A Dissertation

entitled

Relationship between Environmental Social Governance (ESG) Management and

Performance – The Role of Collaboration in the Supply Chain

by

Vincent George Whitelock

Submitted to the Graduate Faculty as partial fulfillment of the requirements for the

Doctor of Philosophy Degree in Manufacturing and Technology Management

________________________________________
Dr. Mark A. Vonderembse, Committee Co-Chair

________________________________________
Dr. Monideepa Tarafdar, Committee Co-Chair

________________________________________
Dr. Doina C. Chichernea, Committee Member

________________________________________
Dr. Peter S. Lindquist, Committee Member

________________________________________
Dr. Patricia R. Komuniecki, Dean
College of Graduate Studies

The University of Toledo

December 2015
 Copyright 2015, Vincent George Whitelock

This document is copyrighted material. Under copyright law, no parts of this document
may be reproduced without the expressed permission of the author.
 An Abstract of

Relationship between Environmental Social Governance (ESG) Management and

Performance – The Role of Collaboration in the Supply Chain

by

Vincent George Whitelock

Submitted to the Graduate Faculty as partial fulfillment of the requirements for the
Doctor of Philosophy Degree in Manufacturing and Technology Management

The University of Toledo

December 2015

This research examines the relationship between environmental social governance (ESG)

collaboration in the supply chain and performance. ESG collaboration can essentially be

described as the interaction within and between organizations in the supply chain

pertaining to joint ESG planning, joint ESG goal-setting, joint ESG decision-making, joint

reduction of negative ESG impacts, and shared ESG know-how or shared ESG knowledge.

This research makes a number of contributions, two of which deserve particular attention.

The first contribution of this paper develops the theoretical basis for linking ESG

collaboration in the supply chain to ESG activity/ practice in the focal firm and to ESG

performance. The second contribution consists of testing empirically the impact of ESG

collaboration on diverse dimensions of ESG activity/ practice and to ESG operational and

financial performance.

Using a combination of stakeholder, agency, institutional, and conventional financial

theories as a referent theoretical base to explain the ESG collaboration—performance link,

this research draws upon differentiation strategy, espoused by the relational view of the

firm (Dyer and Singh, 1998) and the resource-based view (RBV) of the firm (Wernerfelt,

1984) theories for its theoretical development. The relational view of the firm proposes that

iii
organizational capabilities can be developed by creating various combinations of resources

that exist in different supply chain partners (Dyer and Singh, 1998; Takeishi, 2001). In this

regard, collaboration in the supply chain becomes an important organizational capability

that offers the potential for intra- and inter-organizational learning.

Inter-organizational learning involves a problem-solving routine comprising suppliers

and or customers (Schroeder et al., 2002). Likewise, intra-organization learning also entails

a problem-solving routine among internal departments of an organization. This cross-

learning is one of the resources that can be developed among supply chain partners, and it

can impart additional capabilities in organizations (Dyer and Singh, 1998; Grant, 1996a).

The resource based view (RBV) theory of the firm (Barney, 1991; Rumelt, 1984;

Wernerfelt, 1984) proposes that a firm, through the set of resources it possesses, can

develop capabilities providing competitive advantage, so long as these resources are

valuable, rare, inimitable and non-substitutable (VRIN). Environmental social governance

(ESG) management strategy, founded on resources that exhibit the properties proposed by

RBV, can improve ESG and business performance and theoretically create a sustained

competitive advantage. These theories (explain uniqueness in characteristics that cannot be

easily imitated, in order to highlight the factors that play an important role in the

determination of, and making the case for strategic ESG collaboration in the supply chain.

Additionally, more advanced ESG management practices, such as those pertaining to

joint ESG planning, joint ESG goal-setting, joint ESG decision-making, joint reduction of

negative ESG impacts, and shared ESG know-how or ESG knowledge, require the

integration of different stakeholders (e.g., internal departments, suppliers and or customers)

in the supply chain. All of these practices create a web of interactions between supply chain

iv
partners that forms a network of information and knowledge exchange (Vachon et al.,

2001).

The purposes of this research is to propose a definition for ESG Collaboration, propose

a theoretical framework for evaluating the relationship between ESG Collaboration and

Firm Performance, in a supply chain management context, and to examine the proposed

theoretical model. This research uses the focal firm as its level of analysis, proposes a

theoretical model and tests it empirically employing primary data from a large scale survey

and secondary data from multiple databases, using the biggest U.S. listed companies.

Specifically, this research gathers data from the following sources: 1) ESG

Collaboration data from a large scale survey; 2) ESG Management Activity/ Practice data

from a large scale survey; 3) ESG Performance data from a large scale survey; and 4)

Financial Performance data from the Bloomberg, Compustat, Russell and/ or WRDS

databases.

Since this research incorporates two types of data— categorical perceptual (primary)

variables and continuous objective (secondary) variables— this research chooses to

analyze their hypothesized relationships, using the variance based and prediction oriented,

Partial Least Squares Structural Equation Modeling (PLS-SEM) analytical approach. More

specifically, PLS‑SEM path modeling is chosen as the tool to evaluate two causal

models— an ESG Collaboration – Operations Performance model, and an ESG

Collaboration – Financial Performance model, because PLS‑SEM meets the prediction-

oriented goals (i.e., explaining/predicting the target constructs in the structural model) for

identifying causal links in ESG Collaboration strategies, activities and practices that impact

operational performance and financial performance.

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 The results indicate that the proposed theoretical framework, ESG Collaboration –

Performance Link, along with its related structural and measurement models, successfully

explains the variation in their associated latent endogenous variables. More explicitly,

analysis of the findings indicate strong support for all of the hypothesized relationships in

the ESG Collaboration – Operations Performance model, and moderate to strong support

for virtually all of the hypothesized relationships in the ESG Collaboration – Financial

Performance model.

Furthermore, the findings indicate support that a firm’s collaboration on environmental

social governance issues, with its internal organization, its key suppliers, and with its major

customers, leads to increased ESG activity, practices and behaviors resulting in

improvements in ESG performance and in financial performance. The implication for

practitioners and academics is that this proposed theoretical ESG framework has strong

predictive relevance to improve firm performance, and can be used to evaluate risk factors

and identify opportunities for improvement, both of which can potentially impact firm

valuation, negatively or positively. Detailed findings, summary, conclusions, implications,

limitations, reflections and future research opportunities are discussed.

Keywords: Business, Collaboration, Corporate Social Responsibility, CR, Environmental

Social Governance, ESG, Disclosure, Performance, Practices, Supply Chain, Sustainability

vi
To my beautiful children, Velynda Grace, Venyda Gail, Victor George and Valoryn

Genise, as well as to my loving wife, Linda Lorraine, your support and encouragement

throughout this process has enabled any contribution that will be realized as a result of this

work. I look forward to enjoying the fruits of this labor with you. Thank you.

This work is also dedicated to the: The Whitelock; The Lewis, The Beck; The Carter;

The Calhoun; The Bowman; The Moton; The Nelson; The Holmes; The Ellerbee; The

McEwen; The Scotland; The Crockett; The Williams; The McKnight; The Valentine; The

Payton; The Chavis; The Dennis; The Morris; and The Bell families.

It is also dedicated to my close friends and family, for the inspiration and support I have

received from each of them. Also, to my loving, Mother and Father for their love and

guidance, they have given me, throughout my life. I love you all, each and every one.
 Acknowledgements

This experience has truly been a labor of love with the greater sacrifices being made

by my wife, children, siblings, extended family, friends, advisors and mentors. It is because

of these individuals and numerous others, including, foremost, my Savior and Lord Jesus

Christ, that I consider myself blessed and highly favored to submit this work. Each of you

has my deepest gratitude, and I am truly indebted to you.

Given the one page requirement, I must limit the individuals to those whom impacted

me, directly. In no particular order, my most sincere thanks go to Dr. Mark Vonderembse,

Dr. Monideepa Tarafdar, Dr. Doina Chichernea, Dr. Peter Linquist, Dr. Subba Rao, Dr.

Hassan Hassab-Elnaby, Dr. T.S. Ragu-Nathan, Dr. Jeen Lim, Dr. Thuong Le, Dr. Paul

Hong, Dr. Jerzy Kamburowski, Dr. Sonny Ariss, Dr. Stephen Callaway, Dr. William Doll,

Dr. Christine Fox, Dr. Ellen Pullins, Dr. Thomas Gutteridge, Dr. Thomas Sharkey, Dr.

Anand Kunnathur, Dr. Terribeth Gordon-Moore, Dr. Ram Rachamadugu, Dr. Sachin

Modi, Dr. Seth Powless, Dr Anthony Koh, Dr. Bashar Gammoh, Dr. Michael Mallin, Dr.

Gary Moore, Dr. Ozcan Sezer, Dr. Clinton Longenecker, Dr. Saad Alflayyeh, Dr. Jonathan

Chatfield, Dr. Chenglei Hwang, Dr. Dave Nelson, Dr. Ryan Skiver, Dr. Nehemiah Scott,

Armond E. Sinclair, Mohammed T. Hejazi, Dr. Stephan Vachon, Dr. Robert Klassen, Dr.

Norman Johnson, Dr. Wynne Chin, and Robin Kuhl and Susan Welch. I am especially

grateful to my beloved wife, Linda Lorraine Whitelock. Finally, thank you to my loving

and always supportive parents, Mom and Dad, Mrs. Tiny and Mr. Roy George. Whitelock,

and Mrs. Beverly Young Whitelock, and my siblings, Michael Earl Whitelock I, Roy

Sylvester Whitelock and Lucille Marie Whitelock-Booker. It is your lifelong love and

support that have enabled this and all of my accomplishments and dreams. Thank you all.

viii
 Table of Contents

Abstract iii

Acknowledgements viii

Table of Contents ix

List of Tables xiii

List of Figures xiv

List of Abbreviations xvi

1. Introduction 1

1.1 Background - The Case for ESG 2

1.2 Problem Statement 8

1.3 Research Objective / Questions 9

1.4 ESG Research Contributions 10

1.5 Potential Implications 13

1.6 Potential Follow-up Studies 13

2. Literature Review and Model Development 14

2.1 ESG Research Problems 17

2.2 Extra-Financial Factors 18

2.3 ESG Defined 19

2.4 Theoretical Foundation 21

2.5 Theoretical Framework 28

2.5.1 Making the case for ESG Collaboration 28

2.5.2 Theoretical Model 30

2.5.3 Theoretical Constructs - Defined 31

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 2.5.3.1 ESG Collaboration 31

2.5.3.2 ESG Activity/ Practice 32

2.5.3.3 ESG Performance 33

2.5.3.4 Financial Performance 33

2.5.4 ESG Collaboration-Performance link and Research Hypotheses 34

2.5.5 Hypotheses Development – ESG Collaboration Drives Financial

Performance 36

2.5.5.1 ESG Collaboration Linked to Financial Performance 37

2.5.5.2 Governance Collaboration Linked to Environmental

Collaboration, and to Social Collaboration 39

2.5.5.3 Governance Collaboration Linked to Governance Activity/

Practice, and to Performance 43

2.5.5.4 Environmental Collaboration Linked to Environmental

Activity/ Practice 44

2.5.5.5 Social Collaboration Linked to Social Activity/ Practice 46

2.5.5.6 Environmental Activity/ Practice Linked to Performance 49

2.5.5.7 Social Activity/ Practice Linked to Performance 50

2.5.5.8 Governance Activity/ Practice Linked to Performance 52

3. Data Collection Methodology 56

3.1 Instruments Development- Item Generation and Pilot Test 56

3.2 Sample Frame 60

3.3 Data Collection – Secondary Data Methodologies 61

3.4 Data Collection – Measurement Items 62

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 3.5 Causal Model and Hypotheses Testing 62

4. Results 64

4.1 Covariance-Based and Variance-Based Structural Equation Modeling

Overview 64

4.2 Research Goals 67

4.3 Structural Model Characteristics 67

4.4 Measurement Model Specification 68

4.5 Data Characteristics and Algorithm 68

4.6 Methodology Planned: ESG Collaboration (ESGC) 72

4.7 Methodology Planned: Financial Performance (FP) 74

4.8 Reflective Measurement Scale 74

4.9 Path-Modeling Estimation 76

4.10 Model Evaluation 76

4.11 Descriptive Statistics 79

4.12 Assessing the PLS-SEM Output – Operational Performance 80

4.13 Assessing the PLS-SEM Output – Financial Performance 84

5. Summary, Conclusions, Contributions, Implications, Limitations and Reflections 89

5.1 Summary 89

5.2 Conclusions 90

5.3 Theoretical Contributions 92

5.4 Implications for Practitioners 95

5.5 Limitations 98

5.6 Reflections 99

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References (for Chapters 1-3) 104

References (for Chapters 4-5) 115

Figures – ESG Figures 121

Tables – ESG Tables 155

Appendices 183

A. Appendix A – Questionnaire Items - Original 183

B. Appendix B – Typical Environmental Questions during pilot test 184

C. Appendix C – Typical Environmental Questions (Revised) after pilot test 185

D. Appendix D – Typical Questions, after pilot test, Included in the large scale

web-based survey 187

E. Appendix E – Cover letter for the large scale web-based survey 193

F. Appendix F – Follow-up letter for the large scale web-based survey 196

G. Appendix G – Ceres Letter to the Russell 1000 CEOs 197

H. Appendix H – Disaggregated Operational Performance Measurement

Models 203

I. Appendix I – Disaggregated Financial Performance Measurement Models 207

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 List of Figures

Figure 1a Components of S&P 500 Market Value or Market Capitalization. ..............122

Figure 1b Intangible Value as Percent of Market Value for Non-US Markets. ............123

Figure 1c Research Interests – Intersection of 3 Streams of Research. ........................124

Figure 1d Process Steps for Model Evaluation. ............................................................125

Figure 1e ESG Collaboration Hypotheses. ...................................................................126

Figure 1f Population from which Data Sample was obtained. .....................................127

Figure 1g Sample Respondents (20 Firms Self-Identified). ..........................................128

Figure 2a Theoretical Framework for ESG Collaboration – Operational Performance

Link. ..............................................................................................................130

Figure 2b Conceptual Model for ESG Collaboration – Operational Performance Link.

........................................................................................................................131

Figure 2c ESGC – Operational Performance Link – Measurement Model. .................132

Figure 2d Indicator Data (Squared Correlations) - (Operational Performance) (Partial

display due to large number of items). ..........................................................133

Figure 2e Cross Loadings (Squared) – (Operational Performance). .............................136

Figure 2f Latent Variable Squared Correlations (Fornell-Larcker Criterion) –

Operational Performance). ............................................................................138

Figure 2g Summary of Theoretical Level (inner or structural) Model Results –

Operational Performance). ............................................................................139

Figure 2h Path Coefficients – Total Effects – Operational Performance). ...................140

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Figure 3a Theoretical Framework for ESG Collaboration – Financial Performance

Link. ..............................................................................................................142

Figure 3b Conceptual Model for ESG Collaboration – Financial Performance Link. ..143

Figure 3c ESGC – Financial Performance Link – Measurement Model. .....................144

Figure 3d Indicator Data (Squared Correlations) - (Financial Performance) (Partial

display due to large number of items). ..........................................................145

Figure 3e Cross Loadings (Squared) – (Financial Performance). .................................149

Figure 3f Latent Variable Squared Correlations (Fornell-Larcker Criterion) –

Financial Performance). ................................................................................152

Figure 3g Summary of Theoretical Level (inner or structural) Model Results –

Financial Performance). ................................................................................153

Figure 3h Path Coefficients – Total Effects – Financial Performance). .......................154

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 List of Tables

Table 1 Foundational Theories Impacting a Focal Firm’s Strategy for Collaboration

on Environmental Social Governance Risk Factors in a Supply Chain

Context. .........................................................................................................156

Table 2 Definition of ESG Collaboration and Associated Sub-Constructs. ..............157

Table 3 Definition of ESG Activity/ Practice and Associated Sub-Constructs. ........159

Table 4 Definition of ESG Performance and Associated Sub-Constructs. ................161

Table 5 Definition of Business Performance and Associated Sub-Constructs. .........162

Table 6 Comparison of Partial Least Squares and Covariance-Based Analysis. .......163

Table 7 Rules of Thumb for Selecting CB-SEM or PLS-SEM (Hair et al., 2011b). .164

Table 8 Structural and Measurement Model Characteristics (81 Samples). ..............166

Table 9 Structural and Measurement Model Characteristics (20 Samples). ..............167

Table 10 Suggested Sample Size in a Typical Marketing Research. ...........................169

Table 11 Rules of Thumb for Model Evaluation (Hair et al., 2011b). .........................170

Table 12 Guidelines for applying PLS-SEM (Hair et al., 2012). .................................172

Table 13a Descriptive Statistics (81 Samples). .............................................................176

Table 13b Descriptive Statistics (20 Samples). .............................................................179

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 List of Abbreviations

ESGC .........................Environmental Social Governance (ESG)

ESGC .........................Environmental Social Governance Collaboration (ESGC)

EC ..............................Environmental Collaboration (EC)

SC...............................Social Collaboration (SC)

GC ..............................Governance Collaboration (GC)

ESGAP ......................Environmental Social Governance Activity/ Practice (ESGAP)

EAP ............................Environmental Activity/ Practice (EAP)

SAP ............................Social Activity/ Practice (SAP)

GAP............................Governance Activity/ Practice (GAP)

ESGP .........................Environmental Social Governance Performance (ESGP)

EP ...............................Environmental Performance (EP)

SP ...............................Social Performance (SP)

GP ..............................Governance Performance (GP)

FP...............................Financial Performance (FP)

EBIT ...........................Earnings before Interest Taxes (EBIT)

EBITDA .....................Earnings before Interest Taxes Depreciation & Amortization

(EBITDA)

GPR ............................Gross Profit (GPR)

GPM ...........................Gross Profit Margin (GPM)

MV .............................Market Value (MV)

NI_(LOSS) .................Net Income (Loss) (NI_(LOSS))

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OP ..............................Operating Profit (OP)

OPM ...........................Operating Profit Margin (OPM)

PRCC_F .....................Price of Common Stock at Year-End (PRCC_F)

REVENUE .................Revenue (REVENUE)

ROA ...........................Return on Assets (ROA)

ROE............................Return on Equity (ROE)

ROIC ..........................Return on Invested Capital (ROIC)

ROS ............................Return on Sales (ROS)

SCM...........................Supply Chain Members (SCM)

IOU ............................Internal Operating Units (IOU)

KS ..............................Key Suppliers (KS)

MC .............................Major Customers (MC)

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xviii
 Chapter One

Introduction

Environmental Social Governance (ESG) is a set of extra-financial factors that can

have material impacts (positive or negative) on the corporate performance or value of a

firm. It is important to all stakeholders—from investors, employees and boards of directors

to customers, regulators, and activists— of the firm, because ESG provides a means to

gauge a firm’s capacity to endure (sustainability). Chatterji, Levine and Toffel (2009) argue

that ESG topics are too important to rely on metrics that are untested, or when tested, do

not provide transparency. Therefore, in order to effectively evaluate ESG dimensions, and

assess their impact on performance, the discussion or conversation must begin, first, with

a common definition for the construct, environmental social governance, in order to

measure and test it. This research adopts and proposes the following definition (Whitelock

2015):

Environmental Social Governance (ESG) is defined as a set of activity or

processes associated with an organization’s relationship with its ecological

surroundings, its coexistence and interaction with human organisms and other

populations, and its corporate system of internal controls and procedures (such as

processes, customs, policies, laws, rules and regulations, etc.) to direct, administer

and manage all the affairs of the organization, in order to serve the interests of

stockholders and other stakeholders.

Since ESG is important to all firms, it is important to suppliers, customers and focal

firms. Hence, firms, working together as supply chain partners, on ESG issues, can

1
potentially create synergies that can have favorable, material impacts on corporate

performance and firm valuations, thereby supporting the case for ESG collaboration.

