Corporate Culture Key to Sustainable Firms Generating Higher Market Value
Correlation of high sustainability with higher financial performance is not new. What is new? Researchers have uncovered cultural markers for the link.
In a 2009 Journal of Management article, I reviewed the literature examining the link between corporate social responsibility and corporate financial performance. I observed the mechanisms by which CSR enhances financial performance – via enhanced employee commitment, cost savings from energy reduction, etc. – and called for researchers and managers to integrate these mechanisms into financial metrics such as share price and return on assets.
A 2012 working paper from the Harvard Business School makes a meaningful step forward in describing the processes by which company CSR actions eventually produce stronger financial performance. NBS summarized the paper in a recent Research Insight called “The 5 Traits of Firms that Create Sustainability ROI.” The authors find that several cultural markers define high sustainability firms, and those firm meaningfully outperform their low sustainability counterparts on financial metrics such as share price and ROA/ROE (Return on Assets/Return on Equity).
Building a Culture of Sustainability
The correlation of high sustainability with higher financial performance is not a new finding. What is new are the cultural markers the authors uncover – markers that provide a solid theoretical link between sustainability and financial performance. For example, they find that firms labeled high in sustainability are more likely to have formalized processes of stakeholder management. They are also more likely to have specific measures of sustainability-related activities and to disclose those measures to key stakeholders. Further supporting the stakeholder relations hypothesis, the authors find that firms with consumer customers, as opposed to business customers, are more likely to see higher financial returns from sustainability. This supports the hypothesis because individual customers are more sensitive to sustainability as a means of building reputation and brand. (Note, however, that the data span from 1993 to 2010 and therefore may not reflect the emerging trend toward managing supply chains for sustainability.)
In sum, the research suggests that a corporate culture of sustainability, and the practices associated with that culture, lead to enhanced financial performance. This presents enticing research opportunities going forward. Here within NBS we have a knowledge forum related to sustainability culture, where researchers exchange ideas related to how and why sustainability cultures develop and are sustained. Further work in this area will guide managers who seek to build profitable sustainability initiatives by helping them foster the appropriate culture.
John Peloza is a management professor at Florida State University and Topic Editor, Business Case for Sustainability, at the Network for Business Sustainability. His research centres on building a business case for corporate social responsibility.