Lawrence Technological University College of Management A Study of the Market’s Reaction to Superior Sustainability Reporting as Demonstrated by the Financial Performance of Publicly Traded Companies Presented in partial fulfillment of the requirements for the degree of Doctor of Business Administration Derek A D’Angela 3315101 Copyright 2008 by D'Angela, Derek A All rights reserved 2008 3315101 ABSTRACT Recent ethical lapses by business organizations and their management suggest that traditional governance requirements have had less than the desired effect Legislated disclosure alone is insufficient as it provides reactionary guidance that fails to address performance issues since rules can be circumvented and financial data can be tweaked to reflect its most favorable presentation The research evaluated sustainability reporting as an additional resource for reporting on ethical performance and addressed the question of whether companies that demonstrate ethical leadership through best in class sustainability reporting performed better than their peers in terms of value creation The study evaluated a group of top companies recognized in the SustainAbility Global Reporters Listing for 2006 against the market performance of securities traded on the S&P 500 Index during the period of January 1, 2002 to December 31, 2006 The selected datasets were compared relative to the dependent variables of risk and return to identify any potential differences in the datasets The research does not imply causality, as sustainability reporting itself does not create value This is also why the study did not conclude that companies that fail to report on sustainability issues were bad performers; rather organizations could potentially increase their value by doing more to communicate their performance Strong financial performance may encourage enhanced disclosure; in that case sustainability reporting provides a manner by which organizations can demonstrate sound financial decision-making Sustainability reporting may be viewed as a best in class business process that ethical and operationally efficient organizations use to communicate their activities Lawrence Technological University College of Management A Study of the Market’s Reaction to Superior Sustainability Reporting as Demonstrated by the Financial Performance of Publicly Traded Companies Presented in partial fulfillment of the requirements for the degree of Doctor of Business Administration Derek A D’Angela COPYRIGHT Copyright © 2008 by DEREK A D’ANGELA All rights reserved Sustainability Reporting Impact on Financial Performance iv Sustainability Reporting Impact on Financial Performance v ACKNOWLEDGMENTS I would like to express my thanks and appreciation to the many individuals who have supported me in the completion of my doctoral work I would especially like to thank my chair, Dr Patricia Castelli, for her generous time and commitment Her guidance and support were of significant benefit and enabled me to maintain the focus necessary to complete the program culminating with the execution of this study I am also very grateful for having an exceptional doctoral committee and wish to thank Dr Frank Castronova, Dr Vernon Hoffner and Dr Jacqueline Stavros for their continual support and contribution to shaping this research I truly appreciate the time they took from their already full schedules to provide their particular insight to enhance the character of the work I wish to express my gratitude to the many other individuals who directly participated or indirectly supported my work during this program including Mike Rinkus, Dr Tom Marx, the members of DBA Cohort and the faculty and staff of Lawrence Technological University I would also like to offer a sincere thank you to