1.1 Background - The Case for ESG

With regards to publically traded companies, just as it is with most for-profit firms, the

general consensus is that the goal of the managers is to maximize the wealth of the firm or

to maximize the wealth of the shareholders or stockholders. Wealth is a valuation, and can

be measured in a number of ways (e.g. stock price, book value, net present value of

discounted cash flows, profitability, Tobin’s q, enterprise value, market capitalization,

etc.). One measure of shareholders wealth is the price of the stock multiplied by the number

of shares outstanding (also commonly known as market value). In an efficient market the

price of the assets— in this case shares of stock— reflects all publicly available

information.

There is, however, a growing uneasiness that a firm’s wealth valuation frequently relies

on partial information. This concern exists because of the difficulty in valuing information

on non-physical assets, such as brand equity, reputation, and intellectual property, as well

as on other non-financial information, such as risks, knowledge management, and talent

management. This perception is further reinforced based on the fact that traditional

financial statements, such as the Balance Sheet, Income Statement, Cash Flow Statement,

and Statement of Retained Earnings do not adequately capture information on intangibles

or extra-financial information, such as environmental, social, and governance (ESG) risk

factors. For example, Ocean Tomo (accessed January 21, 2012) reported that the ratio of

tangible (or physical) assets as a % of market capitalization, for the S&P 500, has

2
diminished from 83% in 1975 to 20% in 2010 (see Figures 1a and 1b). This implies, not

only that intangible assets are becoming increasingly more important as a share of an

organization’s value, but it also implies that extra-financial information is needed to

capture the value of the firm’s growing non-physical assets.

As a result, pressure is building for focal firms to do better with extra-financial

information (or information that can have a material impact on the valuation of firms) such

as environmental social governance (ESG) issues. This occurs because ESG factors may

result in risks or opportunities to a firm's valuation (CFA 2008). This scrutiny comes from

diverse stakeholder groups, including end consumers, industrial customers, suppliers, and

financial institutions (Henriques and Sadorsky 1999), who believe that investment

decisions and firm’s wealth valuations could be enhanced, if they properly reflected ESG

risk factors in their analyses (Amaeshi and Grayson 2011).

Fueled by environmental and social concerns, and more recently by egregious

governance breakdowns that triggered the global financial crisis (i.e., Enron, WorldCom

and Parmalat corporations in early 2000s, and the collapse of Bear Stearns Companies, the

insolvency of Lehman Brothers Holdings, Northern Rock and Bernie Madoff, more

recently), investors, financial service firms, and policy-makers are pushing harder than ever

for comprehensive corporate disclosure of environmental, social, and governance factors

(Lubber 2009). For instance, Wal-Mart developed an initiative to get their suppliers (of

which they have 100,000) to report to the Carbon Disclosure Project, a reporting

mechanism to measure their carbon footprint (Efrati 2010). Another example is Proctor &

Gamble, who is driving their supply chains to think about carbon and sustainability (Efrati

2010). These sources of pressure, and others like them, are causing organizational

3
managers to adopt various strategies to limit the impact of their operations and products,

on the natural environment (Vachon and Klassen 2008).

The increased interest in environmental social governance issues has spawned a

number of studies that seek to document the ESG—Performance link. In 2004, a report

was published that concluded that environmental, social, and corporate governance issues

affect long-term shareholder value, and in some cases those effects may be “profound”

(AMWG 2004). In 2005, former United Nations (“UN”) Secretary General Kofi Annan

founded the UN Principles for Responsible Investment (the “PRI”), in part, as a response

to a growing view among investment professionals that ESG issues can affect the

performance of investment portfolios. The impact of ESG issues was regarded to be

material enough that a growing consensus thought that appropriate consideration, of such

issues, is necessary to fulfill the fiduciary duty of investment managers (The Hennick

Centre 2009). In 2006, a second report by Asset Management Working Group (AMWG),

compiled 12 studies conducted by 10 international brokerage firms. It found that: 1) ESG

issues are material– there is robust evidence that ESG issues affect shareholder value in

both the short and long term; 2) The impact of ESG issues on share price can be valued

and quantified; and 3) Key ESG issues are becoming apparent, and their importance can

vary between sectors (AMWG 2006). In October 2007, Mercer and the AMWG

collaborated together and published a report that surveyed academic research into the

relationship between ESG issues and financial performance (AMWG 2007).

In November 2009, Mercer released an updated report, pooling together their latest

results with the 2007 report. This 2009 report focused on the need to develop comparable

and reliable standards in order to “mainstream” the integration of ESG into investment

4
processes. This need was justified by the mixed results Mercer (2009) obtained from

surveying 36 academic studies. Of the 36 studies surveyed, Mercer (2009) found: 20

studies showed evidence of a positive relationship between ESG factors and financial

performance; 13 studies showed evidence that the relationship between ESG and financial

performance were inconclusive; and 3 studies showed evidence of a negative relationship

between ESG and financial performance. In aggregate, the 36 studies conducted between

2004 and 2009 revealed, and confirmed by Mercer (2009), that the ESG—Performance

link findings are not only in disagreement and inconclusive, but that it still needs further

study.

Moreover, more recent studies have been conducted and tend to support this position.

For instance, one recent study claims that no consensus has emerged so far on whether

ESG activity leads, or not, to superior performance (Cavaco and Crifo 2010). Other studies,

in addition, report that there is no conclusive causality link between ESG factors and

financial performance (Barnett 2007; Coleman 2011). Several reasons have been given as

to why these results have been inconclusive. Some reasons given include: methodological

shortcomings; difficulty in obtaining reliable measures; and limitations of qualitative

measures, but these will be further explored in another section.

According to Bassen and Kovacs (2008), ESG activity delivers relevant information,

allowing more differentiated investment judgments by enabling investors to better assess

risks and opportunities (Bassen and Kovacs 2008). ESG activities are boundary-spanning,

and require varying degrees of interaction with other organizations (Vachon and Klassen

2008). These interactions with ESG activities present an opportunity for supply chain

members to capitalize on the benefits of joint ESG planning, joint ESG goal-setting, joint

5
ESG decision-making and shared ESG know-how or ESG knowledge. These intra- and

inter-organizational relationships can occur between departments, within a focal firm, or

between the focal firm and its suppliers and or its customers. Extending this logic, these

intra- and inter-organizational relationships create a network of information and knowledge

exchange (Vachon and Klassen 2008) among the participants. Furthermore, when these

participants work together to resolve ESG issues, they provide not only environmental

social governance benefits, but they also lay the foundation to potentially reap synergistic

economic benefits, as well.

The working together, or collaboration, on ESG issues can occur, not only within an

organization among its internal operational and functional departments, but it can also

occur with upstream organizations, such as with suppliers or suppliers’ suppliers or it may

occur with downstream organizations, such as with customers, or even customers’

customers. In any event, understanding how to link environmental social governance

benefits and performance benefits, among supply chain members have received little or no

examination. Separately, there have been a few studies linking the components of ESG (i.e.

environmental collaboration) to performance, but virtually none linking ESG supply chain

collaboration to performance.

In one of the few studies examining supply chain members working together on

environmental issues, Vachon and Klassen (2008) examined the impact of environmental

collaboration (independent variable) in the supply chain on manufacturing and

environmental performance (dependent variables), using perceptual measures in a survey

of North American manufacturers. They found that environmental collaboration with

primary suppliers was predominantly linked to superior delivery and flexibility

6
performance, and that environmental collaboration with customers was predominantly

linked to better quality performance (Vachon and Klassen 2008).

In positioning this research to fill a gap in the supply chain management literature,

concerning ESG management, this research adopts the “environmental management”

construct and its associated questionnaire items from the Vachon and Klassen (2008) paper,

and then adapts, expands and applies this logic to the interesting, hot and timely, extra-

financial, topic of ESG Management. This research proposes to examine the relationship

among ESG Collaboration (the independent variable), ESG Activity/ Practice (the

mediating variable), ESG Performance (the mediating and dependent variable) and

Financial Performance (the dependent variable). It suggests that the ESG Collaboration—

Financial Performance link is not direct, but is mediated through intermediate constructs,

ESG Activity/ Practice and ESG Performance.

This research looks at the ESG Collaboration—Financial Performance link from the

perspective of the focal firm. It hypothesizes that focal firms’ ESG Activity/ Practice, ESG

Performance and Financial Performance are enhanced through ESG collaboration with

supply chain members— that is, among its internal operational and functional departments,

and with its upstream suppliers and downstream customers.

Moreover, this research seeks to contribute to extant literature by filling a lacuna in the

ESG stream of research. More specifically, this study seeks to contribute through the

following: 1) propose a definition for the construct, environmental social governance

(ESG); 2) propose a definition of ESG Collaboration; 3) construct and propose a theoretical

framework that depicts the relationship between ESG Collaboration and Financial

Performance; 4) specifically, propose a causality link between ESG Collaboration and

7
Financial Performance, that is mediated by ESG Activity/ Practice and ESG Performance;

5) perform data analysis; 6) combine primary (large scale survey) and unique secondary

(archival) data sources; and 7) employ scientific methods such as PLS-SEM analysis to

examine the proposed ESG Collaboration—Performance framework.

1.2 Problem Statement

The foregoing section provides evidence of the materiality of ESG activity for investors

and other stakeholders, but it still leaves questions. Although the term, ESG, is employed

in various contexts— e.g., in risk valuation, in socially responsible investment, and in

corporate responsibility, etc., up to the present, there is no clear general understanding of

this concept (Bassen and Kovacs 2008). The term appears in the United Nations PRI

program, and is also employed by major business consulting firms, yet academic and

business literature does not contain an effective and accurate definition (Bassen and

Kovacs 2008). Additionally, despite academics’ and business professionals’ efforts, there

has yet been no conclusive evidence which could universally either confirm or refute a

direct causal link between good environmental, social, and governance performance and a

firm’s financial performance (UNEP 2007). Moreover, although considerable attention has

been given to this issue, especially in management sciences and organizational economics,

no consensus has emerged on whether ESG activity leads, or does not lead, to superior

performance (Cavaco and Crifo 2010). Therefore, further academic research is needed to

define the construct, ESG, and to document the causal link between ESG issues and

corporate financial performance. This will be one of the most crucial factors determining

the use and proliferation of ESG information (Bassen and Kovacs 2008).

8
 The following is known about these issues.

1. Evaluation of ESG factors enables a thorough understanding of the risks and

opportunities a firm faces, allowing enhanced security selection and risk

management (UNEP 2007).

2. ESG factors are becoming increasingly significant for comprehensive firm

valuation (Bassen and Kovacs 2008).

3. Investors, financial service firms, and policy-makers are pushing harder than ever

for comprehensive corporate disclosure of environmental, social, and governance

factors (Lubber 2009).

4. No consensus has emerged so far on whether ESG activity leads, or does not lead,

to superior performance (Cavaco and Crifo 2010).

This research attempts to understand and provide insight regarding this important issue,

however, more needs to be known, and the following is suggested.

1. Create a scholarly definition of the construct, ESG (Bassen and Kovacs 2008).

2. Build an ESG-Performance model that defines relevant constructs and their inter-

relationships.

3. Test the model empirically, using primary data from a large scale survey and

secondary data from a proprietary database.

4. Understand the causal link between ESG activity and performance (Bassen and

Kovacs 2008).

1.3 Research Objective / Questions

9
What is known, and not known, about ESG provides a springboard from which many other

questions, left unanswered, can be answered, and from which many uncharted areas, can

be explored. Thus, the following questions still remain, and are examined in this research.

1. What is ESG?

2. What is ESG Collaboration?

3. What is ESG Activity/ Practice?

4. What is ESG Performance?

5. What is the relationship between ESG Collaboration and Financial Performance?

6. What is the role of ESG Collaboration in the Supply Chain?

7. What is the relationship among ESG Collaboration in the Supply Chain, ESG

Activity/ Practice, ESG Performance and Financial Performance?

a. What is the relationship among Environmental Collaboration in the Supply

Chain, ESG Activity/ Practice, ESG Performance and Financial

Performance?

b. What is the relationship among Social Collaboration in the Supply Chain,

Social Activity/ Practice, Social Performance and Financial Performance?

c. What is the relationship among Governance Collaboration in the Supply

Chain, Governance Activity/ Practice, Governance Performance and

Financial Performance?

1.4 ESG Research Contributions

In general, this research creates new knowledge and potentially makes contributions to

extant literature by informing on the intersection of following streams of research:

10
Corporate Responsibility/Sustainability (i.e. CSR, TBL, PPP, and ESG, etc.);

Collaboration (i.e. Inter- and Intra-firm collaboration); and Supply Chain Management (i.e.

seller-buyer or supplier-customer) (see Figure 1c). More specifically, this study extends

the research, fills a gap, and contributes to the conversation by intersecting these three

streams of research through the following offerings:

 First, this research proposes definitions for the constructs, ESG, ESG

Collaboration, ESG Activity/ Practice and ESG Performance that includes

environmental, social, governance and economic dimensions;

 Second, this research constructs and proposes a theoretical framework that depicts

the relationship among ESG Collaboration, ESG Activity/ Practice, ESG

Performance and Financial Performance.

 Third, this research implicitly proposes a causality relationship, within the ESG

Collaboration— Financial Performance link framework, that suggests that ESG

Collaboration in the Supply Chain is indirectly related to Financial Performance.

More specifically, this causal relationship purports that the ESG Collaboration—

Financial Performance link is mediated by ESG Activity/ Practice and ESG

Performance.

 Fourth, this research combines primary (large scale survey) and unique secondary

(archival) data sources that include measures, with distinguishing features, that:

o most stakeholders consider to be representative of ESG;

o quantify attributes that clearly differentiates between firms on ESG

grounds;

o are objective and require no interpretation or judgment;

11
 o provide consistent, clear-cut indicators that cannot be misconstrued; and

o emanate from independent, non-biased reporting sources.

 Fifth, this paper avoids certain limitations found with similar studies by

accomplishing the following:

o In order to capture the actual relationship between ESG collaboration and

financial performance, business-specific effects will be controlled for. This

is done to avoid unobserved business-classification that could drive both

ESG collaboration and financial performance. The primary interest is how

ESG collaboration in the supply chain relates to financial performance,

within U.S. public stock firms, not in the spurious relationship of financial

performance and ESG collaboration across any type of company;

o In addition to analyzing ESG in the aggregate, the ESG factors will also be

disaggregated into strategic components— those likely to reduce expenses

or increase revenue or productivity, directly, and those strategic

components likely to be a response to stakeholder social pressure— and

analyzed to determine their impact on performance; and

o Because many empirical studies show that not all ESG dimensions are

equally relevant for performance, or more importantly, that there may be

confounding effects among them, the effects of up to thirty-five ESG

dimensions will be analyzed, separately.

 Sixth, this research employs the variance-based, and prediction-oriented, Partial

Least Squares Structural Equation Modeling (PLS-SEM) analysis to examine the

12
 relationship between 1 or more independent and dependent variables (see Figure

1d).

1.5 Potential Implications

The findings of this research may potentially be important for both academic researchers

and practitioners (investors and corporate strategists). Academic researchers may be

interested in the new information leading to a causal link between ESG collaboration and

financial performance. Practitioners, such as investors may be interested in new evidence

that ESG performance is value relevant, or that certain non-sustainability risks might exist.

Other practitioners, such as firms, might find that they can reduce their risk and improve

their financial performance by promoting certain ESG activities and practices.

1.6 Potential Follow-up studies

Results from this research can potentially form the foundation for the following studies:

 Coordination of ESG Activity/ Practice in the Supply Chain;

 Integration of ESG Activity/ Practice with Supply Chain Management;

 Implementation of Strategic ESG Orientation in the Supply Chain;

 Integration of ESG Activity/ Practice and Green Supply Chain Management; and

 The impact of country or industry specific characteristics on firms’ commitment to

ESG Orientation.

13
 Chapter Two

Literature Review and Model Development

Although a formal review of extant literature reveals a limited amount of research on

environmental collaboration, there is virtually no extant literature examining focal firms

working together with supply chain members on ESG issues. This lack of study regarding

the relationship between ESG Collaboration in the supply chain and financial performance

is bitter-sweet. On the one hand, this lack of research poses significant challenges for

current researchers in their attempts to identify support for their hypothesized relationships,

but on the other hand this lack of study presents opportunities for new and interesting

research opportunities in the area of ESG Collaboration in the Supply Chain.

Of the limited environmental collaboration research, studies reveal what environmental

collaboration activities are, and what they are not. For instance, extant literature reports

that environmental collaboration activities are: 1) not concentrated only on products

(Bowen et al. 2001); 2) not unidirectional and control-oriented, such as site audits,

questionnaires, and other buyers’ requirements that are often blended in the

conceptualization of green supply chain (Zhu and Sarkis 2004); 3) not focused only on

environmental monitoring (Vachon and Klassen 2006); and 4) not focused only on the

immediate outcome of the supplier-, or customer-, environmental efforts (e.g., compliance

to existing regulations) (Vachon and Klassen 2008).

However, the same stream of literature points out some of the key characteristics of

environmental collaboration. This literature stream also reports that environmental

collaboration activities: 1) include production processes (Vachon and Klassen 2008); 2)

focus more on the means by which more environmentally sound operations, processes, or

14
products might be achieved (Vachon and Klassen 2008); and 3) consist of sharing policies

and establishing common goals (Vachon and Klassen 2006) for long term planning and

developing a unique, strategic competitive advantage.

Generally speaking, a focal firm is considered to be the initiator of a business

transaction. It conceives, designs, and produces the offerings (e.g., product, goods,

services, information, and money, etc.) intended for consumption. In the example of an

automotive manufacturer, the focal firm is the automotive manufacturer, because it

conceives, designs, and produces automotive vehicles for consumption. Although, it may

have several suppliers of component parts that go into the automotive vehicle offering, it

usually is classified as the focal firm.

However, there are instances where firms produce the same products for final

consumption, and for components use in other products for later consumption. Examples

of such firms include producers of TV/Monitor, Audio/Video, CD/DVD, phone, radio and

computer, etc. devices that can be used for personal consumption, as well as for

components in other OEM products for later consumption (such as in boats, planes, trains,

and automotive vehicles, etc.). In these examples, as is the case with other examples, the

same producer-firm can be considered a supplier, customer, focal firm, or the final

consumer.

With respect to firms working together, or collaborating, each firm in the supply chain

can be considered a focal firm, because each firm is a buyer of product, goods, services,

information, and money, on the one hand, and is also a seller of product, goods, services,

information, and money on the other hand. Therefore, as the buyer of product, goods,

services, information, and money, the focal firm is considered a customer of the selling

15
firm, and as the seller of product, goods, services, information, and money, the focal firm

is considered a supplier to the buying firm (or the final consumer).

Because each focal firm acts as a buying organization to its suppliers, and as a selling

organization to its customers, various types of collaboration, including ESG collaboration,

can take place simultaneously within a focal firm’s operational and functional departments,

and upstream with the suppliers, as well as downstream with the customers. This intra-

organizational and inter-organizational collaboration, on environmental, social, and

governance issues, present potential synergistic opportunities for the focal firm and the

other participating members in the supply chain.

Figures 2a and 3a present the overall models underlying the theoretical frameworks for

this research. They depict the relationships among four major constructs— ESG

Collaboration, ESG Activity/ Practice, ESG Performance and Financial Performance. ESG

Collaboration is the direct involvement of an organization with its internal departments,

both functional and operational, and with its key Suppliers and major Customers in

planning jointly for ESG management and ESG solutions. ESG Activity/ Practice refers to

investment of resources in routines, processes, practices or activity for the continuous

improvement of firm performance in the area of ESG concerns. ESG Performance is the

operational result that involves reduction in negative impacts, or the increase of positive

impacts resulting from ESG factors. Financial Performance is the quantitative and

marketing impact derived from collaborating with supply chain members on ESG planning

and implementing ESG activities and practices. The model hypothesizes that ESG

Collaboration in the supply chain influences ESG Activity/ Practice, which in turn

influences ESG Performance, which impacts Financial Performance. It also hypothesizes

16
that ESG Collaboration in the supply chain may influence ESG Performance, directly, and

Financial Performance, indirectly.

