Organizational leadership and its influence on corporate brownwashing
Faculty of Economic and Business – MSc. Business Administration – Strategic Innovation Management University of Groningen
Author: Evert van Bolhuis, S3465802 Thesis supervisor: Jordi Surroca Co-assessor: Philip Steinberg
Date: June 24, 2019
Abstract: The overall purpose of this study is to determine the effect of organizational leadership on the relationship between the growth orientation of a firm and the level of corporate brownwashing. By doing so, this study contributes to the upper echolons theory by testing the impact of two leadership styles. So far, the impact of different leadership styles has not been examined on this relationship. This study uses secondary data from 154 American publicly traded firms operating in thirteen different industries in 2017. The results indicate significant evidence that transformational leadership strengthens the link between growth orientation and brownwashing. Furthermore, this study found that returns on investment, industry and board size is significantly related to corporate brownwashing.
Key words: Corporate social responsibility, brownwashing, growth orientation, transactional and transformational leadership.
2 INTRODUCTION
The current climate debate results in dynamic challenges for businesses, where customers’ demand is shifting to a more sustainable way of doing business. To compete and survive in this complex environment, firms pursue growth-oriented strategies (Kumar, 2016). In turn, these strategies require funding, often financed by shareholders. In reaction, managers prioritize their shareholders with, among others, reporting lower corporate social responsibility (CSR) scores than realized. On average, shareholders do not appreciate the full focus on the funding of CSR activities (Barnea & Rubin, 2010), but favor firm growth to maximize profits (Delmar et al., 2003). In an attempt to gain the support and resources from its shareholders, managers may report a level of CSR below its real level. This is labelled as brownwashing (Kim & Lyon, 2014). One could argue, managers face competition between their market-based logic and an emerging environmental logic (Dahlmann & Grosvold, 2017). In case of brownwashing, managers reason from their market-based logic and prioritize shareholders with incorrect information (Fisher-Vanden & Thorburn, 2011).
It is important to get a better understanding of CSR communication strategies. From a firm’s perspective, already many advantages of being green have been studied (Dangelico & Pontrandolfo, 2015; Miroshnychenko, Barontini, & Testa, 2017; Testa & Iraldo, 2010; Darnall et al., 2008). A firm can choose to overstate its CSR activities in its communication to, for example, attract more customers. This is called greenwashing (Kim & Lyon, 2011). Nevertheless, the focus of this research lies on greenwashing’s counterpart: brownwashing, which is defined as “issuing communications that understate their environmental achievements” (Kim & Lyon, 2014, p.706). With stating lower environmental achievements, managers try to make the firm more attractive for shareholders’ financial investments. In turn, managers could use these investments to increase the firm’s activities, pursuing a growth-oriented strategy in particular (Delmar et al., 2003). Brownwashing is not primarily described in the literature, while growth orientation seems to be a substantial driver for brownwashing and at the same time many firms are growth-oriented (Delmar et al., 2003). Because of this possible frequent driver, it makes brownwashing an interesting topic in practice and in research.
3 Consequently, the main research question this study tries to answer is:
What is the influence of organizational leadership on corporate brownwashing?
In times when CSR communication seems to become more important in the practical world, it is vital to research brownwashing as a concept and to recognize its characteristics. From a shareholder’s point of view, it is essential to recognize brownwashing in an early stage. Accordingly, this research contributes to the field of CSR communications with providing a fragmentation of the environment of brownwashing. Extending the literature of the upper echelons theory, this study defines a driver of brownwashing and the possible moderating role of leadership. The theory of organizational decoupling is relevant to acknowledge, because managers choose to decouple external CSR communications from internal CSR processes (Meyer & Rowan, 1977), which is the case for brownwashing.
First, this study tested if growth-orientation is a driver for brownwashing and used the proxy of the total asset growth (Cooper, Gulen, & Schill, 2008). It includes a sample of 154 American publicly traded firms operating in thirteen different industries. Hereafter, two well-known leadership styles which possibly affect the level of corporate brownwash differently are distinguished: transactional and transformational leadership (Burns, 1978). The main difference between both styles is that transactional leadership is focused on the (financial) reward and transactions, and transformational leadership involves more cognitive stimulation (Bass, Avolio, Jung, & Berson, 2003).
4 THEORY & HYPOTHESES
Topics which came forward from the research question are explained from the academic literature’s point of view. Starting with a possible driver of brownwashing, growth orientation is firstly defined and described. Hereafter, it focuses on CSR communication and zooms in on corporate brownwashing and its relationship with growth-oriented firms. Next, the characteristics of transformational and transactional organizational leadership are presented and their link with this previously mentioned relation. From logic reasoning from the theory, three hypotheses are constructed.
Growth orientation
Many firms pursue growth strategies to stay ahead of their competitors and to maximize value, using scale and scope to increase efficiency and lower costs (e.g., Kumar, 2016; Delmar et al., 2003). The academic literature identifies three research streams of growth: growth as an outcome, the outcome of growth, and growth as a process (McKelvie & Wilkund, 2010). The focus of this study lies on brownwashing as the outcome of firm growth. This research stream does not explain the cause of growth but focuses more on the consequences of the growth orientation of a firm.
5 From these findings, one can conclude that growth-oriented firms are often in need of resources to control and expand the firm’s activities (Deloof, 2003; Garcia-Teruel & Martinez-Solano, 2007).
CSR and communication
To build a bridge between growth orientation and CSR communication, it is important to firstly explain CSR communication and its strategies for businesses more in-depth. Hereafter, the link between both topics will become clear.
