Department for Business Administration Civilekonomprogrammet
Degree Project in Business Administration 30 credits, Spring 2020 Supervisor: Catherine Lions
Does stakeholder pressure have
an effect on the quality of the
sustainability report?
Abstract
Our planet suffers from severe climate change and environmental issues has never been as important as it is now. Countries and communities come together to get involved in environmental questions and to work against a sustainable future. Companies are also expected to take act on this concern and incorporate sustainability into their business practices. To account for this, company’s disclosure a sustainability report and the numbers of companies that do so has increased rapidly the last years. From 2011 to 2013 there was almost a 50% increase of submitted sustainability reports. Since then, sustainability reporting has gone from optional to mandatory as a new law came into place in 2016. However, as companies start to disclosure sustainability reports more than ever before, new issues have arisen. The lack of regulation means that there is no guarantee for quality in the report and studies has shown that the stakeholders demand higher quality and more transparency of the sustainability report. Thus, it could be of importance for companies to produce reports of better quality in order to meet the demands of their stakeholders. Retaining a good relationship is crucial and it affects the growth of the company as it affects competitive advantage and the possibility to manage risks.
Previous literature has found evidence that stakeholder pressure has influence on the transparency, which has similarities to quality, of the sustainability reports globally. With this thesis we aim to contribute with additional information to existing literature with a new geographical area, Sweden. We also aim to contribute to understanding of how quality of the sustainability reports can be determined. The critical assessment of the sustainability reports from each stakeholder becomes more important and previous literature has shown that different stakeholders have different effect on transparency in the sustainability reports. First and foremost, the purpose of this thesis is to investigate if the pressure from different stakeholder groups has an effect on the quality of the sustainability report. We intend to do so with the following research question: Does stakeholder pressure have an effect on the quality of sustainability reports? The companies will be split into four different groups based on the industry the company operates within and the sub-purpose is to see if there is any difference in the impact on the quality of the sustainability reports between the different groups. The quality will be determined by adherence level to the GRI G4 framework, how many other standards and guidelines the report is in compliance with and the existence of external assurance. The population is the 127 companies who has their reports available in the GRI database. We have conducted a quantitative study using a linear regression analysis on those 127 companies. The results led us to the conclusion that the relationship between stakeholder pressure and the quality of the sustainability reports cannot be explained by the model used in this thesis. A two-sample t test was conducted for each group of industry to see if there was any difference of the mean of quality if the companies was represented in the industry or not. The results showed us that the mean of the quality was higher for the companies operating in an environmentally sensitive industry.
Acknowledgements
We would like to take the opportunity to thank our supervisor Catherine Lions, senior lecturer (Associate Professor) at Umeå School of Business and Economics, for all her support and constructive feedback from the beginning until the end of the research process. Without her expertise and help we would not have been able to complete this degree project and thereby contribute to the research on sustainability within finance and accounting.
We would also like to thank each other for a great teamwork during this semester. Without the flexibility and mutual support from each other in good and bad times, the writing of this thesis would not have been possible.
We would also send our most sincere gratitude’s to our friends Hanne Måseide and Roger Lundmark who has given us valuable insights and help with our statistical tests.
Finally, we would like to thank the staff at restaurant Lingon at Umeå University for providing us with nutritious lunches and huge amounts of coffee throughout the entire research process. The homemade blueberry jam to the pancakes on Thursdays was one of the many highlights this semester.
Eric Westergren & Linn Hasselgren Umeå Universitet
1. Introduction 8 1.1 Problem Background 8 1.2 Problematization 9 1.3 Research Purpose 10 1.4 Research Question 11 1.5 Theoretical Contributions 11 1.6 Practical Contributions 11
1.7 Choice of Subject and Preconceptions 11
1.8 Delimitation 12
2. Theoretical point of reference 13
2.1 Triple Bottom Line 13
2.2 Sustainability report 14
2.3 Global Reporting Initiative 15
2.4 The quality of a sustainability report 16
2.5 Conclusion and own expectations: 17
3. Theoretical framework 18
3.1 Agency Theory 18
3.2 Legitimacy Theory 19
3.3 Stewardship Theory 20
3.4 Stakeholder theory 21
3.5 Expectations in the light of the theories 22
4. Scientific method 24 4.1 Research philosophy 24 4.1.1 Ontology 25 4.1.2 Epistemology 25 4.2 Research approach 25 4.3 Research design 26 4.4 Research strategy 27 4.5 Literature search 28 4.6 Source criticism 28
4.7 Social and ethical considerations 30
5. Research Method 32
5.2 Population and Sample 32
5.3 Regression Analysis 33
5.3.1 The Ordinary least squares (OLS) 33
5.4 Theoretical Regression Model 34
5.5 Variables 34
5.5.1 Dependent variable 34
5.5.2 Independent variables 35
5.5.3 Control variables 36
6. Data and Results 38
6.1 Data collection and Processing 38
6.2 Descriptive Statistics 39
6.3 Model Diagnostics 40
6.3.1 Linearity 40
6.3.2 Distribution and Correlation of the Error Term 42
6.3.3 Serial Correlation 43
6.3.4 Heteroscedasticity 43
6.3.5 Multicollinearity 44
6.4 Empirical Results, Regression Models 46
6.4.1 Customer proximity industries 46
6.4.2 Employee-oriented industries 46
6.4.3 Environmentally sensitive industries 47
6.4.4 Investor-oriented industries 47
6.5 Two-sample t test 47
6.5.1 Customer proximity industries 48
6.5.2 Employee-oriented industries 48
6.5.3 Environmentally sensitive industries 48
6.5.4 Investor-oriented industries 49
6.6 Stakeholder Pressure and Quality of Sustainability Reports 49
7. Analysis 50
7.1 Stakeholder pressure and Quality of sustainability reports 50
7.2 Theoretical Analysis 52
8. Conclusion 55
8.1.1 Reliability 55
8.1.2 Validity 55
8.1.3 Generalizability 56
8.2 Societal and Ethical Implications 56
8.3 Theoretical and Practical Contributions 57
8.4 Suggestions for Further Research 58
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1. Introduction
In this chapter we will introduce the topic of the research of the thesis. First, we will present the background of the study followed by a discussion of the field of research. The following sections will define the purpose of the research, the research question and finally the motivation for the study together with the delimitations of the thesis.
