The influences on the sustainability performance of an organization

Master Thesis

The influences on the sustainability performance of an organization

by

Nicole van Langen

University of Groningen Faculty of Economics and Business Organizational and Management Control

June 2015

Supervisor: H.J. van Elten

Brandenburgerstraat 17 9724BA Groningen n.a.a.van.langen@student.rug.nl

Student number: S2137844

Word count: 13.810

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Table of Contents

Abstract ... 3

1 INTRODUCTION ... 4

2 THEORETICAL FRAMEWORK... 7

2.1 Corporate sustainability ... 7

2.2 Environmental management control system... 11

2.2.3 Sustainability information system ... 12

2.2.1 Formal sustainability management control system ... 12

2.2.2 Informal sustainability management control system ... 13

2.3 Pressures for corporate sustainability ... 13

2.5 Sustainability disclosure ... 14

2.5.1 ISO Certification ... 15

2.6 Conceptual model ... 17

3 METHODOLOGY ... 18

3.1 Definition and Measurements of constructs. ... 19

3.2 Cronbach Alpha and Factor analyses ... 22

3.3 Qualitative research ... 22

3.4 Data analysis... 23

3.5 Controllability, validity and reliability ... 23

4 RESULTS ... 25

4.2 Descriptive statistics ... 25

4.3 Multiple Regression ... 26

4.4 Trimmed analyses ... 27

4.5 Results interviews ... 30

5 DISCUSSION ... 32

5.1 SMCS ... 32

5.2 Pressure ... 33

5.3 Disclosure ... 33

6 CONCLUSION ... 35

7 REFERENCES ... 37

8 APPENDIX ... 41

Appendix A - Measurements ... 41

Appendix B – Questions ... 43

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Abstract

The world is faced with global environmental, economic and social challenges. External parties hold companies responsible for the social consequences of their activities, and thereby companies feel pressured to act sustainable. To prove to those external parties that they are sustainable, organizations disclose information about their sustainable activities and performance. This research investigates the relationship between the sustainability disclosure and the sustainable performance of an organization, and the influence a management control system has on this performance. 28 managers from medium to large-sized organization participated in this research, and filled out a questionnaire. SPSS tests were performed to investigate the relationships. The main findings are that having an ISO certificate is a better predictor for the sustainability performance than disclosing sustainability information at a high degree. Also the development and implementation of an informal sustainability management control system has more influence than a sustainability information system or a formal sustainability information system.

Key words: sustainability performance, management control system, information, formal, informal, sustainability disclosure, ISO 14001

Abbreviations

PSP Perceived sustainability performance MCS Management control system

SMCS Sustainability management control system SIS Sustainability information system

FSMCS Formal sustainability management control system ISMCS Informal sustainability management control system SDIS Sustainable disclosure

ISO ISO 14001 certification

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1 INTRODUCTION

The world is faced with unprecedented global environmental, economic, and social challenges.

Sustainable development has emerged as an organizing principle for addressing these issues (Macagno, 2013). Companies became aware of their corporate social responsibility after being surprised by public responses of their business responsibilities (Porter & Kramer, 2006).

Governments, activists and the media pay increasingly more attention and concern over the social and environmental impact that business have (Adams & Frost, 2008), and hold companies responsible for the social consequences of their activities (Porter & Kramer, 2006). The call for sustainability has led to institutional changes across industries and more buyers than ever are setting sustainability standards for their suppliers (Lampikoski, Westerlund, Rajala & Möller, 2014).

The pressure from those stakeholders force businesses to prove their governance effectiveness, accountability and transparency through corporate sustainability disclosure, but meeting those demands and expectations of stakeholders is a challenging task for many businesses (Amran & Ooi, 2014). Therefore the trustworthiness of the information can be questioned, with greenwashing as a related concept.

The phenomenon of greenwashing is becoming increasingly prevalent (Nyilasy, Gangadharbatla &

Paladino, 2014; Furlow, 2010). Greenwashing is the dissemination of false or incomplete information

by an organization to present an environmentally responsible image (Furlow, 2010). Various

researchers investigated the relation between sustainability disclosure and the effect this has on the

perception of the stakeholders. Sustainability disclosure is the disclosure of financial, social and

environmental information and is part of the dialogue between a company and its stakeholders, and

provides information on a company’s activities that help legitimize its behavior, educate and inform,

and change perceptions and expectations (Adams & Larrinaga-González, 2007). In the research of

Nyilasy et al. (2014) it is expected that green advertising would move consumer attitudes in a positive

direction, irrespective of the level of corporate environmental performance. Different researchers came

to the conclusion that green messages had a higher positive effect on attitudes and purchase intentions

than non-green messages (Schuhwerk & lefkoff-Hagius, 1995; Mobley, Painter, Untch & Unnava,

1995; Henion, 1972). But contrary to those findings, Nyilasy et al. (2014) found that green advertising

can harm companies. Their explanation for this effect is that consumers may become skeptical when

they see discrepant green advertising and corporate performance. Therefore they may form negative

attributions about the motives of the company, and observe the company as a greenwashing company

(Nyilasy et al., 2014). As a result, Nyilasy et al. (2014) state that some companies would be better off

staying silent about their greenness.

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The management control system (MCS) of an organization contains everything a manager should undertake to be sure that the strategies and plans of the organizations are carried out or adjusted (Merchant, 1998). It is a tool which managers can use to implement sustainability in their policy and strategy. Therefore it might also be interesting to investigate whether the different parts of this MCS have an influence of the perception from the manager about the sustainability performance of the company.

To investigate relationships between the abovementioned variables and the sustainability performance of an organization, the research question will be;

Which factors have an influence on the sustainability performance of an organization?

With the related questions;

Is it possible to see whether an organization is sustainable by looking at its external reporting?

What is the difference between the influence of the formal sustainability MCS and the informal sustainability MCS on the sustainability performance?

What is the difference between the influence of the internal and the external pressures for sustainability on the sustainability performance?