Corporate social responsibility could be defined as “the social values, norms, and expectations participants have regarding corporate behavior” (O’Connor, Shumate, & Meister, 2008, p.347). Currently, CSR is widely acknowledged and has a high priority within a firm’s strategy. By engaging CSR activities a firm can, among other things, substantially improve its reputation and build a corporate image (Du et al., 2010). Studies (e.g., Basu & Palazzo, 2008; Vaara & Tienari, 2008) pointed out CSR’s communication challenge: how can a firm gain the most from its CSR communication? CSR communication “serves several interrelated functions including building an organization’s image, identity, and reputation; inviting stakeholder support and identification by creating awareness, information-sharing, and proactive deflection of (anticipated) criticism” (Chaudhri, 2016, p.421). As already stated, customer’s demand is shifting to a sustainable way of doing business. But not every party follows a commonly agreed line and benefits from a sustainable way of doing business.
Du et al. (2010) developed a framework of CSR communication, which identifies message content (e.g., issue, importance) and channel (e.g., corporate, CSR report) as communication drivers. The driver of the framework results in internal outcomes (e.g., awareness, trust), and external outcomes (e.g., the amount of invested capital). Arguing from this framework, CSR communication has a direct effect on the behavior of investors. According to Du et al. (2010), the key challenge of CSR communication is “how to minimize stakeholder skepticism and to convey intrinsic motives in a company’s CSR activities” (p.10). Moreover, Du et al.’s framework (2010) identifies two moderators between the relationship of CSR communication and the internal and external outcomes: stakeholder and company characteristics (e.g., industry).
6 The academic field of greenwashing is increasing (Ramus & Montiel, 2005; Delmas & Burbano, 2011; Kim & Lyon, 2011; Lyon & Maxwell, 2011; Lyon & Montgomery, 2013; Bowen & Aragon-Correa, 2014; Marquis et al., 2016). Greenwashing is a symbiotic way of becoming sustainable without actually reducing the environmental footprint, where firms mislead customers with publicity about environmental performances (King & Lenox, 2001). According to the literature, greenwashing can lead to negative effects like the loss of consumers, investors, employees, and non-governmental organizations’ confidence (Lyon & Montgomery, 2015; Jahdi & Acikdilli, 2009), increased likelihood of detection of non-compliance by nongovernmental organizations or consumers (Dalmas & Burbano, 2011), and a reduced credibility of sustainable mechanism and initiatives (Hsu, 2011; Pedersen & Neergard, 2006). Moreover, Testa et al. (2018) stated that it does not pay financially to be a greenwashing firm. Despite all these negative effects, the main incentive to greenwash is to positively influence opinions of consumers and shareholders (Delmas & Burbano, 2011; Lyon & Montgomery, 2013; Kim & Lyon, 2014).
Greenwashing’s counterpart in CSR communication is brownwashing, where firms decide not to report their realized steps towards a more sustainable organization (Jacobs et al., 2010). Corporations choose to understate their CSR activities in their communication, for example, to avoid being perceived as hypocritical by stakeholders (Fisher-Vanden & Thorburn, 2011). The findings of the study of Carlos and Lewis (2018) show that not all organizations publish their environmental certifications, as reaction on the possibility of reputational threats. This possible threat appears when stakeholders could perceive an inconsistency between claim and actions, and therefore this unbalance could result in a perceived hypocritical view. Moreover, Carlos and Lewis (2018) found a brownwashing strategy is used as a hypocrisy avoidance tactic.
Brownwashing is defined as “issuing communications that understate their environmental achievements” (Kim & Lyon, 2014, p.706). However, less research is conducted about this CSR communication strategy. The literature did find that stakeholder pressure and company growth are essential drivers of brownwashing (Kim & Lyon, 2014). Also, brownwashing is more likely to appear in deregulated environments (Kim & Lyon, 2014), where shareholders have more power relative to regulated environments. Moreover, when profits are low because of increased market scrutiny, this results in the increased salience of shareholders (Morrow et al., 2007). When firms are investing substantially in sustainability and CSR, the expected profits will decrease. Consequently, shareholders are less attracted to the company, and this hurts a firm’s market value (Jacobs et al., 2010; Fisher-Vanden & Thorburn, 2011).
7 effects for brownwashing firms based on operating performance and market value. Their findings implicate that shareholders and stakeholders reward companies have environmental commitments (Testa et al., 2018; Darnall, 2006; Delmas & Toffel, 2004). Based on these findings, one could say brownwashing is decoupling the external communications from the internal practices based on institutional pressures (Eisenhardt, 1989; Berrone & Gomez-Mejia, 2009). An example of the effect of organizational decoupling: the group of firms that voluntarily disclosed CEO compensation earlier than required does exhibit a positive relationship between pay and performance (Andjelkovic et al., 2002).
In the case of brownwashing, one can conclude firms understate their CSR activities hoping to attract more or/and higher shareholder’s investments to reach firm growth (Kim & Lyon, 2014; Du et al., 2010). Firms in need of money to invest in company growth, are looking for multiple possibilities to finance the costs to expand. One of these possibilities is to prioritize shareholders, in order to increase the by shareholders provided resources (Kim & Lyon, 2014). Shareholders are more likely to finance in a firm that is willing to invest in firm growth compared to a firm that invests in sustainability (Barnea & Rubin, 2010). In turn, shareholders hope for a better return on investment. And so, communicating lower CSR activities makes the business more attractive for shareholders’ investments. In this case, growth-oriented strategies can result in corporate brownwashing to finance firm expansion. Reasoning from this point of view and focusing on brownwash on firm level, the following hypothesis is constructed:
Hypothesis 1: growth-orientated firms are more likely to engage in corporate brownwashing.
