Environmental CSR and Corporate Political Activities
Revisiting the profitability of integrated non-market strategies
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Thesis M.Sc. Business Administration - International Management Track University of Amsterdam - Faculty of Economics and Business
Name of Student: Antonia Tänzer Student Number: 11372060 Supervisor: Dr. Ilir Haxhi
Second Reader: Dr. Francesca Ciulli Date of Submission: 26 January 2018
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Statement of Originality
This document is written by Student Antonia Tänzer who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
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Abstract
In recent years, growing interest in corporate environmental initiatives has made the engagement in non-market strategies indispensable for many firms. Despite this increasing attention, previous research is limited in explaining the dynamics between environmental Corporate Social Responsibility (CSR) and Corporate Political Activities (CPA), as controversy about the conceptualization, operationalization as well as the combined effect of both strategies remain. The current study addresses this gap by examining the link between environmental CSR and CPA, and their joined effect on corporate financial performance (CFP). Our core argument is that political informational strategies (i.e., lobbying) and financial strategies (i.e., PAC contributions) are perceived as a form of corporate investment into the firm’s intangible assets, capable of influencing the policy-making process on state-level in the firm’s favor. We therefore argue first that the adoption of environmental initiatives positively affects firm performance, since the initial implementation costs are offset by various gains which are diffused throughout the corporation. Second, we argue that CPA moderates the CSR-CFP relationship, as firms have an array of political strategies at their disposal to influence policy outcomes and set industry standards according to their interests. For a sample of 296 firms listed in the S&P 500 ranking, we first test the effect of environmental CSR on CFP, and then test the moderating effect of CPA on the CSR-CFP relationship. Finally, we examine whether the relationship between environmental CSR and performance differs between B2B and B2C industries. Our results show that while environmental CSR positively impacts firm performance, CPA does not moderate that relationship. Instead, we find that political strategies rather have a direct positive effect on firm performance. Moreover, our results reject any moderating effect of industry type on the CSR-CFP relationship. We contribute to the theoretical debate by fusing firm- and industry-level units of analysis, as well as providing statistical support for CSR as a disaggregate concept. Our practical contributions substantiate the need for increased integration of non-market strategies for firms to yield higher financial returns.
Keywords: Corporate non-market Strategies; Corporate Social Responsibility (CSR); Environmental Corporate
4 Table of Contents
1. Introduction ………...……6
2. Literature Review ……….……..10
2.1 Corporate Social Responsibility (CSR) ……….……10
2.2 CSR Disentangled: Environmental CSR Initiatives ……….……….…11
2.2.2 Environmental CSR Profitability ……….…..12
2.3 Corporate Political Activities (CPA) ………..………...14
2.3.1 CPA Profitability ………...16
2.4 CPA and CSR: From Mutual Exclusion towards Complementarity ……….16
3. Theoretical Framework ………..18
3.1 Environmental CSR and CFP ………...…….19
3.1.1 Environmental CSR: Two Spheres of Influence ………...………...…..19
3.1.2 Impact of Environmental Initiatives on Firm Performance ………...…20
3.2 Environmental CSR, CPA and CFP ………..…23
3.2.1 Corporate Political Strategies ………....23
3.2.2 Lobbying versus Political Action Committees ………..…25
3.3 Environmental CSR, Industry and CFP ………..…...26
3.4 Conceptual Model ………..…27
4. Data and Method ………...………..………….…...29
4.1 Data Collection and Sample ………..….29
4.2 Data Sources ……….….29 4.3 Variables ………..…..30 4.3.1 Dependent Variables ……….….30 4.3.2 Independent Variable ………...….….31 4.3.3 Moderator Variables ……….….32 4.3.4 Control Variables ……….……..33 4.4. Methodology ………..……….……..34
5. Analysis and Results ……….…..36
5.1 Descriptive Statistics ……….……….36
5.2 Correlations and Multicollinearity ……….………37
5.3 Regression Analyses………...40
5.3.1 Regression Analysis for ROA ………....41
5.3.2 Regression Analysis for Tobin’s Q ………....44
6. Discussion ……….…47 6.1 Findings ………..47 6.2 Contributions ……….….50 6.2.1 Theoretical Contributions ………..50 6.2.2 Practical Contributions ………..51 6.3 Limitations ……….52
6.4 Directions for Future Research ………..53
7. Conclusion ………55
8. References ………57
9. Appendices ………..………...…..63
9.1 Appendix A – Overview of Regression Models ………..… 61
5 List of Tables and Figures
Table 1 Summary of Regression Models ……….………35
Table 2 Descriptive Statistics ………...…..37
Table 3 Tolerance and VIF ………...…..37
Table 4 Correlations and Multicollinearity ………....…..38
Table 5 Regression Results for ROA ………...42
Table 6 Regression Results for Tobin’s Q ………...46
Figure 1 Conceptual framework visualizing the hypothesized relationships between environmental CSR, CFP, CPA, and industry type ………...28
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1. Introduction
Going green and doing well? Demands to ‘do good’ have increased for businesses in the course of the past years and have urged firms to embrace ethically and socially responsible practices (Maxwell and Lyon, 2013; Karaosmanoglu et al., 2016; Mantovani, Magalhaes de Andrade and Negrao, 2017). Being environmentally conscious has become a generic norm rather than an option for businesses, and has provoked controversy about what responsibilities companies bear and how these ought to be defined. A growing body of academic literature has since examined the many facets of corporate commitment to environmental initiatives as vested in Corporate Social Responsibility (CSR) (i.e., Meznar, Chrisman and Carroll, 1991; Dowell, Hart and Yeung, 2000; Pedersen, 2010; Sharp and Zaidman, 2010; Valentine and Fleischman, 2008; Martinez-Conesa, Soto-Acosta, and
Palacios-Manzano, 2017). Under a broader ‘umbrella of CSR’, environmental CSR policies comprise techniques such as cutting wasteful production, decreasing pollution in production processes, using sustainable or recyclable material, or adhering to agreements on environmental standards (Blowfield and Frynas, 2005). The voluntary compliance and commitment to those values go beyond what is legally mandatory to promote CSR initiatives, and constitute an essential part of corporate non-market strategies (Baron, 1995; McWilliams and Siegel, 2001).
