The Role of an Ethos of Sustainability: the Hidden Value of Intangible Resources

THE ROLE OF AN ETHOS OF SUSTAINABILITY: THE HIDDEN VALUE OF INTANGIBLE RESOURCES

MATTHEW H. LEVIN Fellow, Fowler Center for Business as an Agent of World Benefit

Submitted in partial fulfillment of the requirements for the degree of

Doctor of Philosophy

Weatherhead School of Management

Designing Sustainable Systems

CASE WESTERN RESERVE UNIVERSITY

August, 2017

CASE WESTERN RESERVE UNIVERSITY

SCHOOL OF GRADUATE STUDIES

We hereby approve the thesis/dissertation of

Matthew H. Levin

candidate for the degree of Doctor of Philosophy *

Committee Chair

Chris Laszlo, Ph.D., Case Western Reserve University

Committee Member

Richard J. Boland, Jr., Ph.D., Case Western Reserve University

Committee Member

Marc J. Epstein, Ph.D., Rice University

Committee Member

Aron Lindberg, Ph.D., Stevens Institute of Technology

Committee Member

Roger B. Saillant, Ph.D., Case Western Reserve University

Date of Defense

April 28, 2017

*We also certify that written approval has been obtained

for any proprietary material contained therein.

Dedication

I dedicate my dissertation work to my wife, best friend, and lifelong partner—my beautiful bride Paulette Massey Levin. Against all good reason, you encouraged me to follow my dream of entering academia as a college professor. Although this required me to give up a lucrative CPA firm partnership position and commit four years of time and cost to the pursuit of a demanding Ph.D. program, you never wavered in your support— even when it required sacrifices on your part.

Table of Contents

List of Tables ...... vii List of Figures ...... viii Abstract ...... xii INTRODUCTION ...... 1 The Research Gap: CSR and Hidden Value ...... 2 Ethos of Sustainability ...... 3 Motivation for this Research ...... 5 Research Process in this Study ...... 6 RESEARCH AIMS ...... 7 LITERATURE REVIEW ...... 9 Introduction ...... 9 Confounding Terminology: CSR, Sustainability, and Corporate Citizenship ...... 11 Does CSR Positively Influence CFP? ...... 12 The Significance of Intangible Value ...... 15 THEORETICAL FOUNDATIONS...... 19 Introduction ...... 19 Resource-based Theory ...... 20 Stakeholder Theory ...... 21 Upper Echelons Theory ...... 23 Theory of the Business...... 24 Summary of Insights from Theory ...... 25 RESEARCH DESIGN AND METHODOLOGY ...... 26 Research Design ...... 26 Research Methodology: Study 1 (QUAL) ...... 30 Research Methodology: Study 2 (Quan) ...... 35 Research Methodology: Study 3 (QUAN) ...... 43 FINDINGS ...... 48 Study 1 (QUAL) ...... 49 Study 2 (Quan) ...... 50 Study 3 (QUAN) ...... 51 DISCUSSION AND CONCLUSION...... 62 Introduction ...... 62 v Discussion ...... 63 Limitations ...... 74 Contributions to Theory and Practice ...... 76 Future Research ...... 77 Appendix A: Study 1 – Qualitative ...... 81 Appendix B: Study 2 – Quantitative ...... 137 Appendix C: Study 3 – Quantitative ...... 225 REFERENCES ...... 303

vi List of Tables

Table 1. Dissertation Research Questions ...... 8 Table 2. Summary of CSR/CSP CFP Literature ...... 14 Table 3. Synopsis of Intangibles Literature ...... 17 Table 4. Synopsis of CSR and Intangibles Literature ...... 18 Table 5. Summary of Foundational Theories ...... 20 Table 6. Summary of Subjects by Sector ...... 32 Table 7. Summary of Subjects by Position ...... 32 Table 8. Summary of Subjects by Age Range ...... 33 Table 9. Summary of Subjects by Educational Background ...... 33 Table 10. Content Analysis: Summary of Sustainability Report Coding Results ...... 39 Table 11. Financial Ratio Analysis: Summary of Financial Data ...... 41 Table 12. Summary: Independent Samples t-tests ...... 43 Table 13. Hypotheses Findings ...... 53 Table 14. Regression Coefficients ...... 54 Table 15. Integration of Research Questions, Findings, and Theory ...... 59

vii List of Figures

Figure 1. Multiphase Mixed Methods Research Design ...... 29 Figure 2. Summary of Codes and Emergent Themes ...... 35

viii Acknowledgements

There are many individuals to whom I am grateful and wish to extend a big

“Thank You.” First, I thank my D.M. cohort of 2016 and Ph.D. cohort of 2017: each of you contributed something valuable that helped me along the way: advice, humor, support, technical guidance, and just knowing you were in the trenches with me. Indeed, I believe I received more from you than I was able to give back.

Second, to my Ph.D. Committee: Chris Laszlo, my Committee Chair, from the very beginning you showed me the way. I’ll not forget the moment we first met: In

October 2013, in Glidden House at breakfast, I had a copy of Embedded Sustainability on my tabletop as I was eating breakfast. You walked by, saw the book, stopped, looked at me and asked: “So you like my book?” (And thank you Kathy Buse for recommending I read the book. How fortuitous was that connection.) Moreover, you have the uncanny ability to know the right moment to step in to offer words of encouragement or advice when they are most needed. Aron Lindberg, my Quantitative and Mixed Methods

Advisor, was extraordinarily patient in illuminating the often confusing path of quantitative methods research. Even as you were finishing your own Ph.D. and then transitioning to your new career, you always found time to help me in my struggles and continuous questions. Marc Epstein graciously agreed to serve on my Committee although he had no direct connection to Case Western Reserve University. Rather, your devotion to the subject matter and commitment to teaching excellence brought us together thanks to Chris Laszlo’s introduction. From our first discussion, in August 2014, you helped frame my thinking on the subject of sustainability and thereafter you willingly shared your vast knowledge of the domain. Dick Boland was my Qualitative Methods

ix Advisor for my first research study. You were continuously engaged throughout that process; you helped my initial learning in research methods, and thereafter you were always available to offer a smile along with sage advice. Roger Saillant completed my

Committee. You stepped in even at the same time you were transitioning to your new life’s journey. You offered high-level, practical, and thoughtful input on areas of sustainability about which I was not previously aware. Further, you brought a sense of calm within the occasional storm of a rigorous Ph.D. timeline. Although not one of my

Committee members, I must also mention Karen Braun who served as my Accounting

Advisor during my first year in the DM Program. You were the first to unveil the sustainability accounting literature that started me on the path which culminated in my dissertation.

I would also like to acknowledge with much gratitude the invaluable contributions of Kalle Lyytinen, Sue Nartker, Marilyn Chorman and Shelley Muchnicki. With so many moving parts at one time (i.e., in excess of 70 D.M. and Ph.D. students spread across four concurrent cohorts), you were always available to help me in the moment, without distraction from all the other demands upon you. Along with you four, there were two other individuals at Case Western who were critical ingredients in my success: Karen

Oye, you helped in my research struggles and showed me better ways to obtain literature and research data through the Kelvin Smith Library with its extensive resources. To say that you dug me out of several big ditches, would be underselling the value of your help.

Alexis Antes, as my copy editor and all-around polisher of my written work, you were always available to help fix my papers, doing so with perfection and often not much lead time.

x To my two Research Assistants, MBA students Xin Zeng and Puneet Hosatti, you

worked countless hours under tight time constraints to expertly analyze the many corporate sustainability reports that were the principal source of data for my two quantitative methods studies. Without this data, my research could not have progressed on the required timeline.

Lastly, to Professor Steve Olson at Georgia State University (and now at

Kennesaw State University), in the 2011 Corporate Responsibility course in my EMBA

Program at GSU, you were the instigator of my epiphany on how business enterprise must have a seat at the table in solving our global sustainability changes.

To each and all of you: Thank You.

xi The Role of an Ethos of Sustainability: The Hidden Value of Intangible Resources

Abstract

MATTHEW H. LEVIN

Business enterprises are investing in major sustainability initiatives; yet, often they do not know the financial outcomes of these activities. While managers may have a sense that

‘doing good’ yields financial rewards, they cannot pinpoint the specific effects on financial performance. There is extensive literature focusing on how corporate social responsibility (CSR) and sustainability initiatives affect corporate financial performance

(CFP). Since 1975 there have been over 200 research studies on this question; yet, the results remain mixed. In some cases, researchers have found a positive relationship between CSR and CFP; whereas, other research has revealed either negative or inconclusive relationships.

This mixed methods three-phased study draws data from a number of for-profit business enterprises, and seeks to understand how sustainability activities influence financial outcomes beneficial to the organization. Beginning with a qualitative research study and 32 interviews of business executives, consultants, and academics representing a broad cross-section of organizations, and followed by two quantitative research studies of

150 public corporations in different sectors of the manufacturing industry, I tease out a broader conceptualization of financial performance.

xii Utilizing existing theory together with analysis of exploratory research data, I

propose a new construct of how certain business organizations—those that have an ‘ethos

of sustainability’—may be enabled to develop unique firm resources that are “valuable,

rare, inimitable, and non-substitutable” (Barney, 1991). The third phase of this study

examines the relationship of an Ethos of Sustainability to Innovation as an intangible

resource of the firm. Based on tests utilizing content analysis of 150 corporate

sustainability reports and regression analysis of the hypothesized relationships, I find

associations between measures of firms’ Ethos of Sustainability and Innovation.

Specifically, striving for Operational Excellence, earning Sustainability Awards and

Memberships, and becoming a Learning Organization reveal significant and positive relationships with Innovation. Whereas, I find no significant relationship between Eco- efficiency and Innovation. Resource-based Theory, Stakeholder Theory, and Upper

Echelons Theory help explain these relationships.

These findings provide support for the business case for CSR and are important to

practitioners and academicians who are responsible for sustainability success within their

organization or field of research.

Keywords: corporate social responsibility (CSR); corporate financial performance

(CFP); ethos; innovation; intangible resources; sustainability

xiii INTRODUCTION

Successful corporations need a healthy society. Education, health care, and equal opportunity are essential to a productive workforce. Safe products and working conditions not only attract customers but lower the internal costs of accidents. Efficient utilization of land, water, energy, and other natural resources make business more productive…At the same time, a healthy society needs successful companies. No social program can rival the business sector when it comes to creating jobs, wealth, and innovation that improve standards of living and social conditions over time. (Porter & Kramer, 2006: 83)

Business enterprises can and must be a solutions provider to help solve the global

challenges we face together. The business sector has to lead the way in reuniting business

and society (Porter & Kramer, 2011). Many companies are making this genuine effort and they do so even if not knowing the financial benefits accruing from such efforts

(Levin, 2015).1 Yet, business enterprises face constant pressure to increase revenues,

reduce costs, and profitably grow; the notion of engaging in a robust CSR program

invites criticism from subscribers to the so-called Friedman doctrine, to wit: CSR is a

“fundamentally subversive” business practice because it extracts wealth from business

owners and redirects it to other non-owner stakeholders (Friedman, 1970).

Contrary to the Friedman doctrine pundits—and for as long as Friedman’s

admonition has stood in the literature—researchers have sought to demonstrate a positive

relationship between CSR2 and CFP.3 Indeed, the relationship between this antecedent

1 Throughout this paper, my three previous research studies underpin this dissertation: I refer to these studies, and identify where they can be found, as follows: Appendix A: Study 1 (Levin, 2015), Appendix B: Study 2 (Levin, 2016), and Appendix C: Study 3 (Levin, 2017).

2 “CSR”: Corporate Social Responsibility. In the literature, CSR is sometimes referred to as Corporate Social Performance (“CSP”). Because of difficulties in determining an adequate measure of CSR, CSP sometimes has been used as an empirical proxy (Kalaitzoglou, Pan, & Niklewski, 2016, citing Margolis, Elfenbein, & Walsh, 2009).

3 “CFP”: Corporate Financial Performance. 1

and consequence has been the single most researched CSR topic (Pope, 2016). The question, “Does it pay to be good?” has spawned an abundance of research studies which have yielded inconsistent results—some studies revealed a positive relationship between

CSR/CSP and CFP, some a negative relationship, some a mixed relationship, and some no relationship at all. These diverse findings are summarized by Margolis, Elfenbein, and

Walsh (2009) in an extensive meta-analysis study:

After 35 years of research and over 200 studies, there is a conclusive if perhaps unsatisfying answer to the question of whether companies benefit financially from social performance. The effect of CSP on CFP is small, positive, and significant. (p. 28)

In my research the aforementioned “unsatisfying answer” became top of mind, especially when reflecting on the inconsistency in results and the volume of studies that revealed other than a positive relationship between CSR and CFP. Companies continue to narrowly view value creation, seeking to optimize short-term financial performance while overlooking the most important customer needs and ignoring the broader influences that shape long-term success (Porter & Kramer, 2011). This prompted me to wonder whether there could be some type of value hidden in the hypothesized relationship between CSR and CFP (Levin, 2017).

The Research Gap: CSR and Hidden Value

Researchers are continually attempting to establish a link between firms’ sustainability initiatives and measurable financial performance; often the researchers are seeking to find a positive relationship between CSR and CFP (Levin, 2017). Recent literature posits they may have been overlooking another type of value that is being shaped by firms’ efforts toward better corporate citizenship—this is a value arising from the creation of intangible resources (see e.g., Branco & Rodrigues, 2006; Guenster, 2

Bauer, Derwall, & Koedijk, 2011; Jenkins, 2006; Nelson, 2004; White, 2006). The

question arises whether the more appropriate valuation of an enterprise should consider

intangible value based on the development of unique firm resources. In other words, is there an important element missing from the myriad of researchers’ studies on the

CSRCFP relationship?

In order to address the aforementioned enigma, in this dissertation I seek to understand how a firm’s focus on certain CSR initiatives and outcomes—an Ethos of

Sustainability as I previously framed the construct (Levin, 2015)—might positively influence financial value. Whereas increases in financial value are typically associated with near-term growth in profitability and/or tangible assets, this study seeks to tease out

a broader conceptualization of financial performance—ultimately focusing on indicators

of an Ethos of Sustainability that may have a significant relationship with a firm’s

intangible resources.

Ethos of Sustainability

In Study 1 (Levin, 2015), I cited examples in which interviewees’ comments gave me the sense that exemplar firms possess a unique connection to sustainability

initiatives—it was clear to me these respective companies embrace sustainability in a way

that journeys far beyond a basic corporate exercise. Continuing my research, I developed

these observations into a new construct which I labeled an Ethos of Sustainability. In

Study 2 (Levin, 2016) and Study 3 (Levin, 2017), I expanded and empirically tested this construct.

“CSR is about having an ethos and values as a company; such principles are frequently expressed in the company vision or goals, which often reflect the given

definition of CSR” (Jenkins, 2006: 246). These organizations display guiding beliefs that sustainability initiatives are much more than a passionless assignment: in reality a business enterprise’s commitment to sustainability is one it believes enriches operational

excellence and leads to innovation—sustainability helps develop unique resources and

enables the firm to be better than its competitors—and management intuitively believes

sustainability initiatives yield long-term financial value even when they cannot precisely

quantify that value (Levin, 2015). Social and environmental issues have taken on

heightened importance to society. For businesses, these issues represent some of the

greatest prospects to identify new markets of profitable growth, vibrant sources of competitive advantage, and effective ways to reduce operating costs and risks (Fisk,

2010).

Moreover, in Study 1, I observed firms with an Ethos of Sustainability were passionately pursuing social and environmental initiatives principally for the reason of being a good corporate citizen (Levin, 2015). In other words, these firms were not necessarily seeking a tangible financial benefit for their organization. However, in

hindsight, managers in these firms recognized that valuable outcomes were accruing to their companies because of its CSR/sustainability initiatives, to wit: in numerous

interviews with senior leaders I heard comments such as:

 “We have developed new technologies and new revenue streams due to our focus on sustainability.”

 “Emphasis on sustainability is simply a better way to manage our company.”

 “Due to our CSR commitment, we have become more environmentally efficient; there is less waste and less energy consumption.”

The following interview comment, from Study 1, illustrates this sense of a firm’s ethos:

What is really powerful about this experience at MMM, what I love about it is – and it goes back to that ethos – is that the biggest step, changing things that we did, there were some unique technologies, but really the common denominator was the person – two, three people that got an idea and absolutely stayed with it, and proved it out and you know, just sweat and grit, got it done. And I think that’s the real power of a big idea, of a big purposeful mission is you know, people aren’t going to give up on that if they see it. (President, Manufacturing Company)

Motivation for this Research

My interest in this topic is derived from 38 years of business experience,

practicing as both a CPA and Partner in a public accounting firm and a Vice President in

Corporate America, thereby viewing a wide variety of business practices (some good,

some bad) from the inside looking out. Additionally, for many years I have been an

engaged participant in the outdoor environment and I have observed both passionate care

and reckless degradation of the natural and social world in which we live.

The genesis for my research interest can be traced back to October 2011 when—

in one of the concluding courses in my Executive MBA Program at Georgia State

University—Professor Steven D. Olson commenced our course in Corporate

Responsibility with the following bold statement: “For the past 15 months this EMBA

Program has taught you how to maximize profit by exploiting available resources. This course in which we are embarking, Corporate Responsibility, will teach you from an

altogether different perspective.” And so began my new journey. The Porter and Kramer

(2006) paper cited in the headnote, above, was one of the papers we read. I have never

forgotten it. Their aforementioned quoted excerpt was the catalyst for my realization that business must have a seat at the table in maximizing the opportunities and solving the challenges we face. Restating portions of the Porter and Kramer (2006) quote: 5

“Successful corporations need a healthy society...At the same time, a healthy society needs successful companies. No social program can rival the business sector when it comes to creating jobs, wealth, and innovation that improve standards of living and social conditions over time” (p. 83).

With many influential mechanisms shaping my perspectives, the good has greatly inspired me and the bad has deeply troubled me. Through this research study—drawing upon lived experiences together with newly acquired academic research foundations—I seek to contribute to the literature and add value to the discussion.

Research Process in this Study

I follow an open mixed methods approach, using both qualitative and quantitative methods in my inquiry. This methodology is best suited to circumstances in which the phenomenon of interest is poorly understood, access to data is difficult or insufficient, a novel theoretical stance is expected, and research must be carried out through multiple phases (Creswell & Plano-Clark, 2010).

The remainder of this paper proceeds as follows: First, I explain the research aims of this study. Next, I review extant literature that has analyzed relationships associated with CSR, CFP, and intangibles. Third, I discuss the critical theoretical frameworks that help the reader understand these relationships. Fourth, I lay out the research design and methods, and explain how my three previous Studies underpin this dissertation and the role of each. Fifth, I integrate and explain the significant research findings from Study 1

(qualitative), Study 2 (quantitative), and Study 3 (quantitative). Last, I conclude this dissertation and draw insights from the research, reflect on contributions to theory and

practice, address limitations encountered in the three Studies, and outline opportunities for future research.

RESEARCH AIMS

My research aims in this dissertation are several: First, I seek to understand the experiences and motivations of executives, consultants, and academics whose organizations have a commitment to sustainability initiatives. Beyond this, I ask how these organizations are connecting their sustainability efforts with resulting financial impact. Are they connecting these initiatives to financial outcomes, and what are the results? Moreover, does an embedded sustainability commitment create a competitive advantage which yields superior financial results when compared to other, less sustainability focused firms? Last, is there another—and less obvious—value or firm resource being created by sustainability initiatives? If so, what specific factors serve as antecedents and can these be identified, empirically studied, and replicated by other firms?

This dissertation study follows a grounded theory path, with research “grounded in experience” pursuant to principles developed by Glaser and Strauss (1967). In the qualitative study I follow the approach of “developing theories from research grounded in data rather than deducing testable hypotheses from existing theories” [emphasis author’s]

(Glaser & Strauss, 1967, as cited in Charmaz, 2006). As such, each of my three research studies led to new discoveries, insights, and further questions which both informed me and compelled me to dig further in a mixed methods form of inquiry utilizing both qualitative and quantitative analyses. Accordingly, my research questions in each study

evolved and were directly influenced by the findings from each previous study. My research questions, and the study in which they arose, are summarized in Table 1:

Table 1. Dissertation Research Questions

By answering my first research question in Study 1, I will better comprehend the domain in which business executives and advisors must operate, contending with the sometimes competing objectives of being a good corporate citizen (satisfying a broad stakeholder group) while concurrently maintaining or improving short-term firm profitability (satisfying a narrow stakeholder group). Additionally, I will learn about the motivations of these individuals and what drives them and their firm toward exemplary corporate citizenship. The second research question is an extension of the first, and will inform me on the extent to which these firms are able to monetize and represent to stakeholders the financial results of the firm’s sustainability efforts.

In Study 2, answering the third and fourth research questions hopefully will enable a quantification of short-term financial value arising from the Ethos of

Sustainability construct I hypothesized in the Study 1 Findings and Conclusion. Further, 8

research questions three and four may tease out distinctions between short-term financial

value (question three) vis-à-vis superior financial results (question four) arising from an

Ethos of Sustainability. In research question five, I seek to evaluate a possible alternative

to question four—specifically, if firms with an Ethos of Sustainability do not financially outperform other peer group firms, then demonstrating that short-term financial results are no different between these groups would be an important finding. If such is the finding, it could be argued that a sustainability ethos is not detrimental to a firm’s financial bottom line and, therefore, a firm should conclude that it is reasonable to simply choose to be a good corporate citizen.

Study 3 adopts a long-term perspective on financial value, and considers whether intangible resources—which could yield a competitive advantage—are being created irrespective of a firm’s short-term financial profitability with respect to sustainability initiatives. Based on these inquiries and related findings, I argue that firms with an Ethos of Sustainability can cultivate the intangible resource of innovation—notwithstanding their ability or inability to measure short-term financial profitability from these sustainability initiatives.

LITERATURE REVIEW

Introduction

Management and accounting literature has explored a variety of issues associated

with CSR, sustainability, and related metrics: whether and how sustainability increases

financial performance; discussions and arguments surrounding non-financial

sustainability metrics; and recent concerns where, in some cases, commitments by certain

companies may be waning due to an inability to connect sustainability initiatives with

financial performance. With respect to this latter point, the relationship between social,

environmental and financial goals is often typified with short-term competition and

inconsistencies vis-a-vis long term benefits (Mackey, Mackey, & Barney, 2007; and

Smith & Tushman, 2005, as cited in Epstein, Buhovac, & Yuthas, 2015). Although this

triad of social, environmental, and financial initiatives may benefit one another in the

long-term, many times, they are conflicting in their need for corporate resources in the

near-term (Margolis & Walsh, 2003). Because of these types of stress factors between

short-term demands vs. long-term goals, a firm’s desire to be socially and

environmentally conscious may be displaced by the financial performance exigencies of

the day (Epstein, Rejc Buhovac, & Yuthas, 2015).

Researchers have been struggling in their search for a universal explanation of the

relationship between corporate social responsibility and corporate financial performance; a comprehensive association between the two constructs has been difficult to reach

(Allouche & Laroche, 2005). The body of literature is broad and deep in analyzing the many facets of CSR and CFP, and the following discussion provides a high-level survey of the landscape. In this section I proceed as follows: First, I address the confounding

nature of terminology pertaining to CSR, sustainability, and corporate citizenship. Next, I summarize the extensive domain of literature in connection with CSR and CFP. Third, I

recapitulate the literature pertaining to CSR and intangibles.4 Last, I introduce the

intangible resource of innovation as a research motivation in this dissertation.

4 See Appendix A: Study1, Appendix B: Study 2, and Appendix C: Study 3 for more detailed discussion of these topics. 10

Confounding Terminology: CSR, Sustainability, and Corporate Citizenship

“CSR” (or “CSP”) has become a generic construct supplanting a number of other

common usage terms, several examples of which are: business ethics, corporate

citizenship/responsibility, stakeholder management, sustainability, sustainable

development, and triple bottom line (Nelson, 2004; Pope, 2016). Yet, there is not a

consistent definition of “CSR” (Kalaitzoglou, Pan, & Niklewski, 2016; Malik, 2015;

White, 2006). Lack of clarity about the terminology can become an obstacle for

practitioners and academics who are working in this area (Nelson 2004).

“CSR” refers to the “economic, legal, ethical, and discretionary expectations that

society has of an organization at a given point in time” (Carroll, 1991; Pope, 2016).

Moreover, CSR captures a firm’s commitment to sustainable economic development—

collaborating with employees, their families, local communities, and the greater society

to improve the general quality of life (Branco & Rodrigues, 2006, citing Holme, 2000).

“Sustainability” has matured from the concept of conservation in the 20th century to a complete model of stewardship—social, economic, and environmental. True sustainability applies systems thinking to anticipate unintended consequences that can occur when the entire system is not considered (Babe, G., in forward to Laszlo &

Zhexembayeva, 2011). Here, the firm must display wisdom in setting appropriate boundary conditions in which it will operate.

“Corporate citizenship”—and its connection to corporate social responsibility— includes pro bono activities, corporate volunteerism, charitable contributions, support for community education and health care initiatives, and environmental programs (Gardberg

& Fombrun, 2006).

There are common elements in how we think about CSR/CSP, sustainability, and corporate citizenship (see e.g., Branco & Rodrigues, 2006: 128, Note 3). Jenkins (2006) recognized: “Several common themes emerged while discussing CSR as a concept… and

CSR is synonymous with sustainability, defined as balancing social, economic and environmental demands” (p. 246). Intuitively, a firm cannot embrace a CSR devotion if it lacks a sustainability commitment. These four terminologies—CSR, CSP, sustainability, and corporate citizenship—endure in research studies and I use them interchangeably in this paper so as to be faithful to the original literature.