the individuals who laid the foundation for my interest and success in this program, including the professors and staff of Eastern Michigan University, Hillsdale College and from my earliest days at University Liggett School Finally, I want to acknowledge the revolutionary thinkers from whom I have inherited the ethical and free market principals that inspire my research Sustainability Reporting Impact on Financial Performance vi TABLE OF CONTENTS CHAPTER INTRODUCTION 1.1 Background 1.2 Key Variables 1.3 Market Assimilation and Reporting 1.4 Capital Asset Pricing Model 1.5 Purpose of Study 10 1.6 Research Question and Hypotheses 11 1.7 Definition of Terms 14 1.8 Limitations of the Study 16 1.9 Significance of the Study 17 1.10 Summary of the Issue and Problem Statement 18 CHAPTER LITERATURE REVIEW 20 2.1 Overview of the Literature 20 2.2 Corporate Governance 22 2.2.1 External Governance 23 2.2.2 Internal Governance 26 2.2.3 Professional Standards 29 2.3 Ethical Leadership 31 2.3.1 Shareholder Theory 35 2.3.2 Stakeholder Theory 38 2.4 Corporate Social Responsibility 42 Sustainability Reporting Impact on Financial Performance vii 2.5 Sustainability and Sustainability Reporting 45 2.6 Previous Research on the Link between Ethics and Financial Performance 52 2.7 Summary of the Literature Review 56 CHAPTER RESEARCH DESIGN AND PROCEDURES 59 3.1 Overview of the Study 59 3.2 Research Question and Hypotheses 60 3.3 Reliability and Validity 63 3.4 Population and Comparison Groups 66 3.5 Selection Procedures 68 3.6 Data Collection 74 3.7 Data Analysis 75 3.8 Summary of the Research and Design Procedures 78 CHAPTER ANALYSIS OF DATA 80 4.1 Introduction to the Analysis 80 4.2 Research Question and Hypotheses 81 4.3 Organization of Data Analysis 84 4.3.1 Historical Securities Prices 85 4.3.2 Calculation of Beta 85 4.3.3 Calculation of Growth 88 4.3.4 Calculation of Beta and Growth by Sector 90 4.3.5 Calculation of Mean and Application of Statistical Tests 91 4.4 Presentation of Descriptive Characteristics of Datasets 94 4.5 Summary of the Analysis of Data 100 Sustainability Reporting Impact on Financial Performance viii CHAPTER FINDINGS AND CONCLUSIONS 102 5.1 Introduction 102 5.2 Findings 103 5.2.1 Historical Securities Prices 103 5.2.2 Findings Relative to Beta 104 5.2.3 Findings Relative to Growth 105 5.2.4 Calculation of Beta and Growth by Sector 107 5.2.5 Calculation of Mean and Application of Statistical Tests 108 5.3 Conclusions 111 5.4 Future Research 117 5.5 Summary 119 APPENDIX A: Companies Chosen for SustainAbility Global Reporters Listing for 2006 130 APPENDIX B: Multiple Methods Calculation of Key Variables 132 Sustainability Reporting Impact on Financial Performance 120 To facilitate exploration of the issue, two datasets were compared relative to the dependent variables of risk and return The study evaluated a group of top companies recognized as leaders in the area of sustainability reporting and included in the SustainAbility Global Reporters Listing for 2006 (see Appendix A) Their performance was compared against the market performance of securities traded on the S&P 500 Index during the period of January 1, 2002 to December 31, 2006 The analysis revealed that the SustainAbility group has both a higher return and lower associated risk when compared with the S&P 500 sample The superior performance of the top sustainability reporting companies means that there may still be a relationship between sustainability reporting and value creation Sustainability reporting may also provide a means for organizations to reduce volatility in securities prices by offering disclosure on non-financial issues and may facilitate performance improvement efforts by enhancing visibility to overlooked areas of the business From an