The early 2000s have witnessed another trend coinciding with the surge of CSR involvement: a tripling of lobbying expenditures and a quadrupling of PAC donations of U.S. public firms in the past decade (Opensecrets, 2017). Hence, simultaneous to increasing research on CSR, an emerging body of literature has investigated the effect of corporate political activities (CPA) on corporate financial performance (CFP) (Getz, 1997; Hillman and Hitt, 1999; Hart, 2001; Blumentritt, 2003; Hillman, Keim and Schuler, 2004; Lux, Crook and Woehr, 2010). Faced with increasing non-market activity, previous literature advances the need for integration of both strategies in order to improve efficiency and ultimately corporate performance (Baron, 2001; Rodriguez, Eden, Siegel, and Hillman, 2006; McWilliams and Siegel, 2011; De Hond et al., 2014; Frynas and Stephens, 2015; Mellhahi, Frynas, Sun and Siegel, 2016). Despite growing interest in non-market strategies, research falls short of providing an unambiguous link between environmental CSR strategies, CPA, and CFP. While a few studies find that CSR, if at all effective, results in costs for the firm (Bird et al., 2007; Fisher-Vanden and Thorburn, 2011; Marsat and Williams, 2011; Lioui and Sharma, 2012), others reject any significant effect of CSR on firm performance (Margolis, Elfenbein, Walsh, 2007). Contrary to these findings, Heal (2010), Lyon and Maxwell (2013), and
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Scherer (2017) find a positive link between environmental CSR and performance by proposing that firms employ environmental CSR policies as a proactive safeguard against environmental disasters or activist movements which may in the future reflect negatively on the company. Likewise, studies have explored the effect of CPA on CFP, claiming that political activities influence and pre-empt the regulatory corporate environment (Hillman and Hitt, 1999). As a result, research distinguishes between informational political strategies, i.e. information provision to policy-makers on the state-level, and financial political strategies, i.e. the provision of financial enticement to campaigns or Political Action Committees (Hillman and Hitt, 1999). Several studies stress the potential of CPA to increase firm performance (Lux, Crook & Woehr, 2010; Hillman et al., 2004; Mathur et al., 2013), yet a growing body of literature challenges these findings by demonstrating that lobbying is a feature of managerial agency-problems (Aggarwal, Meschke, Wang, 2012; Hadani and Schuler, 2012). Due to mixed empirical findings, the academic debate has moved towards conceptual integration of CSR and CPA, claiming that alignment of both strategies, rather than the individual use, can improve competitiveness and firm reputation (De Hond et al., 2014; Liedong, Ghobadian, Rajwani, O’Reagan, 2014). Mindful of the above debate, the configuration between CSR and CPA remains ambiguous due to the lack of studies that cover the intersection of CSR and CPA research. As literature is dissected into those streams advocating mutual exclusion and those in support of CSR-CPA complementarity, we approach this gap with our first research question:
RQ1: To what extent do corporate political strategies (informational vs. financial) affect the relationship between environmental CSR and firm performance?
Mindful of the profit potential that well-aligned corporate strategies bear (Porter and Kramer, 2006; De Hond et al., 2014; Sontaite-Petkeviciene, 2015), we revisit the CSR-CFP relationship while investigating the moderating influence of political strategies to complement our fragmented knowledge about the combined effect of CPA and CSR on financial performance. This is insofar interesting as much research stresses the potentially positive effect of environmental CSR and CPA, yet is inconclusive about the combined effect of both strategies. We adopt an instrumental view of non-market strategies and test whether different corporate political strategies are an effective strategic tool in order to strengthen the effect of environmental policies on firm performance.
Falling short of exploring industry-level contingencies in CSR research, we furthermore observe that different target markets suggest a variant importance of CSR across industry types. For some industries, environmental standards are more stringent and of
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increased relevance than for others (Richards, Glegg, and Cullinane, 2000; Dechezlepretre and Sato, 2017). By the same logic, consumers of firms operating in certain industries perceive the importance of being environmentally-friendly as more important than others. Consequently, we expect to find differences in the relationship between environmental CSR and CFP, depending on a firm’s respective industry. We address this issue with our second research question:
RQ2: To what extent does the type of industry affect the relationship between environmental CSR and firm performance?
In essence, we argue that the initial implementation costs of environmental CSR initiatives are offset by spin-off effects which lead to cost-reduction or revenue-increasing benefits, resulting in a positive direct impact of CSR on CFP. In addition, we argue that the CSR-CFP relationship is positively moderated by the different political strategies that firms employ, as we consider political activities as corporate investments to influence state-level policy processes and outcomes in the firm’s favor (Hillman and Hitt, 1999; Hillman, Keim and Schuler, 2004). Building upon the concept of issue salience, we contend that differences in the relationship between environmental CSR and CFP exist depending on the choice of political strategy, since highly salient environmental issues are to be addressed by more persistent political strategies than less salient issues (Getz, 1997; Bonardi and Keim, 2005). Lastly, we argue that firms in B2C industries are more incited to implement environmental CSR than B2B firms, since they operate in immediate proximity to the end-customer which pressures them to adopt CSR more stringently (Hoejmose, Brammer and Millington, 2012).
In order to address the two research questions, we apply a quantitative approach. For a sample of 296 S&P Fortune 500 firms in the period of 2013-2015, we empirically test the relationship between environmental CSR and CFP, as well as examining the moderating effect of CPA and industry type. We test four hypotheses using hierarchical regression analysis, where CSR is operationalized through KLD strengths and concerns, CPA follows Hillman & Hitts (1999) typology of political strategies, and CFP is measured by Tobin’s Q and Return on Assets (ROA). Given the homogeneity of our sample in terms of origin and size, we find that environmental CSR positively impacts CFP, although we cannot substantiate any moderating effect of CPA or industry type on that relationship.
We contribute to the theoretical debate by addressing how two different levels of analysis – industry and firm variables - moderate the relationship between environmental CSR and CFP. Second, we complement the academic debate by fusing CSR and CPA literature and drawing upon issue salience as a determinant of corporate strategy choice.
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Third, complementary to prior research that has studied CSR as a multidimensional concept including socio-economic, legal, or cultural dimensions (i.e., Doumagay and Moskolaï, 2016; Preuss and Brown, 2012; Fassin et al., 2014; Valentine and Fleischman, 2008), our study adds to the debate by disentangling the concept of CSR. We only test the environmental dimension of CSR, arguing that methodologically, CSR is best measured as a disaggregated concept to connect policies with specific outcomes. Practical implications are twofold. First, dismantling the ‘umbrella of CSR policies’ enables management to determine whether corporate non-market strategies are effective, and which aspects in particular. Second, upon determining a policies’ (in)effectiveness, management can reallocate financial resources towards more cost-efficient or profitable projects. Building on this thought, firms that are reluctant to pick up environmental CSR initiatives are able to gain insights into whether environmental projects, combined with political strategies, are worth spending (financial) resources on.
The remainder of the paper is organized as follows: chapter two reviews the extant literature in the respective fields of research while chapter three proposes a framework to investigate the relationship between environmental CSR, CPA and CFP and proposes a set of four hypotheses. Chapter four lays out the choice of methods and data, while we discuss our findings in chapter five. Chapter six closes with some concluding remarks, implications, as well as the limitations of this study.
