Skip to main content
SpringerLink
Log in

Mismanagement of Sustainability: What Business Strategy Makes the Difference? Empirical Evidence from the USA

  • Original Paper
  • Published:
Journal of Business Ethics Aims and scope Submit manuscript

Abstract

This paper examines whether and to what extent the overall business strategy influences the firm’s mismanagement of sustainability. Specifically, an empirical measure for the mismanagement of sustainability is developed by exploiting the newly available materiality guidelines for US firms to define industry-specific material sustainability issues. Using this measure, this paper shows that mismanagement of sustainability can represent unethical business behavior when firms intentionally perform better on immaterial issues than on material issues by diverting stakeholders’ attention from the firm’s low overall sustainability performance. This paper assumes that the right business strategy can prevent such unethical actions. Based on Miles and Snow’s (Organizational strategy, structure and process, McGraw-Hill, New York, 1978) organizational theory, this paper distinguishes between Prospector and Defender business strategies. By employing multiple firm-level panel regressions, the findings suggest that Prospector-type firms are more likely to mismanage sustainability issues compared to Defender-type firms intentionally. The results give implications for researchers, regulators and standard setters, auditors, sustainability practitioners, and scholars.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. For purposes of this paper, the term “sustainability” is used interchangeably with terms such as “corporate social responsibility” and “corporate citizenship.” This practice is consistent with the work by Khan et al. (2016).

  2. Two-tailed t tests reveal that firms in the final sample and firms in the deleted sample only significantly differ in terms of size effects (t value 23.45). Final firms are, on average, larger. This finding is due to the fact that it is easier to collect data from large firms. Data for small- and medium-sized firms are often not available to the public. However, STRATEGY is not statistically significant between the two sample groups, meaning that there is no difference in pursuing business strategies between final and deleted firms.

  3. However, SASB’s industry sector classification is different from other existing industry classification systems in two ways. First, SASB “rearranged the industries based on the similarity of companies’ sustainability challenges and innovation opportunities […]. Second, […] [SASB] surface industries with great innovation potential in terms of addressing sustainability challenges, without regard to the market cap of currently listed companies” (SASB 2013, p. 1). As a result, SASB established the Sustainable Industry Classification System ™ (SICS). To make the materiality data compatible with the sustainability data from KLD and financial data from COMPUSTAT, SICS industries were mapped in this study to the industries in the Standard Industrial Classification (SIC) codes.

References

  • American Institute of Certified Public Accountants (AICPA). (2013). Materiality background paper on integrated reporting (IR). http://integratedreporting.org/wp-content/uploads/2013/03/IR-Background-Paper-Materiality.pdf.

  • Aragón-Correa, J. A. (1998). Strategic proactivity and firm approach to the natural environment. The Academy of Management Journal, 41(5), 556–567.

    Google Scholar 

  • Artiach, T., Lee, D., Nelson, D., & Walker, J. (2010). The determinants of corporate sustainability performance. Accounting and Finance, 50(1), 31–51.

    Article  Google Scholar 

  • Attig, N., Cleary, S. W., El Ghoul, S., & Guedhami, O. (2014). Corporate legitimacy and investment-cash flow sensitivity. Journal of Business Ethics, 121(2), 297–314.

    Google Scholar 

  • Babiak, K., & Trendafilova, S. (2011). CSR and environmental responsibility: Motives and pressures to adopt green management practices. Corporate Social Responsibility and Environmental Management, 18, 11–24.

    Article  Google Scholar 

  • Barnett, M. L. (2007). Stakeholder influence capacity and the variability of financial returns to corporate social responsibility. Academy of Management Review, 32(3), 794–816.

    Article  Google Scholar 

  • Barth, M. E., Cahan, S. F., Chen, L., & Venter, E. R. (2016). The economic consequences associated with integrated report quality: Early evidence from a mandatory setting. Stanford University, University of Auckland, University of Pretoria, Working Paper.

  • Bebbington, J., Larrinaga, C., & Moneva, J. M. (2008). Corporate social reporting and reputation risk management. Accounting, Auditing and Accountability, 21(3), 337–361.

    Article  Google Scholar 

  • Bentley, K. A. (2013). Antecedents to financial statement misreporting: The influence of organizational business strategy, ethical culture and climate. The University of New South Wales, Working Paper.

  • Bentley, K. A., Omer, T. C., & Sharp, N. Y. (2013). Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), 780–817.

    Article  Google Scholar 

  • Berrone, P., Fosfuri, A., & Gelabert, L. (2017). Does greenwashing pay off? Understanding the relationship between environmental actions and environmental legitimacy. Journal of Business Ethics, 144(2), 363–379.

