Business strategy and corporate environmental responsibility

This thesis examines the environmental dimension of corporate social responsibility inrelation to aspects of corporate strategy. It deals with the determinants of two aspects ofcorporate environmental strategy. First, corporate environmental disclosure,representing the environmental practices that firms communicate to stakeholders.Second corporate environmental performance representing the environmental practicesthey actually perform.The first chapter examines the effects of the firm’s social orientation and of nationalfactors on corporate environmental disclosure. Environmental disclosure is an issuewhich has attracted intense interest lately, probably as a sequence of the high profilescandals occupied public opinion, such as the cases of WorldCom, Enron, and Parmalat.International organizations are leading the drive for environmental responsibility, forinstance the United Nations initiatives to meet the climate change challenge and theSustainable Development Goals. The European Commission’s directive on non-financialreporting obliges large enterprises to disclosure their practices on social andenvironmental matters (EC Directive, 2013). Many enterprises undertake disclosureinitiatives beyond regulations, providing signals to stakeholders and society at large aboutthe extent to which they are responsible, in an attempt to increase social acceptance andlegitimacy.The theoretical background of this chapter draws upon signaling theory, according towhich firms transmit signals and information to stakeholders, aiming at creating positiveimpressions for the firm. The signaling theory is combined with the stakeholder theoryand more specifically with the instrumental stakeholder theory. According to the latter, This thesis examines the environmental dimension of corporate social responsibility inrelation to aspects of corporate strategy. It deals with the determinants of two aspects ofcorporate environmental strategy. First, corporate environmental disclosure,representing the environmental practices that firms communicate to stakeholders.Second corporate environmental performance representing the environmental practicesthey actually perform.The first chapter examines the effects of the firm’s social orientation and of nationalfactors on corporate environmental disclosure. Environmental disclosure is an issuewhich has attracted intense interest lately, probably as a sequence of the high profilescandals occupied public opinion, such as the cases of WorldCom, Enron, and Parmalat.International organizations are leading the drive for environmental responsibility, forinstance the United Nations initiatives to meet the climate change challenge and theSustainable Development Goals. The European Commission’s directive on non-financialreporting obliges large enterprises to disclosure their practices on social andenvironmental matters (EC Directive, 2013). Many enterprises undertake disclosureinitiatives beyond regulations, providing signals to stakeholders and society at large aboutthe extent to which they are responsible, in an attempt to increase social acceptance andlegitimacy.The theoretical background of this chapter draws upon signaling theory, according towhich firms transmit signals and information to stakeholders, aiming at creating positiveimpressions for the firm. The signaling theory is combined with the stakeholder theoryand more specifically with the instrumental stakeholder theory. According to the latter, firms create formal and informal relations with stakeholders which shape corporatebehavior along time and are in turn mirrored in their social reputation. In this way socialreputation emerges as a unique corporate characteristic which reflects the contractualrelationships with stakeholders and hence disclosure of practices. Social reputation isextended to the relational contracts added along environmental issues (instrumental stakeholder theory), reproducing signals and information about environmental behaviorthrough disclosure (signaling theory). Along this line of reasoning, social reputation isrelated to corporate environmental performance, and hence environmental disclosure.In the same chapter, certain national context factors are also examined as possibledeterminants of environmental disclosure of firms. These factors account forenvironmental policies of the country, the openness of the economy to internationaltrade, regulatory quality and corruption levels. Firms operating in an open environmentare expected to be more sensitive to international and national environmental demands,hence showing higher levels of environmental disclosure. The effects of national factorsare enhanced by creating more informed and demanding stakeholders. This in turnincreases a firm’s environmental responses and the associated level of disclosure.The second and third chapters investigate the existence of imitative mechanisms underwhich firms monitor their competitors and imitate the practices of the most successfulcompetitors. This links environmental performance to the competitive strategyframework. Specifically, the second and third chapters highlight the fact that firms do notdetermine their environmental practices in isolation, but they shape and reshape themthrough a process of comparison and learning, having as a reference point the strategy oftheir competitors. According to institutional theory, firms adopt the practices of theircompetitors either because they are mandatory in their industry (regulatory or forcedimitation) or because they are trying to imitate and resemble the most successfulcompetitors (mimetic or competitive isomorphism). In the context of the generic strategies framework, the search of best practices is directedtowards the best performing competitors or the leaders within the strategic group inwhich a firm belongs. Therefore, strategy leaders (for cost or differentiation strategy)constitute a legitimate benchmark that companies monitor and analyze, in search of bestpractices. When a firm discovers that is lagging in environmental performance incomparison to the leader in its specific strategic group, it tries to imitate the leader. The second chapter investigates the existence of imitative mechanism at work, for firmslagging in environmental performance. According to the general competitive strategyframework, the greater the distance of the environmental practices of a firm from theleader in its specific generic strategy group, the greater its future environmentalperformance. More specifically, in the low cost strategy group, firms that are exceeded inenvironmental practices by the cost strategy leader increase their environmentalpractices. For instance they are undertaking actions such as reduction of resources,pollution, energy or materials, following similar actions or the respective cost leader.Similarly, differentiation strategy firms that are exceeded in environmental performanceby the differentiation strategy leader, react by increasing environmental practices thatmay relate to innovation practices such as production of green products, implementingenvironmental innovations, research and development on environmental issues etc. Thegoods sold/ sales ratio is used to identify firms that follow a low cost strategy. For firmsfollowing a differentiation strategy two indices were used to identify them. The R&Dexpenses/ sales ratio for innovative differentiation, and the marketing expenses/ salesratio for marketing differentiation.The third chapter follows a similar approach. Given that a strategic leader does not alwayslead in terms of environmental performance (e.g. luxury firms are not environmentalleaders), this chapter examines the impact on the environmental performance of a firmwhen it finds through competitor monitoring that it exceeds the strategic leader inenvironmental performance. The chapter considers how the firm would react in this case,i.e. whether it reduces its environmental practices to the standards of the strategy leader,or maintain its environmental lead, or enhance the lead with further environmentalinitiatives generating an endogenous competitive advantage. This chapter argues thatwhen a firm finds that it exceeds the strategic leader, it initiates proactive environmental strategies to further improve its competitive stance. According to the results, this mechanism works across strategies, i.e. both whether firms follow cost strategy or differentiation strategy. Country-specific characteristics of a firm’s host country, such as the environmentalperformance index, openness to international trade, and regulatory quality andcorruption, are also considered in chapters two and three. These provide indications ofsignificant effects in some of the cases.Regarding the empirical part of this doctoral dissertation, secondary data is used takenfrom the ASSET4 database. The sample includes 3,215 firms from 21 countries and arange of 11 years (2002-2012) for the first chapter, and 3,221 firms from 46 countriesand a range of 12 years (2002-2013) for the second and third chapters. Data of the Asset4database is collected annually for each company and are characterized by objectivity andtransparency. Data for national factors, notably the environmental performance index ofa country, the openness of the economy, the level of corruption and legislation are takenfrom other sources, notably the Yale University, Thomson Reuters Eikon , and the World.