1.1 Problem Background
The “Greta-effect” have reached global proportions and bushfires in Amazonas and Australia are reminding us of how important it is to take care of the environment. Several animal protection organizations are struggling to preserve natural habitats. However, there is more to sustainability concerns except for environmental issues. Another important aspect of sustainability is social sustainability meaning companies have to provide fair working conditions in all parts of the world.
Business and finance sectors are not excluded from issues regarding sustainability and stakeholders are demanding social and environmental sustainability to a greater extent now than ever before. For example, hedge funds such as Trian Partners, Blue Harbour, Red Mountain Capital, and ValueAct are all recent examples of stakeholder activists who are focusing on Environmental, Social and Governance (ESG) issues as a way of boosting their performance (Fortado, 2017). Companies have also realized the importance of meeting those demands and not only be concerned about profit maximization in order to be able to achieve a long-term growth.
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1.2 Problematization
People are becoming more sustainable all over the world. The “Greta-effect” and “Fridaysforfuture” shows how different countries and communities come together to get involved in environmental questions. It has also become a part of our daily life where we are constantly reminded about being more environmentally friendly and more sustainable. Whether it is about going to the grocery store or buying a car, our society is now full of more sustainable options. Seeing all of this, there is no doubt that sustainability has become the hot topic in today's society, and it does not only apply to us individuals, but corporations also have a pressure of conducting their everyday businesses in a matter that is in line with these expectations. United Nations (2013) argues that corporations need to collaborate and do their part towards a sustainable global economy. To become more sustainable, companies need to integrate economic, environmental, social and governance aspects into their business plan in order to create a long-term economic value for the company. Corporate sustainability is about conducting business today without destructing for future generations (UNEP, 2013, p. 8). Corporate Sustainability and Corporate Social Responsibility (CSR) are important but it is not enough to only have it in practice, we also want to be able to see what the companies are doing to be more sustainable. Stakeholders want them to submit a sustainability report, which makes it possible for us to more concretely see what action the corporations take.
The sustainability report is a non- financial statement where companies present how they work with sustainability in their everyday activities. The Global Reporting Initiative Organization state that a sustainability report should contain information of the corporations economic, environmental and social impacts and how the governance act on creating a sustainable global economy (GRI, n.d.A). In phase with the more sustainable society, a rising number of corporations are now choosing to disclosure a sustainability report. According to UN (2014) almost 50% more reports where submitted in 2013 compared to 2011 (United Nations Global Compact, 2014, p. 40). The new law that regulates the disclosure of the sustainability report is estimated to affect approximately 1600 companies in Sweden (PwC, 2016). However, since sustainability reporting is an emerging discipline there is currently no detailed regulations of what the report needs to include and no universally agreed definition of it. The GRI defines sustainability report as following:
“a process that assists companies in setting goals, measuring performance and managing change towards a sustainable global economy – one that combines long term profitability with social responsibility and environmental care. Sustainability reporting – mainly through but not limited to a sustainability report, is the key platform for communicating the company’s economic, environmental, social and governance performance, reflecting positive and negative impacts.” (UNEP, 2013, p. 8).
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As companies start to disclosure their sustainability report now more than ever, new issues have arisen. The lack of regulations means that there is no guarantee for the quality of the report. Sustainability reports are used as a mean to communicate and as well as it is for the financial statements of the company, it is important that one can trust what is communicated. Lock & Seele (2016) state that stakeholders and scholars often feel a little suspicious towards the company regarding its sustainability report. The authors also argue that non-financial reports need to consider the quality and credibility of the report (Lock & Seele, 2016, p.1). Furthermore, we can see that there is a positive correlation between sustainability report quality and corporate financial performance. One study made by Gao et. al (2016) finds that a sustainability report of higher quality contributes to economic benefits for the company. In their study, they state: “In return, these firms gain greater analyst coverage, higher levels of institutional ownership, greater stock liquidity, higher valuations in SEOs, and lower yields to maturity in bond issuances.” (Gao et. al., 2016, p. 1). UN (2014) state that the quality of the reports is getting better but that there is more room for improvements (United Nations Global Compact, 2014, p. 40). GRI also states that one of their focus these upcoming years is that their standards can improve the quality of the reports (GRI, n.d.B).
“Sustainability is awareness that each entity is surrounded by stakeholders.” (Deloitte., n.d). This quote implies that in order to be sustainable, companies need to acknowledge the stakeholder’s demands. As we are now living in a more sustainable world, it has also become important to the stakeholders that the companies take responsibility and act more sustainable. United Nations also state that stakeholders now pressure corporations to take action and report on sustainability (United Nations Global Compact, 2014, p. 41). The stakeholders also want to be in the loop, they want full insight within the company and therefore require more non-financial statements. The theory of stakeholders was pioneered by Freeman and he argues that stakeholders “could and should be used to revise the entire view of the corporation” (Friedman & Miles, 2006, p. 25). Stakeholders are playing a big part in to what extent companies are presenting their non-financial data. A study made by United Nations about the benefits of a sustainability report shows that 63% of the companies involved saw that sustainability reports enhanced stakeholder relationship (United Nations Global Compact, 2014, p. 41). Many investors are focusing on green investments and customers are becoming more aware of the products they are buying. Regulation is a tool that is used to make more companies disclose non-financial statements, but right now this regulation is not assuring that the non-financial statements are presenting all necessary details. It is therefore of importance that all users of the non-financial statements asses the disclosures critically. In order to do so, one must know how to determine the quality of the reports. This could be a reason for companies to produce reports of better quality in order to meet the demands of the stakeholders. Obtaining a good relationship with stakeholders is crucial and it affects the growth of the company as it affects competitive advantage and the possibility to manage risks (Deloitte., n.d.).
1.3 Research Purpose
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Secondly, the companies will be split into four different groups based on the industry the company operates within. These are “Customers-proximity industries”, “Employee-oriented industries”, “Environmentally sensitive industries”, and “Investor-“Employee-oriented industries” (Fernandez-Feijoo et al., 2013, pp. 58-59). The purpose is to see if there is any difference in the impact on the quality of the sustainability reports between the different groups of stakeholders analyzed. This will hopefully contribute to a better understanding of how stakeholders influence sustainability decisions made by companies in the different industries.
1.4 Research Question
We will study if different stakeholders influence the quality of the sustainability reports in different industries through the following research question:
Does stakeholder pressure have an effect on the quality of sustainability reports?
