non-significant
coefficients are discarded.
2. Ui denotes the individual unobserved heterogeneity captured by the unit error in the Equation 1. The postfixes
indicate the model from which the respective Uj is predicted; the first variable, such as MVA in Ui (MVA-
CSR-CER), is the DV of that equation.

by ROE and MVA - had simultaneous effects with negative CEP. Therefore, the

results point to simultaneous effects for environmental performance only, and not with

social performance.

To test for robustness, we experimented with other measures of CFP, such as

return on investment and different measures of MVA and ROE, but the results were

unchanged. We also tried different measures of CSP, such as the five most frequently

used KLD categories as opposed to the seven categories used in our final analysis. Again,

the results did not change. We also checked to see if a few outliers distorted the results.

We ran the models after screening out all the outliers three standard deviations above and

below the mean. Again, there were no meaningful differences in the results.

Taken together, these results show that negative CSP was the only measure that

presents significant mutual unique effects with CFP, except that ROE had significant

influence on positive CEP. Other measures of CSP and CEP did not predict an
 146

improvement in CFP, and vice versa. Further, CSP and CEP were mutually reinforcing in

all the models. As to Hypothesis 2, we found the presence of simultaneous effects in

respect to CEP but not CSP.

DISCUSSION

In this study, we investigated the nature of the relationship between the three

pillars of sustainability at the firm level of analysis: CFP, CSP, and CEP. We

hypothesized that there are both unique effects and simultaneous effects between these

three pillars. These propositions were only partially supported by the empirical analyses.

We discuss the specifics below.

Our first hypothesis predicted that there are unique effects among the three

performance measures, consistent with prior research, although we did not expect these

effects to be strong. Our expectations have been supported. Specifically, we found that

negative CSP had a significant negative effect on MVA and ROA, and that CFP had a

reciprocal effect. However, none of the other CSP and CEP measures mimicked this

relationship, except the positive effect of ROE on positive CEP. This is somewhat

consistent with the conclusion of Orlitzky, Schmidt and Rynes (2003); they found

corporate social performance had a stronger relationship with the financial returns than

did corporate environmental performance.

Overall, these results suggest that positive corporate social and environmental

performance do not have unique effects with financial performance, once we

accommodate the simultaneous effects. This result challenges long held beliefs about the

financial efficacy of positive corporate social and environmental performance. This

suggests that one-off, short-term efforts to boost financial performance through positive

social and environmental performance are not likely to be systematically effective.

 147

However, negative social performance had a direct and unique effect on financial

performance. This may be because stakeholders are more likely to react to negative

behavior, than positive actions. They are more likely to respond when a firm acts badly

than when it acts positively. This finding has very important implications for strategic

management.

In addition, we found that CSP and CEP were complements rather than substitutes

(Orlitzky, 2006); improving one helps drive the other. This may be because some of the

organizational resources and capabilities that improve either CSP or CEP may be shared.

Another explanation is that organizations that respond to a social issue end up

concurrently addressing an environmental issue and vice versa. For example, a firm may

decide to develop an environmental policy at the same time that it writes its social policy,

or it may report social performance metrics at the same time as it reports environmental

performance. Both of these cases refer to items captured in CSP and CEP. The

implications for government policy makers are important—policy instruments that

motivate either social or environmental performance may stimulate the other.

Hypothesis 2 predicted the presence of simultaneous effects between CSP, CEP,

and CFP. We found that the simultaneous effects applied only to CEP (both positive and

negative) and CFP, whereas CSP was excluded from the system of equations. We argued

that the underlying cause for simultaneous effects is the presence of integrative resources

and capabilities and strategic decisions that accommodate both environmental and

financial issues. If so, then this finding confirms the work of previous commentators, who

have argued that natural resource intensity is consistent with financial performance

(Buysse et al., 2003; Hart, 1995). Firms manage one by managing the other.
 148

Social performance, on the other hand, was not simultaneously related to financial

performance. Combined with the findings of the unique effects analysis, this suggests that

CSP is only related to CFP when firms act irresponsibly. This finding is important as it

suggests that firms cannot systematically expect a cause-effect relationship when they

engage in socially responsible acts, only when they engage in negative social acts. As

well, there may not be an underlying set of resources and capabilities that apply to both

CSP and CFP.

