How Sustainability Strategies Can Be Measured - Literature review Example

2 Literature Review 2 Introduction As a generalised approach, the literature review was performed with an emphasis on addressing the research questions outlined in the first chapter of the study. This was largely done by focusing on literature works that seek to set a theoretical underpinning to the concepts that form a core part of the study. Yet as a critical literature review, the review summarises the main ideas from the articles used, and critiques these articles for their limitations and cases of bias in reporting, where necessary. 2.2 Sustainability The theme of sustainability was reviewed to focus on what companies across the globe can do to attain sustainability and the important role that sustainability plays for them in their daily corporate management tasks. This review therefore looks into the definition of sustainability as well as the strategies that come with sustainability practices. Lastly, there is a focus on sustainability and trust and why it is important that stakeholders have sufficient trust in companies. 2.2.1 Defining sustainability Two major theoretical approaches to the definition of sustainability were identified in the extant literature. The first of these had to do with the view of sustainability from the perspective of efficiency, where companies are expected to show maximum expectation in their approach to social, economic and environmental utilisation of resources (Adams and Geoffrey, 2008). Those who argue for efficiency have generally debated that companies should be able to take the minimal level of social, economic and environmental resources and turn this into a viable end product that benefits an ordinary person in the community (Nidumolu, Prahalad and Rangaswami, 2009). This means that such theorists believe that where there is the excessive use of resource, this can result in waste. There is a second school of thought that focuses on sufficiency perspective, arguing that sustainability should be a framework of how well a company can measure what is sufficient for its need in the production of social, economic and environmental outcomes (Sparkes and Cowton, 2013). This means that the issue of quantity should only be factor when resources used are seen to be resulting in waste. Both definitions admonish sustainability to be a three-tier concept having components of economic, social and environmental outcomes. The first school of thought would however be noted to have failed to appreciate the fact that quantity is always relative to an expected outcome (Szejnwald, de Jong and Levy, 2009). In this end, the second school of thought on sufficiency is adopted for the present research. 2.2.2 Strategies for Sustainability Because sustainability is generally accepted to have a social, economic and environmental component, Broughton (2009) questioned the contribution of businesses to tackling the problems of climate change, social inequity and economic recession. Based on this, the key strategies of sustainability that can be used by companies to ensure that the expected outcomes of sustainability are achieved have been reviewed. For each of these strategies, there can be seen a form of advantage that comes to both the company involved and the society in which the company operates. The first strategy focuses on the use of alternatives. According to Jermier (2008), a major driving force behind corporate sustainability is the ability of organisations to use alternative inputs that guarantee fewer effects on the environment, more social adaptability, and more economic outcomes. Using renewable energy as an example, Khan, Kunz, Kleijnen and Antes (2003) noted that companies that have agreed to go green have reported about advantages of improved social acceptance to their practice, less environmental impact, and more savings on cost. Similar reports have been noted in literature but this particular study had a form of bias in the types of companies that were focused on as most of these were only in the manufacturing sector. Writing on another sustainability strategy, Newton (2012) looked at the issue of redesign. Redesign, when used as a component of sustainability, has been defined as the ability of the company to take a product that has outlived its usage and relevance, and to turn it into another viable product for use (Huntington, 2013). Relating redesign to the three components of sustainability, Altman et al. (2011) stressed that in the course of redesigning, companies are afforded the opportunity of making adjustments that can be considered more environmentally and socially acceptable as they were before. At the same time, the need to redesign brings to mind cost saving in terms of having the fundamental resource or raw material that will be used in production. There are however others who have questioned the efficacy of redesign for environmental sustainability, stressing that most materials that are redesigned tend to be less adaptive to the environment given the fact that most of these materials are old and thus less effective (Orts, 2013). However, based on the position that redesigning give companies much freedom to put their innovative skills to work by making changing that are more acceptable, it can be said that the real benefit of redesign as a sustainability strategy rests with how innovative a company is. The third sustainability strategy is modification, which is similar to redesign. Nikolaeva and Bicho (2010), however, noted that there is a fundamental difference between redesign and modification when the issue of timing is placed in the context of the