Organizational leadership
Now the bridge between growth orientation and brownwashing is clear, the role of organizational leadership will be elaborated on. According to the upper echelons theory, characteristics of top managers influence a firms’ strategic choices and performance levels (Hambrick & Mason, 1984). It means that firm’s leaders partially influence organizational outcomes. In an update, Hambrick (2007) says that executives experiences, values, and personality are characteristics that affect their professional choices. Building on this theory, one can say that a manager’s leadership style affects the outcomes of an organization (e.g., CSR communication strategy). For example, leadership affects firm performance (Van Riel & Fombrun, 2007) and CSR practice (Angus-Leppan et al., 2010), and illustrates the important role of a firm’s leadership, also shown by this quote:
8 Leadership can be interpreted in many ways with corresponding views. Burns (1978) defined leadership as “inducing followers to act for certain goals that represent the values and the motivations – the wants and needs, the aspirations and expectations – of both leaders and followers” (p.19). Burns (1978) introduced two kinds of leadership: transformational and transactional, which are considered mutually exclusive. This analysis focuses on these two styles because this is the flagship of leadership theory (Antonakis & House, 2004).
Transactional leadership focuses on the exchange of resources (Conger & Kanungo, 1998) and has three underlying dimensions: contingent reward, management by exception–active, and management by exception–passive (Judge & Piccolo, 2004) (as shown in table 1). The contingent reward is the degree the manager sets up constructive transactions or exchanges with his/her employees. Management by exception is the degree to which “the leader takes corrective action on the basis of results of leader– follower transactions” (Judge & Piccolo, 2004, p.755). In other words, a firm’s manager takes actions based on the results of transactions between employer and employee. Howell and Avolio (1993) differentiate management by exception active and management by exception passive, with a difference that lies in the timing of the manager’s intervention. Active managers monitor follower behavior, anticipate problems, and take corrective actions before behavioral problems become problematic for the organization (Howell & Avolio, 1993). Passive managers like to wait until the behavioral issues escalate and take appropriate actions afterward (Howell & Avolio, 1993).
TABLE 1. Drivers of transactional leadership (Bass et al., 2003)
Contingent reward behavior
Leaders clarify expectations and offer recognition when goals are achieved. The clarification of goals and objectives usually improve individual and group performance.
Passive management by exception
Leaders either wait for problems to arise before taking action, or take no action at all, showing a passive avoidant behavior. Such passive leaders do not specify agreements, clarify expectations, or set up goals to be reached by the followers. Active management by exception
Leaders specify the standards for compliance, as well as what constitutes ineffective performance, and may punish followers for being out of compliance with those standards. This style of leadership implies closely monitoring for deviances, mistakes, and errors, while implementing corrective actions as quickly as possible.
9 positively related to followers’ commitment, satisfaction, and performance (Bycio et al., 1995; Hunt & Schuler, 1976; Podsakoff et al., 1984).
Transactional leaders have clear expectations from their employees and offer recognition and rewards when the goals are achieved (Bass et al., 2003). Often, this recognition or reward is expressed in terms of money and therefore a firm’s cash flow is supporting this type of leadership (Barling, Weber, & Kelloway, 1996). However, instead of focusing on a long-term collaboration period, managers focus on a single transaction and recognize the direct value of the pay-off between employer and employee (Judge & Piccolo, 2004). One can say the relationship between employer and employee is based on the same standards as the relationship between manager and investor in case of brownwashing. To avoid higher costs, the focus within the collaboration lies within the transaction between both parties, where one party does a favor in the trade of a reward (Bass et al., 2003). A transactional manager’s drive lies in the field of financial incentives. There is no cognitive inspiration between the manager and shareholders, as in transformational leadership (Bass et al., 2003). Moreover, managers and shareholders work separately for their incentives. With the engagement of transactional leadership, there is a lack of collective confidence, which is also the case for brownwashing. One could argue the relationship between growth orientation and brownwashing strengthens because of transactional leadership, which could be explained by the contingent behavior of a transactional leader. Clear goals like a growth-oriented strategy are communicated aimed on persuading shareholders. Not intellectual stimulation, but a transactional manager who provides a clear costs and benefit overview stimulates the relationship between growth orientation and brownwashing, is expected by this study. Because of these similarities in styles of collaborating and a focus on rewards and achievement, the second hypothesis can be composed:
Hypothesis 2: firms that score high on a transactional leadership style strengthen the relationship between growth-orientation and corporate brownwashing.
10 According to Shamir et al. (1993), transformational managers transform the self-concepts of their employees. To encourage the we-feeling, managers build personal and social identification among employees with matching missions and goals. The employees’ feelings of involvement, cohesiveness, potency, performance, and commitment are stimulated by the manager (Shamir et al., 1993). Reaching collective confidence can help a firm to deal with difficult organizational challenges (Guzzo et al., 1993). Instead of working separately as in transactional leadership, a manager tries to affiliate an employee with the organization or a specific team within the organization (Bass et al., 2003). According to Guzzo et al. (1993), tasks which are designed for interdependent work among a firm’s members, the manager must encourage the team to work together to reach collective confidence, which is missing in the case of brownwashing. Employees must believe in their mission, and mostly in themselves (Minionis et al., 1995). Thus, inspiration and affiliation are essential ingredients for a transformational manager. Judge et al. (2002) researched two kinds of leaders by analyzing managers’ statements and speeches and the role of emotions. They found a positive link between the manager’s emotions and the follower’s mood, in case of a charismatic leader.
