The trade-off between social, environmental and financial performance
objectives of corporate sustainability: which one is the winner?
By:
Ania T. Renkema S1897799
a.t.renkema@student.rug.nl
A thesis submitted in fulfillment of the requirements for the degree of MSc Business Administration: Organizational & Management Control
University of Groningen, Groningen, the Netherlands
Abstract
The implementation of corporate sustainability within businesses introduces social and
environmental performance objectives next to existing financial objectives. However, often the
social and environmental objectives are seen as conflicting with financial objectives. This study
examines the relationship between social, environmental and financial performance objectives
as a trade-off to deal with tensions. Using a mixed methods approach, this study uses survey
data from twenty-eight Business Unit managers and complementary interview data from 7
Business Unit managers. First, a structural equation model shows that social and
environmental performance is negatively associated with financial performance, implying a
trade-off to exist. Second, qualitative data analysis shows that financial performance objectives
are prevalent in this trade-off relationship. The implication is that social and environmental
performance generally requires financial and human resources, which in turn, reduces
financial performance. Since financial performance is prevalent in the trade-off it is questioned
with which motives the social and environmental pillar of corporate sustainability are pursued.
Keywords: Corporate sustainability, trade-off, social performance, environmental performance, financial
performance.
Supervisor: Hilco J. van Elten Co-assessor: Berend van der Kolk
2
INTRODUCTION
Nowadays, ‘sustainability’ is a concept we cannot live without anymore. Communities, governments, countries and individuals seem to increasingly share the idea that the resources on earth are finite and should therefore be sustained for future generations (Batty, 2006). Consequently, businesses also show their concern in sustaining social and environmental aspects next to their financial objectives in their adoption of corporate sustainability (Hahn et al., 2010). However, incorporation of these new abstract performance objectives next to existing financial objectives caused fragmentation in literature of how these performance objectives interact in practice (Endrikat et al., 2014; Van der Byl & Slawinsky, 2015).
A rich body of literature explores the relationship between corporate sustainability and organizational performance without one conclusive answer (Margolis & Walsh, 2003; Van der Byl & Slawinsky, 2015). Contemporary research shows that this topic is still very relevant today (Bingham et al., 2011; Perrini et al., 2011; Baird et al., 2012; Barnett & Solomon, 2012; Van der Byl & Slawinsky, 2015). This leaves the current understanding of how these performance dimensions interact in practice largely fragmented. Three prominent perspectives for approaching this relationship are; the win-win perspective, paradox perspective and trade-off perspective (Van der Byl & Slawinski, 2015).
Traditionally, the coexistence of social, environmental and financial performance dimensions was seen through the lens of the win-win perspective where only contributions to social and environmental performance would be made that lead to a harmonic positive influence on financial performance (Van der Byl & Slawinski, 2015). However, this interaction was empirically refused by Margolis & Elfenbein (2008), who conducted an analysis on this relationship described in literature published over a time span of thirty-five years. Subsequently, it has also been criticized for turning a blind eye to tensions that are imposed on organizations by implementing corporate sustainability (Van der Byl & Slawinsky, 2015).
3 (Ramirez, 2012) to balance its social and environmental performance objectives equally to the extent to which it meets financial performance objectives as suggested in the paradox perspective.
A much more promising lens, according to this research, is the trade-off perspective in order to explain the coexistence of social, environmental and financial performance objectives. Because according to several researchers the relationship between these outcomes may quite often be characterized by a trade-off (Hahn et al., 2010; Kaptein & Wempe, 2001; Margolis & Elfenbein, 2008; Margolis & Walsh, 2003; Walley & Whitehead, 1994), as researchers acknowledge that in practice it is hard to address the three dimensions simultaneously (Elkington, 2004; Gray, 2006; Carter & Rogers, 2007; Nidumolu et al., 2009).The trade-off perspective assumes that when one is to invest in a responsible practice (e.g. social or environmental performance of the firm) it consequently leads to the disability of investing in other responsible practices (e.g. financial performance) (Cavaco & Crifo, 2014). The main argumentation of this research is that an increase in social and environmental performance requires a financial sacrifice, thus a decrease in financial performance. This explains the substitutability that needs to be accepted for both performance objectives to coexist. Hence, it is argued here that a trade-off is characterized by the negative influence social and environmental performance exercises on financial performance.
The purpose of this study is to analyze financial and social/environmental performance simultaneously, examining the influence of social and environmental performance on financial performance in Dutch and German companies. Consequently, this research sets out to examine the following two main research questions:
1. Is there a trade-off experienced by BU managers in the attempt to balance social, environmental and financial performance objectives belonging to corporate sustainability? 2. Which of the performance dimensions prevails in the trade-off: the financial or social and
environmental performance objectives?
4 mixed methods study is used combining a quantitative and qualitative component. More specifically, a quantitative study is performed first, followed by a qualitative study. The main reason for a quantitative study derives from the fact that evidence in literature on the relationship between social, environmental and financial performance is available, but is very fragmented. The motivation for a subsequent qualitative study is the fact that literature remains inconclusive on which of the two performance dimensions is given priority in the trade-off.
In sum, literature has largely examined the coexistence of social, environmental and financial performance through the win-win perspective. After this has been refused to hold in practice (Margolis & Elfenbein, 2008) researchers searched for alternative lenses in order to explain the interaction, which increased fragmentation concerning this subject in literature. This research investigates, with a mixed methods research, how tensions belonging to corporate sustainability are addressed and prioritized in practice using survey and interview data from medium to large sized companies in the Netherlands and Germany.