1.5 Theoretical Contributions
With this thesis we aim to contribute with additional information to existing literature with a new geographical area. This new information can hopefully bring new insights of what is important to the different stakeholders in relation to the CSR reporting in Sweden. Our desire is to explain to what extent pressure of different stakeholders influence the quality of the CSR reporting. This will contribute to an understanding of what is important to different stakeholders which further research can benefit from in studies on other relationships involving these stakeholders. If there is a relationship between stakeholder pressure and the quality of the CSR reports, further research can benefit from the results of this thesis in clarify how quality of CSR reports is determined.
1.6 Practical Contributions
Sustainability has an effect on the financial performance of a firm but there is no clear definition or standard of what a sustainability report should contain and therefore more research within this area is needed. We aim to contribute with some practical guidance for companies and find out if they can benefit from disclosing information of quality in their sustainability report. This would be of value for the companies since this research could raise awareness on how to evolve the sustainability report in accordance with stakeholders expectations. It could also give the different stakeholders an insight about their own power of influence. For example, it may be of help to the regulators to understand the drivers of quality in the sustainability reports when stipulating the laws in this matter.
1.7 Choice of Subject and Preconceptions
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sustainable. We have also been living in other countries for a period of time and seen how different countries act towards different environmental issues. Our different experiences started a discussion between us two authors. We realized that we think very highly of Sweden when it comes to environmental issues and we were intrigued to see if this is also applicable to businesses in Sweden. More specifically, if companies in Sweden disclose this information in a sustainability report and what quality these reports have. As both of us authors are also interested in the financial market we also want to know if stakeholders affect the quality of the report. We will however not let our personal feelings towards this subject affect the thesis and its result. The result of this study is based on statistical methodology to reduce the risk of the result being biased.
1.8 Delimitation
We do not conduct a study from a global perspective in this thesis. Instead we have chosen to focus on Swedish companies. Since Sweden is a country to be considered as environmentally conscious (Fernandez-Feijoo et al., 2013, p.61), we think it is interesting to conduct this study in Sweden only. We have not been able to find any research conducted on the relationship between stakeholder pressure and quality of the sustainability reports in Sweden and this is why this thesis will be focusing on this Scandinavian country.
We only study if stakeholder pressure have an effect on the quality of the sustainability reports. We do not study other drivers of quality as, for example, regulation. Also, we do not study other types of stakeholder pressure on companies.
We have retrieved our data on stakeholder pressure and quality of the sustainability report using the GRI database. There might be other databases who provide data on stakeholder pressure, the quality of the sustainability reports, or any of the other variables used in our models that we could have used. However, the source of data is a trusted organization with nothing to gain from providing false or manipulated data. Thus, we are not worried about the credibility of the conclusions made in this thesis. Yet we acknowledge the existence of other methods.
In this study we will examine the reporting year of 2017. The reason for this is that earlier there was no regulation enforcing companies to disclose non-financial information in sustainability reports and no data is available for the years after 2017 in the chosen database. With more data over a longer time period we would possibly be able to draw more exact conclusions. However, we are feeling confident that our analyzed year is enough to make good estimations of the variables.
We have conducted this study during a period of 4 months. In order to fit the time frame, some limitations have been done. A longer time frame would allow a more rigorous investigation of the relationship between our variables.
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2. Theoretical point of reference
In this chapter we will present some relevant concepts and previous research that are connected to our research purpose. In order to gain a deeper understanding, we have included: the triple bottom line, sustainability report, the quality of the sustainability report and quality assurance.
2.1 Triple Bottom Line
The triple bottom line is described as an expansion to the traditional accounting framework that also considers social and environmental impacts. The concept states that there is more than one bottom line in sustainability, and it is used to measure a corporation's financial, social and environmental performance over time. The bottom lines are divided in three different elements: people, planet and profit. Each of them playing a big part in a corporation’s sustainability actions. The first one, people, refers to the social responsibilities. It concerns the issues related to the employees, the ones involved in the community and the labor of the company and the society of the company. A company that implement the people element into their business take social responsibility with fair wages and human working conditions into consideration in their operations. The second element is planet and it refers to the environmental responsibilities a company bear. It concerns how the company works on reducing their ecological footprint, such as reducing waste or investing in renewable energy. The public now demands that corporations take responsibility for any harm that the company can cause to the environment. The last element is profit and it refers to the economic impacts, profit and loss, of a company. The triple bottom line argues that a company can gain financial profitability from working more sustainable and include it as a part of their business plan. An example is when companies use recycling waste in their production, creating a product in which they can sell and generate profit from (University of Wisconsin).
The Triple Bottom Line
Figure 2.1. The triple bottom line (University of Wisconsin).
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from the concept of the triple bottom line (Lamberton, 2015, pp. 7-26). Elkington seems to have anticipated the success of the concept as he stated: “The triple bottom line will become vibrantly interactive because it adds real value for stakeholders and assists companies in successfully navigating their marketplaces” (Wheeler and Elkington, 2001, p. 13). A lot has happened in the world since the concept first came to life, but the triple bottom line is still as important today as it was 26 years ago. Sustainability is still about a company's social, environmental, and economic impact which translates to people, planet and profit in the triple bottom line. However, Elkington argues that companies today still focus more on one of the bottom lines, profit, and despite the success in many other areas, the climate has never been more exposed, and our planet is suffering (Elkington, 2018).
2.2 Sustainability report
Sustainability is synonymous to the concept of corporate social responsibility, also called CSR. The concept has a vivid history and its conceptualized has varied during the course of time. One could argue that the CSR we know today first came of age after World War II when the legitimacy of the companies was confirmed, and the business landscape changed. It can also be traced back to the social movement that emerged in 1960s and drove companies to take more responsibility beyond what they owed to their stakeholders. They were expected to address the public concern about civil rights, environment, consumers and women. The concept of sustainability was at first developed from a concern for the environment but is now used by companies to describe their CSR (Carroll & Brown, 2018, p. 40, 50). The sustainability report is now used as a non-financial statement that includes information of an entity's economic, environmental and social impacts from its corporate performance. It also contains information about the company’s values and governance and how they work towards a sustainable global economy (GRI, n.d.A). Sustainability reporting is a relatively new practice and GRI state that only a handful of companies reported on sustainability when the organization first started out in 1997. In the beginning, the reports main focus was merely to measure and keep track of the use of non-financial resources. Later, when more companies started to report on sustainability more frequently, the focus shifted to the reports materiality. It became clear that the report needed to be more transparent and reflect companies most significant impacts from its corporate performance (GRI, 2016a).