Does CSR Positively Influence CFP?

There is a vast body of qualitative and quantitative research centered on the relationship between CSR and CFP. Three primary research streams have focused on financial outcomes from CSR activities; these are rooted in the management, accounting, and finance literature, with the majority of CSR-related research being published in the management literature (Malik, 2015). A number of researchers have found that diverse

CSR efforts positively affect CFP by increasing revenues, decreasing costs, and/or mitigating risks. Conversely, other researchers have found certain of these CSR antecedents either negatively affect CFP or reveal no significant impact. It is difficult to say if firms that are perceived as being socially responsible financially over- or underperform as compared to firms that do not have an established CSR reputation (Branco &

Rodrigues, 2006). Definitive assessments are affected by a variety of confounding factors, including difficulties related to the measurement of both CSR and CFP, criticisms regarding omitted controls, lack of causality, and the range of qualitative factors which

contribute to CFP (Branco & Rodrigues, 2006, citing Margolis & Walsh, 2003 and

Lantos, 2001).

During the 35-year period between 1972 and 2007 there have been over 200 research studies conducted with respect to the relationship between CSR/CSP and CFP

(Margolis et al., 2009). Included in this literature are six landmark meta-analysis studies which summarize the preponderance of these individual studies. By utilizing these meta- analysis studies as a point of leverage, in Table 2 I summarize the findings from the multitude of individual research studies:

Table 2. Summary of CSR/CSP CFP Literature

In summary, over the long-time span of these research studies, traditional financial measurements5 of the relationship between CSR/CSP and CFP have yielded

inconsistent findings—some studies revealed a positive relationship between CSR/CSP

and CFP, some a negative relationship, some a mixed relationship, and some no

5 Some of the most common measurements have been ROA, ROE, ROS, and Price to Earnings (P/E) ratios. 14

relationship at all. I return to my earlier query of whether there is an important element

missing from the abundance of research, and ask if there is potentially some type of

intangible value being created from a firm’s sustainability initiatives? To this end, I next

review the literature which addresses CSR and intangibles.

The Significance of Intangible Value

In view of research that has been unable to show a strong and consistent causal

link between social and financial performance, a growing body of evidence suggests

there are intangible benefits from CSR. A recent stream of research puts forth the

argument that CSR initiatives may be unassumingly creating an intangible resource or

asset—intrinsically valuable, although difficult to quantifiably estimate (see e.g.,

Guenster et al., 2011; White, 2006).

What are intangibles? “What are intangibles?” is an important beginning query in this discussion. The answer to this question can be elusive. Unlike hard physical assets

citizenship, we are faced with a similar dilemma in connection with the overlapping

jargon of intangible resources, intangible assets, intangible value or, simply, intangibles.

Although technical distinctions between the terms perhaps could be made, for purposes

of this paper and in order to be faithful to the literature, I use the words interchangeably as they originally appeared.

Intangible assets are rarely reported in firms’ traditional financial statements.

“Intangibles, in other words, are not only intangible; they are largely invisible in relation

to standard business management tools and disclosures” (White, 2006: 4)6. In financial

accounting parlance, the International Accounting Standards Board (IASB) defines

intangible asset as: “an identifiable non-monetary asset without physical substance.”7 In

more common business vernacular, an intangible asset is defined as: “…an asset that is

not physical in nature. Corporate intellectual property, including items such as

patents, trademarks, copyrights and business methodologies, are intangible assets, as

are goodwill and brand recognition.”8 In an even broader perspective of assets, intangibles are “a useful or valuable quality, person or thing; an advantage or resource.”9

There is a broad spectrum of intangibles literature, drawing from practitioner as well as academic streams of research. Table 3 provides a synopsis of key points in the literature:

6 See also, Appendix C: Study 3 – “The Significance of Intangible Value: The financial accounting dilemma with intangibles” for a detailed discussion of current issues and difficulties in accounting for the financial value of intangibles.

7 IASB Standard 38.

8 http://www.investopedia.com/terms/c/civ.asp

9 Sisodia, Wolfe, & Sheth (2014): 170. 16

Table 3. Synopsis of Intangibles Literature

CSR and intangibles. In the past 10 years, researchers have become interested in

CSR and how it may influence the creation of intangible resources within the firm. This thinking centers on whether CSR initiatives may lead to an organization’s competitive advantage due to the development of unique resources that are not easily replicable by other firms (Barney, 1991; Branco & Rodrigues, 2006; Sisodia et al., 2014). These streams of research are outlined in Table 4:

Table 4. Synopsis of CSR and Intangibles Literature

Innovation as an intangible resource. Certainly, intangibles have become important factors of business value creation in our contemporary knowledge-based economy. Intangible resources—such as corporate reputation, intellectual capital, innovation, and relationships with stakeholders—are now recognized as key drivers of corporate value in most industry sectors (Jenkins, 2006; Nelson, 2004). Here, I suggest an important next step in this research arena is a methodical examination of the content of

CSR undertakings—the extent to which activities arising from an Ethos of Sustainability may predict an intangible resource of the overall business enterprise.

“During the past half century, the market conditions that executives face have changed dramatically…In this fast-changing and volatile context, innovation in technology, processes, products, and business models has become ever more important”

(Laszlo et al., 2014: 28). Realizing the intangibles landscape is broad and deep, in this

dissertation I narrow my focus to that of innovation as a vital intangible resource which is suggested in the literature (see e.g., Branco & Rodrigues, 2006; Nelson, 2004).

THEORETICAL FOUNDATIONS

Introduction

The literature has emphasized factors that influence firms’ focus on environmental and social initiatives; for purposes of this dissertation these can be organized along four theoretical streams of research: resource-based theory10, stakeholder

theory, upper echelons theory, and theory of the business. I recap the comprehensive analyses of these theoretical foundations from my previous research studies (Appendix B:

Study 2 and Appendix C: Study 3), and expand on the applicability of these theories with respect to an Ethos of Sustainability and its relationship to intangible resources of the

firm. Moreover, these frameworks facilitated the research design and methodology for this current study. These four theories, taken together, illustrate how an engaged leadership team can influence the firm to develop unique intangible resources which enhance the organization and serve a broad constituency while improving the human condition. Table 5 outlines the key foundational knowledge which I draw from these

theories and apply in this study:

10 Resource-based Theory (“RBT”) is sometimes referred to in the literature as the Resource-based View or Resource-based Perspectives (“RBP”). See e.g., Branco and Rodrigues, 2006: “The RBP examine the link between a firm’s internal characteristics and its performance. The differentials in performance are explained primarily by the existence of firm-specific resources that are valuable, rare, not easily imitated by rivals (inimitable) and not easily bought or sold on markets (non-substitutable)” (Branco & Rodrigues, 2006: 116). 19

Table 5. Summary of Foundational Theories

Resource-based Theory

Resources, CSR, CFP, and intangibles. The number of studies devoted to CSR which adopt a resource-based view (often in combination with other theoretical perspectives) has grown in recent years. This trend began with a focus on environmental aspects and has subsequently extended to more general issues of CSR (Branco &

Rodrigues, 2006). “Resources” include the assets that firms use to accomplish their business objectives and implement their strategies—converting inputs into outputs—and these can be classified as tangible (e.g., physical and financial assets) and/or intangible

(e.g., corporate reputation, know-how, experiences and skills, and commitment to the

organization) (Branco & Rodrigues, 2006). Intangible resources and capabilities11 are defined as “non-physical factors that are used to produce goods or provide services, or are otherwise expected to generate future economic benefits for the firm” (Galbreath,

2005: 981).

Resource-based theory can contribute to the analysis of CSR by offering helpful perspectives on how social responsibility may influence a firm’s financial performance.

These perspectives are important in that, among other things, “they explicitly recognise the importance of intangible resources such as know-how, corporate culture and reputation” (Russo & Fouts, 1997: 535). Moreover, “application of resource-based rationales to CSR is appropriate because they influence a firm’s financial performance, require investments of financial and/or human resources, and create new opportunities through changes in technology” (Bansal, 2005: 200).

Stakeholder Theory

Stakeholder theory, and its relationship to CSR and CFP. Stakeholder theory is an important research element which helps explain the potential economic benefit arising from CSR (Jenkins, 2006), to wit: firms that better meet their stakeholders’ needs are rewarded by higher legitimacy, better access to resources (Kalaitzoglou et al., 2016, citing Hooghiemstra, 2000) and favorable financial performance (Preston & O'Bannon,

1997). In this regard, the symbiotic relationship between stakeholder theory and good corporate citizenship is evident: corporate social performance refers to “the ability of the

11 Ray, G., Barney, J.B., and Muhanna, W.A. (2004) use the terms “resources” and “capabilities” interchangeably to refer to the tangible and intangible assets used by firms to develop and implement their strategies (Branco & Rodrigues, 2006: 129, Note 8). 21

firm to meet or exceed stakeholder expectations regarding social issues” (Branco &

Rodrigues, 2006: 119, citing Husted, 2000: 27).

Stakeholder theory, resource-based theory, and their relationship to intangible

value. Serving the implicit expectations of major stakeholders enhances a firm’s

intangibles such as corporate reputation, which can have a positive impact on its financial

performance; conversely, disappointing these constituents may result in a negative

financial effect (Preston & O’Bannon, 1997). Further in this regard, developing effective

relations with primary stakeholders can facilitate increased financial returns because it

aids firms in cultivating valuable intangibles (resources and capabilities). In turn, these

may promote competitive advantage because such intangibles can differentiate a firm

from its competitors (Branco & Rodrigues, 2006). “This ‘social impact’ version of the stakeholder theory implies a lead-lag relationship between social and financial

performance; [intangibles such as] external reputation (favorable or unfavorable)

develop first, then financial results (favorable or unfavorable) follow” [emphasis added]

(Preston & O’Bannon, 1997: 421). This argument from Preston and O’Bannon (1997) is

foundational to the thesis of my dissertation study—that is, intangible resources are being shaped by firms’ efforts toward better corporate citizenship and, further, intangibles may be an important element missing from prior research studies on the CSRCFP relationship. (See “Introduction – CSR and Hidden Value”, above.)

An extensive body of work has explored resource-based theory, including papers that address the role of intangible resources and capabilities such as knowledge, networks, strategic alliances, and collaboration. However, a research focus with respect to business practices has lagged, and intangible value remains underestimated in resource

allocation decisions (Laszlo et al., 2014). Stakeholder theory has evolved alongside

resource-based theory and dynamic capabilities. Although there is evident synergy

between these two theoretical strands, surprisingly there has been little integration

between them (Laszlo et al., 2014).

The suitability of stakeholder theory and resource-based theory, when taken together, should be underscored at this point. RBP can be envisaged as subordinate

perspectives of the stakeholder meta-narrative. Moreover, RBP, when applied to CSR analysis, can be conceived as “a subsidiary theory of the stakeholder meta-narrative in

that a number of constituencies are recognized [that] take a more descriptive view of how

a company addresses and deals with those constituencies” (Branco & Rodrigues, 2006:

126). In tying together the essential and interwoven relationships between resource-based theory (RBT/ RBP), stakeholder theory, and intangibles, Branco and Rodrigues summarized:

RBP are considered as a useful starting point in the analysis of CSR because they emphasize the importance of intangible resources and capabilities and consider them to be the most important sources of firm success. Intangible resources and capabilities are created and enhanced or depleted to a great extent through relationships with stakeholders and these are fundamental sources of a firm’s wealth. A firm’s long-term survival and success is thus determined by the ability to establish and maintain such relationships. RBP perspectives offer important contributions to understanding the mechanisms through which stakeholder management translates into positive impacts on financial performance. In effect, when deciding to engage in CSR activity managers most likely have in mind the possible benefits which are underlined by RBP. (Branco & Rodrigues, 2006: 128)

Upper Echelons Theory

Upper echelons theory and its influence on the firm’s ethos. The top management team (“TMT”) has a pervasive influence on the direction of their firm.

Realizing the importance of the upper echelons in firms, a number of studies have 23

attempted to identify the relationships between CSR and various management

characteristics. Management awareness and commitment is a vital component in attaining

social and environmental improvements (Pedersen, 2010). The firm’s senior leadership

influences performance characteristics and outcomes in a number of ways: Epstein, Rejc

Buhovac, and Yuthas (2010) found where upper management has embraced the belief

that sustainability initiatives are beneficial to their organization, the employees will be willing to make tradeoffs because they know the leaders will be supportive. Lumpkin and

Dess (1996) observed that TMT features are an essential contingency factor influencing the relationship between firm-level innovation and CFP. Similarly, Lyon and Ferrier

(2002) found that the character of the TMT will influence the innovation—CFP relationship.

Theory of the Business

Theory of the business and its relationship to CSR. The growing social awareness about CSR issues has placed considerable burdens on firms to manage the social and environmental impacts of their behaviors and to become accountable to a broader audience than its shareholders (Branco & Rodrigues, 2006). This normative pressure on firms to serve as agents of world benefit has heightened their embracing CSR or corporate citizenship initiatives (Donaldson & Walsh, 2015). “To say that a theory of the business must account for the purpose of business is one thing, it is something else entirely to articulate just what that purpose is” (Donaldson & Walsh, 2015: 202). The purpose, therefore, shall be to optimize overall prosperity by serving humanity

(Donaldson & Walsh, 2015).

Theory of the Business, its relationship to stakeholder theory and CSR.

Trying to meet or exceed stakeholders’ expectations suggests the need to consider

predominant social norms and influential views of firms’ responsibilities. There has long

been ubiquitous suppositions about what a modern firm should be and how it should

behave—i.e., whom shall it serve? In turn, it becomes vital for organizations that are expected to (or want to) appear to be progressive to incorporate such assumptions into their operations (Branco & Rodrigues, 2006).

Here is where CSR/corporate sustainability is gaining momentum within the business community and committed companies are indeed producing significant benefits for both internal and external stakeholders (Donaldson & Walsh, 2015). Research has documented many of these activities: attracting and retaining high quality employees; marketing initiatives focused on attracting and retaining a loyal customer base; socially responsible investment practices focused on attracting impact investors; microfinance initiatives’ ability to provide capital to entrepreneurs at the so-called Bottom of the

Pyramid; and attention to human rights and the environment in firms’ supply chains

(Donaldson & Walsh, 2015).

Summary of Insights from Theory

Viewed in the context of this dissertation study, a firm whose leadership looks outward to a broad array of stakeholders, and with a focus on serving others may, in turn, develop resources leading to unique value (both tangible and intangible) of the organization—the so-called “doing well by doing good”. In part, this grows from developing competencies that are valuable, rare, inimitable, and non-substitutable

(Barney, 1991). Examples of this include: respect for individuals (e.g., ease of hiring

superior personnel, better value production from employees, and lower turnover costs);

greater novelty of products and services (e.g., increased revenue streams from innovative

and better products brought to market); lower cost of capital (e.g., reduced costs of equity and / or debt financing); greater asset utilization (e.g., improved sales-to-asset ratios that

convert ROAs to higher ROEs); easier entry into new markets (e.g., new revenue

opportunities via environmentally or socially defined Blue Ocean Strategies); lower risk related to better management of environmental liabilities (e.g., reducing or eliminating potential financial costs arising from environmental damage); and reduced waste, energy use, and consumption of natural resources (e.g., lower operating costs).

In summary, these beneficial outcomes may be indicative of a firm’s innovation by increasing revenues from new product design and delivery, reducing operating costs and production waste by developing unique new technologies, attracting and retaining exceptional talent, and being viewed in the marketplace as a leading-edge company that will thrive in the hyper-competitive business environment.

RESEARCH DESIGN AND METHODOLOGY

Research Design

This is an exploratory research study with three component parts. Pursuant to a

grounded theory approach for exploratory research (Van de Ven, 2007), I developed

propositions after collecting and analyzing data that were gathered in the first qualitative

study (Levin, 2015), continued to explore these propositions in the second quantitative

study (Levin, 2016), and explored different perspectives in a third quantitative study

(Levin, 2017).

Mixed methods research design. In order to answer my research questions, I

followed an open mixed methods research design (Creswell & Plano-Clark, 2010). This

design provides the opportunity to use more than one method for gathering, analyzing, and representing the human behaviors related to corporate social and environmental initiatives and their relationship to an Ethos of Sustainability. In following a mixed methods research design, both qualitative and quantitative approaches are utilized in combination; this enables a better understanding of research problems than using either approach alone (Creswell & Plano-Clark, 2010). Mintzberg (1979) described this synergy with respect to the integration of qualitative and quantitative data:

For while systematic data create the foundation for our theories, it is the anecdotal data that enable us to do the building. Theory building seems to require rich description, the richness that comes from anecdote. We uncover all kinds of relationships in our hard data, but it is only through the use of this soft data that we are able to explain them. (p. 587)

Typology of the study. The typology of this mixed methods research study is

QUALQuanQUAN (Morse, 1991) and can be classified as “fully mixed sequential design (F4)” following the guidelines outlined by Leech and Onwuegbuzie (2009: 271).

The typology is classified as “fully mixed” rather than “partially mixed” because Study 2

(Quan) and Study 3 (QUAN) incorporate qualitative interpretation of third party archival information in order to develop a coding rubric to obtain data for the quantitative analysis.

Points of mixed methods integration. There are two points of integration between

the three phases: the first integration point occurs as I interpret the findings from Study 1

(QUAL) and how it influenced my design of the hypothesized model for Study 2 (Quan).

The second integration point is when my interpretations from Study 2 (Quan), together

with further research, informed my conceptualization of the hypothesized model to explore in Study 3 (QUAN).

Next, I outline how the remainder of this section proceeds: Figure 1 presents an overview of the mixed methods research design—summarizing the research questions and how they were distributed in each study; the methodologies applicable to each research question; the sequential flow of each study and how it integrates with the other two studies; and the observations and findings from each study. In the discussion that follows, I review the principal methodological aspects of each study.

28 Figure 1. Multiphase Mixed Methods Research Design

29 Research Methodology: Study 1 (QUAL)

The primary research questions for this study were:

RQ1: What are the experiences of executives and advisors in connecting the business enterprise’s sustainability initiatives with growth in financial value?

RQ2: How and to what extent are organizations accounting for, or otherwise measuring, financial value arising from these sustainability initiatives?

I conducted a qualitative research study using semi-structured interviews. In thinking about what should be my source of data, I decided to obtain it through research interviews with corporate executives and managers who were currently employed in for-

profit business organizations with a stated commitment to follow a sustainability path.

Furthermore, in order to “triangulate” my research data, I also sought interviews with professionals who were deeply involved in sustainability, but external to industrial business organizations.12 This latter group included individuals employed as consultants

and advisors, academicians, and entrepreneurs.

I followed an iterative process, one that continually tacked back and forth

between the different components of the design. As my research progressed, I sought to

evaluate how my methods were fitting based on their intended purpose, and to make

course corrections along the way as needed. An important aspect of my research was to

follow the techniques of constant comparison and theoretical sampling, both of which are

foundational to a grounded theory approach. By using the constant comparative method, I

made comparisons of my data during each stage of the analysis (Charmaz, 2006). The

constant comparative method caused me to make analytic distinctions (comparisons)

12 The practice of triangulation has been used in social science research as a means of ensuring validity of data. It is a method of cross-verification from multiple sources, and is an “attempt to map out, or explain more fully, the richness and complexity of human behavior by studying it from more than one standpoint” (Cohen et al., 2000). See also: Altricher et al. (2005), Denzin (2006), and O’Donoghue & Punch (2003). 30

among and between my data at each level of my work, thereby observing the emergence of similarities and differences from within (Glaser & Strauss, 1967). Following each interview, I wrote a memo that freed my thinking to explore ideas about my categories

(Charmaz, 2006). Furthermore, memo-writing served as an excellent tool to capture important ideas while ‘in the moment.’ Theoretical sampling enabled me to let the then- collected data guide my continuing selection of informants, and the refinement of interview questions to pose, with the goal of expanding my research findings to reach theoretical saturation. With theoretical sampling, I was seeking pertinent data with which to develop my theory as it emerged (Charmaz, 2006; Glaser & Strauss, 1967).

When I entered the coding phase with respect to my collected data, I followed a three-cycle process of open coding, next axial coding, and then theoretical coding. My objective was to identify emerging themes based on that data (Saldaña, 2013). See Figure

2 which summarizes my coding results.

Sample. The study participants (“Informants”) were selected from a broad variety of organizations: global corporations, entrepreneurial businesses, consulting firms, academicians, and wealth management firms. With respect to the companies from which

I interviewed the respective Informants, these organizations were in a wide range of industries. See Tables 6 through 9 for a Summary of Subjects by Sector, Position, Age

Range, and Educational Background. The common thread running through each of these entities was they all had articulated a commitment with respect to sustainability initiatives and thought leadership. Furthermore, the individuals interviewed were part of the senior leadership responsible for that organization’s sustainability mission. As outlined above,

my goal in selecting this wide range of Informants was to triangulate on data grounded in

experiences from these diverse vantage points.

Informants were physically located throughout the U.S., with two of them

residing outside the U.S. These geographic areas included: California, Colorado, Georgia,

Illinois, Minnesota, New York, Ohio, Texas, Vermont, Vancouver British Columbia, and

Shanghai China. The individuals were raised in a variety of different countries and

cultures, including: Canada, Germany, India, Korea, the UK, and the U.S. The gender

distribution was 20 male and 10 female. Informants’ ages ranged from mid-30s to mid-

60s. The Informants were highly educated. While I made no attempt to choose

individuals with advanced education, I did ask this background question during our

interview. Of the 30 individuals I interviewed, all 30 held a Bachelor’s degree, 20 had

earned a Master’s degree, two had earned J.D. and four had earned Ph.D. degrees.

Table 6. Summary of Subjects by Sector13

Primary Manfr'g / Pharma/ Transport'n / Consulting / Consumer Media / Real Science/ Academia Industry Mining Hygiene Logistics Advisory Products Publishing Estate Engineering

Number of 11 3 4 7 6 1 1 2 2 Executives

Table 7. Summary of Subjects by Position14

Primary CEO / VP & CSO / Director Manager of Managing Director/ Professor Position President of Sustainability Sustainability Partner

Number of 2 15 4 9 2 Executives

13 I interviewed 30 individuals; however, in several cases the Interviewee had worked at more than one company and / or had held different positions in an organization. In some cases the Interviewee talked about their experiences at more than one of the companies at which they worked. Therefore, the numbers in Tables 1 and 2 total more than 30.

14 Same as Footnote 12. 32

Table 8. Summary of Subjects by Age Range

Age Range 30-39 40-49 50-59 60+

Number of 5 8 9 8 Executives

Table 9. Summary of Subjects by Educational Background

Bachelors Bachelors - Bachelors - Bachelors Masters - College - Natural Social Masters/ Engineering Business MBA Natural JD PhD Degree Science Science Other discipline discipline Science discipline discipline

Number of 7 5 8 10 8 6 6 2 4 Executives

Data collection. Data was collected via one-to-one research interviews with 30

Informants during the period June through October 2014. One manufacturing plant tour was conducted in December 2014 based on the invitation of a previous Informant (from

October). Interviews were conducted in-person whenever possible. Due to the geographic dispersion of the Informants, some interviews were conducted via telephone or Skype audio conference call. During the interview, I recorded the entire discussion via a separate digital recording device. (See Appendix A: Study 1, then Appendix B of that study for the Interview Protocol.) The digitally recorded interviews were transcribed by an independent data transcription service and then analyzed by me.

The interviews were based on a semi-structured format. I asked open-ended questions with the objective of understanding the subject’s concrete, lived experiences concerning sustainability initiatives within their current or former business organization. I followed up each interview question with a variety of probes intended to elicit further details from the Informant.

Data Analysis. Data analysis was a fluid process; my analysis commenced with

the first research interview and continued throughout the study until its completion. As previously explained, I followed a three-cycle process of open, axial and theoretical coding which is recommend by Corbin and Strauss (2008). In order to provide a well- organized platform for data analysis, I used NVivo software. After my analysis was complete (open and axial coding), I had coded 2,374 total references from my data—

“codable moments” which are portions of text with potential significance (Boyatzis,

1998).

When I entered the theoretical coding phase, I capsulized the codes into emergent themes. At this stage I identified 11 theoretical codes which were: Commitment,

Corporate Culture, Difficulties / Complexity, Efficiency, Financial Value, Flourishing,

Innovation, Measurement, Operations Excellence, Stewardship, and Sustainability

Stories. I then cycled back though my data, doing a detailed analysis while looking for clues that would reveal emerging themes. From this process, I identified three emergent themes: Belief, Commitment, and Ethos.

Figure 2. Summary of Codes and Emergent Themes

Research Methodology: Study 2 (Quan)

The primary research questions for this study were:

RQ3: To what degree does an Ethos of Sustainability contribute to Financial Performance of a business enterprise?

RQ4: Further, does an Ethos of Sustainability enable these so-called exemplar companies to financially outperform peer group organizations?

RQ5: Alternatively, if companies with an Ethos of Sustainability do not financially outperform other peer group organizations, can it be said that firms with this ethos fare no worse, financially, by committing to a rigorous sustainability path?

In order to understand the influence of a corporate sustainability ethos on

resulting financial performance, I conducted a quantitative study using archival corporate

data. Informed by the perspectives on Net Positive Impact and Do Less Harm—as described in Appendix C: Study 3, “Research Design and Methods – Net Positive Impact

and Do Less Harm”—I hypothesized that the financial performance of manufacturing

companies would be impacted by the extent to which they engage in corporate

sustainability initiatives. Thus, the deeper a respective company’s sustainability

commitment (i.e., its sustainability “ethos”) the greater would be a positive relationship

with financial profitability results. Through my analysis, I identified measures for the

constructs of Ethos of Sustainability and Corporate Financial Performance, and then set

these into a structural equation model.