    Article  Google Scholar 

  • Buysse, K., & Verbeke, A. (2003). Proactive environmental strategies: A stakeholder management perspective. Strategic Management Journal, 24(5), 453–470.

    Article  Google Scholar 

  • Calace, D. (2015). The researcher’s notes on sustainability: Is Materiality the antidote to greenwashing? https://www.linkedin.com/pulse/researchers-notes-sustainability-materiality-antidote-donato-calace.

  • Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), 1–23.

    Article  Google Scholar 

  • Cho, C. H., Guidry, R. P., Hageman, A. M., & Patten, D. M. (2012). Do actions speak louder than words? An empirical investigation of corporate environmental reputation. Accounting, Organizations and Society, 37, 14–25.

    Article  Google Scholar 

  • Darnall, N., & Sides, S. (2008). Assessing the performance of voluntary environmental programs: Does certification matter? The Policy Studies Journal, 36(1), 95–117.

    Article  Google Scholar 

  • Delmas, M. A., & Burbano, V. C. (2011). The drivers of greenwashing. California Management Review, 54(1), 64–87.

    Article  Google Scholar 

  • Delmas, M. A., & Montes-Sancho, M. J. (2010). Voluntary agreements to improve environmental quality: Symbolic and substantive cooperation. Strategic Management Journal, 31, 575–601.

    Google Scholar 

  • Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. A. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. The Accounting Review, 86(1), 59–100.

    Article  Google Scholar 

  • Dhaliwal, D. S., Radhakrishnan, S., Tsang, A., & Yang, Y. A. (2012). Nonfinancial disclosure and analyst forecast accuracy: International evidence on corporate social responsibility disclosure. The Accounting Review, 87(3), 723–759.

    Article  Google Scholar 

  • DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147–160.

    Article  Google Scholar 

  • Ditlev-Simonsen, C. D., & Midttun, A. (2011). What motivates managers to pursue corporate responsibility? A survey among key stakeholders. Corporate Social Responsibility and Environmental Management, 18, 25–38.

    Article  Google Scholar 

  • Dixon-Fowler, H. R., Ellstrand, A. E., & Johnson, J. L. (2017). The role of board environmental committees in corporate environmental performance. Journal of Business Ethics, 140(3), 423–438.

    Article  Google Scholar 

  • Dowling, J., & Pfeffer, J. (1975). Organizational legitimacy: Social values and organizational behavior. Pacific Sociological Review, 18(1), 122–136.

    Article  Google Scholar 

  • Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The impact of corporate sustainability on organizational processes and performance. Management Science, 60(11), 2835–2857.

    Article  Google Scholar 

  • Eccles, R. G., & Krzus, M. (2010). One report: Integrated reporting for a sustainable strategy (pp. 1–224). New York, NY: Wiley.

    Google Scholar 

  • Eccles, R. G., Krzus, M. P., Rogers, J., & Serafeim, G. (2012). The need for sector-specific materiality and sustainability reporting standards. Journal of Applied Corporate Finance, 24(2), 65–71.

    Article  Google Scholar 

  • Eccles, R., & Serafeim, G. (2013). The performance frontier: Innovating for a sustainable strategy. Harvard Business Review, 91(5), 50–60.

    Google Scholar 

  • Eccles, R. G., & Serafeim, G. (2014). Corporate and integrated reporting: A functional perspective. Working paper, Harvard Business School.

  • Edgley, C., Jones, M. J., & Atkins, J. (2014). The adoption of the materiality concept in social and environmental reporting assurance: A field study approach. The British Accounting, Review, 47(1), 1–18.

    Article  Google Scholar 

  • Elms, H., Brammer, S., Harris, J. D., & Phillips, R. A. (2010). New directions in strategic management and business ethics. Business Ethics Quarterly, 20(3), 401–425.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (1992). The cross-section of expected stock returns. The Journal of Finance, 47(2), 427–465.

    Article  Google Scholar 

  • Global Reporting Initiative (GRI). (2013). G4, Part 2: Implementation manual.

  • Grewal, J., Riedl, E. J., & Serafeim, G. (2015). Market reaction to mandatory nonfinancial disclosure. Harvard Business School and Boston University, Working Paper.

  • Grewal, J., Serafeim, G., & Yoon, A. (2016). Shareholder activism on sustainability issues. Working paper, Harvard University.

  • Hambrick, D. C. (1983). Some tests of the effectiveness and functional attributes of miles and snow’s strategic types. Academy of Management Journal, 26, 5–26.