TABLE 2. Drivers of transformational leadership (Bass et al., 2003)
- Idealized influence (charisma)
Leaders are admired, respected, and trusted. Followers emulate their leaders and identify with them. The leaders put their followers’ needs over their own needs. The leaders share risks with the followers and behave in a way which is consistent with underlying ethics, principles, and values.
Inspirational motivation
Leaders behave in ways that motivate those around them, giving a meaning to all the activities that they carry out. They set up challenging personal objectives. Individual and team spirit is aroused. The group shows enthusiasm and optimism. The leader encourages the followers to envision attractive future states.
Intellectual stimulation
Leaders stimulate their followers’ effort to be innovative and creative, by questioning assumptions, reframing problems, and approaching old situations in new ways. There is no public criticism of the individual members’ mistakes. New ideas and creative solutions to problems are encouraged.
Individualized consideration
Leaders pay attention to each individual need of the followers, acting as coaches or mentors. Followers are empowered. New learning opportunities are created within a supportive organizational climate. Individual differences, in terms of needs and desires, are addressed and recognized.
11 Conflicting goals – the manager wants to run a business; the shareholder wants to earn money – can result in the lack of a we-feeling and affiliation with the firm. Transformational managers would not understate their CSR activities, but they would stimulate and inspire shareholders to invest in CSR activities for several reasons. Transformational leaders in firms orientated to growth need shareholders, but also other stakeholders, so managers should balance its internal and external CSR. From this point of view, I expect that the relationship between growth-orientation and brownwashing firms will be weakened by a transformational leadership style. This could be translated into the following third hypothesis:
Hypothesis 3: firms that score high on a transformational leadership style weaken the relationship between growth-orientation and corporate brownwashing.
As mentioned, transformational leadership and transactional leadership are considered as mutually exclusive (Burns, 1978). However, some scholars state that transformational leadership builds on transactional leadership as a basis, which is called the augmentation effect (Bass & Avolio, 2003; Howell & Avolio, 1993). Bass (2008) says the best leaders are both transactional and transformational. Despite the rich academic discussion this effect has not yet been tested a lot but is important to consider when concluding.
The three hypotheses result in the following conceptual model:
12 DATA & METHODOLOGY
Data collection
The use of multiple data collection methods strengthens academic research (Creswell, 2007). For this research, different data sources are combined. The first data source is used to extract the dependent variable (corporate brownwashing), where ASSET4 via Datastream was assessed, a database with a large amount of environmental, governmental, and social data. According to the methodology of Testa et al. (2018) and Hawn and Ioannou (2016), a Green Practices Index (GPI) and the Green Communication Index (GCI) was build. The GPI measures the level of a firm’s CSR activities and GCI measures to what degree a firm communicates its CSR activities. The difference between GPI and GCI is an indicator of the level of corporate brownwashing and is called the Discrepancy Index. Moreover, one can find a detailed explanation in the measurement section.
In total, 2555 publicly traded American firms with data on 2017 were extracted out of ASSET4. The American market was analyzed because the linguistic analysis to determine the leadership styles would be consistently in English. After correcting for missing values (in total, 2352 firms had no data available on one of more variables), and to prevent endogeneity using control variables out of the second database Orbis, a sample of 203 firms remained. Orbis contains a large amount of business and financial information around the world. The data to calculate the dependent variable – growth orientation – is extracted out of Orbis also. Hereafter, firms’ annual reports from the year 2017 were gathered from the surface web to measure the organizational leadership style with a linguistic analysis. Not all annual reports, however, included a welcoming letter written by the firm’s CEO or manager. To shape a complete and valid image, firms with annual reports without the manager’s personal message were deleted, and a sample of 154 firms operating in thirteen different industries remained.
Measurement
The empirical analysis exists out of one dependent and one independent variable: brownwashing and growth orientation, respectively. Six control variables are used: industry, number of employees, board independence, return on invested capital, the board size, and environmental compensation incentive structures. To analyze the annual reports, eighteen categories are used to measure the moderating effect of leadership styles. In the following section, the variables are explained more in detail.
13 (table 5). A high GCI means a high degree of CSR communication. Every indicator received a score (NO = 0 and YES = 1), and all internal scores combined divided by the number of indicators represents the GPI-score. The same counts for the GCI-score. The data was extracted from ASSET4. To correct for outliers, both GPI-score and the GCI-score were standardized to get a mean of zero and a standard deviation of one (Baum, 2006). The GPI minus the GCI score is the Discrepancy Index (DI). Firms with high DI scores are more likely to underreport their environmental activities, i.e., brownwashing. Firms with a DI around zero have corresponding internal CSR practices and external CSR communication, and firms that score below zero are more likely to be greenwashing (high level of external communication; low level of internal practices) (Walker & Wan, 2012).