Other researchers have investigated the pressure on organizations to act sustainable (Lozano, 2015;

Komodromos & Melanthiou, 2014; Windolph, Harms & Schaltegger, 2013), and concluded that there are internal and external pressures which push the organization in sustainable activities. Other researchers have investigated the pressure of stakeholders on CSR transparency (Fernandez-Feijoo, Romero & Ruiz, 2014), which is related to the sustainability disclosure. They state that different stakeholders demand more sustainability disclosure. Also the link between sustainability disclosure and reputation is investigated (Michelon, 2011), he states that companies that present a higher level of stakeholder engagement also seem to disclose more environmental and social information. However, what’s missing in the current literature, are the indicators for the level of corporate sustainability performance.

From a managerial perspective, this research can be useful. Stakeholders and shareholders which are

involved in the organization demand increasingly more sustainability. Therefore it might be difficult

for the company to meet the demands of the stakeholders, and because of this the company may

disclose more information about their greenness and sustainability in its external reporting. Therefore

it would be interesting to investigate whether disclosing more information gives a veracious view of

the level of sustainability of the company. Another interesting subject of the research is the effect of

the different parts of the MCS on the sustainability of the organization, this might help managers to

improve the sustainability level of the organization.

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The remainder of this thesis is organized as follows. Chapter two provides the theoretical framework,

with a detailed description of sustainability performance, followed by descriptions of variables which

might influence this performance together with the hypotheses. Chapter two ends with a conceptual

framework in which the expected relationships are presented. In chapter three the methodological

approach of this research is explained. After that, chapter four will provide the results of the performed

multiple regressions, followed by a discussion of those results in chapter five. Chapter six will give the

final conclusions of the research and an answer to the research question will be given, chapter six will

end with the limitations of this research and directions for future research.

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2 THEORETICAL FRAMEWORK

In the following section, the concept corporate sustainability will be explained, and a framework which explains the concept will be given. Thereafter, different variables which are expected to have a relationship with the corporate sustainability performance are provided together with the hypotheses.

The chapter will end with the conceptual framework in which those expected relations are made visible.

2.1 Corporate sustainability

The different concepts linked to corporate sustainability; corporate social responsibility, corporate social performance, environmental management and corporate sustainability, have received increasing attention from both practioners and academics (Amini & Bienstock, 2014). The different concepts mentioned have been broadened and refocused multiple times as researchers and corporations seek to better understand the academic and practical implications of these concepts (Amini & Bienstock, 2014). Therefore, Van Marrewijk (2003) claims that there is not one clear definition for corporate sustainability, and it should be accepted that there are various and more specific definitions matching the development, awareness and ambition levels of organizations. According to Marrewijk (2003) the overall concept is about a more humane, more ethical and a more transparent way of doing business.

Although Marrewijk (2003) stated there is not a complete definition of corporate sustainability, some researchers have tried to capture corporate sustainability in a definition. For example, Dyllick and Hockerts (2002) define corporate sustainability as; meeting the needs of a firm’s direct and indirect stakeholders, such as shareholders, employees, clients, pressure groups, communities etc., and moreover, take into account its ability to meet the needs of future stakeholders as well. Although this definition is powerful and appealing, it is still vague according to Lozano (2011). Lozano (2011) defined the concept as follows: ‘corporate sustainability should be understood as corporate activities that proactively seek to contribute to sustainability equilibria, including the economic, environmental and social dimensions of today, as well as their inter-relations within and throughout the time dimension, while addressing the company’s systems, i.e. operations and production, management and strategy, organizational systems, procurement and marketing, and assessment and communication (Lozano, 2011).

To make the definition of corporate sustainability more clear, Amini and Bienstock (2014) undertook a focused review of the sustainability literature that integrates a variety of perspectives. They developed a framework which provide a concrete, multidimensional and comprehensive perspective with regard to corporate sustainability. The dimensions of the framework are: business level application & communication of sustainability performance; scope of organizational focus;

sustainability oriented innovation; economic, ecological-environmental and/or equity-social emphasis

and; compliance stance. Four levels of sophistication are added, to incorporate the interaction both

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among the five dimensions of sustainability in the CS definition, as well as the dynamics of the interaction of these dimensions over time (Amini & Bienstock, 2014).

Business level application & communication of sustainability performance

According to Porter and Kramer (2006) corporate sustainability cannot be successful unless it is part of an overall strategic effort, and a cultural change with regard to sustainability will not take place unless a firm’s sustainability efforts are strategic in nature. At the most unsophisticated level, firms will have no defined efforts towards corporate sustainability, and there will be no internal or external communication of sustainability activities, since there is nothing to report about (Amini & Bienstock, 2014). As the organization’s culture becomes more refined with respect to corporate sustainability, the accent will move from tactical to strategic. Together with the sustainability efforts, corporate sustainability communication becomes more apparent, with the most sophisticated organizations communicating, both internally and externally, highly detailed information on corporate sustainability activities and performance (Amini & Bienstock, 2014).

Scope of organizational focus

For corporate sustainability efforts, in order to be successful and meaningful, organizations must reach out to the supply chain. The least sophisticated organizations will show no interaction with their supply chain in terms of sustainable activities, while the most sophisticated organizations will engage in significant information sharing, resource sharing and optimization efforts as they seek to integrate sustainability activities throughout their supply chain (Amini & Bienstock, 2014).

Sustainability oriented innovation

Organizations that are unsophisticated with respect to sustainability typically have little or no awareness of the relationship between innovation and sustainability. A more sophisticated sustainable organization will have developed some awareness of the synergy between innovation and sustainability and begin to integrate innovation and sustainability efforts. As those companies become sophisticated with regard to sustainability at the highest level, they tend to involve multiple stakeholders in their sustainability and innovation efforts and strive for a zero waste policy to sustainability (Amini & Bienstock, 2014).

Economic, ecological-environmental and/or equity-social emphasis

Based on the triple bottom line

concept and the zero waste approach

, this dimension of the framework focuses on the degree to which an organization embraces all the aspects of sustainability;

economic, ecological-environmental and equity-social. According to Amini and Bienstock (2014) organizations with the lowest sophistication with respect to corporate sustainability, focus only on the economic sustainability, and are not concerned with ecological-environmental or equity-social

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The triple bottom line is also referred to as ‘people, planet and profit’ and has a threefold focus; the majority of triple bottom line firms aim to become more responsive ecologically and socially, while prospering economically (Glavas & Mish, 2014).