    Google Scholar 

  • Hamilton, B. H., & Nickerson, J. A. (2003). Correcting for endogeneity in strategic management research. Strategic Organization, 1(1), 51–78.

    Article  Google Scholar 

  • Hauser Center. (2012). On materiality and sustainability: The value of disclosure in the capital markets initiative for responsible investment Hauser center for nonprofit organizations at Harvard University. http://www.sasb.org/wp-content/uploads/2012/10/On-Materiality-and-Sustainability.pdf.

  • Heath, J. (2006). Business ethics without stakeholders. Business Ethics Quarterly, 16(4), 533–557.

    Article  Google Scholar 

  • Heckman, J. J. (1976). The common structure of statistical models of truncation, sample selection and limited dependent variables and a simple estimator for such models. Annals of Economic and Social Measurement, 5(4), 475–492.

    Google Scholar 

  • Higgins, D., Omer, T. C., & Phillips, J. D. (2015). The influence of a firm’s business strategy on its tax aggressiveness. Contemporary Accounting Research, 32, 674–702.

    Article  Google Scholar 

  • Hitt, M. A., & Collins, J. D. (2007). Business ethics, strategic decision making, and firm performance. Business Horizons, 50, 353–357.

    Article  Google Scholar 

  • Howard, J., Nash, J., & Ehrenfeld, J. (1999). Industry codes as agents of change: Responsible care adoption by US chemical companies. Business Strategy and the Environment, 8(5), 281–295.

    Article  Google Scholar 

  • International Integrated Reporting Council (IIRC). (2013). The international integrated reporting (IR) framework.

  • Ioannou, I., & Serafeim, G. (2010). What drives corporate social performance? International evidence from social, environmental, and governance scores. Working paper 11-016, Harvard Business School.

  • Ioannou, I., & Serafeim, G. (2014). The impact of corporate social responsibility on investment recommendations. Working paper 11-017, Harvard Business School.

  • Ittner, C. D., Larcker, D. F., & Rajan, M. V. (1997). The choice of performance measures in annual bonus contracts. The Accounting Review, 72(2), 231–255.

    Google Scholar 

  • Junior, R., Best, P., & Cotter, J. (2014). Sustainability assurance and reporting: A historical analysis on a world-wide phenomenon. Journal of Business Ethics, 120(1), 1–11.

    Article  Google Scholar 

  • Kelly, M. (2005). The ethics revolution. Business Ethics, 19, 6.

    Google Scholar 

  • Khan, M., Serafeim, G., & Yoon, A. (2016). Corporate sustainability: First evidence on materiality. The Accounting Review, 91(6), 1697–1724.

    Article  Google Scholar 

  • KPMG. (2014). Sustainable insights: The essentials of materiality assessment. https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/materiality-assessment.pdf.

  • Lamin, A., & Zaheer, S. (2012). Wall street versus main street: Firm strategies for defending legitimacy and their impact on different stakeholders. Organization Science, 23, 47–66.

    Article  Google Scholar 

  • Laufer, W. S. (2003). Social accountability and corporate greenwashing. Journal of Business Ethics, 43(3), 253–261.

    Article  Google Scholar 

  • Lennox, C. S., Francis, J. R., & Wang, Z. (2012). Selection models in accounting research. The Accounting Review, 87(2), 589–616.

    Article  Google Scholar 

  • Maniora, J. (2015). Is integrated reporting really the superior mechanism for the integration of ethics into the core business model? An empirical analysis. Journal of Business Ethics, 140, 1–32.

    Google Scholar 

  • Marquis, C., Toffel, M. W., & Zhou, Y. (2016). Scrutiny, norms, and selective disclosure: A global study of greenwashing. Organization Science, 27(2), 483–504.

    Article  Google Scholar 

  • McDaniel, S. W., & Kolari, J. W. (1987). Marketing strategy implications of the miles and snow strategic typology. The Journal of Marketing, 51(4), 19–30.

    Article  Google Scholar 

  • McNulty, E., & Davis, R. (2010). Should the C-suite have a ‘‘Green’’ suite?. Watertown: Harvard Business School.

    Google Scholar 

  • McWilliams, A., & Siegel, D. (2001). Corporate social responsibility: A theory of the firm perspective. The Academy of Management Review, 26(1), 117–127.

    Article  Google Scholar 

  • Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340–363.

    Article  Google Scholar 

  • Miles, G. (1993). In search of ethical profits: Insights from strategic management. Journal of Business Ethics, 12, 219–225.

    Article  Google Scholar 

  • Miles, R. E., & Snow, C. C. (1978). Organizational strategy, structure and process. New York, NY: McGraw-Hill.