TABLE 4. Definition of green practices (Testa et al., 2018)
Variable Description
Pollution prevention Sum of the 10 emission and resource reduction KPIs:
1. Emissions (Does the company describe, claim to have or mention processes in place to improve emission reduction? - Yes = 1/No = 0);
2. Nitrogen oxides (NOx) and Sulfur Oxides (SOx) Emissions Reduction (Does the company report on initiatives to reduce, reuse, recycle, substitute, or phase out SOx or NOx emissions? - Yes = 1/No = 0);
3. Volatile Organic Compounds (VOC) Emissions Reductions (Does the company report on initiatives to reduce, substitute, or phase out VOC? - Yes = 1/No = 0);
4. Particular Matter Emissions Reductions (Does the company report on initiatives to reduce, substitute, or phase out particulate matter less than 10μm in diameter (PM10)? - Yes = 1/No = 0);
5. Waste Reduction Total (Does the company report on initiatives to recycle, reduce, reuse, substitute, treat or phaseout total waste? - Yes = 1/No = 0);
6. e‐Waste Reduction (Does the company report on initiatives to recycle, reduce, reuse, substitute, treat or phase out e‐waste? - Yes = 1/No = 0);
7. Staff Transportation Impact Reduction (Does the company report on initiatives to reduce the environmental impact of transportation used for its staff? - Yes = 1/No = 0);
8. Water Efficiency (Does the company describe, claim to have or mention processes in place to improve its water efficiency? - Yes = 1/No = 0);
9. Energy Efficiency (Does the company describe, claim to have or mention processes in place to improve its energy efficiency? - Yes = 1/No = 0);
10. Toxic Chemicals or Substances Reduction (Does the company report on initiatives to reduce, reuse, substitute or phase out toxic chemicals or substances? - Yes = 1/No = = 0);
Green supply chain management Sum of the 4 resource reduction KPIs:
1. Environmental Supply Chain (Does the company describe, claim to have or mention processes in place to include its supply chain in the company's efforts to lessen its overall environmental impact? - Yes = 1/No = 0);
2. Materials Sourcing Environmental Criteria (Does the company claim to use environmental criteria (e.g., life cycle assessment) to source or eliminate materials? - Yes = 1/No = 0);
3. Environmental Supply Chain Management (Does the company use environmental criteria (ISO 14001, energy consumption, etc.) in the selection process of its suppliers or sourcing partners? - Yes = 1/No = 0);
4. Environment Supply Chain Partnership Termination (Does the company report or show to be ready to end a partnership with a sourcing partner, if environmental criteria are not met? - Yes = 1/No = 0);
Green product development Sum of the 3 product innovation KPIs:
1. Environmental Products (Does the company report on at least one product line or service that is designed to have positive effects on the environment or which is environmentally labeled and marketed? - Yes = 1/No = 0);
2. Product Environmental Responsible Use (Does the company report about product features and applications or services that will promote responsible, efficient, cost‐effective and
environmentally preferable use? - Yes = 1/No = 0);
14 TABLE 5. Definition of green communications (Testa et al., 2018)
Variable Definition
Green communications 1. CSR Sustainability Committee (Does the company have a CSR committee or team? - Yes = 1/No = 0); 2. Integrated Vision and Strategy Management Discussion and Analysis (Does the company explicitly
integrate financial and extra‐financial factors in its management discussion and analysis section in the annual report? - Yes = 1/No = 0);
3. Global Compact (Has the company signed the UN Global Compact? - Yes = 1/No = 0);
4. Stakeholder Engagement (Does the company explain how it engages with its stakeholders? - Yes = 1/No = 0);
5. CSR Sustainability Reporting (Does the company publish a separate CSR/H&S/Sustainability report or publish a section in its annual report on CSR/H&S/Sustainability? - Yes = 1/No = 0);
6. GRI Report Guidelines (Is the company's CSR report published in accordance with the GRI guidelines? - Yes = 1/No = 0);
7. CSR Sustainability Report Global Activities (Does the company's extra‐financial report take into account the global activities of the company? - Yes = 1/No = 0);
8. CSR Sustainability External Audit (Does the company have an external auditor of its CSR/H&S/Sustainability report? - Yes = 1/No = 0).
Independent variable – Measuring growth orientation is relatively difficult, and in the academic literature, it is measured in different ways. In comparison with other possibilities of measuring growth-orientation, Cooper et al. (2008) found that firm asset growth remains the strongest determinant. Relatively to book-to-market ratios, firm capitalization, short- and long-horizon lagged returns, growth in sales (Lakonishok, Shleifer, & Vishny, 1994), growth in capital investment (Titman et al., 2004), accruals (Sloan, 1996), and a cumulative accruals measure (net operating assets) (Hirshleifer et al., 2004), growth rate is the strongest proxy of growth-orientation and is even stronger for large corporates (Cooper et al., 2008).
growth-orientation is measured by the asset growth rate (ASSETG) and is calculated with a year-to-year percentage, as in the study of Cooper et al. (2008). Firm’s total assets were extracted from 2016 and 2017 from the Orbis database and calculated the difference in growth or decline by using this formula:
𝐴𝑆𝑆𝐸𝑇𝐺 = (𝐴𝑆𝑆𝐸𝑇2017 − 𝐴𝑆𝑆𝐸𝑇2016) 𝐴𝑆𝑆𝐸𝑇2016
To compute this formula, firms must have a total asset > 0 in both 2016 as 2017. After calculating ASSETG, the score was standardized to get a valid index of the firm’s growth orientation.