2.1 ESG Research Problems

The ESG stream of literature, found in organizational, economics and financial research,

identifies several problems that offer opportunities to fill a gap.

 First, conceptually, ESG has not been defined in terms that are generally acceptable,

and ESG has not been adequately distinguished from other corporate responsibility

concepts such as CSR, TBL and Sustainability, etc.

 Second, the current ESG stream of literature points up the issue that the ESG–

Financial performance link is inconclusive (Coleman 2011) for a number of

reasons.

o One reason cited is methodological shortcomings – i.e. misspecification of

analytical models (McWilliams and Siegel 2000).

o Another reason mentioned is the difficulty in obtaining reliable measures of

ESG (van Marrewijk 2003).

o An additional reason talked, about is that measures suffer limitations

because they are qualitative and sourced in surveys or content analysis of

firm documents (Coleman 2011).

 Third, the literature stream identifies that no conclusive causality link between ESG

factors and Financial Performance has yet emerged (Barnett 2007; Coleman 2011).

17
  Fourth, measures found in previous studies to test the financial benefits of corporate

ESG lack distinguishing features (Coleman 2011). According to Coleman (2011),

ideal measures:

o should address behavior that most stakeholders consider to be

representative of ESG;

o should quantify a signal that clearly distinguishes between firms on ESG

grounds;

o need to be objective in that no interpretation or judgment is required;

o provide consistent and unambiguous signals that cannot be misinterpreted;

and

o should emanate from an independent source that is not subject to reporting

bias by the firm, or other body, with an interest in the result.

2.2 Extra-Financial Factors

Extra-financial factors may be understood as qualitative information that describe

outcomes of corporate structures, strategies and processes which in turn have material

impacts on corporate performance (Bassen and Kovács 2008). As evidenced in prior

scholarship, there have been many labels ascribed to extra-financial or non-financial

factors that expose companies to adverse financial impact, or provide companies with

potential financial opportunities. These include constructs such as “sustainability factors,”

“corporate social responsibility (CSR) factors,” “nonfinancial factors,” “extra-financial

factors,” and “social investment factors.”

18
 For the practitioner, these extra-financial or nonfinancial factors traditionally have been

used, by sponsor organizations to: 1) align investment strategy with missions and

philosophies; 2) orient investment decisions with larger societal goals and objectives; and

3) make investment decision-making consistent with personal political views (CFA 2008).

Additionally, academic and commercial efforts have also been made to understand the

potential economic impact of these extra-financial or non-financial factors on groups of

companies. This refers to the attempts made to understand potential new opportunities on

which companies may capitalize, and to identify risks that may place constraints on future

economic resources of a firm (CFA 2008). These efforts to apply non-financial or extra-

financial factors, on groups of companies, tend to reinforce the notion of the materiality of

non-financial or extra-financial factors.

Furthermore, partly due to corporate scandals (i.e., Enron, WorldCom, Tyco, Global

Crossing and Parmalat in the early 2000s) and in some instances outright fraud (i.e., Bear

Stearns Companies, Lehman Brothers Holdings and Northern Rock, more recently) which

has rendered financial data untrustworthy, more recent research has been giving increasing

attention to another kind of non-financial or extra-financial set of risk factors—

Environmental Social Governance (ESG) risk factors. These factors are believed to result

in risks or opportunities that can potentially impact a firm's valuation (CFA 2008).

2.3 ESG Defined

ESG is both an acronym and a construct that describes three central areas of concern—

Environmental, Social, and Governance— that measure the firm’s capacity to endure

(sustainability). ESG is interpreted broadly, frequently with ethical connotations, and is

19
usually mentioned in the context of socially responsible investment (SRI). ESG concerns

are generally considered to be non-financial, or intangible, factors that figure in the

valuation of a firm, and although ESG is widely mentioned in academic and practitioner

research, there are no universally accepted definitions of ESG (IFM 2011).

Extant research on ESG more or less characterize ESG as: Strategic needs (Porter &

Kramer 2006); Social Responsible Investment (SRI) (SIF 2007; Kinder 2005a, 2005b);

Behavior (CFA Institute 2008); Issues (IFM 2011; CFA Institute 2008); Intangible

measures (Bloomberg 2009); Sustainability (Brimble and Stewart 2009); Corporate Social

Responsibility (CSR) (Harmon, Fairfield and Behson 2009); Factors (ESG Managers

2011); Investment methodologies (ESG Managers 2011); and even as Opportunities (IFM

2011) and Risks (IFM 2011). Of all the characterizations of ESG, as previously identified,

sustainability, at a first glance, may appear to be the most appealing as a representative of

ESG. However, research on sustainability provides the definition of sustainability as

development that "meets present needs without compromising the ability of future

generations to meet their needs" (WECD 1987). This definition, although widely cited, still

is vague and ambiguous. Thus, this characterization of ESG makes it difficult to explain

what ESG is, and points up the need for a convincing and precise definition.

The lack of a convincing and precise definition of ESG, not only confuses researchers,

but it also increases the probability of obtaining confounding effects among ESG

dimensions (Manescu 2011). It also increases the difficulty of obtaining reliable measures

of ESG (van Marrewijk 2003), and furthermore, the lack of a universally accepted

definition of ESG also increases the potential for improper analysis, due to misspecification

of analytical models (McWilliams and Siegel 2000). These reasons support the need for a

20
persuasive and precise definition of the construct, environmental social governance (ESG),

and this need is the motivation for the following proposed definition (Whitelock 2015).

Environmental Social Governance (ESG) is defined as a set of activity or

processes associated with an organization’s relationship with its ecological

surroundings, its coexistence and interaction with human organisms and other

populations, and its corporate system of internal controls and procedures (such as

processes, customs, policies, laws, rules and regulations, etc.) to direct, administer

and manage all the affairs of the organization, in order to serve the interests of

stockholders and other stakeholders.

Environmental social governance (ESG), integrated into a firm’s strategic planning,

can be a differentiator, particularly for those who can interpret and relate ESG factors to a

firm’s future prospects. Such firms may potentially develop a competitive advantage,

especially if others should fail to recognize the same risks or opportunities related to those

factors (CFA 2008). In this regard, a Stakeholder strategy that includes active engagement

with a firm’s management, and its Board of Directors on ESG activity, practices, and

processes, can potentially lower risk and enhance long-term value creation. Such an

approach leads to a strategic orientation that enables differentiation, and improved ESG

performance.

2.4. Theoretical Foundation

This section provides the theoretical foundation leading to the linking of ESG collaboration

in the supply chain and performance. In this regard, Stakeholder, Agency, and Prospect

theories are presented first, to help explain the role in determining a strategic orientation,

21
such as with ESG. Then, Raising Rivals’ Costs (RRC), Resource based view (RBV), and

Relational View theories are introduced to form a premise to show how a strategic

orientation, such as ESG can be a differentiator. These theories, individually as well as

collectively, lend support as a foundational base for strategic ESG collaboration of the focal

firm within and among its internal departments, as well as between the focal firm and its

key suppliers and between the focal firm and its major customers (see Table 1), for it is

posited that ESG risk factors can materially impact a firm’s valuation.

Stakeholder Theory (Freeman 1984) views the firm as an organizational entity

through which numerous and diverse participants accomplish multiple, and not always

entirely congruent, purposes (Donaldson and Preston 1995). Freeman defines a stakeholder

as “any group or individual who can affect or is affected by the achievement of an

organization’s objectives” (Freeman 1984: 46). In crafting this definition, Freeman (1984)

took the position that companies produce externalities that affect many parties, which are

both internal and external to the firm (Sarkis, Ginzalez-Torre and Adenso-Diaz 2010).

Externalities often cause stakeholders to increase pressures on firms to reduce negative

impacts and increase positive ones (Sarkis, Ginzalez-Torre and Adenso-Diaz 2010).

As a ‘going concern’, a phrase made popular by John R. Commons (1936), the

established corporation, according to stakeholder theory, is comprised essentially of three

major groups—External stakeholders, Internal stakeholders and Shareholders/

Shareowners. External stakeholders include participants such as: Communities;

Competitors; Customers; Governments; Political Groups; Suppliers; and Trade

Associations. Internal stakeholders include participants such as: Companies; Employees;

‘Financiers’ or ‘Investors’; and Parent Company. ‘Shareholders/ Shareowners’ is the third

22
stakeholder group. ‘Shareholders/ Shareowners’ is distinguished from the terms ‘Investors’

and ‘Financiers’ by referring only to those individuals, institutions, or entities that own

shares of common or ordinary stock in the firm in question (CFA 2008). ‘Investors’ and

‘Financiers’, in this regard, refer to all individuals or institutions who are considering

investment opportunities in shares and other securities of the firm in question.

Agency theory, developed as an adjunct to economic risk research (Holmstrom 1979,

1987; Jensen and Meckling 1976; Ross 1973), describes the relationship between a

principal (the owner of resources) and the agent (those who perform the work). With

respect to the firm, this depiction regards the principal as the shareholder while the agent

is referred to as the strategic decision-making unit within the firm (i.e. employees).

Accordingly, it can be claimed that, ‘‘. . . because executive-level managers are agents for

shareholders, maximizing the present value of the firm is the appropriate motivating

principle for management’’ (Quinn and Jones 1995 p. 22). This view of the strategic

decision-making unit as the economic agent to the shareholder is commonly referred to as

the Principal–Agent Model of the Firm (Morgan and Strong 2003).

Although, Agency theory postulates that principal-agent problems can arise from

interest nonalignment and principals’ inability to monitor agents (Baker 1992), for the most

part, ‘‘managers/agents . . . stay focused on the need for profitable operations to the extent

that they own company stock and/or have part of their compensation contingent on strong

financial performance (interest alignment)’’; and, ‘‘. . . the interests of shareholders/

principals are kept in mind in major corporate decisions by a vigilant board of directors

(monitoring)’’ (Frankforter et al. 2000, p. 322). These agents, therefore, are retained by the

shareholders to reduce risk or exposure, and costs, while increasing returns and value for

23
the firm. For in the risk-return relationship, generally, one can expect to obtain greater

returns for increasing levels of risk, but competitive advantage is achieved by continuously

increasing returns, for a given level of risk, or by continuously increasing returns while

simultaneously reducing levels of risk.

Prospect theory (Kahneman and Tversky 1979), applied to the strategy–performance

relationship, indicates that strategists are risk-seeking when recent performance has been

unsatisfactory and risk-averse when recent performance levels have been attained or

surpassed (Bowman 1980; Bromiley 1991). This notion is manifested in the form of a

‘complacency effect’ where past business performance was found to be positively related

to a firm’s ability to respond to competitors, but negatively related to its motivation to do

so (Jayachandran 2000). In contrast, conventional financial theory suggests a strategy–

performance link that proclaims a positive risk-seeking and business return relationship.

All of these factors and theories play an important role in the determination of strategic

orientation within the firm and commonly explain differences in the manifest strategies

firms pursue in their main marketplace (Morgan and Strong 2003). Such an example occurs

when the agent exercises significant managerial discretion. In this case, the autonomy

created, by the agent, can allow the firm to pursue courses of action that satisfy their self-

interest to develop a certain composition of strategic orientation (Shaw et al. 2000 p. 612).

However, the main theoretical perspective, for employing a strategic orientation, such

as with ESG, is the development of capabilities that differentiate one firm from its rivals,

enable the firm to improve performance, and thereby provide competitive advantage. This

perspective is embodied in Raising Rivals’ Costs (RRC) theory (Director and Levi 1956),

in Differentiation strategy (Porter 1985a), in the Resource based view (RBV) theory of

24
the firm (Barney 1991; Rumelt 1984; Wernerfelt 1984) and in extensions of RBV— the

Relational View (Dyer and Singh 1998).

According to the Raising Rivals’ Costs (RRC) theory, firms essentially have three

different types of strategies to increase the cost of their rivals (Director and Levi 1956). All

involve increasing the cost of a resource to competitors (McWilliams et al. 2002). The first

type of strategy involves the firm monopolizing a resource that is necessary to competitors.

When this can be accomplished, the firm can charge competitors a monopoly price, while

charging a lower price when transferring the resource within its own firm. This creates a

cost advantage for the initiating firm (Sibley and Weisman 1998; McAfee 1999). The

second type of strategy that increases the cost to their rivals is to use differentiation to

secure a unique reputation and public recognition as a high status firm (D’Aveni 1996).

High status firms have been shown to have particular access to low cost capital (Fombrun

and Shanley 1990) and to have unique pricing benefits (Podolny 1993), where low status

firms have been shown to have actually been blocked out of bidding processes (Stevens

1991). The third Raising Rivals’ Costs tactic is to use the political process to influence

legislation or agency rulings that restrict the use of a resource by competitors. When this

can be accomplished, the government restriction on the resource forces competitors to pay

a higher price for the resource or to use an inferior resource (McWilliams et al. 2002). As

with the first strategy, this strategy creates a cost advantage for the initiating firm.

The second Raising Rivals’ Costs (RRC) strategy, the one that uses differentiation

and creates a unique reputation that cannot be easily imitated (McWilliams et al. 2002), is

an example of a strategy that enables firms to outperform their rivals through fair play, and

by effectively incorporating externalities in decision making. Differentiation strategy, as

25
espoused by Michael Porter is consistent with Raising Rivals’ Costs strategy in that

differentiation strategy, involves creating a customer perception that a product or service

[or company] is superior to that of other firms, based on brand, quality, and performance,

so that a premium price can be charged to customers (Porter 1985a).

The resource-based view (RBV) theory of the firm (Barney 1991; Rumelt 1984;

Wernerfelt 1984) posits that a firm, through the set of resources it possesses, can develop

capabilities that provide competitive advantage. RBV has become a valuable theoretical

perspective increasingly used to analyze manufacturing and supply chain strategies (Hult

et al. 2006; Schroeder et al. 2002; St. John et al. 2001). It is consistent with RRC and

differentiation strategy in that RBV focuses on the heterogeneity of firm resources, to

create a valuable, rare, inimitable and non-substitutable (VRIN) framework, as the primary

source of differentiation and sustained competitive advantage.

The relational view suggests that organizational capabilities can be developed by the

combination of resources existing in different organizations in the supply chain (Dyer and

Singh 1998; Takeishi 2001). Sharing these capabilities, through collaboration, creates

value among supply chain members in the form of inter-organizational learning (Vachon

and Klassen 2008). Inter-organizational learning entails a problem-solving routine

involving supplier and/or customers (Schroeder et al. 2002), and in addition to being one

of the resources that can be developed in the supply chain, inter-organizational learning

can instill additional capabilities in organizations (Dyer and Singh 1998; Grant 1996a).

In summary, individually as well as collectively, these theories lend support as a base

for strategic ESG collaboration in the Supply Chain, for it is posited that ESG risk factors

can materially impact a firm’s valuation. Stakeholder theory holds the firm as an entity

26
through which many and varied participants accomplish multiple purposes. It takes the

position that firms produce externalities that affect many parties, whether internal or

external to the firm, and that these externalities often cause stakeholders to increase

pressures on firms to reduce negative impacts and increase positive ones. Agency theory

puts forward the notion that executive-level managers are agents for shareholders, and

maximizing the present value of the firm is the appropriate motivating principle for

management. This implies that a firm’s agents are interested in increasing returns relative

to exposure to negative forces, many of which are disclosed in ESG information. Prospect

theory indicates that strategists are risk-seeking when recent performance has been

unsatisfactory and risk-averse when recent performance levels have been attained or

surpassed, opening the door for disclosure of ESG information to drive leaders to reduce

negative performance and to increase positive results. Raising Rivals’ Costs (RRC) theory

hypothesizes that differentiation creates a unique reputation that cannot be easily imitated.

Differentiation strategy, espoused by RRC theory, is an example of a strategy that enables

firms to outperform their rivals through fair play, and by effectively incorporating

externalities in decision making. Differentiation strategy involves creating a customer

perception that a product, service or company is superior to that of others, based on brand,

quality, and performance. Thus, it is believed that reputational capital can be enhanced by

incorporating ESG considerations into a firm’s decision-making and communication

strategies, and is also tied to long-term sustainability. Resource Based View (RBV) theory

posits that a firm, through the set of resources it possesses, can develop capabilities

providing competitive advantage, and Relational View theory suggests that organizational

capabilities can be developed by the combination of resources existing in different

27
organizations in the supply chain. Sharing these capabilities, through collaboration, creates

value among supply chain members in the form of intra- and inter-organizational learning.

Together, the aforementioned theories— Stakeholder, Agency, Prospect, Raising

Rivals’ Costs (RRC), Differentiation strategy, Resource Based View (RBV) and Relational

View— suggest that differentiation in capabilities and in resources, developed through

inter-organizational workings among supply chain members, is a primary source of

improved performance and sustained competitive advantage (see Table 1). This “working

together,” or collaboration among supply chain members, can equally benefit other

domains, including environmental social governance (ESG) areas.

2.5 Theoretical Framework

2.5.1 Making the case for ESG Collaboration

Over the past half century, studies that employ definitions of Corporate Social

Responsibility (CSR) identify characteristics of CSR as encompassing economic, legal,

ethical, and discretionary [later referred to as philanthropic] expectations (Carroll 1979 p.

500, 1991 p. 283). Because this definition has been used successfully for research purposes,

it has become important in thinking about the ‘business case’ of CSR (Carroll and Shabana

2010).

As with Corporate Social Responsibility (CSR), the rationale or case for ESG is similar,

and may be categorized under four arguments: (1) reducing cost and risk; (2) strengthening

legitimacy and reputation; (3) creating win–win situations through synergistic value

creation with stakeholders; and (4) building competitive advantage (Kurucz et al. 2008).

28
 Carroll and Shabana (2010) expand upon these arguments in building a business case

for CSR (Carroll and Shabana 2010), and likewise this approach can be applied for building

the ESG case. First, in this regard, cost and risk reduction arguments could posit that ESG

may allow a firm to realize tax benefits or avoid strict regulation, which would lower its

cost. The firm could also lower the risk of opposition by its stakeholders through ESG

activities. Second, legitimacy and reputation arguments could hold that ESG activities may

help a firm strengthen its legitimacy and reputation by demonstrating that it can meet the

competing needs of its stakeholders and at the same time operate profitably. A firm

therefore would be perceived as a member of its community, and its operations would be

sanctioned. Third, improved competitiveness arguments could contend that, by adopting

certain ESG activities, a firm may be able to improve their reputational standing, improve

their ESG performance, improve profitability, build stronger relationships with its

stakeholders, build employee loyalty, reduce employee turnover, attract better employee

talent, and build customer loyalty, etc. resulting in the potential ability of the firm to

differentiate itself from its industry peers and competitors. Fourth, synergistic value

creation arguments could hold that ESG activities may present opportunities for a firm that

would allow it to fulfill the needs of its stakeholders and at the same time pursue its profit

goals.

The pursuit of these opportunities, made possible through examining, documenting,

and illustrating that ESG collaboration in the supply chain has a positive economic impact

on performance, could have important implications. These implications could drive interest

among academics and practitioners, and encourage researchers to make the business case

of ESG collaboration in the supply chain.

29
 This prospect provides the motivation to: 1) define key ESG collaboration constructs

and sub-constructs; 2) build a research model that defines the relevant constructs and their

inter-relationships; and 3) validate the hypotheses that describe the complex relationships

through primary and secondary empirical data. This is done in the context of ESG risk

factors, and is depicted in a theoretical framework, described in the next section.

