Report from the Research Frontier: September 2019

New findings: How to choose environmental certification; institutional shareholders drive CSR; and firm politics shape stakeholder treatment

Every month, researchers publish dozens of articles on business sustainability. NBS highlights insights at the frontier of knowledge. See all monthly highlights.

How to Choose an Environmental Certification for Your Firm

Hamish van der Ven (McGill University) shares two recommendations for sustainable sourcing. For more, see his book: Beyond Greenwash: Explaining Credibility in Transnational Eco-Labeling.

Do Not: Shop for boutique third-party certifications. “Small is beautiful” is a great mantra for artisan soap makers, but not for third-party standard setters. You want a brand that your stakeholders recognize and respect. You also want the organization to be still around in 5, 10 or 20 years.

Do: Go big or go home. Size matters when it comes to third-party standard setters. The bigger the organization and the more widespread its standards, the more rigorous it has to be in its approach to standard setting, enforcement, and impact monitoring. When possible, go with an organization that has a good share of the market and a global presence.

Do Not: Assume that all third-party standard setters are created equal. They are not. In pretty much any sector, you can find an organization that will happily take your money to certify your practices as “sustainable.”

Do: Read up on your options. You should choose your third-party standard setter as carefully as you would a romantic partner. Read about their systems and processes for setting standards and checking compliance. Find out who else they are working with. (My book, Beyond Greenwash, is a great place to start.)

Institutional Investors Drive (and Seek) Firm CSR

What do institutional investors want? Corporate social responsibility (CSR) is high on their list. Increased institutional holding improves portfolio firms’ CSR performance, according to new research. Performance improves especially around material issues that might lead to lawsuits or regulatory penalties, such as gender discrimination and environmental practices.

Tao Chen (Nanyang Business School) and colleagues studied firms’ level of institutional ownership and CSR performance (based on the MSCI ESG KLD database). Over time, the authors found that a 10 per cent increase in institutional ownership leads to an average of 0.45 point increase in CSR ratings.

A strong CSR record can also draw institutional investors to a company, Chen told NBS. “Other research shows that with the rapid growth in client demands for sustainability commitments, many institutional investors are willing to pay a premium to invest in socially responsible firms.”

Article: Chen, T., Dong, H., & Lin, C. 2019. Institutional shareholders and corporate social responsibility. Journal of Financial Economics.

Your Organization’s Ideology Shapes How You Manage Stakeholders

We like to think we’re independent thinkers. But research shows that a company’s openness to stakeholder input depends on the company’s “ideology” — the political views of its employees. When employees are more liberal, the company will be more willing to incorporate external activists’ demands.

Researchers Abhinav Gupta and Forrest Briscoe drew this conclusion by studying how Fortune 500 firms responded to stakeholder protests between 2001 and 2015. The researchers analyzed the political donations of each companies’ employees, identifying whether employees generally gave to liberal or conservative candidates. They found that firms with liberal-leaning employees are more likely to agree to stakeholder demands.

“Executives tend to make decisions that are consistent with prevailing beliefs in the organizations,” the authors write. That can be good news for the company: a fit between corporate practices and organizational ideology leads to superior firm performance. But if you’re responsible for stakeholder relationships, you may want to make sure the firm’s ideology isn’t making your decisions for you.

There’s a lesson for activists as well: Some firms will always be a tougher nut to crack. Analyzing target firms’ ideological openness (e.g., via the U.S. Federal Election Commission database) can provide some useful information about a company’s likely response.

Article: Gupta, A., & Briscoe, F. 2019. Organizational political ideology and corporate openness to social activism. Administrative Science Quarterly.

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