15 a large amount of research that uses secondary data to determine leadership styles. As an example, Salter et al. (2010) researched words used more frequently by leaders rated high on transformational leadership. Among others, teamwork, inspire, purpose, and relationships are words more used by transformational managers. Barchiesi and La Bella (2014) proposed to research leadership styles with conducting external assessments, where the involvement of stakeholders is required to shape a valid image of the firm’s manager. Because this method is very time consuming, I focus on the linguistic analysis of the manager’s communication, like the paper of La Bella et al. (2018). They (2018) did research on organizational leadership styles by analyzing companies’ tweets making use of a self-developed 10-Factor Leadership Model.
To determine the organizational leadership style, the software Linguistic Inquiry Word Count (LIWC) was used. One can use a manager’s communication as a proxy for measuring leadership styles (e.g., Gruber et al., 2015; La Bella et al., 2018). The LIWC software made it possible to give a rating on different categories to written messages. The software offers a wide variety of categories. Based on the literature review, eighteen categories were chosen, which are suitable for measuring transformational and transactional leadership, as shown in table 6. From the 203 firms in the data sample, 154 included manager’s personal message in their annual report. Each message was analyzed and received a score on all eighteen categories.
TABLE 6. Categories used for linguistic analysis
Variable Linguistic category Examples Words in category
Transactional leadership 1st person singular I, me, mine 24
2nd person you, your, thou 30
Achievement win, success, better 213
Power superior, bully 518
Reward take, price, benefit 120
Money audit, cash, owe 226
Certainty always, never 113
Transformational leadership 1st person plural we, us, our 12
Social processes mate, talk, they 756
Friends buddy, neighbor 95
Cognitive processes cause, know, ought 797
Insight think, know 259
Causation because, effect 135
Discrepancy should, would 83
Tentative maybe, perhaps 178
Perceptual processes look, heard, feeling 436
Affiliation ally, friend, social 248
Risk danger, doubt 103
16 al. (2018) did, high pollution industries were given the score 1 (e.g. manufacturing, mining) and less pollution industries score 0 (e.g. finance, information technology). The data with the different industries is extracted out of Orbis.
Number of employees – Represents the firm size in terms of number of employees in 2017, extracted from Orbis. As mentioned by Testa et al. (2018), the size of the firm is important to consider as a control variable as it affects the level of brownwashing.
Return on invested capital – Represent firm performance, as performance affects the level of CSR communication (Testa et al., 2018). This variables is sourced from Orbis.
Board Size – According to research, the size of the board can affect CSR activities (Walls et al., 2012; Shamil et al., 2014). Larger boards can lower the influence of the firm’s management and are associated with CSR activities and better environmental reporting quality (Rao et al., 2012). The data on the size of the board comes from ASSET4.
Board independence – According to Abdullah et al. (2011), the independency of boards influences the decision on CSR disclosure. A dummy is used to answer the question: Does the company comply with general regulations regarding board independence? (0 = NO and 1 = YES). This variable is sourced from ASSET4.
Environmental Compensation Incentive Structure – A third dummy variable which measures if a senior executive’s compensation is linked to CSR targets (0 = NO and 1 = YES). Incentive structures like this proved to increase environmental activities (Cordeiro & Sarkis, 2008; Berrone & Gomez-Mejia, 2009). This score is sourced from ASSET4.
Empirical analysis
17
TABLE 7. Overview variables
Variable Abbreviation Definition Type Source
Dependent variable - (2017)
Discrepancy Index DI The level of corporate brownwashing
Standardized (GPI– GCI) score (-1, 1)
Datastream
Independent variable - (2016-2017)
Growth orientation ASSETG Year-to-year percentage of a firm’s total assets
Standardized ASSETG (-1, 1)
Orbis Control variables - (2017)
Industry IND Polluting industries (1); Less polluting industries (0)
Dummy (0, 1) Orbis Number of Employees EMPL The number a firm’s
employees
Fixed number Orbis Board Independence BI If the company complies
with general regulations regarding board independence
Dummy (0,1) Datastream
Return on invested capital ROI The amount of a firm’s returns on invested capital
Fixed number Orbis Board Size BS The size of the firm’s leader
board
Fixed number Datastream Environmental Compensation
Incentive Structure
ECIS If a senior executive’s compensation is linked to CSR targets
Dummy (0, 1) Datastream
Moderating variables - (2017)
Transformational leadership TFL The level of
transformational leadership
Standardized TFL score (-1, 1)
Annual reports (surface web) Transactional leadership TAL The level of transactional
leadership
Standardized TAL score (-1, 1)
Annual reports (surface web)
To conduct the empirical analysis, variables were prepared to include them in three models. In Model 1, the dependent variable and the control variables are included, as shown in table 8. Hereafter, the independent variables were included in Model 2. At last, Model 3 included the moderating variables. All the tests are performed in SPSS.
TABLE 8. Regression equations
Model 1 𝑌 = 𝑎 + 𝛽𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝑒
Model 2 𝑌 = 𝑎 + 𝛽𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝛽𝐴𝑠𝑠𝑒𝑡𝐺 + 𝛽𝑇𝑟𝑎𝑛𝑠𝑓𝑜𝑟𝑚 + 𝛽𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 + 𝑒
Model 3 𝑌 = 𝑎 + 𝛽𝑐𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝛽𝐴𝑠𝑠𝑒𝑡𝐺 + 𝛽𝑇𝑟𝑎𝑛𝑠𝑓𝑜𝑟𝑚 + 𝛽𝑇𝑟𝑎𝑛𝑠𝑎𝑐𝑡𝑖𝑜𝑛 +
18 RESULTS
This chapter explains the results of the empirical analysis. It contains the results of the factor analysis, descriptive statistics and correlations and lastly the results of the hierarchical regression.