    Google Scholar 

  • Miles, R. E., & Snow, C. C. (2003). Organizational strategy, structure, and process. Stanford, CA: Stanford University Press.

    Google Scholar 

  • Miles, R. E., Snow, C. C., Meyer, A. D., & Coleman, H. J. (1978). Organizational strategy, structure, and process. The Academy of Management Review, 3(3), 546–562.

    Article  Google Scholar 

  • Miller, K., & Serafeim, G. (2014). Chief sustainability officers: Who are they and what do they do? Chapter 8 in Leading Sustainable Change, Oxford University Press.

  • Milne, M. J., & Patten, D. M. (2002). Securing organizational legitimacy: An experimental decision case examining the impact of environmental disclosures. Accounting, Auditing and Accountability Journal, 15(3), 372–405.

    Article  Google Scholar 

  • Oliver, C. (1991). Strategic responses to institutional processes. Academy of Management Review, 16, 145–179.

    Article  Google Scholar 

  • Perez-Batres, L. A., Doh, J. P., Miller, V. V., & Pisani, M. J. (2012). Stakeholder pressures as determinants of CSR strategic choice: Why do firms choose symbolic versus substantive self-regulatory codes of conduct? Journal of Business Ethics, 110(2), 157–172.

    Article  Google Scholar 

  • Porter, M. E., & Kramer, M. R. (2006). Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78–92.

    Google Scholar 

  • Prakash, A. (2001). Why do firms adopt ‘beyond-compliance’ environmental policies? Business Strategy and the Environment, 10(5), 286–299.

    Article  Google Scholar 

  • Roberts, P. W., & Dowling, G. R. (2002). Corporate reputation and sustained superior financial performance. Strategic Management Journal, 23(12), 1077–1093.

    Article  Google Scholar 

  • Ruf, B., Muralidhar, K., & Paul, K. (1998). The development of a systematic, aggregate measure of corporate social performance. Journal of Management, 24(1), 119–133.

    Article  Google Scholar 

  • Schons, L., & Steinmeier, M. (2015). Walk the talk? How symbolic and substantive CSR actions affect firm performance depending on stakeholder proximity. Corporate Social Responsibility and Environmental Management, 23(6), 358–372.

    Article  Google Scholar 

  • Schreck, P. (2009). The business case for corporate social responsibility: Understanding and measuring economic impacts of corporate social performance (pp. 1–124). Heidelberg: Physica-Verlag.

    Google Scholar 

  • Scott, W. R. (1995). Institutions and organizations. Thousand Oak, CA: Sage.

    Google Scholar 

  • Serafeim, G. (2014). Integrated reporting and investor clientele. Working paper, Harvard Business School.

  • Simons, R. (1987). Accounting control systems and business strategy: An empirical analysis. Accounting, Organizations and Society, 12(4), 357–374.

    Article  Google Scholar 

  • Stevens, J. M., Kevin Steensma, H., Harrison, D. A., & Cochran, P. L. (2005). Symbolic or substantive document? The influence of ethics codes on financial executives’ decisions. Strategic Management Journal, 26(2), 181–195. https://doi.org/10.1002/smj.440.

    Article  Google Scholar 

  • Strand, R. (2013). The chief officer of corporate social responsibility: A study of its presence in top management teams. Journal of Business Ethics, 112, 721–734.

    Article  Google Scholar 

  • Strike, V. M., Gao, J., & Bansal, P. (2006). Being good while being bad: Social responsibility and the international diversification of US firms. Journal of International Business Studies, 37(6), 850–862.

    Article  Google Scholar 

  • Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610.

    Article  Google Scholar 

  • Sustainability Accounting Standards Board (SASB). (2013). Innovation behind the scenes: SICS. http://www.sasb.org/innovation-scenes-sics/.

  • Sustainability Accounting Standards Board (SASB). (2014). Securities law, not semantics. https://www.sasb.org/risks-differing-definitions-materiality/.

  • Sustainability Accounting Standards Board (SASB). (2015). Implementation manual. http://using.sasb.org/wp-content/uploads/2015/11/SASB_ImplementationGuide-113015.pdf.

  • Sustainability Accounting Standards Board (SASB). (2016a). About SASB. http://www.sasb.org.

  • Sustainability Accounting Standards Board (SASB). (2016b). SASB’s materiality map. http://www.sasb.org.

  • Sustainability Accounting Standards Board (SASB). (2017). Conceptual framework. https://www.sasb.org/wp-content/uploads/2017/02/SASB-Conceptual-Framework.pdf.

