BUYER-SUPPLIER RELATIONSHIPS:
EFFECTIVE SUSTAINABILITY RISK MANAGEMENT BY
USING FORMAL AND RELATIONAL GOVERNANCE
MECHANISMS
ELINE M. ENSING 1902660
e.m.ensing@student.rug.nl
MSc Accountancy & Controlling – track Controlling MSc Supply Chain Management
University of Groningen Faculty of Economics and Business
Nettelbosje 2
Groningen, The Netherlands
Supervisors: prof D.P. van Donk & prof J. van der Meer - Kooistra Monday, March 03, 2014
3 ABSTRACT
Firms still fail in properly monitoring sustainability in their supply chain; even though the risk exists that unsustainable supplier behavior will be projected in the form of adverse publicity to the buying firm (Carter & Jennings, 2004). From a transaction costs theory perspective we investigate how buying firms use formal and relational governance mechanisms to effectively manage sustainability risks. This is done by an explanatory survey study. The main findings of the paper are that the level of usage of relational governance mechanisms has a significant effect on the effectiveness of sustainability risk management. For the relationships between the level of usage of formal relationship and effectiveness of sustainability risk and the complementary relationship between formal and relational governance mechanisms no significant relationships were found.
Keywords: formal governance mechanisms, relational governance mechanisms, sustainability,
supply chain governance mechanisms, buyer-supplier relationships, risk management
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1. INTRODUCTION
In the last three decades, a range of scandals regarding bad labor conditions at suppliers´ sites came out, from which the Nike sweatshop scandal in the nineties is the most well-known. The “race to the bottom” among its suppliers had disastrous impact on Nike’s reputation and led to protests and boycotts. Twenty years later, an investigation of the International Textile Garment and Leather Workers’ Federation (ITGLWF) investigated 83 factories across Indonesia, Sri Lanka and The Philippines and still found “widespread violations and abuses of workers’ rights” (ITGLWF, 2012, p32). These factories supplied 60 well-known brands like Wal-Mart, Marks & Spencer, Tesco and Converse. Apparently, firms still fail in properly monitoring sustainability in their supply chain; even though the risk exists that unsustainable supplier behavior will be projected in the form of adverse publicity to the buying firm (Carter & Jennings, 2004). This risk is called sustainability risk, the likelihood of negative impacts on a firm’s public image, due to unsustainable supplier behavior. In order to mitigate the exposed sustainability risk, firms make use of formal contracts with sustainability requirements to ensure the sustainable performance of their supplier (Anderson & Dekker, 2005; Malhotra & Lumineau, 2011). However, since no contract is complete, scholars state that these contracts should be complemented by strong relationships between buyer and supplier (e.g. Dekker, Sakaguchi & Kawai, 2013; Holland, 1995; Gallear & Ghobadian, 2004; Wang & Wei, 2007). Therefore, we investigate how firms manage relationships with their suppliers in order to mitigate the risk related to unsustainable supplier performance.
Relationships between buyers and suppliers are managed by formal and relational governance mechanisms. Governance mechanisms are safeguards that firms use to control inter-firm exchange, minimize exposure to opportunism (Wathne & Heide, 2000), protect transaction cost investment, and to promote the continuance of relationships (Jap & Ganesan, 2000). Where formal governance mechanisms arrange the roles and responsibilities of both parties, specific procedures, penalties for noncompliance, and outputs to be delivered in formal contracts (Poppo & Zenger, 2002), relational governance mechanisms involve the direct interaction between the buyer and its suppliers in order to develop joint solutions. This interaction encompasses different activities such as providing training and education programs (Sancha, Gimenez & Sierra, 2013).
In different research fields (marketing, supply chain management, accounting and information management), governance mechanisms have been studied extensively (e.g. Cannon & Perrealt, 1999; Liker & Choi, 2005). A review of the literature on governance mechanisms to extend sustainability to suppliers shows that some studies have focused on the implementation of suppliers’ codes of conduct and assessment (e.g., Jiang, 2009; Krueger, 2008; Van Tulder, van Wijk & Kolk, 2009); others have reconsidered the underlying assessment and market governance mechanisms in the light of proposals for more extensive collaboration (e.g., Park-Poaps & Rees, 2010; Vachon & Klassen, 2006; Vurro, Rosso & Perrini, 2009), and a few have compared the effect of different mechanisms (Jiang, 2009; Klassen & Vachon, 2003; Lee & Klassen, 2008; Reuter, Foerstl, Hartmann & Blome, 2010). However, none of these authors investigated the relationship between governance mechanisms and effective sustainability risk management.
Literature to date does not show how governance mechanisms are used for sustainability risk management, while scholars found that governance mechanisms can as well be used as risk management strategy (; Engardio, 2001; Foerstl, Reuter, Hartmann & Blome, 2010; McGillivray, 2000). In addition, firms that are able to mitigate their sustainability risks will experience competitive advantages (Campbell, 2007; Hart, 1995; Russo & Fouts, 1997;). Gordon, Loeb and Tseng (2009) found that the management of risks has a positive effect on firm performance. It is therefore important to know how firms mitigate sustainability risks in order to be able to increase firm performance.
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While scholars state that firms cannot assure a sustainable supply chain without managing strong relationships with their suppliers, research to date does not explain how firms manage these relationships with their suppliers. In that sense, it is not clear how governance mechanisms are used to mitigate sustainability risks (Sancha et al., 2013). In addition, only a few articles have investigated the subject of sustainability risk (Christopher, Mena, Khan & Yurt, 2010). None of these articles focused on the mitigation of sustainability risks.
To fill the gaps in the existing literature, the research question that will be answered is: how do buying firms use governance mechanisms to mitigate supplier sustainability risks? In order to answer this question, we will do an explanatory survey research among Dutch manufacturers. The objective of this research is to provide insights into the topic of sustainability risk management and therefore an explanatory survey approach (Forza, 2002) was done in order to test four hypotheses. The unit of analysis is the relation between buyer and its first tier supplier. The remainder of this paper has the following structure; in the next section we will provide a literature review on sustainability risk and governance mechanisms to mitigate sustainability risk, followed by propositions concerning the relationships between different governance mechanisms and the exposed sustainability risk. Subsequently, we will elaborate on the employed methodology. Next, we will present the results of our investigation and discuss them. Finally, we will highlight the conclusions of this study and the managerial implications, as well as providing some recommendations for future research.
2. LITERATURE REVIEW
In this section, the theoretical foundation of this study will be described. Firstly, the concept of sustainability risk will be analyzed to get a proper overview of what it is. Secondly, we will elaborate on formal as well as relational governance mechanisms to get an overview of how they are used in the supply chain. Thirdly, we will elaborate further on these governance mechanisms to investigate how those mechanisms can be used in risk management. Subsequently, we will provide hypotheses and a research framework, based on the theoretical background.