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2. Literature Review
The following section provides a state of the art in the field of CSR and CPA research as well as their respective relationships with firm performance. Starting off with a definitional and conceptual overview of CSR, we further review the literature in terms of environmental CSR profitability, and later define different political strategies as well as linking them to firm performance.
2.1 Corporate Social Responsibility (CSR)
The debate around Corporate Social Responsibility (CSR) has matured in the course of the last decades and the perceptions about this construct have been refined continuously. Any definition of CSR is inevitably linked to the question of what constitutes the role of the firm and where to set its boundaries. Is a businesses’ responsibility limited to making profits (Friedman, 1970) or can this perception be extended to a voluntary effort to contribute to some social good to the wider society (Porter and Kramer, 2006, 2011)? The academic debate has moved beyond these initial impetuses and now offers more trenchant approaches towards the responsibility of businesses and how these efforts can be linked to the triple bottom line of environmental, social, and economic development. In the absence of a universally accepted definition of CSR, the European Commission stresses the responsibility that firms have in minding their social impact on the environment and society as a whole, thereby recognizing that no ‘one-size-fits-all’ strategy exists (EU Commission, 2011). Firms are subsequently urged to “have a process in place to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close cooperation with their stakeholders” (EU Commission, 2011).
CSR has been studied in terms of various dimensions, i.e. its social impact and its influence on business strategy (Meznar, Chrisman and Carroll, 1991; Doumagay and Moskolaï, 2016; Sharp and Zaidman, 2010), its relation to human rights (McCorquodale, 2009; Preuss and Brown, 2012), its context to business communication (Moravcikova, L’ubica and Rypakovaa, 2015; Shim, Chung and Kim, 2017; Scandelius and Cohen, 2016), or in terms of managerial orientation and ethics (Valentine and Fleischman, 2008; Pedersen, 2010; Fassin et al., 2014; Goel and Ramanathan, 2014). In conformity with a neoclassical view of the firm as a profit-maximizer, research likewise examines links between CSR and firm performance and market value. Results and empirical evidence are ambiguous: Some scholars attribute CSR a positive impact on financial performance, mostly relying on KLD strengths and concerns measures (Bragdon and Karash, 2002; Dowell, Hart and Yeung, 2000;
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Epstein and Schnietz, 2002; Graves and Waddock, 2000; Barnett and Salomon, 2012). Servaes and Tamayo (2013), too, endorse a positive relationship between CSR and performance, but find that this relationship exists only for firms with high customer awareness, as well as for firms that have been perceived negatively by customers before implementing CSR. Thus, the authors stress the additional value of CSR in enhancing corporate reputation. Contrasting views are put forward by Holman, New and Singer (1990) and McWilliams and Siegel (2001) who find a non-significant relationship between CSR and firm performance. Supply-and-demand approaches towards CSR support this notion and substantiate that the relationship between CSR and performance is neither positive nor negative, as firms will adopt a level of CSR that matches the demand in the market (McWilliams and Siegel 2001; retrieved from Barnett and Salomon, 2012). The adoption of CSR policies is inevitably associated with some implementation costs for the firm, and diverging results thus far are likely caused by heterogeneous or imprecise measures of CSR (Orlitzky, Schmidt, and Rynes, 2003).
2.2 CSR Disentangled: Environmental CSR Initiatives
Within the synoptic concept of CSR, environmental CSR has been conceptualized in various ways, at the broader level as “a concept where companies integrate environmental concerns in their business operations and the interaction with stakeholders, without compromising economic performance” (Khalid, Rashid and Rahman, 2015, p. 705). Bansal and Roth (2000) complement environmental corporate initiatives by “changes to the firm’s products, processes, and policies, such as reducing energy consumption and waste generation, using ecological sustainable resources, and implementing an environment management system” (Bansal and Roth, 2000, p. 717). As for this research, balancing environmental concerns under the premise not to jeopardize economic performance is essential since the object of research is to test environmental CSR profitability, or in other words, whether CSR is reconcilable with financial objectives (Baron, 2001; Khalid, Rashid and Rahman, 2015). By embracing environmental policies, firms commit to improve resource efficiency, minimize wasteful production, and avert those practices which are harmful for the maintenance of ecosystems to be used by future generations (Makuriezic, 2004, p. 2). Mindful of those commitments, we assume that firms will still not cease to be profit-maximizing entities which are driven, if not by profit-making, at least by financial survival. Through the complementary pursuit of environmental and economic objectives, firms can ideally create shared value for both the firm and the environment and thereby enhance firm
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economic profitability while simultaneously benefitting the corporate environment (Porter and Kramer, 2011).
Diverse research has sought to find motivations for firms to engage in environmental CSR policies (Bansal and Roth, 2000; Manzini and Mariotti, 2003; Makuriezik, 2004; Ambec and Lanoie, 2008; Barnett and Salomon, 2012). The motivations to adopt corporate environmental policies are manifold and can be politically, legally, economically, or socially motivated. It is noteworthy that academic discourse has long described CSR as a reactive rather than a proactive concept, while more recent developments in the broader academic debate stress the importance of adopting proactive non-market strategies in order to remain competitive (Meznar and Nigh, 1995; Blumentritt, 2003; Hillman and Hitt, 1999; Porter and Kramer, 2006; Rim and Ferguson, 2017). If we build our research on the assumption that firms will not cease to be profit-oriented entities when committing to socially or environmentally oriented initiatives, the adoption of CSR does not only trail behind the question of what motivates firms to do so, but more so, does it pay off to behave environmentally conscious?
2.2.2 Environmental CSR Profitability
Mirroring the trend in the general debate about CSR profitability, research is yet inconsistent in substantiating the profitability of environmental CSR initiatives. Ambec and Lanoie (2008) provide a comprehensive account on why environmental CSR has long been associated with increasing costs for the firm. Their notion rests upon the market efficiency paradigm, i.e. that markets work efficiently without intervention so that resources are distributed and used to the most efficient extent possible. Nonetheless, in the absence of well-defined property rights, nature is not subject to ownership and its resources and services often go undervalued (Folkersen, 2018). In the spirit of the tragedy of the commons, firms excessively use resources while not accounting for externalities – until government intervenes and firms have to limit their overuse (Ambec and Lanoie, 2008). This paradigm has led to the general assumption that environmental policies bear considerable implementation costs for corporations (Bird, Hall, Momente and Reggiani, 2007; Margolis et al., 2007; Marsat and Williams, 2011; Lioui and Sharma, 2012).