argument. Explaining further, Missimer, Karl-Henrik, Göran and Sverdrup (2010) also stressed that modification is normally applied while a piece of material, concept, service, or resource is being used within the organisation. This is not like redesign when the changes are applied at the end of usage, but while usage is taking place. Karl-Henrik (2010) actually admonished companies that want to embrace sustainability to accept modification as an opportunity of showing greater commitment to the environment and society. This call has been made in a wake when most companies have been reported to be highly reluctant to change, arguing that modification is expensive and economically unsustainable (Andersen, 2010). Clearly, those who argue this way have not looked at the long term impact of deciding to spend more to attain environmental sustainability. This is because even if the short term consequence of modification comes with cost, once the society comes to appreciate the efforts being made by the company, chances are that they would continue to do business with such a company and therefore contribute to its economic success. H1. Sustainability strategies have a correlation with reputation. 2.2.3 Sustainability and trust Within the modern corporate parlance, the stakeholder is defined as an individual or group affected by an organisation and playing an important role in the management of organisations (Freeman and Reed, 1983). In this light, the need for companies to structure their activities and sustainability programmes in a way that boasts the trust of stakeholders has been noted to be very important. Looking into the theme of sustainability and trust among stakeholders, Prior (2009) indicated that the four-point stakeholder dynamics of sustainability is an approach to sustainability that focuses on stakeholders as the core implementers of the sustainability agenda for the organisation. Orts (2013) and Hart and Milstein (2009), on the other hand, noted that there are several responsibilities that companies wanting to go by this model have to fulfil. Particularly, the need to be aware that putting stakeholders at the centre of sustainability means that they have to be ready to go by the principles of corporate governance must be known. This is because the corporate governance principles put particular emphasis on the relationship between companies and their stakeholders, where equal attention is given to the roles needed to be played by both shareholder stakeholders and non-shareholder stakeholders. As understood by Franklin (2010), sustainability and trust are two inseparable concepts because society has come to accept that sustainability comes with its own cost to companies. Consequently, it is only companies that are ready placed the interest of society first that would be committed to taking up the role of sustainability. Because of the sacrifices that such companies make, it is easier for the society to put its trust in the companies, knowing that they would take up other challenging steps that aim to protect society. Hart (2012) gave an example with Toyota when the company developed the boldness to retrieve over 20,000 pieces of cars from the market because of reports of faulty airbags. The reported noted that this step taken by the company, even though came with immediate economic consequence turned out to be a reason for the company to improve on its corporate branding due to the trust it developed in stakeholders. This is an indication of how sustainability leads to trust, and the benefits that trust brings to companies. Also writing about Toyota, Gladwin, Kennelly and Krause (2012) noted that today, the company’s brand has been improved and considered more acceptable by the consumer because of the trust the consumer has developed in the company’s dedication to offer sustainable products. H2: Highly sustainable companies have higher levels of trust among their stakeholders 2.3 Reputation as a sustainability dimension Missimer et al. (2010) focused on the theme of connection between sustainability and reputation. From the findings obtained in the study, it was noted that reputation has become an important form of competitive advantage for today’s global business environment. Meanwhile, it is through competitive advantage that economic sustainability is achieved. This therefore elaborates the important connection between sustainability and reputation. Gladwin, Kennelly and Krause (2012) and Fried (2011) rightly supported the position by stressing that corporate reputation has become an important means through which companies brand themselves to the general public and to key stakeholders, including shareholders. The analytical implication that can be derived from this point is that through corporate reputation, companies are able to gain brand equity making them appealing and attractive to customers and shareholders. Meanwhile, as companies become the choice of customers and shareholders, their chances with profitability go up due to the fact that these people are direct financial contributors to companies (Jermier, 2008). Newton (2012) and the Global Reporting Initiative (GRI) (2007) thus confirm that sustainability and reputation are correlated and impacts on each other. H3: Companies can use reputation to develop sustainability 2.4 Corporate reputation In this second theme on corporate reputation, the researcher builds on the concluding part of the first theme by analysing how the trust developed for companies as a result of sustainability can lead to the creation of a larger concept of reputation. In this section therefore, reputation will be defined, as well as its constructs and relation to sustainability given. 