Starting with the general descriptions of my sample, from the 154 observations, firms score a .045 on growth orientation (ASSETG) as shown in table 10 (the descriptive statistics and correlations). This means that, on average, the total assets of 2017 are 0.45 percent higher than the sample’s total assets in 2016.
On average, firms have a lower GPI (.57) then GCI (.72). Looking at the histogram of figure 2, one can say my sample consists out of more brownwashing firms (GPI-GCI = < 0) than greenwashing firms (GPI-(GPI-GCI = > 0).
On average, LIWC analyzed the 154 annual reports and recognized 79 percent of the content. According to Tausczik and Pennebaker (2010), this percentage is sufficient to draw conclusions based on the findings.
Before testing the hypotheses, a principal axis factor analysis was carried out with Oblimin with Kaiser Normalization as rotation method and retain measures for each construct based on the following criteria: (1) each measure must have a loading of greater than 0.5; (2) each measure must not have a loading of greater than 0.4 to more than one factor; (3) each measure must load into the correct factor (Song et al., 2011). The four final factors that remained are presented in table 9.
TABLE 9. Factor loadings from factor analysis
TABLE 10. Descriptive statistics and correlations Mean (standard deviation) 1 2 3 4 5 6 7 8 9 10 11 12 1. GPI 0.57 (0.16) 1 2. GCI 0.72 (0.13) .327** 1 3. Brownwashing -0.15 (0.17) .682** -.468** 1 4. Growth Orientation 0.05 (0.15) 0.066 -0.102 0,140 1 5. Transformational Leadership 13.51 (3.39) 0.133 -0.005 0.129 -0.045 1 6. Transactional Leadership 6.61 (1.55) 0.025 -.211* .187* .235** .375** 1 7. Number of Employees 67741.94 (202357.84) 0.150 -0.011 0.149 -0.008 0.126 0.104 1
8. Return on Invested Capital 8.06 (9.49) .162* -0.059 .197* 0.157 0.121 0.155 0.076 1 9. Board Size 11.37 (1.98) .304** .170* 0.153 0.143 -0.018 0.015 .176* 0.062 1 10. Environmental Compensation Incentive Structure 0.09 (0.28) -0.002 0.076 -0.061 -0.015 -0.134 -.214** -0.035 -.199* -0.058 1 11. Board Independence 0.88 (0.33) .187* 0.125 0.078 0.078 -0.015 -0.010 0.084 0.150 .227** -0.030 1 12. Industry 0.67 (0.47) .197* 0.018 .170* 0.131 0.012 0.118 0.037 .211* -0.015 0.017 0.044 1
**. Correlation is significant at the 0.01 level 2-tailed).
To test the three hypotheses, hierarchical regression methods are used. The variables were mean-centered recommended by Aiken and West (1991) to test interaction effects. The application of Belsley, Kuh, and Welsch’s (1980) multicollinearity diagnostic test says there are no multicollinearity problems in the mean-centered regression models (Variance Inflation Factors are bigger than 1 and below 10).
Table 11 represents the results of three hierarchical regressions for the Discrepancy Index. Model 1 contains the six control variables (Industry, Return Invested Capital, Board Independence, Employees, Board size, and Environmental Compensation Incentive Structure) and has an R-square of 0.105, and a significant F statistic of 2.718. Model 2 contains the same control variables plus the main variables (growth orientation, transformational leadership, and transactional leadership). The R-square of Model 2 is 0.130, and the F statistic (2.253) is also significant (p < 0.05). In Model 3, the interaction or moderating variables are added into Model 2. The R-square of Model 3 is 0.160, and the F statistic (2.319) is significant (p < 0.05), the strongest F statistic of all three models.
TABLE 11. Results from Hierarchical Regression Analyses
Model 1 Model 2 Model 3
Coef. Sig. Coef. Sig. Coef. Sig.
Intercept -1.070 0.030** -1.002 0.045** -1.152 0.030** Main effect Growth Orientation 0.061 0.466 0.109 0.218 Transformational 0.048 0.600 0.012 0.899 Transactional 0.116 0.206 0.124 0.174 Interaction Growth x Transformational 0.115 0.033** Growth x Transactional 0.004 0.967 Control Number of Employees 0.001 0.142 0.001 0.200 0.001 0.201 Board Size 0.061 0.141 0.059 0.161 0.071 0.099* Industry 0.308 0.079* 0.270 0.125 0.290 0.098* Board Independence -0.002 0.176 -0.002 0.212 -0.002 0.183
Return on Invested Capital 0.023 0.024** 0.020 0.050** 0.021 0.064*
Environmental Compensation Incentive Structure -0.099 0.731 -0.002 0.994 -0.077 0.794
F value 2.718 .016** 2.253 .022** 2.319 .012**
R² 0.105 0.130 0.160
Dependent Variable: Discrepancy Index; N=154. * Significant at p < .10 (2-tail test);
21 Examining the results of table 11 reveals interesting findings. From the data, one can say there is no effect between growth orientation and corporate brownwashing. Model 2 (p = .466) and Model 3 (p = .218) have no significant relationship between growth orientation and brownwashing, although the level of significance is increasing over the models. Therefore, one cannot say as predicted by H1, growth orientation increases the Discrepancy Index, and there is no support for H1. Looking at H2, transactional leadership was expected to have a positive moderating effect on the relationship between growth orientation and brownwashing. The data does not confirm this either. Moreover, the coefficient of transactional leadership as a moderator almost zero (0.004), which suggests no moderating effect and this finding is not significant (p = .967). Therefore, there is no support for H2. Surprisingly, the data suggest transformational leadership as a positive and effect on (p = .033) the link between growth orientation and the Discrepancy Index. However, this positive effect was not expected, as in H3, negative moderating effect for transformational leadership was stated. The data suggests an opposite and significant outcome. Therefore, H3 is also not supported.
