Bridging the gap: How sustainable development can help companies create shareholder value and improve financial performance

• Published date: 01 January 2017
• Date: 01 January 2017
• DOI: http://doi.org/10.1111/beer.12135
• Author: Fernando Gómez‐Bezares,Justyna Przychodzen,Wojciech Przychodzen

ORIGINAL ARTICLE

Bridging the gap: How sustainable development can

help companies create shareholder value and improve

financial performance

Fernando G

omez-Bezares

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Wojciech Przychodzen

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Justyna Przychodzen

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1

Department of Finance, University of

Deusto, Avenida de las Universidades 24,

Bilbao, Bizkaia, 48007, Spain

2

University of Liverpool, Management

Online Programme, Laureate Online

Education, Haarlebergweg 23C, 1101 BH

Amsterdam, The Netherlands

Correspondence

Wojciech Przychodzen, Department of

Finance, University of Deusto, Avenida de

las Universidades 24, Bilbao, Bizkaia,

48007, Spain.

Email: wojciech.przychodzen@yahoo.com

Abstract

This study examines the effect of integrating sustainability into corporate strategy on various

aspects of shareholdervalue creation and financial performance inthe British capital market. The

employed method is basedon the content analysis of corporate disclosures and a new technique

for assessing the adoption of the corporate sustainability concept (embracing the environmental,

social, and financial aspects of a company’s policies at the same time). Using extensive data of

FTSE 350 firms coveringthe years 2006–2012, 65 companies wereselected as meeting corporate

sustainability criteria. For the above period,we find that these firms were characterized by higher

financial risk exposure, lower asset growth rates, lower BV/MV ratios, lower EVA ratios, and

higher MVA ratios.Such relations were generally present among differentsize and industry group-

ings. The results support the thesis that firms that incorporate sustainability issues into their

business operations are better able to leverage their resources toward strongerfinancial perform-

ance and shareholder value creation thanother companies. The paper contributes to the literature

by offering a more holistic approach to corporate sustainable performance measurement and

shedding additional light on its relationto financial performance in the contextof the recent global

financial crisisand its direct aftermath.

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INTRODUCTION

Today, no one seriously denies the need for sustainable business prac-

tices, as the viability of businesses depends on healthy ecosystems and

just societies (Etzion, 2007). A firm’s sustainable development capabilities

can play a role in generating broader organizational advantages that allow

the company to capture premium profits (Hart, 1995; Russo & Fouts,

1997). Corporations that base their competitive strategies on awareness

and protection of both the natural environment and society should see

this strategic emphasis as a benefit. Thus, companies should adopt sus-

tainable development activities only if they complement the organiza-

tion’s strategies and ultimately enhance profitability or shareholder

wealth (Kapoor & Sandhu, 2010; Siegel, 2009). Each company must be

able to select those aspects of the ongoing sustainable wave that inter-

sect with its particular business. An emphasis on window dressing in that

area will not provide long-term profitability and may lead to a decline in

market share and a loss of reputation (Besley & Ghatak, 2007).

In recent years, our understanding of the effects that such proac-

tive sustainable strategies can have on financial performance and the

creation of shareholder value processes has expanded quite substan-

tially. Many different corporate social and environmental performance

measurement approaches have been introduced. However, simple,

multidimensional measures, which embrace all aspects of the sustain-

able development concept at the same time, are still relatively under-

explored. With this study, we seek to fill this gap by contributing to a

better, more precise understanding of the concept of corporate sus-

tainable performance (CSP) and its possible influence on corporate

financial performance (CFP) in the wider context of the recent global

financial crisis of 2008–2009. In particular, we ask, How does effective

management of social, environmental and financial factors simultaneously

impact various aspects of shareholder value creation and financial

performance?

Our results indicatethat firms that incorporate sustainability issues

into their business strategy are generally able to reap higher financial

rewards than other companies. The results also show that such firms,

especially during a global financial meltdown, are exposed to higher

financial risk, which may limit their capacity to generate value for

shareholdersfrom a historical perspective. However, in the longer-term

BusinessEthics: A Eur Rev 2017; 26: 1–17 wileyonlinelibrary.com/journal/beer V

C2016 JohnWiley & Sons Ltd

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Received:28 March 2016

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Revised: 15 October2016

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Accepted:23 October 2016

DOI 10.1111/beer.12135

perspective, the market is still characterized by a more favorable per-

ception of sustainable companies.

This study contributes to the literature on the measurement of

corporate sustainable performance by offering a more holistic

approach, of the sort that is rather underdeveloped in the existing

body of literature.Thus, it enables the developmentof general theoret-

ical frameworks for achieving corporate sustainability. Second, the

results of the study, which show a positive relationship between CSP

and CFP in the context of the global financial crisis and its aftermath,

shed new lighton the existing evidence in that area.

The remainder of this studyis structured as follows. Section 2 dis-

cusses the existing evidence on the relation between various aspects

of CSP and CFP, provides the theoretical framework upon which this

empirical work is based, as well as the research hypotheses. Section 3

presents details of the methodological process we implement. Section

4 describes the data and sample selection procedure. Section 5

presents and discusses our empirical results. Section 6 draws conclu-

sions and makessuggestions for future research.