2.1. Sustainability risk management
According to Christopher, Mena, Khan & Yurt (2010), sustainability risk refers to increasing vulnerability across the supply chain due to the negative impacts of (global) sourcing on economic, social and environmental performance. A negative impact can be found in the fact that unsustainable supplier behavior will be projected in the form of adverse publicity to the buying firm (Carter & Jennings, 2004). Having a reputation as a sustainable firm is important to safeguarding market confidence, reputation and public trust (Deloitte, 2013). Ocean Tomo’s 2010 Intangible Asset Market Value report suggests that only 20% of an S&P 500 company’s market value can be explained by its physical and financial assets. This is down from 83% in 1975. The remainder comprises intangible factors, such as intellectual capital, human capital, brand and reputation, and relationships with regulatory bodies, non-governmental organizations, customers, suppliers and other external stakeholders (COSO, 2013). Unfortunately, unsustainable supplier behavior can seriously undermine such intangible factors, exposing an organization to legal, regulatory, or reputational damage (Carter & Jennings, 2004). That is why experienced business leaders work to ensure that they have an effective approach to mitigating these risks in the form of sustainability risk management. This is especially important in an environment marked by intense scrutiny and rising enforcement (Deloitte, 2013).
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Risks within buyer supplier relationships, whether sustainability risks or not, are aligned with two ‘control problems’ identified in prior studies that originate from the transaction cost theory (TCT) context: appropriation concerns and coordination requirements (Dekker, 2004; Ding, Dekker & Groot, 2013; Gulati and Singh, 1998). According to TCT, key transaction characteristics that generate these risks or control problems include asset specificity, environmental uncertainty and transaction frequency (Williamson, 1996). TCT suggests that the presence of relationship-specific assets put the involved firms at risks, because the value of these assets would reduce outside the specific relationship. Due to self-interest, collaborating partners may take advantage of an incomplete contract to maximize their own benefits at the expense of the other partner, leading to greater concerns of appropriation. From the perspective of organization theory, coordination costs arise from task-related coordination needs and social integration that are necessary to combine resources and integrate activities to complete the task (White and Liu, 2005). Cooperating to complete joint tasks can be costly in terms of coordination, adjustment to each other's actions and the mechanisms required to smooth communication.
Prior research suggests that the selection of an appropriate supplier and the design of contracts are critical control choices to effectively mitigate appropriation concerns and facilitate coordination (Dekker, 2008). While not only selecting the right partner can decrease the likelihood that control problems occur (Ireland, Hitt & Vaidyanath, 2002), also appropriate contract design provides a basis for control such as through agreements on behaviors and results, and monitoring partners’ actions and performance. According to TCT, these control choices are expected to be aligned with the underlying transaction characteristics to effectively mitigate sustainability risk.
According to KPMG (2006), an effective and business-driven risk management approach is one that is focused on three objectives; risk prevention, risk detection and risk response. Risk prevention contains of the controls designed to reduce the risk of the occurrence of events that are not sustainable. Sustainability risks can be prevented by means of appropriate supplier selection, the design of formal contracts and investments training and education programs to suppliers (Dekker, 2008). Sustainability risks can be detected by using controls designed to discover events that are not sustainable, for example by third party audits, the evaluation of contracts, and questionnaires (Min & Galle, 1997). Based on the detected sustainability risks, firms can improve existing contracts with their suppliers, switch to other suppliers or invest in training and education programs to suppliers in order to protect against (future) sustainability risks (Lee & Klassen, 2008). The usage of risk prevention, risk detection and risk response simultaneously are found to increase the effectiveness of a buying firm’s sustainability risk management (Deloitte, 2013; Kleindorfer & Saad, 2009; Kliem, 2000).
The result of the literature review on sustainability risk is the fact that an effective sustainability risk management should include controls for risk prevention, risk detection and risk response. In addition, the selection of an appropriate supplier and the development of formal contracts are very important tools for effective sustainability risk management. In the next section, we will elaborate on formal and relational governance mechanisms.
2.2. Formal and relational governance mechanisms in supply chain management In the past three decades, different streams of research with different perspectives on inter-organizational relationships have analyzed governance mechanisms (Trienekens, 2012). In this research, we adopt a new institutional economics view with the Transaction Cost Theory (TCT). In TCT “frequency, specificity, uncertainty, bounded rationality and opportunistic behavior are central concepts, all crucial to understand the organization of governance” (Maher, 1997, p168). Another view used is the Resource Based View. RBV provides insights into the various ways that
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firms may design contracts to use and deploy resources critical to the creation or maintenance of competitive advantages (Mayer & Salomon, 2013).
Governance mechanisms in the supply chain, whether relational or formal, are used to reduce conflicts and stimulate cooperation between different parties (Wathne & Heide, 2004; Williamson, 1996). Where formal governance mechanisms arrange the roles and responsibilities of both parties, specific procedures, penalties for noncompliance, and outputs to be delivered in formal contracts (Poppo & Zenger, 2002), relational governance mechanisms involve the direct interaction between the buyer and its suppliers in order to develop joint solutions. This interaction encompasses different activities such as providing training and education programs (Sancha, Gimenez & Sierra, 2013). This relational governance perspective points out the potential importance of relational norms in supply chain relations (Lumineau & Henderson, 2012). Relational norms specify acceptable limits on behavior for both parties, and therefore serve as a general protective purpose against deviant behavior (Heide and John, 1992).
Literature on governance mechanisms has traditionally focused on formal governance mechanisms and are also called transactional governance mechanisms (Lumineau & Henderson, 2012). A large stream of research, including the TCT approach, has indicated that the use of formal contracts provides safeguards that protect against the consequences of bounded rationality and opportunistic behavior (Williamson, 1996). The roles and responsibilities of both parties, specific procedures in operations, penalties for noncompliance, and outputs to be delivered are arranged in formal contracts (Poppo & Zenger, 2002; Reuer & Ariño, 2007). Advancements in theory on governance mechanisms recognizes the role of relational governance, since this form of governance can provide benefits similar to those of formal governance related to controlling opportunism and facilitating adaptation (Heide & John, 1992; Lusch and Brown, 1996).
Since firms often use both formal and relational governance mechanisms simultaneously in order to take advantage of their differential impacts (Bradach, 1997), scholars question what mix of mechanisms would lead to the best managed relationship (Lumineau & Henderson, 2012). However, scholars do not agree on which relationship between formal and relational governance mechanisms exists. On the one hand, formal and relational governance mechanisms are seen as substitutes (e.g. Corts & Singh, 2004; Crocker & Reynolds, 1993; Kalnins & Mayer, 2004). The presence of relational governance mechanisms leads to the expectation of reduced opportunism, which reduces the necessity for detailed contracts (Gulati, 1995). Relational governance mechanisms operate as self-enforcing safeguards which are more effective and not as costly as formal governance mechanisms (Hill, 1990). From this point of view, relational mechanisms substitute the formal controls characteristic of formal contracts (Dyer and Singh, 1998). Moreover, detailed formal contracts might obstruct the further development of strong relations between parties or might even destroy the existing relationship (Ghoshal & Moran, 1996).
