EFFECT OF CORPORATE SUSTAINABILITY FACTORS ON ORGANIZATIONAL PERFORMANCE
CHAPTER ONE
INTRODUCTION
1.1 Background of the study
Not until recently, the issue of corporate sustainability was not taken seriously
among business owners and shareholders. To them, it is just another avenue to waste funds that would otherwise be used for profitable production. But this is no longer the case, as a lot of corporations and businesses now see corporate sustainability as a prerequisite for organizational growth and profitability. (Chukwuweike, 2014).
Corporate sustainability is an approach that creates long-term stakeholder value by implementing a business strategy
that considers every dimension of how a business operates in the ethical, social, environmental, cultural, and
economic spheres. It also formulates strategies to build a company that fosters longevity through transparency and
proper employee development (Wikipedia, 2014).
Corporate sustainability is an evolution on more traditional phrases describing ethical corporate practice. Phrases
such as corporate social responsibility (CSR) or corporate citizenship continue to be used but are increasingly
superseded by the broader term corporate sustainability. Unlike phrases that focus on “added-on” policies, corporate
sustainability describes business practices built around social and environmental considerations. (Wikipedia, 2014).
Corporate sustainability does not just increase a corporation’s performance, it increases their good will, strong brand
name and reputation and by so doing brings about customer loyalty which, in turn, result in repeat purchase (The
dream of every business owner)
Neoclassical economics and several management theories assume that the corporation’s objective is profit
maximization subject to capacity (or other) constraints. The key agent in such models is the shareholder, acting as
the ultimate residual claimant who provides the necessary financial resources for the firm’s operations (Jensen and
Meckling, 1976; Zingales, 2000).
However, there is substantial variation in the way corporations actually compete and pursue profit maximization.
Different corporations place more or less emphasis on the long-term versus the short-term (Brochet., Loumioti.,
serafeim., 2012); care more or less about the impact of externalities from their operations on other stakeholders
(Paine, 2004); focus more or less on the ethical grounds of their decisions (Paine, 2004); and assign relatively more
or less importance on shareholders compared to other stakeholders (Freeman., Harrison., wicks., 2007). For
example, Southwest Airlines has identified employees and Novo Nordisk patients (i.e., their end customers) as their
primary stakeholder.
During the last 20 years, a relatively small but growing number of companies have voluntarily integrated social and
environmental issues in their business models and daily operations (i.e. their strategy) through the adoption of related
corporate policies. Such integration of environmental and social issues into a company’s business model raises a
number of fundamental questions for scholars of organizations. Does the governance structure of firms that adopt
environmental and social policies differ from that of other firms and, if yes, in what ways? Do such firms have distinct
stakeholder engagement processes and adopt different time horizons for their decision-making? In what ways are
their measurement and reporting systems different? Finally, what are the performance implications of integrating
social and environmental issues into a Company’s strategy and operations? Some scholars argue that companies
can ―do well by doing goodǁ (Godfrey, 2005). (Elfenbein and Walsh, 2007). Porter and Kramer, 2011) based on the
assumption that meeting the needs of other stakeholders–e.g. employees through investment in training-directly
creates value for shareholders (Freeman, Harrison, Wicks, Parmar, de Colle., 2010, Porter and Kramer, 2011). It is
also based on the assumption that by not meeting the needs of other stakeholders, companies can destroy
shareholder value because of consumer boycotts (Sen, Gurhan-canli, Morwitz., 2001), the inability to hire the most
talented people (Greening and Turban, 2000), and by paying potentially punitive fines to governments.
On the other hand, other scholars argue that adopting environmental and social policies can destroy shareholder
wealth (Clotfelter 1985; Friedman, 1970; Galaskiewicz, 1997; Navarro 1988;). In its simplest form, their argument is
that sustainability may simply be a type of agency cost: managers receive private benefits from embedding environmental and social policies in the company’ strategy, but doing so has negative financial implications for the
organization (Baloti and Hanks, 1999; Brown et al., 2006). Moreover, these companies might experience a higher
cost structure (e.g. paying their employees living rather than market wages).
Consequently, the argument continues, companies that do not operate under such additional environmental and
social constraints will be more competitive and as a result, will be more successful in a highly competitive
environment. In fact, this hypothesis is well captured in Jensen (2001) who states:
Companies that try to do so either will be eliminated by competitors who choose not to be so civic minded, or will
survive only by consuming their economic rents in this manner.
People all over the world expressed considerable concern for damage to the environment and its effects on their lives
and businesses. In the Brundtland report it is clear that corporate sustainability is important to the future of their
businesses, fortunes of nations and individuals (Edwards, 2005; White, 2009).
According to (Ullmann,.2007) corporate sustainability tend to focus on how to organize and manage corporate
activities in such a way that they meet physical and psychological needs without compromising the ecological, social
or economic base which enable these needs to be met. The role of corporations in this process is significant in most
countries around the globe, and especially so in the industrialized West.
In the views of Hart (2007) corporations are the only organizations with resources, technology, the global reach, and,
ultimately the motivation to achieve sustainability.
In response to their sustainable development policies and practices, many companies claim that they recognize their
social and environmental responsibilities, in addition to their economic responsibilities, and are seeking to manage
and account for these activities in an appropriate manner.
Corporate sustainability reporting has become such an important issue that most companies are now embracing
because of its long term impact on the performance of the corporation. Statistics from Global Reporting Initiative
(GRI) reflect this trend in Sustainability Reporting. According to Peiyuan, Xubiao & Ningdi (2007), the number of
enterprises writing sustainability reports based on GRI framework worldwide increased from 150 in 2002 to 750 in 2005. “From 1 January to 31 December 2010, the number of sustainability reports registered on the GRI Reports List
increased by 22 percent” (GRI, 2011).
EFFECT OF CORPORATE SUSTAINABILITY FACTORS ON ORGANIZATIONAL PERFORMANCE