Sample. I utilized the Morningstar database to select the sample group of

companies (N=150) based on the following search criteria—each entity: (1) is a for-profit

enterprise; (2) is a U.S.-based Company that issues U.S. GAAP audited financial

statements, has common equity shares that are publicly traded and listed on either the

NYSE or NASDAQ,15 and has published a periodic sustainability report(s); and (3) has

its primary business operations centered in the manufacturing industry (i.e., the Company

is non-diversified into other unrelated industries).

My reasoning for the aforementioned sample group criteria was as follows: (1) the

dependent variable of interest in my study is financial performance of a business

enterprise; (2) for purposes of analysis and comparability, I desire to examine companies

15 NYSE: New York Stock Exchange; NASDAQ: National Association of Securities Automated Quotations System. 36

that follow the same accounting procedures (i.e., GAAP rather than IFRS16) and that have publicly accessible data; and (3) manufacturing companies are plentiful in the U.S. and historically have been fraught with a plethora of social and environmental issues. Further, sector-specific research [e.g., the manufacturing industry] is needed in order to facilitate more accurate measurement of financial performance which would, therefore, increase internal validity (Salzmann, Ionescu-Somers, & Steger, 2005). This enables a focus on the special uniqueness that is in inherent in discrete industries (Griffin & Mahon, 1997).

(See Appendix B: Study 2, then Appendix B of that study for a listing of the manufacturing companies in the sample group and a summary of sample group manufacturing companies by sector and industry.) The baseline fiscal year was 2014 for the analyzed sustainability reports. I selected 2014 in order to ensure availability of the needed sustainability reports.

Development of independent variables: Ethos of Sustainability and data collection. The construct “Ethos of Sustainability,” as used in this research study, refers to how companies possess a unique connection to sustainability initiatives and how these organizations embrace sustainability in a way that eclipses a basic corporate exercise.

“Ethos” itself cannot be directly observed. Therefore, the independent variable focus is with respect to constructs of “Net Positive Impact” and “Do Less Harm” for which specific qualitative coding indicators were developed.

The data were obtained via content analysis of the sample group companies’ published sustainability reports and organized using NVivo software. Content analysis is an established research technique for making replicable and valid inferences from texts to

16 See Appendix B: Study 2, then Appendix A of that study for the definition of these terms. 37

the contexts of their use. This method is empirically grounded, exploratory in process,

and predictive or inferential in intent (Krippendorff, 2013). Content analysis is an

appropriate research methodology for this study because it can be simultaneously applied

by several researchers to a wide range of data. This is accomplished by using a standard

Coding Manual which has been developed for this specific analysis (Krippendorff, 2013).

It is a technique that has been utilized with greater effect since the 1980s, as it allows for

rigorous analysis of voluminous business data such as that which is present in this

research study (Duriau, Reger, & Pfarrer, 2007; Woodrum, 1984). Further, content

analysis is well-suited for use in predictive studies with respect to accounting earnings

and financial impact arising from social and environmental initiatives (see, e.g., Epstein

& Roy, 2003; Tetlock, Saar-Tsechansky, & Macskassy, 2008; Wang, Dou, & Jia, 2015).

Here is where I developed a Construct Table and Coding Manual that outlined specific

words, actions, and representations which could be observed in corporate sustainability

reports. Due to the extensive volume of material and rigor required in the data collection,

I hired two Weatherhead School of Management MBA research assistants to assist with

the data collection and analysis. (See Appendix B: Study 2, “Research Design” for

detailed discussion of those procedures, then Appendix C of that study for the Coding

Manual.)

Between myself and the two research assistants, we examined and coded 150 corporate sustainability reports during the time period March through August 2016.

When this process was complete, we had coded 13,856 total references from the data—

“codable moments”—which are portions of text with potential significance (Boyatzis,

1998). Table 10 summarizes these results:

Table 10. Content Analysis: Summary of Sustainability Report Coding Results

Development of dependent variables: Corporate Financial Performance and data collection. Corporate Financial Performance was measured based on ratio analyses of selected financial accounting data. Results from this ratio analysis enabled a comparison and ranking of a respective company’s financial results relative to its Ethos of Sustainability. Historically, a wide range of financial ratios has been used for evaluating corporate financial performance relative to sustainability activities, and there is no final consensus on the proper measure of financial performance in this regard

(Cochran & Wood, 1984). Also of note, corporate social performance appears to be more

highly correlated with accounting-based measures of financial performance than with market-based indicators of financial performance (Orlitzky et al., 2003).

The accounting ratios used in this research study were as follows:

 Return on Assets (ROA)—The ratio of operating earnings to total assets measures the relative efficiency of asset utilization (Cochran & Wood, 1984; Griffin & Mahon, 1997).

 Return on Sales (ROS)—The ratio of operating earnings to net sales measures the profit margin attained by the portfolio of products offered by the firm (Cochran & Wood, 1984; Griffin & Mahon, 1997).

 Return on Equity (ROE)—The ratio of net income to owners’ equity reflects the profitability of the firm by measuring the investors’ financial accounting return (Griffin & Mahon, 1997).

 Earnings per Share (EPS) and Price to Earnings (P/E)—Using accounting returns to measure financial performance focuses on how firm earnings respond to different managerial policies. The most common measures of accounting returns used in such studies are earnings per share (EPS)—the ratio of net earnings to the total number of common shares outstanding, and price to earnings (P/E)—the ratio of common share market price to net earnings. (Cochran & Wood, 1984, citing Bragdon & Marlin, 1984; Bowman & Haire, 1975; Folger & Nutt, 1975; Heinze (1976); Preston, 1978; and Spicer, 1978)

These ratios, separately calculated for each company in the sample group, enabled a determination of financial performance with respect to the following: operating earnings compared to assets deployed in the business, sales of the company’s products and services, and owner’s investment in the enterprise (ROA, ROS, and ROE, respectively); and, net earnings per common shareholder (EPS) and how these earnings affect the market price of the respective common shares outstanding (P/E). Each firm’s Ethos of

Sustainability could then be analyzed relative to Corporate Financial Performance for each firm in the sample group. (See Appendix B: Study 2, “Research Design” for a detailed discussion of those procedures.) 40

In order to obtain the financial data needed for this ratio analysis, I utilized

Mergent Online software available through the Case Western Reserve University

Research Library. Mergent Online has an extensive database of financial data with respect to public companies. The financial data was with respect to the 2015 fiscal year, which allowed a one-year time lag compared to the independent variable data (2014 corporate sustainability reports).

Using Excel, I calculated the aforementioned financial ratios for the 150 companies. The spreadsheet itself was very large, with 150 rows and 51 columns, too large to include with this research paper. Table 11 presents an excerpt of data from this spreadsheet.

Table 11. Financial Ratio Analysis: Summary of Financial Data

Data analysis. This study was designed to analyze a statistically significant sample (N = 150) of public corporations. (See Appendix B: Study 2, “Methods” for detailed discussion of the following procedures.) Using IBM SPSS Statistics 24, I conducted data screening, correlations testing, exploratory factor analysis, and

independent samples t-tests. In my analyses, I observed measurement items that had

skewness problems. Specifically, I observed extensive skewness with respect to the

dependent variable data.

With further testing and analysis, and using SPSS, I conducted log10

transformations of the respective dependent variable data in an attempt to obtain

normality in the data set (Hair, Black, Babin, & Anderson, 2010). Subsequent to the

screening for skewness, and transformation / elimination of non-normal items, I re-ran

the correlations matrix. Once again, I observed few correlations between the independent

and dependent variables. Notwithstanding the aforementioned issues of non-normality in

the data set, I attempted to do exploratory factor analysis (EFA) in order to observe what

results could be obtained via factor reduction. Throughout the aforementioned data

analysis, I ran 14 EFAs at different inflection points in the process. In all cases, the

results revealed substantial problems with cross-loadings, Heywood loadings, and overall

lack of convergent and discriminant validity.

At this point I concluded that due to non-normality in the data set I would be

unable to perform structural equation modeling. Therefore, I attempted alternative

procedures by performing independent samples t-tests. Using SPSS, I conducted independent samples t-tests for each of the retained data items per the Final Correlations

Matrix. Table 12 presents these t-test results:

Table 12. Summary: Independent Samples t-tests

Std. Sig. High N Mean Deviation (2-tailed) Low NPI 6 ROS 1 49 0.067878 0.0731827 0.274 0 101 0.048694 0.1110623 NPI 9 ROS 1 59 0.063549 0.0646225 0.401 0 91 0.049392 0.1180073 NPI 11 ROS 1 52 0.061040 0.0734353 0.591 0 98 0.051735 0.1123657 NPI 13 ROS 1 49 0.061961 0.0861840 0.554 0 101 0.051564 0.1068927 DLH 3 ROS 1 59 0.071590 0.1114068 0.103 0 91 0.044179 0.0916480 DLH 4 ROS 1 46 0.069520 0.0825945 0.239 0 104 0.048521 0.1071091

As outlined in Table 12, none of the independent samples t-tests resulted in significance

(p ≤ .05) for the independent variables with respect to the one retained dependent variable. Therefore, the t-tests were inconclusive in attempting to identify a relationship between the independent and dependent variables.

Research Methodology: Study 3 (QUAN)

The primary research question for this study was:

RQ6: What Ethos of Sustainability factors influence a relationship with Innovation?

The goal of Study 3 was to understand, and provide insights about, how

CSR/sustainability-focused organizations—those that have an Ethos of Sustainability—

may generate outcomes that can become unique intangible resources (Barney, 1991;

Wernerfelt, 1984) and which could ultimately lead to increased intangible value of the

firm. I did this through the exploration of certain Ethos of Sustainability predictors in the

sample group companies, with Innovation as the dependent variable of interest. Based on

the management and financial literature, together with my findings in Study 2 (Levin,

2016), I observed that establishing a direct causal link between CSR and CFP has in some

cases yielded results that were either negative, inconclusive, or positive but with a small

effect. Sensing there may be another ingredient in the relationship between CSR and

CFP, in Study 3 I endeavored to gain more insights from the literature together with a re-

examination of the research data from my previous two studies (Levin, 2015; Levin,

2016). Moreover, the literature in this area of intangibles reveals a considerable amount

of scholarly thought devoted toward advancing two vital arguments: (1)

CSR/sustainability commitments may yield the creation of intangible resources; and, (2) intangibles are underappreciated and undervalued when considering the overall value of a business enterprise. (See Appendix C: Study 3, “Goal of the Study and Research

Question” and “Literature Review: CSR, CFP and Intangible Value” for a detailed discussion of this analysis.)

Sample. For Study 3, I utilized the same sample group as in Study 2 (Levin,

2016). This data was obtained via the Morningstar database. (See “Research

Methodology: Study 2 (Quan)”, above, for discussion of these procedures.)

Development of independent variables and dependent variables. Informed by the perspectives of Net Positive Impact and Do Less Harm, and their relationship to an Ethos of Sustainability, I conjectured that intangible resources in manufacturing firms would be affected by the extent to which they engage in CSR/sustainability initiatives. Moreover, based on the literature previously discussed, I narrowed my dependent variable focus on intangible resources to one construct which is Innovation.

My thinking about the composition of the conceptual model evolved throughout this study, based on emergence of insights as I continued to study the literature and the data, and I conceptualized which of the coded Indicators might have a significant relationship with Innovation. Thereafter, I finalized the conceptual model and developed hypotheses based on these conceptualizations. Restating the Study 3 hypotheses:

Hypothesis 1. Operational Excellence (OE) is positively associated with Innovation (IN).

Hypothesis 2. Sustainability Awards, Certifications, and Memberships (SA) are positively associated with Innovation (IN).

Hypothesis 3. A Learning Organization (LO) is positively associated with Innovation (IN).

Hypothesis 4. Eco-efficiency (EE) is positively associated with Innovation (IN).

In connection with findings in Study 2 (Levin, 2016), underpinning this Study 3 are the following critical assumptions:

 The constructs of Net Positive Impact (NPI) and Do Less Harm (DLH) were accurately measured by the rigorous content analysis I previously performed.

 Because measures of NPI and DLH were inconclusive with respect to a CFP relationship, these constructs may not directly predict financial performance.

 However, a company’s CSR/sustainability focus may influence the development of valuable intangible resources such as Innovation within the firm. 45

Data collection. For Study 3, I utilized certain of the data that was previously

collected in Study 2 (Levin, 2016). This data was obtained via content analysis of corporate sustainability reports. (See Appendix C: Study 3 “Research Design and

Methods – Data Collection and Analysis” for discussion of these procedures.)

Data analysis. I performed regression analyses in SPSS with respect to

Innovation as the dependent variable of interest. My procedures were as follows: I selected certain single-item measurements from the aforementioned Net Positive Impact

(NPI) and Do Less Harm (DLH) codings. Prior to entering the coded data into SPSS, I standardized the raw data based on the length of each corporate sustainability report, to

wit: the corporate sustainability reports analyzed in this study ranged from only several

pages to over 150. Accordingly, it stands to reason that longer reports would contain far

more data and could confound the regression results. In order to normalize the substantial

differences in report length, I standardized the number of coded pages by calculating an

index based on the number of coded instances for each Indicator in a respective

sustainability report divided by the number of pages coded per the sampling criteria.

Next, I loaded the standardized coded data and control variable data into SPSS.

(See “Controls”, below.) I ran the first regression with only the dependent variable and

controls; then I ran the second regression by adding the aforementioned independent

variables. The purpose for this sequence of regressions was to identify how much

explanatory value was incrementally added by the independent variables.

I also considered the reliability of using single-item measures as the independent

variables in this regression model. The application of single-item measures in quantitative

research analysis historically has been met with controversy. More recent, however,

authors in management science research have challenged the conventional wisdom by demonstrating that single-item measures can have acceptable psychometric properties

(Fuchs & Diamantopoulos, 2009); today, single-item measures are accepted as a viable alternative to multi-item measures for construct development (Bergkvist & Rossiter,

2007; Drolet & Morrison, 2001). When the focal constructs are concrete rather than abstract, the use of single-item measures is deemed appropriate (Fuchs &

Diamantopoulos, 2009). In Study 3, the constructs of interest were Operational

Excellence, Sustainability Awards and Certifications, Learning Organization, and Eco- efficiency; all of these constructs are well-defined (i.e., concrete) in the literature. (See

Appendix C: Study 3, “Conceptual Framework and Hypotheses” for a detailed discussion on development of these variables.)

A second important factor in considering the use of single-item measures in management research is the appropriateness for the particular instance of research

(Wanous, Reichers, & Hudy, 1997). In this regard, Fuchs and Diamantopoulos (2009) advise that for situations in which the researcher is interested in obtaining a general view of the construct—with a research objective of gaining an overall sense of the relationships—a single-item measure often is adequate for this purpose (Fuchs &

Diamantopoulos, 2009 citing Poon, Leung, & Lee, 2002). As previously explained, this current research study is exploratory in design with a conceptual model not previously explored; i.e., my research is a case of ‘first impression.’ Therefore, I conclude that the use of single-item measurements for variable constructs is appropriate and acceptable in this research study.

In running these regressions, I was looking for significant relationships between

the independent and dependent variables. I added each independent variable one at time

and then observed the model summary R2, standardized beta, whether the relationship

was significant, and whether the relationship made sense (i.e., had face validity).

Controls. A significant body of literature recognizes the impact of firm size on

CSR investments (Kalaitzoglou et al., 2016). Accordingly, differences in CSR and

dependent outcomes may result from firm size and need to be operationalized as control

variables (Makni, Francoeur, & Bellavance, 2009, citing Ullman, 1985 and Waddock &

Graves, 1997). Controlling for size is appropriate because smaller firms may not display

as much explicit socially responsible behavior as do larger firms (Waddock & Graves,

1997). This distinction may arise because larger firms are subject to greater public

scrutiny than their smaller counterparts, and their social programs are more likely to be

observed and publicized (Crilly, Ni, & Jiang, 2015). Margolis and Walsh (2001), in their

meta-analysis of 95 previous studies on the relationships between CSR and CFP,

identified firm size as being one of the most prevalent control variables used. In this current research study, I controlled for firm size using two metrics: Total Number of

Employees and Gross Assets. These data were obtained for the 2015 fiscal year, utilizing the Mergent Online database.

FINDINGS

In this section I present my mixed methods research findings. These findings are

based on my three studies previously discussed (QUALQuanQUAN), now

integrated into one overall research dissertation.

Study 1 (QUAL)

In this study, I had four significant findings which, taken together, provided answers to my first two research questions. One of these findings was an unexpected discovery. The following were my research questions in Study 1:

RQ1: What are the experiences of executives and advisors in connecting the business enterprise’s sustainability initiatives with growth in financial value?

RQ2: How and to what extent are organizations accounting for, or otherwise measuring, financial value arising from these sustainability initiatives?

First, I found that exemplar sustainability companies exhibit confidence that a focus on sustainability is a better way to run an enterprise—which leads to operational excellence (Finding 1). This was a preliminary answer to RQ1, because this finding set the tone for further discoveries as my interpretations evolved. Specifically, Finding 1 informed me that executives see a commitment to sustainability as enabling improvement in overall business productivity, quality, and financial stewardship of the enterprise.

Next, I found that exemplar companies are deeply devoted to following a sustainability path, even if they cannot monetize the specific financial value arising from sustainability initiatives (Finding 2). This finding concurrently answered both RQ1 and RQ2, in that certain firms are voluntarily—sometimes passionately—engaging in sustainability initiatives even though they are not measuring (or claim they do not know how to measure) the financial outcomes from these activities.

Third, I found that exemplar sustainability companies reflect a culture—a spirit of the enterprise—that is distinct, unique, and palpable. I labeled this the firm’s “ethos”

(Finding 3). This was an unexpected finding that eclipsed my initial research questions and became the guiding vision for my next two research studies as well as this

dissertation. I view this as an unexpected finding because in my original sample selection my intent was to interview only those firms that had a stated commitment to following a

sustainability path; I did not “expect” to observe certain companies that were far more

committed than others. Subsequently I expanded this observation to become a new

construct that I named an “Ethos of Sustainability.”

I had a fourth finding that was not described as such in Study 1. Specifically, I

discovered that executives who are associated with exemplar companies often talk about

their focus on sustainability driving innovation. In my research interviews, I heard stories

of how certain product lines “never would have been developed” without the Company’s

focus on sustainability initiatives, and how that led to discovering new market needs

which were very profitable for the enterprise. Moreover, in the theoretical (i.e., third)

coding phase of this study, I listed “Innovation” as one of the 11 theoretical codes. (See

Figure 2, above.). However, at that time I did not cite “innovation” as one of the primary

findings only because I was seeking to limit my stated findings to a total of three.

Recently, reflecting on my work in Study 1, I concluded that innovation should have been

appropriately cited as Finding 4. The following comment from an Informant in one of my

research interviews illustrates this:

But the thing that came out of sustainability…This is one of the things that people got to get their head around is the out-of-box, unexpected things that come out of this journey. We would have never thought about biomimicry and about www and about change in the industry, if we hadn’t gone down this sustainability path to create this. It was one of the big successes that we had. It was great. (CEO, Manufacturing Company)

Study 2 (Quan)

Notwithstanding firms’ lack of measuring their financial performance from

sustainability initiatives (Study 1 findings), for the past half-century academic researchers 50

have been analyzing these relationships and attempting to quantitatively establish a

positive relationship between CSR and CFP. In this regard, in Study 2, I had three

research questions:

RQ3: To what degree does an Ethos of Sustainability contribute to Financial Performance of a business enterprise?

RQ4: Further, does an Ethos of Sustainability enable these so-called exemplar companies to financially outperform peer group organizations?

My findings in Study 2 were an enigma—despite following a rigorous process of

data collection and analysis—I was unable to obtain satisfactory correlations between the

independent and dependent variables in the hypothesized model. Therefore, I was unable to conclude structural equation modeling or alternative procedures of independent samples t-tests. As such, my findings were inconclusive with respect to the research questions (RQ3, RQ4, RQ5) and hypotheses. Perhaps there is another alternative to

quantitatively analyze these relationships that does not require a normal distribution of

my data; however, such methodology is beyond the scope of this dissertation study.

Study 3 (QUAN)

Once again reflecting on my discoveries in Study 1 (QUAL), I observed a significant number of Informants conceptualized whether some type of intangible asset value may arise from their firm’s sustainability path—among 30 interviewees in that study, I had 69 coded references to “intangibles”. This followed from one of my queries in Interview Questions # 1 and 2: “Did the outcome of the project add tangible or

intangible value to the organization?” (See Appendix A: Study 1, then Appendix A in that study for the Interview Protocol.)

Upon further conceptualization, I believed a connection to development of intangible resources could be an interesting and important relationship in my Study 2

(Quan) data; therefore, based on further research in the literature, in Study 3 (QUAN) I hypothesized that a firm’s Ethos of Sustainability (IV) would have a significant relationship with Innovation (DV) as an intangible resource. As previously explained, I tested this by using certain single-item measures from my Study 2 (Quan) data as predictors in Study 3 (QUAN). In this regard, in Study 3, I had the following research question:

RQ6: What Ethos of Sustainability factors influence a relationship with Innovation?

Innovation. Innovation has long been recognized as one of the vital factors contributing to national economic growth, competitiveness, and higher living standards; innovation is now central to the knowledge-based economy. Innovation is complex, nonlinear, and dynamic (Ozorhon, 2012) and rapid technological innovation is impacting an increasing breadth of business sectors with disruptive effect (Laszlo et al., 2014). The nature of innovation is intangible in form and there is a lack of clear definition or well established classification of the construct (Ozorhon, 2013). A helpful definition of innovation is: “the adoption of an idea or behavior, whether a system, policy, program, device, process, product or service, that is new to the adopting organization” (Ozorhon,

2013: 455, citing Damanpour, 1992: 376). This definition supports my dissertation research, as the description embraces a broad range of business activities and initiatives.

Hypotheses and findings. For this study, I developed the following four hypotheses:

Hypothesis 1. Operational Excellence (OE) is positively associated with Innovation (IN).

Hypothesis 2. Sustainability Awards, Certifications, and Memberships (SA) are positively associated with Innovation (IN).

Hypothesis 3. A Learning Organization (LO) is positively associated with Innovation (IN).

Hypothesis 4. Eco-efficiency (EE) is positively associated with Innovation (IN).

I had three key findings and one finding that, although the hypothesis was not supported, still yielded an interesting result. The three supported hypotheses satisfactorily answered

RQ6. Tables 13 and 14 summarize these findings:

Table 13. Hypotheses Findings

Conceptualization Regression Conclusion

Supported / Hypothesis Relationship β (Standardized) p-value Effect Unsupported

H1. OE --> IN 0.327 0.000 Strong Yes H2. SA --> IN 0.351 0.000 Strong Yes H3. LO --> IN 0.214 0.003 Moderate Yes H4. EE --> IN -0.060 0.467 [ns] None No

Table 14. Regression Coefficients

Coefficientsa Unstandardized Standardized t Sig. Model Coefficients Coefficients B Std. Error Beta (Constant) -0.078 0.060 -1.303 0.195 Operational excellence (OE) 0.571 0.143 0.327 3.984 0.000 Sustainability awards (SA) 0.457 0.096 0.351 4.740 0.000 Company functions as a learning 0.225 0.076 0.214 2.973 0.003 1 organization (LO) Eco-efficiency (Reduce -0.032 0.043 -0.060 -0.730 0.467 environmental impacts) (EE) Gross Assets (GA) 66,013,714 0.000 0.037 0.380 0.705 Total Number Employees (NE) 54,158 0.000 0.048 0.494 0.622 a. Dependent Variable: Innovation Model Summary: R2 = 0.326

First, I find there is a strong relationship between operational excellence and

innovation (β = 0.327; p = 0.000) (Hypothesis 1). From a practitioner viewpoint, 6Sigma

views operational excellence as “…a way of looking at business as a whole rather than

dealing with the individual parts of a business separately.”17 Moreover, Fast Company recently explained: “Operationally excellent enterprises possess the processes and structures—or the intangible assets—that give them the visibility, control, tools, and management practices necessary to drive greater operational effectiveness and efficiency.”18 Becoming operationally excellent is a precursor to innovation streaming

through the organizational structure (Lev & Daum, 2004). Viewed in a different light, a

firm that it is struggling with its quality of operations may be unable to devote either the

17 https://www.6sigma.us/operational-excellence/

18 https://www.fastcompany.com/3002767/anatomy-operational-excellence 54

time or the financial investment toward developing new technologies and innovative processes.

Second, my findings reveal that a firm obtaining sustainability awards,

certifications and memberships is a strong predictor with respect to pursuit of innovation

(β = 0.351; p = 0.000) (Hypothesis 2). This was the strongest relationship in my Study 3

analysis. Achieving prestigious sustainability awards, memberships, and certifications

such as America’s 100 Most Trustworthy Companies (Forbes), Annual Green Ranking of the S&P 500 (Newsweek), LEED Platinum and Gold Certification, and membership in

the SASB Advisory Council can be indicators of a leading-edge company—a firm that is

continuously striving to develop innovative products and services amid a forward-

thinking, stakeholder-focused environment. This follows from studies in which

researchers utilized listings of sustainability awards, memberships, and certifications as

the sample group selection criteria when examining CSR initiatives and their relationship

to innovation in products, services, and processes (see e.g., Jenkins, 2006; Ozorhon,

2013; Zairi, 2002).