The remainder of this paper is organized as follows. The following section defines background information on the research questions for this study. The methodology section describes the method of sample selection, data collection, and data analysis for both the quantitative and qualitative component of this research. Finally, there is a description of the results of analyses followed by the discussion and conclusion for this research.
5
BACKGROUND LITERATURE
First, background information on the concept of corporate sustainability is presented in order to clarify the theoretical foundation of this research. Second, background information on the three prominent perspectives explaining the relationship between social, environmental and financial performance is used to formulate a hypothesis for the first research question of this study. Implying that managers make a trade-off between social/environmental performance and financial performance in practice. Third, examples from literature supporting that either social and environmental
performance or financial performance is prevalent in a trade-off is presented. This served as a
foundation for the qualitative analysis for the second research question of this study. The relationship that is being studied is depicted in figure 1.
Figure 1
Conceptual model
Corporate Sustainability
Corporate sustainability refers to the integration of sustainability efforts of companies as a strategy (Hahn et al., 2010). However, one generally accepted definition for the concept of corporate sustainability is hard to be found in both practice and literature (White, 2013). The below displayed excerpt from White’s article ‘Sustainability: I know when I see it’ from 2013 acknowledges the confusion that exists in defining sustainability.
‘’ This same observation might apply to sustainability — it is hard to define, but many of us believe we “know it when we see it.” 1
In a speech to the Association for the Advancement of Sustainability in Higher Education (AASHE), Peter Senge, visionary thinker and author of The Fifth Discipline, bet that there were about 2000 definitions [of sustainability] in the room, and then went on to assert that sustainability was about “…what constitutes a healthy community in the future” ( Senge, 2008).’’
- White (2013, p. 213) `
Social and Environmental
6 Even though, it is hard to define corporate sustainability in one all explaining definition, it is agreed upon in literature that the definition includes social, environmental and financial objectives in most cases (White, 2013). Corporate sustainability is also referred to as the ‘triple bottom line’ by several researchers, representing the inclusion of the three pillars; social (people), environmental (planet), and financial (profit) objectives that are ‘the bottom line’ of sustainability (Elkington, 2004; Moldan et al., 2012; Kondoh et al., 2014). Since defining corporate sustainability includes these three pillars in almost all cases, this research follows the definition of Elkington (2004) for the triple bottom. The triple bottom line advocates that the long-term success of a business and its environment depends on the emphasis placed on all three ‘pillars’ of sustainability, namely; the economic, environmental and social, rather than solely focusing on short-term economic performance (Elkington, 2004).
The economic pillar of corporate sustainability encompasses the maintenance of sufficient economic resources for the company to survive financially (Moldan et al., 2012). Economic prosperity contributes positively to poverty, employment and quality of life for the society and should therefore be sustained (Ramirez, 2012). However, one should take great care to what extent and with which consequences economic development is pursued. The economic crisis of 2008 put the concept of economic development under close scrutiny, as it was the most important goal over the last five decades to maintain economic growth (Moldan et al., 2012). The crisis sparked the light for the concept of sustainable economic development (Moldan et al., 2012). It made individuals and political authorities question whether economic sustainability means ‘economic prosperity without growth’ (Jackson, 2009). It is increasingly more recognized that the connection of economic sustainable development needs to be put into perspective with the environmental and social pillars of corporate sustainability (Moldan et al., 2012).
The social pillar of corporate sustainability is defined as a threefold of concepts (Vallence et al., 2011). It consists of (a) sustainable development addressing the basic social needs and creation of social capital, (b) the bridging of social sustainable development goals with financial and environmental performance goals and changing behaviour accordingly, and (c) the maintenance of the social sustainability development in form of social norms, values or cultures (Vallence et al., 2011).
7 designed for improvement in the environmental dimension, such as the Environmental Sustainability Program of the US National Science Foundation in 2009 and the Millennium Ecosystem Assessment Project in 2005 (Moldan et al., 2012).
As can be seen from the argumentation above, the three pillars of corporate sustainability are interrelated and impact each other by various means (Elkinton, 2004). However, the interaction among the three dimensions remains unclear (Elkington, 2004).
The interaction between social, environmental and financial performance: the trade-off
This research combines the two pillars of social and environmental performance together in one construct. It opposes this construct to financial performance. As mentioned in the introduction, corporate sustainability required companies to incorporate social and environmental performance objectives next to their existing financial objectives. And the social and environmental performance objective are considered to be more abstract than financial performance (Endrikat et al., 2015). According to Hahn et al., (2015) it can be explained by two characteristics that make the performance dimensions different from financial performance. First, social and environmental performance requires different indicators for the measurement of performance (Hahn et al., 2015). It is possible to measure social and environmental performance dimensions in monetary terms, but researchers argue it is more suitable to measure the performance in its own measures, as measurement in monetary terms would eventually contribute solely to the performance of the financial dimension (Hahn et al. 2015). There is still a significant lack of agreement and operationalization on social and environmental performance in literature (Henri & Journeault, 2010). Second, the social and environmental performance dimensions have a long-term orientation whereas the financial dimension operates under a short-term orientation (Hahn et al., 2015). Financial performance measures can often be immediately evaluated, as performance is observable within a short period of time. Results of social and environmental performance on the other hand is not observable within a short-time span. It is even questionable if the sustainability efforts of an individual company are ever to be observed directly in the increased overall well-being of the social and environmental aspects of life (Batty, 2006).