On the other hand, other scholars state that the nature of the relationship between formal and relational governance mechanisms is complementary (e.g. Li, Xie, Teo & Peng, 2010; Poppo & Zenger, 2002; Ryall & Sampson, 2009). To complement to the limits of formal, relational governance mechanisms are needed in order to encourage continuity in case of change and conflict (Lee & Cavusgil, 2006) or to strengthen the exchange between parties when the formal contract is not specific (Cavusgil, Deligonul & Zhang, 2004; Hadfield, 1990). In addition, relational governance might help to overcome the drawbacks of inflexible formal governance mechanisms (Lumineau & Henderson, 2012). Well specified formal contracts reduce the exposed risks in the relation between parties and might therefore encourage to develop strong relationships (Lorenz, 1999). Thus, formal governance mechanisms might ask for complementary relational forms of governance and strengthens the effectiveness of relational governance by providing backups and confidence in the relationship (Gulati & Singh, 1998).
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Therefore, in this research we will focus on the influence of both formal and relational governance mechanisms on exposed supplier sustainability risk. In addition, we will investigate the nature of the relation between formal and relational governance mechanisms
2.3. Governance mechanisms and sustainability risk
As we have identified the differences between formal and relational governance mechanisms, we will now review literature on how these mechanisms are used in the field of sustainability. From the point of view of supply chain management, when governance mechanisms are used with the aim of improving the performance of the supplier, governance mechanisms are also known as supplier development practices (Sancha et al., 2013). A supplier development practice is any effort by an industrial buying firm to improve the performance or capabilities of its suppliers (Krause, Handfield & Scannel, 1998). There are different supplier development practices, including (1) supplier assessment, (2) providing suppliers with incentives to improve performance, (3) instigating competition among suppliers, and (4) working directly with them with training or other activities (Krause et al., 1998). Keating, Quazi, Kriz and Coltman (2008) and Large and Gimenez Thomsen (2011) provided only support for the positive impact of supplier assessment and collaboration on sustainability performance.
Supplier assessment activities entail the gathering and processing of information with the aim of assessing and monitoring supplier’s performance (Klassen & Vachon, 2003). These evaluative activities can take the form of the evaluation of contracts, questionnaires, non-regulatory standards, and third party audits (Min & Galle, 1997). On the other hand, supplier collaboration activities involve the direct interaction between the buying firm and its suppliers in order to develop joint solutions (Sancha et al., 2013). This interaction encompasses different activities such as providing training and education programs to suppliers, sponsoring meetings for suppliers in order to share information and experience, and undertaking joint applied research regarding alternative materials or processes (Lee & Klassen, 2008). In this sense, supplier assessment could be seen as a formal governance mechanism and collaboration as a relational governance mechanism.
Furthermore, some recent studies stress the importance of implementing both types of approaches simultaneously. Lee and Klassen (2008) found, in a case study of small and medium enterprises, that the combination of evaluation and collaboration provides synergies that help suppliers build the organizational capabilities or skills that enable them to improve their environmental performance and that of their customers (i.e., the buying firms). Similarly, Reuter et al. (2010) concluded that relying only on assessment or collaboration is not effective. On the one hand, supplier development is of primary importance because it facilitates capability building in supplier evaluation. On the other hand, supplier assessment is needed to determine which suppliers to develop and their needs. Finally, Foerstl et al. (2010), in their study about the integration of sustainability risk management in supplier management processes, found that supplier assessment enables the effective implementation of sustainable supplier development. Based on this literature review, we will select formal governance mechanisms and relational governance mechanisms as governance mechanisms for our research. We will also investigate the relationship between both governance mechanisms.
2.4. Development of hypotheses
To analyze the impact of the level of usage of formal governance mechanisms and usage of relational governance mechanisms on the effectiveness of the firm’s sustainability risk management, we adopt the lens of the TCT and the Resource-Based View (RBV). According to
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TCT, economizing on transaction costs should be a determining factor in the selection of modes of exchange between a firm and its suppliers (Williamson, 1996). Transaction costs include both the direct costs of managing relationships and potential opportunity costs derived from poor governance decisions (Williamson, 1996). Opportunism ‘‘refers to a lack of candor or honesty in transactions, to include self-interest seeking with guile’’ (Williamson, 1996, p. 9). Because some suppliers may act unsustainably, unethically or even illegally, this creates the need for costly monitoring (Simpson & Power, 2005; Carter & Rogers, 2008). Therefore, we propose that to reduce excessive opportunism in terms of suppliers acting unethically, companies use a governance mechanism based on formal contracts. By implementing an evaluative approach and developing a formal contract, they are able to improve their suppliers’ sustainable performance, which in turn will reduce the exposed supplier’s sustainability risk (Gimenez & Sierra, 2012). Following the literature on supplier development (e.g., Krause, Handfield & Scannel, 1998; Krause, Scannel & Calantone, 2000), we adopt the premise that the usage of formal governance mechanisms are directly associated with a more effective sustainability risk management. Accordingly, we hypothesize that:
H1: There is a positive relationship between the level of usage of formal governance mechanisms and the effectiveness of sustainability risk management.
According to the RBV, valuable, rare, and difficult to copy resources and capabilities can provide critical sources of competitive advantage (Barney, 1991). The natural RVB of Hart (1995) proposes that environmental challenges may lead to the development of intangible resources with which to meet those challenges. These intangibles can be sources of improvements in sustainable performance which may in turn lead to a competitive advantage. Carter and Rogers (2008) pointed out that intangible resources, such as the learning that occurs between buyers and suppliers when they are working together to improve sustainable performance, can be considered as valuable, rare, and difficult to copy resources (Barney, 1991). These resources can lead to increased sustainability performance because the shared knowledge can be applied to obtain operations’ processes with a smaller footprint. Pagell, Wu and Wasserman (2010) also stressed that the ability of managers to form collaborative relationships to improve sustainability is a valuable asset that results in a sustainable advantage in making responsible and profitable supply chains. Collaborative relationships contribute to developing trust and a better understanding of what the buyer expects, especially when it comes to non-economic elements of performance (Pagell et al. 2010) and, therefore, lead to improved sustainability. Based on the above arguments, we expect that the usage of relational governance mechanisms helps in making suppliers more sustainable, which contributes to improving the supplier’s sustainable performance. This in turn contributes to a higher effectiveness of the firm’s sustainability risk management. Therefore, we hypothesize that:
H2: There is a positive relationship between the level of usage of relational governance mechanisms and the effectiveness of sustainability risk management.