2.5.2 Theoretical Model

This section expands on the simplified research models introduced earlier in Figures 2a

and 3a. The expanded research models are depicted in Figures 2b and 3b. These figures

identify the sub-constructs associated with the three major constructs. The first major

construct, ESG Collaboration (ESGC), is comprised of three sub-constructs—

Environmental Collaboration (EC), Social Collaboration (SC), and Governance

Collaboration (GC). The second major construct, ESG Activity/ Practice (ESGAP), is also

comprised of three sub-constructs— Environmental Activity/ Practice (EAP), Social

Activity/ Practice (SAP), and Governance Activity/ Practice (GAP). Like the previous two

major constructs, the third major construct, ESG Performance (ESGP) is also comprised of

three sub-constructs— Environmental Performance (EP), Social Performance (SP), and

Governance Performance (GP). The fourth major construct, Financial Performance, is

comprised of Quantitative Performance (QP) and Marketing Performance (MP) indicator

compound annual growth rates (CAGR)— EBIT, EBITDA, Gross Profit Margin (GPR),

Gross Profit (GPR), Net Income (Loss) (NI_(LOSS)), Operating Profit Margin (OPM),

Price of Common Stock (PRCC_F), Revenue, Return on Assets (ROA), Return on Equity

(ROE), Return on Invested Capital (ROIC), and Return on Sales (ROS).

30
 The expanded models, in Figures 2b and 3b, hypothesize that ESG Collaboration in the

supply chain influences ESG Activity/ Practice, which in turn influences ESG

Performance, and thus Financial Performance. They also depict the underlying model with

major constructs, sub-constructs, potential data sources, and four significant hypothesized

relationships. These four hypothesized relationships comprise eleven hypotheses, and are

enumerated in Figure 1e.

2.5.3 Theoretical Constructs - Defined

In this section, definitions for the major constructs, sub-constructs and measurement items

are presented. These definitions are included in tables as outlined below:

 Table 2 – Definition of ESG Collaboration and Associated Sub-Constructs’;

 Table 3 – Definition of ESG Activity/ Practice and Associated Sub-Constructs;

 Table 4 – Definition of ESG Performance and Associated Sub-Constructs;

 Table 5 – Definition of Financial Performance and Associated Sub-Constructs

2.5.3.1 ESG Collaboration

ESG Collaboration (ESGC) is defined as the direct involvement of an organization with its

internal departments, both functional and operational, and with its key Suppliers and major

Customers in planning jointly for ESG solutions. ESG Collaboration can include, in

addition to joint ESG planning, joint ESG goal-setting, joint ESG decision-making, joint

reduction of negative ESG impacts, and shared ESG know-how or shared ESG knowledge.

In this regard, ESG collaboration is less concerned with the immediate outcome of supply

31
chain member efforts (e.g. compliance with existing rules and regulations), and more

interested in the means by which more robust and positive ESG solutions may be achieved.

Accordingly, the focus in this paper is on collaboration among a focal firm, its internal

operations and functional departments, its suppliers and suppliers’ supplier and its

customers and customers’ customer on issues related to, associated with, or being

concerned with the ecological impact of altering the surroundings, its co-existence and

interaction with other organisms, and its system of internal controls and procedures by

which individual companies are managed. Collaboration in this context, envisions healthy

intra- and inter-organizational relationships where focal firms, suppliers and customers

plan together the reduction of negative ESG impact from procedures, production processes,

products and relationships.

ESG collaboration is comprehensive in the sense that it includes the exchange of

technical and nontechnical information, and requires a mutual willingness to learn about

each other’s operations in order to plan and set goals for ESG improvement. ESG

collaboration also implies cooperation to reduce the ESG impact associated with material

and information flows in the supply chain. Healthy ESG collaboration, not only

encompasses a good understanding of each other’s responsibilities and capabilities in

regard to ESG management, but it also assumes that benefits, including environmental,

social, governance and economical ones, will accrue to all participating parties. ESGC

encompasses the sub-constructs, Environmental Collaboration (EC), Social Collaboration

(SC), and Governance Collaboration (GC).

2.5.3.2 ESG Activity/ Practice

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ESG Activity/ Practice (ESGAP) refers to investment of resources in routines, processes,

practices or activity for the continuous improvement of firm performance in the area of

ESG concerns. These routines, processes, practices or activity are implemented to

minimize potential negative impacts on the environment, on society and on corporate

governance. This dimension addresses how a company manages a broad range of ESG

operational issues in their company. It expresses actually what the firm does, regarding its

ESG activity. ESGAP encompasses the sub-constructs, Environmental Activity/ Practice

(EAP), Social Activity/ Practice (SAP), and Governance Activity/ Practice (GAP).

2.5.3.3 ESG Performance

ESG Performance (ESGP) is defined as the achievement or accomplishment of given ESG

tasks measured against preset known ESG benchmarks or standards of accuracy,

completeness, costs, and speed. ESGP encompasses the sub-constructs, Environmental

Performance (EP), Social Performance (SP), and Governance Performance (GP).

2.5.3.4 Financial Performance

Financial Performance (FP) is the quantitative result obtained from investing in routines,

processes, practices or activity that are implemented to minimize potential negative

impacts on the organization. It also refers to high acts of a firm where its business results

are superior to that of directly comparable organizations. ‘‘Superior implies that firms seek

a level of . . . performance that exceeds that of referents, often its closest competitors’’

(Morgan and Strong 2003; Porter 1991; Chakravarthy 1986). Financial Performance (FP)

encompasses the sub-constructs, EBIT, EBITDA, Gross Profit Margin (GPR), Gross Profit

33
(GPR), Net Income (Loss) (NI_(LOSS)), Operating Profit Margin (OPM), Price of

Common Stock (PRCC_F), Revenue, Return on Assets (ROA), Return on Equity (ROE),

Return on Invested Capital (ROIC), and Return on Sales (ROS), and is measured in

compound annual growth rates (CAGR) over a four year period.

2.5.4 ESG Collaboration—Performance link and Research Hypotheses

Working together, or collaboration, by focal firms with upstream suppliers and downstream

customers, goes beyond existing market boundaries. Collaboration enables focal firms to

grow through external networking, beyond cross-functional integration (Hong and Jeong

2006). Collaboration utilizes value chain capabilities to deal with supply chain issues, and

develops organizational capabilities (Lorenzoni and Lipparini 1999). Collaboration

includes knowledge integration and cooperation between organizations (Vachon and

Klassen 2008), and in order for focal firms to achieve increasing benefits afforded by

collaborative activities, stand out, and become dominant among their peers, these firms

require inter-organizational business process and relationship capabilities to utilize existing

strengths (Hong and Jeong 2006). These strengths, among many, may include product and

service development capabilities and supplier and customer relationship skills (Hong and

Jeong 2006).

Collaboration attributes and capabilities are generally recognized as resources that

might generate competitive advantage (Grant 1996a), and case evidence supports the

collaboration—performance link. Some cases cited in extant literature, during the last

decade or so, include: Improved product quality (Gavaghan et al. 1998); improved

productivity (Geffen and Rothenberg 2000); and improved financial performance (Carter

34
et al. 2000). However, not only are collaboration attributes and capabilities expected to

translate into improved cost and quality (Hart 1997; Porter and van der Linde 1995), as

suggested in extant literature, but collaboration attributes and capabilities can also be

expected to translate into other dimensions as well, such as improved environmental

performance (Vachon and Klassen 2008).

In this context, environmental collaboration takes the form of joint planning and

decision making regarding environmental issues (Vachon and Klassen 2008). This view is

consistent with examples and cases presented in the green supply chain literature (Geffen

and Rothenberg 2000; Hall 2000; Handfield et al. 1997), and include activities such as

green purchasing (Zsidisin and Siferd 2001), design for the environment (Vachon et al.

2001), life-cycle analysis (Vachon et al. 2001), reverse logistics (Prahinski and

Kocabasoglu 2006; Vachon et al. 2001) and product stewardship (Snir 2001).

The common thread among these collaborative activities is that they are all boundary-

spanning environmental activities, and they require varying degrees of interaction with

other organizations upstream and downstream in the supply chain (Vachon and Klassen

2008). These inter-organizational relationships create a network of information and

knowledge exchange (Vachon and Klassen 2008) among the participants, and the working

together, or collaboration, on resolutions to environmental issues, provide not only

environmental benefits, but also the potential for synergistic economic benefits, as well.

Additionally, environmental collaboration was found to be directly associated with a

proactive environmental management orientation (Bowen et al. 2001), and was also

recognized as leading to the development of capabilities in the sense of the natural-

resource-base-view (NRBV) of the firm (Russo and Fouts 1997). NRBV considers the

35
natural environment into RBV to theoretically create a sustained competitive advantage,

and has been associated with positive environmental performance (Aragon-Correa 1998;

Porter and van der Linde 1995).

This paper argues that focal firms, attempting to achieve sustainability, improved firm

performance and competitive advantage, can enhance their chances by collaborating with

its internal operational and functional departments, and with its upstream suppliers and

downstream customers in the supply chain, regarding, not only environmental practices,

but also regarding social and governance practices, as well. Therefore this paper logically

extends the collaboration—performance link to include environmental social governance

collaboration in the supply chain by proposing the following links: 1) ESG Internal

Collaboration—financial performance link; 2) ESG Supplier Collaboration—financial

performance link; and 3) ESG Customer Collaboration— financial performance link. Thus,

this paper, proposes a causal environmental social governance supply chain

collaboration—financial performance theoretical model, and accordingly, hypothesizes

that ESG Collaboration has an indirect relationship with financial performance of the focal

firm that is mediated by intermediate constructs, ESG Activity/Practice and ESG

Performance. For that reason, this paper suggests the following series of hypotheses, in the

next section, to help explain the following hypothesized relationships.

2.5.5 Hypotheses Development – Environmental Social Governance (ESG)

Collaboration Drives Financial Performance

Collaboration usually involves joint planning and joint decision-making regarding

pertinent issues, and generally spawns two key competitive advantages. The first

36
competitive advantage of collaboration points up the fact that collaboration includes

knowledge integration and cooperation between organizations. These benefits have been

recognized as resources that can generate competitive advantage (Grant 1996a). In this

context, focal firms that adopt collaborative activities with their internal operating

departments and their key suppliers, and major customers can develop organizational

capabilities (Lorenzoni and Lipparini 1999), which in turn, can be expected to transform,

not only into features, such as cost and quality (Hart 1997; Porter and van der Linde 1995),

but also into improved operational, financial and marketing performance. Literature

review, regarding collaboration, identifies case evidence giving support to the linkage

between collaboration and improved productivity (Geffen and Rothenberg 2000). It also

identifies limited surveys that support improved product quality (Gavaghan et al. 1998)

and improved financial performance (Carter et al. 2000).

The second competitive advantage of collaboration points up the fact that collaboration

is directly associated with a proactive management orientation (Bowen et al. 2001). A

proactive management orientation is recognized as leading to the development of

capabilities (Russo and Fouts 1997), and is often associated with positive performance

(Aragon-Correa 1998; Porter and van der Linde 1995), because a proactive management

orientation anticipates potential issues and attempts to eradicate them before they become

unmanageable.

2.5.5.1 ESG Collaboration Linked to Financial Performance

ESG Collaboration is a proactive management orientation that seeks joint planning and

joint decision-making, with internal operating departments and key suppliers, and major

37
customers, in order to share knowledge, cooperate with each other, and jointly achieve

goals on ESG issues. Consistent with the benefits obtained with collaboration on other

supply chain issues, it is expected that ESG collaboration can also achieve competitive

advantages associated with resources such as knowledge integration, and intra- and inter-

organizational cooperation. Furthermore, ESG collaboration is also expected to develop

organizational capabilities that can be translated into improved activities and practices,

improved ESG Performance, and to improved Financial Performance (FP) or, more

specifically, to operational, quantitative and market performances.

As indicated earlier, collaboration can occur internally, within an organization or

externally, between a firm and its suppliers, or between a firm and its customers. Cohen

and Roussel (2005), found in their research, that companies, frequently, do not effectively

collaborate internally. The lack of successful internal collaboration, by a focal firm, implies

that external collaboration will also be ineffective. This finding supports the notion that

internal collaboration is a prerequisite to external collaboration. Also consistent with the

‘internal collaboration, first’ logic, Erhun and Keskinocak (2011), in their research, argue

that collaboration should often start with internal departments within a firm, and then

extend externally outside a firm.

Collaboration with external supply chain members increases internal collaboration of

the focal firm (Stank et al. 2001), and according to some studies, focal firms, “that have

learned to collaborate internally, are the most successful in creating collaborative

relationships” (Sabath and Fontanella 2002). Furthermore, such collaboration can create

synergy that fosters improvement across the broader supply chain network (Vachon and

Klassen 2008).

38
 The literature on collaboration identifies that collaboration internally, within

organizations, is beneficial and leads to external collaboration, and that collaboration

externally, without organizations, is also beneficial and leads to internal collaboration. The

logical extension of this repetitive collaboration cycle reinforces itself, and implies that

internal collaboration increases external collaboration, and external collaboration, in turn,

increases internal collaboration, and so on, and so on. Organizations participating in this

collaboration cycle can logically be expected to develop capabilities and resources that are

valuable, rare, inimitable and non-substitutable, which can lead to unique competitive

advantages and improved performances.

Collaboration essentially refers to a tight coupling between (and within) firms seeking

to achieve mutual goals. Collaboration is an intermediate form of hybrid governance, lying

between the two ends of the governance continuum of vertical integration and market

exchange (Cao and Zhang 2011). In this regard, collaboration puts emphasis on governance

through relational and contract means (Nyaga et al. 2010), thereby, implying that

governance collaboration is an appropriate construct to capture the joint relationship

between (and within) firms.

2.5.5.2 Governance Collaboration Linked to Environmental Collaboration, and to Social

Collaboration

Governance Collaboration (GC) in the supply chain is important to all supply chain

members, from the suppliers’ supplier, to the focal company, to the customers’ customer.

Since the supply chain is a network of companies, a governance failure in any one of the

nodes of the network can have dramatic consequences for the remaining supply chain

39
members and for the entire supply chain. Governance collaboration with supply chain

partners, like collaboration on other supply chain issues, can achieve competitive

advantages associated with knowledge integration and intra- and inter- organizational

cooperation. Additionally, these resources can lead to capabilities that translate to

improved activities and practices, as well as improved operational, financial and market

performances. Therefore, governance is a factor that should not be ignored, but should be

considered in seeking the best possible results for focal firms and their supply chain

partners.

The past couple of decades have highlighted the role that risks, posed by governance

breakdowns, can have on society. These risks are often cited for the governance failures at

Enron Corporation, Worldcom, Parmalat, and others in the early 2000s and the more recent

troubles at the Bear Stearns Companies, Lehman Brothers Holdings, and Northern Rock.

The governance failures cited most often include: a lack of transparency and internal

controls; inadequate risk management systems; and remuneration systems that are

disconnected from the long-term strategic interests of the company. Other failures include:

inadequate corporate checks and balances on insiders’ activities; inadequate protection of

shareowners from the misplaced priorities of board members; the manipulation and

misappropriation of company resources by management; the misunderstanding of risk (or

failure to adequately measure risk) by management and other groups that exercised

significant influence over a company’s affairs; and, in some instances, outright fraud (CFA

2009).

These governance failures have resulted in the loss of trillions of dollars of investors’

capital around the world, and the loss tens of thousands of jobs. As a consequence,

40
academics and investors have continued to probe the link between corporate governance

and performance to define exactly what constitutes good corporate governance at a level

that is measurable by researchers and investors (Larker, Richardson and Tuna 2007).

As such, a number of studies, published in recent years, reinforce the link between good

corporate governance and strong profitability, and between good corporate governance and

investment performance. (See Gompers, Ishii and Metrick 2009; Brave, Jiang, Thomas and

Partnoy 2008; Bhagat and Bolton 2007; Larker, Richardson and Tuna 2007; Anson, White

and Ho 2004; Brown and Caylor 2004; and Bauer and Guenster 2003). These studies

suggest that good corporate governance plays a significant role in maintaining viable

entities, and in safeguarding investors’ interests. Furthermore, good corporate governance

effectively serves the interests of stockholders and other stakeholders, leading to

sustainable enterprises.

In the Corporate Social Responsibility (CSR) stream of literature, internal and external

monitoring (by board leadership, independent boards, institutional investors, and security

analysts) has been positively linked to corporate social responsibility (CSR) (Jo and

Harjoto 2011). Although CSR does not specifically address governance management, as

does environmental social governance (ESG), CSR does include the other two—

environmental variables (e.g., product, environment, etc.) and social variables (e.g.,

employee, diversity, community, etc.) (Hillman and Keim 2001; Baron et al. 2011; and Jo

and Harjoto 2011).

Corporate Governance, according to Jo and Harjoto (2011), positively influences

Corporate Social Responsibility (CSR), leading to a proactive environmental management

orientation (Bowen et al. 2001). Therefore, collaboration on environmental social

41
governance activity/ practice, being a form of proactive management, is posited to be

linked toward preventing failures, rather than toward troubleshooting, appraising or

monitoring activities.

The logic, gleaned from literature review, and validated by executive experience,

confirm that good corporate governance matters. It starts within the focal firm, and is

improved through the collaboration process with supply chain partners. Good governance

promotes trust in the firm, and in its people, and it improves morale among staff and

stakeholders. It enhances the perception of the organization among people and

stakeholders, and leads to improved reputations. Good corporate governance ensures that

rules, regulations and laws, particularly those associated with environmental and social

issues, are followed, and when not followed, corrective action is implemented.

Since Corporate Governance positively influences Corporate Social Responsibility

(CSR) (Jo and Harjoto 2011), and since CSR includes environmental and social variables

(Hillman and Keim 2001; Baron et al. 2011; and Jo and Harjoto 2011), which implies that

corporate governance positively influences environmental and social factors, and since the

cycle of collaboration leads to increased collaboration (Stank et al. 2001; and Erhun and

Keskinocak 2011; and Jo and Harjoto 2011), a logical extension can be made to link

Governance Collaboration (GC) to Environmental Collaboration (EC), and Governance

Collaboration (GC) to Social Collaboration (SC), resulting in the following hypothesized

relationships:

Hypothesis 1a (H1a). As a firm’s Governance Collaboration in the supply chain

increases, its Environmental Collaboration should increase.

42
 Hypothesis 1b (H1b). As a firm’s Governance Collaboration in the supply chain

increases, its Social Collaboration should increase.

2.5.5.3 Governance Collaboration Linked to Governance Activity/ Practice, and to

Performance

Academic research and practitioner experience confirm that good corporate governance is

an essential factor to the success of any enterprise. It connects the firm, and its’ Board, to

its membership and stakeholders. It improves the quality of the decisions that are made,

and it improves the ability of the organization to weather a crisis. It pursues excellence,

seeks continuous improvement, and ensures people and organizations are accountable for

their actions and decisions. Good governance establishes activities and practices that

clarify authority, simplify decision-making, improve financial stability, and assure goals

are established and achieved, in order to serve the interests of stockholders and other

stakeholders.

Collaboration, as supported by extant literature, is linked to capabilities and resources

that translate to improved activities and practices. Organizations participating in the

collaboration cycle can logically be expected to develop capabilities and resources that are

valuable, rare, inimitable, and non-substitutable, which can lead to unique competitive

advantages and improved performances. Since a number of studies, published in recent

years, reinforce the link between good corporate governance and financial performance

(Gompers et al. 2003; 2010; and Jo and Harjoto 2011), and since collaboration is linked to

improved activities and practices, then a logical extension can be made to link Governance

Collaboration (GC) to Governance Activity/ Practice (GAP), Governance Activity/

43
Practice (GAP) to Governance Performance (GP), and Governance Performance (GP) to

Financial Performance (FP). Thus, these associations, in the supply chain context, can

plausibly lead to the following hypothesis:

Hypothesis 2c (H2c). As a firm’s Governance Collaboration in the supply chain

increases, its Governance Activity/ Practice should increase.