For some companies it is now mandatory to submit a sustainability report while others choose to do so voluntarily, partly because an increased concern in today’s society demands it but also because the it serves some benefits for the company. Below, in table 1, some of these internal and external benefits are presented:
Internal Benefits External Benefits
Increased understanding of risks and opportunities Mitigating – or reversing – negative environmental, social and governance impacts
Emphasizing the link between financial and non-financial performance
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Influencing long term management strategy and policy, and business plans
Enabling external stakeholders to understand the organization’s true value, and tangible and intangible assets
Streamlining processes, reducing costs and improving efficiency
Demonstrating how the organization influences, and is influenced by, expectations about sustainable
development
Benchmarking and assessing sustainability performance with respect to laws, norms, codes, performance standards, and voluntary initiatives
Avoiding being implicated in publicized environmental, social and governance failures
Comparing performance internally, and between organizations and sectors
Table 2.1. Data collected from Global Reporting Initiatives (GRI, n.d.C).
The internal and external benefits, presented in the table above, shares one important cause. They provide information that can influence the firm's long-term value. The sustainability reports, unlike other financial statements, give an insight of the company’s future performance, making it is possible to look at capital other than financial. EY (2013a) state that the sustainability reporting process of collecting and analyzing data enables companies to evaluate their own value chain. This information can have significant impact the company's overall performance, the investors perception and the access to capital (EY, 2013a, p.6-14). The benefits from the sustainability report was evaluated by a survey in another report from EY (2013b). The survey clarified that the report improves a firm's reputation, access to capital, operating efficiency and waste reduction. These benefits have also shown to serve the interest of shareholders, stakeholders and employees (EY, 2013b, p. 3).
2.3 Global Reporting Initiative
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also encourage companies to adapt the sustainable impacts in the business strategy and operations. The content of the sustainability report includes information related to the company's core business strategy, where it helps the company to set goals, measure performance and manage change. It promotes changes that is in interest for both the company and the stakeholders (GRI, n.d.D).
The G4 guidelines was released in 2013 and it is the fourth and latest edition of the GRI guidelines. The G4 guidelines was developed with extensive consultation from both experts and stakeholders. This because key stakeholders such as investors, employees and customers have a vital role in the assessment of the company’s activities. The intention of the new edition was to make the guidelines more adoptable for organizations worldwide, no matter of the applicable reporting standard. Thus, the new guidelines are more flexible than the earlier versions. Other important global frameworks, such as the UN compact principles, was also used as an inspiration when stipulating the guidelines. Another new aspect is that the G4 guidelines encourage companies to focus on the most critical aspects in order to make the report more strategic and focused (GRI, n.d.D).
2.4 The quality of a sustainability report
The reporting principles in GRI 101 describe what information the sustainability report need to include to ensure the quality. The report quality is defined with the following keywords: accuracy, balance, clarity, comparability, reliability and timeliness. The principle accuracy acknowledges that the information in the reports can be expressed differently so the characteristics of definition varies. Although, it suggests that the information need to be accurate and detailed in order for the stakeholders to make a correct estimate of the entity’s performance. The balance principle suggests that both negative and positive performance aspects need to be included in the report to be able to estimate the performance of the firm. This will also help to reduce the information bias. Clarity suggests that the information need to be presented in a adequate manner for the stakeholders. The information should be easy to access and easy to comprehend. The comparability principle evaluates the performance over time. It suggests that the report should be updated constantly so that the stakeholders are able to analyze the changes within the company. This also enhance the ability of comparison between other organizations. The reliability principle implies that the report can be evaluated and the results can be assured. Stakeholders should be able to review internal documentations that endorse the information. It also suggests that the preparation process should be reflected in the report to ensure the quality and materiality of the information. Timeliness suggest that the entity need to report and disclose information that is available for the stakeholders on a regular basis. The economic, environmental and social impacts should therefore only be presented at a certain point of time. The reporting is expected to be disclosed consistent as it facilitates the stakeholder’s decision making (GRI,2016b, p. 4-16).
The reporting principles in GRI 101 is one way to determine the quality of a sustainability report. However, since there are no legal regulations on how to assess the quality of the report, other methods can also be used. Hail (2002, p. 750) used a method where the quality of the sustainability report is measured with an index. The quality index is calculated from ratings of different criteria that is of interest. Bachoo et al. (2013, p.72) used another method to determine the quality of the report, where the quality depends on how much information is disclosed in the sustainability report. The quality is considered to be acceptable if at least three of the following four criteria is met:
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● “the main impacts/issues in all key areas such as energy, emissions, waste, water are described;”
● “quantitative data (including year-on-year data) in all key areas, as graphs or tables are provided;”
● “measures of performance against targets in all key areas are provided.”
2.5 Conclusion and own expectations:
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3. Theoretical framework
In this chapter we will review previous literature to form the framework which we intend to use when conducting our study. The theories we have identified as relevant to our study are Agency Theory, Legitimacy Theory, Stewardship Theory, and Stakeholder Theory. With the help from previous research, these theories will be explained in detail. To avoid any bias, we will also present some of the critique against these theories. We will finish by presenting our expectations from the results in the light of each theory.
3.1 Agency Theory
The model of man that lay ground for agency theory is of a rational person who seeks to maximize his or her personal utility (Davis et al., 1997, p.22). This model can be traced back to when Adam Smith presented his ideas of an economic man in “The Wealth of Nations” in 1776. The agent and the principal will try to receive as much utility as possible at the lowest cost as possible. Owners are becoming principals when assigning executives to manage their firms for them. The executives are becoming agents of the principals and they are morally responsible for maximizing shareholder utility. However, according to agency theory executives are rational individuals and when given the choice between two alternatives, the agent and principal the principal will choose the alternative that increases his or her individual utility (Davis et al., 1997, p.22). If the utility functions of self-serving agents and principals concur, there will be no agency problem since they both enjoy increases in their individual utility. When the interests of the agent and the principal differ, agency cost will arise. This due to when given the opportunity, agents will seek to maximize their own personal utility at the cost of their principals. The objective of agency theory is to reduce the agency costs by sophisticated internal control systems to keep the agents self-serving behaviors in check (Davis et al., 1997, p.22).