We might have uncovered different results had we decomposed CSP further into

its individual dimensions. For example, Hillman and Keim (2001) found that, among the

five KLD categories, only community relations was significantly related to MVA. We

leave this exercise for future researchers, as the purpose of this study was to develop a

construct that accurately captured the essence of the social equity pillar of sustainable

development.

We can speculate why CEP and CFP experience simultaneous effects but CSP and

CFP do not. It may be because the resources and capabilities required for CEP are more

consistent with CFP than they are with CSP. It is possible that traditional strategic

management activities share less with CSP than CEP. Prior research has shown that firms

do not manage social issues as systematically as they deal with environmental issues

(Hart, 1995; Klassen & Whybark, 1999; Shrivastava, 1995b). Our interviews offer some

insights. These managers indicated that social issues tend to be defined by the stakeholder

group, context, issue, and time frame. Each issue is often unique. Environmental issues,

on the other hand, are embedded in science and law and were not seen to be as fickle or

fleeting. It may also be that the social issues have not reached the same level of

consciousness among managers as environmental issues, so the notion of simultaneity is

 149

ahead of reality. In other words, social performance is not yet embedded in organizational

processes and institutional structures (see Hoffman's (1999) evaluation of environmental

issues). In contrast, environmental issues are widely identified and similarly interpreted.

A recent McKinsey (2007) survey of 2,687 executives around the world, for example,

showed that executives rank environmental issues as the most important societal issue in

terms of impact on shareholder value.

It is also worth noting that CEP and CSP experience simultaneous effects. Dutton

and Dukerich's (1991) research helps illuminate these findings. They argued that a firm's

image and identity relate to individual motivations and interpretations of issues in the

organization. If employees embrace either social responsibility or environmental

responsibility as part of their overall identity building process, they may engage in a

similar pattern of action with the other type of issue, thus simultaneously determining

CSP and CEP.

Collectively, these results show that there exist both unique and simultaneous

effects; however, their presence is not equal across all three performance measures. These

findings have important implications for the way in which organizational researchers and

practitioners think about corporate social and environmental performance. Most prior

research has argued for a causal relationship; in other words, that it pays for firms to be

socially and environmentally responsible. The results in this prior research, while largely

positive, are not conclusive (Margolis & Walsh, 2001).

We also do not expect that this present analysis will be the definitive study on this

issue, but it has moved both the discussion and the empirical tests markedly forward. In

terms of the empirical contribution, we tested for simultaneous effects in the same model

as unique effects, with time series cross-sectional data involving 9,594 observations. We
 150

accommodated both fixed and random effects through the Hausman-Taylor estimation

procedure and discriminated between positive and negative social and environmental

performance. This is a large step forward in empirical analysis, and it casts doubt on most

of the causal relationships found in prior research.

In our opinion, this work makes a greater contribution through its theoretical

arguments, especially the presence of simultaneous relationships. We rooted this

discussion in sustainability discourse. Sustainable development is often conceptualized

using notions of interconnectedness, inclusiveness, and interdependence (Gladwin et al.,

1995). This view is consistent with the view that sustainability assumes complex adaptive

systems (Holling, 2001). In this paper, we suggested that firms are open systems

embedded within larger societal systems. The interconnections, at the firm level of

analysis, are shaped by integrative resources and capabilities and the social,

environmental and financial aspects of strategic decisions. As a result, we can expect that

business sustainability is strategic, long-term, and systemic throughout an organization.

This research encourages researchers to push beyond the simplicity of direct causal

relationships, to the dynamic inherent within social, environmental, and financial

performance.