  • Torugsa, N. A., O’Donohue, W., & Hecker, R. (2013). Proactive CSR: An empirical analysis of the role of its economic, social and environmental dimensions on the association between capabilities and performance. Journal of Business Ethics, 115(2), 383–402.

    Article  Google Scholar 

  • Trompeter, G. M., Carpenter, T. D., Desai, N., Jones, K. L., & Riley, R. A. (2013). A synthesis of fraud-related research. Auditing: A Journal of Practice and Theory, 32, 287–321.

    Article  Google Scholar 

  • Tucker, J. W. (2011). Selection bias and econometric remedies in accounting and finance research. Journal of Accounting Literature, 29(Winter), 31–57.

    Google Scholar 

  • Turban, D. B., & Greening, D. W. (1997). Corporate social performance and organizational attractiveness to prospective employees. Academy of Management Journal, 40(3), 658–672.

    Google Scholar 

  • Unerman, J. (2008). Strategic reputation risk management and corporate social responsibility reporting. Accounting, Auditing and Accountability Journal, 21(3), 362–364.

    Article  Google Scholar 

  • Unerman, J., & Zappettini, F. (2014). Incorporating materiality considerations into analyses of absence from sustainability reporting. Social and Environmental Accountability Journal, 34(3), 172–186.

    Article  Google Scholar 

  • US Supreme Court. 1976. Materiality definition. TSC v. Northway, 426 US 438, 449, 1976. https://supreme.justia.com/cases/federal/us/426/438/case.html.

  • Velthouse, B., & Kandogan, Y. (2007). Ethics in practice: What are managers really doing? Journal of Business Ethics, 70(2), 151–163.

    Article  Google Scholar 

  • Waddock, S. A., & Graves, S. B. (1997). The corporate social performance-financial performance link. Strategic Management Journal, 18(4), 303–319.

    Article  Google Scholar 

  • Walker, K., & Wan, F. (2012). The harm of symbolic actions and green-washing: Corporate actions and communications on environmental performance and their financial implications. Journal of Business Ethics, 109(2), 227–239.

    Article  Google Scholar 

  • Welch, E. W., Mazur, A., & Bretschneider, S. (2000). Voluntary behavior by electric utilities: Levels of adoption and contribution of the Climate Challenge program. Journal of Public Analysis and Management, 19(3), 407–425.

    Google Scholar 

  • Westphal, J. D., & Zajac, E. J. (1998). The symbolic management of stockholders: Corporate governance reforms and shareholder reactions. Administrative Science Quarterly, 43(1), 127–153.

    Article  Google Scholar 

  • Westphal, J. D., & Zajac, E. J. (2001). Decoupling policy from practice: The case of stock repurchase programs. Administrative Science Quarterly, 46(2), 202–228.

    Article  Google Scholar 

  • World Commission on Environment and Development (WCED). (1987). Our common future. Oxford: Oxford University Press.

    Google Scholar 

Download references

Acknowledgements

The author gratefully acknowledges the helpful comments and suggestions from the editors and two anonymous reviewers. Thanks also to the conference participants at the 2016 IESE 19th Symposium on Ethics 19th International Symposium on Ethics, Business and Society, 2017 Management Accounting Section (MAS) Midyear Meeting of the American Accounting Association (AAA) and the 2017 Annual Congress of the European Accounting Association (EAA). The paper’s development has started during a research stay as visiting scholar at the Boston University, Questrom School of Business, Boston, MA, USA, in 2015.

Author information

Authors and Affiliations

  1. Faculty of Business, Economics, and Social Sciences, Management and Financial Accounting, Technical University of Dortmund, Vogelpothsweg 87, 44227, Dortmund, Germany

    Janine Maniora

Authors
  1. Janine Maniora
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Janine Maniora.

Ethics declarations

Conflicts of interest

The author declares that she has no conflict of interest.

Research Involving Human Participants and/or Animals

This article does not contain any studies with human participants or animals performed by any of the authors.

Informed Consent

No humans are involved.

Additional information

Ethical Challenges in Strategic Management: The 19th IESE International Symposium on Ethics, Business and Society.

Appendices

Appendix 1

See Table 5.

Table 5 Materiality definitions
Full size table

Appendix 2

See Table 6.

Table 6 Composite measure construction for STRATEGY.
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Maniora, J. Mismanagement of Sustainability: What Business Strategy Makes the Difference? Empirical Evidence from the USA. J Bus Ethics 152, 931–947 (2018). https://doi.org/10.1007/s10551-018-3819-0

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10551-018-3819-0

Keywords

JEL Classification

Search

Navigation