Third, groundbreaking innovation is a complex and cumulative learning process

through which firms seek to develop distinctive technological competence (Bessant,

Caffyn, & Gilbert, 1996). Underpinning this learning process is a continual investment in

education and skill development. The catalyst for this process is the system leader; these

individuals enable the organization to overcome inertia and see opportunities for

innovation (Senge, Hamilton, & Kania, 2015). My research findings indicate a

moderately strong relationship with respect to companies that function as a learning

organization, and a culture of innovation (β = 0.214; p = 0.003) (Hypothesis 3). This is

consistent with literature that argues for the importance of firms striving to become a

learning organization and how this can foreshadow evolving innovative discoveries.

“The concept of ‘learning’ organizations has grown in popularity in recent years.

It seems to be the new battleground as the ability of an organization to ‘learn’ faster than

its competitors holds the promise of sustainable competitive advantage” (Epstein & Rejc

Buhovac, 2014: 201). This echoes Senge (2006): “The only sustainable advantage is an

organization’s ability to learn faster than the competition.” Moreover, “learning to learn”

is a key component of strategic technology management (Bessant et al., 1996); a

company’s ability to learn (i.e., its absorptive capacity) affects its actual learning process

and is an important factor in a company’s ability to leverage new knowledge (Epstein &

Rejc Buhovac, 2014).

In my analysis of corporate sustainability reports, I observed a number of

instances in which firms discussed the considerable amount of training that is an ongoing

feature of employee technical and leadership talent expansion. Technical training coupled

with ongoing refreshers of current literature in the field is essential for a company to

harness the skills and expertise needed to exploit a new and cleaner technology. In turn,

this capability will drive an organization’s ability to compete in the priority of innovation

(Epstein & Rejc Buhovac, 2014).

My fourth finding is nonsignificant although interesting. In my initial conceptualization, I hypothesized that eco-efficiency would have a positive relationship

with innovation. In fact, my findings are that the relationship is nonsignificant and slightly negative in direction (β = -0.060; p = 0.467) (Hypothesis 4). Thus, with respect to

the firms in the sample group, the findings suggest their pursuit of eco-efficiency does

not yield innovative results. The reason for this outcome may be that in their corporate

sustainability reports—although (a) eco-efficiency/reducing adverse environmental impacts and (b) innovation were common topics of discussion—these firms may not have equated the two. Specifically, companies may reduce environmental impacts by following fundamental and time-tested environmental practices such as reducing pollution, waste sent to landfill, and energy use. Although these practices yield value to the state of the environment, they may not drive leading-edge innovation. Rather, much of the value these firms receive from eco-efficiency may be due to reduced costs but not necessarily new and innovative processes. As an example, in a global study by Manan et al. (2010) of firms earning awards for energy efficiency and renewable energy, the researchers did not articulate innovation or new technology development as an ingredient

in the process.

The World Business Council for Sustainable Development has outlined the

critical aspects of eco-efficiency; among these criteria are the following which are more

so geared toward doing less harm: a reduction in the material intensity of goods or

services; a reduction in the energy intensity of goods or services; and reduced dispersion

of toxic materials. While these types of initiatives certainly are noble pursuits that yield

environmental value, one can see that the targeted outcomes would result in “being less

bad” rather than achieving true net positive impact and as a consequence may not be

innovative. Making things using fewer resources is not a new idea, yet it remains the

cornerstone of producing goods and services in a more sustainable fashion. “Critics such

as William McDonough disparage eco-efficiency as simply doing less bad, but therefore

still bad” (Lovins, 2008: 33).

Firms frequently talk about their environmental performance initiatives; here the

literature contains many studies in this area. A common environmental focus of

organizations is with respect to basic improvements, e.g., reducing energy consumption by changing to more efficient facilities lighting, modestly reducing CO2 emissions, and recycling spent consumer packaging goods such as bottles, cans, and cardboard boxes.

These are “nice-to-have” initiatives, but not necessarily innovative and likely not ones

that will move the needle in yielding net positive environmental improvements.

The following Table 15 integrates the research questions, findings, and supporting

theory from Study 1, Study 2, and Study 3 in this dissertation:

Table 15. Integration of Research Questions, Findings, and Theory

Research Question Study Findings Supporting Theory

Resource-based Theory; Exemplar sustainability companies exhibit confidence that a focus Stakeholder Theory; on sustainability is a better way to run an enterprise—which leads Upper Echelons Theory; to operational excellence (Finding 1). What are the experiences of Theory of the Business executives and advisors in connecting Further, exemplar companies are deeply devoted to following a 1 the business enterprise’s sustainability 1 (QUAL) Upper Echelons Theory; sustainability path, even if they cannot monetize the specific initiatives with growth in financial Theory of the Business value? financial value arising from sustainability initiatives (Finding 2). Executives who are associated with exemplar companies believe Resource-based Theory; their focus on sustainability drives innovation (Finding 4). Upper Echelons Theory

Exemplar companies are deeply devoted to following a How and to what extent are sustainability path, even if they cannot monetize the specific organizations accounting for, or financial value arising from sustainability initiatives. Certain firms 2 otherwise measuring, financial value 1 (QUAL) are voluntarily—sometimes passionately—engaging in Theory of the Business arising from these sustainability sustainability initiatives even though they are not measuring (or initiatives? claim they do not know how to measure) the financial outcomes from these activities (Finding 2). Exemplar sustainability companies reflect a culture—a spirit of the enterprise—that is distinct, unique, and palpable (Finding 3). Executives in these firms talked about “being restorative” and “doing the right thing” for the broader community. Moreover, these firms displayed a sense of purpose and commitment to Stakeholder Theory; exemplary corporate citizenship that was intertwined in the n/a n/a - Unexpected finding. 1 (QUAL) Upper Echelons Theory; corporate fabric. I labeled this the firm’s “ethos”. This was an Theory of the Business unexpected finding that eclipsed my initial research questions and became the guiding vision for my next two research studies as well as this dissertation. I view this as an unexpected finding because in my original sample selection my intent was to interview only those firms that had a stated commitment to

Research Question Study Findings Supporting Theory following a sustainability path; I did not “expect” to observe certain companies that were far more committed than others.

To what degree does an Ethos of Inconclusive findings: An Ethos of Sustainability does not 3 Sustainability contribute to Financial 2 (Quan) contribute to Financial Performance of the enterprise (H1). Performance of a business enterprise?

Further, does an Ethos of Inconclusive findings: An Ethos of Sustainability does not enable Sustainability enable these so-called 4 2 (Quan) exemplar companies to financially outperform peer group exemplar companies to financially organizations (H1). outperform peer group organizations?

Alternatively, if companies with an Ethos of Sustainability do not financially outperform other peer Inconclusive findings: It cannot be said that firms with an Ethos of 5 group organizations, can it be said 2 (Quan) Sustainability fare no worse, financially, by committing to a that firms with this ethos fare no rigorous sustainability path (H2). worse, financially, by committing to a rigorous sustainability path?

What Ethos of Sustainability factors Resource-based Theory; There is a strong relationship between operational excellence and 6 influence a relationship with 3 (QUAN) Stakeholder Theory; innovation (H1). Innovation? Upper Echelons Theory

Research Question Study Findings Supporting Theory

A firm obtaining sustainability awards, certifications and memberships is a strong predictor with respect to firms’ pursuit of Upper Echelons Theory innovation (H2).

There is a moderately strong relationship with respect to Resource-based Theory; companies that function as a learning organization, and a culture Stakeholder Theory of innovation (H3).

The pursuit of eco-efficiency does not have a significant relationship with innovation (H4).

61 DISCUSSION AND CONCLUSION

“We cannot solve our problems with the same thinking we used when we created them” (Albert Einstein).

Introduction

We, our global society, are in the midst of a sea change, from old ways of

thinking to new. No matter our stakeholder perspective—whether as a business leader,

employee, consumer, or everyday citizen—we are experiencing profound changes in

what society expects of businesses and how those firms react to such expectations. These

are driven by economic, health, social and ecological pressures that require a new type of

business response (Laszlo & Zhexembayeva, 2011).

Viewed through the lens of the business executive, market conditions have

dramatically shifted in the past half century—volatility, increased risk, global integration,

and disruptive innovation are but some of the dynamics that organizational leaders must

confront (Laszlo et al., 2014). Moreover, most contemporary companies recognize that the best way to increase corporate profitability is through top-line growth, and the best path to top-line growth is through innovation (Van de Ven, Polley, Garud, &

Venkataraman, 2008). In this regard, intangible resources such as know-how, reputation, and effective stakeholder relationships have become increasingly critical to success

(Laszlo et al., 2014).

The goal of this dissertation study has been to understand, and provide insights about, how certain organizations—those with an Ethos of Sustainability—may develop unique firm resources that can create intangible value and sustained competitive advantage (Barney, 1991; Wernerfelt, 1984). In this final section of this dissertation, I organize my conclusion as follows: first, I draw together inferences and conclusions from 62

this research study. Next, I acknowledge limitations to my research. Third, I discuss the

anticipated contributions to knowledge in the field. Last, I provide recommendations for

future research.

Discussion

I first review the insights gained through this three-phased mixed methods study

and provide explanations regarding findings observed, unexpected findings, and

unsupported hypotheses.

Inferences from Study 1 (QUAL). Early in my qualitative research interviews

(Study 1) I came to understand that firms are “thinking about” financial outcomes in

connection with their sustainability initiatives, and managers may even have an intuitive sense about where financial values reside. However, they have done little or nothing to calculate financial value related to these activities. I observed that organizations in my qualitative research study think about “value” in one or more of the following four ways:

(1) cost reduction (42 coded References); (2) revenue growth (33 coded References); (3) risk reduction (17 coded References); (4) intangible asset value (69 coded References)

(Levin, 2015). However, my research data also revealed that business enterprises are

struggling with how to calculate the financial results from their social and environmental

activities—notwithstanding financial measurement and reporting methodologies that

recently have been proposed (see e.g., Epstein & Rejc Buhovac, 2014; Willard, 2012).

The following research interview comments underscore these points:

So see, that’s, I think, the biggest challenge you’re going to have. There’s a gigantic disconnect between things that people talked about – and even where you started at, which is where people seem to find value, or what those companies get the most value out of it. It’s in their ethos. But who’s

measuring value? And are they measuring the value? And I think the answer is “no.” (Professor and Sustainability Consultant)

Although business enterprises are thinking about financial value that may arise from sustainability initiatives, these same organizations are not making a rigorous effort to isolate and specifically calculate the financial value related thereto. Yet, these business organizations—and certainly the exemplar companies I identified in my research— continue with their commitment to sustainability initiatives. I wondered why they do so—what is the spark that compels organizations to continue these commitments?

My findings in Study 1 suggest a paradox: On the one hand, business leaders claim that the analytic business case may not be convincing, or providing evidence, about financial value arising from sustainability initiatives and that this is an obstacle to sustainability activities. For example, the global consulting firm Accenture said the following in their CEO Study on Sustainability 2013:

Underlying our in-depth conversations with CEOs is a sense of frustrated ambition. Business leaders see sustainability reshaping their business environment and are committed to reorienting their companies to take advantage as they scale up their contribution to global priorities. But even as they make progress in embedding sustainability through their business, it is becoming increasingly apparent that they are constrained by market expectations, and are struggling to quantify and capture the business value of sustainability…when asked about the barriers to further progress in embedding sustainability into their organizations, CEOs see one factor more than any other over the past decade: the lack of a link between sustainability and business value [emphasis added] (Accenture, 2013: 11-12).

Considering the range of sustainability initiatives in business enterprises, there are

a number of success stories. “Yet for all the success of companies…across a broad range

of firms there is a surprising gap between executive talk about sustainability and the

ability to actually create value from it. Data from a joint study conducted by MIT Sloan

Management Review and the Boston Consulting Group suggest that as early as 2011, two-thirds of all companies believed that sustainability was a source of competitive advantage. This awareness of sustainability as a driver of business value appears encouraging, but a more sobering statistic shows that only a third of the respondents actually reaped financial profits from efforts toward sustainability” (Laszlo et al., 2014:

3).

However, on the other hand, my deeper probe finds that the pursuit of sustainability initiatives in exemplar companies is strongly influenced by nonanalytic factors which may, or may not, ultimately contribute to superior financial performance.

The aforementioned “paradox” reveals itself in that I found certain business enterprises— those that I discovered were ‘exemplar companies’ as I unpacked my research interview data—were following a path distinct from other organizations. These exemplar companies were passionate about and committed to their sustainability mission, notwithstanding their inability or lack of effort to quantify the financial value of these initiatives. Here is where theory of the business (Donaldson & Walsh, 2015) helps us understand the intrinsic motivations of these firms. Specifically, overarching short-term profitability demands is a firm’s ethos that their mission shall be to optimize overall prosperity by serving humanity (Donaldson & Walsh, 2015) (Findings 1, 2 and 3).

Three other theories help inform the research questions and related findings in

Study 1. Exemplar sustainability firms are confident that a focus on sustainability is a better way to manage the enterprise, thereby leading to operational excellence and enabling the firm to be better than their competitors (Finding 1). One example of this outcome is executives’ belief that a sustainability focus drives innovation (Finding 4).

Here, resource-based theory and upper echelons theory become instrumental. Upper echelons theory informs us that the senior leadership team is a critical ingredient in setting the vision of the organization (Hambrick & Mason, 1984), while resource-based theory explains how the development of unique competencies can lead to a competitive advantage (Barney, 1991). Exemplar sustainability firms—with confidence about how their sustainability focus is a better way to manage the enterprise (Finding 1) and their ethos of corporate citizenship and “doing the right thing” (Finding 3)—appear committed to serving a broader stakeholder group. Specifically, the individuals with whom I spoke expressed compassion and care for employees, the environment, and the community at large. These firms realize they have a diverse constituency with respect to the impacts of their products and services. Stakeholder theory informs us about how these firms’ actions affect many stakeholder groups, both internal and external to the organization (Freeman,

1984).

Inferences from Study 2 (Quan). My findings from this research study—while disappointing in that they were ultimately inconclusive—to some extent yielded observations that were both interesting and informative. First, the content analysis of corporate sustainability reports identified two points that firms discuss far and away more often than anything else in my coding rubric:

 NPI 1: The use of positive, affirming words (e.g., "better", "collaboration", "culture", "diversity", "efficiencies", "ethics / ethical conduct", "helping people live better lives, “honesty”, "improve", "inclusive", "integrity", "opportunities", "principles", "protect", "progress", "quality", “serving”, "solutions", "responsible / responsibility", "transparency", "transform / transformative", "values"). A positive tone of voice, corporate humility, and / or care for people is evident. (2,770 coded responses; 19.99% of all coded responses – see Table 10, above.)

 DLH 5: Initiatives to reduce adverse environmental impact—e.g.: (a) creating less pollution: air, land, and / or water; (b) using less natural resources: water, oil, coal, minerals, timber, and / or natural gas; and, (c) causing less waste: production efficiencies to use less materials and / or use of recycling. (2,259 coded responses; 16.30% of all coded responses – see Table 10, above.)

With respect to NPI 1, this is a highly aspirational construct. While noble in thought and desire, these words can easily lack accountability. Who is to say when a firm is, in fact, living up to these aspirational statements? With respect to DLH 5, this is the so-called “low-hanging fruit” upon which many sustainability-minded firms focus. These points are somewhat easy to identify, measure, discuss, and—to a certain extent— massage. For example, a company stating “we will reduce carbon emissions by 20%”—in what context does this reside? What if that firm were already the worst polluter in the region and far exceeding clean air standards? Without context-based metrics, an absolute number can be meaningless (McElroy, 2012).

Taken together, the qualitative coding results for these two Indicators (NPI 1 and

DLH 5) may be evidence of so-called “greenwashing” by some firms in the sample group. In the common vernacular, greenwashing is defined as: “Misleading customers about the environmental benefits of a product through misleading advertising and unsubstantiated claims…Disinformation disseminated by an organization so as to present an environmentally responsible image…Tools used in greenwashing could include press releases by a company which may tout various initiatives such as task forces, re-branding of products, energy or pollution reductions, etc.”19

19http://www.investopedia.com/terms/g/greenwashing.asp:

Second, the content analysis revealed that only 70% of firms issuing sustainability reports were doing so for the most recent year (Table 10). The other 30% of firms issuing

sustainability reports issuing were doing so for older years and then allowing that report

to stand in representation of the companies’ sustainability commitments for several years

out (i.e., the sustainability report is not a contemporaneous “living and breathing

document”).

Third, the content analysis revealed that for firms issuing sustainability reports,

only 35% are following GRI reporting standards (or, at least, reporting those results) and less than 9% are obtaining independent third-party verification of the overall sustainability report (Table 10).

Even with the sustainability report issues and shortcomings noted above, this form

of disclosure is worthwhile. “Sustainability disclosure is valuable because it helps a

company demonstrate that it is managing its risks and has a track record of paying

attention to its sustainability performance…Stakeholders expect and demand increased

sustainability disclosure to improve both monitoring and decisions” (Epstein & Rejc

Buhovac, 2014: 224, 230).

Inferences from Study 3 (QUAN). Through the research question in this study, I

have sought to determine which if any single-item measures of an Ethos of Sustainability

have a significant relationship with Innovation. The findings reveal that three of the

hypothesized relationships—striving for operational excellence, earning sustainability

awards and certifications, and becoming a learning organization—are significant with

respect to an organizational culture of innovation. Whereas, one of the hypothesized

relationships—eco-efficiency and reducing adverse environmental impacts—is not

significant with respect to an organizational culture of innovation. To my knowledge, this

study is the first to explore these discrete regression model relationships.

The three foundational theories cited earlier in this dissertation—resource-based

theory20, stakeholder theory, and upper echelons theory—have a vital chemistry between

them as well as each serving an important role in underpinning the relationships between

CSR/sustainability, CFP, and intangible resources. This causal relationship is central to

the thesis of Study 3.

The resource-based view is a good beginning point in analyzing CSR because it

emphasizes the importance of intangible resources, one of the critical sources of firm

success (Branco & Rodrigues, 2006). Furthermore, the resource-based view has a close

association with stakeholder theory; indeed, “the resource-based and stakeholder views

are complementary rather than competing” (Freeman, Harrison, Wicks, Parmar, & De

Colle, 2010). Connecting these two theories with their impact on the creation of

intangible resources, these resources thrive or perish largely through connections with

stakeholders and are essential sources of a firm’s wealth (Branco & Rodrigues, 2006). In

turn, these stakeholder relationships drive a firm’s long-term survival. Further, RBP contributes to understanding the processes through which stakeholder management yields tangible and intangible value (Branco & Rodrigues, 2006).

20 Reiterating the previous terminology explanation: Resource-based Theory (“RBT”) is sometimes referred to in the literature as the Resource-based View (“RBV”) or Resource-based Perspectives (“RBP”). 69

organization have the capacity to either support or oppose a firm-wide CSR agenda. If

there is opposition to the pursuit of CSR/sustainability initiatives, then the development

of valuable intangible resources which would otherwise stem from these initiatives would

be lost.

The resource-based view of competitive advantage helps us understand how firms

foster the capacity for sustainability-driven radical innovation (Laszlo & Zhexembayeva,

2011). Moreover, the resource-based view also suggests that firms with the skill to

develop unique stakeholder-satisfying resources can enjoy competitive advantages

(Freeman et al., 2010, citing Russo & Fouts, 1997). Effective stakeholder relationships

can be especially valuable in developing a culture of innovation within the firm; strong relationships with stakeholders will promote sharing of technologies and resources which a firm can leverage to its competitive advantage (Jansen et al., 2006). Upper echelons theory plays an important role, as well, with an effect on innovation; TMT (top management team) characteristics are essential influencers of the relationship between firm-level innovation and resulting financial value (Lumpkin & Dess, 1996; Lyon &

Ferrier; 2002)

The literature provides a variety of references to the relationships between the cited theories and the predictor variables in this study; examples include:

 The affirming influence from upper echelon leaders, and understanding the needs of multiple stakeholders, are drivers of operational excellence [OE] (Latham, 2013). (Stakeholder Theory and Upper Echelons Theory) (Hypothesis 1)

 Leaders and managers who champion the CSR agenda help create high ethics and standards in the organization, thus becoming a firm of distinction that consistently earns sustainability awards and certifications [SA] (Jenkins, 2006). (Upper Echelons Theory) (Hypothesis 2)

 Organizations learn what works best, through a process of trial and error. Mintzberg’s organizational learning approach is consistent with the stakeholder-based theoretical perspective that firms can learn from their external stakeholders [LO]. (Freeman et al., 2010, citing Mintzberg, 1978) (Stakeholder Theory) (Hypothesis 3)

earning sustainability awards and certifications, and becoming a learning organization—

may develop the valuable intangible resource of innovation.

Integration of Inferences: Study 1, 2, and 3. Considering the component parts of

this dissertation, in their totality, I summarize the key insights as follows: In Study 1

(QUAL), I observed that exemplar companies see their focus on sustainability as a better

way to manage their business, and this leads to operational excellence. That they are not

calculating a financial value from sustainability did not seem to deter their commitment

or dampen their ethos. I note, however, this type of commitment is applicable to what I

identified as “exemplar sustainability companies.” This same commitment may not be

present in other firms. In Study 2 (Quan), I was unable to find significant relationships

between an Ethos of Sustainability and short-term profitability measures of CFP with

respect to the sample group companies. To some extent, this result is consistent with

other research studies. Moreover, a meta-analysis of 200 prior studies found an

“unsatisfying answer” in the relationship between different measures of CSR and CFP;

although the meta-relationship was significant and positive, CSR had only a small effect

on CFP (Margolis, Elfenbein, & Walsh, 2009). The researchers’ conclusion: If a firm is

looking for a large financial payback from CSR, there are better ways to invest corporate assets (Margolis & Elfenbein, 2008). Reflecting on my findings in Study 1 and Study 2 led me to conceptualize the research model for Study 3 (QUAN) by focusing on how an

Ethos of Sustainability would predict a valuable intangible resource: innovation. Certain aspects of this relationship have been thoughtfully discussed in the literature and innovation has been identified as critical to a firm’s long-term success; however, to my knowledge, until my Study 3 there has been no quantitative testing of specific predictors.

In Study 3, I found three predictors of a significant and strong relationship with

Innovation [IN]: Operational Excellence [OE], Sustainability Awards and Memberships

[SA], and the Company Functioning as a Learning Organization [LO]. In turn, innovation, as an important intangible resource, may be “valuable, rare, inimitable, and non-substitutable”, thereby capable of increasing a firm’s intangible value (Barney,

1991). This latter point is a subject for future research.

Concluding Thoughts. A firm’s culture of innovation does not simply spring forth. Rather, it must be fostered with selected ingredients. An Ethos of Sustainability may help either initially cultivate or further expand the valuable intangible resource of innovation; and if this resource is unique in the marketplace, then innovation may yield the firm a sustained competitive advantage. In order to embrace the investment necessary to create intangible resources such as innovation, a firm’s leaders must look beyond the immediacy of net income in the upcoming fiscal quarter or year-end. And for a U.S.- based public company, this is extraordinarily difficult to do. For anyone who has lived inside of, or provided consulting services to, a public company, the challenge of dealing with “the Street” (i.e., Wall Street analysts) is well-understood.

The concept of “cradle to cradle”, popularized in the 2002 book of same name by

William McDonough and Michael Braungart, was actually an idea introduced in 1976 by

Walter Stahel21. In 2001, at a corporate meeting in the Netherlands, Mr. Stahel stated:

“Sustainability has little application in the short term. Its value is as a vision” (Lovins,

2008).

Quantifying intangible value is problematic to do. The accounting profession has been struggling with this issue for years. The initial step may be in researching and acknowledging that intangible resources such as innovation can be, and are being, created from an organization’s proactive business initiatives. Specific to the field of sustainability, embracing Walter Stahel’s thoughtful insight that sustainability is really about a longer-term vision can help organizations stay the course and not succumb to short-term profitability pressures that would result in abandoning their corporate responsibility ideals.

In conclusion, this dissertation study spans the research agendas of multiple academic disciplines. Herein I draw together research from the disparate fields of sustainability and corporate social responsibility; management science and organizational behavior; resource-based theory, stakeholder theory, upper echelons theory, and theory of the business; and financial and social accounting. The findings suggest a forward path in staying true to an Ethos of Sustainability, all the while developing the valuable intangible resource of innovation.

21 Mr. Stahel was Director of a project on product life extension at Battelle Research Laboratories in Geneva, Switzerland (Lovins, 2008). 73

Limitations

Every research study is imbued with limitations, and the subject study is no different. I organize my discussion in this section based on the following considerations:

(a) the individuals interviewed in Study 1 (Appendix A); (b) the data sources used in

Study 2 (Appendix B) and Study # 3 (Appendix C); and (c) the sample group firms in

Study 2 (Appendix B) and Study 3 (Appendix C).

In Study 1, I realized that because each of my Informants is employed in a position of responsibility with respect to sustainability, perhaps there could be interviewee bias. Stated more frankly: I knew I was talking to the ‘cheerleaders’ for sustainability within their respective organization; might they be predisposed toward a limited viewpoint or a social desirability bias by feeling they needed to ‘tell the researcher what he wanted to hear’? Certainly, I did not detect this. Rather, the

Informants appeared to be realistic with respect to the difficulties as well as the opportunities of their role and their organization’s sustainability commitment.

Also in Study 1, in most cases only one representative was interviewed with respect to an organization. This may have introduced a single-informant bias that could have been limited by interviewing more than one individual in the organization.