Another important contribution is the distinction we drew between social and

environmental performance. Prior research has often treated environmental performance

as merely a component of social performance. In this paper, we teased apart the

theoretical differences between CSP and CEP, and tested these differences in empirical

analysis. The differential findings supported our view that these constructs are indeed

theoretically different.
 151

The control variables also yielded interesting findings. We found that firm

growth is negatively and significantly related to positive CSP. High growth firms, with

ample opportunities and favorable market reactions, may be distracted from managing

social issues, or high growth firms may not see social issues as a priority. Also, industry

dynamism is positively related to positive CSP but industry concentration is negatively

related. Firms may be more conscientious of their social and environmental impact in a

dynamic environment, and less conscientious in a monopoly business environment. These

two variables are less significant when predicting negative CSP. At the same time, the

results show that larger firms scored higher in both positive and negative CSP than

smaller firms, likely because their visibility requires active stakeholder management and

yet their size lends itself to making mistakes, which is consistent with the findings of

Strike, Gao, and Bansal (2006). Similarly, firm asset age and capital intensity predict

higher levels of both positive and negative CSP.

The firm's cost efficiency was negatively related to positive CEP, which means

that cost-focused firms invest less in developing environmental management capabilities

than those firms less cost-focused. More importantly, the significant and positive effect of

market risk on positive CEP suggests that investments in environmental initiatives are

often a risk management exercise, which is consistent with prior research (Bansal et al.,

2004; Orlitzky et al., 2001). Such investments seem to be made irrespective of financial

performance, as CFP does not influence positive CEP significantly, with the exception of

ROE. However, greater CFP does reduce the level of negative CEP, as shown in Table

4.5 and Table 4.6. In addition, firm size and asset age are significantly related to negative

5
A copy of the results tables are not included here because of their length, but are available on request.
 152

CEP, the former being positive and the latter being negative; but they have no

relationship with positive CEP.

There are some limitations in this research. First, the firms in our sample are

relatively large multinational firms headquartered in the US; thus, the conclusions cannot

be easily generalized from this study to a wider group of firms without caution. Second,

the KLD data use a US-centric notion of CSP and CEP (Strike et al., 2006). The same

relationships tested in different institutional contexts, with differing political systems,

levels of economic development, and cultural beliefs, may bear different results. It is

possible that the potential worth of commensurate resources and capabilities is

undermined in institutional contexts that do not value CSP and CEP. Third, our model

specification may not fully reflect the dynamic nature of CSP and CEP, such as time lags

or cross-lagged complexity in the interrelationship. More sophisticated dynamic models

can be constructed either by borrowing the approaches taken by other disciplines that

experience multiple lags, such as labor economics (see for example Arellano & Bond,

1991), or by using growth-focused structural equation models such as latent growth

modeling (Curran et al., 2003; Duncan et al., 1997).

These empirical limitations and findings offer opportunities to fuel future research.

For example, there may exist a relationship between causal and simultaneous

relationships. Firms that can address causal relationships between the three types of

performance may learn to integrate the three types of performance simultaneously and

build the commensurate integrative resources and capabilities. Consequently, we may see

firms evolve in their ability to address business sustainability over time.

Furthermore, there may be interesting findings when researchers focus on the

persistence of performance rather than on the level of performance. We did not find
 153

significant unique effects in this study, however, the reason might be that the

responsibility commitment (positive activities) only helps a firm sustain its financial

performance over an extended period of time, but does not impact the level of financial

performance. In contrast, irresponsible acts may drag down a firm's performance,

changing both the sustainability and level of financial performance.

CONCLUSION

Proponents of sustainable development have argued that social equity,

environmental integrity, and economic prosperity are systematically interconnected.

Despite its wide normative appeal, few researchers have teased out the underlying

theoretical relationships among the three pillars of sustainability at the firm level (CFP,

CSP, and CEP), and none have tested their co-alignment. For those who have addressed

the binary relationships among these performance measures, a causal orientation has been

dominant. Here, we have argued that the three pillars are connected through two

distinctive mechanisms: unique effects and simultaneous effects. The result is a business

model that integrates business and society. The mechanism of simultaneity represents an

important contribution toward fully understanding the dynamics inherent in business

sustainability.