In the supplier development literature, Krause et al. (2000) found that assessment is an enabler of the collaborative approach. Supplier assessment can help identify where supplier development activities should be concentrated (Hahn, Watts & Kim, 1990). Once the needs of improvement have been identified, the buying firm can focus their resources in training the supplier to obtain the required capabilities. Furthermore, Modi and Mabert (2007) found that evaluation is a prerequisite for effective knowledge transfer from buyers to their suppliers. In the sustainability literature, there is scant evidence about the relationship between these two practices. Only Foerstl et al. (2010), after conducting a multiple case study, point out that supplier sustainability risk assessment enables the implementation of supplier development initiatives such as training. Based on the above arguments and evidence, we expect that the usage of formal governance mechanisms has a complementary relationship with relational governance mechanisms.
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The complementary relationship between relational governance and formal contracts may work in reverse, as well (e.g. Luo, 2002; Poppo & Zenger, 2002; Coletti, Sedatole & Towry, 2005). Regardless of the duration of the relationship, a lot of dimensions of the exchange are hard to specify in formal contracts; managers are constrained by the contract to foresee and contractually resolve potential future contingencies (Poppo & Zenger, 2002). As a result, when unforeseen disturbances arise, contracts are not able to maintain the continuity of the relationship (van der Meer-Kooistra & Vosselman, 2000). Formally specified agreements for adapting to change promote more long-term relationships, but do not guarantee continuation or mutually acceptable resolutions (Tomkins, 2001). Thus, contracts alone may serve simply to facilitate termination of an exchange as courts use it to review the broken aspects of the contract and then allocate assets between the parties on some basis deemed equitable (Macneil, 1978). Relational governance becomes a necessary complement to the adaptive limits of contracts by fostering continuance and bilateralism when change and conflict arise (Macneil, 1978). The relational value of solidarity figures prominently in promoting exchange into the future: it ensures a ‘keep on with it’ attitude such that each party desires to and is able to depend on the other (Macneil, 1980: 92). Thus, managers choose relational governance, as contracts become increasingly customized, to increase the odds of continuance, and thereby further safeguard specific investments from premature and costly termination (Poppo & Zenger, 2002). Relational governance may also promote the refinement (and hence increased complexity) of formal contracts (Håkanson & Lind, 2004). As a close relationship is developed and sustained, lessons from the prior period are reflected in revisions of the contract. Exchange experience, patterns of information sharing, and evolving performance measurement and monitoring may all enable greater specificity (and complexity) in contractual provisions. As a consequence, relational exchanges may gradually develop more complex formal contracts, as mutually agreed upon processes become formalized. As a result, this will improve a firm’s sustainability risk management.
Based on the arguments and evidence above, we can formulate the following hypotheses:
H3a: The level of usage of formal governance mechanisms will moderate on the relationship between the level of usage of relational governance mechanisms and the effectiveness of sustainability risk management. More specifically, the relationship will be stronger under a high level of usage of formal governance mechanisms than under a low level of usage of formal governance mechanisms.
H3b: The level of usage of relational governance mechanisms will moderate on the relationship between the level of usage of formal governance mechanisms and the effectiveness of sustainability risk management. More specifically, the relationship will be stronger under a high level of usage of relational governance mechanisms than under a low level of usage of relational governance mechanisms.
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Figure 2.1: Research model
3. METHODOLOGY
The aim of this study is to investigate the relationship between the usage of formal and relational governance mechanisms and the sustainability risk that firms are exposed to. Literature about different governance mechanisms and their relation with firm performance exists (e.g. Sancha et al., 2013; Gimenez & Sierra, 2012, Foerstl. et al., 2010), however, whether these governance mechanisms are used as sustainability risk mitigation strategies is not known yet (Gimenez & Sierra, 2012). Therefore, this study will use an inductive approach in order to build theory on this topic (Karlsson, 2009).
The research method applied in this study is an exploratory survey approach. Research on how firms manage sustainability-related supplier risks in their purchasing organization is still in an exploratory stage (Basu & Palazzo, 2008). However, governance mechanisms in buyer-supplier relationships have been studied extensively (e.g. Dekker, 2008, Gimenez & Sierra, 2013;, Klassen & Vachon, 2008; Lumineau & Henderson, 2012. The corresponding bodies of knowledge have been developed enough to use for theory testing survey research (Handfield & Melnyk, 1998). Data collection is carried out with the specific aim of testing the concepts developed in relation with sustainability risk management, the linkages hypothesized among concepts and the validity boundaries of the model (Forza, 2002).
3.1. Sample
Data from the Netherlands from the 2014 round of the International Manufacturing Strategy Survey (IMSS) were used to test the influence of various types of governance mechanisms on the exposed sustainability risk for buying firms. The IMSS was founded in 1992 to gather data about practice and performance related to manufacturing strategy in a global setting (see Voss & Blackmon, 1998; Ettlie (1998). The survey focused on ISIC Divisions 25, 26, 27, 28, 29 and 30. In Table 3.1 the number of respondents for each of the ISIC codes is shown.
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Table 3.1: Sample by ISIC Code
ISIC
Code Division Nr of respondents %
25 Manufacturer of fabricated metal products, except machinery and equipment 22 44,9%
26 Manufacturer of computer, electronic and optical products 5 10,2%
27 Manufacturer of electrical equipment 4 8,2%
28 Manufacturer of machinery and equipment not elsewhere classified 13 26,5%
29 Manufacturer of motor vehicles, trailers and semi-trailers 2 4,1%
30 Manufacturer of other transport equipment 3 6,1%
Total number of respondents: 49
For 2014, research coordinators in around 20 countries administered the survey on a country by country basis. Dillman’s (1978) total design method for mail survey research was followed and data were collected from around 700 companies in approximately 20 countries. An important note to this research is that only the data collected from 49 Dutch manufacturing firms was used, since the entire set of data, consisting of more than 700 companies, was not available at the time when writing this paper. 331 Firms were asked to fill in the survey and 49 firms did respond. The response rate of the Dutch survey was therefore around 15% and there are less than 30% missing values.
3.2. Unit of analysis
Karlsson (2009) describes the unit of analysis as the “level of data aggregation applied during the subsequent analysis” (p. 106). Since buying firms are held responsible not only for the sustainable performance of their first tier supplier, but as well for the sustainable performance of all firms in the supply chain, this research focusses on the relationships between buyers and suppliers in the entire supply chain. However, due to the explorative nature of this research and limited time available, we will only investigate the relationship a buyer has with its first tier supplier. The results of this study could as well be generalizable for the other relationships in the supply chain (i.e. the relationship between supplier and their suppliers). In the figure below (Figure ), the unit of analysis of this study is shown.