investor perspective, since the top sustainability companies at least did not perform worse that their peers from the S&P 500 Index then companies who are superior reporters should be preferred over those that offer less transparency The research does not imply causality, as sustainability reporting itself does not create value Sustainability reporting should be viewed as best in class business process is 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Finance (2007) Stock Research Center: Historical Quotes [Data File] Available from http://finance.yahoo.com/q/hp?s= Sustainability Reporting Impact on Financial Performance 130 APPENDIX A: Companies Chosen for SustainAbility Global Reporters Listing for 2006 Sustainability Reporting Impact on Financial Performance 131 List Other 50 Top 50 Top 50 Top 50 Other 50 Top 50 Top 50 Other 50 Other 50 Top 50 Other 50 Other 50 Top 50 Other 50 Top 50 Other 50 Top 50 Top 50 Other 50 Other 50 Top 50 Other 50 Other 50 Other 50 Top 50 Top 50 Other 50 Other 50 Top 50 Other 50 Other 50 Other 50 Top 50 Other 50 Other 50 Top 50 Top 50 Top 50 Top 50 Top 50 Top 50 Other 50 Top 50 Other 50 Other 50 Other 50 Top 50 Top 50 Top 50 Other 50 Company 3M ABN AMRO ABN AMRO Real adidas Group Alcan Anglo American Anglo Platinum Aracruz Celulose AstraZeneca BAA Barclays BASF BBVA BC Hydro BHP Billiton BMW BP British American Tobacco British American Tobacco British Land BT Carrefour Chevron Citigroup Co-operative Financial Services Daiwa Securities Group Dexia Dofasco DSM EDP Eisai Électricité De France Enel ESB ExxonMobil Ford Fuji Photo Film Gap General Electric GSK Henkel Holcim HP HSBC Intel ITV KarstadtQuelle Kesko Lafarge Landcare Research List Other 50 Top 50 Top 50 Top 50 Other 50 Top 50 Top 50 Top 50 Top 50 Other 50 Top 50 Other 50 Other 50 Other 50 Other 50 Other 50 Top 50 Top 50 Other 50 Other 50 Top 50 Top 50 Top 50 Other 50 Other 50 Top 50 Other 50 Top 50 Other 50 Top 50 Other 50 Other 50 Top 50 Other 50 Other 50 Top 50 Other 50 Other 50 Other 50 Other 50 Other 50 Top 50 Other 50 Top 50 Top 50 Top 50 Top 50 Other 50 Top 50 Top 50 Company Lloyds TSB Mecu Migros MTR National Grid Natura Nedbank Group Nike Nissan Motor Norsk Hydro Novo Nordisk O2 Omron Österreichische Kontrollbank Otto Peugeot Philips PotashCorp PricewaterhouseCoopers Procter & Gamble Rabobank Rio Tinto SAS Sasol Seiyu Seven and I Holdings Severn Trent Shell Group Sodexho Alliance Sony Standard Chartered Starbucks Statoil STMicroelectronic Storebrand Suez Suncor Suntory Swiss Reinsurance Tata Steel Telecom Italia Telus Tokyo Electric Power Unilever Vancity Veolia Environnement Vodafone Volkswagen Watercare Services Westpac Banking Sustainability Reporting Impact on Financial Performance 132 APPENDIX B: Multiple Methods Calculation of Key Variables Sustainability Reporting Impact on Financial Performance 133 SustainAbility Group 3M ABN AMRO Real Alcan Aracruz Celulose AstraZeneca Barclays BASF BBVA BHP Billiton BP British American Tobacco BT Chevron Citigroup Enel ESB ExxonMobil Ford Fuji Photo Film Gap General Electric GSK HP HSBC Intel Lafarge Lloyds TSB Nike Nissan Motor Norsk Hydro Novo Nordisk PotashCorp Procter & Gamble Rio Tinto Sasol Shell Group Sony Starbucks Statoil STMicroelectronic Suez Suncor Telus Unilever Veolia Environnement Vodafone Westpac Banking Beta Using LINEST 0.7844 1.3637 1.0257 0.8627 0.6593 1.0459 0.9877 0.6672 0.9349 0.7975 0.2501 0.8498 0.7588 1.3228 0.4459 0.1449 0.9070 1.2159 0.6917 0.9585 1.1899 0.7473 1.3483 0.7020 1.6260 0.7243 0.8843 0.7696 0.7397 0.5270 0.5176 0.7708 0.4820 0.9096 0.6377 0.8410 0.9798 0.9979 0.4991 1.7787 1.3339 0.5809 0.6667 0.5333 0.4680 1.2221 0.2936 Beta Using SLOPE 0.7844 1.3637 1.0257 0.8627 0.6593 1.0459 0.9877 0.6672 0.9349 0.7975 0.2501 0.8498 0.7588 1.3228 