19 Critique on Agency Theory
Critics have identified the fact that positivist agency researchers are only concentrating on the agent side of the agent and principal problem. However, the problem may also occur from the principal side. The critics state that the theory is unconcerned with the principals who might cheat, evade responsibility and take advantage of the agents. Further, agents may be unknowingly dragged into work with a harmful working environment and without any scope for encroachment, where the principals act as opportunistic (Panda and Leepsa, 2017, p.78).
Several researchers have criticized the positive agency theory on various grounds and have suggested a different agency theory called behavioral agency theory. The behavioral agency theorists argue that the standard agency theory only draw attention to the principal and agent conflict, agency cost and the adjustment of both parties interests to minimize the agency problem. The behavioral agency model suggests some modifications such as the agents’ motivation, risk averseness, time preference and equitable compensation (Panda and Leepsa, 2017, p.79).
Critics have also identified limitations to agency theory. Firstly, the theory assumes a contractual agreement between the principal and the agent for a limited or unlimited future where the future is uncertain. The theory also assumes that contracting can eliminate the agency problem, but in reality, the theory faces many obstacles like information asymmetry, rationality, fraud and transaction cost. Finally, the theory considers the managers as opportunistic and ignores the competence they possess (Panda and Leepsa, 2017, p.79).
3.2 Legitimacy Theory
Legitimacy can be defined as “a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions” (Suchman, 1995, p.574).
20 Critique on Legitimacy Theory
One big issue with legitimacy theory is that legitimacy and its related concepts are both abstract and indefinite. The abstraction is necessary when building a theory but to achieve elegance, the categories of the formal models must also be well specified. The vagueness of the models can only be reduced by applying the theory to detailed observations of human activity and not be used in a wider scope of research on legitimacy (Hybels, 1995, p.241).
3.3 Stewardship Theory
Stewardship theory has its roots in psychology and sociology. The theory was designed for researchers to examine situations where executives, as stewards, are motivated to act in the best interests of the principals. The model of man that lays ground for stewardship theory is based on a steward whose behavior is arranged in such way that pro-organizational and collectivistic behaviors result in higher utility than individualistic and self-serving behaviors. When given the choice between self-serving behavior and pro-organizational behavior, the stewards behavior will be in congruence with the interest of the organization. Even in cases where the interests of the steward and the principal are not aligned, the steward will see higher value in cooperation than defection (Davis et al., 1997, p.24).
Stewards in heterogeneous organizations with competing stakeholders and competing shareholder objectives will make decisions that they consider are in the best interest of the group. A steward who is improving the performance of the organization will generally satisfy most groups. This because most groups of stakeholders have interests that are well served by increasing the wealth of the organization. Thus, a pro-organizational steward will be motivated to maximize the performance of the organization and thereby satisfy the competing interests of the various stakeholders. The steward has the believe that there is a trade-off between personal needs and organizational objectives and by working toward organizational and collective goals the personal needs are met. Consequently, the opportunity set of the steward is limited by the idea that the utility gained from his or her pro-organizational behavior is higher than the utility gained by an individualistic and self-serving behavior. (Davis et al., 1997, p.25).
If applying this theory, so instead of the relationship between managers and stakeholder’s companies can be seen as stewards in society. The pro-organizational behavior will become a pro-societal behavior and the company would care for the resources of the society rather than the resources of the company.
Critique on Stewardship Theory
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3.4 Stakeholder theory
The modern view of stakeholder theory originates from Freeman´s (1984, cited in Cordeiro and Tewari, 2015, p.835) conceptual model which specifies that an entity must include and address the interests of all of the stakeholders who might be affected by the actions of the entity and not only the interests of the stockholders. Further, it is possible to arrange stakeholders into groups of primary and secondary stakeholders where primary stakeholders are those whose participation is vital for the survival of the firm, while secondary stakeholders are those who are affecting and influencing the firm but are not engaging in transactions with the firm (Clarkson, 1995, pp.106-107). The Stakeholder Theory intends to resolve three interconnected issues that are related to business. These are “the problem of understanding how value is created and traded, the problem of connecting ethics and capitalism, and the problem of helping managers think about management such that the first two problems are addressed” (De Colle et.al, 2010, p.405). Post et al. (2002, p.8) defines stakeholders as individuals and constituencies that contribute to the firm’s wealth-creating capacity and activities and thus its potential beneficiaries and/or risk bearers. Ferrero et al. (2013, p.47) further suggests that the disclosure of sustainability performance could be a mechanism to cover the stakeholder´s demands. Manetti and Tocafondi (2012, p.365) argues that this mechanism is important to reinforce during both the sustainability reporting and sustainability reporting assurance in order to guarantee the materiality and relevance of the information disclosed in the reports and assurance statements. For example, a survey co-sponsored by Ernst & Young and GreenBiz Group (2011, cited in James, 2014, p. 98) showed that 68% of the responding 274 large companies, indicated that shareholder expectations were among the factors that determined the company’s sustainability agenda during the next two years. Delmas and Toffel (2012) have provided an updated framework of their original idea from 2004 where they describe how stakeholders such as regulators, customers, activists in the form of NGOs and local communities exercise pressure to companies. Cordeiro and Tewari (2015, p.836) argues that companies’ firm responses such as environmental policies and strategies are becoming more urgent to implement if the firm is facing strong pressures from the key stakeholders such as, but not limited to, the ones mentioned above. This will be of relevance when analyzing if the stakeholder pressure does have an effect on the quality of the sustainability reports since it can be an explanation for different quality in different industries. Fernandez-Feijoo et al. (2013, p.54) states that it is possible to create four categories of industries based on the influence of four main groups of stakeholders (customers, investors, environment and employees). This will also be the approach of this thesis to study their influence on the quality of the sustainability reports. Critique on Stakeholder Theory
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Some say that stakeholder theory cannot provide help in answering the larger questions of business ethics and that it would be better to start all over and reconsider the role of firms in society and how CSR issues provide a ground for understanding the responsibilities of owners, managers and workers of a firm. (Ortis and Strudler 2009, p.612)
3.5 Expectations in the light of the theories
The agency theory will be used to draw conclusions about the relationship between investors and the management within the companies examined. One type of stakeholder in a company is the owner, in agency theory called principal. We find it relevant to include the agency theory to our theoretical framework since one of the reasons for companies to disclose information in financial- /and non-financial statements is to reduce the information asymmetry between the agent and the principal. With the agent-principal relationship, a positive relationship between stakeholder pressure and the quality of the sustainability report, might implicate that investors will practice their influence to make sure that the report is of better quality in order to reduce the information asymmetry. Similar to the Fernandez-Feijoo et al. (2013) study we expect to find a positive relationship between stakeholder pressure in investor-oriented industries and the quality of the sustainability report.