8 (2010) name two major limitations for taking the win-win perspective as a lens in explaining the interaction between the performance dimensions of corporate sustainability. Therefore make the win-win perspective undesirable for further research. First, Hahn et al. (2010) argue that only focusing on consensus will result in taking the lowest common denominator strategy for sustainable development. This means that conflict is avoided and ambition to truly develop business activities sustainably is not large enough. Second, Hahn et al. (2010) argue that the win-win perspective fails to grasp the corporate contributions made for sustainable development, because it is purely restricted to win-win situations and sustainability is perceived as a means for profit maximization rather than an end in itself.
Moreover, the causality assumed by researchers in the win-win perspective is questionable. The causality explains that corporate sustainability leads to good relationships with a larger stakeholder group that in turn leads to increased financial performance (Perrini et al., 2011; Donaldson & Preston, 1995) is also questionable. Margolis & Elfenbein (2008) found that good corporate sustainability performance does not destroy shareholder value, whereas bad performance does. This assumed relationship is based on logical fallacy (Norreklit, 2000). The finding that exceptionally bad corporate sustainable performance leads to detriment of stakeholder value, which in turn leads to decreased financial performance does not allow researchers to assume the opposite is true (Norreklit, 2000). So, the profitability derived from stakeholder satisfaction when engaging in corporate sustainability is neither a necessary outcome nor a probable one.
A more contemporary perspective for explaining the interaction between social, environmental and financial performance objectives is the paradox perspective. Van der Byl & Slawinsky (2015), promoters of the paradox perspective in explaining the interaction state:
‘’The paradox approach, with its focus on contradictory, yet interrelated tensions and complexity thinking, offers a more rigorous approach to understand corporate sustainability tensions than the other approaches’’ (p.66)
9 A third perspective for the interaction between the performance dimensions of corporate sustainability is the trade-off perspective. The trade-off perspective views the interaction between both performance dimensions as a substitutable decision, which advocates that performance in one dimension is only feasible by compromising the other (Hahn et al. 2010).
A recent study by Epstein & Buhovac (2014) provides a proposition that managing corporate sustainability might not be as paradoxical as we are made to believe. Epstein & Buhovac (2014) provided a relevant explanation of how the trade-off perspective may work in corporate sustainability. In their recent research where ‘best practices’ in corporate sustainability were investigated they concluded that companies view corporate sustainability as a trade-off. In 2003 Margolis & Walsch already called for papers investigating the trade-offs in corporate sustainability as a response to the win-win perspective of which its influence as the most promising explanation for the interaction significantly declined in that period. Eccles & Serafeim (2013) argued recently that organizations often launch a sustainability program with the hope that they will receive a financial reward for ‘doing the right thing’, which is often not aligned with companies their strategy and daily operations. However, according to these authors one needs to understand the trade-offs that occur when putting effort in sustainable practices, from which a common understanding is largely lacking (Eccles & Serafeim, 2013). Subsequently, Lester et al. (2013) state that managing corporate sustainability could be challenging because the efforts undertaken in one performance dimension might divert resources from other alternatives that could deliver performance in another performance dimension. Hahn et al (2010) even argue that trade-offs and conflicts between the economic, environmental and social dimension of corporate sustainability might represent the rule rather than exception (p.218).
Building on the background literature, this research assumes a trade-off in explaining the relationship between social, environmental and financial performance. Therefore the following research question was proposed:
1. Is there a trade-off experienced by BU managers in the attempt to balance social, environmental and financial performance objectives belonging to corporate sustainability?
10 necessarily increase the profitability of the company (Friedman, 1970). Some evidence in literature exists for this negative relationship. Bird et al. (2007) found that while complying with sustainability regulation is necessary and corporate resources need to be spent on achieving this, commitment and resources spent beyond the compliance objective are not necessarily rewarded. Also, Fisher-Vanden & Thorburn (2011) reported abnormal negative stock returns for companies announcing voluntary membership of the EPA Climate Leaders program. Margolis & Elfenbein (2008) argued that companies have no reason to not engage in corporate sustainability activities, but should not expect financial rewards. They state that engaging in such activities require human and financial resources, but if the company its goals is to make a return on this investment there are alternative ways of allocating the respective financial resources that have a higher payoff (Margolis & Elfenbein, 2008). They conclude with ‘doing good may be its own reward’ (Margolis & Elfenbein, 2008, p. 20). In sum, companies can expect to incur costs of human and financial resources for pursuing sustainability objectives. What companies cannot expect is to make a substantial return on this investment (Russo & Fouts, 1997; Al-Tuwaijri, 2004).
Consequently, a trade-off can be determined when social and environmental performance negatively influences financial performance. This hypothesis was first introduced by Preston & O’Bannon (1997), however they failed to find significant empirical evidence for this relationship. This research aims to empirically test whether this relationship holds in a contemporary setting as proposed by Epstein & Buhovac (2014). Therefore it is hypothesized:
H1: Financial performance is negatively influenced by social and environmental performance.
Which performance dimension wins the trade-off?
11 might considerately place emphasis on the achievement of social and environmental performance at the cost of financial performance.