Moreover, each interview was semi-structured in format and the Informant was not briefed beforehand on the specific interview questions. This format required the interviewee to rely on memory of past events and actions; as a result, responses were subject to recall bias.

In Study 2 and Study 3, corporate sustainability reports were used as a primary data source for the qualitative content analysis. Corporate sustainability reports tend to be

highly-scrubbed documents; many companies utilize significant involvement by its internal marketing department and its external public relations firm in developing these reports. The data contained in the sustainability reports may be only an indication of what firms say they are doing, and this may differ from actual practices (Abbott & Monsen,

1979; Cochran & Wood, 1984). Moreover, some companies have been known to outsource the entire writing of its sustainability report, and with little internal involvement by senior management.

Porter and Kramer (2006) addressed the dilemma of obtaining critically reliable evaluation information about organizations’ CSR activities. The researchers’ concerns and disapprovals were aimed at three diverse sources of assessment data: corporate sustainability reports, third-part CSR ratings and rankings, and independent non-profit organizations, consultancies, and academic researchers who are knowledgeable in the area (Porter & Kramer, 2006). All data is fraught with limitations and biases, and these difficulties are inescapable in research. In order to overcome this potential limitation, I relied on the phenomenon of radical transparency (Laszlo & Zhexembayeva, 2011) to provide reasonable assurance about the reliability of what companies are reporting in their sustainability reports.

Content analysis as a qualitative data collection technique may have inbred limitations. Specifically, although the coding rubric is objective in its application, there is subjectivity in determining what are the items of interest to be coded (Krippendorff,

2013). Here, I was careful in my development of the aforementioned Coding Manual to read the available literature and thoughtfully consider the appropriate Indicators to be coded.

Also in Study 2 and Study 3, the sample group was comprised of public companies centered in the manufacturing industry with their principal headquarters located in the United States. While this sample enabled analysis of a rich and diverse group of large companies in an industry that has historically faced many social and environmental issues, the sample selection foreclosed examining a statistically significant number of privately-owned firms or foreign companies. Including a broader sample selection might have affected the quantitative analysis results. Therefore, the findings in this study may not accurately represent the CSR/sustainability attitudes and business focal areas of smaller, privately owned and / or foreign (non-U.S.-based) firms. This could affect the overall generalizability of these research findings.

Contributions to Theory and Practice

My contribution to knowledge and the literature is threefold. First, little scholarly attention has been devoted to relationships between (a) corporate social responsibility, sustainability, corporate citizenship (whichever terminology one chooses), (b) the creation of intangible resources or intangible value, and (c) the impact of theory in these associations. My dissertation research marks an early step in that journey. Moreover, the resource-based view of the firm has become one of the most talked-about theories in strategic management. Recently, researchers are tying resource-based theory to sustainability initiatives and their potential impact on financial performance. My research continues this effort.

Second, validating and quantifying a link between an Ethos of Sustainability and

CFP could lead researchers to new discoveries about how to grow financial value in business enterprises while at the same time benefiting society and the environment.

Lastly, a number of organizations today are committed to considerable financial and human resources investments in pursuing CSR/sustainability initiatives. Recognizing that establishing a causal relationship between CSR and CFP has yielded inconsistent research findings and, moreover, that ascertaining a financial relationship between these predictor and dependent variables may eclipse any 12-month accounting period, understanding long-term intangible value may help practitioners and managers cope with the short-term pressures of annual financial performance.

Future Research

In Study 1 (QUAL) I noted that some researchers and other observers commented about how sustainability commitments and behaviors differ among private versus public companies. That is, private companies are influenced by only one or a few founders who may have a philanthropic disposition with respect to investing in sustainability initiatives no matter what the cost; whereas, public companies are beholden to a broader group of investors and market analysts who may not much care about a sustainability focus and who may not be willing to make such investments. In my research, I interviewed individuals employed by private as well as public companies; I did not detect a bias one way or the other. However, I did not specifically focus on this aspect in my research design. In future empirical research, it may be interesting and worthwhile to evaluate whether there are any qualitative and quantitative differences in this regard.

In Study 2 (Quan), the use of corporate sustainability reports for data collection has been both supported and criticized in the literature. No doubt, these reports are a rich data source with respect to the company’s spoken word and, further, access to these reports is relatively easy which helps facilitate data collection. In future research, one

method to help ensure improved validity and reliability of the data in corporate sustainability reports for purposes of quantitative analysis would be to select only those

sample group companies that have obtained third-party assurance of their reports. As

previously explained, in my sample group I observed that less than 9% of the firms had

included third-party verification reports along with the published sustainability report.

(See “Inferences from Study 2 (Quan)”, above).

Also in Study 2 (Quan), with respect to the use of financial data to calculate accounting ratios and measure the dependent variable, I examined only one point in time

(2014 sustainability reports  2015 financial data). This was done in order to avoid endogeneity of the financial data with respect to the sustainability reports I had analyzed and coded. Moreover, in the literature, other research studies often focus on short-term profitability measures. These analyses can be extended by performing longitudinal studies using multiple years’ financial data to assess the impact on longer-term CFP.

Conducting a longitudinal analysis of profitability relationships (e.g., ROA, ROS, and

ROE) over a multi-year time horizon would help smooth anomalies in year-to-year

micro- and macro-economic conditions that may confound short-term financial results in

a quantitative model.

In Study 3 (QUAN) I developed a conceptual model that examined certain

corporate sustainability practices regarding their possible relationship with the intangible

resource of innovation. While this study revealed several significant relationships, there

is important further work to be done. Establishing relationships between the predictor variables and innovation as an intangible resource is only the beginning of a long and winding road. The threshold question becomes: what financial value, if any, is associated

with these relationships? After all, the sample group is comprised entirely of public companies. Financial performance matters—if not for the near-term then certainly for the long-term viability of the enterprise.

Future research should consider methods in which to calculate financial value arising from the intangible resource of innovation, or any other intangible that may be influenced by an Ethos of Sustainability. Calculations of intangible value historically have been met with argument and disagreement. Opponents of using accounting methodology to assign value to any so-called intangible asset would argue that such calculations are arbitrary and based on unreliable estimates. Yet, the reality is that many accounting calculations involve estimates of some sort. Period-end accruals of revenues and expenses are based on estimates. Useful lives of depreciable and amortizable assets are based on estimates. Reserves for contingent liabilities are based on estimates. One thing is clear, however: assigning zero value to a known intangible asset certainly is incorrect. This is not to suggest that a calculated value for an intangible resource should appear in GAAP-based financial statements. Rather, accounting for intangible value in the firm’s internal financial statements could be useful to managers who are responsible for the firm’s CSR/sustainability activities. Moreover, in a future sale of the firm, having calculated its intangible value could help support why the asking price exceeds the value of identified tangible assets. This difference is typically accounted for as “goodwill”, which is an intangible asset that lacks specificity.

The above outlined approach could contribute to standardized measurement and reporting of how intangibles drive performance. In the long-run, when companies consistently disclose such measures, this approach would allow researchers to perform

more detailed research to further investigate the value creation arising from intangible

resources (Lev & Daum, 2004).

Finally, an avenue for further research is with respect to firms’ eco-efficiency

sustainability initiatives. As noted in the Appendix C: Study 3 – “Findings”, many of the

cited activities under the umbrella of eco-efficiency are those in which organizations are

merely “grabbing low hanging fruit” by following fundamental energy and waste

reduction programs. Although the environment may be benefitting from firms “doing less

harm”, there may be no meaningful innovative processes being developed. Future

research should consider analyzing and providing guidance to managers and practitioners

in order to help them identify opportunities for developing leading-edge eco-efficiency

technologies.

My hope is that future researchers who come behind me will continue to explore

and advance these opportunities. The greater society will be the ultimate beneficiary of our collective work.

Appendix A: Study 1 – Qualitative

LOOKING BEYOND THE BOTTOM LINE: CONNECTING THE DOTS BETWEEN BUSINESS ENTERPRISE SUSTAINABILITY INITIATIVES AND GROWTH IN FINANCIAL VALUE

Matthew H. Levin Fellow, Fowler Center for Business as an Agent of World Benefit

Submitted in Partial Fulfillment of the Requirements for the Qualitative Research Report in the Doctor of Management Program at the Weatherhead School of Management

Advisors: Richard J. Boland, Jr., Ph.D. Karen W. Braun, Ph.D. Chris Laszlo, Ph.D.

CASE WESTERN RESERVE UNIVERSITY

April 2016

LOOKING BEYOND THE BOTTOM LINE: CONNECTING THE DOTS BETWEEN BUSINESS ENTERPRISE SUSTAINABILITY INITIATIVES AND GROWTH IN FINANCIAL VALUE

ABSTRACT

Business enterprises are investing in major sustainability initiatives; yet, often they do not know what are the financial benefits or outcomes of these activities. While managers may have an intuitive sense that “doing well by doing good” does yield financial rewards, they cannot pinpoint the specific effects on financial performance. There is extensive literature that focuses on non-financial measurements of sustainability initiatives. However, relatively little research exists that addresses related financial performance. I conducted a qualitative research study, using grounded theory methodology, to explore the experiences of business managers, advisors, and academicians who have responsibility for providing leadership in their respective organization’s sustainability initiatives. My objective was to better understand how these individuals and their organizations think about sustainability outcomes from a financial perspective. I discovered that although businesses may ‘think about’ financial performance metrics to monetize sustainability outcomes, few organizations are actively trying to account for resulting financial value. I wondered why this is so? And if organizations are not measuring sustainability financial impacts, what is the spark that causes them to remain engaged in a deep sustainability commitment? Utilizing existing theory together with rigorous analysis of my research data, I propose a new hypothesis about how certain business organizations—those that have embedded a cultural ‘ethos of sustainability’—may have developed a unique resource that itself can lead to better financial performance. These findings are important to practitioners and academicians who are responsible for sustainability success within their organization or field of research.

Keywords: corporate reporting; ethos; exemplar; financial performance; financial value; intangible assets; measurements; resource-based theory; social accounting; stakeholders; sustainability; sustainable development.

82 INTRODUCTION

In recent years, business enterprises, non-profits and society have become keenly interested in sustainability (Bonini & Bové, 2014; Chouinard, Ellison, & Ridgeway,

2011; Ehrenfeld, 2008; Fisk, 2010; Friedman, 2006; Hardin, 1968, 1985; Hawken, 2010;

Laszlo & Zhexembayeva, 2011). Yet, there is not a uniformly accepted method for measuring and reporting sustainability successes or failures, leaving unresolved the question of what performance measurements and representations really matter. Also unresolved is the question of how sustainability initiatives should be connected to growth in financial value, as well as the question of whether and how financial measurements and representations can shape this pivot point in enterprise sustainability.

“Sustainability” is a term which has different meanings to varied audiences. It is a fuzzy term. Individuals will sometimes ask: “What does sustainability really mean?”

Used in the context of business enterprise financial value for this study, I believe the following definition best suits my research approach:

Sustainability, in the corporate sense, is more than an environmental issue or maintaining a good brand image through effective PR; it is the ability of the organization to know, understand, and consider all the factors that impact its value and drive its ability to continue to operate into the future. [Sustainability is:] activities and approaches that maintain or increase added value without creating long-term threats to economic, environmental, or social systems; sustainability typically seeks to create “sustainable development.”22 (Institute of Management Accountants, 2008: 29, 37)

While I like this definition because it frames the construct of sustainability within

a financial value concept, I believe it may fall short of an even higher level of thinking—

that of moving from the more traditional “do less harm” to one of “net positive impact.”

22 See Appendix C Glossary for definition of this term. 83

Accordingly, I add this further definition of sustainability: “The possibility that humans

and other life will flourish on the Earth forever” [emphasis author’s] (Ehrenfeld, 2008:

49). My research is centered on how sustainability adds financial value, yet I believe an

important ingredient to this is enhancing value for society and the environment.

In the early stage of my study, I believed the current state of sustainability

performance measurement and reporting was inadequate. My preliminary research even

suggested this. What I learned through my further research, however, was that I must first

separate the notion of sustainability measurement into two discrete categories:

measurement of non-financial results and measurement of financial results.

With regard to measurement of non-financial results from sustainability

initiatives, much has been written on the subject; academic as well as practice journals

and books abound on the subject (see Discussion and Hypothesis Development –

Overview). As well, many business enterprises are preparing extensive sustainability

reports for use by various stakeholders (see, e.g., The Coca-Cola Company, Intel,

Johnson & Johnson). There is not a ‘lack of guidance or reporting’ with respect to non-

financial sustainability measurements. There is not a ‘lack of ideas’ about non-financial

sustainability measurements. Rather, the challenge lies in us having many different

opinions together with a lack of consensus on what measures are truly important and how

best to report them. One author alone lists 45 different reporting measures to consider

(Epstein, 2008). The Global Reporting Initiative lists 58 reporting standards in a 92-page

document (GRI, 2013).

Turning to measurement of financial results from sustainability initiatives, my

research revealed this is where the real gap resides—this is the unexplored territory. My

analysis of pertinent studies suggests the present chasm is in connecting sustainability

initiatives with resulting financial impact. Several practitioner publications were

particularly enlightening to us in this regard (see Discussion and Hypothesis

Development – Overview). My viewpoint was framed by the global consulting firm

Accenture, who in their Study on Sustainability reported:

Considering the range of sustainability initiatives in business enterprises, there are

a number of success stories. “Yet for all the success of companies…across a broad range

of firms there is a surprising gap between executive talk about sustainability and the

ability to actually create value from it. Data from a joint study conducted by MIT Sloan

Management Review and the Boston Consulting Group suggest that as early as 2011,

two-thirds of all companies believed that sustainability was a source of competitive advantage. This awareness of sustainability as a driver of business value appears encouraging, but a more sobering statistic shows that only a third of the respondents actually reaped financial profits from efforts toward sustainability” (Laszlo et al., 2014:

3). McKinsey&Company (2014) echoes these findings.

To address this gap, I conducted 32 interviews with 30 different individuals following a qualitative research methodology (see Research Design). These interviews

were with corporate executives, consultants, advisors, and academicians, whereby they

and their organizations had a stated commitment toward sustainability. My goal was to

better understand how business enterprises engage in sustainability initiatives; what the

successes they enjoy and the challenges they endure are; and whether and how these

organizations are able to connect their respective sustainability initiatives with growth in financial value.

To my surprise, I found certain business enterprises—those that I discovered were

‘exemplar companies’ as I unpacked my research interview data—were following a path distinct from other organizations. These exemplar companies were passionate about and committed to their sustainability mission, notwithstanding their inability at times to quantify the financial value of these initiatives. I call this their organization’s “ethos.” It is distinct, it is unique, and it is palpable. I could feel this ethos as I engaged with the respective individuals during my research interviews.

RESEARCH QUESTION

What are the experiences of executives and advisors in connecting the business enterprise’s sustainability initiatives with growth in financial value? How and to what extent are organizations accounting for, or otherwise measuring, financial value arising from these sustainability initiatives?23

LITERATURE REVIEW

I begin with a synopsis of the history of social accounting measurement, followed by an analysis of how sustainability reporting has been an influencer of business enterprise behavior. Next, I examine sustainability and measurement of financial

23 See Appendix C Glossary for definition of these terms: financial value; sustainability initiatives. 86

performance. Lastly, I offer an overview of literature regarding my Emergent Theme of ethos in business.

History of Social Accounting Measurement and Sustainability Reporting

Social accounting has been defined as “the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large” [emphasis added] (Gray, Owen, & Maunders,

1987). In this context, social accounting is not designed to measure or communicate the financial value of the aforementioned actions. Traditional financial accounting (known in the U.S. as “generally accepted accounting principles” – or “GAAP”) addresses the financial information needs of an enterprise’s managers and owners; whereas, social accounting takes a different perspective of providing measurement information to a broader range of social variables and social interests (Mook, 2013).

One of the earliest attempts to address social accounting measurement and reporting was done by Epstein, Flamholtz, and McDonough (1976): in 1975, the

Securities and Exchange Commission (SEC) received testimony on whether SEC registrants (i.e., public companies) should be required to begin reporting “matters of primarily social rather than financial concern” (Epstein et al., 1976: 23). At that time, the

SEC’s attention was on several social responsibility factors, including equal employment opportunity and environmental policy.

In the early period of social accounting (1960s–1970s), its focus was on fundamental reporting considerations for business enterprises: whether it provided a product or service valued by the public; if it obeyed the law; and if it provided employment opportunities for the local community (Epstein et al., 1976). Since that time,

however, the concept of social accounting has expanded in many directions, in part as a response to the growing expectations and demands of society.

By the 1970s, a variety of constituents had increasing interest in transparency and reporting by business enterprises; these interested parties included social responsibility funds, activists and environmentalists, religious organizations, and labor unions. Business enterprises also became interested in this new accounting area for purposes of their own internal management. In response to this, in 1974 the National Association of

Accountants developed an outline of the primary areas of attention for social performance: community involvement, human resources, physical resources and environmental contributions, and contribution to society of an enterprise’s product or service.

During the 1980s and 1990s social accounting was evolving, from simply an internal tracking of social and environmental effects, to communications with internal and external stakeholders via extensive sustainability reports. As we entered the new millennium, the 2000s saw a continued growth in studies of social accounting.

Researchers have analyzed the extent to which social and environmental sustainability results are accounted for and disclosed, and the specific methods followed (Borkowski,

Welsh, & Kristin, 2010; Hespenheide, Pavlovsky, & McElroy, 2010; Kolk, Walhain, &

Van de Wateringen, 2001; Li‐Chin & Taylor, 2007; McElroy, 2012; Yuthas & Epstein,

2012). Conversely, others have asserted that insufficient research has been done with respect to social accounting research or that guidance on measurements and reporting has lacked consensus (Giannetti, Almeida, & Bonilla, 2010; Gray, 2010; Lim, 2011; Parker,

2007). “The “ideal metric” should be able to quantify how wise is the balance among

development, environmental health and societal equity (Giannetti et al., 2010). More

recent, there is some interest in bringing sustainability and social accounting education

into the university classroom of business schools. Braun and Tietz (2013) wrote an

analysis paper describing the current state of sustainability reporting, and recommended

strategies and resources for integrating sustainability in the undergraduate managerial

accounting course.

The accounting profession has been grappling with social accounting and

reporting considerations, and whether and how to integrate reporting of these non-

financial effects when a business enterprise issues its audited financial statements. A

number of respected NGOs (non-governmental organizations) have stepped up to fill the

void in social accounting reporting guidance. These organizations include: American

Institute of Certified Public Accountants (AICPA), Global Reporting Initiative (GRI),

Institute of Management Accountants (IMA), International Integrated Reporting Council

(IIRC), Sustainability Accounting Standards Board (SASB), and a branch of the United

Nations (UN). A detailed discussion of these NGOs is beyond the scope of this study.

However, I mention several key points below and also throughout this paper.

The IIRC has been a key thought leader in addressing the value and use of

information—not only with respect to reporting organizations’ non-financial information

on social and environmental initiatives, but also providing information to external

stakeholders that enables them to make more informed decisions about how internal

business strategies and financial results are linked. Further, the IIRC’s goal is that “…an

organization will no longer produce numerous, disconnected and static communications.

[Rather,] this will be delivered by the process of integrated thinking, and the application

of principles such as connectivity of information” (IIRC, 2014). Similarly, the AICPA

has said:

Members [i.e., CPAs] in business, industry and government – can add value within their organizations by serving in an integrative role in the value creation process, linking company strategy to sustainability, evaluating risks and opportunities, and providing measurement, accounting and reporting skills. Members in public accounting practice – can add value to their clients by providing services related to the development of sustainable business strategies, sustainability accounting and reporting, and assurance. (AICPA, 2014)

GRI has developed standards for social and environmental performance

measurement, and GRI is frequently cited by contemporary authors. Peloza, Loock,

Cerruti, and Muyot (2012), referenced this, by stating they adopt GRI’s widely cited definition of sustainability reporting:

Sustainability reporting is the practice of measuring, disclosing, and being accountable for organizational performance while working towards the goal of sustainable development. The GRI Reporting Framework is intended to provide a generally accepted framework for reporting on an organization’s economic, environmental and social performance. (pp. 75–76)

The U.S. Securities and Exchange Commission (SEC) has expressed a different

position on integration of sustainability non-financial data in U.S. regulatory reporting of

financial statements. SEC Chairman Mary Jo White recently stated:

When disclosure gets too much or strays from its core purposes, it can lead to “information overload”—a phenomenon in which ever-increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets. (Grant Thornton, LLP, 2014: 5, citing www.sec.gov/News/Speech/Detail/Speech/1370539864016)

Chairman White emphasizes her belief that the SEC’s role is to “shape disclosure

rules consistent with the federal securities laws and its core mission”; the SEC

subsequently announced that disclosure of nonmaterial information would be

unmanageable, and would increase costs without corresponding benefit to investors. In

years after the SEC stated its aforementioned position, the SEC’s Advisory Committee on

Disclosures reviewed these matters again and recommended “the Commission require

disclosure of social and environmental information only when the information is material” (Grant Thornton LLP, 2014).

All of the above leaves me to ask: Is there (or will there ever be) uniformity in

thinking about social accounting and sustainability reporting to the wide variety of

business enterprises’ internal and external stakeholder groups?

Sustainability Reporting as an Influencer of Business Enterprise Behavior

With respect to business enterprises’ reporting to their stakeholders, opinions are

mixed on the value of information being delivered. Gray examined the role of accountants—whether they could encourage the development of social, environmental, and sustainability reporting by large enterprises and whether such reporting should be governed by financial market principles and exigencies. There is a growing importance in the relationship between social, environmental and financial performance (Gray, 2006).

This significance is reflected in society’s increased interest in the business, accounting

and political communities. The underlying driver is that social responsibility, financial

reporting and voluntary sustainability reporting can have a consistent and positive effect

on sustainability (Nattawut & Sirilak, 2013). However, while sustainability is one of the

most important issues facing business, focusing on social responsibility is an empty

exercise without a robust reporting rubric (Gray, 2006).

Corporate social and environmental responsibility is no longer an option. Many

companies have recognized that stakeholder impacts are critical success factors for the

respective enterprise. It is no longer an issue of ‘whether’ these responsibilities are

important—instead, ‘how’ to deal with these matters is the central challenge. “Integrating

social and environmental impacts into both operational and capital investment decisions

requires expertise that typically lies in the finance functions” (Epstein, 2008). However,

my research reveals that oftentimes the finance and accounting functions are largely

absent from the measurement and reporting of sustainability initiatives (see Future

Research). Business enterprises have a wide variety of reasons to be interested in this,

including concern for society and the environment, government regulations, stakeholder

pressures and / or economic profit to (Epstein, 2008).

The motivation for organizations to develop and disclose sustainability

measurements is based on four primary factors: stakeholder demands, shareholder

expectations, evolving regulations, and performance evaluation of sustainability and

corporate citizenship efforts (Hespenheide et al., 2010). There can be meaningful

differences between organizations that pursue sustainability activities vs. those that do

not; one of the most important impacts on enterprise financial performance has to do with its positioning among prominent stakeholders. Examples of sustainability activities that could be important to this constituency include the following: prospective employees who would choose one employer over another; customers who would be willing to pay more for a company’s products or services, or remain loyal to that enterprise; investors

and lenders who may perceive that an organization has a lower risk profile or cost of

operations.

Further with regard to influencing business enterprise behavior, organizations that preach sustainability initiatives but do not take a leadership position may be disappointed

with the outcomes. In order to reap maximum benefit from their investments in enterprise sustainability, firms must integrate sustainability practices into their overall culture and day-to-day business practices. Laszlo and Zhexembayeva reached this conclusion and recommended that a firm engage in embedded sustainability. “Here, a firm incorporates environmental, health, and social value into the company’s core business with no trade- off in price or quality. The goal is not green or social responsibility for its own sake. It is meeting new market expectations in ways that strengthen the company’s current strategy or help it to develop a better one” (Laszlo & Zhexembayeva, 2011). My research supports this (see Findings).

An important driver of business enterprise behavior is the United Nations’ Six

Principles for Responsible Investment. These Principles are increasingly followed by business enterprises and considered by investors worldwide (see Appendix 2 for a listing of these Principles).

At this stage in my research I began to wonder: With all that has been said and written about social accounting measurement and sustainability reporting to stakeholders—and the apparent differences in thinking about the path to take—how are business enterprises connecting all these activities to growth in financial value of the respective organization? While social and environmental sustainability initiatives certainly are a noble pursuit, owners of a for-profit business enterprise expect it to earn a meaningful profit.

Sustainability and Measurement of Financial Performance

During the 30 years following the development of social accounting measurement, a number of commentators have said that business enterprises are in need

of related financial accounting standards and financial performance measurements—yet a gap still remains [emphasis added]. An accounting methodology is needed—one that can quantify the relative benefits and costs of financial, social and environmental sustainability activities. The accounting perspective—encompassing financial analysis, valuation activities, and risk management—is indispensable in holding the discipline of sustainability together (Kraten, 2014).

My research and review of previous literature on the subject of financial measurement of sustainability initiatives revealed only limited focus by academic journals on these matters. Similarly, professional practice journals—while stating the need for measurement of financial value—often stop short of articulating specifics on how to accomplish this measurement. In order to find relevant guidance on measuring financial value from sustainability initiatives, I must look to the work of practitioner consultants.