Regardless if the seeking of legitimacy is based on pragmatic, moral, or cognitive behaviors. It is relevant to apply legitimacy theory when investigating and discussing sustainability issues. This because of the strong connection between sustainable operations and legitimacy. In the light of legitimacy theory, we expect all companies to be proactive and try to improve their legitimacy by producing sustainability reports of high quality. This might implicate that stakeholder pressure not necessarily will have a significant impact on the quality of the sustainability reports. In that case, the findings will be contradictory to the Fernandez-Feijoo et al. (2013) study who found a positive relationship between stakeholder pressure and the transparency (which has similarities to quality) of the sustainability report for all groups of industries.
As good stewards they will do this in a responsible way and look after the interests of all parties in society. This could implicate that there is no need for stakeholders to put pressure on companies and the grouping of stakeholders made in this thesis would not matter since all stakeholders would in general be satisfied by the actions of the companies. the stewardship theory perspective, we expect that size (which we similar to the Fernandez-Feijoo et al. (2013) study will use as a proxy for employee-oriented industries) will have a positive relationship with the quality of the sustainability report. This since we believe that large companies with a large number of employees will feel the obligation to the employees to act as good stewards in the society. We also expect that the environmentally sensitive industries will have a positive relationship with the quality of the sustainability report since those industries are consuming a large amount of natural resources. According to the stewardship theory the companies will care for all the interests of the society, including the environment, in a responsible way. We expect that this responsibility will include high quality of the sustainability reports.
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4. Scientific method
In this chapter we will describe and motivate the scientific method and decisions taken regarding the research philosophy, design and approach of this thesis. Further, we will explain the method for searching existing literature and the criticism for the sources of information used. Finally, we will discuss societal and ethical considerations regarding the study.
4.1 Research philosophy
When conducting a study, we develop knowledge within a field of research. Research philosophy relates to the development of knowledge and the nature of that knowledge. The choice of research philosophy contains important assumptions about the way we are viewing the world. Those assumptions will lay ground for the research strategy and the choice of methods as a result of that strategy. The adoption of research philosophy will be influenced, to some extent, by practical considerations (Saunders et al., 2007, p.101). Although, the particular view of knowledge and the way knowledge is developed will be the main influence. As an example, a researcher who is concerned with facts, such as specific inputs needed in a manufacturing process, will likely have a different approach to the way of conducting the research from the researcher who is more concerned with the feelings and attitudes among the workers in the same manufacturing process (Saunders et al., 2007, p.102).
Figure 4.1 The research onion (Saunders et al., 2007, p.102).
If the research philosophy is based on the positivist paradigm, one would prefer to work with an observable social reality. To generate a research strategy for obtaining this data, the researcher will likely use an existing theory to develop new hypotheses. The hypotheses will be tested and confirmed which lead to developments in the existing theory and they may also be tested by further research (Saunders et al., 2007, p.103).
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applicable in the future then some of the value of generalization is lost (Saunders et al., 2007, pp.106-107).
4.1.1 Ontology
Ontology is concerned with the nature of reality. This may raise questions regarding the assumptions the researchers have about the way the world operates. There are two main aspects of ontology which are both likely to be accepted as producing valid knowledge. These are objectivism and subjectivism. Objectivism state that social entities does exist in a reality which is external to social actors (Saunders et al., 2007, p.108). The term social actors is a metaphor that suggest that we as humans play a role on the stage of human life (Saunders et al., 2007, p.106). Objectivists tend to see the culture of an organization as something it has while the subjectivist would say that culture is something that the organization is (Saunders et al., 2007, p.109). The viewpoint of the subjectivist is that reality is socially constructed and that there are existing multiple versions of reality as the social actors interpret the reality differently (Saunders et al., 2007, p.108).
We will take an objectivist viewpoint in our research since we aim to draw conclusions about a phenomenon which can be observed and is external to us researchers and other social actors. We will not have the viewpoint of the subjectivist since this would mean that the reality is socially constructed, and all social actors have their own reality. This in turn would make it impossible to generalize the result of this study. Instead we would have to analyze each observation in a thorough manner and only be able to draw conclusions about that single observation.
4.1.2 Epistemology
The epistemology states what is considered as acceptable knowledge in the field of research (Saunders et al., 2007, p.102). As with the example with the two different researchers in the first paragraph of this chapter, the input researcher would only consider observable phenomena as credible data. Another important element of the positivist paradigm is that the research as far as possible should be conducted objectively. The input researcher would claim that there is no way he or she could alter the substance of the data collected. The assumption is that the researcher is distanced from the subject of the research and does not affect or get affected by it (Saunders et al., 2007, p.103). With the interpretivist paradigm it is important to embrace an empathetic position. The challenge is to enter and understand the world from the point of view of the research subjects (Saunders et al., 2007, p.106).
The conclusions made in this study about if the stakeholder pressure have an effect on the quality of the sustainability reports will be based on the collected data and statistical tests. We are not looking to explain human behavior, rather we aim to explain a simple cause and effect relationship. Thus, our epistemological approach is the positivist paradigm where we build our knowledge upon observable and measurable data. With the interpretivist approach we would analyze and try to build an understanding of the relationship rather than build concrete knowledge.
4.2 Research approach
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research project. One could choose either the deductive approach or the inductive approach. The deductive approach, which relates to the positivist paradigm, is when you develop a theory and hypothesis and design a strategy to test the hypothesis. Robson (2002) cited in Saunders et al., 2007, p.117) lists five stages through which the deductive research will advance. These are:
1. “Deducting a hypothesis (a testable proposition about the relationship between
two or more concepts or variables) from the theory;”
2. “Expressing the hypothesis in operational terms (that is, indicating exactly how
the concepts or variables are to be measured), which propose a relationship between two specific concepts or variables;”
3. “Testing this operational hypothesis;”
4. “Examining the specific outcome of the inquiry (it will either tend to confirm the
theory or indicate the need for its modification);”
5. “If necessary, modifying the theory in the light of the findings.”