2.5.5.4 Environmental Collaboration Linked to Environmental Activity/ Practice

Institutional theory suggests that institutional pressures influence organizations to adopt

certain management activities and practices. The premise of this theory makes it

appropriate to help explain firms’ adoption of environmental, social, and governance

management practices.

Institutional theory highlights the role of social and cultural pressures imposed on

organizations (Scott 1992). It does so by influencing managerial decision-making

regarding organizational practices and structures. According to DiMaggio and Powell

(1983), institutional theory, contain three institutional mechanisms— coercive, mimetic

and normative isomorphism. These institutional mechanisms create a basis for developing

a common culture and mindset. The common culture and mindset is designed to produce

similar activities and practices across organizations that share a common organizational

field. Such a field includes, not only, resource and product consumers, regulatory agencies,

and other organizations that produce similar services or products (DiMaggio and Powell

1983, p. 148), but it also includes key suppliers, major customers, and operational and

functional departments of focal companies, as well.

44
 Jennings and Zandbergen (1995) argue that, coercive factors (particularly, in the form

of industrial self-regulation, government regulations, and regulatory enforcement) have

been the main thrust of environmental management practices, and because of that, firms

throughout each industry have implemented similar practices. They maintain that firms that

share the same organizational field are affected in similar ways by the institutional forces

that originate from them. One example is the coercive force that manifests itself in

customer demands. In this regard, focal firms acquiesce to adopting environmental

management activities and practices (such as certifying to the ISO 14001 environmental

management system (EMS) international standards), because major customers or

consumers demand that such practices be adopted and implemented. This same coercive

pressure is mimicked and applied, by focal firms, in order to require key suppliers to adopt

and implement the same ISO 14001 international organization standards. In this regard,

firms, that share a common organizational field, are persuaded and incentivized to

collaborate, adopt and succumb to these isomorphic institutional pressures, because of the

potential business and financial rewards (such as sales, market share, rents and profits, etc.)

that collectively accrue to the participants in the network. Hence, collaboration with firms,

in the same organizational field, results in establishing standards, practicing imitation and

creating similarity in form, with respect to activities and practices.

Firms, participating in the environmental collaboration cycle, as described herein,

develop capabilities and resources that are valuable, rare, inimitable and non-substitutable.

These capabilities and resources translate to improved environmental activities and

practices, and although coercive pressures may help explain the adoption of environmental

activities and practices by some participants, the participants generally continue to

45
implement such activities and practices to reap the potential business and financial rewards,

that may accrue to the supply chain members. Alternatively, not implementing such

environmental activities and practices may result in the loss of business and financial

rewards, or even result in damage to brand equity or reputational capital, or the imposition

of fines, suspensions, product recalls, disruptions to operations, forced shut-downs of

facilities, firms or industries, or even worse, imprisonment. Therefore, a logical extension

can be made to link Environmental Collaboration (EC) to Environmental Activity/ Practice

(EAP) and Environmental Activity/ Practice (EAP) to Environmental Performance (EP).

Thus, these associations, in the supply chain context, can plausibly lead to the following

hypothesis:

Hypothesis 2a (H2a). As a firm’s Environmental Collaboration in the supply

chain increases, its Environmental Activity/ Practice should increase.

2.5.5.5 Social Collaboration Linked to Social Activity/ Practice

Institutional theory suggests that institutional pressures influence organizations to adopt

socially responsible management activities and practices. Institutional theorists argue that

firms are more likely to mimic the behavior of other firms that are tied to them through

networks (Guler et al. 2002). These firms collaborate with each other, mimic, adopt and

implement social activities and practices of other successful firms. They adopt these social

activities and practices because of the desire to be a good neighbor, to improve talent

management, to improve or maintain relations with their communities, and to improve their

company’s goodwill, brand equity, and reputational capital. With respect to the latter,

46
managers become concerned with preserving the reputation of their firms for the sake of

continued business success (Campbell 2007).

Goodwill, brand equity, and reputational capital are important, because they impact

perceptions, behaviors and decision-making of customers, consumers, investors and other

stakeholders, relative to a firm’s prices, products, goods, services, information and money.

These perceptions, behaviors and decision-making are potentially manifested in the

acceptance or rejection of organizational activities and practices. Subsequently, these

acceptances or rejections impact the firm’s operational and financial performances, and

ultimately the firm’s value. Thus, as posited, at least, with goodwill, brand equity, and

reputational capital, risk and opportunity to a firm’s appeal can be regarded as a function

of the public’s perception of the social activities and practices in which a firm engages, and

to the performances that result from those social activities and practices.

Generally speaking, according to Campbell (2007), activity and practices that are

considered to be socially responsible should at least satisfy two minimum requirements.

They include: 1) firms must not knowingly do anything that could harm their

stakeholders—notably, their investors, employees, customers, suppliers, or the local

community within which they operate; and 2) if firms do cause harm to their stakeholders,

they must then rectify it whenever the harm is discovered, and brought to their attention.

These requirements identify the minimum standard for firms to behave in socially

responsible ways. Maignan and Ralston (2002) identified three motivations for socially

responsible behavior. They include: 1) managers intrinsically valued such behavior; 2)

managers believed that this behavior enhanced the financial performance of their firms;

47
and 3) stakeholders— particularly, customers, regulators, community, and other coercive

forces— pressured firms to behave in socially responsible ways.

Firms, participating in the social collaboration cycle, as described herein, develop

capabilities and resources that are valuable, rare, inimitable and non-substitutable. These

capabilities and resources translate to improved social activities and practices, and although

coercive pressures may help explain the adoption of social activities and practices by some

participants, the participants generally continue to implement such activities and practices

to reap the potential business and financial rewards, that may accrue to the supply chain

members. Additionally, firms continue to implement social activities and practices,

because they seek to build brand equity, and improve reputational capital, by making

investments in social activities and practices they believe will give them their desired

results.

In any case, if the goodwill, brand equity, or reputational capital of a firm is

compromised, it becomes increasingly more difficult for the firm to continue doing

business with its major customers and key suppliers. When supply chain partners lose faith

in a firm, and no longer trust it, they will generally take their business elsewhere, and the

firm’s profitability may suffer (MacCaulay 1963). Therefore, a logical extension can be

made to link Social Collaboration (SC) to Social Activity/ Practice (SAP). Thus, this

association, in the supply chain context, can reasonably be stated in the following

hypothesis:

Hypothesis 2b (H2b). As a firm’s Social Collaboration in the supply chain

increases, its Social Activity/ Practice should increase.

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2.5.5.6 Environmental Activity/ Practice Linked to Performance

From the resource-based view (RBV) perspective, with regards to environmental

collaboration, firms work together on environmental issues to develop resources and

capabilities, that, when implemented in the form of environmental activities and practices

(EAP), give firms synergistic environmental benefits that are greater than what could have

been obtained, if no collaboration on environmental issues were involved. From the

institutional theory perspective, many firms collaborate and implement environmental

activities and practices because of coercive (particularly, industrial self-regulation,

government regulations, regulatory enforcement, and customer requirements, etc.),

mimetic (imitation of best-in-class practices), and isomorphic (creating similarity in form)

pressures. These firms work together on environmental goals to reduce emissions, waste,

water, energy, fuel, etc. They disclose environmental issues, share environmental policies,

and learn each other’s responsibilities, capabilities, and operations in order to achieve

collective environmental benefits. Firms collaborating on environmental issues also pool

resources to reduce adverse environmental impact of their operations, such as

implementing activities to reduce pollution from production processes, and from chemical

use, waste, storage and disposal, etc. They also anticipate and resolve environmental-

related problems, such as developing recovery systems for fuel, waste, reuse, recycle,

remanufacture, and closed-loop systems. Furthermore, collaborating companies seek to

reduce adverse environmental impact of their products, by implementing activities and

practices, such as, using eco-friendly, recyclable, and substitute materials, bio-degradable

packages, re-manufacturing, recycling, and taking-back products at end-of-life cycle, etc.

49
 ‘How do specific environmental activities and practices improve performance’ is a

question that many researchers ask. Specific environmental activities and practices

partially impact the firm’s cost structure in various ways. Depending on the environmental

activities and practices adopted and implemented, operational costs associated with

material use, waste, packaging, storage, disposal, and equipment, etc., will vary.

Additionally, brand equity and reputational capital will be impacted. The goal is to reduce

operational costs, while growing the business, without harming the eco-system, or breaking

laws, regulations or regulatory enforcement limits. The more successful the environmental

activities and practices are, the more those activities will contribute to the improvement of

the brand equity, reputational capital and performance of the firm.

These environmental activities and practices (EAP) generate benefits in terms of: 1)

improved environmental performance (Vachon and Klassen 2008); 2) cost and quality

(Klassen and Vachon 2003; Klassen and Whybark 1999b; Hart 1997; Porter and van der

Linde 1995); 3) financial performance (Carter et al. 2000); and 4) performing better on

their conventional corporate performance (profitability and maximizing shareholders

wealth) (Jo and Harjoto 2011). Therefore, this research develops the following hypotheses:

Hypothesis 3a (H3a). As a firm’s Environmental Activity/ Practice increases, its

Environmental Performance should improve.

Hypothesis 4a (H4a). As a firm’s Environmental Performance improves, its

Financial Performance should improve.

2.5.5.7 Social Activity/ Practice Linked to Performance

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From the resource-based view (RBV) perspective, with regards to social collaboration,

firms work together on social issues to develop resources and capabilities, that, when

implemented in the form of social activities and practices (SAP), give firms synergistic

social benefits that are greater than what could have been obtained, if no collaboration on

social issues were involved. From the institutional theory perspective, many firms

collaborate and implement social activities and practices because of coercive (particularly,

industrial self-regulation, government regulations, regulatory enforcement, and customer

requirements, etc.), mimetic (imitation of best-in-class practices), and isomorphic

(creating similarity in form) pressures. These firms work together on social goals to

improve labor practices, employee working conditions, training, skills development and

total wages paid. They also collaborate to promote gender and ethnic equality, reduce

workplace injury and illness rates, abolish child or compulsory labor, and prevent

workplace discrimination, etc. They disclose social issues, share policies on Remuneration,

Health & Safety, Human Rights and Training, etc., and learn each other’s responsibilities,

capabilities and operations in order to achieve collective social benefits. Firms

collaborating on social issues also pool resources to improve the impact of their operations,

such as implementing activities and practices to increase local jobs, develop local

workforce skills, improve community relations, development, schools, housing and

infrastructure, etc. They also anticipate and resolve social-related problems, such as

implementing activities to develop Code of Conduct, Supplier Management System, and

proactively identify and correct possible, human rights concerns and corporate social

responsibility (CSR) challenges, etc. Furthermore, collaborating companies seek to reduce

adverse social impact of their products by implementing activities and practices, such as

51
providing public service announcements, training and incentives to return, recycle or reuse

‘end of use’ products, promote use of returnable, recyclable packages and containers, etc.

‘How do specific social activities and practices improve performance’ is a question

many researchers ask. Specific social activities and practices partially impact the firm’s

brand equity and reputational capital in specific ways. The goal is to improve the appeal of

the firm in the eyes of customers and other stakeholders, so that the firm can improve

business rewards, such as sales, market share, rents, and access to top employees, etc., and

simultaneously, reduce penalties, such as fines, sanctions, increased regulations, etc. The

more successful the social activities and practices are, the more those activities will

contribute to the performance of the firm.

These social activities and practices (SAP) generate benefits in terms of: 1) improved

social performance (Jo and Harjoto 2011); 2) improved corporate financial performance

(CFP) (Margolis and Walsh 2003). 3) performing better on their conventional corporate

performance (profitability and maximizing shareholders wealth) (Jo and Harjoto 2011).

Therefore, this research develops the following hypotheses:

Hypothesis 3b (H3b). As a firm’s Social Activity/ Practice increases, its Social

Performance should improve.

Hypothesis 4b (H4b). As a firm’s Social Performance improves, its Financial

Performance should improve.

2.5.5.8 Governance Activity/ Practice Linked to Performance

From the resource-based view (RBV) perspective, with regards to environmental

collaboration, firms work together on governance issues to develop resources and

52
capabilities, that, when implemented in the form of governance activities and practices

(GAP), give firms synergistic governance benefits, that are greater than what could have

been obtained, if no collaboration on governance issues were involved. From the

institutional theory perspective, many firms collaborate and implement governance

activities and practices because of coercive (particularly, industrial self-regulation,

government regulations, regulatory enforcement, and customer requirements, etc.),

mimetic (imitation of best-in-class practices), and isomorphic (creating similarity in form)

pressures.

These firms work together on governance goals to align supply chain goals with

business objectives, track performance against goals, translate goals into actionable targets

for all employees across all functions, meet customer and other stakeholder expectations,

meet responsible sourcing requirements, and adopt fair and open communications, etc.

They disclose governance issues, share ethics policies, report annually sustainable

performance to stakeholders, measure and disclose organizational performance against the

goal of sustainability development, and learn about each other’s responsibilities,

capabilities, and operations, in order to achieve collective governance benefits, etc.

Firms collaborating on governance issues also pool resources to improve governance

impact of their operations, such as implementing activities to improve corporate

reputations, rebuild public trust, improve living and working conditions, and make long-

term commitments and investments that create trust in the community, etc. They also

anticipate and resolve governance-related problems, such as implementing anti-corruption,

anti-extortion & anti-bribery initiatives, integrating sustainability into Supply Chain

Management decisions, and safe-guarding reputations, etc. Furthermore, collaborating

53
companies seek to reduce adverse governance impact of their products, by implementing

activities and practices, such as, procuring quality raw material inputs, purchasing inputs

from ethical and responsible business partners, and buying from sources that embrace core

human values, labor standards, the environment, and anti-corruption stances, etc.

‘How do specific governance activities and practices improve performance’ is a

question many researchers ask. Specific governance activities and practices partially

impact firm performance in specific ways. The goal of governance is to provide a system

of internal controls and procedures to direct, administer, and manage all of the affairs of

the organization, in order to serve the interests of the stockholders and other stakeholders.

Firms accomplish this goal by implementing effective organizational structures that

maintain this focus, and implement best-in-class practices. Specific activities and practices

support this goal by obtaining varying levels of return in exchange for varying levels of

risk. Over the long-term, quality decisions are made that increase the returns for given

levels of risk. The higher the spread, the better the performance will be, which leads to

competitive advantage for the firm.

These governance activities and practices (GAP) generate benefits in terms of: 1)

improved governance performance; 2) improved performance (Klassen and Vachon 2003);

3) positive corporate financial performance (Gompers et al. 2003; 2010); and 4) enhanced

corporate financial performance (Jo and Harjoto 2011). Therefore, this research develops

the following hypotheses:

Hypothesis 3c (H3c). As a firm’s Governance Activity/ Practice increases, its

Governance Performance should improve.

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Hypothesis 4c (H4c). As a firm’s Governance Performance in the supply chain

improves, its Financial Performance should improve.

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 Chapter Three

Data Collection Methodology

3.1 Instruments Development— Item Generation and Pilot Test

This section discusses the instrument development and pilot testing processes for the

primary survey data collection method. The pilot test was conducted using a small sample

of three respondents to evaluate the feasibility, time, cost, and adverse events, concerning

the ESG collaboration research study in an attempt to improve upon the study design prior

to performance of the full-scale research project. The instruments that measure

“Environmental Collaboration with key Suppliers” and “Environmental Collaboration with

major Customers” were adopted from previous studies (Vachon and Klassen 2008; and

Ellinger et al. 2000) (see Appendix A, “Questionnaire Items – Original”). Since these

instruments have been tested in previous studies and were found to be valid and reliable,

they were not tested again in the pilot study of this research. These questions were then

adapted and included in the Social Collaboration and Governance Collaboration portions

of the large scale survey.

Three executive business leaders were invited to complete a manual copy of the ESG

Collaboration survey. They included an Environmental Attorney from a Tier 1, Automotive

Component Supplier, a Director of a Commercial Bank, and a Plant Manager of a Metal

Fabrication company. All three were asked to complete the survey, note any questions that

they did not understand, and record the amount of time that it took them to complete the

survey. Two of the executives— the Attorney and the Banker completed the survey during

the pilot test. The average time it took these two executives to complete the test was 32

minutes, and the main comment for each question was that they needed examples to better

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understand the questions. A sample of the typical question asked of these two executives

can be seen in Appendix B.

Based on the feedback from the Attorney and the Banker, the typical question was

revised to include examples for each question. The typical question that was revised can

be seen in Appendix C. This set of questions were given to the third executive (the Plant

Manager), and was asked to complete the survey, note any questions that they did not

understand, and record the amount of time that it took them to complete the survey. This

executive completed the manual survey in 20 minutes and had relatively few questions.

Based on this feed-back, the typical questions, listed in Appendix D, were formatted and

included in the web-based large scale survey launch. An introductory cover letter, in

Appendix E, was attached and distributed to the target executives, and the attached

friendly-reminder letter, in Appendix F, was sent as a friendly follow-up.

As previously indicated, the current research uses an online survey to collect primary

data. The design of the web survey was done using Qualtrics, a web-based survey software

company (http://www.qualtrics.com/, Accessed April 13, 2012). It was designed to be user-

friendly and easy to complete, with questions as straight forward as possible, so that the

respondent knows precisely what is asked, and therefore able to provide the most accurate

response possible.

Since previous research had not found significant differences between a single page

form and a multi-page form survey presentation (Batagelj and Vehovar 1998), a multi-page

form was adopted to separate the questions by subject matter to avoid confusion of the

responder. For instance, “environmental collaboration with internal departments, key

suppliers and major customers” questions were placed on one page; “social collaboration

57
with internal departments, key suppliers and major customers” questions were placed on a

second page; and “governance collaboration with internal departments, key suppliers and

major customers” questions were placed on a third page.

Questions regarding ESG Activity/ Practice were separated by subject and included on

separate pages. For instance, “environmental activity/ practice with internal operating

units” questions were on one page; “social activity/ practice with internal operating units”

questions were on a second page; and “governance activity/ practice with internal operating

units” questions were on a third page.

Likewise, questions regarding ESG Performance were separated by subject and

included on separate pages. For instance, “environmental performance of internal operating

units” questions were on one page; “social performance of internal operating units”

questions were on a second page; and “governance performance of internal operating units”

questions were on a third page.

With regards to the current research, the prospective respondents need to have

experience and knowledge in joint planning and joint goal-setting with the members of the

supply chain, on environmental social governance (ESG) issues. Therefore, it was decided

to seek input from the Chief Executive Officer (CEO) (or his/her direct report with

accountability for ESG/ Sustainability reporting), or from other appropriate senior level

managers (e.g. President, COO, CFO, Executive Vice President, Chief Sustainability

Officer, Corporate Responsibility Officer, Corporate Social Responsibility Officer, Chief

Compliance Officer, etc.) from the largest U.S. Listed companies, as respondents for this

study.

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 A survey instrument was developed based on the previously reviewed literature. 3

phone conversations were held with the three original executives to review the

questionnaire. After the discussions, the questionnaire was tweaked and modified to refine

and clarify the constructs and items.

A mailing list was acquired from a third party. In addition to the mailing list, this

resource provides email and contact information for CEOs of the largest U.S. Listed

companies, in terms of market valuations. This information was used to facilitate

distribution of the web-based survey to the targeted population, which is the Russell 1000

companies.

A three-wave survey process similar to that prescribed by Dillman (2000) was

implemented. The three point questionnaire administration process followed these steps:

1) send an email with a link to the Internet survey; 2) send another email with a link to the

survey at 6 weeks; and if needed 3) send a further link at 12 weeks. Reminders were sent

six to eight weeks after the initial introduction letters, and again six to eight weeks after

the reminder letters were sent. This process was repeated with other executives in each of

the Russell 800 firms until the resultant 81 respondents were received over a period of

eighteen to twenty-four months, with 20 firms self-identifying with their name and ticker

symbols.