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Zero waste is a holistic approach to tackling waste problems in the twenty-first century. Zero waste policies and strategies should

promote recycling activities by creating waste recycling jobs and hence contribute to circular economic growth (Zuman, 2015).

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sustainability. As organizations become more sophisticated with respect to corporate sustainability, they also understand the importance of the other two dimensions and attempt to address these issues in some way. The most sophisticated organizations embrace a triple bottom line approach in that they incorporate economic, ecological-environmental and equity-social concerns in their strategic decisions (Amini & Bienstock, 2014).

Compliance stance

In the route to becoming more sophisticated, the corporate sustainability activities of organizations shift from simply doing what they must do to comply with regulations, to participating in the development and evolution of sustainability regulations, and recognize that becoming more sustainable can reduce cost associated with compliance as well as reducing liability costs (Amini &

Bienstock, 2014). Although compliance with environmental regulations can be difficult and complicated, from a competitive and strategic point of view it makes more sense to be proactive with respect to sustainability and comply with environmental regulations before they are forced to do so (Amini & Bienstock, 2014).

In summary, if an organization is sophisticated at the highest level with respect to sustainability, then

it is a proactive organization in the field of sustainability, and therefore sustainability is a part of their

overall strategy. They do not only strive for economic benefits, but also strive for environmental and

social developments, and they try to get the complete supply chain integrated in this process. They

communicate their sustainability activities internally and externally and try to innovate in a sustainable

manner. In table 1, the framework of Amini and Bienstock (2014) is given.

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Table 1

Corporate sustainability framework Amini & Bienstock, 2014

Business level application and communication

Ill-defined sustainability initiatives within organization, no external communication with respect to CS activities

Tactical level sustainability activities, few external communications with respect to CS activities

Strategic level sustainability activities, some quantification &

external

communication of CS performance

Intrinsically sustainability zero- waste oriented organization, public disclosure of highly granulated sustainability performance data

Scope of organizational focus

No supply-chain interaction

Limited interaction with supply chain

Some

information/resource sharing within supply chain

Significant information, resource sharing &

optimization efforts across supply chain

Sustainability oriented innovation

Innovation activities are not

sustainability related

Some awareness of relationship between innovation and sustainability

Innovation activities begin to involve multiple stakeholders

Zero-waste approach involving significant sustainability oriented innovation efforts that involve multiple stakeholders

Economic/ecology- environmental/equity- social emphasis

Emphasis solely on economic

sustainability

Primary emphasis on economic sustainability, tentative efforts toward ecological- environmental sustainability

Triple bottom line approach, economic, ecological-

environmental, equity- social sustainability

Organization embraces a triple bottom line sustainability approach

Compliance stance Sustainability activities limited to minimal efforts at regulatory compliance

Sustainability activities increase beyond minimal regulatory compliance, but are not systematically related to organizational strategy

Incorporation of regulatory compliance within organizational strategy, participation in development and evaluation of sustainability regulation

Recognized industry thought leader that embraces and encourages zero-waste approach to

sustainability

regulations, recognition of importance of public- private partnerships

I II III IV

Level of sophistication (I= least sophisticated; IV= most sophisticated

Measures of sustainable performance

To measure the environmental performance, the directional distance function (DDF) can be used.

However, the use of DDF has been restricted to environmental studies, and thus far, no studies have

used this method for sustainability measurement, which should include wider aspects of the

environmental, economic, and social domains (Zhang, Kong and Choi, 2014). Another measurement

in the environmental area is the ecological footprint, which questions how large an area of productive

land is needed to sustain a defined population indefinitely. It takes into account the resource

consumption and waste assimilation of a particular human population and economy or organization

(Wackernagel & Rees, 1996). This measure does measure the environmental impact, but just like with

DDF, it does not include the other aspects of sustainability. The study of Zhang et al. (2014) bridges

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the gap of those dynamic trends and developed a new DDF method to measure sustainability performance from a multidimensional viewpoint. However, using this measurement would be beyond the scope of this research. Above of that, it is hard to compare different industries at their sustainability performance, since the use of resources and waste is different between industries.

Bernard and Jones (1996) tried to compare six different industries on their productivity, and came to the conclusion that the industries had divergent results. Although this is they measured not the same variable, it can be assumed that the difficulty of comparing various industries is also a problem for other variables. Therefore the sustainability of an organization will be measured by the perception of the business unit manager about the sustainability performance of the organization. In this way, it is not the ‘real’ sustainability performance which is measured and compared, but the perception of the managers.

The framework above indicates that companies with a more sophisticated sustainability level, score higher at different aspects; integration of sustainability in the policy, disclosure of sustainability information, etc. Fernandez-Feijoo et al. (2014) found a relationship between pressure from the market and employees on CSR report transparency. This would mean that the level of sustainability disclosure is not necessarily related to the level of sustainability performance. To find out which factors are indicators for the level of sustainability performance, the research question which will be investigated is;

Which factors have an influence on the sustainability performance of an organization?

The remainder of this chapter will explain the variables which might have an influence on the PSP, and together with those explanations, hypotheses will be provided. The chapter will end with a conceptual framework which shows the expected relationships between the independent variables and the dependent variable.

2.2 Environmental management control system

Companies recognize the seriousness of environmental threats and accordingly develop tools, strategies and programs to achieve more environmental friendly products and production processes (Pondeville, Swaen & De Rongé, 2013). The environmental management control system is such a tool.

A management control system (MCS) is a broadly defined concept and contains everything a manager should undertake to be sure that the strategies and plans of the organization are carried out or, if necessary, are adjusted (Merchant, 1998). MCS’s help organizations to increase the probability that employees make decisions and take actions which are in the organizations’ best interest. Those control functions consist of organizing, planning, evaluating and rewarding (Chow, Shields & Wu, 1999).