Yet, those market inefficiencies likewise provide grounds to argue that CSR can, under some circumstances, lead to improved financial performance (Judge and Douglas, 1998; Klassen and McLaughlin, 1996; Nehrt, 1996; Porter and Van der Linde, 1995; Christmann, 2000; Ambec and Lanoie, 2008; Barnett and Salomon, 2012). What most of the
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studies share in substantiating a positive impact of environmental CSR on performance is a variety of indirect positive effects that CSR has on financial performance, such as a more efficient use of resources (Porter and Van der Linde, 1995; Lioui and Sharma, 2012) or the improvement of firm reputation through immediate and successful compliance with environmental values and convictions which are deemed important within the customer segment that the firm serves (Dowell and Muthulingam, 2017). One interesting notion is advanced by Heal (2010) who points to benefits through internalizing possible external effects to mitigate a clash of corporate and societal interests which negatively affect firm performance in the long-run. This line of thought is similar to the contributions made by de Hond et al. (2014) who emphasize the alignment of CSR and CPA policies in order to improve a firm’s reputation. Likewise, if corporate interests and strategies are non-aligned with those of its environment (be it societal, cultural or ethical norms), negative external effects arise and the focus on profit maximization will not be associated with doing more ‘social good’ as Porter and Kramer (2011) suggest (Heal, 2010). This idea has been reinforced more recently by Ferrero-Ferrero, Fernandez-Izquierdo, and Munoz-Torres (2016) who have obtained that environmental CSR has a positive impact on firm performance only if complemented by consistent and social corporate governance.
Further findings suggest a non-significant, trivial or minor effect of environmental CSR on firm performance. Some researchers points to insufficient measures of KLD strengths and concerns (Lioui and Sharma, 2012), while other scholars contest the reliability of such databases in terms of the replicability of results, independence, or transparency of data sources (Chatterji, Levine and Toffel, 2009; Rahman and Post, 2012). This notion is reinforced by Horvathova (2010) whose meta-analysis points to overall inconclusive results in the academic debate with regards to environmental CSR policies and financial performance, although finding that a positive link can exist through increased patterns of innovation. The above reviewed literature diverges in its findings, not least due to different performance measures. In fact, it hints at a more abstract underlying issue of CSR profitability research: inconsistent forms of performance measurement and contestation about the unit of analysis (Kirby, 2005).
Mindful of abovementioned issues, researchers have sought to find adequate outcome and success measures in CSR research. Rangan et al. (2015) propose to classify CSR initiatives into three so-called ‘CSR theatres’ where each theatre disposes over its individual outcome metric. The authors distinguish between initiatives that aim at promoting philanthropy such as donations to charity or involvement with local communities which
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result in social impacts and are thus not to be measured in financial terms, from initiatives that seek to improve operational efficiency (Rangan et al., 2015, p. 3). Those initiatives are usually concerned with reducing resource waste and pollution whose impact is spread over the entire value chain of the firm, thus improving operational effectiveness at different levels of production, sourcing, or distribution (Rangan et al., 2015). Lastly, the authors categorize initiatives that are targeted at transforming business models as observed in social entrepreneurship, triple-bottom line business models, and microfinance loans. This CSR is integrative of the entire business model, and performance measures usually link social or environmental impact directly to the bottom line of the firm (Rangan et al., 2015, p.4). Although the authors rightfully remark that the dividing lines between the theatres are fragile and sometimes even non-existent, it is likewise an advancement towards a more structural classification of CSR policies. What the prior section highlights is that different CSR initiatives require different success measures as each policy has a different intent and effect (Rangan, Chase and Karim, 2015). One example of many, the authors make proceeds to rationalize CSR which enables us to find specific performance measures thereof and make social, environmental and financial objectives reconcilable.
As the academic discourse moves beyond the juxtaposition of CSR and CFP, we can observe a similar development in the field of corporate political strategies. We will briefly review the state of the art in CPA research as well as its implications for firm performance in the following section.
2.3 Corporate Political Activities (CPA)
Hillman, Keim and Schuler (2004) define corporate political activities as “corporate attempts to shape government policy in ways favorable to the firm” (p.837). Like CSR, CPA can be conceptualized as an umbrella concept which “captures the firm’s policies, processes and practices that are intended to influence ‘governmental policy or process’ ” (Getz, 1997, pp. 32–33). Most commonly, corporate political activities practically translate into forms of lobbying, financial contributions to specific political parties, party-membership or political affiliation of board members, or take more indirect forms such as seeking support among voters in the broader population (Hillman and Hitt, 1999).
At the broadest level, firm engagement in public policy can either be reactive or proactive, dubbed by scholars as ‘bridging’ or ‘buffering’ (Meznar and Nigh, 1995; Blumentritt, 2003). According to this classification of political strategies, firms that engage in reactive ‘bridging’ are hesitant to participate in the policy-process and monitor their political
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environments instead, in order to comply with new legislation and react to changes in the political and legal environment. ‘Buffering’ behavior on the other hand denotes active participation in form of information-sharing, lobbying, or other forms of taking part in the policy-making process (Hillman, Keim and Schuler, 2004). This classification gives a general indication of corporate political behavior, yet more refined conceptualizations of proactive behavior have been forwarded. Mindful of Hillman and Hitt (1999) and Hillman, Keim and Schuler (2004), firms can thereby adopt issue-by-issue approaches to political activity (transactional approach), or seek influence in the policy-making process on a regular basis as a constant and overarching part of their political strategy (relational approach) (Hillman and Hitt, 1999). Whereas the former approach pertains to not necessarily continuous involvement in the policy process, the latter approach can be considered as a more proactive approach by establishing profound relationships ‘across issues’. This is advantageous in case an issue of contestation arises which requires corporate action, as the sought for instruments to influence the policy process in favor of the firm are already present and well established (Hillman and Hitt, 1999). Firms seeking to influence the policy-making process have several strategies at their disposal, classified as direct or indirect strategies. Hillman and Hill (1999) distinguish between information-based strategies, financial incentive strategies, and constituency-building strategies. While the former two constitute direct influential strategies, the latter can be considered an indirect strategy. When employing Informational strategies, firms strive to influence the policy-making process by providing policy-makers with specific information. Tools of information strategies are lobbying, surveying, establishing think-tanks, or diffusing expertise and knowledge to political decision makers (Hillman and Hitt, 1999: p. 834). Financial strategies stress the alignment of corporate interests with those of policy-makers by providing financial enticement. Tools of a financial strategy are direct financial payments to political parties or decision-makers, campaign contributions, or personal service by either hiring a political decision-maker for a position within the company, or an employee as a representative in a political position (Hillman and Hitt, 1999, p.834). Lastly, in the realm of indirect political strategies firms can resort to Constituency-building strategies, namely those strategies that seek influence in the policy-process by turning to private individuals and citizens in order to indirectly influence public policy via voters and citizens. Although these three generic strategies are distinct in their characteristics, it should be noted that firms are very unlikely to make use of only one of the strategies, and rather use them conjointly, depending on issue and context.