However, also the proposition that financial performance is seen as superior over social/environmental performance is supported by several authors. In neoclassical economic theory, the main aim of the manager is to maximize the wealth of shareholders (Friedman, 1970). This means that when social/economic performance comes at the cost of financial performance, the manager is not acting in the best interest of the shareholder and therefore violates his/her trust. Also, when looking to companies in practice, it is frequently obvious that financial performance is prevalent. In 2010, Foxconn (Apple’s Manufacturer) faced harsh penalties when it went public how dangerous and inhumane the working conditions were in its manufacturing plants (Eccles & Serafeim, 2013). And also British Petroleum (BP) is still facing the financial consequences of its catastrophe at the Deepwater Horizon oil rig in the Gulf of Mexico, which was the consequence of unsustainable managerial decision making and negligent engineering (Eccles & Serafeim, 2013). Epstein & Buhovac (2014) also investigated the trade-off, which they name a win-lose situation. In their case study, Nike introduced the usage of environmentally friendly material as a ‘win’ for the environmental pillar that increases the costs of raw materials, which is a ‘loss’ for the financial pillar. However, through innovation Nike tries to reduce costs elsewhere, in this example in respect of reducing waste in the production process, which is a ‘win’ for the financial pillar (Epstein & Buhovac, 2014). In other words: eventually they implement only those sustainable strategies that lead to better financial performance. They are not willing to accept the financial loss as a consequence of achieving a more sustainable business practice, and therefore seek for methods to recover the loss incurred in the financial dimension.
As displayed in these examples, literature is still inconclusive regarding which performance
dimension is prioritized over the other in a trade-off situation. This research therefore aims to explore which performance dimension is prevalent in a trade-off by seeking an answer to the following research question:
12
METHODOLOGY
This research uses a ‘mixed methods approach’, which refers to the use of two or more methods in a study retrieving both qualitative and quantitative data (Teddlie & Tashakkori, 2009). This research approach was chosen based on the consideration that the research questions and purpose of the study could only be satisfied with a combination of quantitative and qualitative components (Teddlie & Tashakkori, 2009). The use of mixed methods has several important implications for this study. First, it contributed to triangulation, which compares the qualitative and quantitative data and promotes corroboration (Bryman, 2006). Second, it added to enhancement, which is described by Bryman (2006) as supplementating one set of findings by gathering further data. Specifically, the quantitative analysis served the purpose of empirically testing the trade-off relationship between two variables. Whereas the qualitative data served the purpose of both corroboration of the quantitative findings and providing a proposition for the inconclusive findings concerning the prevalence of one performance dimension in the trade-off relationship.
Quantitative study: methodology
Sample selection and data collection
The quantitative data was gathered by a survey research method that involved the administration of a written questionnaire. In order to ensure controllability, reliability and validity for the research it is important to undertake a standardized process for construction and conduction of the survey instrument (Aken et al., 2012). For the survey, existent relevant academic questionnaire instruments were used for the draft version of the instrument, which promotes unidimensionality (Abdullah, 2006). Circulation of the instrument within the research group, consisting of 4 researchers and an academic supervisor, led to some modifications and eventually the final questionnaire. Due to the usage of existent academic questionnaire items no pilot test was conducted, as the constructs were already tested in previous studies. Since multiple researchers were obtaining the data, a very clear and strict protocol was constructed for conducting the survey. All researchers were writing their research on one common subject. Reliability was ensured through the different characteristics of the respondents to which each researcher had to adhere when contacting the respondents. Moreover, a standardized survey was developed, which was conducted in a face-to-face situation with the respondents by the researchers.
13 over lower managers and business unit employees. Another important characteristic is that the BU manager is supervised by higher management within the organization. Non-probability sampling was used as a strategy the collection of respondents (Blumberg et al., 2005). A research group of 4 students relied on their network to collect respondents for the research that adhered to the required characteristics mentioned earlier. The non-probability sampling was also not restricted to specific industries, as it was not in the scope of the research.
Twenty-eight completed surveys were administered and collected for this study. These twenty-eight observations were all significant and relevant, as they complied with the previously stated standards. The observations were retrieved from a variety of industries. The sample consisted of BU managers that on average had 954 employees who directly or indirectly reported to them, and were part of a larger organization that consisted of a total of 16,162 employees on average. The respondents indicated to have worked in their current position for approximately 5.8 years and for the organization a total of 15.8 years on average. Approximately fifty-four percent of the respondents indicated to have full profit and loss responsibility, whereas the remaining fourty-six percent indicated to have a not-for-profit/budget responsibility (32.1%) and cost responsibility (14.3%). The descriptive statistics of the sample can be found in table 1.
Table 1
Sample statistics
A: Sample statistics
N Mean Minimum Maximum Standard Deviation
BU employees 28 953.61 1 10,000 2,245.66
Organization employees 28 16,161.46 120 100,000 27,266.59
Years in current function 28 5.84 0 18 4.4
Years working for current organization 28 15.77 2 35 10.18
B: Distribution of industries
Industry Number of
respondents (%)
Agriculture, forestry, and fishing
1 (3.6%)
Construction 3 (10.7%)
Finance, insurance and real estate 2 (7.1%) Manufacturing 3 (10.7%) Non-classifiable establishments 6 (21.4%) Retail trade 2 (7.1%) Services 4 (14.3%) Transportation,
communications, electric, gas, and sanitary services
5 (17.9%)
Wholesale trade 2 (7.1%)
14
C: Primary area of responsibility
Area of responsibility Number of respondents (%) Cost responsibility 4 (14.3%)
Full profit and loss responsibility 15 (53.6%)
Not-for-profits / budget responsibility
9 (32.1%)
Total 28 (100%)
Definition and measurement of constructs
The construct social and environmental performance was measured using an instrument adapted from Kruis (2008, Q.84, Appendix B) containing eight items ranging on a seven-point Likert scale (1= very poor, 7= very good). Kruis (2008) measured BU performance with her instrument on the following aspects: the attainment of goals, customer and employee satisfaction, problem-solving ability of the BU and compliance with guidelines. For this study, the instrument items were slightly changed in order to specifically reflect the BU’s performance on social and environmental dimensions of performance instead of general BU performance. The modifications of the initial instrument of Kruis (2008) was therefore made applicable and relevant for the social and environmental performance construct.