3.2 Sample Frame

A stock market index is a method of measuring a section of the stock market. The Russell

1000 Index is a stock market index that measures the performance of the large-cap segment

of the U.S. equity universe. It is a subset of the Russell 3000 Index (which represents 98%

59
of the investible US equity market), and includes approximately 1,000 of the largest

securities based on a combination of their market capitalization and current index

membership. The Russell 1000 represents approximately 92% of the U.S. market

capitalization. The Russell 1000 Index is constructed to provide a comprehensive and

unbiased barometer for the large-cap segment and is completely reconstituted annually to

ensure new and growing equities are reflected (Russell Investments, 2010).

The Russell 1000 Index is a finite population, and the target population developed in

this study are the Russell 1000 companies that file 10K financial statements with the

Securities Exchange Commission (SEC), in the period of study, and the Russell 1000

companies that do not. This division ensures that all companies chosen for this study

operate under the same environmental, social and governance rules and regulations of the

U.S. Government, namely the EPA, OSHA, SEC, Sarbanes-Oxley, and Dodd-Frank, etc.

It is estimated that 800 companies, out of the Russell 1000 company population, filed

10K financial statements with the Securities Exchange Commission (SEC), in the period

of study, resulting in a target population proportion of 80% (800/1000). Samples from this

800 company population were used to test the hypothetical framework described to

determine the relationship between ESG Collaboration in the Supply Chain and

Performance. 81 sample respondents from 800 company population returned the survey,

resulting in a response rate of 10.1% (81/800) (see Figure 1f). Of the 81 respondent firms,

24.7% (20/81) of the firms self-identified, with stock ticker symbols, enabling the

researchers to extract secondary financial data, in order to empirically test the ESG

Collaboration— Financial Performance link. These 20 firms represented 19 different SIC

codes (see Figure 1g).

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3.3 Data Collection – Secondary Data Methodologies

The authors’ motivation for using secondary data methodologies to empirically examine

the relationship between ESG performance and firm financial performance was inspired

by research conducted by previous scholars in the operations and supply chain management

(OSCM) literature. These scholars recognized that the availability of data collected by

corporations, government agencies, news agencies, industry groups, and other parties is

growing very rapidly, and note that the growing use of communications and information

systems to collect data has created numerous opportunities for research that employs

secondary data (Boyer and Swink 2008). Recent articles (Roth 2007; Fisher 2007) have

called for more research using secondary data, and examined some of the benefits and

limitations involved with this type of data.

Some of the benefits of secondary data sources include wide availability, lower data

collection expense, and that they are generally more ‘‘objective’’ than self-reported survey

data (Boyer and Swink 2008; Singhal 2008), particularly with respect to performance data

(Singhal 2008).

Some limitations of secondary data sources include dependence on the quality of the

data, on the standards and on protocols that govern their collection— factors which are

usually outside the control of the researcher. Therefore, since the researcher is dependent

on another party for data collection, she/he must assume that the data were collected

correctly.

Other limitations of secondary data research include: 1) available data might not

include measures that tap the construct of interest exactly (Boyer and Swink 2008; Singhal

61
2008), frequently leaving researchers with proxy measures that may only partially

represent or reflect the theoretically relevant variables (Boyer and Swink 2008); 2) data

from computers or reports are not always accurate, or devoid of bias; 3) data is noisy (e.g.,

financial reports), making statistical significance of hypothesized relationships hard to

establish; and 4) inaccessibility to corporate databases.

3.4 Data Collection – Measurement Items

This research evaluates the relationship among ESG Collaboration in the Supply Chain,

ESG Activity/ Practice, ESG Operational Performance and Financial Performance using a

subset of ESG corporate-wide measures, which are common to most companies, have been

of interest to many (Eccles, Krzus and Serafeim 2011), and have caused risk issues in the

past (CFA 2008; Bloomberg 2010). These measurement-items are listed in the survey

instrument in the appendix. Aside from the ESG Collaboration, ESG Activity/ Practice and

ESG Operational Performance data, which were gathered from a primary survey, the

Financial Performance data were compiled from secondary data sources.

3.5 Causal Model and Hypotheses Testing

Since this research incorporates two types of data— categorical perceptual (primary)

variables and continuous objective (secondary) variables— this research analyzes their

hypothesized relationships, using the variance based and prediction oriented, Partial Least

Squares Structural Equation Modeling (PLS-SEM) analytical approach. The results

indicate that ESG Collaboration in the Supply Chain increases ESG Management Activity/

Practice, which in turn improves ESG performance and has a favorable bottom-line

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influence on Financial Performance. Findings, summaries, conclusions, contributions,

implications, limitations, reflections and future research opportunities are discussed.

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 Chapter Four

Results

4.1 Covariance-Based and Variance-Based Structural Equation Modeling Overview

Structural Equation Modeling (SEM) has become a quasi-standard in marketing and

management research, when it comes to analyzing the cause–effect relations between latent

constructs (Hair et al. 2011b). It combines features of first-generation multivariate principal

component analysis (PCA) and linear regression analysis (Fornell 1982 1987), making it a

second generation multivariate analysis technique that is beneficial for the practice of

developing and testing theories (Hair et al. 2013; Ringle et al. 2012; Shook et al. 2004;

Steenkamp and Baumgartner 2000). SEM, which essentially has become a popular choice

in multivariate analytical techniques, offers a number of statistical methods, two of the

more popular being: covariance-based SEM (CB-SEM) (Diamantopoulos and Siguaw

2000; Joreskog 1978, 1982; Rigdon 1998), and variance-based partial least squares (PLS)

path modeling (PLS-SEM) (Hair et al. 2013; Lohmoller 1989; Rigdon 2012; Wold 1982).

CB-SEM, a parametric approach, and PLS-SEM, a nonparametric and variance-based

approach, are different, but complementary, in that the PLS-SEM approach’s advantages

are the CB-SEM approach’s disadvantages, and vice versa (Fornell and Bookstein 1982;

Hair et al. 2011b, Henseler, Ringle, and Sinkovics 2009; Joreskog and Wold 1982;

Lohmoller 1989; Schneeweiss 1991). CB-SEM is also a confirmatory approach. It

concentrates on the framework’s theoretically hypothesized relationships, and strives to

minimize the difference between the covariance matrix (that is implicit in the theoretical

framework) and its sample covariance matrix (Editorial 2013a). Its basic objective, along

with variance explanation, is to closely estimate a covariance matrix that matches that of

64
the observed sample data. In this regard, assuming the existence of valid and reliable

constructs, the overarching goal of CB-SEM is to achieve model “fit” (Hair et al. 2011a).

Unlike CB-SEM, PLS-SEM is a prediction-oriented, variance-based approach (Editorial

2013a). It concentrates on dependent (endogenous) variables (constructs) in the

framework, and seeks to maximize their explained variance, such as that which is

represented in the coefficient of determination, R2, value. Its basic objective, in addition to

variance explanation, is to predict the dependent variables.

In 1974, PLS-SEM was introduced as a soft modeling approach (Wold 1974, 1982), or

path analysis with composites approach (Marcoulides and Saunders 2006). It was

considered to be more flexible than CB-SEM, in applying statistical techniques, and sought

to overcome the rigid assumptions of CB-SEM. Since its introduction, PLS-SEM has

increased in popularity (Editorial 2013b), and thanks to software tools, such as LVPLS

(Lohmoller 1984), PLS Graph (Chin 2003), SmartPLS 2 (Ringle et al. 2005), and

SmartPLS 3 (Ringle et al. 2015), PLS-SEM is experiencing increasing widespread

application as a method, in both academic research and in business research practice (Hair

et al. 2012, 2013; Lee et al. 2011; Ringle et al. 2012).

As suggested in numerous studies, researchers have been drawn to the PLS-SEM

approach for a myriad of reasons. One study, in particular, looked at all the empirical

research articles, using the PLS-SEM path method, that were published in MIS Quarterly,

in the 20-year period from 1992 through 2011 (Ringle et al. 2012). The authors found that

there were 65 journal articles containing 109 applications deploying the PLS-SEM

technique. The most cited reasons for employing the PLS-SEM technique included the

following: 1) small sample size (24 studies (30.77%)); 2) non-normal data (20 studies,

65
33.85%)); and 3) formative measured latent variables (20 studies (30.77%)). In an editorial

publication, Hair et al. (2013) suggested that PLS-SEM’s use in strategic management

presents numerous research application opportunities. They even go so far as concluding,

in a 2011 research study, that, “PLS-SEM path modeling, if appropriately applied, can

indeed be a ‘silver bullet’ for estimating causal models in many theoretical models and

empirical data situations” (Hair et al. 2011b).

The variance-based approach of PLS-SEM shifts the focus from theory testing to

predictive modeling (Chin and Newsted 1998). In this regard, PLS-SEM’s objective is to

maximize prediction in the dependent variables, rather than explain the co-variances of all

of the indicators used in a model, as is the case with CB-SEM analysis (Fornell 1989; Falk

and Miller 1992). The comparison of PLS analysis with covariance based analysis is

summarized in Table 6, titled ‘Comparison of Partial Least Squares and Covariance-

Based Analysis’. It depicts what many researchers believe… “that PLS is best suited to

situations where the primary modeling objective is prediction, when the focus is on

explaining variance, when parametric assumptions do not hold, when explicit latent

variable scores are desired, when model complexity is high, and when sample sizes are

small” (Hulland et al. 2010).

With this backdrop, and review of the considerations identified in Table 7, titled

‘Rules of Thumb for Selecting CB-SEM or PLS-SEM’ (Hair et al. 2011b), the current

research chooses to employ the Partial Least Squares path modeling approach of structural

equation modeling as its methodology to analyze the theoretical framework examining the

ESG Collaboration-Performance link. The decision leading to the PLS-SEM choice

included an evaluation of the goals, objectives and research characteristics of the current

66
study, including, the following: 1) Research Goals; 2) Structural Model Specification; 3)

Measurement Model Specification; 4) Data Characteristics and Algorithm; and 5) Model

Evaluation concerns. These considerations are explained and outlined in Table 7.

4.2 Research Goals

The current research strives to examine the relationship between ESG Collaboration

(ESGC) and firm Performance (P) in a supply chain context. In doing so, it empirically

tests the proposed theoretical framework in order to achieve the goal of predicting the

impact on P, which results from a firm collaborating with its internal operating units (IOU),

its key suppliers (KS), and its major customers (MC) on Environmental Social Governance

(ESG) issues.

4.3 Structural Model Characteristics

The theoretical framework, in this research, is relatively complex, and contains two

proposed structural models to evaluate the relationships of the focal firm and its supply

chain members. There are two proposed structural models because the researchers are

interested in examining the relationship between ESGC and firm operating performance

(OP), as well as the relationship between ESGC and firm financial performance (FP). The

ability to examine the relationship between ESGC and FP was made possible by 20 (of the

81 respondent) firms, who disclosed their corporate identity. This disclosure enabled the

researchers to gather archival, secondary financial data on the 20 respondent firms and tie

that objective information back to their respective primary, perceptual responses to the

survey questions.

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 Key elements of the first proposed structural model reveal a total of 15 latent

constructs, 33 structural model relationships, and 110 indicators for model estimation.

Table 8, titled ‘Structural and Measurement Model Characteristics (81 Samples),’

outlines the relevant information associated with the latent constructs, the model

relationships, and the measurement indicators, associated with the 81 respondent firms.

Key elements of the second proposed structural model reveal a total of 16 latent

constructs, 42 structural model relationships, and 123 indicators for model estimation.

Table 9, titled ‘Structural and Measurement Model Characteristics (20 Samples),’

outlines the relevant information associated with the latent constructs, the model

relationships, and the measurement indicators, associated with the 20 identity disclosing

respondent firms.

4.4 Measurement Model Specification

The proposed theoretical framework contains hypothesized relationships and measurement

models, described as Reflective-Reflective types (see Figures 2c and 3c). These

specifications indicate that these hierarchical component models have first-order and

second-order latent constructs, each of which is connected to indicators. These indicators

reflectively measure, or estimate, the models’ latent variables. These measurement models

are depicted in Figures 2c and 3c.

4.5 Data Characteristics and Algorithm

PLS focuses on the analysis of variance, and can be carried out using SmartPLS 3 software.

PLS is a soft modeling approach to SEM, in regards to data distribution, with no

68
assumptions about data distribution (Esposito Vinzi et al. 2010). It becomes a good

alternative to CB-SEM when the following circumstances are encountered (Bacon 1999;

Hwang et al. 2010; Wong 2010):

1. Sample size is small.

2. Applications have little available theory.

3. Predictive accuracy is paramount.

4. Correct model specification cannot be ensured.

PLS is also useful for structural equation modeling in applied research projects

especially when there are limited participants. In addition to being deployed in business

strategy (e.g., Hulland 1999), PLS-SEM has also been deployed in many other fields, such

as behavioral sciences (e.g., Bass et al 2003), management information system (e.g., Chin

et al. 2003), marketing (e.g., Henseler et al. 2009), and organization (e.g., Sosik et al. 2009).

Determining the appropriate sample size is often the first challenge faced by

researchers. Hair et al. (2013) suggest that sample size can be driven by the following

factors in a structural equation model design:

1. The significance level

2. The statistical power

3. The minimum coefficient of determination (R-square values) used in the model

4. The maximum number of arrows pointing at a latent variable

In practice, such as in marketing research, a study would typically have a significance

level of 5%, a statistical power of 80%, and R2 values of at least 0.25 (Wong, 2013). Using

such parameters, the minimum sample size required, depending on the maximum number

of arrows pointing at a latent variable, can be reviewed in the guidelines in Table 10, titled

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‘Suggested Sample Size in a Typical Marketing Research,’ which is offered by

Marcoulides & Saunders (2006).

Previous research appearing in academic and practitioner journals (e.g., Reinartz et al.

2009; Lu et al. 2011) also indicate that PLS-SEM is a powerful method to analyze complex

models using smaller samples (Ringle et al. 2012). Other researchers agree, and some, in a

meta-study of MIS Quarterly journal articles, over a 20 year period, noted that PLS-SEM

is a formidable method to analyze complex models using representative sets of data in

smaller samples (Hair et al. 2011b; Hair et al. 2012; Ringle et al. 2012).

Ringle et al. (2012) conducted research that examined 65 studies containing 109

structural equation model estimations deploying the PLS-SEM technique, that was

published in MIS Quarterly (a top IS journal), in the 20-year period from 1992 through

2011. They also benchmarked their results against those obtained from a review of three

marketing journals, with the highest journal impact factor, according to the Thomson

Reuters 2010 journal citation report. Those three top journals included the Journal of

Marketing (JM), the Journal of Marketing Research (JMR) and the Journal of the Academy

of Marketing Science (JAMS). These three marketing journals published 41 journal articles,

with 60 models using PLS-SEM, in the 20-year period between 1992 and 2011. They found

that the most frequently cited reasons for employing the PLS-SEM technique in these

empirical articles were related to sample sizes. More specifically, they found that 24 studies

(36.92%), in MIS Quarterly, involved small sample sizes, and 15 studies (25.00%), in the

3 top marketing journals, were also concerned with small sample sizes. Of the 109 models

published in MIS Quarterly, 25 (22.94%) had sample sizes of less than 100 observations,

70
and of the 60 models published in the three top marketing journals, JM, JMR, and JAMS,

11 (18.33%) had fewer than 100 observations (Ringle et al. 2012).

Hair et al. (2012) also conducted widespread research in the 30 top ranked marketing

journals. That research allowed them to identify 204 empirical PLS-SEM applications that

were published in a 30-year period (1981 to 2010). Topics examined included: the reasons

for using PLS-SEM; data and model characteristics; outer and inner model evaluations;

and reporting standards. A significant reason given for employing the PLS-SEM technique

also related to data characteristics, such as sample size. In this regard, the authors found

that 94 studies (46.08%) gave reasons of small sample sizes for employing the PLS-SEM

technique, and cited 76 of 311 models (24.44%) as having less than 100 observations, with

Lee (1994) having the smallest sample size (n=18) (Hair et al. 2012).

Based on their extensive review of the use of PLS-SEM in top marketing journals, Hair

et al. (2012) offer a comprehensive set of guidelines, for applying PLS-SEM. These

guidelines are designed to provide researchers, editors, and reviewers with

recommendations, rules of thumb, and corresponding references (Hair et al. 2012), to

enhance the quality of future studies employing the PLS-SEM approach.

Together these researchers, Ringle et al. (2012) and Hair et al. (2012), would generally

agree with the notion, “If correctly applied, PLS-SEM can indeed be a ‘silver bullet’ for

estimating causal models in many model and data situations (Hair et al. 2011), especially

when complex models and small sample sizes are involved (Ringle et al. 2012). However,

these authors would also agree that “correctly applied” implies following the

recommendations outlined in the ‘Rules of thumb for Model Evaluation’ (Table 11) and

in the ‘Guidelines for applying PLS-SEM’ (Table 12).

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4.6 Methodology Planned: ESG Collaboration (ESGC)

This research discusses the application of a second-generation multivariate data analysis

method called Structural Equation Modeling (SEM), for business strategy research, with a

focus on Partial Least Squares (PLS). There are two sub-models in a structural equation

model— the inner model and outer model. The inner (or structural) model specifies the

relationships between the independent and dependent latent variables, whereas the outer

(or measurement) model specifies the relationships between the latent variables and their

observed indicators.

ESG Collaboration (ESGC), in a supply chain context, is an example of a latent variable

that is multidimensional and difficult to observe directly. However, it can be measured

indirectly with a set of measurable indicators that serve as proxy. In order to understand

ESG Collaboration, a survey was conducted to ask business executives about their

collaboration experience, with their firm’s supply chain members. In this survey,

executives were asked to rate their experiences on a scale representing 9 latent variables,

namely 3 ESG Collaboration (ESGC), 3 ESG Activity/ Practice (ESGAP), and 3 ESG

Performance (ESGP), using a 7-point Likert scale indicating: (1) not at all, (4) moderately,

and (7) great extent.

The current research, on the ESGC—Performance link, examines a relatively complex

framework, using a comparatively small sample dataset. Email addresses of CEOs, COOs,

CFOs, CSOs, Presidents, Vice Presidents and other Senior Managers, with responsibilities

for environmental, social, and governance issues, were researched and acquired. Letters of

introduction were emailed to these executives, explaining the survey and requested their

72
participation. As incentives to completing the survey, and returning the respondents’ email

address, the respondent would receive a summary of the results, in addition to receiving a

chance at a tablet computer, in a random drawing.

The dataset was gathered randomly from a population of 800 public and private

conglomerate firms that filed 10K financial statements with the Securities Exchange

Commission (SEC), in the period of study. The large scale survey returned 81 sample

respondents from the 800 company population, resulting in a response rate of 10.1%

(81/800). Data from these respondents were used to test the hypothetical framework to

determine the relationship between ESG Collaboration in the Supply Chain and

Performance.

The 81-respondent sample-size meets the PLS-SEM minimum sample size

considerations, stated in Table 6 and in Table 10. It says that minimum sample should be

equal to “ten times the largest number of structural paths directed at a particular latent

construct in the structural model” (Hair et al. 2011b). In the current study, the largest

number of structural paths directed at a particular latent construct, FP, is “3,” as can be

seen in Figures 3b and 3c.

More specifically, the research methodology employed a professionally designed, large

scale survey. It was administered on-line, through an electronic questionnaire. The

questionnaire was accessed via a hyperlink in the introduction letter, using the Qualtrics

Survey software system. The survey employed 110 questions, that gave the respondents

choices on a 7-point Likert-type scale, with 1 = not at all, 4 = moderately, and 7 = great

extent. The 110 question instrument was designed to seek an understanding of a firm’s

collaboration management and activities/ practices, concerning ESG issues, with Internal

73
operating units, suppliers and customers, and their impact on environmental, social and

governance performances, and financial performance. The theoretical framework is

visually shown in Figures 2a, 2b, and 2c, and the survey questions asked are presented in

the Appendix D. The Collaboration constructs were each measured by 5 questions. This

design is in line with similar research conducted in the strategy literature (Vachon and

Klassen 2008).