2.4.1 Defining reputation Reviewing literature on corporate reputation, one is quick to realise that there is no independent or generally accepted form of definition that can be given to the term. This is because there are several issues and concepts that come together to make up corporate reputation. Pink (2009) noted some of these concepts as credibility, trust, loyalty, brand, and customer relationships management. As a multidiscipline concept, Pogue (2010) attempted a definition that seems to capture all the other concepts of corporate. The definition was given as the perceptual representation of a company’s overall appeal that encompasses past and future prospects. From this definition, corporate reputation can be said to be an important concept that makes it possible for the outside world to critique a company’s actions and prospects and draw its own perception on what the overall appeal of the company is like. Based on this, Elkington (2014) indicated that corporate reputation is a concept that all companies should take very seriously because once the perception is created, it is very difficult to change them. More so, it is often very difficult to determine the exact form of overall appeal or perception developed for a particular company, based on the company’s past and future prospects. 2.4.2 Reputation capital Even though very common in the world of Web 2.0, reputation capital has come to be accepted by several corporate entities as an important asset needed to stay competitive in the community of marketplace (Fried, 2011). This is because reputation capital is seen as a quantitative measure of an organisation’s reputational value that is expressed in a very specific context (Porter and Kramer, 2009). The limitation that comes with this definition however has to do with the fact that it is not all the time that the context within which reputational value of the company is being measured presents avenue for quantitative measure to take place. Aragon-Correa and Sharma (2013), for example, likened reputational capital to a more qualitative concept represented by the sum of the value of intangible assets within the company. Because these assets are intangible, assigning a quantitative measure to them has always been difficult. Fundamentally however, reputation capital represents a measure, whether qualitative or quantitative, that is given to represent the company’s reputational value. For a company to take competitive advantage of its reputation, it is expected that the reputation capital of the company will be ranked as very high. There are a number of practical ways in which reputation capital have been used in the world of Web 2.0 to represent the importance of this concept. Writing about E-bay’s seller rating, Chanda (2007) observed that there is sufficient evidence to suggest that whenever a companies or seller receives 1%of negative review, the price of that company’s item drops by 4%. In the like manner, companies that want to stay very competitive in the market must have a means of knowing the kind of ratings that their customers and the general public give to them through reputation capital (Christensen, 2009). Haugh and Talwar (2010) argued that the best way for a company to improve its reputation capital is for it to know where it currently belongs in terms of the capital ranking. This call is directly reflected in the objective of the study in finding an appropriate means of measuring sustainability and reputation within the organisation. By employing the right means of measure, it will be possible to tell where a company belongs in terms of the reputation quota assigned to such intangible assets as business process, safety, integrity, and trademarks. 2.5.3 Reputation constructs Because reputation has already been noted to be a very multidisciplinary concept, it can be expected that there will be several approaches that make up the concept. Searching through literature, four major approaches were identified. The first of these come under accountancy. Elaborating on the principles of corporate governance, Hopkins (2011) noted that corporate governance is a concept that has been instituted with the aim of helping companies gain reputation through acceptable accountancy practices. This is because the role of accountancy in corporate financial worth is very important affecting such aspects financial decisions as share prices, merger, acquisition, and liquidity (Sen, 2013). This notwithstanding, Post (2002) lamented that this approach has not produced effective outcomes as a framework for corporate reputation. Agreeing with this position, Shiller (2003) indicated that accountancy can be easily manipulated, especially when it does not involve third parties and external auditing. This assertion spells out the need to have a more independent and universally accepted framework for corporate reputation. This study will therefore make use of this framework in its subsequent methodology. The RepRisk AG (2014) noted that RepRisk is a metric that seeks to give information on the level of reputation that a company holds by collecting and analysing ‘negative incidents, criticism, and controversies about companies and projects worldwide’. After the collection and analysis, the metric then ‘offers information on activities related to human rights violations, poor working conditions, corruption, and environmental destruction’ (RepRisk AG, 2014). This is where Post (2002) admonished on the use of RepRisk as a framework for reputation. The second reputation construct found focused on economics, where the ability of the company to be responsible with