Figure 3.1: Unit of analysis: the relationship between the buying firm and the first tier supplier
3.3. Variable measurement
In this research, we will measure the effectiveness of sustainability risk management according to an advisory report on fraud and risk management by KPMG (2006). According to KPMG (2006), an effective and business-driven risk management approach is one that is focused on three objectives; risk prevention, risk detection and risk response. The usage of these three objectives is also prescribed by e.g. Deloitte (2013), Kleindorfer and Saad (2009) and Kliem (2000). To measure the effectiveness of the sustainability risk management of a firm, we aim to develop a sum variable consisting of the level of risk prevention now, the level of risk prevention in the previous three years, the level of risk detection now, the level of risk detection in the previous three years, the level of the implementation of the risk response, now and in the
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previous three years. All items were measured on a 5-point Likert scale. In Appendix A all corresponding survey questions can be found.
The independent variables in this research, the level of usage of formal governance mechanisms and the level of usage of relational governance mechanisms are measured as follows. For the measurement of the level of usage of formal governance mechanisms, we follow Krause et al. (2000), Gimenez and Sierra (2012) and Sancha et al. (2013) and measure it by the firm’s perception of usage of formal evaluation, monitoring and auditing using established guidelines and procedures. According to these authors, both measurements of the current level of implementation and the firm’s efforts during the last three years were used in order to improve reliability. In order to measure the level of usage of relational governance mechanisms, we use the firm’s perception of implementation of training/education in sustainability issues for suppliers’ personnel. Here we follow Krause et al. (2000), Gimenez and Sierra (2012) and Sancha et al. (2013) again. Both measurements of the current level of implementation and the firm’s efforts during the last three years were used in order to improve reliability. In Appendix A all corresponding survey questions can be found.
3.4. Control variables
In this research, we will take some control variables into account. Control variables are variables that are held constant in order to assess or clarify the relationship between dependent and independent variables (Flynn, Sakakibara & Schroeder, 1995). We have selected three control variables; the quality of the buyer-supplier relationship, the pressure from the firm’s environment to act sustainable and innovativeness.
Quality of the buyer-supplier relationship
According to Liu, Li and Zhang (2010), the quality of a buyer-supplier relationship is an important precondition for the success of a long-term exchange relationship and it determines the likelihood that the relationship among partners will continue. Transaction Cost Theory (TCT) can explain why the buyer-supplier relationship quality is important for the buyer’s sustainability risk management (Chang, Cheng & Wu, 2012). Buyers incline to invest in the relationship with specific suppliers in that their switches to new alternates will cause higher transaction cost (Mudambi & Mudambi, 1995). Accordingly, TCT’s notion of asset specificity, which refers to investments that are idiosyncratic to a focal relationship, is related closely to the concept of adaptations (Athaide & Klink, 2009; Cannon & Perreault, 1999). Adaptation processes include relationship-specific investments in areas such as sustainability, technology, logistics, administration, financing, and knowledge (Claycomb & Frankwick, 2010). Buyers decide to continue investing in a relationship due to favorable evaluation of relationship performance (Palmer & Bejou, 1994). Once the relationship is terminated, the values from the relationship are lost for both the buying and supplying firm (Ploetner & Ehret, 2006). Since both parties invested in their relationship with each other, it is very likely that their relationship will continue and additional investments will be made (Liu et al., 2010). This also holds for additional sustainable requirements from the side of the buyer; the better their relationship is, the higher the likelihood is that the supplier will invest in order to comply to the new sustainability requirements (Chang et al., 2013). In this way, the sustainable performance of the supplier will increase, which leads to a lower risk that the supplier will not comply to new sustainability standards. As a result, the quality of the buyer-supplier relationship determines the likelihood that the supplier will comply to sustainability standards, which will lead to a more effective sustainability risk prevention. This in turn will lead to a more effective sustainability risk management (Deloitte, 2013).
The items used for measuring the quality of the buyer-supplier relationship were adapted from Ellinger, Daugherty and Keller (2000) and Giménez and Ventura (2005). In Appendix A all corresponding survey questions can be found.
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Level of sustainability pressure
Firms owe many of their decisions to the pressures by their peers, customers and external agencies responsible for their ongoing legitimacy (DiMaggio and Powell, 1983). Institutional power over of an organization can be regulative (e.g. government regulations, contracts or the threat of penalty) as well as more normative in the form of peer practices and industry standards (Scott, 1995). Pressures for example enforce rather than influence change by directly tying requirements to resources and penalties for non-compliance. This can lead to performance change that is visible but not necessarily beneficial (Chatterji and Toffel, 2010). However, this change in operations and complying to new standards, forced by their stakeholders, does lead to the fact that firms operate in a more sustainable way. As a result, the level of sustainability pressure positively influences the likelihood that firms will comply to sustainability standards (Simpson, 2012). In order to comply to these sustainability standards, firms will refine contracts with their suppliers, so that they will act in a more sustainable way as well (Vachon & Klassen, 2006). The modifications in the contract can be seen as a risk prevention tool, used by the buying firm. This form of risk prevention will in turn lead to a more effective sustainability risk management (Deloitte, 2013).
The items used for measuring the level of sustainability pressure were adapted from Maxwell and van der Vorst (2003), Sayce and Ellison (2003) and Sarkis, Gonzalez-Torre and Adenso-Diaz (2010). In Appendix A all corresponding survey questions can be found.
Firm’s innovativeness
The third control variable in this research is innovativeness. According to Teece, Pisano and Shuen (1997), the capability of a firm to act in an environmental friendly way is characterized by the ability of firms to innovate and adapt to changing market needs. These capabilities reflect firm’s capability to address the growing concern of sustainable expectations while improving sustainable and financial performance (Klassen & Whybark, 1999; Kleindorfer, Singhal & van Wassenhove, 2005; Quak & de Koster, 2007). Since innovativeness reflects the sustainable concern of a firm, innovative firms will be more likely to ask from their suppliers to act in a sustainable manner as well (Singhal & van Wassenhove, 2005). As a result, buying firms will refine contracts with their suppliers, so that they will act in a more sustainable way as well (Vachon & Klassen, 2006). In this way, the sustainable performance of the supplier will increase, which leads to a lower risk that the supplier will not comply to new sustainability standards. As a result, the quality of the buyer-supplier relationship determines the likelihood that the supplier will comply to sustainability standards, which will lead to a more effective sustainability risk prevention. This in turn will lead to a more effective sustainability risk management (Deloitte, 2013).
The items used for measuring the firm’s innovativeness of sustainability pressure were adapted from Singhal and van Wassenhove (2005). In Appendix A all corresponding survey questions can be found.
3.5. Research Quality
Content validity represents the sufficiency with which a specific domain of content (i.e. construct) was sampled (Nunnally, 1988). As Flynn et al. (1995) highlighted, content validity is subjective and judgmental but is often based on two standards put forward by Nunnally (1988): 1) does the instrument contain a representative set of measures and 2) were sensible methods of scale construction used? All items were measured based on existing measures (see 3.3: Variable measurement and 3.4: Control variables. All types of governance mechanisms were measured on 1–5 Likert-type scales from none (1) to extensive (5). In Appendix A all corresponding survey questions can be found.