Our findings show that that there may be a false trade-off between the economy

and the environment and society. In fact, our study shows that organizations can

simultaneously experience positive environmental and financial performance because

they are internally consistent. We obtained these results, in spite of the high hurdles we

set for statistical significance through the inclusion of time series cross-sectional dataset

and advanced statistical techniques. Armed with this knowledge, future business and
 154

government policies can more confidently promote integration among the three pillars of

business sustainability.
 155

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CHAPTER 5

GENERAL CONCLUSIONS
 164

Chapter 5: General Conclusions

Study 1 (Chapter 2) of this thesis focused on developing the corporate social

performance (CSP) and corporate environmental performance (CEP) constructs, in hopes

of clarifying the conceptual confusion around business sustainability. We started by

analyzing both quantitative data and qualitative data inductively with a suspicion that

there might be underlying differences between CSP and CEP that would warrant a

theoretical distinction between them. The empirical analyses allowed us to identify six

categories in which CSP and CEP are distinct. Based on these empirically identified

categories, and by drawing upon previous research as well, we developed a list of six

conceptual attributes that systematically discriminated between CSP and CEP. We

therefore concluded that future research should recognize this distinction and should not

continue to overlook the conceptual uniqueness of CSP and CEP.

Study 2 (Chapter 3) aimed to examine the pattern of co-evolution among the three

pillars of business sustainability. Our theory predicted that corporate social,

environmental and financial performance (CFP) would each follow an underlying

trajectory, and the slopes of their growth trajectories would be positively related. In other

words, the rate of growth in one performance would be mirrored in changes in other

performance measures, eventually leading to similar tracks of evolution. The data largely

supported this prediction. Specifically, we found that both CSP and CEP strongly

coalesced with return on equity (ROE) over time, while only CSP covaried with market

value added (MVA) in growth. The co-evolution proposition did not work well with the

return on assets (ROA) model, although CSP and CEP continued to positively covary, a

trend that was present in both models when ROE and MVA were used as the CFP
 165

measures. These results suggest that the three measures of corporate performance do co-

evolve over time.

In Study 3 (Chapter 4), we theorized that there are two mechanisms of achieving

sustainability: the unique effects that arise from causal relationships, and the simultaneous

effects that arise from integrative resources and capabilities. These two mechanisms push

the frontier of sustainability by pulling the three pillars tightly together as mutually

consistent systems. We tested the presence of these two types of effects using large scale

data, and we found partial support. Unique effects emerged only in the case of negative

CSP, while simultaneous effects were present for both positive CEP and negative CEP.

These results imply that positive social and environmental activities did not generate the

expected financial returns when the potential simultaneity was controlled for, while the

negative activities did cause observable damages to firms, particularly on the social side.

Further, our results support a view that environmental management encourages

innovation and that such innovation permits increased integration of environmental issues

into traditional strategic considerations. In addition, we found that CSP and CEP did

complement, but were not substitutes for, each other.

This research contributes to the field of business sustainability - and to business

and society at large - in a number of ways. Although there were certainly identifiable

contributions on the methodology side in terms of an extensive and rich dataset and an

advanced longitudinal analysis, we chose to discuss the theory-related contributions. First,

we led scholarly efforts to investigate business sustainability using an historical trajectory

approach. The conventional approach has been to examine how the level of one variable

influences the level of another within a short time frame, typically one to two years. But

in this kind of approach, the temporal changes of variables, as well as the changes in their
 166

relationships, are left insufficiently addressed. With the trajectory approach, however, not

only is a time dimension fully brought into the theory, which speaks to the heart of

sustainability, but we are also in a better position to discover the evolving pattern of

sustainability, which gives us an important tool for gaining an understanding of the

underlying sustainability processes.

Second, the contrast between the unique effects and the simultaneous effects that

we developed in Study 3 has significant implications for future research as well as for

management practice. This contrast exposes the two major mechanisms that connect the

three pillars of business sustainability, each representing a different managerial approach.