the management of its internal and external resources was emphasised (Hart and Milstein, 2009). In a study by Prior (2009), greater percentage of respondents noted that they would only do business with companies that guarantees value on investment. This means that economically, companies are expected to exhibit a very high level of reputation that is considered acceptable by all stakeholders, both those within the company and outside the company. The use of this construct also poses some challenges when it comes to credibility of outcomes (Shiller, 2003). This is another indication for which this study will use RepRisk in the methodology because RepRisk gives universally accepted standards by which information on reputation is obtained and represented. Marketing was noted to be another important reputation construct where companies can focus on building reputation for growth. According to Brady (2011), the global business climate has today presented a form of competition where most companies are forced to use the wrong approaches to marketing to creating wealth. Some of these include misinformation on labels and in advertisements. Meanwhile, marketing is said to be viewed from a consumer end where consumers are constantly becoming empowered on the need to make the right decisions about what they hear during marketing and what they receive after making purchase (Higgins and Green, 2011). Once any form of misbalance is experienced, chances are that the company will lose out on its reputation. The last construct has been noted to be in the area of organisational behaviour, where the behaviour of the organisation that comes to for a culture has been noted to be very critical in assessing companies for reputation. In the opinion of Doz (2011), organisational behaviour is even a greater reputation construct because it is something that almost every other person coming into contact with the organisation experiences. 2.5 Measuring Sustainability Strategies Szejnwald, de Jong and Levy (2009) presented data on the use of GRI as a form of sustainability strategy framework. Here, the GRI was noted to be a sustainability indicator that takes a universal approach measuring how sustainable companies are (Karl-Henrik, 2010). Writing on the importance of using GRI in gaining information on sustainability strategy, Altman et al. (2011) stressed the fact that this form of reporting promotes trust between organisations and all other key stakeholders in the outcome of economic sustainability report. The works of other researchers can be used to analyse the findings made on the usefulness of the GRI in measuring sustainability. Adams and Geoffrey (2008) and Doz (2011) indicated that the reason such trust can be guaranteed between organisations and stakeholders is the fact that GRI reporting is standardised and based on transparent quantitative outcomes that cannot be easily manipulated. Similarly, Aragon-Correa and Sharma (2013) and Franklin (2010) endorsed the use of GRI reporting for the fact that it draws very close connection between sustainability and strategic planning. By implication, companies that use this reporting system are guaranteed of the fact that the outcome of their sustainability reporting will not be different from the company’s core strategic plans and goals. On how the RepRisk index ensures that companies care about CSR, the work of Willis (2013) showed that even though most companies have their own CSR models, they are hardly motivated to implement the outcomes of the CSR models. With the use of RepRisk, companies are seen to be obliged to focus not only on economic sustainability but also on their core social responsibilities (Porter and Kramer, 2009). Elkington (2014) shared in this opinion as it was mentioned that the RepRisk has been used over the years to ensure that companies become good corporate citizens. Hart (2012) linked the use of RepRisk to the creation of corporate reputation and indicated in today’s competitive market, customers always look beyond cost and quality because these are variables that they can be assured of finding in the products and services of as many competitors as possible. In such a case, the neutralising factor that brings about patronage is the assessment of customers of how socially responsible and reputable the organisations are. It can indeed be established from this position that RepRisk also leads to sustainability through corporate citizenship. H4: Using GRI offers a more involving measure than RepRisk, as GRI involves sustainability, which includes reputation. 2.4 Conclusions The results that have been collected so far can be interpreted to mean a very strong and positive support for the use of GRI and RepRisk as a framework of sustainability (Hart and Milstein, 2009 and Pink, 2009). However, it can be noted that there are several researchers and organisations that are more comfortable with the adaptation of GRI than RepRisk. This is because GRI plays roles that are seen to be incorporated in what RepRisk does. For example, whereas RepRisk focuses only on reputation, GRI focuses on sustainability, which is also seen to incorporate reputation, as seen in the review (Pogue, 2010). The results have also been very useful in outlining the important role that stakeholders have to play in the sustainability of the companies (Hopkins, 2011; Huntington, 2013). Clearly, companies have been noted to need their stakeholders in the overall sustainability agenda. Base on these results and their interpretations, it can be concluded that there is sufficient support in literature for the aim of the study. 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