Abstract
Prior research suggests that voluntary environmental governance mechanisms operate to enhance a firm’s environmental legitimacy as opposed to being a driver of proactive environmental performance activities. To understand how these mechanisms contribute to the firm’s environmental legitimacy, we investigate whether environmental corporate governance characteristics are associated with voluntary environmental disclosure. We examine an increasingly important attribute of a firm’s disclosure setting, namely the disclosure of greenhouse gas (GHG) information. GHG information represents proprietary non-financial information about the firm’s exposure to environmental concerns and is related to the firm’s operations and future profitability. Thus, we expect governance participants would view such information as a potentially important strategic device for managing stakeholders’ demands for information concerning environmental risks. We find that the presence of an environmental committee and a Chief Sustainability Officer (CSO) is positively associated with the likelihood of GHG disclosure and that CSOs are associated with disclosure transparency. Further analysis reveals that the likelihood of disclosure is associated with committee size, number of committee meetings, expertise of committee members and CSO, and overlap between the environmental committee and audit committee. Only expertise of the environmental committee members and the CSO are associated with GHG disclosure transparency, while larger committees tend to be associated with lower transparency. Our results are particularly important to those with interests in evaluating the potential role that corporate governance mechanisms play in responding to stakeholder concerns about environmental risks. Directors and officers who are considering appointment to similar governance positions, may wish to consider what attributes would make such governance positions more influential.
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Notes
For the purposes of the current study, we adopt the term “GHG emission accounting” from the CDPs Greenhouse Gas Emissions Questionnaire. From the CDP, GHG emission accounting includes information about emission and management of numerous items including carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and other fluorinated gases (USEPA 2009). These gases are released as a result of manufacturing processes and the burning of fossil fuels. The terms GHG emissions and carbon emissions are used interchangeably in practice. In addition, “sustainability” refers to the corporate practice of creating long-term shareholder value by focusing corporate strategy around economic, environmental, and social endeavors which includes the management of GHG emissions.
The sample includes all US firms in the FT500, comprised of 500 of the largest companies in the world based on market capitalization from 2002 until 2004, and the S&P 500 companies from 2005 and 2006.
From manager responsibility perspective this is also grounded in the early economic positions of Friedman’s shareholder wealth maximation arguments ( e.g., Freidman 1970). These views were also further developed from a finance perspective (e.g., Jensen and Meckling 1976), and analytical economics literature (e.g., Akerlof 1970; Verrechia 1983; Grossman 1981). See Cormier and Magnan (1999) for a summary of the theoretical drivers of an economic approach to environmental disclosures.
Broadly the theoretical frameworks under this view include Legitimacy Theory (e.g., Lindblom 1994)-related frameworks such as Stakeholder Theory (Freeman 1984), Institutional Theory (Meyer and Rowan 1977), Political Economy Theory (Tinker et al. 1991), among others. See Gray et al. (1995) for a review of social and environmental disclosure literature relying or building upon these frameworks.
We also note that economic theoretical explanations and stakeholder theoretical explanations for disclosure patterns need not be mutually exclusive (Dawkins and Fraas 2011).
Examples include Ingram and Frazier (1980), Wiseman (1982), Li et al. (1997), Al-Tuwaijri et al. (2004), Clarkson et al. (2008), Patten (2002), Cho et al. (2006, 2012), Cho and Patten (2007), Cormier et al. (2004, 2005), Prado and Garcia (2010), Huang and Kung (2010), Cormier and Magnan (1999), Rupley et al. (2012), among others.
Rankin et al. (2011) find the extent and credibility of GHG disclosures are greater for firms reporting through the CDP process.
Examples of recent regulatory requirements include the EPAs Mandatory GHG Reporting Rule, issued on 22 September 2009, which requires major emitters and suppliers of fossil fuels to report GHG emissions beginning 2010 (USEPA 2009).