Those management control systems shape the practices of the organization, support the strategy and if

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used appropriately, they can push the organization in the direction of sustainability (Gond, Grubnix, Herzig & Moon, 2012). To include the concept of sustainability in the definition of management control systems, Pondeville et al. (2013) have adjusted the definition and included the environmental aspect. According to Pondeville et al. (2013) a sustainability management control system (SMCS) is a package of formal, information-based routines and procedures that managers use to maintain or alter patterns in organizational activities, specifically concerning the environmental aspect of organizational performance. Managers’ perception of pressure from regulatory stakeholders influence the development of an environmental control system (Pondeville, 2013).

The SMCS of an organization makes use of an sustainability information system and has formal and an informal controls, which will be discussed below.

2.2.3 Sustainability information system

An information system collects, processes and stores information for decision-making, coordination and control, and this information can be used for management control. Therefore, a developed information system can facilitate the implementation of formal and informal control systems (Pondeville et al., 2013). A sustainable information system (SIS) provides useful sustainability information to managers, which should act as a replenishment of the regular information system.

Sustainable proactive companies integrate sustainability into all aspects of their management, and thereby they do not only collect internal information, but also external information like predictions about sustainability legislation, consumers’ preferences for green products and technological developments. This information can be used to evaluate the current programs of the organization and balance the sustainability and business priorities (Berry & Rondinelli, 1998).

Hypothesis 1: The use of the sustainability management information system is positively related to the perceived sustainability performance.

2.2.1 Formal sustainability management control system

The most visible and objective components of a control system is the formal management control system. This includes the rules, standard operating procedures and budgeting systems in the organization (Langfield-Smith, 1997). Translated to the formal sustainability management system (FSMCS), sustainable procedures and rules of an organization can promote sustainable performance.

Sustainable rules and procedures might be established by managers to link the expected results to

decisions and in that way they might form their sustainable objectives. Other formal sustainability

controls include the integration of sustainable objectives in the planning system, the inclusion of

sustainable performance indicators in reward systems and comparisons of results to sustainable

objectives through sustainable auditing (Pondeville et al., 2013). Since the purpose of the FSMCS is

promoting sustainable performance, the hypothesis related to the formal SMCS is:

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Hypothesis 2: The use of the formal SMCS is positively related to the perceived sustainability performance.

2.2.2 Informal sustainability management control system

Informal controls include the unwritten policies of the organization and often derive from the organizational culture (Langfield-Smith, 1997). Informal controls are an important aspect of the MCS since the effectiveness of formal controls may be dependent on the nature of the informal controls that are also in place (Langfield-Smith, 1997). The informal control system can, together with the formal controls, provide an efficient means to carry out the intended sustainability strategy. The informal controls are implemented to ensure the support of managers and employees. By using the informal sustainability management control system (ISMCS), employees get involved and participate in sustainability decisions, which make them part of a continuous sustainability performance improvement process (Florida, 1996). Informal controls help control the results in a less conventional way than formal controls do (Pondeville et al., 2013).The ISMCS can provide an efficient means to carry out the intended sustainability strategy, together with the formal SMCS. Therefore the following hypothesis can be stated:

Hypothesis 3: The use of the informal SMCS is positively related to the perceived sustainability performance.

2.3 Pressures for corporate sustainability

As mentioned in the introduction, organizations are experiencing a high pressure to engage in sustainability. Those companies have experienced increasing environmental pressure, but simultaneously recognize various benefits and incentives to green their supply chains and processes (Zhu, Sarkis & Lai, 2007). Internal awareness is a key dimension for enterprises to implement sustainable practices. Proactive companies usually have greater implementation of sustainable practices beyond requirements of laws and regulations, while reactive companies only seek compliance with regulatory requirements (Zhu et al., 2007). Those proactive companies are driven by internal pressure for sustainability, while the reactive companies experience external pressures to become sustainable. The important internal drivers according to the research of Zhu et al. (2007) are the company’s environmental mission, international multinational policies, potential liability for disposal of hazardous materials, and the cost for disposal of hazardous materials, environmental friendly goods and packages. The external pressures can be divided into three main factors; regulation, market and suppliers (Zhu et al., 2007). It is expected that those pressures have an influence on the corporate sustainability performance, and therefore the following hypotheses can be stated:

Hypothesis 4: The intensity of internal pressure for corporate sustainability is positively related to the

perceived sustainability performance.

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Hypothesis 5: The intensity of external pressure for corporate sustainability is positively related to the perceived sustainability performance.

2.5 Sustainability disclosure

As a result of the public pressure for sustainable development, business stakeholders demand better knowledge of how environmental, social and economic impacts are factored into business strategies and decisions, and they also require compliance in reporting of daily operations (Amran & Ooi, 2014).

Sustainability reporting is crucial for businesses to show their stakeholders that they are effective in meeting their own sustainability goals, future business growth and long-term success (Amran & Ooi, 2014). This reporting is called sustainability disclosure (SD); the disclosure of financial, social and environmental information. It is part of the dialogue between a company and its stakeholders, and provides information on a company’s activities that help legitimize its behavior, educate and inform, and change perceptions and expectations (Adams & Larrinaga-González, 2007).

In the early stages of sustainability reporting, it began with obvious and piecemeal reporting of topics that were important according to the company, but currently it has developed into structured disclosure of a business’ environmental, social or sustainability impact. The broadening adoption is substantiated by increasing stakeholder demand and greater acceptance of social responsibility by business executives (Amran & Ooi, 2014). The most important reason for businesses to initiate reporting is to protect their brand and reputation (Amran & Ooi, 2014). Also Friedman and Miles (2001) indicate the importance of this reason; they state that sustainability disclosure can be conceived as a determinant of the reputation of a business since companies show externally that they are aware of the need for managing a wider range of social and environmental issues (Friedman & Miles, 2001). Pressure from stakeholders force businesses to prove their governance effectiveness, accountability and transparency through corporate sustainability disclosure, but meeting those demands and expectations of stakeholders is a challenging task for many businesses (Amran & Ooi, 2014).

According to Okongwu, Morimoto & Lauras (2013) there are three different levels of sustainability.