Epstein, together with several colleagues, has researched and written extensively on many aspects of social accounting and financial performance measurement:

Managers would like to make more sustainable choices, but the relentless demand for financial performance can make them hesitant to do so. Some sustainability decisions are no-brainers—reducing materials use, becoming more energy efficient, recycling—but most choices are far more challenging and can pit financial results and social impacts against each other…In many cases, the sustainable choice is the best choice financially but loses out to another alternative because of flaws inherent in the cost- benefit analysis. In traditional decision making, only direct financial costs and benefits are factored into decisions—the full monetary consequences that arise as a result of environmental and social impacts are overlooked…Companies are making suboptimal decisions because they lack the tools and knowledge needed to include sustainability performance outcomes in their [financial] decision-making models. (Yuthas & Epstein, 2012: 27, 33)

Willard has stated that—as a “for-profit enterprise”—business organizations need to be equipped with financial measurement methods to enable its leaders to connect their sustainability initiatives with increased financial value. Further, these companies must demonstrate that sustainability-related strategies are smart business. He presented quantifiable evidence that investing in sustainable development yields financial value to the organization (Willard, 2012).

The issue of focusing on financial value with respect to sustainability (decreases as well as increases in value) has been emphasized by the Institute of Management

Accountants:

The depletion of intangible assets can ultimately lead to a decline in financial performance...Reliance on traditional data with its requirements to comply with GAAP [Generally Accepted Accounting Principles] creates a widening gulf that brings with it the risk that the accounting profession will become better and better at reporting what is less and less relevant in a knowledge-based economy and, in the worst case, provide less warning of impending declines in organizational worth. (Institute of Management Accountants, 2008: 30, 37)

Both Epstein et al. and Willard have proposed financial models that quantify financial performance of sustainability initiatives within a business enterprise context.

Epstein’s financial model considers organizational activities that lead to both

“Sustainability Performance” and “Operational Performance.” In turn, Sustainability

Performance can lead to “Stakeholder Reactions” with inherent financial value,

“Monetary Benefits” and “Monetary Costs” (Yuthas & Epstein, 2012). Willard’s financial model looks at “Sustainability Benefits” that both “Capture Opportunities” and

“Avoid Risks” (Willard, 2012). Interestingly, both Epstein’s and Willard’s models consider similar types of metrics.

Measuring intangible value 24 is yet another critical element of the financial value discussion. In the past 30 years, the intangible values of organizations have increased substantially—from 5% of company value in 1978 to 75% of company value in 2009

(Willard, 2012). Acquiring companies are paying substantial premiums to purchase target companies based on intangible value of that organization. As intangible value in business enterprises continues to grow in importance, so too should the focus on how sustainability initiatives add to this value. Financial managers involved in the creation of economic sustainability reporting may wish to consider the context, importance and relevance of intangible aspects of financial value (Institute of Management Accountants,

2008).

Ethos and its Connection to Business Enterprise Financial Value

As my research evolved, I discovered an Emergent Theme of how a business enterprise’s ethos with respect to sustainability may be a contributing factor to superior financial performance. Concurrent with this emerging theme, I returned to the literature for guidance. Several researchers have examined the construct of business ethos, and I more fully explore this literature in the Discussion and Hypothesis Development section of my study.

RESEARCH DESIGN

Methodology

This is a qualitative research study grounded in experience pursuant to principles developed by Glaser and Strauss (1967). I followed the approach of “developing theories from research grounded in data rather than deducing testable hypotheses from existing

24 See Appendix C Glossary for definition of this term. 96

theories” [emphasis author’s] (Glaser & Strauss, 1967, as cited in Charmaz, 2006). I

designed my research to advance the scientific discipline while also being a value-add for

contemporary practitioners (Simon, 1976, as cited in Van de Ven, 2007).

In thinking about what should be my source of data, I decided to obtain it through

research interviews with corporate executives and managers who were currently

employed in for-profit business organizations with a stated commitment to follow a

sustainability path. Furthermore, in order to “triangulate” my research data, I also sought interviews with professionals who were deeply involved in sustainability, but external to industrial business organizations.25 This latter group included individuals employed as

consultants and advisors, academicians, and entrepreneurs.

I followed an iterative process, one that continually tacked back and forth

between the different components of the design; throughout this process, I assessed the

implications of what I was hearing and how that affected the greater whole. As my

research progressed, I sought to evaluate how my methods were fitting based on their

intended purpose, and to make course corrections along the way as needed. Specifically,

during the interview process—as I was hearing certain comments and trying to make

sense of what I was hearing—I recognized that I may need to ask other questions and omit less relevant questions, and to consult other sources for both literature research and interviews. Moreover, during my research journey I noted any insights about business

25 The practice of triangulation has been used in social science research as a means of ensuring validity of data. It is a method of cross-verification from multiple sources, and is an “attempt to map out, or explain more fully, the richness and complexity of human behavior by studying it from more than one standpoint” (Cohen et al., 2000). See also: Altricher et al. (2005), Denzin (2006), and O’Donoghue & Punch (2003). 97

enterprises that were moving beyond sustainability activities focused on “do less

harm”—to those of “net positive impact.”

An important aspect of my research was to follow the techniques of constant

comparison and theoretical sampling, both of which are underpinnings of a grounded

theory approach. By using the constant comparative method, I made comparisons of my

data during each stage of the analysis (Charmaz, 2006). The constant comparative

method caused me to make analytic distinctions (comparisons) among and between my data at each level of my work, thereby observing the emergence of similarities and differences from within (Glaser & Strauss, 1967). Following each interview, I wrote a memo that freed my thinking to explore ideas about my categories (Charmaz, 2006).

Furthermore, memo-writing served as an excellent tool to capture important ideas while

‘in the moment.’ Theoretical sampling enabled me to let the then-collected data guide my

continuing selection of informants, and the refinement of interview questions to pose, with the goal of expanding my research findings to reach theoretical saturation. With theoretical sampling, I was seeking pertinent data with which to develop my theory as it emerged (Charmaz, 2006; Glaser & Strauss, 1967).

When I entered the coding phase with respect to my collected data, I followed a three-cycle process of open coding, next axial coding, followed by theoretical coding. My objective was to identify emerging themes based on that data (Saldaña, 2013). See Figure

1 which summarizes my coding results. Early in the open coding phase (i.e., even prior to the axial coding phase), I believed that key themes were emerging. Still, however, I remained open to possible emergence of new ideas and surprises.

I, as the Principal Researcher, have 36 years of practical business experience at

the time this study was conducted. My professional expertise includes accounting and

taxation working in an international CPA firm, followed by as a Vice President with a

national hotel company, and currently as a Partner in a large Atlanta-based CPA firm. My

academic degrees include a Bachelor’s in Accounting and Finance, a Master’s in

Taxation, and an Executive MBA. In my personal life, I have been a certified scuba diver

for 40 years while logging over 850 dives and 2,000 hours underwater; over this extended

period I have observed and been concerned about continuing environmental degradation

in Earth’s marine and freshwater systems. Taken together, these professional, academic

and personal experiences have provided a rich history from which to draw upon in

designing this research study. These previous experiences contributed to my understanding of the contexts and processes by which events and actions have taken place in the lives of my study participants, as well as my interpretations of what I was hearing from them (Maxwell, 2013).

Sample

My study participants (“Informants”) were selected from a wide variety of organizations: global corporations, entrepreneurial businesses, consulting firms, academicians, and wealth management firms. With respect to the companies from which

I interviewed the respective Informants, these organizations were in a wide range of industries (see Tables 1–4 for a Summary of Subjects by Sector, Position, Age Range, and Educational Background). The common thread running through each of these entities was they all had articulated a commitment with respect to sustainability initiatives and thought leadership. Furthermore, the individuals interviewed were part of the senior

leadership responsible for that organization’s sustainability mission. As outlined under

Methodology, my goal in selecting this wide range of Informants was to triangulate on data grounded in experiences from these diverse vantage points.

Informants were physically located throughout the U.S., with two of them residing outside the U.S. These geographic areas included: California, Colorado, Georgia,

Illinois, Minnesota, New York, Ohio, Texas, Vermont, Vancouver British Columbia, and

Shanghai China. The individuals were raised in a variety of different countries and cultures, including: Canada, Germany, India, Korea, the UK, and the U.S. The gender distribution was 20 male and 10 female. Other than noting gender, I made no attempt to select Informants based on gender as my preliminary research did not suggest a gender bias in sustainability thinking. Informants’ ages ranged from mid-30s to mid-60s. Here I was somewhat surprised: at the start of this study I believed that ‘younger’ people would be more so disposed to concerns about social and environmental issues, and that ‘older’ people would be less concerned about these issues. My surprise was that I noted passion and commitment from every individual I interviewed—regardless of their age.

My Informants were highly educated. While I made no attempt to choose individuals with advanced education, I did ask this background question during our interview. Of the 30 individuals I interviewed, all 30 held a Bachelor’s degree, 20 had earned a Master’s degree, two had earned JD and four had earned PhD degrees.

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Table 1. Summary of Subjects by Sector26

Primary Manfr'g / Pharma/ Transport'n / Consulting / Consumer Media / Real Science/ Academia Industry Mining Hygiene Logistics Advisory Products Publishing Estate Engineering Number of 11 3 4 7 6 1 1 2 2 Executives

Table 2. Summary of Subjects by Position27

Primary CEO / VP & CSO / Director Manager of Managing Director/ Professor Position President of Sustainability Sustainability Partner

Number of 2 15 4 9 2 Executives

Table 3. Summary of Subjects by Age Range

Age Range 30-39 40-49 50-59 60+

Number of 5 8 9 8 Executives

Table 4. Summary of Subjects by Educational Background

Number of 7 5 8 10 8 6 6 2 4 Executives

Data Collection

I commenced my data collection once I received approval of the appropriate

Institutional Review Board. In my interview procedures, I followed the IRB Protocols of the Beaumont Report.

26 I interviewed 30 individuals; however, in several cases the Interviewee had worked at more than one company and / or had held different positions in an organization. In some cases the Interviewee talked about their experiences at more than one of the companies at which they worked. Therefore, the numbers in Tables 1 and 2 total more than 30.

27 Same as Footnote 12. 101

The study participants were selected by reaching into my professional and

personal network. I extensively utilized “snowball technique” in identifying and securing research interviews with Informants who held key positions as corporate officers or consultants. For example: A professor at Case Western Reserve University in Cleveland,

OH introduced me to a sustainability and strategy consultant in Atlanta, GA; who in turn introduced me to a wealth manager of a sustainability-focused equities investment portfolio in Atlanta, GA; who in turn introduced me to 11 corporate sustainability executives working at public and private companies in a wide variety of industries. This is only one example of how one introduction led to another, and how I was able to secure research interviews with leaders in industrial companies and consulting firms who eagerly provided rich data for this study.

Data was collected via one-to-one research interviews with 29 Informants during the period June through September 2014. The 30th interview was conducted in October

2014 due to rescheduling by the respective Informant. One follow-up meeting was conducted in November 2014 with a previous Informant (from August) who requested the meeting. In that follow up meeting, additional data was collected. Additionally, de-

identified feedback was provided to that Informant, at his request, regarding emerging

themes in my research. One manufacturing plant tour was conducted in December 2014

based on the invitation of a previous Informant (from October).

Several days prior to each interview I advised the Informant of his/her rights to informed consent. Prior to commencement of each interview with the Informant I obtained the necessary approved release form; I advised the Informant about their right to terminate the interview at any time; and I explained how their interview responses will be

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protected under confidentiality procedures including password-protected computer data

files, non-identification of the Informant’s name or other personal information, and

destruction of the audio recording once the original study is completed.

Interviews were conducted in-person when possible. Due to the geographic

dispersion of the Informants, some interviews were conducted via telephone or Skype

audio conference call. During the interview, I recorded the entire discussion by using two

separate digital recording devices (the second for backup redundancy). Prior to recording

the discussion, I asked for permission to do so and advised that I would turn off the recorders if at any time during the interview the Informant requested such (see Appendix

2: Interview Protocol).

My interviews were based on a semi-structured format. I asked open-ended

questions with the objective of understanding the subject’s concrete, lived experiences

concerning sustainability initiatives within their current or former business organization. I

followed up each interview question with a variety of probes intended to elicit further

details from the Informant. Prior to the interview I advised each Informant to expect the

total run time to be 60 to 75 minutes. Several interviews ran only 45 to 50 minutes due to

time constraints of the Informant; whereas, several other interviews ran two hours or

more because the Informant wished to continue the dialogue. Overall, I collected rich

data from the Informants who appeared delighted to share extensive stories about their

lived experiences.

All interviews were transcribed by a recommended independent transcription

service located in India. Once document transcripts were received, I reviewed them for

accuracy and proper de-identification. I did this by listening to the entire audio recording

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while editing the document where needed. This first pass through the transcribed document was done prior to open coding the respective transcript. All digital documents

have been stored on my computer which is password-protected and physically secured.

All printed documents have been stored in a locked file drawer which is also physically

protected. All audio recordings will be destroyed on or before January 31, 2016 in

accordance with prescribed IRB guidelines. All de-identified transcribed data will be

retained indefinitely by me while following the aforementioned physical protection procedures.

Data Analysis

Data analysis was a fluid process; my analysis commenced with the first research interview and continued throughout the study until its completion. Specifically, once the initial transcribed documents were received, I reviewed them while listening to the audio recordings. As I did this review, I carefully listened to the Informant’s intonation throughout the discussion, noting instances of laughing, raised voice, tapping on the table, and other points of stress or emphasis. When such points were observed, I edited those into the document transcript for future reference. As previously explained, I followed a three-cycle process of open, axial and theoretical coding which is recommend by Corbin and Strauss (2008). In the initial coding process, I open coded 304 comments capturing the richness of the Informants’ responses.

In order to provide a well-organized platform for data analysis, I used NVivo software. One of my primary reasons for using NVivo software was because it was not internet-based. Once the software was loaded onto my computer, I could work on my

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coding analysis anywhere—without the need for internet connection—and I could ensure

continuous back-up at all times so that data would not be lost from a system crash.

During open coding, I freed my thinking to consider what the data was telling me.

I coded 16 of my transcripts, and at that stage I had identified 330 open codes. Before

moving forward with further coding, I carefully reviewed these open codes, rearranging

certain codes and grouping them together. This led me to axial coding where I noted

similarities in which certain codes could be linked. At that point I had collapsed the code

list down to 93. I moved forward with open coding the remainder of my transcripts; by

the conclusion of open coding I had expanded to 181 open codes. Open coding the

remaining 14 transcripts felt somewhat easier because I had detail-reviewed my open

code list and collapsed that initial list down to 93 as explained above. From there I

completed my axial coding. When I had finished this phase of my work, I had 24 axial codes.

The process of open and axial coding was not linear. Rather, I continuously cycled back and forth between research interviews, transcript reviews, open and axial coding, literature review, and discussions among the researchers on my team. This reinforced the constant comparison aspect of my grounded approach to this qualitative research study. During this process I also looked for disconfirming information. I noted several instances of Informants’ comments that were contradictory to other comments, as well as new themes that were emerging. I coded these contradictory comments to allow for further review once all open and axial coding was finished. I concluded that the

several contradictory statements were outliers—‘one-off’ comments that were not echoed

by other Informants.

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After my analysis was complete (open and axial coding), I had coded 2,374 total

references from my data—“codable moments” which are portions of text with potential

significance (Boyatzis, 1998). However, I was not yet satisfied that I had thoroughly

penetrated my transcript analysis. I wanted to ensure I had reached theoretical saturation,

that I had uncovered all worthy nuances, and that my axial coding was complete.

Therefore, I did a high-level pass through the data, this time looking for new ideas as well

as any other potential disconfirming information. Nothing remarkable was noted.

With regard to my literature review, throughout this research study I read

academic and practitioner papers and books. In my study of sustainability and accounting

measurements, I found numerous authoritative practitioner-based publications and I sought to learn from these practitioners regarding the subject matter (see References).

When I entered the theoretical coding phase, I focused on identifying codes that I could then capsulize into emergent themes. At this stage I identified 11 theoretical codes which were: Commitment, Corporate Culture, Difficulties / Complexity, Efficiency,

Financial Value, Flourishing, Innovation, Measurement, Operations Excellence,

Stewardship, and Sustainability Stories. I then cycled back though my data, doing a detailed analysis while looking for clues that would reveal emerging themes. Because I was using the NVivo software platform, I could easily do this task by running several query reports. From this process I identified three Emergent Themes: Belief,

Commitment, and Ethos.

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Figure 1. Summary of Codes and Emergent Themes

FINDINGS

Overview

There have been numerous research studies in connection with business

enterprises’ focus on non-financial sustainability outcomes such as reduced pollution,

reduced exploitation of natural resources, and improved employment practices (see, e.g.,

Borkowski et al., 2010; Ehrenfeld, 2008; Epstein, 2008; Epstein et al., 1976; Giannetti et al., 2010; Gray, 2010; Gray et al., 1987; Hespenheide et al., 2010; Kolk et al., 2001; Li‐

Chin & Taylor, 2007; McElroy, 2012; Nattawut & Sirilak, 2013; Parker, 2007). Further, in recent years several (but not many) researchers have addressed the difficult task of

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finding ways to monetize the financial outcomes attributable to an organization’s sustainability initiatives (see, e.g., Epstein & Rejc Buhovac, 2014; Willard, 2012). While these previous studies have illustrated the concern that governments, society, and business enterprises have for the growing challenges of sustainability, my research—to my knowledge the first empirical study that specifically reaches into the organizations’ executive level to examine key factors which motivate decision-making about sustainability initiatives—revealed that certain organizations possess a unique sense of purpose in this regard.

As previously discussed in Research Design, I selected the sample of Informants based on my initial understanding that they—and the organizations for which they work—had articulated a meaningful commitment to sustainability and thought leadership.

Even with this, I found these organizations were distinguishable in their sustainability emphasis, and I categorized them based on one of two labels I assigned during my coding and analysis: the organization was either an ‘exemplar sustainability company’ or a

‘conventional sustainability company.’ This latter classification is not intended to diminish these companies in favor of the former. Rather, it signifies these ‘conventional companies’ are doing what is needed in sustainability—each has made a commitment to sustainability as a part of their business thinking; each has at least one high-level internal executive dedicated to the sustainability function (either Vice President, Director, or

Manager level); each evaluates business projects while keeping an eye on sustainability impacts; each produces some form of sustainability reporting of non-financial measurements. But when considering the ‘conventional companies’ against the backdrop of the ‘exemplar companies,’ something was different.

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With the exemplar companies, something was definitely different. How does one describe a feeling? (How does one describe a taste or smell of a certain food?) Each of us can experience the same stimulus, yet we may interpret it differently. I sensed a unique

‘air’ within the exemplar companies—it is difficult to describe, just like a taste or smell can be difficult to describe. But it was very real. Months after the respective research interview was conducted, I can still remember the feeling—even without the aid of an audio recording or a transcript in front of me. One of the most memorable (i.e., colorful) comments came from the current CEO of a manufacturing company who, in describing the former CEO’s / Founder’s passion about moving to a focus on sustainability, said:

The whole management team pretty much, except R&D people, thought he was -- it was like a fad, dah-dah, dah-dah [laughing]. He was hell-bent to get off oil, and one thing that he did is he collected disciples, one at a time. I’m not kidding. It’s almost like Jesus and the disciples that he would get a convert. He would work on people and convert, convert. But he really didn’t have an idea how to do this. So the thing that he did was he went out and collected all the experts around sustainability—Just collected all these people and was picking their brain and writing them letters and going to see them, reading all the books. So he came up with his roadmap of how to convert all the theory of sustainability into a business.

In the exemplar companies I interviewed, there was a spirit within the business enterprise that was discernable. Indeed, sustainability focus has evolved from a defensive mindset of “do less harm” to a more purposeful approach of making a “net positive impact,” and from incremental change in pilot projects to radical innovation at scale. This evolution has been one of asking how responsible, thoughtful business practices can add considerable value to the respective organization and society as a whole.

Discoveries

I interviewed 30 individuals who were associated with 26 different organizations.

Of these, I identified 19 as exemplars (see Table 5). It is these 19 exemplars I find most 109

enlightening with the thrust of my study and I focus my containing discussion in this

regard.

My findings comport with the apparent dearth of research studies on how business

enterprises measure the financial value of their sustainability initiatives; if anything,

many companies continue down a path of sustainability even if they cannot point to the

financial value related thereto. Based on my research and analysis, I identified three

patterns of behavior (Emergent Themes) engaged in by organizations in my research

sample. Before proceeding further, I believe it would be helpful to briefly explain the

meaning of these three themes.

I discovered that executives who are associated with exemplar companies often

talk about their focus on sustainability driving innovation. Several executives related

stories of how certain product lines “never would have been developed” had it not been

for the Company’s focus on sustainability initiatives and how that led to discovering new market needs which were very profitable for the enterprise. In time, I came to realize that exemplar company executives have confidence that focusing on sustainability initiatives is simply better management—sustainability entails doing the right things at the right time and making smart business decisions. In 84% of the sample exemplar organizations

I observed these types of dialogues, and I use Belief to broadly describe these management attitudes.

Despite their belief—and intuitive sense—that a focus on sustainability leads to increased profitability of the enterprise, I consistently observed how the individuals I interviewed were for the most part unable to point to specific line items in their companies’ financial statements and say: “Here is proof that sustainability initiatives

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make us more profitable.” Certainly, these individuals could describe how, for example,

“reducing energy use in turn reduces energy costs, or, I developed a new product that was influenced by a sustainability focus, or, improving employee well-being practices leads to

reduced personnel costs.” Yet, they could not pinpoint in their financial statements how

profitability had been enhanced by these activities. It was clear from my research data

(74% of the time) that the exemplar companies exhibited a deep devotion to their mission

of sustainability even though they could not specifically or accurately monetize the related financial value of doing so. I describe this phenomenon as Commitment.

My most interesting discovery was the extraordinary sense of mission exhibited by 84% of Informants in exemplar companies. As previously described in this research paper, there was ‘something in the air’ within the exemplar companies. During my research interviews, I noted that company employees (Informants and others) displayed

an attitude of purpose, an awareness of ‘what I’m doing here really matters.’ I heard from

several Informants: “this is who we are.” I refer to this sense of mission as Ethos.

Table 5. Summary of Respondents’ Emergent Themes

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The exemplar companies emerged from my data—I did not identify them as such at the beginning of my research journey. Moreover, when I commenced my research I did not anticipate an exemplar construct becoming an element of my findings:

Finding 1: Exemplar companies exhibit confidence that a focus on sustainability is a better way to run an enterprise—which leads to operations excellence: ‘BELIEF’.

During my interview discussions I was impressed with how often I heard certain words, phrases or references repeated by the various exemplar company Informants. With regard to Finding 1, two of these words were “innovation” and “efficiency.” As I continued to review the interview transcripts, I did a text word search of these two terms by using a Query feature in my NVivo software. For “innovation,” this word was mentioned 46 times by eight exemplar companies (42% of the exemplars). For

“efficiency,” this word was mentioned 69 times by 13 exemplar companies (68% of the exemplars). Had I extended my text word search to other related phrases for “innovation” and “efficiency,” I likely would have identified many more such references. Moreover, my Informants often described how their focus on sustainability drives innovation, improves efficiency throughout the organization, focuses on the needs of the consumer, and leads to the organization being better overall. Individuals whom I interviewed repeatedly displayed a sense of confidence—an inherent belief—that their organization’s focus on sustainability leads to operations excellence; it is a better way to manage the enterprise. Figure 2 provides excerpts of Informants’ comments as examples of their thinking and how they articulated these thoughts:

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Figure 2. Belief – Selected In Vivo Comments

Belief (Note: for de-identification purposes, I replaced certain words with triple letters only; lower case triple letters – e.g., yyy – are for Product or other potentially identifying words; upper case triple letters – e.g., XXX – are for Company names.)