4.7 Methodology Planned: Financial Performance (FP)

The research methodology also employed a secondary, objective, archival data collection

component that was administered by the researchers. The effort involved identifying

survey respondents that disclosed their company names and or ticker symbols, and

extracting four years of company financial performance data from Compustat, Russell, and

Bloomberg company databases. The four years of financial performance data were used to

compute the compound annual growth rates (CAGR) for key financial performance

indicators, for each of the disclosing companies. The CAGR were then matched to the

disclosing company’s respective primary, perceptual responses to the survey questions. In

this way the researchers were able to examine the relationship between ESGC and firm

operating performance (OP), as well as the relationship between ESGC and firm financial

performance (FP). Twenty (of the 81 respondent) firms disclosed their corporate identity,

enabling the researchers to gather archival, secondary financial data on these firms and tie

that objective data back to their respective primary, perceptual survey responses.

4.8 Reflective Measurement Scale

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The latent variable, ESG Collaboration (ESGC), is comprised of 3 sub-constructs—

environmental collaboration (EC), social collaboration (SC), and governance collaboration

(GC). Each sub-construct is made up of 5 observed indicators— achieving goals

collectively, developing mutual understanding, reducing negative impacts, conducting

joint planning, and making joint decisions.

The latent variable, ESG Activity/ Practice (ESGAP), is also comprised of 3 sub-

constructs— environmental activity/ practice (EAP), social activity/ practice (SAP) and

governance activity/ practice (GAP). EAP is comprised of 14 observed indicators, SAP is

comprised of 9 observed indicators, and GAP is comprised of 12 observed indicators.

The latent variable, ESG Performance (ESGP), is likewise comprised of 3 sub-

constructs— environmental performance (EP), social performance (SP) and governance

performance (GP). Each of these sub-constructs is comprised of 10 observed indicators

each.

The latent variable, Financial Performance (FP), is comprised of numerous observed

indicators, including the following: EBIT, EBITDA, Gross Profit Margin (GPR), Gross

Profit (GPR), Net Income (Loss) (NI_(LOSS)), Operating Profit Margin (OPM), Price of

Common Stock (PRCC_F), Revenue, Return on Assets (ROA), Return on Equity (ROE),

Return on Invested Capital (ROIC), and Return on Sales (ROS), and is measured in

compound annual growth rates (CAGR) over a four year period.

The outer loadings, composite reliability, average variance extracted (AVE) and its

square root, for each of the 10 latent constructs— EC, EAP, EP, SC, SAP, SP, GC, GAP,

GP and FP are examined and reported, herein.

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4.9 Path-Modeling Estimation

Since there were no missing values in the data set at run time, due to the practice of

replacing missing values using the mean substitution process, the “PLS Algorithm –

Settings” were configured using the following parameters:

1. Weighting Scheme: Path Weighting Scheme

2. Data Metric: Mean 0, Variance 1

3. Maximum Iterations: 300

4. Abort Criterion: 1.0E-7

5. Initial Weights: 1.0

4.10 Model Evaluation

For the purposes of the current research, respondent data were analyzed using three

statistical software packages— Microsoft Excel 2007, IBM SPSS Statistics v21, and

SmartPLS 3.2.0 (Ringle, Wende, and Becker 2015). These packages were used to provide

appropriate descriptive statistics and analyses for the proposed structural and measurement

models. In order to thoroughly evaluate the proposed framework, this research seeks to

apply the guidelines, outlined in Table 7, titled ‘Rules of Thumb for Selecting CB-SEM

or PLS-SEM’ (Hair et al. 2011b), Table 11, titled ‘Rules of Thumb for Model

Evaluation’ (Hair et al. 2011b), and Table 12, titled ‘Guidelines for applying PLS-SEM’

(Hair et al. 2012).

Using PLS-SEM to assess model estimation requires a two-step process—

measurement model assessment and structural model assessment. The first step is to assess

the reliability and validity of the measures used in the measurement model. Since the model

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in question is of the Reflective-Reflective type, this assessment must be done according to

reflective model specifications. The goal here is to first establish confidence in knowing

that the indicator measures adequately represent the latent constructs and variables of

interest. The second step is to assess the estimates of the structural model. In this step, the

goal is to examine the stability of the parameter and constraint estimates. This can be done

in several ways, but the recommended method, in these ‘rule of thumb‘ guidelines, is to

generate a holdout sample of, say, 30 percent of the original sample.

The first phase is evaluating the reflective measurement model. This part focuses on

the reliability and validity of the measures used to represent each construct. It provides an

evaluation on how accurate (i.e., reliable) the measures are and also their convergent and

discriminant validities. For the reflective estimation model, in question, the following steps

are recommended in order to perform effective model evaluation:

Step 1 Reflective Measurement (Outer) Model Assessment

• Indicator reliability. For indicator reliability, standardized indicator loadings > =

0.70 is the goal, however, in exploratory studies, loadings of 0.40 are acceptable

(Hulland 1999).

• Discriminate validity - Cross loadings. For discriminate validity, each indicator

cross loading should load highest on the construct it is intended to measure (Chin

1998; Gregoire and Fisher 2006).

• Significance of weights. For significance of indicators' weights relative

contribution to the construct, report t-values, p-values or standard errors (Chin

1998; Gregoire and Fisher 2006).

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 • Internal consistency reliability. For internal consistency reliability, do not use

Cronbach’s alpha. Composite reliability > = 0.70 is the goal, however, in

exploratory research 0.60 is considered acceptable (Bagozzi and Yi 1988).

• Convergent validity. For convergent validity, Average Variance Extracted (AVE)

> = 0.50 is the goal (Bagozzi and Yi 1988).

• Discriminate validity - Fornell-Larcker criterion. For discriminate validity, use

Fornell-Larcker criterion. Each construct's AVE should be higher than its squared

correlation with any other construct (Fornell and Larcker 1981).

Having established the appropriateness of the measures, the second phase is evaluating

the reflective structural (inner) model. This part focuses on providing evidence supporting

the theoretical model as exemplified by the structural portion of the model. A major

emphasis in PLS analysis is on variance explained as well as establishing the significance

of all path estimates. Predictive power of the reflective structural (inner) model is assessed

by the R2 values of the endogenous constructs, which also represent the amount of variance

in the construct in question that is explained by the model. For the reflective structural

(inner) model, in question, the following steps are recommended in order to perform

effective model evaluation:

Step 2 Reflective Structural (Inner) Model Assessment

• R Squared. For R squared (R2), acceptable levels depend on research context. R2 >

0.25 Weak, 0.50 Moderate, 0.75 Strong (Hair et al. 2010).

• Effect size (f Square (f2)). For Effect size (f Square (f2)) f2 of 0.02, 0.15, or 0.35 is

indicative of weak, moderate, or strong effects, respectively (Cohen 1998).

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 • Path coefficient estimates. For path coefficient estimates, use bootstrapping to

assess significance (Chin 1998, Hensler et al. 2009). The minimum number of

bootstrap samples is 5,000, and the number of cases should be equal to the number

of observations in the original sample. Critical t-values for a two-tailed test are 1.65

(significance level = 10 percent), 1.96 (significance level = 5 percent), and 2.58

(significance level = 1 percent).

• Predictive relevance Q Square (Q2) and q square (q2). For predictive relevance, Q2

and q2, use blindfolding. Q2 > 0 is indicative of predictive relevance; q2 of 0.02,

0.15, 0.35 for weak, moderate, or strong degree of predictive relevance (Chin 1998,

Hensler et al. 2009).

4.11 Descriptive Statistics

Descriptive statistics for the key elements of the structural and measurement models, in the

current research, are included in Table 13a titled, ‘Descriptive Statistics (81 Samples),’

and in Table 13b titled, ‘Descriptive Statistics (20 Samples).’ These statistics were

compiled using Microsoft Excel 2007, and include key measurements for each of the 110

and 123 variables included in the respective structural and measurement models. The

specific labels include: 1) Variable (construct, sub-construct and indicator, etc.); 2) Count

(sample size or the number of cases evaluated); 3) Mean (average value of the responses);

4) Standard Deviation (average distance each value falls from the mean value); 5) Variance

(square of the standard deviations from the mean); 6) Skewness (degree of symmetry of a

distribution around a mean); 7) Kurtosis (relative peakedness or flatness of a distribution

compared with the normal distribution); 8) Missing Data (number of missing items per

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variable that was replaced using mean substitution); and Ratio of Missing to Total Data.

Of the 81 respondents, 20 (24.7%) provided demographic information such as job title,

company name, ticker symbol, and email address. Of those 20 who provided such

information, all were from publicly traded stock companies. Job titles included those such

as President, Chief Operating Officer, CFO, VP Internal Audit, Director of Environmental,

Health, and Safety, Director of Corporate Responsibility, Sustainable Development

Manager, Sustainability Manager, Environmental Engineer, Sustainability Analyst, Lead

Certified Pharmacy Technician, and Executive Assistant. The 20 self-identified

respondents represented 19 different industries, as represented by their SIC codes, and

employed a range of 64 to 375,000 employees. Key industry characteristics of the self-

identified respondents are included in Figure 1g, titled ‘Sample Respondents (20 Firms

Self-Identified).’

4.12 Assessing the PLS-SEM Output – Operational Performance

The PLS-SEM path modeling algorithm was run. In step one, the reflective-reflective

measurement (outer) model was evaluated, and the following topics were discussed:

• Indicator reliability was assessed using standardized indicator loadings (see Figure

2d - Indicator Data (Squared Correlations) – (Operational Performance)). All

standardized indicator loadings were greater than or equal to the 0.40 acceptable

level in exploratory studies, with the vast majority exceeding the goal of greater

than or equal to 0.70 (Hulland 1999), suggesting indicator reliability was

adequately demonstrated.

80
• Discriminate validity was assessed, based on correlations, using the square of the

loadings and cross loadings (see Figure 2e – Cross Loadings (Squared) –

(Operational Performance)). The square of the loadings were used because it gives

a more intuitive interpretation since it represents the percentage overlap (i.e., shared

variance) between an item and any construct (Chin 2010). For discriminate validity,

each indicator cross loading should load highest on the construct it is intended to

measure (Chin 1998; Gregoire and Fisher 2006). Substantially all of the loadings

had higher average loadings and narrower ranges indicating greater confidence that

substantially all items help (i.e., converge) in estimating the underlying construct.

• Significance of weights (see Figures 2g and 2h).

• Internal consistency reliability was assessed, using composite reliability (see Figure

2f – Latent Variable Squared Correlations (Fornell-Larcker Criterion) –

(Operational Performance)). All of the composite reliability scores, for each block

of indicators for the latent variables, were greater than or equal to the 0.60

acceptable level in exploratory studies, with all exceeding the goal of greater than

or equal to 0.70 (Bagozzi and Yi 1988), suggesting internal consistency was

adequately demonstrated.

• Convergent validity was assessed using Average Variance Extracted (AVE) (see

Figure 2f). AVE attempts to measure the amount of variance that a latent variable

component captures from its indicators relative to the amount due to measurement

error. All of the AVE scores, for each block of indicators for the latent variables,

were greater than or equal to the 0.50 acceptable level (Bagozzi and Yi 1988), with

81
 all exceeding 0.90, suggesting that 50% or more variance of the indicators should

be accounted for, and was adequately demonstrated.

• Discriminate validity was assessed using the Fornell-Larcker criterion (see Figure

2f). AVE provides a basis to see whether each construct is more highly related to

its own measures than with other constructs. Presenting AVE with squared

correlations have two advantages. It provides a more intuitive interpretation since

it represents the percentage overlap (i.e., shared variance) among constructs and

construct to indicators, and it tends to be easier to distinguish the differences (Chin

2010). For discriminate validity, each construct’s AVE should be higher than its

squared correlation with any other construct (Fornell and Larcker 1981). All AVEs

for the latent variables range from 0.88 to 0.99, suggesting each measure strongly

relates to the construct it attempts to reflect.

The PLS-SEM path modeling algorithm was run. In step two, the reflective-reflective

structural (inner) model was evaluated, and the following topics were discussed:

• The coefficient of determination, R Square (R2), for each hypothesized relationship

was evaluated (see Figure 2g – Summary of Theoretical Level (inner or structural)

Model Results – (Operational Performance)). The R2, displayed, is the R2 for the

dependent variable in that relationship. Predictive power of the structural or inner

model is assessed by R2 values of the endogenous constructs (Chin 2010).

Acceptable levels of R2 depend on the research context. R2 > 0.25 is considered

weak, R2 > 0.50 is considered moderate, and R2 > 0.75 is considered strong (Hair

et al. 2010). All R2 values for the hypothesized relationships are greater than or

82
 equal to the moderate threshold level of 0.50, suggesting that 50% or more of the

variance, in the construct in question, is explained by the model.

• The change in R Squares can be explored to see whether the impact of a particular

independent LV on a dependent LV has significant impact, indicating predictive

relevance. Effect size (f Square (f2)) can be calculated and used as a gage for

whether a predictor LV has a small, medium or large effect at the structural level

(Chin 2010). Effect size (f Square (f2)) f2 of 0.02, 0.15, or 0.35 is indicative of weak,

moderate, or strong effects, respectively (Cohen 1998) (see Figure 2g). All f2 values

indicate strong effects, suggesting predictive power in that all independent

predictor LVs have substantive impact on their respective dependent LVs.

• Like R2 values, the corresponding standardized path coefficient estimates can also

be examined and interpreted in the same manner. For path coefficient estimates (see

Figure 2g and 2h), use bootstrapping to assess significance (Chin 1998, Hensler et

al. 2009). The minimum number of bootstrap samples is 5,000, and the number of

cases should be equal to the number of observations in the original sample. Critical

t-values for a two-tailed test are 1.65 (significance level = 10 percent), 1.96

(significance level = 5 percent), and 2.58 (significance level = 1 percent). All direct

path coefficients, for each path in the hypothesized relationship, exceed 0.70,

indicating, predictive relevance, in that each independent LV has substantive

impact on their corresponding dependent LV.

• Predictive relevance Q Square (Q2) and q square (q2) represent measures of how

well-observed values are reconstructed by the model and its parameter estimates.

For predictive relevance, Q2 and q2, use blindfolding. Q2 > 0 implies that the

83
 structural model has predictive relevance, whereas Q2 < 0 represents a lack of

predictive relevance (see Figure 2g). Changes in Q2 is represented by q2, and q2 of

0.02, 0.15, and 0.35 is indicative of weak, moderate, or strong degree of predictive

relevance (Chin 1998, Hensler et al. 2009). Each path in the hypothesized

relationships, has Q2 > 0, which implies that each path in the structural model has

predictive relevance.

4.13 Assessing the PLS-SEM Output – Financial Performance

The PLS-SEM path modeling algorithm was run. In step one, the reflective-reflective

measurement (outer) model was evaluated, and the following topics were discussed:

• Indicator reliability was assessed using standardized indicator loadings (see Figure

3d - Indicator Data (Squared Correlations) – (Financial Performance)). All

standardized indicator loadings were greater than or equal to the 0.40 acceptable

level in exploratory studies, with the vast majority exceeding the goal of greater

than or equal to 0.70 (Hulland 1999), suggesting indicator reliability was

adequately demonstrated.

• Discriminate validity was assessed, based on correlations, using the square of the

loadings and cross loadings (see Figure 3e – Cross Loadings (Squared) – (Financial

Performance)). The square of the loadings were used because it gives a more

intuitive interpretation since it represents the percentage overlap (i.e., shared

variance) between an item and any construct (Chin 2010). For discriminate validity,

each indicator cross loading should load highest on the construct it is intended to

measure (Chin 1998; Gregoire and Fisher 2006). Substantially all of the loadings

84
 had higher average loadings and narrower ranges indicating greater confidence that

substantially all items help (i.e., converge) in estimating the underlying construct.

• Significance of weights (see Figures 3g and 3h).

• Internal consistency reliability was assessed, using composite reliability (see Figure

3f – Latent Variable Squared Correlations (Fornell-Larcker Criterion) – (Financial

Performance)). Except for the LV, FP (CR = 0.139), all of the composite reliability

scores, for each block of indicators for the latent variables, were greater than or

equal to the 0.60 acceptable level in exploratory studies, with all exceeding the goal

of greater than or equal to 0.70 (Bagozzi and Yi 1988), suggesting internal

consistency was adequately demonstrated.

• Convergent validity was assessed using Average Variance Extracted (AVE) (see

Figure 3f). AVE attempts to measure the amount of variance that a latent variable

component captures from its indicators relative to the amount due to measurement

error. Except for the LV, FP (AVE = 0.435), all of the AVE scores, for each block

of indicators for the latent variables, were greater than or equal to the 0.50

acceptable level (Bagozzi and Yi 1988), with all exceeding 0.90, suggesting that

50% or more variance of the indicators should be accounted for, and was adequately

demonstrated.

• Discriminate validity was assessed using the Fornell-Larcker criterion (see Figure

3f). AVE provides a basis to see whether each construct is more highly related to

its own measures than with other constructs. Presenting AVE with squared

correlations have two advantages. It provides a more intuitive interpretation since

it represents the percentage overlap (i.e., shared variance) among constructs and

85
 construct to indicators, and it tends to be easier to distinguish the differences (Chin

2010). For discriminate validity, each construct’s AVE should be higher than its

squared correlation with any other construct (Fornell and Larcker 1981). Except for

the LV, FP (AVE = 0.435), all AVEs for the latent variables range from 0.87 to

0.99, suggesting each measure strongly relates to the construct it attempts to reflect.

The PLS-SEM path modeling algorithm was run. In step two, the reflective-reflective

structural (inner) model was evaluated, and the following topics were discussed:

• The coefficient of determination, R Square (R2), for each hypothesized relationship

was evaluated (see Figure 3g – Summary of Theoretical Level (inner or structural)

Model Results – (Financial Performance)). The R2, displayed, is the R2 for the

dependent variable in that relationship. Predictive power of the structural or inner

model is assessed by R2 values of the endogenous constructs (Chin 2010).

Acceptable levels of R2 depend on the research context. R2 > 0.25 is considered

weak, R2 > 0.50 is considered moderate, and R2 > 0.75 is considered strong (Hair

et al. 2010). All R2 values for the hypothesized relationships are greater than or

equal to the moderate threshold level of 0.50, suggesting that 50% or more of the

variance, in the construct in question, is explained by the model.

• The change in R Squares can be explored to see whether the impact of a particular

independent LV on a dependent LV has significant impact, indicating predictive

relevance. Effect size (f Square (f2)) can be calculated and used as a gage for

whether a predictor LV has a small, medium or large effect at the structural level

(Chin 2010). Effect size (f Square (f2)) f2 of 0.02, 0.15, or 0.35 is indicative of weak,

86
 moderate, or strong effects, respectively (Cohen 1998) (see Figure 3g). Except for

hypothesis H4a and its corresponding hypothesized path relationship, EP  FP (f2

= 0.000, which is weak), all f2 values indicate strong effects, suggesting predictive

power in that all independent predictor LVs have substantive impact on their

respective dependent LVs.

• Like R2 values, the corresponding standardized path coefficient estimates can also

be examined and interpreted in the same manner. For path coefficient estimates (see

Figure 3g and 3h), use bootstrapping to assess significance (Chin 1998, Hensler et

al. 2009). The minimum number of bootstrap samples is 5,000, and the number of

cases should be equal to the number of observations in the original sample. Critical

t-values for a two-tailed test are 1.65 (significance level = 10 percent), 1.96

(significance level = 5 percent), and 2.58 (significance level = 1 percent). Except

for hypothesis H4a and its corresponding hypothesized path relationship, EP  FP

(PC = 0.013, which is weak), all direct path coefficients, for each path in the

hypothesized relationship, exceed 0.70, indicating, predictive relevance, in that

each independent LV has substantive impact on their corresponding dependent LV.