Those different levels are given in table 2. The first level, define, aims to check whether the

organization defines and reports key stakeholders and their needs, sustainability strategies and policies

and major sustainability attributes that enable to measure performance. At level two, measure and

manage, organizations should report information showing that they measure and manage sustainability

issues, this process should be confirmed by self-assessments and audits. At the third level, improve

and change, organizations should not only report how the performance measures are used to change

and improve performance, but they should also report about the engagement of the services of an

independent auditing body in order to certify the reliability of the reported information, as well as the

continuous improvement process (Okongwu et al., 2013). The first level is the lowest level, whereby

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the organization discloses little information, and the third level is the highest sustainability disclosure level according to Okongwu et al. (2013).

Table 2

Levels of disclosure Okongwu et al. (2013)

Societal development sustainability

Level 3 Improve and change -Based on corporate performance assessment, an improvement plan is developed in order to satisfy the major stakeholders -Third-party (external) audits are performed

Level 2 Measure and manage -Corporate performance indicators and measures are reported -Self-assessments and audits are performed

Level 1 Define -Stakeholders and their needs are identified -Sustainability policies and strategies are stated

-Key societal development sustainability attributes are defined

According to Amini and Bienstock (2014), organizations with a higher sustainability sophistication level disclose more sustainability information, like their sustainable activities and performance. To find out if it is possible to see at the information provided by an organization whether they perceive themselves as sustainable or not, the following hypothesis is stated:

Hypothesis 6: The degree of sustainability disclosure is positively related to the perceived sustainability performance.

2.5.1 ISO Certification

According to Okongwu et al.(2013), at the highest level of disclosure reporting, external auditing is a subject to disclose information about. One of the audits which can be reported about, which is widely adopted across the world and has sustainability as a subject, is the ISO 14001 certificate. ISO is the International Organization for Standardization. The ISO certifications and guidelines are well-known around the world (ISO 14000 – Environmental management, n.d.).

The ISO 14001 environmental standards are introduced in 1995. ISO 14001 responded to concerns

about the relationship between trade and environment, and the lack of oversight by global trading

institutions over environmental issues (Potoski & Prakash, 2013) The ISO 14000 family of standards

provides practical tools for companies and organizations looking to manage their environmental

responsibilities improved (ISO 14000 – Environmental management, n.d.). It requires participants to

establish a written environmental policy approved by senior management, that lays out quantifiable

environmental targets with plans for regularly reviewing them, and to designate a top manager to

oversee if the plans are implemented well. ISO 14001 is a voluntary, nontraditional approach to

environmental governance, which complemented the extant regulatory structure. But unlike some

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other voluntary environmental programs, ISO 14001 requires participants to receive an initial certification audit and subsequent annual audits to verify that their policy is conducted well and is of ISO 14001 caliber (Potoski & Prakash, 2013).

Nguyen and Hens (2015) investigated whether there was a difference in the environmental performance of Vietnamese cement plants which were ISO 14001 certified and plants which were not.

They also investigated whether this sustainable performance increased after the adoption of ISO 14001. They found a significance difference between the certified and non-certified plants on selected environmental indicators like dust, SO

, NO

, as well as a significant improvement after the adoption of ISO 14001 (Nguyen & Hens, 2015). Other researchers found a relationship between ISO 14001 participation and air pollution reduction in different countries like Japan, Turkey, Israel, Turkey, India and Austria (Potoski & Prakash, 2005; Toffel 2005; Turk 2009; Link & Naveh, 2006; Padma, Ganesh

& Rajendran, 2008; Schylander & Martinuzzi, 2007). To find out whether ISO 14001 certification also has an effect on the broader concept sustainability, the following hypothesis can be stated:

Hypothesis 7: ISO 14001 certification is positively related with the perceived sustainability

performance.

17 2.6 Conceptual model

In the figure below, the conceptual model is provided. It shows the expected relationships between the independent variables and the dependent variable explained above.

Perceived Sustainable Performance (PSP) Use of Formal

Sustainability Management Control

System (FSMCS)

Degree of External Pressure related to

Sustainability (EPRES) Use of Sustainability

Information System (SIS)

Use of Informal Sustainability Management Control

System (ISMCS)

Degree of Internal Pressure related to Sustainability

(IPRES)

Degree of Sustainability Disclosure (SDIS)

ISO Certification (ISO)

+

+

+

+

+

+

+

H1

H2

H3 H1

H4

H5

H6

H7

Figure 1: Conceptual Model

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3 METHODOLOGY

The method used in this research is theory-testing. The driver of a theory-testing process is a business phenomenon faced by many companies (Van Aken, Berends & Van der Bij, 2012). Different theories about sustainability strategies, sustainability disclosure and sustainability performance are quite elaborated, but the relation between those variables have not been fully addressed in the literature.

Therefore, theory testing will be used to find the relationships between those variables. The first step in theory testing is finding a gap in the literature, then the important variables should be identified and a conceptual model with the hypotheses should be given. Thereafter data collection and analysis takes place, followed by the results, theoretical implications and future research (Van Aken et al., 2012).

The analysis of this thesis is based on survey data from business units in 28 medium to large sized organizations in the Netherlands and Germany. A medium to large sized organization is defined as an organization with at least 150 employees. The data collection is be done partly by myself, and partly by three other students. Of the nine organizations I arranged myself, eight were supplemented with an interview. In building the questionnaire, we relied as much as possible on instruments which are validated in previous studies and on theoretical input. Those questionnaires were filled in together with one of the four researchers, who got an interview training and followed an interview protocol to keep the circumstances of the questionnaire the same as much as possible.

The ideal respondents for the questionnaire were middle-level managers, who have at least 20 employees in their span of control, who are responsible for both costs and the revenues, and work for an organization with at least 150 employees. More information about the companies and managers which were included in the dataset can be found in the tables 3 and table 4.

The managerial level is the appropriate level of analysis in this study, since those managers work with the formal and the informal sustainable management control system, and have to deal with the different kind of pressures. To get access to those companies, four students approached seemingly interesting companies by phone, and sent them information about the research by e-mail. As a result of this procedure, the sample is not random, but it is called a convenience sample, which will be discussed in the chapter ‘controllability, reliability and validity’.