We patented it then we fought in xxx with competitors and so We’re in a situation where we fundamentally believe that forth, but literally it’s probably been the best product sustainability is a major, major driver in our business strategy. introduction in our history of any product. It became half our I see some companies that are in maybe more difficult, business in the United States in three years and it was a challenging situations and they haven’t spent as much time manufacturer’s dream. There’s no waste. You don’t throw out trying to think about what their future markets are going to be, any yyy out because they’re all different. If you had something and maybe they’re in very comfortable, profitable situations that was actually a defect, it really wasn’t a defect…But the and happy with the status quo and might not want to change thing that came out of sustainability. This is one of the things that too much.. I think you’ve got some companies that do that people got to get their head around is the out-of-box, sustainability essentially for compliance reasons, or they’ll talk unexpected things that come out of this journey. We would about it for PR and doing things on the periphery of their have never thought about biomimicry and about www and business. But is it really fundamentally core to their business about change in the industry, if we hadn’t gone down this strategy? I think that’s what we’re – and I use the “fortunate.” sustainability path to create this. It was one of the big Our leadership team has absolutely, totally brought that in. successes that we had. It was great. (Vice President – Sustainability, Manufacturing (CEO, Manufacturing Company) Company) You don’t have to try to be sustainable, to be sustainable. The So sustainability is the second-hand view of it; the first view is market will force you to be. The reasons folks like me – my it’s a way to make us better. And typically at DDD if we are position exists and my team’s exists is because we believe we doing something to make ourselves more efficient, it’s going to will get there faster, more efficiently, and we will make fewer revert back to our reduction of energy, which reverts back to mistakes if we focus on sustainability as a capability within our our reduction of carbon, and so it’s all tied together. business. (Vice President – Sustainability, Transportation and (Vice President – Sustainability, Building Products and Logistics Company) Manufacturing Company) So we are very sensitive to reputation of our main brand, and And I think there is a link, but it’s hard – it would be hard to this was looked at as something that burnishes the BBB say the direct correlation, other than I think it’s better company and that we’ve had the wherewithal to not only – it management of the company. And it’s also a company that’s wasn’t like buying RECs on the market. Instead, we actually aware of the external forces, not only the regulatory forces – put the capability in and so we could operate every day in a What are our customers demanding? What are our next better way in terms of environment, day in, day out, because we generations of customers demanding? What’s the next big put in these fuel cells and they actually worked. Not only did thing that we need to do to be innovative, to be creative, and to they work, but they delivered some savings and some green add value to GGG? And some of those will have an jobs. environmental attribute. (Vice President – Sustainability, Consumer Products (Director - Sustainability, Passenger Transportation Company) Company) There’s a couple of reasons why, one of them is – and one of The other one I think is – “a better way to manage” is, I think the ones I think where – from a value creation standpoint, the the reason this is – I think it’s a good term, because the reason thing that is most concerning for these companies that are we’ve been successful with this is we’ve integrated it flourishing is that there is a synergistic value that happens from [sustainability focus] into how we manage all the way to the fully deploying sustainability. So that when you do a [shop] floor. It’s connected to things like waste and efficiency sustainability action you get – you reduce your environmental and productivity. And you really can’t rip them apart. They’re footprint, you reduce your utility bills, you increase market all in there together. And, again, I think it gives that greater share, it becomes easier to hire and retain talent. If you use meaning to people that do things, so I think they are both good. really cool initiatives, it drives innovation. So all these things (President, Manufacturing Company) start to pile up cumulatively, and they create an environment, an economic ecosystem where you’re flourishing. So it’s not one plus one, it’s one plus – exponentially, it just skyrockets, and it’s hard to account for that. I mean it just is. (Director of Sustainability Planning, Consulting Firm)

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Finding 2: Exemplar companies are deeply devoted to following a sustainability

path, even if they cannot monetize the specific financial value arising from their

sustainability initiatives: ‘COMMITMENT’.

My research design included Interviewer questions that would elicit Informants’

responses about how their organization measures and reports non-financial and financial outcomes arising from their sustainability initiatives. During my research interviews, there was much discussion about measurement of non-financial and financial outcomes.

In order to explore the data in this regard during my transcript analysis, I did a text word search using the words “measure” and “measurement.” Here, I obtained 242 uses of these two words by 17 of 19 exemplar Informants (89% of the total exemplars). Had I expanded the word search to include words related to “measure”—such as “metrics” and

“value”—I likely would have obtained hundreds more responses from all 19 exemplars.

Interestingly, my two highest incidences of using the words “measure” or

“measurement” were from the following two individuals: (1) An accounting professor and sustainability consultant used the word 67 times. He went on to say that in his consulting role he has observed that most business enterprises are measuring processes,

and not impact, benefit, or financial value 28 [emphasis added]. (2) Further to this point,

the Vice President - Chief Sustainability Officer of a building products company used the

words “measure” or “measurement” 43 times in the course of our interview. Interestingly,

he expressed significant concern that his company has been unable to determine reliable

28 Based on 8/25/2014 Research Interview.

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methods for calculating financial value arising from sustainability initiatives29 [emphasis added]. Yet, this same individual was deeply passionate about how the pursuit of sustainability initiatives is important to him, personally, and to the leadership of his company. These two examples underscore my sense-making as I analyzed the data: exemplar organizations may be committed to a sustainability path even though they are unable to monetize the financial value arising therefrom. Figure 3 presents examples of comments I heard during my interviews that illustrate these findings.

Figure 3. Commitment – Selected In Vivo Comments

Commitment There are a number of people who say, “We’ll just make the So see, that’s, I think, the biggest challenge you’re going to business case, just show him the numbers.” And that’s not have. There’s a gigantic disconnect between things that people enough, it’s just not enough. It has to really kind of hit home talked about that it’s – and even where you started at, which is and shift the perspective to say, “This is a game changer, this is where people seem to find value, or what those companies get important to the industry and to our organization in ways the most value out of it. It’s in their ethos. But who’s beyond what we may be able to measure and what those measuring value? And are they measuring the value? And I numbers say.” think the answer is “no”. (CEO, Strategy and sustainability Consulting Firm) (Accounting Professor and Sustainability Consultant) I don’t know how to say this, It feels like – not appropriate, but But I’m aware of other executives, like our CEO, saying, “you you know, there’s always been the sense at HHH that a core know – he’ll talk – he has these quarterly meetings and he’ll value of this company is achieving sustainability for just tell everyone that “sustainability is important because sustainability’s sake and not for the sake of selling bbb. So we sustainability drives long-term value, not quarter to quarter, aren’t a company that often tries to quantify, for example. but longer term. And sustainability drives innovation, and (Vice President – Sustainability, Manufacturing helps and attract key talent.” Company (Director – Sustainability, Pharmaceutical Company) It’s like, “We can do this.” It’s going to be little contributions It gets a little bump from that. But that’s a temporary bump. along the way by many, many different entities, but you can These are very long-term phenomena – a company as a great make these things better and improve the health of watersheds employer or as an environmental steward, it’s a very long time with – when I look at packaging – sometimes it’s just the will. before that turns into alpha, as they say. And I find it very What I’ve seen is it’s the will to innovate that seems to really be difficult in any period of time to identify the alpha that comes the thing that drives sustainability, and internally that’s sort of from ESG research. I’m a skeptic of people who say you can the – internal tension is always around…being able to execute easily build a portfolio of ESG leaders in alpha form. Our our business, and meet all of our business goals, objective is to not underperform. Our objective is to perform (Vice President – Sustainability, Consumer Products like the benchmarks with a better footprint. Company) (Managing Director, Sustainability Portfolio Management Firm) And we don’t ever really use metrics for decision making. You There are some things that we do that – we are trying things, know, if it’s something that’s more value for us – more valuable we look out into the future and say,” It looks like probably the for us to create with the amount of resources we have, and the way we’re going to have to go, the numbers don’t make sense assets that we use you know, then we’ll launch it. today, but we need to know about that.” (Director of Sustainability, Building Products and (Vice President – Sustainability, Transportation and Manufacturing Company) Logistics Company)

29 Based on 8/15/2014 Research Interview, 11/13/2014 follow-up Interview, and various email discussions in-between. 115

Finding 3: Exemplar companies reflect a culture – a spirit of the enterprise – that is

distinct, unique, and palpable: ‘ETHOS’.

I believe my most profound finding was in connection with the construct of ethos and how a business ethos may be an underpinning of companies adopting, developing, and continuing a sustainability trajectory. Approximately ¼ of the way through my

research interviews, I began to sense a unique purpose that certain companies

(subsequently labeled as exemplars) exhibited. My research culminates with a discovery

that such a business ethos is intertwined through the fabric of these organizations. There

were a number of Informants’ comments that led us to this discovery. Few specifically

mentioned “ethos;” yet many of their words, phrases, and at times passionate dialogues

suggested it. Some of these words and phrases were: “restorative”, “transparency”,

“thought leadership”, and “doing the right thing”. A number of my Informants talked at length in ways that brought to mind ethos. One such comment from the CEO (formerly

CFO) of a manufacturing company illustrates this:

Yeah, I was CFO. But HHH sort of flipped the whole organization too. He turned them on. It was like a light went on at this meeting, and everybody started pulling in the same direction. You didn’t have the backtalk about, “we’re not going to make money doing this. This is stupid…” -- you didn’t have all that going on. Now it was, “how are we going to do this?”

A lengthy dialogue from the VP - Sustainability of a transportation and logistics

company concluded as follows:

Sustainability fits us as an organization because we've always felt we are all about doing the right thing for our people, for our communities and obviously trying to keep the company economically prosperous… Yeah, I think what I was saying was that, to me sustainability is only going to work and you're only going to be successful at it if it is what you are going to naturally do. You can’t bolt sustainability on. So if you're a company out there and you think, “looks like sustainability is a new wave and we need to jump on, let's figure out what we want to do and we'll just put those people 116

in this room,” -- you're not going to get anywhere. Sustainability has got to be -- it really just needs to be a way to help manage and measure your activities that are focused on social responsibility and environmental stewardship. And what it does when you get good at it, at reporting and measuring, is it helps you figure out where to push your momentum, where do you need to put more focus, if I am okay or if I'm pretty good at this how do I get really good at that. But if you're not in the ballpark, if you are talking about initiatives that you wouldn’t normally do I think you're going to fail, I just don’t think you will ever get there.

Moreover, these exemplar companies employed a workforce that appeared to share these values; exemplar employers exhibit an intentionality in their hiring practices as expressed in the following interview excerpt with a Corporate Director of

Sustainability:

So if you're trying to create something, you kind of intentionally look for that in your hiring. So you look for passion and -- in addition to skill -- and you look for humility -- in addition to skill. And interest in sustainability - - in addition to skill, whether you're hiring a maintenance person at XXX, or the new CFO, you look and you try to match the culture.

All totaled, I captured 73 In Vivo codes of dialogue that were rich in expression with respect to the Ethos of an Enterprise. Additional selected comments are presented in

Figure 4. I further explore the construct of ethos in the Discussion section which follows.

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Figure 4. Ethos – Selected In Vivo Comments

Ethos What is really powerful about this experience at MMM, what I Honestly, I really think it comes from EEE, NNN, and PPP. I love about it is – and it goes back to that ethos – is that the mean, FFF is the founder, RRR is the former CEO, and ZZZ is biggest step, changing things that we did, there were some the current CEO. These are people who pick up trash on their unique technologies, but really the common denominator was morning exercises. These are people who do foster care. I the person – two, three people that got an idea and absolutely mean, these are just remarkable leaders, they’re inspirational. stayed with it, and proved it out and you know, just sweat and And it did really – it comes from the top and they just unleash grit, got it done. And I think that’s the real power of a big idea, this culture of appreciative inquiry and empowerment and of a big purposeful mission is you know, people aren’t going to almost kind of get out of the way. It’s just amazing. give up on that if they see it. (Director – Sustainability, Mining Company) (President, Manufacturing Company) And a lot of companies say, “Oh we can’t work on that,” or And when I think about the value hierarchy for sustainability, I “We can’t do this because of cost.” And what we say is, “Well call the top level “righteous.” And that makes some people we can’t afford not to.” I mean, you’re missing the big picture uncomfortable. But I think it’s an accurate term because if you don’t have an aggressive, proactive program in reducing sustainability is the only thing I know that gets people to think waste, water, and energy. about products and businesses in a morally superior way. (Director of Sustainability – Pharmaceutical Company) (Vice President – Sustainability, Building Products and Manufacturing Company) Oh man…There’s a deep-seated attitude about things, and that So that was the excitement was, with a vvv you can only have – can grow from knowledge about knowing these things have to you have a very limited socio-demographic of people that will be sustainable, and have to function within certain boundaries sponsor an nnn. You have to be a billionaire. You know, for or they just won’t work. Or it can come from some behavioral mine, I’m not a billionaire, but you just need an apartment conviction from the spiritual sort of “We’re supposed to do owner that’s willing to give back to the community. So I’ve had this, and if we don’t we’re evil people and something terrible is a very strong response to our presentation and I’ve got a lot of going to befall us.” I think there are probably multiple ways to very large community players wanting to be involved in it. instill that in societies. (Managing Director and Partner, Real Estate Investment (Professor and Marine Ecologist) Fund) Like I, obviously, could have gone back and worked for another Most people that come from the outside think that we’re full of broker dealer or a bank, trust department or what have you. BS and we didn’t walk it and so they get here and they go: “It’s She actually raised the issue to me: “What don’t we do in everything you do.” So it’s how do you perpetuate the something that we could be proud of?” culture, and how do you change the world, to be honest with (Managing Director, Sustainability Portfolio Management you.” Firm) (CEO, Manufacturing Company)

DISCUSSION AND HYPOTHESIS DEVELOPMENT

Overview

My research journey has taken me on a path that began with one line of thinking but ended at an altogether different place. This evolved as follows: my initial research suggested a more robust measurement rubric and defined reporting standard was needed for business enterprises making representations about social and environmental sustainability initiatives. To my surprise, what emerged from both the published literature and my research data is that there presently exists a considerable amount of guidance in the areas of measurement and reporting of non-financial outcomes from these sustainability initiatives (see, e.g., AICPA, 2014; Borkowski et al., 2010; Ehrenfeld,

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2008; Epstein, 2008; Epstein et al., 1976; Epstein & Yuthas, 2014; Giannetti et al., 2010;

Grant Thornton LLP, 2014; Gray, 2010; Gray et al., 1987; GRI, 2013; Hespenheide et al.,

2010; Institute of Management Accountants, 2008; Kolk et al., 2001; Li‐Chin & Taylor,

2007; Nattawut & Sirilak, 2013; Parker, 2007). Conversely, my research data revealed

that business enterprises are struggling with how to monetize the financial results from

these social and environmental activities—notwithstanding several financial

measurement and reporting methodologies that recently have been proposed (see, e.g.,

Epstein & Rejc Buhovac, 2014; Epstein & Yuthas, 2012; Willard, 2012).

With respect to monetizing the financial value obtained by business enterprises

from their sustainability initiatives, I observed that organizations in my research study

think about “value” in one or more of the following four ways: (1) cost reduction (42

coded References); (2) revenue growth (33 coded References); (3) risk reduction (17

coded References); (4) intangible asset value (69 coded References). Although business

enterprises are thinking about financial value that may arise from sustainability

initiatives, these same organizations are not making a rigorous effort to isolate and

specifically calculate the financial value related thereto. Yet, these business

organizations—and certainly the exemplar companies I identified in my research—

continue with their commitment to sustainability initiatives. I wondered why they do

so—what is the spark that enables these organizations to ‘keep on keeping on’?

I return now to my findings, and consider how sustainability initiatives may

contribute to growth in financial value of the business enterprise. Reiterating my three primary findings:

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Finding 1: Exemplar companies exhibit confidence that a focus on sustainability is a better way to run an enterprise—which leads to operations excellence: ‘BELIEF’.

Finding 2: Exemplar companies are deeply devoted to following a sustainability path, even if they cannot monetize the specific financial value arising from their sustainability initiatives: ‘COMMITMENT’.

Finding 3: Exemplar companies reflect a culture—a spirit of the enterprise—that is distinct, unique, and palpable: ‘ETHOS’.

My findings suggest a paradox: On the one hand, business leaders claim that the

analytic business case may not be convincing, or providing evidence, about financial value arising from sustainability initiatives and that this is an obstacle to sustainability activities (see, e.g., Accenture’s comments in my Introduction section). Yet, on the other hand, my deeper probe finds that the pursuit of such activities in exemplar companies is strongly influenced by nonanalytic factors which may, or may not, ultimately contribute to superior financial performance.

There may be a sequential logic and interrelationship to my three primary findings, in that Finding 1 appears to harmonize with Finding 2 and, in turn, Findings 1 and 2 appear to harmonize with Finding 3. This leads me to ask whether there is a correlative effect between investment in sustainability initiatives and superior financial performance. Furthermore, is an ethos of sustainability—woven through the organization’s culture—a potential driver of such superior financial performance? (See

Future Research.)

Ethos in Business

Etymologically, the word “ethos” has been traced to the early Greek language, and is defined as “habitual character and disposition; moral character; habit, custom; an

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accustomed place.”30 In modern language, the Merriam-Webster dictionary defines

“ethos” as “the distinguishing character, sentiment, moral nature, or guiding beliefs of a

person, group, or institution.”31

The construct of a “corporate ethos” or “business ethos” in contemporary business

environments has not been extensively explored in the literature (Melé, 2012; Williams,

2008). However, there are several academic papers that have looked at ethos within the business setting, and I relied on them to inform my research. Williams points out that

“increasing numbers of scholars and researchers are choosing to use the term corporate

ethos because rhetorical theory provides a sound theoretical basis for understanding the

concept of ethos and why it matters to communicators who wish to persuade their

audiences” [emphasis author’s] (Williams, 2008: 100).

A business enterprise’s ethos extends beyond the formal structures of that

organization. It is more than “a mere nexus of contracts or an abstract entity where

different stakeholder interests concur” (Melé, 2012: 89). Rather, it is more appropriate to

see the firm as a “human community,” which has roots in several sources including

managerial literature and business ethics scholars. A business enterprise viewed through

the lens of a human community suggests the firm itself should be seen as a “community

of persons”—one that is oriented to profitable and efficient provision of goods and

services. As a “community of persons,” both individuals and the whole are emphasized; it

“makes explicit the uniqueness, conscience, free will, dignity, and openness to human

flourishing” (Melé, 2012: 89).

30 http://www.etymonline.com/index.php?allowed_in_frame=0&search=ethos&searchmode=none

31 http://www.merriam-webster.com/dictionary/ethos 121

Ethos within an organization is believed to be a key driver of knowledge-creating

activities (Matsudaira, 2010). The ongoing practice of ethos within Nissan Motor

Company is what enables “knowledge (intangible) assets” to be generated and sustained

in a knowledge-creating company such as Nissan which follows the “Nissan Production

Way.” This, arguably, is what leads to a superior automobile product (Matsudaira, 2010).

Further, a strong sense of mission has been linked to higher performing organizations.

This was evident based on an analysis of corporate mission statements, whereby higher-

performing firms created a strong identity—or internal ethos (Williams, 2008). Within

the mission statement, communicating an organization’s values—those that are most

important to a corporation and its stakeholders—is believed to strengthen a corporation’s

ethos (Williams, 2008). Williams continued, by citing Collins and Porras: “Core values

and beliefs are the organization’s basic precepts about what is important in both business

and life, how business should be conducted, and what is to be held inviolate” (Collins &

Porras, 1991: 35). A “virtue ethic approach to business”—“a calling”—has been likened

to the business ethos construct set forth by Melé (McPherson, 2013). This comports with

my sense about comments repeatedly heard in my research interviews about sustainability initiatives: individuals in their respective organizations felt “it is our mission”; “it is in our DNA”; “it is who we are.”

Ethos of Sustainability

I overlay the construct of ethos with that of sustainability initiatives, as this follows from my research findings. Specifically, in my findings I cited examples where

Informants’ comments gave me the sense that exemplar companies possess a unique connection to sustainability initiatives—it was clear to me these respective companies

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embraced sustainability in a way that went far beyond that of a basic corporate exercise.

Rather, these exemplar companies displayed guiding beliefs that sustainability initiatives

were much more than a passionless assignment: in reality a business enterprise’s

commitment to sustainability was one it believed led to operations excellence—

sustainability enables them to be better than their competitors—and management

intuitively believes sustainability initiatives yield financial value even when they cannot

precisely quantify that value.

Resource-Based Theory: Theory that Guided Me

My research process was inductive, and based on a grounded theory approach that enabled my findings to emerge from the data. Moreover, throughout my research interview process, I continued to read the published literature with the goal of identifying

prior academic research and theoretical support from which to make sense of my

findings. This led to the culmination of my research discussion: Resource-Based Theory

(RBT) and the Resource-Based View of the Firm (RBV) (see, e.g., Barney, 1991;

Conner, 1991; Grant, 2010; Wernerfelt, 1984). At its core, RBT proposes that sustained competitive advantage obtains based on firm resources that are valuable, rare, inimitable, and non-substitutable (Barney, 1991). Barney defined firm resources as follows:

Firm resources include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness. In the language of traditional strategic analysis, firm resources are strengths that firms can use to conceive of and implement their strategies. (Barney, 1991: 101)

He continued the discussion by explaining various firm attributes that can lead to

value creating strategies. Barney, in citing a number of authors, classified potential firm

resources into three discrete categories: physical capital resources (e.g., a firm’s physical 123

technology, geographic location, and/or access to raw materials); human capital resources

(e.g., experience, judgment, and/or insight of individual managers and workers); and organizational capital resources (e.g., a firm’s formal reporting structure, its formal and informal planning, and/or informal relations among internal and external groups).

Resource-based theory has been extensively discussed in the literature, following emergence of this theory in the 1980s (Barney, 1991; Barney & Clark, 2007; Bogner,

Thomas, & McGee, 1999; Conner, 1991; Conner & Prahalad, 1996; Grant, 2010;

Kraaijenbrink, Spender, & Groen, 2010; Laszlo & Zhexembayeva, 2011; Marcus, 2005;

Newbert, 2008; Russo & Fouts, 1997; Stoelhorst & Van Raaij, 2004; Wernerfelt, 1984,

2013). “Since the 1991 publication of the first Journal of Management special issue devoted to resource-based inquiry, resource-based theory (RBT) has evolved from a nascent, upstart perspective to one of the most prominent and powerful theories for understanding organizations” (Barney et al., 2011).

Ethos of Sustainability and Resource-Based Theory: Development of New Hypothesis

Emerging from my review of applicable literature together with analysis of my research data is a hypothesis that incorporates my findings of an organization’s ethos of sustainability and long-standing RBT. Hart (1995) discusses how strategies associated with a natural-resource-based view of the firm may be interconnected and how this may lead to a differentiated reputation resulting in competitive advantage. Similarly, I believe that my three primary research findings with respect to sustainability and financial performance—labeled herein as Belief, Commitment, and Ethos—may be interconnected such that they become valuable, rare, inimitable, and non-substitutable, thereby leading to competitive advantage. I think this notion is well-capsulized by Hart’s discussion of

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observations made by Hamel and Prahalad. In citing this, I overlay my three findings of

Belief, Commitment, and Ethos:

Hamel and Prahalad (1989) observed that companies that were rising to positions of global leadership invariably began with ambitions that were out of proportion to their initial resources or capabilities [Finding 1: ‘Belief’ and Finding 2: ‘Commitment’]. Organizationwide dedication to a compelling long-range vision (a shared vision or “intent”) was the key to generating the internal pressure and enthusiasm needed for innovation and change [Finding 1: ‘Belief’ and Finding 2: ‘Commitment’]. Creating such a shared vision of the future appears to require strong moral leadership (Bennis & Nanus, 1985; Selznick, 1957) and an empowering social process, reaching deep into the management ranks (Campbell & Yeung, 1991; Hart, 1992; Senge, 1990) [Finding 3: ‘Ethos’]. Given the difficulty of generating such a consensus about a purpose, shared vision is a rare (firm-specific) resource, and few companies have been able to establish or maintain a widely shared or enduring sense of mission (Fiegenbaum, Hart & Schendel. In press: Hamel & Prahalad, 1989). (Hamel & Prahalad, 1989, as cited in Hart, 1995)

Sustainable development may require such a shared vision of the future and,

thereby, it could afford opportunity for competitive advantage. This could occur through

the accumulation of rare and firm-specific resources involving a shared vision of the

future, focus on technology, and competency development (Hart, 1995).

In my study, I seek to extend the research on connecting sustainability initiatives

and financial performance. Early strategy research did not thoroughly address this

important link, or it did so in a fashion that was exploratory and lacked rigor (Laszlo &

Zhexembayeva, 2011; Sharma & Aragón-Correa, 2005). Instead of probing for

comprehensive answers, research literature often concentrated on processes such as

saving costs by reducing pollution or energy use (Laszlo & Zhexembayeva, 2011;

Sharma & Correa, 2005). This amounted to little more than harvesting low-hanging fruit rather than zeroing in on the drivers of sustainability thought leadership and how it contributes to financial value. “It is not sustainability itself that increases 125

profitability…Instead, environmental and social strategies force companies to acquire

constituent capabilities which in turn allow them to develop new competencies that lead

to competitive as well as sustainability advantages…In other words, getting good at

managing environmental and social performance leads to new organizational competencies that apply broadly to every aspect of business management” (Laszlo &

Zhexembayeva, 2011: 68-69).

Marcus (2005) described the resource-based view of competitive advantage in the

context of strategic environmental sustainability, and to this thinking, I add the construct

of an ethos of sustainability. That is, firms that have woven sustainability into their

cultural fabric (i.e., their ethos) may be better positioned to develop resources that are, in

the words of Barney (1991), “valuable, rare, inimitable, and non-substitutable.”

Establishing distinctive competencies that are made up of constituent elements—

especially those that are complex in combination—adds value to customers through

product differentiation or lower costs; this in turn can provide competitive advantage

(Barney, 1991; Laszlo & Zhexembayeva, 2011; Marcus, 2005). In my research, I found

that exemplar companies—those possessing an ethos of sustainability—believe they are

enabled to develop unique and valuable resources based on a constant focus on

innovation, engaging with an employee workforce that is devoted to a shared vision,

striving for operations excellence, and embedding sustainability thinking in their strategy

development. I, therfore, propose the following hypothesis for future research, as this

may have impact for current and future managers with regard to financial performance of

the business enterprise:

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Firms that have an embedded Ethos of Sustainability may be able to accumulate the resources necessary for superior financial performance more quickly and effectively than firms without such embedded ethos.

FUTURE RESEARCH

The goal in my study has been to contribute to empirical management research

and related literature by exploring links between firms’ sustainability initiatives and

resulting financial performance. To my surprise, I uncovered three behavioral characteristics (Emergent Themes) that may overshadow a manager’s common attitude of

‘prove it to me with the financial numbers.’ I believe there are several areas for future research, based on observations and findings that emerged from my research study. First, some researchers and other observers have commented that behaviors about sustainability commitment differ among private versus public companies. That is, private companies are influenced by only one or a few founders who may have a philanthropic disposition with respect to investing in sustainability initiatives no matter what the cost; whereas, public companies are beholden to a wider group of investors and market analysts who may not much care about a sustainability focus and who may not be willing to make such investments. In my research, I interviewed individuals employed by private as well as public companies; I did not detect a bias one way or another. However, I did not specifically focus on this aspect in my research design. In future empirical research, it may be interesting and worthwhile to evaluate whether there are any real differences in this regard.