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THEORETICAL FRAMEWORK AND

DEVELOPMENT OF HYPOTHESES

The academic literatur e on the direction and significance of the rela-

tionship between CSP and CFP is fragmented and inco nclusive. The

same tends to be true for the possible financial effects of socially

responsible investing (Revelli & Viviani, 2015). There may be various

reasons for the contradictory results reported by existing studies,

including the characteristics of the content analysis technique used

by the particular researcher (Berthelot, Cormier, & Magnan, 2003),

research design (Patten, 2002), sampling and measurement errors

along with stakeholder mismatch (Orlitzky, Schmidt, & Rynes, 2003),

chosen time horizon and sa mple of firms (Eabrasu, 2015), and the

character of the analyz ed drivers of corporate soc ial performance

(Frynas & Yamahaki, 2016). There are also issues of causal direction

and non-linearity. The q uestion of causal direction i mplies that it is

not clear whether financial performance is the result of or the trigger

for sustainable business activities (Orlitzky, 2008; Seijas-Nogareda &

Ziegler, 2006). The non-linearity suggests that directionality is not

simple and that there may even be a sy nergistic relationship

between CSP and CFP (Chang & Kuo, 2008; Waddock & Graves,

1997). Non-linearity can also be caused by good or bad management

(Wagner & Blom, 2011; Ziegler & Schr€

oder, 2005). Institutional and

market-level forces may pl ay a role as well (Rodrigo, Duran, & Are-

nas, 2016).

Another important reason why existing studies have failed to

deliver convincing evidence of a clear business case for CSP is that

they tend to focus on a single aspect of sustainability (Peloza, 2009)—

environmental, social or financial—rather than on a proper balance

among them and their relationship with various dimensions of

accounting-based or market-based measures of financial performance.

Finally, companies performing poorly in one area may also increase

their discretionary disclosures in another area to change stakeholder

perceptions of their actual activities. The balanced approach can elimi-

nate these problems.

For instance, concerning the environmental aspect s of CSP,

Clarkson, Li, and Richardson (2004) use isolated volunta ry corporate

environmental disclosures; Dowell, Hart, and Yeung ( 2000) use adop-

tion of a single global environmental standard; Zhao ( 2008) uses

registration with the ISO 14001 environmental management system;

and De Haan, Lammertjan, and Scholtens (2012) use the Ne wsweek

Green Ranking. In the area of corporate social performan ce, Kane,

Velury, and Ruf (2005) used employee relations, and Boyle, Higgins,

and Rhee (1997) used compliance with industry initiatives on busi-

ness ethics and conduct. Increasing numbers of studies also comb ine

analysis of selected aspects of both corporate env ironmental and

social performance (i.e., KLD dataset, Fortune magazin e survey, Sara-

sin&Cie dataset, EIRIS data) and their influenc e on financial or stock

market performance (Brammer, Brooks, & Paveli n, 2006; Chiu &

Sharfman, 2011; Nelling & Webb, 2009; Zieg ler, Schr€

oder, &

Rennings, 2007).

Finally, the study of the financial aspects of corp orate sustain-

ability (CS) and their influence on corporate financial performance is

relatively new and less established than the study of the environ-

mental and social aspects. Howe ver, the concept is generating a

growing body of literature , noting especially that unre strained

growth of revenue can lead to se rious financial difficulties. Connect-

ing sustainability to corporate finance is about addressin g exploita-

tive investment activi ties and maintaining prop er balance between

different operating and financial policies in a lo ng-term perspective

(Haigh, 2012; Przychodzen & Przychodzen, 2013). Sustainable cor-

porate finance also relates dividend policy to firms’long-term devel-

opment (He, Li, & Tang, 2012) and requires a multidimensional

approach (Soppe 2004, 2011).

Managers recognize th e financial value of stakehold er reactions

to social and environmental pe rformance, which minimize the mag -

nitude of the loss in a “win-lose”scenario an d, under some condi-

tions, may turn it into a “wi n-win”scenario (Epstein , Rejc Buhovac,

& Yuthas, 2015). It follows that corporate activities in the area of

sustainable developme nt are strictly connected to the effecti ve man-

agement of relationshi ps with key stakeholders. Th ese improved

relationships can impr ove a firm’s operating environment in several

ways because each group o f stakeholders supplies the firm with crit-

ical resources (Alchian & Demsetz, 1972; Cornell & Shapiro, 1987). It

could be argued that a compan y that is consistently soci ally, envi-

ronmentally, and financially responsible should have a stronger repu-

tation for keeping its com mitments that are related to i mplicit

contracts (i.e., job se curity, clean living conditions for loc al commun-

ities, proper quality an d environmental impacts of p roducts and

services used as inputs, and e xcellence in customer ser vice). This,

over the course of time, sh ould lead to tangible benefits for the sus-

tainable corporation i n the form of stronger stakehold er incentives

to contribute inputs to the firm (Funk, 2003; Jawahar & McLaughlin,

2001; Peloza & Papania, 2008). Furthermore, corporate social

responsibility (CSR) engagement initiatives tend to have a more

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OMEZ-BEZARES ET AL.