22 CONCLUSION & DISCUSSION
This study aims to research the role of organizational leadership on corporate brownwashing, with a sample of 154 publicly traded American firms operating in thirteen industries. When describing corporate brownwashing (Kim & Lyon, 2014; Testa et al., 2018) and reasoning from the literature, this study found growth orientation to be a possible driver (Delmar et al., 2003). In line with the theory of decoupling (Eisenhardt, 1989), managers decouple external communication with internal practices to satisfy shareholders (Kim & Lyon, 2014) for reaching firm growth (Delmar et al., 2003). The data of my empirical model does not correspond, as the data did not suggest a link between growth orientation and corporate brownwashing. Inconsistent with H1, I found a positive but insignificant relationship between growth orientation and corporate brownwashing. Firms that pursue a growth-oriented strategy are perhaps more likely to understate their CSR activities, but there are no significant results to support this. At the same time, managers prioritize shareholders with understating CSR activities hoping to, among others, gain more resources from shareholders, as found in the study of Jacobs et al. (2010). However, this study does not succeeded in defining growth orientation as a driver of corporate brownwashing.
Despite the hypothesized positive moderating role of transactional managers on the link between growth orientation and brownwashing, the models suggest no moderating role for H2. Concerning the models, transactional leadership has no effect on the relationship between growth orientation and corporate brownwashing. One explanation of this result could be that, as in line with the findings of Bass et al. (2003) transactional leaders do not like to take high risks, and therefore, they perceive brownwashing as too risky. One could say with engaging brownwashing high risk is involved, because when shareholders discover the real CSR activities instead of the lower communicated scores, the confidence in the managers will probably decrease dramatically (Kim & Lyon, 2014).
The return of invested capital seems to affect the level of corporate brownwashing, just as the industry the firm is operating in and the size of the firm’s board. From this findings, one could conclude firm performance affects the level of brownwashing, in line with the findings of Testa et al. (2018). A firm with high returns of invested capital is more likely to engage corporate brownwashing. Moreover, in line with the findings of Storey (1994) and Bozzi et al. (2017), industry has an effect on the level of brownwashing. Firms operating in industries with relatively high pollutions have a higher possibility to engage corporate brownwashing. As last, in line with the findings of Walls et al. (2012), Shamil et al. (2014), and Rao et al. (2012), the size of a firm’s board affects the level of corporate brownwashing.
23 activities is influenced by transformational managers. Despite the expected negative moderating role, transformation leadership appears to foster the link between growth orientation and corporate brownwashing. Therefore, H3 is also not supported.
Referring to the main research question ‘How does leadership influence corporate brownwash?’, one can conclude that leadership has a significant effect on the link between growth orientation and corporate brownwashing. Transformational managers, who build on charisma and intellectual stimulation (Bass et al., 2003) positively affect the relation between growth orientation and understating the firm’s CSR activities. This finding corresponds to – and is the main contribution to – the upper echelons theory, which suggests leader characteristics affect the organizational outcomes. This study contributed to the theory of organizational decoupling, where managers act differently than they communicate because of institutional pressures (Eisenhardt, 1989).
Theoretical contribution
24 quality. One can conclude the theoretical contributions with the statement that organizational leadership affects the relationship between growth orientation and corporate brownwashing, but it needs more research to conclude in which way it affects brownwashing.
Practical implications
As already mentioned, shareholders can benefit by recognizing corporate brownwashing at an early stage. Managers mislead shareholders with incorrect CSR communication, which harms the shareholder’s decision if investing in the firm. Based on this study, one can say transformational managers are more likely to engage in corporate brownwashing. If shareholders see managers who are score high on transformational characteristics (idealized influence (charisma), inspirational motivation, intellectual stimulation, and individualized consideration), they need to be cautious. These transformational managers have a higher probability to communicate lower CSR scores than the actual realized CSR scores. By recognizing this, shareholders can prevent to make decisions based on false company information.
Limitations & future research
This study has several limitations, and some of these issues could be addressed in future research. Especially the used methods the like linguistic analysis are not completely waterproof. A manager’s letter to stakeholders, which is signed by the firm’s manager was analyzed, but this message could be written by someone else. When the words and sentences do not represent the manager, this had major implications in my research. However, this method could easily be replicated, which would be a suggestion for future research to see if the findings will correspond. Moreover, there is room for improvement for the empirical models. Because three out of the six control variables were significant, one could improve the model by firstly adding new and significant control variables. Secondly, one could take other proxies and measurements for the control variables. Also, this analysis is done on firm level. Further research could focus on brownwashing on product level to see if outcomes correspond.
At last, the augmentation effect is important limitation to recognize. According to Bass and Avolio (2003) and Howell and Avolio (1993), transformational leadership builds on transactional leadership as a basis. If this is the case, my findings of a significant moderating role transformational leadership build on transactional leadership values. This way of thought comes closer to my hypotheses, where transactional leadership positively affects the level of corporate brownwashing. However, in this study, they are considered, as most research, mutually exclusive, as in the study of Burns (1978).
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