Examples include from the financial reporting literature includes: Forker (1992), Beasley (1996), Dechow et al. (1996), Klein (2002), Eng and Mak (2003), Abbott et al. (2004), Karamanou and Vafeas (2005), Farber (2005), Larcker et al. (2007), and Laksmana (2008). Examples from non-financial reporting practices includes: Haniffa and Cooke (2005), Prado et al. (2009), Rankin et al. (2011), among others discussed in the study.
Although the CSO position is a relatively new position, the strategic influence of this executive position is also analogous with the impact and adoption of other strategically specialized executive positions that have evolved in the past, such as Chief Risk Officers and Chief Information Officers (e.g., Beasley et al. 2010; Pagach and Warr 2010; Feeny et al. 1992; Lubin and Esty 2010).
Greenwashing is a term used by many to describe the practice by individuals or organizations to mislead outside parties about an organization’s environmental practices or the environmental advantages of a product or service provided. Greenwashing entails public emphasis on anecdotal examples of corporation’s positive environmental expenditures without mention of their wrongdoings or specifics with respect to operational results or data.
The CDP discloses the names of all firms they ask to participate in their project along with the firm’s response choice.
Examples utilized to help select our regression design and control variables include, but are not limited to: Huang and Kung (2010), Clarkson and Li (2004), Lang et al. (2003), Clarkson et al. (2008), Cho and Patten (2007), Richardson et al. (2004), Lang et al. (1993), Branco and Rodrigues (2008), Stanny and Ely (2008), Peters and Romi (2013), among others.
The authors had several discussions with CDP and PriceWaterhouseCoopers representatives involved in grading firm disclosures about the methodology and its application.
The CDP questionnaire builds upon itself every year, asking firms to disclose greater detail about their GHG strategies, emissions, goals, etc. Because the basic questions remain unchanged with additional questions added each year, the scoring possibilities for each question each year were assigned accordingly. There was not, in accordance with the CDP disclosure measurement methodology, judgment used to determine how “environmentally well” a firm responded to a question. Instead, the firm was assigned an allotted score dependent upon the extent they answered each part of the question. Several individuals were involved in the scoring to ensure similarities in disclosure assignment.
See additional discussion in the results section regarding mitigation of endogeneity concerns.
Many firms choose not to develop a stand-alone committee to deal with these issues, but instead assign additional responsibilities to other standing committees. In addition to reading proxy statements for environmental committees, we also examined the responsibilities of standing committees to determine whether sustainability responsibilities were assigned to them. We found this on several occasions and the responsibilities were predominately assigned to the audit committee or the governance committee. On these occasions, firms were also assigned a 1 for COMMITTEE.
An example from a director assigned to environmental committees with both Ashland, Inc., and International Paper includes the fact that this individual was the founder and Chairman Emeritus of The Conservation Fund, a NGO dedicated to conserving America’s natural and historic heritage and a former president of The Nature Conservancy from 1973 to 1980.
Two examples of CSO experts include Gene Kahn and Patricia Calkins. First, Gene Kahn, VP Global Sustainability Officer (later CSO) General Mills “dropped out of his graduate program in English at the University of Washington in 1972, leased some farmland near Rockport, Washington, and started figuring out how to raise food without pesticides, herbicides, or artificial fertilizers. He went on to create Cascadian Farm, one of the first organic food companies in the United States, which he and his business partners sold to General Mills in 2000. Kahn, the erstwhile hippie farmer and organic pioneer, has since become the big company’s VP of sustainable development” (Fishman 2006). Second, Patricia A. Calkins VPEHS for Xerox, previously worked for AT&T on sustainability initiatives and environmental challenges, worked with the USEPA in developing market based voluntary sustainability programs and provided consulting services to corporations developing environmental leadership strategies, earned a master’s degree in civil/environmental engineering, and serves as a member of the external advisory board for the University of Michigan’s Center for Sustainable Systems. She also serves on several boards including the Central and Western New York Chapter of the Nature Conservancy and the Golisano Institute for Sustainability at the Rochester Institute of Technology (Xerox 2010).