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The reliability and validity of each scale was further analyzed following Flynn et al.’s (1995) example. Construct validity is supported if the items in a scale all load on a common factor when within-scale factor analysis is run. Table 3 shows that all eigenvalues exceeded the minimum threshold of 1.0 and helped confirm the dimensionality of each construct. Divergent or discriminant validity was tested by analyzing bivariate correlations between each of the variables (see Table 4.3).
3.6. Data reduction and analysis
In order to extract the underlying constructs from our measured items, an exploratory factor analysis was conducted (Kim and Mueller, 1978). This was done to help ensure reliable scales (Flynn et al., 1995; O’Leary-Kelly and Vokurka, 1998). The examination of Kaiser-Meyer-Olkin value (0.560) indicates satisfactory adequacy for a factor analysis. This value is not really high, but higher than the minimum of 0.500. A minimum Kaiser–Meyer–Olkin score of 0.500 is considered necessary to reliably use factor analysis for data analysis. Similarly, Bartlett’s test had significance levels of p<0:00000. Then, a principal component analysis was conducted with varimax rotation.
In order to test our hypotheses, hierarchical regression analysis is performed using SPSS. Hypothesis 1, the influence of the level of usage of formal governance mechanisms on the effectiveness of the firm´s sustainability risk management, will be tested by means of a regression analysis. Hypothesis 2, the influence of the level of usage of relational governance mechanisms on the effectiveness of the firm´s sustainability management, will be tested the same way. Next to this, we will also make use of control variables. As mentioned before, these control variables are the quality of the buyer-supplier relationship, the level of sustainable pressure and the firm´s innovativeness. For the regression analysis, this can be summarized in the following formula:
Effectiveness of sustainability risk management = constant + β1 * level of usage of formal governance mechanisms + β2 * level of usage of relational governance mechanisms + β3 * quality of the buyer-supplier relationship + β4 * pressure to be sustainable + β5 * innovativeness +
ε i
In hypothesis 3a we will test the interaction effect of the level of usage of formal governance mechanisms on the relationship between the level of usage of relational governance mechanisms and the effectiveness of sustainability risk management. In hypothesis 3b we will test the interaction effect of the level of usage of relational governance mechanisms on the relationship between the level of usage of formal governance mechanisms and the effectiveness of sustainability risk management. In order to do this, all independent and control variables will be standardized. Subsequently, an interaction term will be calculated. For the corresponding regression analysis, the formula is as follows:
Effectiveness of sustainability risk management = constant + β1 * level of usage of formal governance mechanisms + β2 * level of usage of relational governance mechanisms + β3 * quality of buyer-supplier relationship + β4 * pressure to be sustainable + β5 * innovativeness + β6 * level of usage of formal governance mechanisms * level of usage of relational governance mechanisms +
ε i
17 4. RESULTS
In this section, we present the results of the factor analysis and subsequently the tests of our hypotheses.
4.1. Factor analysis
The results of the principal components analysis are given in Table 4.1. Six factors emerge with eigenvalues greater than one, accounting for 68.19% of the variance. The items with factor loadings greater than or equal to 0.400 were regarded as significant and retained (Nunnally, 1988). There were no items that had cross loadings larger than 0.400 on another component, so no items were removed. An internal consistency analysis was done for each factor using the SPSS reliability procedure (Saraph, Benson & Schroeder, 1989; Flynn et al., 1995). Most Cronbach’s coefficient alphas are around 0.800, while the value of innovativeness (0.658) is in between the widely accepted value of 0.700 and the minimum recommended value (0.600). Therefore, we can conclude that our measures are reliable.
Factor scores were saved from the principal component analysis for the effectiveness of sustainability risk management, the level of usage of formal governance mechanisms, the level of usage of relational governance mechanisms, the quality of the buyer-supplier relationship, the level of sustainable pressure and innovativeness using the regression method. Factor scores are the weighted averages of values on all the original variables using factor loadings as weightings. Using factor scores in this manner creates a more accurate measure than simply computing a mean, which assigns equal weights to items (Lastovicka and Thamodaram, 1991).
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Table 4.1: Results of Principal Components Analysis
Factor loadings
Item 1 2 3 4 5 6
F1: Effectiveness of sustainability risk man.
Risk prevention - 3 years 0,727
Risk prevention - now 0,715
Risk detection - 3 years 0,668
Risk detection - now 0,731
Risk response - 3 years 0,799
Risk response - now 0,864
F2: Level of usage of formal governance mech.
Supplier´s sustainability assessment - 3 years 0,503
Supplier´s sustainability assessment - now 0,654
F3: Level of usage of relational governance mech.
Supplier training/education - 3 years 0,854
Supplier training/education - now 0,858
Supplier collaboration - 3 years 0,699
Supplier collaboration - now 0,745
F4: Quality of buyer-supplier relationship
Information sharing with suppliers - 3 years 0,766
Information sharing with suppliers - now 0,841
Long term supplier collaboration - 3 years 0,838
Long term supplier collaboration - now 0,842
F5: Level of sustainability pressure
Environmental stakeholder pressure 0,629
Social stakeholder pressure 0,734
Importance of environmental processes 0,772
Importance of social processes 0,797
Importance of contribution to society 0,895
Innovativeness
Ability to introduce new products - now 0,880
Ability to introduce new products - vs competitors 0,772
Eigenvalue 1,670 3,406 2,883 2,674 2,788 1,500
Percentage of variance explained 83,51 56,8 72,1 66,8 55,8 74,9
19 4.2. Testing hypotheses
Table 4.2 displays the means, standard deviations and correlations of the variables. All individual variables were checked for linearity, homoscedasticity and normality (Hair, Black, Babin & Anderson, 2009). As might be expected, because many forms of formal and relational governance mechanism are often undertaken at the same time, the scales were positively correlated with each other. In addition, the pressure that stakeholders employ to make firms operate more sustainable is correlated with the usage of sustainable governance mechanisms as well. The analyses did not reveal any problems regarding the assumptions to use a regression analysis. Regression diagnostics did not reveal multicollinearity among the variables. The variance inflation factors (VIF) associated with each of the regression ranged from 1.095 to 1.793, which shows that multicollinearity is not an issue.
Table 4.2: Descriptive statistics
and Pearson correlations
Variable Mean SD 1 2 3 4 5 6 1. Effective sustainability risk management 18,49 3,90 1,000 2. Formal governance mechanisms 5,23 1,67 0,154 1,000 3. Relational governance mechanisms 7,54 3,13 0,221 0,534 ** 1,000
4. Quality of the buyer
supplier relationship 10,15 3,16 0,628 ** 0,229 0,175 1,000
5. Sustainable pressure 14,53 3,80 -0,132 0,451 ** 0,320 * 0,115 - 1,000
6. Innovativeness 6,07 1,60 0,196 0,182 0,234 0,096 0,202 1,000
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).