Table 3

Information about organizations and managers

Mean Min Max

Business unit employees 954 1 10.000

Organizational employees 16.161 120 1.000.000 Years working at current position 6 0 18

Years working at organization 16 2 35

19 Table 4

Sectors of companies interviewed

Sector Amount of Companies

Agriculture, forestry, and fishing 1

Construction 3

Manufacturing 3

Transportation, Communications, electric, gas, and sanitary services 5

Wholesale trade 3

Retail trade 2

Finance, insurance, and real estate 2

Services 4

Non-classifiable establishments 4

Food industry 1

TOTAL 28

3.1 Definition and Measurements of constructs.

In this section definitions and explanations of measurements of the constructs are provided. The used definitions are summarized in table 5.

Dependent variable

Perceived Sustainability Performance

The dependent variable is the perceived sustainability performance (PSP). This is the organizational sustainability performance as perceived by the manager of the researched business unit. The instrument used to measure this variable is inspired by Kruis (2008),Van de Ven & Ferry (1980), Hitt

& Middlemist (1979) and Hitt et al. (1983). These studies formed the basis for further development of the survey measurement. The respondents were asked to rate the sustainability performance of their business unit on eight aspects, e.g. ‘achievement of BU goals concerning sustainability’, ‘employee satisfaction with the sustainability of your products/services’ and ‘problem-solving ability of the BU in achieving greater sustainability’. Those aspects are rated using a 7-point Likert scale (1=very poor, 4= satisfactory, 7= very good). The complete list with the aspects of all the variables can be found in Appendix A.

Independent variables

Sustainability information system

The independent variable sustainability information system (SIS) is inspired by the aspects used by

Pondeville et al. (2013) which are from there further developed for this research. The definition of SIS

used in this research is ‘a system which collects, processes and stores information for decision-

making, coordination and control associated with sustainability’. The respondents were asked to

indicate the extent to which the information indicated in the question is used with respect to the

operations in their business unit. Measurement is done on a 7-point Likert scale (1=to a small extent,

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7=to a large extent). Examples of questions are ‘sustainability information that relates to possible future events (e.g., new environmental regulations, that can affect your operations)’ and ‘sustainability information on broad factors external to your business unit (e.g., technological developments, mobility policy)’.

Formal & Informal Sustainability Management Control System

The independent variables formal sustainability management control system (FSMCS) and informal sustainability management control system (ISMCS) are measured by using eight aspects per variable, which are inspired by Pondeville et al. (2013). The definitions used in this research are ‘the rules, standard operating procedures and budgeting systems in the organization associated with sustainability’ for FSMCS and ‘the unwritten policies of the organization associated with sustainability’ for ISMCS. Respondents were asked to indicate the extent to which the information indicated by the questions is used, with respect to their business unit. Examples of aspects used for the FSMCS are ‘integration of sustainability objectives in the planning systems’ and ‘detailed description of sustainability functions’ and examples of aspects used for the ISMCS are ‘all BU employees are encouraged to make suggestions for improvements in the sustainability of the production process’, BU management is really involved in the sustainability management process’ and ‘work teams at the BU level are built to manage sustainability problems’. Measurement of those variables is done using a 7-point Likert scale (1= to a small extent, 7= to a large extent).

Internal and External Pressure

The measurement of the internal pressure (IPRES) and the external pressure (EPRES) for sustainability is developed by Zhu et al. (2007). The definition used in this research are ‘the internal pressure an organization experiences to become sustainable’ for IPRES and ‘the external pressure an organization experiences to become sustainable’ for EPRES. The internal pressure is measured using the aspects of Zhu et al. (2007), examples are ‘internal policies from our organization’s subsidiaries or BUs’ and ‘cost for disposal of hazardous materials’. The external pressure is measured using three different aspects of Zhu et al. (2007); regulations, market and suppliers. Respondents were asked to indicate whether they perceived those pressures, using a 7-point Likert scale (1 = not at all important, 2 = not important, 3 = not thinking about it, 4 = important, 5 = extremely important).

Sustainability disclosure

The definition of sustainability disclosure (SDIS) used in this research is ‘the disclosure of financial,

social and environmental information’. A well-developed measurement for sustainability disclosure

(SDIS) is GRID. But since this is a relatively extensive measurement, it goes beyond the scope of the

survey. Therefore another, shorter, measurement is chosen. Okongwu et al. (2013) came up with a

qualitative measurement for sustainability disclosure, in which the researchers used all available

information and documents of the company, and based on this information they filled in a checklist

21

with eight subjects and granted a level of disclosure to the company. This checklist is added to the survey, and the managers of the business-units were asked to indicate whether they disclosed information on the seven items. In this study, a total score was granted instead of a level, based on the total amount of items disclosed.

ISO 14001 Certification

To gain information about the companies ISO 14001 certification (ISO), the website of the companies was used to see whether the companies where ISO 14001 certified or not. Half of the companies, 14, were ISO 14001 certified, the other half was not or did not disclose this information.

Table 5

Definitions of variables

PSP the degree of organizational sustainability performance as perceived by the manager of the researched business unit

FSMCS the degree of use of the rules, standard operating procedures and budgeting systems in the organization associated with sustainability ISMCS the degree of use of the unwritten policies of the organization associated

with sustainability

SIS the degree of use of a system which collects, processes and stores information for decision-making, coordination and control associated with sustainability

IPRES the degree of internal pressures an organization experiences to become sustainable

EPRES the degree of external pressures an organization experiences to become sustainable

SDIS the degree of disclosure of financial, social and environmental information ISO the fact if an organization is ISO 14001 certified

Table 6

Set of constructs and measurement items

Variable Code Source Scale

Perceived Sustainability Performance

PSP Kruis (2008),Van de Ven & Ferry (1980), Hitt & Middlemist (1979) and Hitt et al. (1983)