Scholars have been preoccupied with the causal logics of sustainability variables that

emphasize short-term gains and direct effects. As a result, the potential of simultaneous

effects has not previously been part of the equation. Yet, the presence of simultaneous

relationships represents an approach for strategically managing social and environmental

issues that is fundamentally different from traditional causal thinking. Further, a focus on

the systematic interdependence among the performance measures, as opposed to the

binary relationships between them (as in prior studies), also provides a new way of

theorizing sustainability issues that is based on a systems view.

Third, this research demonstrates one way of integrating the resource-based view

(RBV) and institutional theory. By analyzing the interplay of the two, we can see the

emergence of the integrative resources and capabilities, which provides a unique

theoretical explanation as to how business sustainability may evolve in a healthy manner.

We are not the first to try to bring institutional factors into the theories of predicting

organizational behavior and performance. To the best of our knowledge, however, we are

among the few who attempt to decipher the institutional processes involved in strategic
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decision-making (also see Oliver, 1991; Oliver, 1997), rather than simply introducing

broad institutional variables (such as regulative pressure) into the model. The outlined

interaction between institutional theory and RBV has much to offer to the enrichment of

both theories.

Lastly, this research systematically compares CSP and CEP based on the analysis

of both the archival and interview data. The distilled conceptual attributes that

discriminate between the two constructs expose the conceptual problem that has been

ignored in previous research. With the core constructs being clarified and seriously

developed, this field of study will be more likely to generate knowledge that features

greater consistency, accuracy and richness.

These contributions must be viewed in light of the limitations of this research.

First, the firms in our sample are large multinational firms headquartered in the U.S.; thus,

it is not clear if the findings can be generalized to other types of firms. Second, we have

relied on KLD data in measuring CSP and CEP, but KLD is not without its own issues,

such as its investor orientation. Although we have explained why KLD data can be used

with confidence in the Methods section of Study 1 (Chapter 2), certainly there are ways to

further improve the measurement in future research. Third, a reliance on KLD data also

makes this research suffer from the U.S.-centric nature of the CSP and CEP standards that

are used to compile KLD social ratings (Strike et al., 2006). It is likely that the results will

change when the same relationships are examined within different national and cultural

contexts.

This thesis research offers guidance to several lines of inquiry in future research.

One of the most fruitful areas would be to look at how sustainability-related variables

evolve, which echoes the increased call for process-oriented research in management
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literature. For example, although we identified individual trajectories for CSP, CEP and

CFP in Study 2, we did not discuss the details of these trajectories, choosing instead to

focus on the way they co-align over time. Future research may disclose important

information by examining the specific trajectories of important variables. More

importantly, researchers can explore certain evolutionary processes by examining their

conditional trajectories, where the goal is to find out what factors may influence the shape

of the growth trajectories, and how. Furthermore, new knowledge may emerge when

researchers focus on the persistence of performance rather than on the level of

performance; the former has been largely overlooked in the field of sustainability as well

as in many others. Such inquiries can be addressed well through a trajectory approach.

Future research could also build theoretical models by drawing upon the interplay

framework that we developed in Study 2 to integrate the institutional logic with the

principles of strategic management. This way, the specific processes associated with each

stage in the framework may be refined and disclosed, such as the process by which

institutional valuation is translated into competitive opportunities, and that certain

innovations take place to accommodate initially conflicting needs. Cross-disciplinary

work may be particularly helpful in this area, since the processes often involve multi-

disciplinary knowledge, such as organizational behavior, issue interpretation, institutional

contradictions and industry analysis.