Table 4.3 presents the results of the regression analyses. The quality of the buyer-supplier relationship, the level of sustainability pressure and innovativeness are included as control variables. As predicted, there is a significant relationship between the quality of the buyer-supplier relationship and the effectiveness of the firm’s sustainability risk management (β = 0.64, p < 0.01). The relationship between the firm’s innovativeness and the effectiveness of sustainability risk management is significant as well (β = 0.14, p < 0.100). For the other control variable, the level of sustainable pressure, no significant relationship with the effectiveness of sustainability risk was found (β = 0.04, p < 0.100).
Hypothesis 1 refers to the direct positive effect of the level of usage of formal governance mechanisms on the effectiveness of sustainability risk management. As can be seen in Table 4.3, the level of usage of formal governance mechanisms has no significant impact on the effectiveness of sustainability risk management (β=0.453, p>0.100). Thus, hypothesis 1 cannot be accepted.
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Table 4.3: Linear regression results
Dependent variable: Effectiveness of sustainability risk management
(1) (2) (3) (4) (5) (6)
Quality of buyer-supplier
relationship 0,628 *** 0,631 *** 0,640 *** 0,637 *** 0,636 *** 0,619 ***
Pressure to be sustainable -- 0,132 0,145 0,148 0,132 0,156
Firm's innovativeness -- 0,119 * 0,136 * 0,120 * 0,126 *
Degree of usage of formal
governance mechanisms (H1) -- -- -- 0,453 -- --
Degree of usage of relational
governance mechanisms (H2) -- -- -- -- 0,221 * --
Interaction formal and relational
governance mechanisms (H3) -- -- -- -- -- 0,162
R- squared 0,017 ** 0,058 * 0,088 * 0,076 * 0,093 *
Adjusted R-squared 0,004 *** 0,010 *** 0,016 ** 0,005 *** 0,022 **
F-value 0,831 1,211 1,222 1,081 1,305
* , Coefficient is significant at the 0,100 level ** , Coefficient is significant at the 0,050 level
***,Coefficient is significant at the 0,010 level
Hypothesis 2 refers to the direct positive effect of the level of usage of relational governance mechanisms on the effectiveness of sustainability risk management. As can be seen in Table 4.3, the level of usage of relational governance mechanisms has a significant impact on the effectiveness of sustainability risk management (β=0.221, p <0.100). Therefore, hypothesis 2 can be accepted.
The results regarding the moderation effect of formal governance mechanisms on the relationship between the level of usage of relational governance mechanisms and the effectiveness of sustainability risk management (H3a) and. the moderation effect of relational governance mechanisms on the relationship between the level of usage of formal governance mechanisms and the effectiveness of sustainability risk management (H3b) are as follows. In Table 4.3 it can be found that there is no significant interaction effect (β = 0.162, p > 0.100). Therefore, hypotheses H3a and H3b cannot be accepted. In order to determine how this moderator works, an interaction plot is drawn for both hypotheses. This interaction plots are shown in Figure 4.1 and Figure 4.2.
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The level of usage of formal governance mechanisms will moderate on the relationship between the level of usage of relational governance mechanisms and the effectiveness of sustainability risk management
Figure 4.2: Interaction plot of H3b;
The level of usage of relational governance mechanisms will moderate on the relationship between the level of usage of formal governance mechanisms and the effectiveness of sustainability risk management
In these interaction plots, regression equations were rearranged into simple regressions of the level of usage of relational and formal governance mechanisms on the effectiveness of
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sustainability risk management. This was done with given conditional values of the level of usage of formal governance mechanisms and the level of relational governance mechanisms (M+1SD; M-1SD).
In Figure 4.1, we find that in a situation with a low level of usage of formal governance mechanisms, the level of usage of relational governance mechanisms is insignificantly related to the effectiveness of sustainability risk management (simple slope test: β = 1.503, p = 0.229 > 0.100). In a situation with a high usage of formal governance mechanisms, the level of usage of relational governance mechanisms is insignificantly related to the effectiveness of sustainability risk management as well (β = 2.789, p = 0.245 > 0.100).
In Figure 4.2, we find that in a situation with a low level of usage of relational governance mechanisms, the level of usage of formal governance mechanisms is insignificantly related to the effectiveness of sustainability risk management (simple slope test: β = 2.388, p = 0.173> 0.100). In a situation with a high usage of formal governance mechanisms, the level of usage of relational governance mechanisms is insignificantly related to the effectiveness of sustainability risk management as well (β = 4.792, p =0.225 > 0.100).
In Figure 4.3, all results of the hypotheses and tests with control variables are shown.
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5. DISCUSSION & LIMITATIONS
In this section we will discuss the findings related to the hypotheses with earlier reviewed literature in mind and sum up some limitations of this study.
5.1. Discussion
The development of a formal contract and the implementation of an evaluative approach enables a firm to improve their suppliers’ sustainable performance, which in turn will reduce the exposed supplier’s sustainability risk (COSO, 2013). Following the literature on supplier development (e.g., Krause, Handfield & Scannel, 1998; Krause, Scannel & Calantone, 2000), our first hypothesis dealt with the relationship between the level of usage of formal governance mechanisms and the effectiveness of a firm´s sustainability risk management. This effect was expected to be positive. According to the findings, there is no significant relationship between the level of usage of formal governance mechanisms and the effectiveness of sustainability risk management. This is not in line with the results of Gimenez and Sierra (2012) and Sancha et al. (2013), who investigated the relationship of the level of usage of formal governance mechanisms and the firms sustainable performance. The fact that the level of usage of formal governance mechanisms positively influences suppliers´ sustainable performance does not mean that there will be a positive effect on the effectiveness of the firms risk management. The findings of COSO (2013) are therefore not supported in this study.
The reason why the hypothesis is not supported might be found in the measurement of the effectiveness of sustainability risk management. For this variable we used the data of a question about supplier risk mitigation. Within this supplier risk mitigation, it is very likely that respondents also thought about supplier’s supply risks or other operational risks. However, another reason for the fact that our hypothesis is not supported might be that we based our hypothesis on COSO (2013). COSO (2013) is a joint initiative of five private sector organizations which develops frameworks and guidance on enterprise risk management. Whether the development of a formal contract and the implementation of an evaluative approach enables a firm to improve their suppliers’ sustainable performance and will reduce the exposed supplier’s sustainability risk, has not been tested empirically yet. Therefore, the COSO (2013) sustainability risk management system might be doubted.