With the inductive approach, you would collect data and develop a theory as a result of the data analysis (Saunders et al., 2007, p.117). The approach origins from the emerge of social sciences in the 20th century. The researchers were critical of the deductive approach since it enabled a cause-effect link to be made between different variables without an understanding of the way’s humans interpreted the social world (Saunders et al., 2007, p.118). The users of induction would also argue that deduction has a tendency to construct a pre-settled methodology that does not allow any alternative explanations of the phenomenon. Induction is suitable for small samples where you want to explain the context in which certain events are taking place (Saunders et al., 2007, p.119).
The purpose of this thesis is not to form a new theory, rather we aim to extend knowledge of previous research. Thus, the inductive approach is not a suitable way of conducting this study. Our desire is to draw conclusions about the effect stakeholder pressure has on the quality of the sustainability reports. Existing theory will result in the hypotheses and we hope that from our findings we will be able to either reject or confirm our null hypothesis. By this we hope to be able to draw a conclusion and contribute to previous research by establishing a relationship between the variables.
4.3 Research design
The research design is the broad plan how to go about answering the research question. It should contain clear objectives related to the research question, specify the sources of data collection, consider the delimitations one could have such as access to data, time, location and money, and discussing ethical issues. The justification of the research design should always be based on the research question and the objectives should be consistent with the research philosophy (Saunders et al., 2007, p.131).
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of a phenomenon. It is then of importance that the researcher has a clear picture of the phenomenon before the collection of data. Finally, there is the explanatory study. These are the studies that establish causal relationships between variables. In these studies, the researcher is studying a situation or problem in order to explain the relationships between variables (Saunders et al., 2007, p.134).
Our main target is not to clarify the understanding of the relationship. Thus, the exploratory study is not a suitable design for our research. Neither will we try to describe the relationship and therefore the descriptive study is not suitable either. We intend to determine whether there is a relationship between stakeholder pressure and the quality of the sustainability report or not. This is a simple cause and effect relationship. The only suitable design for our research is the explanatory study. The research design of explanatory studies is also consistent with the methodological assumptions of the objectivist and positivist paradigm in the ontology and epistemology.
4.4 Research strategy
The research strategy involves two main approaches when it comes to collecting the data, qualitative approach and quantitative approach. These two approaches also affect the nature of the research as they have different philosophical standpoints (Bryman & Bell, 2015, pp. 37, 626). A qualitative research contains data that is not quantified or non-numerical data (Saunders et al., 2007, p. 608). Where the focus within a qualitative approach lays on words rather that numbers, compared to a quantitative approach. The qualitative approach involves collecting qualitative data that is analysed with interpretative methods. The qualitative research is connected with a interpretivist epistemological approach and a subjective ontological approach. The aim of the study usually concerns the perception of the social world and how it is interpreted. Where social personalities is seen as a result of interactions between individuals rather than phenomena (Bryman & Bell, 2015, p. 392). With the qualitative approach, the data is more transient and more complex compared to the quantitative data. This means that to fully understand the study, the data cannot be taken out of context. The data is new and often gathered by the researcher himself (Collis & Hussey, 2014, p. 6, 130).
The quantitative approach is when the researcher collects quantitative data and then analyses this data using statistical methods in the research. It can numerical data or values that can be measured numerically that has been quantified (Saunders et al., 2007, p. 608). This data do not have to be collected by the researcher himself, thus it can be collected from already existing data (Collis & Hussey, 2014, pp. 5-6). The quantitative study should not be influenced by the time of the study nor its writers, which gives it a consistent result (Bryman & Bell, 2015, p. 164). The data from a quantitative study can be taking out of context and therefore it has a higher degree of reliability (Collis & Hussey, 2014, p. 130). The science approach is natural, and the social reality is subjective which means that the quantitative approach is associated with positivist epistemological approach and a objective ontological approach (Bryman & Bell, 2015, p. 160).
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it is in line with the research philosophy, as we also take a positivist epistemological approach and a objective ontological approach.
4.5 Literature search
The literature search lays the foundation of the thesis as it is the base of knowledge while writing it. The literature search is a systematic process where one collects the existing amount of knowledge within the area of the subject of interest. The purpose of using reviewed literature is to be able to justify the conducted research as it enlightens the existing knowledge within the area of interest. It may also be used to build the research design and inform on how to process the data (Bryman & Bell, 2015, p. 100). In this study, various literature and publications such as articles, books and previous research have been used to gain a deeper understanding of the subject. It also provides us with an insight of the topic concerning the aspects that have already been discovered and the aspects that are still not explored within it. This is important as it lays the ground of the knowledge used in this study and in the sense of what this thesis can contribute with. The reviewed literature and the knowledge we have gained from it will therefore be reflected throughout the whole thesis, in the research question, the theoretical framework, methodology and the discussion.
The literature used in this study is secondary data. This means that the information and data used in this thesis are collected from available existing sources that are of relevance to the subject of our research. The secondary sources can come in a great variation and can be found through very different means, such as: the internet, academic journal databases, reports, books, articles and the newspaper (Collis & Hussey, 2014, p. 76).
4.6 Source criticism
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Table 4.1. Journals used along with the rating of them. (Association of Business Schools, 2015)
Definition of ratings:
4*: “Journals of Distinction. Within the business and management field including economics, there are a small number of grade 4 journals that are recognised world-wide as exemplars of excellence. Their high status is acknowledged by their inclusion in a number of well-regarded international journal quality lists. The Guide normally rates a journal 4* if they are rated in the highest category by at least three out of the five non-university based listings – Financial Times 45, Dallas List, VHB, Australian Deans’ List, CNRS. In addition, journals from core social sciences disciplines that do not appear in those listings may also be rated 4* on the grounds that they are clearly of the finest quality and of undisputed relevance to business and management. In the Guide of 2015, this applies to three journals from the fields of sociology and psychology.”
4: “All journals rated 4, whether included in the Journal of Distinction category or not,
publish the most original and best-executed research. As top journals in their field, these journals typically have high submission and low acceptance rates. Papers are heavily refereed. Top journals generally have the highest citation impact factors within their field.”