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2.3.1 CPA Profitability
Research has long sought to establish antecedents of corporate political activities such as firm size (Bhuyan, 2000; Schuler, Rehbein and Cramer, 2002; Hillman, Keim and Schuler, 2004), the degree of government regulation or dependency, or industry concentration (Hart, 2001; Hillman, Keim and Schuler, 2004). Moreover, assessing CPA as part of a firm’s integrated non-market strategy has been under scrutiny for long (Baron, 1995 and 1997; Getz, 1997; Hillmann and Hitt, 1999; Hansen and Mitchell, 2000; Aggarwal, 2001; Boddewyn, 2003; Bonardi, Holburn and Van den Bergh, 2006).
When addressing the question of profitability, research diverges in terms of results. Some scholars find that corporate political activities do not lead to higher returns and potentially even decrease accounting and market performance (Aggarwal et al., 2012; Hadani and Schuler, 2012). Yet, a larger part of research obtains that CPA is a substantial determinant of firm performance and has attributed a positive impact to corporate engagement in political activities on firm performance (Lux, Crook and Woehr, 2010; Bonardi et al., 2006). Proofs of a positive link between CPA and increased market value or performance reach as far back as to Schuler (1996), obtaining that political engagement in practices such as petitions increases the market share of corporations. Bonardi et al. (2006) enhance this view by proposing that corporate non-market strategies determine firm performance through an interplay between a firm’s external dimension (i.e. its political and regulatory environment) and its internal dimension (i.e. its firm-specific capabilities that enable the firm to alleviate costs that occur with political transactions). Likewise, petitioning bears the capability to alter the policy focus of public debates in favor for the firm and thus offers a powerful tool in determining firm performance (McKay and Webb-Yackee, 2007). This notion is reinforced by Kim (2008) who finds that firms active in lobbying retract higher returns than non-lobbying firms, but that the degree of impact heavily depends upon the market in which the firm operates. In discovering the contingencies that influence the relationship between CPA and performance, Unsal, Hassan and Zirek (2016) find that the effect of CPA on firm performance differs across corporations depending on ideology and political orientation of the management. The tactics of CPA are diverse; yet, many of the practices bear the potential to enhance firm performance.
2.4 CPA and CSR: From Mutual Exclusion towards Complementarity
The call for increased integration between non-market strategies has been imminent in the academic debate for several years (Baron, 1995; Baron, 2001; Rodriguez et al., 2006; De
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Hond et al., 2014; Frynas and Stephens, 2015). Whereas some scholars lean towards complementarity (De Hond et al., 2014), another stream of literature proposes that the two concepts exist in mutual exclusion (Jamali and Mirshak, 2010; retrieved from Mellhahi et al., 2016). Research has conventionally treated CSR and CPA as separate strategies, but recently moved towards a more complementary approach. Along this spectrum, De Hond et al. (2014) stress the degree of alignment between CPA and CSR as a determinant of increasing firm reputation. As firms can pursue either aligned, non-aligned or misaligned strategies, those that will align their CPA and CSR strategies will most likely experience abnormal high reputation gains rather than those who dis- or non-align their strategies. This notion is affirmed by Liedong et al. (2014) who suggest that integration of CPA and CSR policies improves a firm’s competitiveness and increases the corporate influence in the policy-making process. Aligned CSR and CPA policies enhance the perception of the firm as ‘trustful’ and thus facilitate the development of trust relationships with government authorities (Liedong et al., 2014). In line with this body of literature, research has further obtained that CEO ideology (i.e. liberal vs. conservative) leads to different levels of CSR participation, where CEOs with liberal values pursue CSR policies more consistently than conservative CEOs when faced with low financial performance (Chin, Hambrick and Trevino, 2013). For environmental CSR in particular, Delmas, Lim and Nairn-Birch (2016) find a U-shaped relationship between the degree of a firm’s environmental position and its lobbying efforts, suggesting that firms with high environmental concerns (‘clean firms’) as well as those with low environmental concerns (‘dirty firms’) both display high lobbying efforts in order to shape policy-outcomes in their favor - yet, for different reasons. Specifically, the authors find that both high performing firms as well as low performing firms spend considerable amounts on lobbying, the former to influence policy-making at the roots, the latter to lobby for a change towards environmental norms. Another stream of research considers political ideology as prognostic for CSR activities, stressing that CEO political ideology is determinant of CSR engagement (Gupta, Briscoe and Hambrick, 2016). This implies that CPA and CSR are not necessarily complementary, but rather predictive of one another.
Despite prior findings, establishing a clear link between environmental CSR and political activity is difficult since policy issues to the attention of policy-makers are generally dispersed over several issues, and not limited to one (environmental) concern (Delmas, Lim and Nairn-Birch, 2016). Thus, unless the political activity targets one issue exclusively, such as lobbying one specific regulatory proposal, we have to be cautious in establishing cause and effect of corporate political strategies and increased performance.
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3. Theoretical Framework
Up to now, literature fails to deliver an unanimous link between environmental CSR, CPA and firm performance due to conceptual issues and imprecise measures thereof. Several controversial issues need revalidation and are addressed in our research. The first concerns the scarcity and inconclusiveness of empirical studies. To date, Horvathova (2010) delivers the most comprehensive meta-analysis of quantitative studies in the field of environmental CSR profitability, comprising 37 empirical studies in total. Although this is a solid commencement given the scope of available literature, it implies that relatively few studies have taken on corporate environmentalism as a means to influence firm performance in a quantitative study yet, as much of current research delivers anecdotal, rather than generalizable evidence. Second, a large part of research studies the aggregate effect of CSR on performance (i.e., McWilliams and Siegel, 2001; Sharp and Zaidman, 2009; Pedersen, 2010; Doumagay and Moskolaï, 2016). This is contentious because a firm may score highly on one subset of CSR such as human right concerns, but low on another, i.e. environmental concerns. Depending on what aspect of CSR is most valuable to the firm, aggregating CSR as a concept blurs the degree of the firm’s actual CSR concern and can substantially mislead managerial implications and recommendations. The third issue concerns the lack of follow-up research. As controversy around the unit of analysis and the performance measure of CSR exists, limited research justifies its conceptual approach to measure CSR outcomes with financial metrics. We proceed from the current state in academic research that the individual and combined effect of CSR and CPA on performance is ambiguous, and inquire why firms continuously employ both strategies regardless of whether the individual and combined link to performance is positive, negative, or insignificant.
To take on the controversies as set out above, this research does three things in particular. First, it re-examines the link between environmental CSR and firm performance and simultaneously proposes a justification as to why financial outcome metrics are an adequate success measurement of CSR. Second, we control for a moderating effect of CPA on the CSR-CFP relationship. Different from research that integrates CPA and CSR complementary, this study considers political strategies as instrumental, namely as a means to further the firm’s objectives as laid out in its environmental policies. Since environmental policies per se can be conflictual with profitability objectives, it is thought-provoking whether political strategies can mitigate this predicament. Third, we examine the extent to which the relationship between environmental CSR and firm performance differs across industries, as research fails to deliver univocal results (Hoejmose, Brammer and Millington,
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2012; Delmas et al., 2016). The subsequent section proposes a framework that integrates environmental CSR, CPA, CFP, and industry into one overarching framework and develops the subsequent hypotheses.