Carter and Rogers (2008) pointed out that intangible resources, such as the learning and training that occurs between buyers and suppliers when they are working together to improve sustainable performance, can be considered as valuable, rare, and difficult to copy resources. These resources can lead to increased sustainability performance because the shared knowledge can be applied to obtain operations’ processes which are more sustainable (Gimenez & Sierra, 2012). Therefore, our second hypothesis dealt with the relationship between the level of usage of relational governance mechanisms and the effectiveness of a firm´s sustainability risk management. This effect was expected to be positive. According to the findings, there is a significant relationship between the level of usage of relational governance mechanisms and the effectiveness of sustainability risk management. However, it might be doubted whether the investments in training and education for suppliers influence the effectiveness of sustainability risk management, because underlying mechanisms (e.g. trust) might cause this effect (Vosselman & van der Meer-Kooistra, 2009). In this research, we did not take the role of trust into account. On the other hand, the fact that firms invest in training and education for suppliers, might implicate the existence of long term relationships, which leads to trust between buyer and supplier (Vosselman & van der Meer-Kooistra, 2009).
The relationship between formal and relational governance mechanisms is complementary (e.g. Luo, 2002; Poppo & Zenger, 2002; Coletti, Sedatole & Towry, 2005). One the one hand, when
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unforeseen disturbances arise, contracts are not able to maintain the continuity of the relationship and should be complemented by relational governance mechanisms (van der Meer-Kooistra & Vosselman, 2000). On the other hand formal governance can help identify where supplier development activities should be concentrated (Hahn, Watts & Kim, 1990). Once the needs of improvement have been identified, the buying firm can focus their resources in training the supplier to obtain the required capabilities. Therefore, we expected that the level of usage of formal governance mechanisms would influence the relationships between relational governance mechanisms and the effectiveness of sustainability risk management. We also expected that the level of usage of relational governance mechanisms would influence the relationships between formal governance mechanisms and the effectiveness of sustainability risk management. Both effects were expected to be positive. The results show that both relationships are not significant, which is not in line with literature. To better understand the interaction effects, interaction plots were analyzed.
The interaction plots shows that in a situation with a low level of usage of formal governance mechanisms, the level of usage of relational governance mechanisms is positively related to the effectiveness of sustainability risk management. In the same situation, but then with a high level of usage of formal governance mechanisms, the influence of formal governance mechanisms on the relationship between relational governance mechanisms and effectiveness of sustainability risk management becomes higher. Even though hypothesis 3a is not accepted, this research gives an indication that higher levels of usage of formal governance mechanisms have more influence on the relationship between relational governance mechanisms and effectiveness of sustainability risk management. For hypothesis 3b, the interaction plots shows that in a situation with a higher level of usage of relational governance mechanisms, the level of usage of formal governance mechanisms is positively related to the effectiveness of sustainability risk management. Even though hypothesis 3b is not accepted, this research gives an indication that higher levels of usage of relational governance mechanisms have more influence on the relationship between formal governance mechanisms and effectiveness of sustainability risk management. As a result, the higher the level of usage of formal and relational governance mechanisms, the more their relationship is complementary.
The fact that formal governance mechanisms correlates largely with relational governance mechanisms is interesting, since no significant complementary relationship was found. The full collinearity VIFs did not reveal any issues of multicollinearity.
5.2. Limitations
In this research, several assumptions are made which can affect the reliability of the results. The first point of discussion is the size of the data set used for the statistical tests. We only had access to data of 49 Dutch firms and therefore it is hard to state that the results are reliable and generalizable. The regression analyses resulted in the fact that all hypotheses had to be rejected. Unfortunately, the data set will be enlarged after this paper was finished, so the larger data set could not be used for this research. In order to test whether the size of the data set has an influence on the outcomes of the regression analyses, we have enlarged the data set to 147 firms, three times the existing data set of 49 firms. In this situation, hypothesis 1 and 3 would be accepted as well. The size of the data set is therefore an important point of concern of this study. Another point of concern is the measurement of the variables. Since this research has been done based on an existing data set, it is hard to investigate whether the interview questions exactly represent the variables. Some questions of the survey are posed differently than when we had to set up a totally new questionnaire. The most doubtful case is the measurement of the effectiveness of sustainability risk management. For this variable we used the data of a question about supplier risk mitigation. Within this supplier risk mitigation, it is very likely that
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respondents also thought about supplier’s supply risks or other operational risks. As we were restricted by time constraints, this problem could not be overcome.
A third issue is that the role of trust is not taken into account in this study, whilst this is an important aspect for the management of inter-firm relationships (Vosselman & van der Meer-Kooistra, 2009). The way firms make use of both formal and relational governance mechanisms depends a lot on to which extent both parties believe that the collaboration will succeed (Lumineau & Henderson, 2012). Finally, this research has been done with data from 49 Dutch manufacturing firms. Therefore, it cannot be stated that the results of this study are not generalizable for all firms or suppliers in the world or in Europe. Because of the usage of survey data, it is not known to what extent firms have suppliers in the Netherlands, Europe, Asia or the rest of the world. This might be an important limitation of this study, since the risk that firms calculate for relationships with their suppliers might be influenced by the geographical distance between the buying firm and de supplying firm. In this study we cannot draw conclusions about the differences between the usage of governance mechanisms for different geographical areas.
6. CONCLUSION
While scholars state that firms cannot assure a sustainable supply chain without managing strong relationships with their suppliers, research to date does not explain how firms manage these relationships with their suppliers (e.g. Foerstl et al., 2010; Gimenez and Sierra, 2012; Sancha et al., 2013). The goal of this study is therefore to investigate how buying firms use formal and relational governance mechanisms to mitigate supplier sustainability risks and whether the usage of formal governance mechanisms affects the usage of relational governance mechanisms. Based on prior research in the field of accounting, marketing and operations research, four hypotheses are developed to test these relationships.
This research, based on 49 Dutch manufacturers, shows that the effectiveness of sustainability risk management is not related to the level of usage of formal governance mechanisms. For this relationship no significant relationship was found. However, for the relationship between the level of usage of relational governance mechanisms and the effectiveness of the firm’s sustainability risk management, a significant relationship exists. It can be stated that higher levels of usage of relational governance mechanisms lead to a more effective sustainability risk management. Regarding the complementary relationship between the usage of formal and relational governance mechanisms, no significant effect was found. However, we did find that higher levels of usage of formal and relational governance mechanisms results in a more complementary relationship between the two variables.
In this research, three control variables were taken into account; the quality of the buyer-supplier relationship, the level of the pressure to be sustainable and the firm’s innovativeness. The quality of the buyer-supplier relationship and the firm’s innovativeness were found to have a significant relationship with the effectiveness of sustainability risk management. These relations were positive. The level of sustainable pressure does not significantly relate to the effectiveness of sustainability risk management.
For the academic literature, the results of this study imply that more research should be done to the phenomenon of sustainability risk. In a transaction cost setting, one significant relationship was found. Existing literature on relational governance mechanisms was supported. By the addition of control variables, this research also shows that the overall quality of the buyer-supplier relationship is very important to be able to manage sustainability risk. In risk management the influence of the quality of the buyer-supplier relationships has not been taken into account yet.