Another important research area would involve looking into the mechanisms of

achieving sustainability. In this work, we have identified two major mechanisms, unique

effects and simultaneous effects. Each of them is complex enough to decode. For example,

what kinds of capabilities are required to create simultaneous effects? How does the

integration process play out through organization-wide initiatives? As well, there might
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be an interesting relationship between the causal and simultaneous effects. Can one be

substituted for the other? Meanwhile, future research could build distinctive nomological

networks around CSP and CEP, two distinct yet closely tied constructs. It will be

interesting to see how the narrowly defined CSP, with CEP removed, relates to the

familiar variables. Researchers could also look at how CSP and CEP may interact, as

firms seek to improve their reputations.

The field of sustainability is relatively new, but the issues are becoming

increasingly urgent as the planet's resources are imposing limits to growth. And with

higher prices of even the most basic commodities, such as energy and food, the equity

among people is being further eroded. It is important, then, for business scholars to

decode the dynamics between social, environmental and financial performance in order to

guide corporations in practice and, in turn, build the foundation for a sustainable society

and planet.
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Appendices
A List of Semi-structured Interview Questions

Differences between CSP and CEP:

1. What are the key social issues or social activities in your business?
2. What are the key environmental management issues/activities in your business?
3. Do you treat social activities differently from environmental activities in
management? And why?
4. Do you think that there are good reasons to separate corporate performance in
social management and corporate performance in environmental management? If
yes, what are they?
5. Do you think a company's social performance and environmental performance
will influence its financial outcomes differently? How?

Views about the interrelationships:

1. What do you think about the simultaneity argument that I am making, in terms of
the relationships among the three performance measures? What would you expect
from the results?
2. What kind of firm resources or capabilities do you think are consistent among the
social, environmental and financial performance?
3. What is your reaction to the results that I just briefed for you?
 Ethics Approval

Richard Ivey School of Business

Ivey
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Use of Human Subjects - Ethics Approval Notice

Principal Investigator: Tima Bansal Review Number: 017/07(BREB)

Re: PhD student Jijun Gao
Protocol Title: Business sustainabtlity: Achieving financial, social & environmental
performance simultaneously
Approval Date: Revised May 5,2008 End Date: May 5,2009

This is to notify you that the Ivey School of Business Expedited Research Ethics Board (BREB) has granted
expedited approval to the above named research study on the date noted above.

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administrative aspects of the study. Subjects must receive a copy of the signed information/consent
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Investigators must promptly also report to the BREB:

a) changes increasing the risk to the participant(s) and/or affecting significantly the conduct of the study;
b) all adverse and unexpected experiences or events that are both serious and unexpected;
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This is an official document. Please retain the original in your files.

 172

Curriculum Vitae
JIJUN GAO

EDUCATION

University of Western Ontario 2008 (A.B.D)

P.h.D, General Management (Strategy), Richard Ivey School of Business.

Beijing Technology and Business University 1998

Master in Economics. Specialized in Business Administration.
Xinxiang Teachers College 1993
College Diploma in Mathematics. Specialized in Mathematics Education.

RESEARCH INTERESTS
• Business and society, stakeholder management, and corporate social responsibility
• Business strategy, competitive advantage, and international business

PUBLICATIONS

Anderson, R., Abdelnour, S., Gao, J., Le Ber, M., Seifzadeh, P. & Slawinski, N. 2008.
"Knowledge forum on valuing business sustainability: Summary report". Released by
the Research Network for Business Sustainability.

Strike, V., Gao, J., and Bansal, P. 2006. Being good while being bad: Social
responsibility and the international diversification of U.S. firms. Journal of
International Business Studies, 37 (6): 850-862.

Bansal, P. and Gao, J. 2006. Building the future by looking at the past: Examining
published research in organizations and environment. Organization and Environment,
19(4): 458-478.

Strike, V., Gao, J., and Bansal, P. 2006. "The (ir)responsibility of multinational
enterprises". Academy ofManagement Best Paper Proceedings.

CASE STUDIES
Bansal, P and Gao, J. Adapting to climate change: The case of Suncor Energy and the
Alberta oil sands.

INDUSTRY EXPERIENCE
Before entering the PhD program, Jijun had over seven years of industry experience as a
marketing and sales senior executive in the information technology, food and e-learning
industries in China.