0.4459 0.1449 0.9070 1.2159 0.6917 0.9585 1.1899 0.7473 1.3483 0.7020 1.6260 0.7243 0.8843 0.7696 0.7397 0.5270 0.5176 0.7708 0.4820 0.9096 0.6377 0.8410 0.9798 0.9979 0.4991 1.7787 1.3339 0.5809 0.6667 0.5333 0.4680 1.2221 0.2936 Beta Using Cov/Var 0.7838 1.3626 1.0248 0.8620 0.6588 1.0450 0.9869 0.6666 0.9342 0.7969 0.2499 0.8491 0.7581 1.3217 0.4455 0.1448 0.9063 1.2150 0.6911 0.9577 1.1889 0.7467 1.3473 0.7014 1.6247 0.7237 0.8836 0.7690 0.7391 0.5265 0.5172 0.7702 0.4816 0.9089 0.6372 0.8404 0.9790 0.9971 0.4987 1.7773 1.3328 0.5804 0.6662 0.5329 0.4676 1.2211 0.2933 Stock Price Growth 47.4% 151.9% 64.6% 319.9% 30.5% 116.3% 155.1% 51.3% 391.9% 72.9% 325.2% 100.8% 95.2% 37.0% 153.6% 76.6% 117.2% -45.1% 21.1% 44.5% 3.7% 26.4% 104.7% 90.1% -35.7% 53.7% 46.1% 84.8% 149.4% 321.1% 124.3% 396.1% 78.4% 218.1% 423.6% 82.7% -4.5% 262.9% 374.6% -43.9% 71.8% 434.4% 276.1% 79.5% 154.9% 18.6% 200.2% Sustainability Reporting Impact on Financial Performance 134 S&P 500 Sample Agilent Technologies ALLTEL Corp Altria Group Inc Apartment Investment & Mgmt'A' Applera Corp-Applied Biosystems Bemis Company Citizens Communications Coca Cola Co CONSOL Energy Inc Consolidated Edison Dow Chemical EOG Resources Express Scripts Fifth Third Bancorp FIserv Inc Goldman Sachs Group Hercules Inc Hess Corporation Home Depot Ingersoll-Rand Co Ltd International Flav/Frag Leggett & Platt McGraw-Hill MGIC Investment Micron Technology Monsanto Co New York Times Cl A Newmont Mining Corp (Hldg Co.) NICOR Inc Parker-Hannifin Peabody Energy Plum Creek Timber Co Praxair Inc Public Storage RadioShack Corp Reynolds American Inc Rockwell Automation Inc Stryker Corp Tyco International United Technologies V.F Corp Valero Energy Verizon Communications Vornado Realty Trust Weatherford International Ltd Weyerhaeuser Corp Williams Cos Beta Using LINEST 1.4777 0.8503 0.4652 0.4643 1.2018 0.8381 0.8523 0.5736 1.0183 0.5320 1.1108 0.7937 0.8557 0.8361 1.2774 1.2183 1.0224 0.7388 1.1056 1.2406 0.6308 0.8820 0.7694 1.0774 1.6493 0.8123 0.7954 0.1610 0.8707 1.1535 0.9359 0.7929 1.0784 0.4476 1.0220 0.5409 1.1137 0.6892 1.1793 1.0322 0.8142 0.8122 0.9939 0.4332 0.9102 1.0624 2.0224 Beta Using SLOPE 1.4777 0.8503 0.4652 0.4643 1.2018 0.8381 0.8523 0.5736 1.0183 0.5320 1.1108 0.7937 0.8557 0.8361 1.2774 1.2183 1.0224 0.7388 1.1056 1.2406 0.6308 0.8820 0.7694 1.0774 1.6493 0.8123 0.7954 0.1610 0.8707 1.1535 0.9359 0.7929 1.0784 0.4476 1.0220 0.5409 1.1137 0.6892 1.1793 1.0322 0.8142 0.8122 0.9939 0.4332 0.9102 1.0624 2.0224 Beta Using Cov/Var 1.4766 0.8496 0.4649 0.4639 1.2008 0.8374 0.8516 0.5731 1.0175 0.5316 1.1100 0.7930 0.8550 0.8355 1.2763 1.2174 1.0216 0.7382 1.1047 1.2396 0.6303 0.8813 0.7688 1.0766 1.6480 0.8116 0.7948 0.1609 0.8700 1.1526 0.9351 0.7922 1.0776 0.4473 1.0212 0.5405 1.1128 0.6887 1.1783 1.0314 0.8136 0.8116 0.9932 0.4329 0.9094 1.0615 2.0208 Stock Price Growth 26.5% 34.6% 137.0% 77.4% 0.4% 56.5% 85.0% 13.7% 200.1% 53.3% 40.2% 234.3% 208.9% -23.3% 22.2% 129.0% 89.8% 158.7% -16.1% 100.6% 83.0% 20.9% 146.2% 4.5% -58.0% 248.4% -38.6% 144.6% 44.1% 78.4% 518.3% 79.1% 133.3% 248.9% -40.5% 210.3% 280.1% 94.9% -44.9% 110.3% 135.0% 450.5% -1.4% 280.1% 133.5% 52.7% 9.3% ... was evaluated against the market to test the non-causal relationship between sustainability and risk and reward as the variables of interest Sustainability was considered as a manifestation of. .. Sustainability Reporting Impact on Financial Performance 25 the engagement of an external auditor to attest to the fact that the financial statements fairly present the result of operations and... Financial Performance 24 To facilitate this objective the SEC maintains the Electronic Data Gathering, Analysis, and Retrieval database (EDGAR), an online repository with key filings and financial