The construct financial performance was measured using an instrument adapted from Choi & Yu (2014, Q4, p.364) containing five items ranging on a seven-point Likert scale (1= very poor, 7= very good). Choi & Yu (2014) aimed to measure the organizational performance by incorporating the concept of the Balanced Scorecard within their instrument. Financial performance was translated as the extent to which profitability, cost saving and efficiency, market value and brand improvement objectives were achieved. This instrument originally adopted a five-point Likert scale, but for this research it was decided to transform it into a seven-point Likert scale in order to achieve consistency in the measurement of constructs for this study.
In order to verify validity two assessments were performed; the convergent and discriminant validity (Wong, 2013). To verify convergent validity, the Average Variance Extracted (AVE) was examined and a Confirmatory Factor Analysis (CFA) was performed for the two first-order constructs. In order for the constructs to reflect acceptable validity, the AVE should exceed 0.5 (Hair et al., 2007). For the CFA two elements were examined: the factor loadings and the significance of the factor loadings. The respective cut-off values that reflect acceptable validity are 0.5 for factor loadings and p <0.05 for significance (Rencher, 2002). Table 2 displays the CFA for the latent construct social and
environmental performance for both the initial and respecified model.
15 deletion of the respective item, the factor loading of item eight did not meet the criteria with a
decreased insignificant loading of 0.486. After respecification of the latent construct social and environmental performance all loadings were sufficient (loading > 0.5, p < 0.01) and additionally increased AVE from 0.508 to 0.610.
Table 2
Factor analysis latent construct: social and environmental performance
Items Initial model Respecified model Standardized loadings Standardized loadings
1. Achievement of BU goals concerning sustainability. 0.812** 0.791**
2. Cooperation with other BU’s on sustainability topics 0.654** 0.650**
3. Satisfaction of internal customers of your BU concerning the sustainability of your products/services.
0.799** 0.904**
4. Satisfaction of external customers of your BU concerning the sustainability of your products/services.
0.459 -
5. BU employee satisfaction with the sustainability of your products/services.
0.841** 0.840**
6. Compliance with standards and behavior guidelines concerning sustainability.
0.749** 0.706**
7. Problem-solving ability of the BU in achieving greater sustainability.
0.771** 0.769**
8. Overall BU sustainability performance. 0.513* -
AVE 0.508 0.610
* p <0.05, ** p < 0.01
Table 3 displays the CFA for the latent construct financial performance for both the initial and respecified model. Also this model was subject to respecification, as the AVE was not sufficient. Item 4 was deleted as the factor loading loaded in the opposite direction and did not meet Rencher’s (2002) criteria. After this respecification of the latent construct financial performance all loadings were sufficient (loading > 0.5, p < 0.05) and additionally increased AVE from 0.205 to 0.527.
Table 3
Factor analysis latent construct: financial performance
Item Initial model Respecified model Standardized loadings Standardized loadings
1. My BU has a competitive advantage in its sales and profit growth.
0.640* 0.868**
2. My BU has a competitive advantage in its market value.
0.530 0.911**
3. My BU has a competitive advantage in cost saving and efficiency.
0.547* 0.510*
4. My BU has a competitive advantage in its brand improvement.
-0.416 -
5. My BU’s overall financial performance. 0.103 0.515*
AVE 0.205 0.527
16 Additionally, multicollinearity was also not an issue for both constructs (VIF values < 5 for a
tolerance of 0.2, Hair et al., 2007).
Next, discriminant validity was examined according to the Fornell & Larcker (1981) criterion. In order to support discriminant validity, the AVE for each individual construct should exceed the squared correlation between the latent constructs (Fornell & Larcker, 1981). As can be derived from table 4, this is indeed reinforced and therefore discriminant validity has been established.
Table 4
Discriminant validity according to Fornell & Larcker criterion (1981)
Social and Environmental Performance
Financial Performance Social and Environmental Performance 0.610
Financial Performance
0.125 0.527
Finally, to assess the reliability of each construct, the Cronbach’s alpha and composite reliability were examined. Traditionally, Cronbach’s alpha is used to assess internal consistency reliability in research (Wong, 2013). However, the Cronbach’s alpha tends to provide a very conservative measure in PLS-SEM, therefore it is suggested to assess it additionally with composite reliability (Hair et al., 2012; Bagozzi & Yi, 1998). Bagozzi & Yi (1988) and Nunnally (1967) suggest a cut-off point of 0.7 in order to reflect an acceptable level of internal consistency reliability for both measures. Table 5 reflects the reliability measures for both constructs and affirms that reliability of the respecified model is ensured. Especially the reliability of financial performance is increased by respecification
(composite reliability increased from 0.053 to 0.806).
Table 5
Reliability assessment: latent constructs
Items Social and
environmental performance (respecified) Financial performance (respecified) Composite reliability 0.816 0.806 Cronbach’s alpha 0.876 0.712 Data Analysis
PLS-17 SEM assesses the psychometric properties of the measurement model and estimates the parameters of the structural model (Al-Gahtani et al., 2007, p. 686). The measurement model has been assessed in the previous section: definition of measurement of constructs. The results of the structural model are reported in the next section. In order to ensure controllability of the analysis, a summary and
justification for the settings of the measurement model as well as the structural model is reported in appendix A. Moreover, it has to be mentioned that PLS-SEM lacks the goodness-of-fit measures, which is one of the major limitations this software poses to this research (Henseler et al., 2014).
Qualitative study: methodology
18
RESULTS
The result section is concerned with the evidence found from both quantitative and qualitative data analysis in order to answer the research questions. First, quantitative and qualitative evidence for the first research question is reported. Subsequently, qualitative evidence for the second research question is reported.