Second, and as further discussed in the Limitations section which follows, none of my Informants were employed in the accounting or finance functions within industrial enterprises. Moreover, in most cases I interviewed only one person per organization. In

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order to further test my findings, it may be helpful to interview several individuals in different areas of each organization—including the accounting and finance functions— and then analyze results to determine whether there is internal consistency with functional areas of the same organization. (I note, however, several of my Informants who work as financial consultants and advisors are employed in financial roles; yet, none of these individuals work inside corporate industrial entities which is the thrust of my aforementioned comments.)

Lastly, in concluding my Discussion section I hypothesized that a firm’s ethos of sustainability may be an important driver of superior financial performance when compared to other organizations which lack this ethos. More to the point, are business enterprises that embrace this ethos financially outperforming peer companies that do not?

If an ethos of sustainability does in fact enable superior financial performance, are there specific mechanisms (constituent capabilities) that combine with this ethos to drive the outperformance? This should be quantitatively tested to determine whether my proposed hypothesis holds up under rigorous examination, and whether new insights about drivers of superior financial performance can be gleaned.

LIMITATIONS

At the beginning of my data collection I thought of one potential limitation; mid- way through my data collection a second limitation occurred to me. At the beginning: I realized the sample size was small—30 Informants. Although the interview subjects represented substantial business enterprises geographically dispersed and with a wide range of industry classifications, still, this was only 30 individuals from whom I sought to gain insights about a landscape that is broad and deep. Mid-way: I realized that because

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each one of my Informants is employed in a position of responsibility with respect to sustainability, perhaps there could be Interviewee bias. Said more bluntly: I knew I was talking to the ‘cheerleaders’ for sustainability within their respective organization; might they be predisposed toward a limited viewpoint? I do not know. Certainly, I did not detect this. Rather, the Informants appeared to be realistic with respect to the difficulties as well as the opportunities of their role.

With respect to existing theory that guided my Discussion and Hypothesis

Development, I relied significantly on Resource-Based Theory (RBT) and the Resource-

Based View of the Firm (RBV). Although this theory has been in place and extensively researched since the early 1980s, some commentators today argue about whether RBT is truly a theory of the firm or something otherwise. In fact, one of the researchers I cited as providing helpful guidance in my own thinking and hypothesis, himself considered that

RBT may be more so a “view than a theory” (Marcus, 2005: 29). As well, Kraaijenbrink et al. (2010) argue both for and against RBT effectively serving as a theory of the firm.

Still, many researchers continue to embrace RBT as a theory, and I subscribe to this line of thinking (Barney, 1991; Barney, Ketchen, & Wright, 2011; Conner, 1991; Conner &

Prahalad, 1996; Hart, 1995; Hart & Dowell, 2010; Laszlo & Zhexembayeva, 2011).

CONCLUSION

I conclude my research study by first looking back at how my thinking has evolved during this journey: Initially, I believed that a more robust sustainability measurement rubric was needed. In my review of previous research literature I learned that significant guidance exists with respect to non-financial measurements and representations; the largely unexplored territory is in the area of a financial measurement

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methodology. However, early in my research interviews I came to a new understanding—

that is, firms are thinking about measuring financial outcomes and they even have an

intuitive sense about where financial values reside, yet they have done little if anything to

monetize that value. As I analyzed my collected data, what emerged were three distinct

behavioral characteristics (Emergent Themes) among exemplar companies that appeared

to overshadow these firms’ inability (or slow approach) to account for financial outcomes

of sustainability performance. From there I developed a proposed new hypothesis—one

which focuses on an ethos of sustainability—that could have meaningful impact for

managers whose responsibility it is to develop business tactics and strategies. Finally, I

identified several follow-on considerations for future research.

I believe my proposed new hypothesis, if supported by quantitative analysis and

further empirical study, may add significant value to managers’ understanding of how sustainability initiatives can positively influence financial performance. My hope is that future researchers who come behind me will continue to explore and advance these opportunities. The greater society will be the ultimate beneficiary of our collective work.

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Appendix 1: Interview Protocol

[Note 1: The following interview outline is based on discussions with corporate sustainability officers and directors. For interviews with individuals in other positions (e.g., sustainability a consultant) the format was slightly revised to be more appropriate in context.]

[Note 2: All Interviewer questions and comments are identified in italics.]

Step 1: Introduction and Explanation

Hello (name ______). Thank you so much for taking the time to meet with me today. I really appreciate it. Before getting started with the interview, there are several items I would like to cover.

Purpose of my Research and this Interview:

The purpose of my research is to better understand how business organizations measure sustainability projects and investments, and what information and performance representations are most important in that regard. I’m particularly interested in understanding the link between examples of successful sustainability projects and increased enterprise value. Your responses will become part of a study that I am doing in connection with my doctoral research dissertation. The questions are designed to obtain information about your own experiences with regard to organizational sustainability projects and investments. I am not interested in your organization’s specific business plans or proprietary information.

Confidentiality:

I previously sent you the disclosure and release forms that explain my responsibility to you.

All information that you disclose in this interview will be held in strict confidence. Your comments will be transcribed anonymously – omitting your name, anyone else you refer to in this interview, as well as the name of your current organization and/or past organizations. Your interview responses will be included with all the other interviews I conduct.

Audio Recording:

To help me capture your responses accurately and without being overly distracting by taking extensive notes, I would like to record our conversation with your permission. As well, I may make some brief written notes. Again, your responses will be kept confidential. If at any time, you are uncomfortable with this interview, please let me know and I will turn the recorder off. 131

Format of Interview:

I will ask you four discussion questions on this topic; each may have some follow-up questions, depending on where the discussion heads. The interview will last approximately 60 minutes. I am looking forward to our learning together. I am especially interested in hearing about your personal (i.e., “lived”) experiences. I ask that you recall and tell me about as much detail as possible with respect to my questions. During our discussion, I may ask you to provide more context or clarification on certain of your comments. Do you have any questions before we begin?

Step 2: Opening Icebreaker Question

Before we begin talking about business projects and investments regarding sustainability initiatives in your organization, I’d like to learn more about you. Would you please explain a brief background of yourself—where you grew up, went to school, how you got started in your current professional area?

Probes:  How did you come to be in your current position?  Please tell me about your personal interest in the area of sustainability?

Step 3: Experiential “lived experience” questions regarding Sustainability Initiatives

Interviewer: Question # 1— I would like to focus for a few minutes on a business sustainability project or investment with an environmental or social dimension—one that you feel is a major success story. Please tell me about your lived experience when you were working on such a project—at any time in your career? Please describe the project in detail from beginning to end.

Probes:  What factors enabled the project / investment to move forward and succeed?  Please describe the sustainability goals / purpose.  What was your role?  What was most memorable about this project (either good or bad)?  Was this project or investment aimed at reducing a negative footprint (e.g., doing less harm) or on increasing enterprise value (e.g., a net positive impact)?  What types of measurements or other information did you rely upon in making your decision(s)?  What types of performance representations did you give to Internal Stakeholders during and at the conclusion of the project? To External Stakeholders?  How did the outcome of the project add tangible and / or intangible value to the organization?

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Interviewer: Question # 2— Next, I would like to focus on a business sustainability project or investment with an environmental or social dimension—one that you believe did not live up to initial expectations or about which you may still have some doubts Please describe the project in detail from beginning to end.

Probes:  Please take me back to that experience  Why did it achieve a less than optimal result?  Please describe the sustainability goals / purpose.  What was your role?  What was most memorable about this project (either good or bad)?  Was this project or investment aimed at reducing a negative footprint (e.g., doing less harm) or on increasing enterprise value (e.g., a net positive impact)?  What types of measurements or other information did you rely upon in making your decision(s)?  What types of performance representations did you give to Internal Stakeholders during and at the conclusion of the project? To External Stakeholders?  Did the outcome of the project add any tangible and / or intangible value to the organization?

Interviewer: Question # 3—Regarding your organization’s business projects or investments, what types of performance measurements are you using, and how is that information utilized to drive business or investment decisions?

Probes:  Can you give me some specific examples?  What kinds of sustainability information do you share with your / your organization’s Internal and External Stakeholders (e.g., feedbacks, results, performance measurements)?  Are there any standard guideline documents that you use as a reference source? [If I am asked for examples: e.g., GRI-G4 Reporting Principles and Standard Guidelines, The Ten Principles of the UN Global Compact, IIRC,SASB, IMA 67, etc.].  How do you / does your organization determine your / its sustainability reporting objectives?

Interviewer: Question # 4— Thank you for your thoughtful responses. I have one final question: Focusing for several minutes on the potential for moving sustainability beyond our efforts of reducing harm, to one of creating genuine betterment and adding value Have you come across the idea of “flourishing or thriving organization” or “flourishing outcomes” used in the context of sustainability?

 [If “No,” Interviewer will give the Informant a brief explanation of “flourishing” (e.g., initiatives directed toward “net positive impact” rather than “doing less harm”). 133

o Net positive impact: e.g., planting trees to repopulate deforested land, or fostering community after-school programs for young children of low- income working families [i.e., Flourishing]. o Doing less harm: e.g., cutting waste, reducing pollution or GHGs [i.e., traditional Sustainability].

Probes:  Do your organization’s sustainability initiatives include—or aspire to include— the broader sustainability concept (construct) of “flourishing”?  Please tell me about your lived experience with one sustainability project or investment whose objective was net positive impact, if you have been involved with such a project (e.g., planting trees to repopulate deforested land)? o Please take me back to that experience, and describe it in detail. o Can you give some examples of performance results that were reported to your Internal and External Stakeholders? o Did the result of this project or investment add measureable long-term value to the enterprise?  Please tell me about your lived experience with one sustainability project or investment whose objective was doing less harm, if you have been involved with such a project (e.g., cutting waste or GHGs)? o Please take me back to that experience, and describe it in detail. o Can you give some examples of performance results that were reported to your Internal and External Stakeholders? o Did the result of this project or investment add measureable long-term value to the business enterprise?

Step 4: Closing

This concludes our interview. Would you please take a moment to reflect on our discussion? Is there anything you feel we missed covering on your experiences with sustainability projects and investments, or anything you wish to clarify or more fully talk about?

As I progress with my research, if I need to clarify anything we’ve discussed, may I follow up with a brief phone call or email? Do you have a preference (call or email)?

Thank you for your investment of time with me today!

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Appendix 2: United Nations’ Six Principles for Responsible Investment

Principle 1: We will incorporate ESG [Environmental, Social and Governance] issues into investment analysis and decision- making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment community.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

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Appendix 3: Glossary of Terms

Financial value / Financial performance – For purposes of this study, I use “financial value” and “financial performance” as generalized terms that address different ways in which sustainability initiatives can affect (in the case of this paper - improve) the financial condition of an organization. These effects on financial value and financial performance can arise in a number of different ways: reducing costs, minimizing risks, increasing revenues, and growing the value of intangible assets.

Intangible assets – For purposes of this study, “intangible assets” includes assets that are created from within the business enterprise and typically are not accounted for in an organization’s financial statements. Examples of such assets include: customer goodwill, employee engagement, reputation, and brand name value. “These are non-monetary assets that cannot be seen, touched or exactly physically measured, and which are created over time through human effort; intangibles form a core component of human capital” (Institute of Management Accountants, 2008).

Intangible value – For purposes of this study, “intangible value” refers to the monetary value of intangible assets. This value is often theoretical, in that it relates to an asset that itself is not represented in financial statements and, further, any calculation of intangible value must be based on one or more assumptions. Still, this value is calculable by using basic financial modeling. (Note: There are certain instances when intangible assets are recorded in the financial statements. However, these situations are limited in number and beyond the scope of this study.)

Stakeholders – “Those who affect or could be affected by an organization’s activities, products or services and associated performance” (Institute of Management Accountants, 2008).

Sustainable development – “Meeting the needs of the present generation without compromising the ability of future generations to meet their own needs” (The United Nations World Commission on Environment and Economic Development, Brundtland Commission. “Our Common Future.” 1987). “A sustainable development strategy is fostered by a strong sense of social-environmental purpose, which provides the backdrop for the firm’s corporate and competitive strategies” (Hart, 1995). This strategy produces in a way that can be maintained indefinitely and it focuses on economic and social concerns as well as those in the environmental sphere (Hart & Dowell, 2010).

Sustainability initiatives – For purposes of this study, I use “sustainability initiatives” to reference the wide variety of business activities, investments, and projects undertaken by organizations – with respect to its stakeholders – that seek to incorporate a focus on environmental and /or social impacts.

Triple Bottom Line (TBL) – “An approach used that involves measuring the economic, environmental, and social performance of an organization or a project” (Institute of Management Accountants, 2008). TBL is also known as “The Three Ps” of People [social], Planet [environmental], and Profit [financial] or “The Three Pillars of Sustainability.” Origination of the term Triple Bottom Line is attributed to John Elkinton in 1994.

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Appendix B: Study 2 – Quantitative

BEYOND THE BOTTOM LINE: AN ACCOUNTING PERSPECTIVE ON THE ROLE OF A CORPORATE SUSTAINABILITY ETHOS IN EXPLAINING FINANCIAL PERFORMANCE

Matthew H. Levin Fellow, Fowler Center for Business as an Agent of World Benefit

Submitted in Partial Fulfillment of the Requirements for the Quantitative Research Report in the Ph.D. in Management: Designing Sustainable Systems Program at the Weatherhead School of Management

Advisors: Marc J. Epstein, Ph.D. Chris Laszlo, Ph.D. Aron Lindberg, Ph.D.

CASE WESTERN RESERVE UNIVERSITY

October 2016

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BEYOND THE BOTTOM LINE: AN ACCOUNTING PERSPECTIVE ON THE ROLE OF A CORPORATE SUSTAINABILITY ETHOS IN EXPLAINING FINANCIAL PERFORMANCE

ABSTRACT

Business enterprises are investing in major sustainability initiatives; yet, often they do not know what the financial outcomes of these activities are. While managers may have a sense that “doing good” yields financial rewards, they cannot pinpoint the specific effects on financial performance. There is extensive literature focusing on how CSR (corporate social responsibility) and sustainability initiatives affect the financial performance of the firm. However, my research reaches back to the behavioral antecedents of what causes a CSR commitment and how this, in turn, may influence financial performance. Utilizing existing theory together with rigorous analysis of research data, I explored how a new construct—a culturally embedded ethos of sustainability—can inspire firms to develop distinctive competencies that are “valuable, rare, inimitable, and non-substitutable” (Barney, 1991). These findings are important to practitioners and academicians who are responsible for sustainability success within their organization or field of research.

Keywords: corporate social responsibility (CSR); ethos; financial performance; resource-based theory; stakeholder theory; sustainability; theory of the business; upper echelons theory

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INTRODUCTION AND PROBLEM OF PRACTICE

A peculiar paradox of American economic history is that the large corporation has been, at one and the same time, the symbol of economic progress and yet a consistent object of criticism for instituting problems for which it has traditionally divested itself of responsibility. Growing corporate interest in social accounting, which is intended to provide the firm with usable measures of social involvement, indicates recent corporate awareness of its linkage to society. The empirical study of corporate social involvement, however, is in an undeveloped state (Abbott & Monsen, 1979: 501). [emphasis mine]

The definition of sustainability is: ______(fill in the blank).

If you are struggling with how to complete the previous sentence, you are not alone. In recent years, business enterprises, non-profits, and society have become keenly interested in sustainability (see e.g., Bonini & Bové, 2014; Chouinard et al., 2011;

Ehrenfeld, 2008; Epstein, 2008; Epstein & Rejc Buhovac, 2014; Epstein & Yuthas, 2012,

2014; Fisk, 2010; Friedman, 2006; Hardin, 1968, 1985; Hart, 1995; Hawken, 2010;

Institute of Management Accountants, 2008; Laszlo & Zhexembayeva, 2011). Yet, there is not a uniformly accepted method for measuring or reporting sustainability successes or failures, and there is an unresolved dilemma: what sustainability activities and corporate performance measurements really matter to firms and their stakeholders who are struggling with assessing these outcomes? Furthermore, how are sustainability initiatives

being connected to resulting financial performance? And why do some companies strive

to be exemplars in following a sustainability path whereas other companies do little or

nothing in this regard? With these questions in mind, we may very well be at an

inflection point in shaping enterprise sustainability commitment and practices.

We, our global society, are in the midst of a sea change, from old ways of

thinking to new. No matter our perspective—whether as a business leader, employee, 139

consumer, or everyday citizen—we are expecting and experiencing profound changes in

what society expects of businesses and how those firms react to such expectations. Laszlo

and Zhexembayeva (2011) vividly outlined these notions which are driven by economic,

health, social and ecological pressures that require a new type of business response. They

cite three significant and distinct trends which are interconnected; moreover, these three trends are becoming a major market force that is redefining the way companies compete:

 Declining resources—declining resources refers to the creeping exhaustion of precious natural resources such as clean water, food (nutritional value as well as overall supply in general), energy, soil, and biodiversity.

 Radical transparency—radical transparency is driven by the extraordinary advance of the civil sector and facilitated by precipitous developments in the field of information technology. Here, “transparency has become the dynamic, immediate, and substantive force of modern corporate life” (Laszlo & Zhexembayeva, 2011: 10).

 Rising expectations—with rising expectations, employees and consumers at large are holding firms to higher standards with respect to the products they sell and the working environment they provide. Coupled with radical transparency, companies are not only held to a higher standard—but if they should fail in accountability to that standard—the general public is likely to eventually find this out, in some cases sooner rather than later.

This paper commenced with profound comments from Walter F. Abbott and R.

Joseph Monsen. More striking than their words is the date: it was 1979. Ignoring the year of journal publication—if we simply read that first sentence—can we not imagine these same words being written last year, last week, yesterday? The role of the firm is continually questioned with each successive wave of emerging social awareness in today’s society: pollution is the 1970s, South African apartheid in the 1980s, and international human rights abuses in the 1990s are compelling examples. As a result, business firms have come under scrutiny and been called upon to solve the problems to which they have contributed (Margolis & Walsh, 2001). Yet—in the context of for-profit 140

enterprises—earning a net income, generating a positive cash flow, and returning profits

to the investors is critical to the long-term viability of the enterprise, to wit, at the end of

the day a business enterprise it expected to pay its bills, invest in its future, and provide a

satisfactory financial return to its equity owners. This is especially so with “public

companies.”32

What is this Phenomenon Called Sustainability?

“Sustainability” is a term which has different meanings to varied audiences. It is a

fuzzy term. Individuals will sometimes ask: “What does sustainability really mean?”

Used in the context of corporate financial performance for this study, I believe the

following definition best suits my research approach:

Sustainability, in the corporate sense, is more than an environmental issue or maintaining a good brand image through effective PR; it is the ability of the organization to know, understand, and consider all the factors that impact its value and drive its ability to continue to operate into the future. [Sustainability is:] activities and approaches that maintain or increase added value without creating long-term threats to economic, environmental, or social systems; sustainability typically seeks to create “sustainable development” (Institute of Management Accountants, 2008: 29, 37).

While I like this definition as it frames the construct of sustainability within a financial performance concept, I believe it may fall short of an even higher level of thinking—that of moving from the traditional “do less harm” to one of “net positive impact.” Accordingly, I add this further definition of sustainability: “The possibility that

humans and other life will flourish on the Earth forever” [emphasis author’s] (Ehrenfeld,

2008: 49). My research is motivated by understanding how sustainability adds financial value, and an important component of the conversation is enhancing value for society and

32 See Appendix A for a definition of this term. 141

the environment. I believe that firms with the right know-how can accomplish all of these objectives.

In a qualitative research study conducted during 2014–2015 (Levin, 2015), I found that certain organizations, which I labeled as exemplar companies, reflect a distinct culture of sustainability—a spirit of the enterprise. Moreover, this spirit eclipses the “do less harm” mindset and rises to the higher-level conviction of “net positive impact.”

Ultimately, I called this unique cultural attitude an “Ethos of Sustainability.” Moreover, in concluding this qualitative research study, I developed the following hypothesis:

In order to test this hypothesis, I conducted a quantitative research study to further explore the connection, if any, between an Ethos of Sustainability (the independent variable) and Corporate Financial Performance (the dependent variable). Further, my research problem in the quantitative study centers on whether the data will show that companies with an Ethos of Sustainability financially outperform peer group organizations. From a strategic management standpoint, such a finding may be essential to the long-term competitive advantage of a respective company over its rivals.

Given the challenges in addressing issues about sustainability—among them: questions about what “sustainability” really means; arguments about whether sustainability initiatives result in a net cost or a net benefit to the organization; and profitability pressures from owners and / or other stakeholders—additional studies are certainly needed. My research provides new insights into the antecedents and outcomes of focusing on sustainability initiatives in for-profit business enterprises. While previous

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studies illustrated the concern that governments, society, and business enterprises have for the growing challenges of sustainability, my research—to my knowledge the first empirical study that specifically reaches into the organizations’ executive level to examine key factors which motivate decision-making about sustainability initiatives and how this affects financial performance—will reveal how certain organizations possess a unique sense of purpose in this regard. This research extends the literature and addresses a gap in understanding how executive-level advocacy with respect to sustainability may have a direct effect on the firm’s financial performance.

GOAL OF THE STUDY AND RESEARCH QUESTIONS

The goal of this study is to understand, and provide insights about, how certain sustainability-focused organizations—those that have an embedded Ethos of

Sustainability—may have developed a unique firm resource that leads to superior financial performance (Barney, 1991; Wernerfelt, 1984). These so-called exemplar companies exhibit this ethos (Levin, 2015); the question becomes whether a deeply ingrained sustainability culture is a causal factor in enhancing financial performance? It is here that little is known. In this regard, my research questions are as follows:

(1) To what degree does an Ethos of Sustainability contribute to Financial Performance of a business enterprise?

(2) Further, does an Ethos of Sustainability enable these so-called exemplar companies to financially outperform peer group organizations?

(3) Alternatively, if companies with an Ethos of Sustainability do not financially outperform other peer group organizations, can it be said that firms with this ethos fare no worse, financially, by committing to a rigorous sustainability path?

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THEORETICAL FRAMING AND LITERATURE REVIEW

Introduction

Over the past 35 years managerial literature has explored a variety of issues

associated with sustainability and related accounting metrics: whether and how

sustainability increases financial performance (see, e.g., Bonini & Bové, 2014; Epstein &

Rejc Buhovac, 2014; Epstein & Yuthas, 2012; Fisk, 2010; Hart, 1995; Hart & Dowell,

2010; Russo & Fouts, 1997; Willard, 2012); discussions and arguments surrounding non- financial sustainability metrics (see e.g., Borkowski et al., 2010; Epstein, 2008; Gray,

2006; Gray et al., 1987; Hespenheide et al., 2010; McElroy, 2012; Mook, 2013); and

recent concerns where, in some cases, commitments by certain companies may be waning

due to an inability to connect sustainability initiatives with financial performance (see e.g., Accenture, 2013; Laszlo et al., 2014).

With respect to this latter point, the relationship between social, environmental and financial goals is often typified with short-term competition and inconsistencies vis- a-vis long term benefits (Mackey, Mackey, & Barney, 2007; and Smith & Tushman,

2005, as cited in Epstein, Buhovac, & Yuthas, 2015). Although this triad of social, environmental, and financial initiatives may benefit one another in the long-term, many times, they are conflicting in their need for corporate resources in the near-term (Margolis

& Walsh, 2003). Because of these types of stress factors between short-term demands vs. long-term goals, a firm’s desire to be socially and environmentally conscious may be supplanted by the financial performance exigencies of the day (Epstein et al., 2015).

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Four Theories Helped Ground this Quantitative Study

In this research study, four principal theories helped inform my understanding of the research problem and findings from the previous qualitative study (Levin, 2015).

Moreover, these findings and theories facilitated the research design methodology for this quantitative study. These four theories—resource-based theory, upper echelons theory, stakeholder theory, and theory of the business—suggested to me that the construct of ethos may be an important antecedent in the chain of effects from a firm’s sustainability initiatives to resulting financial performance.

First, I explored the literature to gain a better understanding of the meaning of

“ethos” and its relationship in a business environment; next, I expanded this construct of ethos to encompass a sustainability focus. Third, I tied together ethos and sustainability by examining resource-based theory in the literature and how this theory proposes that a firm can develop unique resources which are “valuable, rare, inimitable, and non- substitutable” (Barney, 1991). Further, in this regard, I studied how several researchers

(Hart, 1995; Laszlo & Zhexembayeva, 2011; Marcus, 2005) proposed that resource-based theory can be extended to encompass the effects of a deeply committed sustainability focus. Fourth, I explored upper echelons theory (Hambrick & Mason, 1984) and considered how this theory might influence managers based on a dedicated sustainability path set forth by top management. Lastly, I reviewed and brought into the conversation two additional theories that helped ground this mixed methods study: stakeholder theory and theory of the business.

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Ethos in Business

Etymologically, the word “ethos” has been traced to the early Greek language and

is defined as “habitual character and disposition; moral character; habit, custom; an accustomed place.”33 Aristotle, for example, suggested that ethos had three dimensions:

intelligence, character, and goodwill (McCroskey & Young, 1981). In modern language,

the Merriam-Webster dictionary defines “ethos” as “the distinguishing character, sentiment, moral nature, or guiding beliefs of a person, group, or institution.”34 The

construct of a “corporate ethos” or “business ethos” in contemporary business environments has not been extensively explored in the literature (Melé, 2012; Williams,

2008). However, there are several academic papers that have explored ethos within the business setting, and I relied on them to inform my research.