3.1 Environmental CSR and CFP
In the current study we adopt a strategic approach towards CSR in acknowledging that environmental CSR is not only adopted out of altruistic means but is likewise driven by financial motives. Hence, CSR policies are cost-benefits calculations for the company (Baron, 2001). Environmental initiatives - and any newly adopted initiative really - increases firm expenditures in the short-term through implementation costs (Lioui and Sharma, 2012; Barnett and Salomon, 2012). Attributing CSR an exclusively positive effect on firm performance is thus premature. To establish patterns of the relationship between environmental initiatives and firm performance, we need to detect the underlying mechanisms of how CSR affects CFP, and towards what objective environmental initiatives are targeted. To address this predicament, we apply Rangan et al.’s (2015) framework of CSR policies as we have described in more detail in prior chapter. We first argue why strategic environmental CSR is best aimed at operational efficiency and why it can be measured in terms of financial performance metrics, and lastly propose several paths through which it affects CFP.
3.1.1 Environmental CSR: Two Spheres of Influence
Based on Rangan et al.’s (2105) classification framework, we suggest an overlap of environmental CSR and ‘theatre two’ initiatives aiming at operational efficiency through which we approach the juxtaposition of CSR and profitability. Environmental CSR initiatives are subject to the corporations’ interpretation of what is necessary to protect its environment, and its goodwill to stick to such policies. In practical terms, this most commonly leads to changes in procurement, sourcing, and the structure of production chains, as well as to the use of sustainably sourced materials, recycling of by-products, and the cut of emissions and waste products (Bansal and Roth, 2000; Blowfield and Frynas, 2005). Common nominator of these policies is an adjustment to the firm’s internal and external operations which effectively impact the entire value chain of the firm (Rangan et al., 2005). We suggest environmental CSR thus to have two spheres of influence: one sphere is the external dimension by which environmental CSR policies affect the firm’s immediate natural environment, and the other sphere is the internal dimension, by which the firm’s production processes and operational
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structures are changed and restructured. Ergo, tangible success metrics are twofold and complementary. On one hand, we can keep track of corporate environmental performance on the external dimension by measuring absolute pollution outputs, the decrease of carbon gas emissions, chemicals and toxins emitted back into the ecosystem, i.e. measures that capture the firms’ direct interaction with its environment (Sun, Wu and Yang, 2018). The internal dimension, on the other hand, measures the degree to which environmental initiatives affect the firm’s internal operational efficiency (Porter 1995; Lioui and Sharma, 2012; Rangan et al., 2015). Hence, the adequate internal outcome measure is linking operational performance to the bottom line of the firm, i.e. measuring the firm’s capability to produce more cost-efficiently through limiting its use of resources, the cost decrease through cutting waste material, or the amount of revenue increase through capturing new sustainable customer segments or ‘green’ markets (Ambec and Lanoie, 2008). The appropriate classification of CSR enables us to examine environmental initiatives from an economic, rather than a social or ecological perspective which we proceed to do in the following section.
Whereas general belief cast doubts that the opportunity costs of implementing CSR are too high to be reconcilable with profitability objectives, we argue that these costs can be offset. We follow Ambec and Lanoie’s (2008) structure of argumentation in drawing on spin-off effects via cost-reduction and revenue-increasing potential through successful CSR implementation, which is echoed in the broader academic debate. CSR profit potential thus follows an indirect and diverted path, rather than being imminently effective (Lioui and Sharma, 2012).
3.1.2 Impact of Environmental Initiatives on Firm Performance
We observe three main effects in different parts of the firm’s operations through which environmental CSR can reduce costs for the firm by increasing operational efficiency. First, spin-off effects are likely to emanate from restructuring a firm’s sourcing and a more efficient use of resources (Porter and Van der Linde, 1995; Ambec and Lanoie, 2008). This notion, advanced by Porter and Van der Linde back in 1995, suggests that environmental pollution equals an inefficient use of a firm’s resources. If we assume that a firm used its resources optimally, it would source as much material as needed in order to sustain its operations and meet its production targets. Pollution, on the other hand, hints at an inefficient use of resources as it indicates that resources have been wasted, instead of being processed to its optimal use (Porter, 1995).
Building on prior thought, a more efficient use of resources is inevitably connected to induced innovation (Lioui and Sharma, 2012; Li, Zhao, Zhang, Chen and Cao, 2018).
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Environmental policies trail behind a necessary change in the firms’ production processes due to the firm having to comply with some socially or environmentally responsible benchmarks or in limiting its use of specific materials. The logical outcome in the absence of its conventional production methods or material choice is innovation, ideally in a way that reduces costs and simultaneously meets the prescribed environmental standards (Lioui and Sharma, 2012; Porter, 1996). The proposed link between environmental CSR and performance thereby goes via green innovation (Li et al., 2018; Saunila, Ukko and Rantala, 2017), and increasing R&D intensity (Ho, Li, Tam and Tong, 2016). In its extreme form, increasing innovation can also lead to the firm securing a pioneer position in a certain technology (Ambec and Lanoie, 2008), or enjoying a first-mover advantage vis-a-vis its competitors (Wirl, Feichtinger and Kort, 2013; Saeidi, Sofian, Saeidi, Saeidi and Saaeidi, 2015). Bocquet, le Bas, Mothe and Poussing (2013) find that firms which adopt strategic CSR are likely to show higher levels of both, product- and process design innovation, leading to strategic superiority as opposed to firms that do not adopt environmental CSR as an integral part of their strategy.