Is there a trade-off experienced by BU managers in the attempt to balance social, environmental and financial performance objectives belonging to corporate sustainability?
Figure 2 reports the results of the structural model. Additionally, Table 6 quantifies the results of the overall model in terms of path coefficients, the p-value and the proportion of variance (R²).
Figure 2
Results of the structural equation model
Table 6
Results of the structural equation model
Description of path Path coefficient P value R²
Social and Environmental Performance Financial Performance
-0.354 0.002** 0.126
Number of iterations: 51 , n = 28
19 Elaborating on this finding, qualitative data, gathered complementary to the survey, also supports the empirical evidence for the trade-off hypothesis. One very remarkable comment was made by one of the respondents:
‘’Initially I thought of sustainability as a win-win situation, where care for people and the
environment would generate more financial resources. But now I also see the other side of the coin, as generally costs exceed the benefits’’ (References: RC 5, 7, Appendix C).
This respondent also initially treated the relationship between performance dimensions as a win-win situation, where good corporate behaviour would lead to a good financial position. However, this respondent recognized that, while working for his organization, in most situations it cannot be a win-win and one needs to acknowledge the costs associated with ‘being sustainable’. The respondent added:
‘’ We would always have to go for sustainability initiatives in order to comply with them. In case it goes further than merely complying with laws and regulations, I cannot tell you with certainty whether financial resources would be made available to do so… However, when additional costs are to be incurred, the trade-off will always be considered.’’ (References: RC 22, 23, 27, Appendix C).
Additionally, he was especially concerned with the compliance requirements concerning sustainability imposed to the organization by the government, customers or certification. However, he also
acknowledged the financial costs associated with pursuing sustainability and was not certain whether social and environmental performance would be funded financially beyond the scope of compliance. Another respondents agreed on this:
‘’ I wish it was more driven to do the right thing, but currently it’s more compliance driven and driven by cost reductions’’ (Reference RD 6, Appendix C)
Illustrating that trade-offs for social and environmental objectives are generally accepted when it is imposed on the organization by law or regulation. This additionally shows that when social and environmental performance is not concerned with law and regulations, it is questionable whether the organization will accept the trade-off. This is consistent with the line of thought of Bird et al. (2007) who found that commitment and resources spent on sustainable initiatives are not necessarily rewarded. When asking the respondents whether social and environmental performance always required financial or human resources the following answers were given:
20 ‘’It will always cost human effort at least’’ (Reference: RB 18, Appendix C)
‘’ My gut feeling tells me yes. Sustainable materials always cost more and also retaining personnel for a longer period of time will increase costs. I cannot think of situations right now, where
sustainability does not require financial or human resources’’ (Reference RF 17, 18, 19, Appendix C)
The respondents indicated that efforts undertaken in social or environmental performance initiative are associated with increased costs (i.e. a decrease in financial performance) or increased human resource hours spent on pursuing those initiatives. Which confirms the proposition of Friedman (1970).
In sum, quantitative analysis confirmed that an increase in social and environmental performance is associated with a decrease in financial performance. Support from qualitative analysis showed that this decrease is generally associated with either an increase in direct costs spent on the sustainability initiative or indirect costs spent on human resources required for the initiative.
Which of the performance dimensions prevails in the trade-off: the financial or social and environmental performance objectives?
Confirmation of a trade-off in the attempt to balance social, environmental and financial performance, subsequently led to the exploration of which performance dimension is prevalent in this trade-off situation. All respondents indicated that financial performance measures are prevalent in the trade-off situation, which is in line with the theory of Friedman (1970). When respondents were asked whether financial performance objectives are more important than social and environmental performance, some researchers commented:
‘’Primary the financial objectives are seen as more important’’ (Reference: RC 18, Appendix C) ‘’Yes’’ (Reference RE 19, Appendix C)
‘’ But in the end the financial position of the company will override the objectives of sustainability. I also find the financial objectives superior to sustainability objectives.’’ (Reference: RF 13, 14, Appendix C)
21 an additional explanation that illustrated as to why financial performance is superior. One respondent stated:
‘’ The financial objectives are more important. Eventually we’re listed on the stock exchange and will therefore be judged on the achievement of our financial performance objectives.’’ (Reference: RA 16, 17, Appendix C)
Another respondent enforced this statement, by stating:
‘’ For companies that are listed on the stock exchange, the achievement of financial objectives will always override those of sustainability objectives… The company for which I work will always prioritize the financial objectives over the sustainability objectives.’’ (Reference: RB 10, 13, Appendix C)
As can be derived from these statement, corporations experience pressure from primary stakeholders (i.e. the shareholders in this example) to prioritize financial performance objectives, as they will be evaluated solely on financial performance. However, not only corporations are subject to evaluation based on financial performance, as indicated by the following respondents:
‘’We are a commercial organization so the achievement of financial objectives will always have priority…. But in most instances we primarily pursue those sustainability efforts that pay themselves back financially, because we’re a commercial organization’’ (Reference: RE 11, 18, Appendix C) Also the pressure that exists in commercial organizations to make a financial return on any investments was indicated by a respondent to be reason for prioritizing financial objectives over sustainability related objectives. This reinforces again that the pressure from primary stakeholder for financial objectives (e.g. higher management, employees, customers, suppliers) is presumably larger than the pressure from secondary stakeholders who are usually concerned with sustainable objectives (Hahn et al., 2015). This was reinforced by comments made by two other respondents:
22 the coin….There is no such thing as free lunch’’ (Reference: RE 8, 9, 10, 11, 12, 13, 14, 15, 16, 20, Appendix C)
‘’ The financial performance objectives always have priority to be honest. The margins under which we operate are very small and this requires us to be aware of the costs and return that are associated with certain business activities, because the continuity of the company is also at stake. And when this can be combined with sustainable initiatives it will always have the preference within the
organization. But the financial objectives are superior…. I am responsible for the existence of a financially healthy organization.’’ (Reference: RG 17, 18, 19, 20, 22, Appendix C)
23
CONCLUSION AND DISCUSSION
Ever since the growing awareness towards the finiteness of resources, individuals, countries but also businesses have been concerned with being more ‘sustainable’ (Batty, 2006). Businesses are adopting corporate sustainability strategies in great numbers, but what influence does the incorporation of social and environmental performance objectives have on existing financial performance objectives of companies? While researchers initially thought that this influence would be positive (i.e. the win-win perspective), strong evidence for such a link is not provided in literature (Margolis & Elfenbein, 2008). Alternative influences were proposed in literature (i.e. paradox and trade-off perspective) and increased the fragmentation and therefore confusion on this relationship (Van der Byl & Slawinsky, 2015). The objective of this study is to bring Preston & O’Bannons’s (1997) trade-off hypothesis to bear on the interaction between social, environmental and financial performance objectives and take the next step in understanding the relationship between social/environmental and financial
performance, by examining the trade-offs.
