The Heterogeneity of Board-Level Sustainability Committees and Corporate Social Performance

Rani Hoitash is Gibbons Research Professor of Accountancy at Bentley University; Udi Hoitash is Associate Professor of Accounting and Gary Gregg Research Fellow at D’Amore-McKim School of Business, Northeastern University. This post is based on a recent article authored by Mr. Hoitash, Mr. Hoitash, and Jenna J. Burke, Bentley University, forthcoming in the Journal of Business Ethics.

In our article, The Heterogeneity of Board-Level Sustainability Committees and Corporate Social Performance, forthcoming in the Journal of Business Ethics, we explore the performance impact of board-level sustainability committees.

Despite the increased prevalence of these committees on corporate boards, some critique their presence as a mere symbolic action to appease disgruntled stakeholders—ranging from representatives of local communities to employees, the environment, consumers, and suppliers. Indeed, early findings from academic research have shown these committees to have little to no performance impact. This is puzzling when combined with the finding that companies continue to adopt (Eccles et al. 2014), improve, and dedicate resources to these committees.

Sustainability committees, as examined in our article, are voluntary stand-alone committees whose responsibilities are listed in the company’s annual proxy filing. Since these committees are voluntary, a board can dictate which stakeholder groups they focus on. Practitioner publications have noted that responsibilities range from a general focus on overall sustainability policies and procedures to specific foci on stakeholder groups such as employees or the environment (The Conference Board 2010; The Corporate Library 2010). Yet, prior literature has not incorporated this notion into measurement and analysis (Al-Tuwaijiri et al. 2004; Berrone and Gomez-Mejia 2009; Mallin et al. 2013; Rodrigue et al. 2013; Walls et al. 2012).

The primary objective of our article is to explore the diverse range of stakeholder impacts that a sustainability committee oversees, which prior literature has not considered. To achieve this objective, we hand-collect sustainability committee responsibility disclosures from public company proxy filings of US firms for the period 2003—2013. Within these 1,243 disclosures, firms explicitly claim accountability for oversight of four stakeholder groups (i.e., community, employee, environment, and consumer/supplier). For example, Arch Coal, one of the nation’s largest mining companies, has an “Energy and Environmental Policy” committee which focuses on compliance with emerging environmental policy. Delta Air Lines has a “Safety and Security” committee which focuses on ensuring the safety of the airline’s employees and passengers. Both of these qualify as sustainability committees, yet clearly have vastly different intended performance impacts. The aggregation of these committees in prior research, as necessitated by lack of data on committee responsibilities, may explain why extant evidence suggests these committees to have little performance implications.

We theorize that sustainability committees are a formal acknowledgement of responsibility to specific stakeholder groups, which enhances accountability (i.e., the expectation that one may be called upon to justify one’s actions to others) and acts as a goal to affect action and strengthen the performance impact for those stakeholders (Dubnick 2005; Ryan and Smith 1954). For example, committees that focus on the environment are theoretically and practically likely to influence different actions and performance outcomes than committees that focus on employee-related issues.

Using a unique dataset, findings support this theory and suggest that board-level sustainability committees focused on specific stakeholder groups have performance implications in that stakeholder dimension. We also generally find that sustainability committees positively influence sustainability strengths, but do not mitigate concerns, which is consistent with our overarching shared value framework (Porter and Kramer 2011; Lopez et al. 2007). According to this theoretical framework, the “existence and associated actions of board-level sustainability committees are motivated by shared value creation, where the interests of a diverse group of stakeholders are satisfied and sufficient profit is achieved.” Thus, sustainability committees will manage both opportunities and risks to pursue positive sustainability performance and limit the impact of negative sustainability performance. For the latter action, findings suggest that sustainability committees serve a risk management role by monitoring, but not necessarily mitigating, negative performance impacts.

We also find that effective sustainability committees are larger, more independent, and meet more frequently. This suggests that if boards don’t dedicate the proper resources to these committees, even focused sustainability committees can fail to enhance relevant performance.

The full article is available for download here.

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