Third, further cost-cutting opportunities can be observed in the firms’ relationships with its employees, its stakeholders, as well as its investors (Singhapakdi, Lee, Sirgy and Senasu, 2015; Scandelius and Cohen, 2016). While Ambec and Lanoie (2008) point to less employee layover through solid CSR policies - people enjoy working for responsible companies more than for reckless ones -, we argue that the potential to strengthen the firms’ relations to its various other stakeholders is decisive in substantiating successful environmental initiatives. We thereby draw on a rather broad definition of stakeholders, i.e. those “group(s) or individual(s) who can affect or (are) affected by the achievement of the organization’s objectives” (Freeman, 1984, p. 46). We extend the stakeholder perspective to the firm’s natural environment and argue that through pollution, waste, and emissions firms impact the environment in a way that in the long run jeopardizes their own place in the ecosystem. As nature ‘pays back’ through resource scarcity, rising sea levels, or climate change, the only way firms will be able to sustain their operations in the long run is by limiting their environmentally destructive behavior. Or, as Gladwin et al. (1995) put it: “Quite simply, how many organizations could exist in the absence of oxygen production, fresh water supply, or fertile soil?” (Gladwin et al., 1995, p. 875)
On the other hand, positive spin-off effects emanate from the potential to increase revenues for the firm. This effect goes through various outlets within the corporation. First, environmental initiatives can provide opportunities to differentiate a firm’s
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product and thus serve new ‘greener’ market segments (Ambec and Lanoie, 2008). This implies identifying new, profitable markets or pioneering in ‘green product development’ (Chen, 2001). Hence, firms are able to combine market exploration with first-mover advantages in green or sustainable technologies or so-called ‘eco-industries’ which are increasingly subsidized on state- and union-level (see i.e. EU Science Hub, 2012).
Second, environmental initiatives impact CFP via its potential to increase revenues through reputation gains (Lii and Lee, 2012; Sontaite-Petkeviciene, 2015; Birkey, Michelon, Patten and Sankara, 2016). As competitive forces are crucial in determining a firm’s profitability (Porter, 1979; Bansal and Roth, 2000), firms are in need of a legitimation for what they do. These legitimation forces pertain to image- or reputation-related awareness amongst consumers, the public, its competition and its various other stakeholders, as firms strive to increase their perceived legitimation with those groups by behaving environmentally conscious (Bansal and Roth, 2000; Makuriezik, 2004). Reputation and image- building are thereby a positive by-product of successfully implemented environmental policies. On this normative level, reputation is increased by the public perceiving the firm to ‘do the right thing’ and to commit to standards that are ethically tenable, ultimately leading to a shift in consumer preferences towards more sustainable products (Wood, 1991; Bansal and Roth, 2000). Moreover, the company can extend its reach to environmentally-conscious customer segments who would otherwise not have been targeted by the firm. In the classic competitive realm, firms compete amongst each other to be most profitable or to secure a strategic competitive advantage in order to increase revenues (Porter, 1979). In the realm of strategic CSR, firms compete to be most sustainable and to derive a competitive advantage through building ‘ecologically related resources’ in order to enhance their long-term profitability (Bansal and Roth, 2000, p. 724). Hence, we argue that the competitive focus is shifted away from being most cost-efficient or profitable, towards being most ‘ecologically-competitive’ (Bansal and Roth 2000, p. 724) as a source of sustainable competitive advantage and ultimately, profit-maximization (Hart, 1995; McWilliams and Siegel, 2011).
One prominent example of how environmental initiatives can influence financial performance is data giant Google, which operates globally and requires extensive energy resources to sustain its data centers (Google, 2017). As part of Google’s environmental CSR strategy, the multinational turned to purchasing renewable energy in 2010, and has hence expanded its efforts to entirely replace fossil fuel power for its data centers with renewable energy (Google, 2017). These policies have an external impact in reducing emissions that would otherwise be released back into the atmosphere, yet Google simultaneously reaps
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financial gains. Prices for solar and wind energy plummeted in the course of the past years compared to coal and crude oil prices, so purchasing renewable energy is more cost-efficient than relying on oil supply in the long-run (Google, 2017). Hence, this enables Google to invest surplus budget into other business projects while ensuring continuous sustainable energy supply for its data centers (Google, 2017).
The potential to increase revenues or to decrease costs justifies linking CSR outcomes to tangible and financial measurement metrics, instead of environmental and social impact measures only (Porter and Kramer, 2006; Rangan et al., 2015) Assuming that environmental CSR initiatives bear the potential to influence firm performance via indirect operational spin-off effects, we argue:
Hypothesis 1: The adoption of environmental CSR policies positively affects firm financial performance.
3.2 Environmental CSR, CPA and CFP 3.2.1. Corporate Political Strategies
Based upon Hillman and Hitt’s (1999) typology of corporate political strategies, we use two distinctions of political strategies, namely informational and financial political strategies. While the former targets policy-makers by providing information such as research, surveys or lobbying, the latter seeks influence via direct financial contributions to parties or politicians (Hillmann and Hitt, 1999). Hillman and Hitt (1999) propose a third strategy, namely constituency-building strategies. These strategies are conceptually difficult to operationalize as they pertain to indirect forms of diffused influencing via the firms’ power to set standards in the population (Hillmann and Hitt, 1999). In the current study, we use direct, active corporate political strategies only, as defined in prior literature review. CPA strategies, although inconclusive at times, bear the potential to lead to abnormal high returns, which holds especially true for lobbying (Lux, Crook and Woehr, 2011; Bonardi et al., 2006; Chen et al., 2015; Mathur, Singh, Thompson and Nejadmalayeri, 2013), as well as for political expenditures (Cooper et al., 2010). We suggest CPA to be an investment of the firm seeking to shape policy outcomes in its favor via political engagement with the ultimate objective to increase financial returns (Hillman and Hitt, 1999 and 2004; Chen et al., 2015). By virtue of financial contributions or by having a board member in a political position, a firm can create a linkage to government, and thus, assumes power not only in a corporate context but expands its power to the political realm (Hillman, Zardkoohi and Bierman, 1999). This power
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is particularly important to exert influence in setting environmental standards. Environmental standards are frequently formed by rules and regulations which are exogenous to the firm and emanate from the corporate political environment, hence, pre-empting litigation and regulatory outcomes are crucial factors that hold the potential to pay off for the firm (Hillman and Hitt, 1999). By identifying those gaps that make the deliberate targeting of legislative processes and policy-makers possible, firms are presented with the opportunity to shape policy-outcomes according to their own interests as well as putting issues on the public agenda - usually those that either threaten their continuity or those that bear the potential to increase profitability. Hence, we expect the relationship between environmental CSR and CFP to be more positive when additionally employing a CPA strategy that targets contentious environmental issues and sets industry standards. De Hond et al. (2014) have substantiated this notion by the example of energy giant Philips’ conversion from normal light bulbs to energy-saving bulbs. Philips turned to the production of energy-saving light bulbs in the early 2000s while marketing more environmentally sustainable products. Yet, shortly after introducing the said light bulbs to the markets, the company faced a decrease in sales which only picked up again after 2009, the year the European Union passed legislation to phase out all incandescent light bulbs (Philips, Annual Reports 2005-2012; retrieved from de Hond et al., 2014). The passing of legislation in the EU coincided with extensive lobbying efforts by Philips at Union level (OECD, 2007), leaving the multinational with a competitive advantage in producing energy-saving light bulbs as being one of the first adopters. Serving as one example of many, the case of Philips exemplifies that environmental CSR policies and corporate political activity go hand in hand.