This study has several findings with important implications. First, this study empirically establishes that financial performance is negatively influenced by social and environmental performance, implying a trade-off can exist. Qualitative results confirmed this empirical finding and helped in explaining that managers usually associate the achievement of social and environmental performance with additional costs, therefore decreasing financial performance. Managers therefore indicated that pursuing social and environmental performance beyond the scope of compliance was not self-evident. Moreover, qualitative data aided in explaining which one of the performance dimensions is likely to prevail in a trade-off situation. When managers are faced with a trade-off resulting from tensions in corporate sustainability, it is likely that the financial performance dimension will prevail due to pressure from primary stakeholders for financial performance. Subsequently, an increase in financial performance is likely to guide decision-making in this trade-off.
24 dimensions, rather than a paradox. Additionally, evidence is reported for the prevalence of financial performance in a trade-off situation consistent with neoclassical theory on which the trade-off hypothesis proposed in literature builds (Friedman, 1970). Concluding, the results suggests that implementing corporate sustainability (a) imposes a trade-off between social, environmental and financial performance dimensions to managers, and (b) is characterized with a prevalence of financial performance objectives.
Limitations
This research used non-probability sampling of BU managers and collected data through the use of surveys and interviews. Therefore the findings of this study are subject to a number of limitations. The limitation of non-probability sampling is that research results are generally less generalizable (Pfeiffer, 2010), so it is encouraged to generalize these research findings with caution. Moreover, procedures were followed to minimize bias in survey and interview instrument. However, almost every study contains in some way or another a limited amount of unavoidable bias and noise
(Aragones et al., 1999), which is a fact that should also be taken into consideration when interpreting the findings of this research.
Future research
An interesting direction for future research is to perform a longitudinal study in testing the trade-off relationships between social, environmental and financial performance objectives belonging to corporate sustainability. According to Hahn et al. (2015) one of the distinct features of social and environmental performance is its long-term orientation. Since this study performed a cross-sectional study with a short-term orientation on this relationship, it could not be examined whether assessment of both performance dimensions on a long-term orientation would still suggest a trade-off situation. Moreover, research has been conducted in Western Europe, which is usually typified by an
25
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Appendix A: PLS-SEM algorithm and bootstrapping settings
Settings algorithm
Algorithm to handle missing values: pairwise deletion Data metric: Mean 0, Var 1
Initial weights: 1.0
Max. number of iterations: 10.000 Stop criterion: 5
Use Lohmoeller settings: No Weighting scheme: path
Settings bootstrapping:
Algorithm to handle missing values: pairwise deletion Parallel processing: yes
Test type: two tailed
Sign changes: individual changes Complexity: complete bootstrapping
Confidence interval methods: bias-corrected accelerated bootstrap Samples: 5000
Significance level 0.05
Justification:
For the treatment of missing values in the structural model it is recommended by Hair et al. (2007) to choose for ‘pairwise deletion’. This is a missing value treatment method that retains as much information as possible, as it deletes only those cases that exhibit missing values in each pair of variables (Hair et al., 2014). Moreover, a path weighting scheme should be applied, as it is applicable for the largest variety of PLS path model specifications and estimations (Hair et al., 2014). The maximum iterations configured in the algorithm was 1,000, as
recommended by the PLS-SEM software and the stop criterion was set at 10^5 as this value needs to be sufficiently small (Hair et al, 2014).
32
Appendix B: Interview questions
1. What is your perceived definition of sustainability?
2. What kind of sustainability initiatives are undertaken within your company? 3. Are you directly affected by these initiatives?
4. Do you think enough is done concerning sustainability within the organization?
5. What is according to you perceived as more important within the organization, the achievement of financial or sustainability objectives? Why?
6. What do you perceive as more important? Why?
33
Appendix C: Interview summaries
Respondent A (RA):
AR: What is your perceived definition of sustainability?
RA 1: That you have a long-term orientation on the consequences of your actions. RA 2: And doing this not only for yourself, but also for future generations.
AR: What kind of sustainability initiatives are undertaken within your company?
RA 3: In our corporate vision we for example stated that we show great concerns towards sustainability. RA 4: And we’re shifting from a ‘reputation management’ perspective towards sustainability to a more
proactive management style where employee participation is encouraged. AR: Are you directly affected by these initiatives?