We acknowledge that our selection of control variables is not an exhaustive inclusion of variables addressed in the vast body of prior disclosure literature. Since the objective of this study is not tied to replicating a specific study’s design choices, we are limited in drawing exact inferences regarding our results compared to a specific prior study. Consistent with archival research designs, our study is also limited by variables that are unintentionally omitted which could be correlated with our variables of interest.
KLD Research and Analytics, Inc. provides an independent rating of corporate social responsibility for public firms. The specific environmental performance ratings are a measurement based on a binary system with 1 representing the existence of a specific environmental strength or weakness and 0 representing the absence of a specific strength or weakness. The environmental rating for firm specific strengths includes the following: beneficial products and services, pollution prevention, recycling, alternative fuels, PPE and other environmental strengths. The environmental rating for concerns includes: hazardous waste, regulatory problems, ozone depleting chemicals, substantial emissions, agricultural chemicals, climate change and other environmental concerns.
Although firm-specific GHG disclosure policies might remain constant across years, we do not find this to be the case. Many times firms chose a disclosure strategy, only to change to a non-disclosure strategy the next year. In contrast, governance structures do remain more consistent, but, as indicated in Table 5, out of 429 unique firms, only 89 have CSOs and 75 have a sustainability committee. Because of the timing of our sample, it was extremely rare for firms to have either of these in place in 2002, making it possible to examine the effects of these relationships since their inception.
It is also important to note that many other countries already have mandatory carbon disclosures or carbon markets where cross-listed firms would be expected to compete (although participation with CDP disclosure guidelines remains voluntary).
We create an aggregate measure of ENVINDEX by searching for each firm on three separate indices: the Dow Jones Sustainability World Index (DJSWI), the Domini 400 Social Index (DSI) and the FTSE 4Good Index (FTSE4).The DJSI was created in 1999 and is the first global index tracking the financial performance of sustainability focused firms. This index encompasses the top 10 % of the world’s largest 2,500 companies in the Dow Jones Global Total Stock Market Index in terms of economic, environmental and social criteria. Firm analysis and ranking is updated annually. The DSI began in May of 1990 as an index of US equities that was the first benchmark created to measure the impacts of environmental, social and governance factors on investment portfolios. Finally, the FTSE4 is an index that measures the economic performance of firms that meet specific responsibility standards, while encouraging investment in those companies. Specifically, firms are recognized for their environmentally and socially responsible activities.
All industry adjusted independent variables are presented in raw form in the descriptive statistics.
With the significance associated with some of the independent variables in our analysis, there is the possibility of incorrect inferences due to multicollinearity. All independent variables are evaluated for multicollinearity and variance inflation factors are below the stringent logistic regression threshold of 2 (well below the regression threshold of 10).
The models included in the Durbin–Wu–Hausman test are taken from prior literature and are as follows: (1) COMMITTEE = f(OFFICER, ESI, ENVST, LEV, SIZE, OUTSIDE), with all variables as defined in the current paper besides OUTSIDE representing the proportion of outside directors, (2) OFFICER = f(COMMITTEE, ENVST, ESI, SIZE, LITIGATION, ROA, FINANCING, CEONOTCHAIR, INSTOWN, CROSSLIST), with all variables as defined in the current paper besides CEONOTCHAIR, controlling for CEO duality and representing a 1 if the CEO is not the chair of the board. Results indicate logistic regression is consistent and that endogeneity does not appear to present a problem.
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We gratefully acknowledge Teri Lombardi Yohn and Daniel Beneish for their helpful comments.
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We appreciate the helpful comments from conference and workshop participants at the 2010 American Accounting Association Annual Conference, Portland State University’s 5th International Conference on Business and Sustainability, Indiana University, Texas Christian University, Texas Tech University, the University of Utah, the University of Arkansas, and the University of Kansas.
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Peters, G.F., Romi, A.M. Does the Voluntary Adoption of Corporate Governance Mechanisms Improve Environmental Risk Disclosures? Evidence from Greenhouse Gas Emission Accounting. J Bus Ethics 125, 637–666 (2014). https://doi.org/10.1007/s10551-013-1886-9
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DOI: https://doi.org/10.1007/s10551-013-1886-9