7-point likert

Formal Sustainability Management Control System

FSMCS Pondeville et al. (2013) 7-point likert

Informal Sustainabilty Management Control System

ISMCS Pondeville et al. (2013) 7-point likert

Sustainability Information System SIS Pondeville et al. (2013) 7-point likert

Internal Pressure IPRES Zhu et al. (2007) 7-point likert

External Pressure EPRES Zhu et al. (2007) 7-point likert

Sustainability Disclosure SDIS Okongwu et al. (2013) Interval

ISO 14001 Certification ISO Ordinal

22 3.2 Cronbach Alpha and Factor analyses

For the variables consisting of multiple questions, a factor analysis was carried out, the Cronbach Alpha was calculated in SPSS, and the correlation matrix was checked if the measures all exceeded a minimum value of 0.3. A factor analysis allows the researcher to transform a large set of scale items down to a smaller, more manageable number of dimensions or factors (Pallant, 2011). For the factor analyses, the Kaiser-Meyer-Olkin value should be lower than 0.6 (Kaiser, 1974) and the Barlett’s test of Sphericity should be lower than 0.05 for statistical significance (Barlett, 1954). Cronbach’s Alpha measures the internal consistency of a scale, and should ideally be above 0.7 (Pallant, 2011). The outcomes of those tests are reported in table 7. For the variables which met the criteria for the factor analysis and the Cronbach Alpha, the different aspects were transformed into one variable by calculating the mean scores. For all the variables, the skewness and kurtosis were checked, to see whether it had a normal distribution, which was the case for all the variables.

The variable ‘External Pressure’ did not meet the criteria for the factor analysis and the Cronbach Alpha. Therefore a construct could not be made for this question and it was left out the further analyses.

3.3 Qualitative research

All the questionnaires were filled in together with the respondent. 19 of the questionnaires were performed by other students, and I did nine myself, of which eight were followed up with a short interview at the end of the questionnaire. Those open questions were asked, to provide extra information for the research. This information will be used as an extra explanation for the found relationships in the quantitative analyses. The questions asked can be found in Appendix B. To be able to get the most information, companies and respondents were guaranteed anonymity. Companies or managers will not be mentioned by name in this thesis, instead they are granted a number.

Table 7

Analysis of constructs

Variable KMO BTS CA

Perceived Sustainability Performance 0.763 0.000 0.880 Formal Sustainability Management

Control System 0.695 0.001 0.758

Informal Sustainabilty Management

Control System 0.832 0.000 0.931

Sustainability Information System 0.755 0.000 0.815

Internal Pressure 0.614 0.000 0.724

External Pressure 0.521 0.115 0.480

Sustainability Disclosure

ISO 14001 Certification

KMO = Kaiser-Meyer-Olkin measure

BTS = Barlett's test of sphericity

CA = Cronbach Alpha

23 3.4 Data analysis

For the data analysis, the software package IBM SPSS statistics 22 was used. To see whether the different independent variables influences the dependent variable, a standard multiple regression analysis was used. A multiple regression can be used to see how well a set of variables is able to predict a particular outcome, which variable in a set of variables is the best predictor of an outcome and whether a particular predictor variable is still able to predict an outcome when the effects of another variable are controlled for (Pallant, 2011). Multiple regression is based on correlation, but also allows a more sophisticated exploration of the interrelationship among a set of variables (Pallant, 2011). There were some missing variables in the collected data. In the tests the missing values were excluded pairwise.

3.5 Controllability, validity and reliability

Controllability, validity and reliability are the most important research-oriented quality criteria, because they provide the basis for inter-subjective agreement on research results (van Aken et al., 2012). Those criteria are used to manage the quality of this research.

Controllability is a prerequisite for the evaluation of validity and reliability. The detailed description of the study enables others to replicate it and check whether they get the same outcomes. This detailed description includes the way in which data is collected, how respondents are selected, which questions where used in the survey and the interview, how the data is analyzed etc. (Van Aken et al., 2012). Also the results are presented as precisely as possible to increase the controllability of the research.

The results of a study are reliable when they are independent of the particular characteristics of that study, and thereby can be replicated in other studies. There are four different potential sources of bias;

the researcher, the instrument, the respondent and the situation. The results of a research should be independent of the researcher who conducted the study, the respondents, the instrument used and the situation in which the research was carried out (Van Aken et al., 2012). To increase the reliability of the measurement, the number of respondents should be as high as possible. Therefore we included 28 different companies, which is appropriate for this time scale. Other ways used to increase reliability related to the researcher is using multiple researchers and standardization of data collection, analysis and interpretation. That is why the interviews were conducted by four different researchers who followed an interview protocol.

Quantitative research was combined with qualitative analyses, such that the qualitative results could work as an explanation of the relations found in the quantitative analyses.

The questions in the survey are as much as possible used from of inspired by previously published measurements. Thereby the change of a higher Cronbach’s Alpha is increased (Van Aken et al., 2012).

In this research we make use of a convenience sample. Convenience sampling is the selection of a

sample of participants from a population based on how convenient and readily available that group of

24

participants is. It is a type of nonprobability sampling that focuses on a sample that is easy to access and readily available (Salkind, 2010). Convenience samples may be biased because individuals who choose to participate in a study may not fully represent the population from which the sample has been drawn (Sousa, Zauszniewski & Musil, 2004). Results from those studies might not be very generalizable to other settings. Although convenience samples are not scientific samples, they do on occasion have value to researchers who recognize their severe limitation. In this case it allows some quick exploration of a hypothesis that may eventually be tested using some form of probability sampling (Lavrakas, 2008).

To increase the reliability related to the circumstances of the research, the interview will be held on different times of the day, in a one-on-one conversation between the interviewee and the interviewer.

Also it is explained to the interviewee that the results will be handled with care and as well as the interviewee as the company will stay anonymous in the research.

The validity of a research refers to the relation between the way it has been generated and the research results or conclusion. There are three different types of validity; construct-, internal-, and external validity (Van Aken et al., 2012). Construct validity is the extent to which an instrument measures what it is intended to measure, and thus refers to the quality of the operationalization of the concepts (Van Aken et al., 2012). Therefore we used existing measurements, to make sure that the concepts are covered completely and that the measurement has no components that do not fit the meaning of the concept.

The results of a study are internally valid when conclusions about relationships are justified and complete (Van Aken, 2012). Therefore we try to interpret the results at different ways, and find out which one is the most plausible in the research, this reduces the change that important causes of relations are overlooked.

The external validity of a research refers to the generalizability or transfer of research results and

conclusions to other organizations and situations (Van Aken, 2012). To increase the external validity,

as much companies as possible are used, fitted in the scope of the research.