In the context of this study, corporate political capital are considered as another intangible asset that firms seize in order to enhance profitability (Bonardi et al., 2006). In conjunction with environmental CSR policies, corporate political strategies are of an instrumental nature to further the firm’s objectives as vested in its environmental commitment in order to shift and shape industry standards. It follows:
Hypothesis 2a: The use of CPA strategies positively influences the relationship between environmental CSR and firm financial performance.
3.2.2 Lobbying versus Political Action Committees (PACs)
Building upon the notion of widely salient issues to determine a corporation’s choice for a certain political strategy (Hillman and Hitt, 1999; Bonardi and Keim, 2005), we propose that corporate political activism proportionally increases with the level of salience that an
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issue bears (Hillmann, Keim and Schuler, 2004). We argue that environmentalism has moved towards acquiring a high-profile status during the past decade as a result of non-governmental campaigning, increasing corporate environmental scandals, a rise of awareness related to pollution and climate change and a subsequent increase in environmental consciousness within the wider population. We hence suggest environmental issues to be widely salient in nature due to their versatile exposure within the broader public debate and the urgency with which the controversy in the public, scientific and academic realm is pursued. Issues that are widely salient, i.e. that concern a wider segment of the public and voters, ought to be addressed by different corporate political strategies than issues that are less salient (Bonardi and Keim, 2005). An ever growing body of research agrees that widely salient issues should be encountered with consistent and more aggressive political strategies than less salient issues (Getz, 1997; Hillman and Hitt, 1999). In classifying political strategies, Chen et al. (2015) obtain that lobbying, in particular, is a corporate political investment that qua its direct influence on the policy process helps shape policy outcomes in the political environment, which, due to structural boundaries, would else be beyond the influence of corporations. As lobbying can reach up as far as the executive branch in government to stimulate change in the firm’s favor, we hypothesize lobbying to be a particularly effective strategy which firms use in an instrumental manner to push corporate interests (Hersch, Netter and Pope 2008). Interests of firms can be manifold, of course, but in the current context we assume firm interest to be defined by the effectiveness of the environmental initiative - that is, whether it pays off financially. This assumes a causal link between environmental initiatives and performance in the first place, and substitutes a firm’s interest with profit-maximization of environmental CSR. Simultaneously, we suggest that financial contributions to PACs are not comparable in exerting the same level of influence on the political process that lobbying does, and will thus cease to be an effective instrumental strategy to push the financial success of CSR. In line with Ansolabehere et al. (2003) we propose that campaign contributions are, if at all, driven by ideological reasons by management to financially support a specific political figure or party of their own choosing, and not by the prospect of returns. This is rooted in the assumption that the monetary amount which one firm spends constitutes only a fragment of a parties’ or political actor’s entire budget. While PAC contributions constitute merely a level of participation in the polity for the firm, each individual firms’ financial contributions is not high enough to expect effective tangible returns (Ansolabehere, de Figueiredo and Snyder, 2003).
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Constituting a substantial part of Hillman and Hitt’s (1999) informational strategy, we apply the concept of issue salience to environmental initiatives and hence expect lobbying to have a stronger influence on the relationship between environmental CSR and firm performance, as opposed to PAC contributions. Due to the high salience of environmental issues, interests of the firm as they are laid out in firm environmental initiatives are best served by the persistent use of informational political strategies. It follows:
Hypothesis 2b: The use of informational strategies (lobbying) will more positively influence the relationship between environmental CSR and firm performance than the use of financial political strategies (contributions to PACs).
3.3 Environmental CSR, Industry and CFP
As a supplement to our main study, we hypothesize that the effect of environmental CSR on firm performance differs depending on the industry type in which a firm operates. As literature has found different argumentations behind potential effects of industry types, we present some selected ones in the following and close with our hypothesized effect. Most commonly, research suggest that the success of environmental initiatives is related to the level of pollution of the industries, (i.e. Delmas, Lim and Nairn-Birch, 2016), a firms’ main customer segments, as well as the general awareness of environmental-related issues among its customers (Zhu, Sarkis and Gend, 2005). In a study conducted by Delmas et al. (2016) the authors divide corporations into ‘clean’ and ‘dirty’ firms, where corporate greenhouse gas emissions classify them as belonging to either of the two groups. The authors find that both, clean and dirty firms are inclined to adopt CSR initiatives and political strategies, yet for different reasons. Whereas dirty firms adopt those by the virtue of damage control or to polish their reputation, clean firms adopt them because they are an integral part of their business idea, and stem from a belief about what is the ‘right thing to do’. In the same way that industries differ in their pollution levels, we argue that this likewise holds true for a firms’ customer segment. Consider a firm that sells raw materials to another firm, which in turn processes these into a final product. The selling firm may or may not participate in environmentally-conscious practices, but more importantly, this fact is of subordinate interest to the purchasing firm. For the purchasing firm, considerations will most likely be price-, or quality-oriented. Compare this to a firm that sells products directly to customers who, in the face of rising interest in environmental issues, are concerned with the origin of their products. For that customer, the level of a firm’s environmental involvement is crucial in the buying process and decision. Thus, the impact of environmental initiatives is different for firms
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selling to other firms (B2B), than for firms selling to customers (B2C). This is rooted in the assumption that B2B firms lack the incentive to implement CSR due to their perceived distance to the end-consumer (Gonzalez-Benito and Gonzalez-Benito, 2006). For B2C industries, on the other hand, environmentally-sensitive customers make CSR initiatives a necessity as those firms interact directly with the final customer, leading to higher levels of scrutiny as well as external and internal stakeholder pressure (Hoejmose, Brammer and Millington, 2012).
Prior research has substantiated the importance of distinguishing between B2B and B2C markets in developing environmental initiatives. Hoejmose, Brammer and Millington (2012) provide an example for 340 firms based in the United Kingdom by establishing that for B2B firms, environmental policies are less of a concern in green supply chain management decisions than for B2C industries due to the lack of proximity to final consumer households. If we assume that B2C firms are exposed to more external pressures through their immediate contact with final customers, their exposure to different stakeholders, and their being held accountable in the public, we hypothesize the following:
Hypothesis 3: The effect of environmental CSR on firm performance is stronger for firms in B2C industries than for firms in B2B industries.
3.4 Conceptual Model
The abovementioned hypotheses are visualized in Figure 1 below. We hypothesize environmental CSR to positively impact CFP, while this effect is strengthened by CPA. We expect firms that employ lobbying to have higher financial returns caused by environmental CSR than firms that financially contribute to PACs. Lastly, we expect that the positive effect of environmental CSR on CFP is reinforced by operating in a B2C industry, rather than operating in a B2B industry. These hypothesized relationships are visualized in Figure 1 below, and we proceed to empirically test them in the following section. Subsequently, in the ensuing chapter we elaborate on the data and method at hand, followed by our statistical analysis.