3: “3 rated journals publish original and well executed research papers and are highly
regarded. These journals typically have good submission rates and are very selective in what they publish. Papers are heavily refereed. Highly regarded journals generally have good to excellent journal metrics relative to others in their field, although at present not all journals in this category carry a citation impact factor.”
2: “Journals in this category publish original research of an acceptable standard. A well
regarded journal in its field, papers are fully refereed according to accepted standards and conventions. Citation impact factors are somewhat more modest in certain cases. Many excellent practitioner-oriented articles are published in 2-rated journals.”
1: “These journals, in general, publish research of a recognised, but more modest
standard in their field. Papers are in many instances refereed relatively lightly according to accepted conventions. Few journals in this category carry a citation impact factor.”
(Association of Business Schools, 2015, p.7).
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used when building the core of the theoretical frame. To further extend the understanding of the theory we have used sources from other journals that do not have a rating in the publication from Association of Business Schools, but which we still consider as reliable since the published articles are reviewed by an editorial board with academic peers. However, the risk of bias could be greater in these articles so the need of critical assessment of the information was important. One way of doing this is to cross check the information in the articles to make sure it is not very different from what is established by other researchers in the field.
4.7 Social and ethical considerations
Ethics, in the context of research, refers to the appropriateness of the behavior of the researcher in relation to those who are subject of the research or affected by it. Ethics can be defined as moral principles, norms or standards of behavior that function as a guide in our interaction with other people. Thus, research ethics relates to how to conduct our research in moral and responsible manners. This means that the research must be methodologically sound and morally defensible to the participants. Further, what we consider as morally defensible is affected by broader social norms of behavior (Saunders et al., 2007, p.178).
Below we will list the principles that depict the guidelines according to Bryman & Bell (2015). We will also describe how we intend to follow them:
● Harm to participants – This is the potential of causing harm to the participants through the research process. - As we do not have any participants, this will not be a potential problem in our research.
● Dignity – This is the requirement to respect of showing dignity to the research participants, and the need to avoid causing discomfort or anxiety. – Same as above.
● Informed consent – This is the need to ensure the fully informed consent of the research participants. – Same as above.
● Privacy – This is the need to protect the privacy of the research subjects and avoid infringement of privacy. – Same as above.
● Confidentiality – This is the requirement of ensuring confidentiality of research data regarding individuals, groups or organizations. – We will not include any participants in our study. The data we are using comes from resources available through Umeå university library and the GRI database. Thus, there is no risk of publicizing confidential data.
● Anonymity – This is the protection of anonymity of individuals or organizations. – The information we are using comes from resources available through Umeå university library and the GRI database. Thus, there is no risk of breaking anonymity.
● Deception – This is the potential for deception through our research process, this could either be in the form of lies or other behaviors that are misleading. – We intend to make all possible efforts to be transparent in our research process. We will also use data from secondary sources in order to not deceive. The results from our research will be presented in a clear way to avoid misinterpretation from the readers of this thesis.
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sponsorship. Information about where funding for the research has come from should also be included. – We do not have any professional nor personal affiliations related to our research. We are students who are conducting this research as our degree project. We do not have any relations that could have the potential of influencing our results or conclusions.
● Honesty and transparency – This is the need for being open and honest in the communication of information about the research to all interested parties, including the need for trust. – We have a clear description of our research philosophy, method and other stand-points regarding this study. In the following chapter we will also explain more in detail how we intend to conduct our research and the statistical testing. We will in clear manners describe our process and the results from this study. Thus, we will fulfill the standards of honesty and transparency in our research.
● Reciprocity – This is the concept that the research should be of mutual benefit to the researcher and the participants. It could also be that some extent of collaboration or active participation is involved. – We do not have any research participants nor collaboration partners in this research. Thus this is not of our concern. We are still hoping that our research will be of mutual benefit for us as business students and Umeå university. Without the help of our university, this study would not have been conducted.
● Misrepresentation – This is the importance of avoiding any misleading, misunderstanding, misrepresenting or false reporting of the research findings. – We intend to provide a clear presentation of both our scientific method, and our research method. By this, we aim to prevent any risks of misinterpretation. We also intend to clearly explain every step taken in the process and how we are analyzing our results.
When conducting our research, we will follow these principles to ensure that the societal and ethical guidelines are being followed. However, it is unlikely that we are at risk of violating any of these considerations as the study is based on public sources and secondary data. Thus, there is no risk of causing any harm or break confidentiality or anonymity to the participants, or failing with regard to informed consent. Our methods for collecting data and conduction for statistical testing will be described in detail to provide transparency to the process. Our desire is to provide enough details so that there is no doubt how we arrived at our results and conclusions.
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5. Research Method
In this chapter we will describe the methods that is used to conduct this study regarding examining if there is correlation between stakeholder pressure and the quality of a sustainability report. We start with stating the hypotheses and population, then we will explain the regression analysis and the variables that is used in the study.
5.1 Statistical Hypothesis
A hypothesis is an idea or proposal that is developed through the theoretical framework. The statistical hypothesis is when empirical evidence is tested for association or causality using statistics. To develop a hypothesis from the theoretical framework is in line with the positivist approach (Collis & Hussey, 2014, pp. 51, 77, 104). The hypotheses in this study reads as following:
H01: There is no relationship between customer-proximity industries and the quality of the sustainability report.
HA1: There is a relationship between customer-proximity industries and the quality of the sustainability report.
H02: There is no relationship between employee-oriented industries and the quality of the sustainability report.
HA2: There is a relationship between employee-oriented industries and the quality of the sustainability report.
H03: There is no relationship between environmentally sensitive industries and the quality of the sustainability report.
HA3: There is a relationship between environmentally sensitive industries and the quality of the sustainability report.
H04: There is no relationship between investor-oriented industries and the quality of the sustainability report.
HA4: There is a relationship between investor-oriented industries and the quality of the sustainability report.
5.2 Population and Sample
A population is a specific group of people or objects that is examined for statistical purposes (Collis & Hussey, 2014, p. 197). Our population is composed of both listed and unlisted entities in Sweden who disclose non-financial data in sustainability reports and are registered in the GRI database. The reason for choosing the GRI framework as the source of data is that the GRI standards define several principles that are related to the content of the sustainability report that has the purpose of improving the quality and the transparency of the report (Fernandez-Feijoo et al., 2013, p.54).