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4 RESULTS

In this section, the outcomes of the analyses are reported. First the descriptive statistics are given, followed by a correlation matrix and the outcomes of the multiple regression and trimmed multiple regressions.

4.2 Descriptive statistics

Table 8 presents descriptive statistics for each variable. For each variable the theoretical range, minimum, maximum, mean and standard deviation are presented. The sample includes 28 managers of companies in the Netherlands and Germany. The mean number of employees is 16.161. Half of the companies were ISO 14001 certified. As can be adopted from the table, the SIS is used more than the FSMCS and the ISMCS.

Table 9 presents the correlation matrix of the dependent and the independent variables. These bivariate correlations show how each variable on its own relates to other variables. The variables SIS, FMSCS and ISMCS have a quit high correlation with each other. This is not surprising since those are related concepts, and those systems are based on each other. However, independent variables should not correlate too high with each other, and their value should not exceed 0.7. This is not the case for the bivariate analyses.

It is also checked if the independent variables show at least some relationship with the dependent variable (PSP), with a minimum value of 0.3. This is the case for SIS, FSMCS, ISMCS, SDIS and ISO. Only IPRES is does not have a correlation higher than 0.3 with PSP. There are four variables which correlate significantly with PSP, those are FSMCS, ISMCS, SDIS and ISO. This means that if a company scores higher on one of those variables, they will probably also score higher on PSP.

All the tolerance values are above the minimum of 0.1, and the variance inflation factors are below 10,

which indicates the absence of multicollinearity. Multicollinearity can be defined as the existence of

significantly related columns in the design in the correlation matrix. A multiple linear regression has

some important assumptions for the applicability of estimation models, one of these assumptions is the

lack of multicollinearity in the explanatory variables (Sinan & Alkan, 2015). The lack of

multicollinearity in this research means that a multiple regression can be performed with those

variables.

26 Table 8

Descriptive statistics

Variable Theoretical range Min Max Mean StdDev

1 Perceived sustainability performance (PSP) 1.00-7.00 1.38 5.94 4.6875 1.16150 2 Formal sustainability management control

system (FSMCS) 1.00-7.00 2.25 6.25 4.0324 1.12371

3 Informal sustainability management control

system (ISMCS) 1.00-7.00 1.63 7.00 4.2917 1.50440

4 Sustainability information system (SIS) 1.00-7.00 2.00 7.00 4.6852 1.31301 5 Internal pressure (IPRES) 1.00-7.00 1.00 7.00 3.3833 1.141042

6 Sustainability disclosure (SDIS) 0-7 0 7 4.59 2.062

Variable Yes No

7 ISO 14001 certification (ISO) 14 14

Table 9

Correlation Matrix

PSP SIS FSMCS ISMCS IPRES SDIS ISO

PSP .

SIS 0.347 .

FSMCS 0.506

0.682

.

ISMCS 0.665

0.643

0.697

.

IPRES 0.059 -0.002 -0.001 0.174 .

SDIS 0.446

0.334

0.448

0.232 -0.342 .

ISO 0.532

0.422

0.356

0.444

0.181 0.392

.

a

Correlation is significant at 1%

b

Correlation is significant at 5%

4.3 Multiple Regression

To test the hypotheses in the conceptual model, a standard multiple regression was performed with all the independent variables and PSP as dependent variable. The results of this regression are reported in table 10.

The R Square tells how much of the variance in de dependent variable is explained by the model. The value of R Square in this model is 0.596. Since the sample is small, the Adjusted R Square of 0.422 should be used. This means that the model explains 42.2% of the perceived sustainable performance, which is quite a respectable result. The statistical significance of the model is 0.027 (p<0.10), which indicates that the model is significant.

By evaluating each of the independent variables, it is known which of the variables included in the

model contributed to the prediction of the dependent variable. The largest value for Beta in table 11 is

0.658 for ISMCS. This means that the use of the ISMCS makes the strongest unique contribution to

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explaining PSP, when the variance explained by all other variables is controlled for. By looking at the significance of the variables, it can be seen which variable is making a statistically significant unique distribution to the equation. If the Sig. value is less than 0.10 it is making a significant unique contribution to the prediction of PSP. Consistent with H2, it is found that the use of the ISMCS has a significant effect on the PSP (Beta 0.508; Sign 0.037). The other tested hypotheses do have an effect on the PSP, but those relationships are not significant. However, in the theoretical framework it is stated that the other variables should also have a relationship with PSP. To find those relationships, trimmed analyses were performed.

Table 10

Model Evaluation

R Square Adjusted R Square Statistical Significance ANOVA

0.608 0.440 0.022

Table 11

Results of multiple regression analysis on PSP

Coefficient S.E. t-Statistics Significance

Standardized Beta (two-tailed)

SIS -0.301 0.219 -1.216 0.244

FSMCS 0.042 0.287 0.150 0.883

ISMCS 0.658 0.202 2.509 0.025

IPRES -0.005 0.161 -0.026 0.980

SDIS 0.278 0.125 1.249 0.232

ISO 0.244 0.482 1.155 0.268

4.4 Trimmed analyses

Since only one of the variables was significant in the conceptual model, a trimmed analysis was performed to see whether there are more significant variables when removing one of them. Multiple regression analyses were performed, each time eliminating one independent variable. Only the results where another variable became significant will be provided here, those are the regressions without ISO and without SDIS. The reason that only those analyses show an extra significant variable, lies in the term of Beta; it measures the strength of the unique contribution of the independent variable on the dependent variable. Since ISO certification is a part of SDIS, the unique contribution of both variables is reduced when the multiple regression is performed with both variables.

Multiple regression without ISO

The first trimmed analysis performed was with the independent variables, excluding ISO, and PSP as

the dependent variable. This model is significant at the 5% level (table 12). In this trimmed analysis in

which a multiple regression is performed (table 13), the relationship between ISMCS becomes even

more stronger and more significant than in the previous analysis. In addition of that result, also another

variable became significant with the trimmed analysis; SDIS (Beta 0.216, sig 0.082). The ISMCS