RA 5: I am personally involved with a sustainability project as every manager within the organization receives
certain tasks regarding sustainability.
RA 6: This current project was delegated to me as a task from higher management.
AR: Do you think enough is done concerning sustainability within the organization?
RA 7: Yes, everything can always be improved just as with sustainability. RA 8: Is it enough?
RA 9: Yes I think we put enough effort currently in sustainability concerning the current market conditions. RA 10: I think we are one of the leaders of corporate sustainability together with a few other competitors, there
are a lot doing worse.
RA 11: We are now approaching a boundary where the return on sustainable investments are too long-term in
order to initiate something new.
RA 12: Considering this, a second consideration is to perform sustainable initiatives as a demand from
customers.
RA 13: But the current market conditions do not allow us to charge a premium for our products.
RA 14: However, when one of our largest customers is to introduce certain sustainability criteria to products
they want to purchase, we have to and will adhere to those.
RA 15: And that is the problem we currently encounter regarding sustainability.
AR: What is according to you perceived as more important within the organization, the achievement of financial or sustainability objectives? Why?
RA 16: The financial objectives are more important.
RA 17: Eventually we’re listed on the stock exchange and will therefore be judged on the achievement of our
financial performance objectives.
AR: What do you perceive as more important? Why?
RA 18: If it was a family company, sustainability.
RA 19: Because I think it will pay itself back on the long-term.
AR: Do you agree on the statement that sustainability efforts should always be rewarded financially? Why?
RA 20: I think this is even the case. RA 21: That’s my perception.
RA 22: This will happen either directly or indirectly.
RA 23: If we look at higher education personnel, they are mostly always interest in sustainability.
RA 24: By being sustainable you can for example attract a more talented workforce and that is also necessary
for satisfactory financial results of the company.
AR: Do you agree that sustainability efforts always require financial or human resources?
RA 25: Yes it requires financial or human resources, but it will also generate additional financial resources.
Respondent B (RB):
AR: What is your perceived definition of sustainability?
RB 1: Sustainability means to me the creation of systems in which every person is enabled to act sustainable if
you prefer to do so.
RB 2: What I mean with this is that the investment in sustainability is returned in order to create a ‘healthy
balance’.
AR: What kind of sustainability initiatives are undertaken within your company?
RB 3: We have an initiative called ‘energy saving in transportation’, which combines sustainability efforts with
34
RB 4: Because of energy efficient transportation you will both save costs and decrease the CO2 emission.
AR: Are you directly affected by these initiatives?
RB 5: For certain sustainability objectives we have KPI’s to which we have to adhere as managers. RB 6: We also have KPI’s for employees that are connected to reward systems within the company. RB 7: We reward those employees that show the best performance in these sustainability KPI’s.
AR: Do you think enough is done concerning sustainability within the organization?
RB 8: I wish regulation was designed concerning sustainability. RB 9: Because you always have to comply with regulation.
AR: What is according to you perceived as more important within the organization, the achievement of financial or sustainability objectives? Why?
RB 10: For companies that are listed on the stock exchange, the achievement of financial objectives will always
override those of sustainability objectives.
RB 11: In organizations in general, I think not all sustainable objectives will be ‘trashed’ immediately, but I
think that the efforts are always assessed in terms of costs and risks.
RB 12: Consequently, also the return on the sustainability investment will be assessed.
RB 13: The company for which I work will always prioritize the financial objectives over the sustainable
objectives.
AR: What do you perceive as more important? Why?
RB 14: I cannot pinpoint my finger on just one objective, I would rather say it would be a mix between both. RB 15: Especially the environmental concerns are important to me as it is necessary to maintain health and
welfare for the general public.
AR: Do you agree on the statement that sustainability efforts should always be rewarded financially? Why?
RB 16: I think from the company’s perspective that any investment in sustainability should pay itself back
financially.
RB 17: This also happened for example with the project we undertook mentioned before.
AR: Do you agree that sustainability efforts always require financial or human resources?
RB 18: It will always cost human effort at least.
Respondent C (RC):
AR: What is your perceived definition of sustainability?
RC 1: Sustainable entrepreneurship with the three pillars people, environmental and profit. RC 2: When I consider sustainability I mostly look to the two pillars of people and profit.
RC 3: Especially when I started working for this company, I saw that the environmental aspect was not
considered to the same extent and not crucial for the business of this company.
RC 4: So the image I hold concerning sustainability was to some extent shaped by this company.
RC 5: Initially I thought of sustainability as a win-win situation, where care for people and the environment
would generate more financial resources.
RC 6: But now I also see the other side of the coin, as generally costs exceed the benefits.
RC 7: And when your competitor does not care for sustainability, and your customer does not value it either, it
can jeopardize the continuity of your organization.
AR: What kind of sustainability initiatives are undertaken within your company?
RC 8: Yes, especially the people pillar benefits from our company.
RC 9: We are a very important source of employment for the Northern part of the Netherlands.
RC 10: While we do not conduct business here that much, and it would be more logical and attractive to move
our business to Rotterdam for example, we considerately choose to stay here.
RC 11:The environmental pillar is not very prominent without our business to be honest.
AR: Are you directly affected by these initiatives?
RC 12: Yes, as I mentioned before my perception of sustainability is shaped by the company’s activities and
concerns.
RC 13: And I will act according to their boundaries and vision when doing my work.
AR: Do you think enough is done concerning sustainability within the organization?
RC 14: If we look to the core business, the priorities are assigned elsewhere.
RC 15: And it’s not the case that we do not attach any importance to sustainability, it’s rather the vision of the