• Predictive relevance Q Square (Q2) and q square (q2) represent measures of how

well-observed values are reconstructed by the model and its parameter estimates.

For predictive relevance, Q2 and q2, use blindfolding. Q2 > 0 implies that the

structural model has predictive relevance, whereas Q2 < 0 represents a lack of

predictive relevance (see Figure 3g). Changes in Q2 is represented by q2, and q2 of

0.02, 0.15, and 0.35 is indicative of weak, moderate, or strong degree of predictive

relevance (Chin 1998, Hensler et al. 2009). Each path in the hypothesized

87
relationships, has Q2 > 0, which implies that each path in the structural model has

predictive relevance.

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 Chapter Five

Summary, Conclusions, Contributions, Implications, Limitations and Reflections

5.1 Summary

In many theoretical model and empirical data situations, PLS‑SEM path modeling can be

an effective tool for evaluation and estimation. PLS‑SEM provides parameter estimates

that maximize the explained variance (R² values) of the dependent (endogenous)

constructs, which makes it useful in evaluating measurement models. The method also

supports prediction-oriented goals, and is useful in explaining and predicting the dependent

or target constructs in the structural model. Furthermore, the PLS-SEM method supports

the theoretical development of standard path models for assessing the success drivers of

certain dependent and target constructs.

The current research evaluated the theoretical frameworks identified in Figures 2b &

2c. First, it examined the firm-level responses to a large scale survey by 10.1%

(81/800) of the target population, to test the link between ESG Collaboration and ESG

Performance. Then secondary, objective financial data for a subset of the respondent firms

(the 24.7% (20/81) that self-identified) was combined with their respective primary data,

and examined to inform on the relationship among ESG Collaboration, ESG Activity/

Practice, ESG Performance and Financial Performance. The structural models and

measurement models were evaluated, and displayed promising results. Key attributes of

the models are included in Figures 3c, 3e, 4c and 4e.

The topic, ESGC, is bitter-sweet, in that it is exploratory and breaks new ground,

implying that only a small number of respondents would be able to share information on

ESGC, but at the same time, provides tremendous opportunities to create new knowledge

89
and identify a potential causal relationship with financial performance, that could

potentially benefit many practitioners. Therefore, the triple threat, posed by a complex

research model, a smaller sample size, and the need to predict dependent and target

constructs, makes the PLS-SEM multivariate analysis tool the ideal choice for model

estimation, evaluation and prediction, in this current research.

This research, not only evaluated the ESGC—Performance link in the aggregate, but it

also looked at the individual components of ESG, namely Environmental Collaboration,

Social Collaboration and Governance Collaboration and their relationship to

Environmental Performance, Social Performance and Governance Performance,

respectively. Empirical support was also found for these disaggregated relationships.

Furthermore these ESGC relationships were viewed from the perspective of the focal firm

in its collaboration with its internal operating units, its key suppliers and its major

customers.

5.2 Conclusions

This research intersects three streams (sustainability, collaboration, and supply chain

management). Its purpose is to propose a definition for ESG Collaboration, propose a

theoretical framework for evaluating the relationship between ESG Collaboration and Firm

Performance, in a supply chain management context, and to examine the proposed

theoretical model using primary perceptual data from a large scale survey and secondary

objective data from financial databases.

This theoretical framework is rather complex, containing as many as ten hierarchical

first-order and second-order constructs in reflective-reflective type measurement and

90
structural models. Specifically, the research gathered categorical perceptual (primary) data,

via a large scale survey, from executives of public stock-traded firms. The survey asked

questions about their internal operations, suppliers, and customers, regarding ESG

collaborative activities, ESG practices and ESG performances. The research also collected

continuous objective (secondary) data, from third party database sources, to test time

delayed impact of ESG collaboration activity on financial performance.

In this research, PLS‑SEM path modeling is chosen as the tool to evaluate two causal

models— an ESG Collaboration – Operations Performance model, and an ESG

Collaboration – Financial Performance model. PLS‑SEM path modeling is chosen because

it meets the prediction-oriented goals (i.e., explaining/predicting the target constructs in

the structural model) for identifying causal links in ESG Collaboration strategies, activities

and practices that impact operational and financial performance.

The results indicate that the proposed theoretical framework, ESG Collaboration –

Performance Link, along with its related structural and measurement models, successfully

explains the variation in their associated latent endogenous variables. More specifically,

analysis of the findings indicate strong support for all of the hypothesized relationships in

the ESG Collaboration – Operations Performance model, and moderate to strong support

for virtually all of the hypothesized relationships in the ESG Collaboration – Financial

Performance model.

Moreover, the findings indicate support that a firm’s collaboration on environmental

social governance issues, with its internal organization, its key suppliers and with its major

customers, leads to increased ESG activity, practices and behaviors resulting in

improvements in ESG performance and in financial performance. The implication for

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practitioners and academics is that this proposed theoretical ESG framework has strong

predictive relevance to improve firm performance, and can be used to evaluate risk factors

and identify opportunities for improvement, both of which can potentially impact firm

valuation, negatively or positively.

5.3 Theoretical Contributions

This research presents several major contributions that intersect three streams of

literature— Collaboration (inter- and intra-firm), Sustainability (CSR, TBL, PPP), and

Supply Chain Management (seller-buyer and supplier-customer dyads) (Figure 1c.). First,

it proposes a definition of ESG and ESG Collaboration that can be used as a common base

to link future ESG management research. Second, it proposes ESG Collaboration

constructs, sub-constructs, and measurement items that have the characteristics for being

employed as the basis for future ESG studies in individual focal firms, and in the supply

chains of which they are a part. Third, it proposes two framework: an ESG Collaboration—

Operational Performance causality link; and an ESG Collaboration—Financial

Performance causality link that combines primary (perceptual) data and secondary

(objective) data.

The implication for researchers is that pressure is building for ESG management to

become a main conversation topic on sustainability for many reasons: investor

requirements for long term performance; diminishing resources; global competition;

changing consumer demands; market forces; and expected increased regulation by

lawmakers and policy-makers, etc. Key stakeholders are pushing harder than ever for

comprehensive corporate disclosure of ESG management, and the ESG researchers can use

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the ESG Collaboration—Performance frameworks to study various ESG attributes and

practices, that are implemented by focal firms, to assess their impact on performance.

Researchers that can identify, replicate and generalize causal linkages can not only help

focal firms improve their sustainability, but they can also help their firm’s supply chains

become more effective and efficient, in the identified areas, thereby improving the

sustainability of companies, supply chains, communities, and individuals. Furthermore,

researchers that can add to the ESG conversation by helping to identify and validate causal

linkages to minimize ESG risk factors and increase opportunities for ESG performance

improvement, thereby improving the utilization of financial, material and human resources,

will help to improve the sustainability of firms, their supply chains, people and the planet.

In publically traded stock firms, shareholders elect the members of the firms’ boards of

directors, whose primary responsibility is to act in the owners’ best interests by monitoring

and controlling the firm’s top-level managers. Boards achieve their expected objectives by

using their resources, such as personal knowledge, expertise, relationships with a wide

variety of organizations, and powers to direct the affairs of the organization and reward

and discipline top-level managers. The implications for board members is to create a

system of controls and procedures that fosters an environment whereby relevant material

ESG considerations are identified and effectively managed, in a way that best serves

stakeholders’ interest, and particularly the owners’ interests.

Top-level management is responsible for making sure the firm uses the strategic

management process, to identify, formulate, select and implement appropriate strategies

that are consistent with the objective of creating long-term value for the stakeholders, and

particularly for the owners. The implication for top-level management is to access the

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firm’s resources and capabilities, and scan the external and internal environment for EGS

challenges and opportunities, relevant to their firm and industry. Then, act and respond to

competitive actions to mitigate the risks posed by ESG challenges, while simultaneously

capitalize on the opportunities presented by them.

Evidence suggests that boards of directors have not been highly effective in monitoring

and controlling top-level manager’s decisions and subsequent actions (Hitt et al. 2015,

Campbell et al. 2012; Dalton et al. 2006), and because of their relative ineffective

performance, as well as the economic devastation caused by the recent financial crisis,

boards are experiencing increasing pressure from shareholders, lawmakers, and regulators

to become more forceful in their oversight role to prevent top-level managers from acting

in their own best interests (Hitt et al. 2015). The research on the relationship between ESG

Collaboration and Performance can benefit boards of directors, top-level managers,

lawmakers and policy-makers, because it provides a comprehensive framework for ESG

management, which is one of the major extra-financial, intangible, variables, not

adequately represented by traditional financial statements, but can have a significant

impact (positive or negative) on the performance and valuation of firms.

The ESG Collaboration framework can be used to help these stakeholders devise and

implement relevant strategies to counteract the negative impacts of material ESG

considerations that are particularly relevant to their firm and industry. Using this research

as a basis to create effective ESG Collaboration management strategies, will enable all

stakeholders, to work in concert to improve performance of firms, supply chains,

communities, individuals, domestically and globally.

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5.4 Implications for Practitioners

Over the last three and one-half decades, the ratio of tangible (or physical) assets as a % of

market capitalization, for the S&P 500, has diminished from 83% in 1975 to 20% in 2010

(Ocean Tomo 2012). This implies, not only that intangible assets are becoming

increasingly more important as a share of an organization’s value, but it also implies that

extra-financial information is needed to capture the value of the firm’s growing non-

physical assets.

In addition, pressure is building for focal firms to do better with extra-financial

information (or information that can have a material impact on the valuation of firms) such

as environmental social governance (ESG) issues. Diverse stakeholder groups, including

end consumers, industrial customers, suppliers, and financial institutions believe that

investment decisions and firm’s wealth valuations could be enhanced, if they properly

reflected ESG risk factors in their analyses and decision-making.

This research indicates that ESG considerations affect air, water, land and underground

resources, individual, community and organizational capabilities, and process, procedural

and control systems. Additionally, it teaches that ESG considerations also impact investor

perceptions of opportunities and challenges posed by firms, and that significant potential

for performance improvement, and enhancing value and the bottom line, lay in the

identification and management of material ESG issues. Furthermore, continued success in

ESG initiatives purports to make ESG management a differentiator, and provide the firm

with an edge, compared to its peers.

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 In an ever shifting environment, where resources are diminishing, consumer demands

are changing, and regulations are increasing, greater challenges and opportunities are

expected to occupy more attention of a firm’s key stakeholders. For those firms that

carefully manage material ESG risks and opportunities, today, they should be better

positioned to successfully navigate the future obstacles, in an increasingly complex world.

Because sophisticated and savvy investors are doing more ESG due diligence, and

believe long-term sustainability of their portfolio companies is tied to the incorporation of

material environmental, social, and governance considerations into business decision-

making and communication strategies, they are demanding that firms provide greater

transparency on their ESG management plans, activities, practices, and performances. This

transparency can assist investors, and business leaders, in more properly assessing risk

factors that can potentially detract from the valuation of a firm, or possibly provide

opportunities for improvement that can potentially add to the valuation of firm.

The implications for executive leadership of firms are to embrace the challenges posed

by material ESG considerations, and capitalize on the opportunities presented by these

challenges. Significant potential for creating value exists through thoughtful and deliberate

initiatives to solve ESG-related challenges. Executive leaders are encouraged to seek ESG

opportunities for improvement, turn those opportunities into action items, implement the

actions, track their performance over time, and continuously improve upon them.

Investors and other firms seek to create value. They scan the environment for

opportunities that meet their strategic requirements. They often look for potential

investment opportunities that are poised for growth, are undervalued, or are

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underperforming, and seek to invest, partner, acquire, merge, take over, collaborate or work

with them to increase their value. Extra financial information, such as material ESG

considerations, is one of the key remaining variables that impact the valuation of for-profit

companies, in positive or negative ways, and offer executive leaders a way to significantly

improve their performance, as well as the performances of each member of the supply

chain, through collaboration on ESG management.

The ESGC-Performance models, examined in this research, have relevant implications

for strategic management researchers and business practitioners. Business professionals

are in a never-ending quest to understand relationships and find ways to improve

operational and financial performance. Such models can become a valuable tool to assist

in measurement, estimation, assessment, monitoring, and benchmarking key drivers to a

process in order to improve and predict performance. The ESGC-Performance framework

indicates that collaborating with supply chain members, on activities concerning ESG

issues can lead to improved practices, improved environmental, social and governance

performance, improved financial performance, and overall more productive organizations.

The ESG Collaboration – Performance framework helps firms to predict the impact on

operational and financial performance by collaborating with internal operating units, key

suppliers and major customers on certain ESG activities and practices. Making appropriate

ESG decisions that create firm value, and refraining from those ESG decisions that destroy

firm value will assist practitioners in their quest to do better with extra-financial

information (or information that can have a material impact on the valuation of firms), such

as ESG risk factors.

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5.5 Limitations

There are a number of limitations to research that requires a combination of primary,

perceptual responses and secondary, archival data. One limitation is the reliance on

obtaining a sizable number of respondents to a large scale survey. In today’s information

age, potential respondents are deluged with requests from many global sources requesting

executives to voluntarily share information on their companies’ strategies, activities,

practices and performance results. Thus, making the landscape extremely competitive in

successfully obtaining adequate participation to one’s research project. Furthermore, if one

is successful, in getting respondents to set aside valuable time to anonymously provide

perceptual information on their operations, the fact that the information comes in

anonymously, prevents researchers from identifying the source firm, thereby reducing the

potential to extract objective secondary archival data to match it against the anonymously

provided primary perceptual data.

Although this research was moderately successful in getting respondents from self-

identified firms, representing 19 different SIC codes, a significant limitation to

Environmental Social Governance Collaboration research is that ESG is relatively new, for

publically traded stock firms, and not widely understood, and its reporting or disclosure is

not required by any regulatory body. It has been only a few years ago, in June 2011, when

a jointly-signed Ceres letter of 31 shareholder signatories, who represent more than $1

trillion in total assets under management, asked the CEOs of the Russell 1000 firms, to

actively embrace ESG risks in both their actions and required investor disclosures. These

investors argue that the long-term sustainability of their portfolio companies is tied to the

incorporation of environmental, social, and governance considerations into business

98
decision-making and communication strategies. This research’s target population is 800 of

the same Russell 1000 firms, who were recently requested by their institutional investors

to incorporate ESG considerations into their decision-making and communication

strategies.

This newness minimizes sample sizes for research opportunities, thereby reducing the

ability to make broad generalizations. However, as with any exploratory and cutting edge

research, creation and dissemination of new and relevant knowledge of Environmental

Social Governance Collaboration, that positively impacts business performance, will

inevitably spur additional interest and research, in the future.

5.6 Reflections

This research acknowledges that the valuation of publically traded stock firms is not

entirely represented by traditional financial statements, and a cursory look at the market

value to book value ratios of these firms, indicate that they are significantly different from

1.0. This indicates that that extra-financial factors, other than intangible factors, are

contributing to the market value of a firm. Research indicates that intangible assets, over

the last three to four decades, have become increasingly important as a component of the

market value such firms (Ocean Tomo 2012). Although reputation, branding, and other

intangible assets impact the market valuation of firms, there is a growing interest, from

investors and potential investors, in identifying, disclosing, and quantifying extra-financial

risk factors such as environmental, social and governance issues.

ESG issues are becoming increasing important to investors because of their potential

positive or negative impacts to a firm’s earnings prowess. As viewed through the eyes of

99
investors, firms that are perceived as having ESG issues, are considered to be more risky

than those that do not have such issues. The riskier firms would command lower valuations,

and be expected to provide higher returns. Sophisticated investors who can spot such

opportunities, or threats, can make the appropriate investment decisions in order to create

shareholder value.

In June 2011, Ceres, a group who represents more than $1 trillion in total assets under

management, asked the CEOs of the Russell 1000 firms in a jointly-signed letter of 31

shareholder signatories, to actively embrace ESG risks in both their actions and required

investor disclosures. These investors argue that the long-term sustainability of their

portfolio companies is tied to the incorporation of environmental, social, and governance

considerations into business decision-making and communication strategies.

The combination of the growing importance of intangible factors as a key to the

valuation of firms (Ocean Tomo 2012), the growing interest of investors in achieving

sustainability of their firms, through understanding ESG management strategies (Ceres,

2011), and the emphasis of these investors targeting ‘their’ CEOs of the Russell 1000 firms,

where secondary data can be obtained, was the trifecta of motivation to propose a standard

definition of ESG (Whitelock 2015), to study the relationship between ESG management

and performance, and to survey and test the model on a sample of firms, from the Russell

1000 firm population, that represents over 92% of US market capitalization (Russell 2010).

Data to test and analyze the model came from two source types— primary data from a

web-based, large scale survey, sent to CEOs and their direct reports in charge of

sustainability, environmental, social and governance matters, and secondary data extracted

primarily from Russell Investments, Compustat and Bloomberg databases. A search of the

100
respective databases was made to extract secondary financial data for the Russell 1000

firms. 800 of the 1000 firms were found to have financial data in the Compustat and

Bloomberg databases. The remaining 200 companies changed names or were acquired,

merged, taken private or ceased to exist, and their ticker symbols or names were no longer

listed. Email addresses of numerous executives, from each of the Russell 800 firms, were

acquired, and an introductory letter, with a Qualtrics hyperlink to the survey, was sent to

the CEOs of these firms (Appendix). Reminders were sent six to eight weeks after the

initial introduction letters, and again six to eight weeks after the reminder letters were sent.

This process was repeated with other executives in each of the Russell 800 firms until the

resultant 81 respondents were received over a period of eighteen to twenty-four months,

with only 20 firms self-identifying with their name and ticker symbols.

With only 20 of the 81 firms self-identifying, this situation resulted in a revised strategy

to create two ESG Collaboration frameworks, rather than one. The first framework was an

ESG Collaboration— ESG Operational Performance link, using 81 firms, and the second

framework was an ESG Collaboration— ESG Financial Performance link, using 20 self-

identified firms. The fact that only 20 firms self-identified, prevented the researchers from

extracting objective, secondary data from the Russell, Compustat and Bloomberg databases

and relating it to more than the 20 firms.

It appears that the difficulty in acquiring more than 81 respondents, and more than 20

self-identified firms, from the Russell 800 publically traded stock firms, was potentially

due to a number of reasons, five of which are particularly relevant and are identified. First,

ESG is relatively new for publically traded stock firms. Very few of them have dedicated

resources for the formulation and implementation of ESG strategies, and there is no one

101
Champion placed in charge of ESG, for most firms. For example, although many leaders,

collectively, within a firm, may be responsible for various aspects of sustainability,

research indicates that in 2014 there were only 36 Chief Sustainability Officers in

publically traded companies, up from 1 in 2011 (Weinreb 2014), that were responsible for

formulating, implementing, monitoring and reporting on sustainability initiatives. Second,

the Ceres request, to the CEOs of the Russell 1000 firms, indicates that few of these

publically traded firms have formally communicated their ESG strategies or communicated

whether they even incorporate ESG considerations in their business decision-making. For

example, Kohlberg Kravitz Roberts and Co. L.P. (KKR) own and operate publically traded

firms in the Russell 1000 index, but KKR created only their fourth ESG report, covering

the 2013 calendar year, describing ESG initiatives and the integration of ESG issues in

their investment processes, not for their publically traded stock companies, but only for

their private equity investment process and private equity portfolio companies (KKR

2014). Third, ESG considerations are very revealing and sensitive. Sharing such

information can result in positive or negative perceptions by the investing communities,

thereby impacting perceived risk-return tradeoffs and valuations. Furthermore, poorly

crafted communiques can attract unwanted attention and questions from activist

shareholders, environmental protection agencies, occupational, safety, and health

administrations, labor protection agencies, SEC and a host of other internal and external

stakeholders. Fourth, firms may be reluctant to share successful proprietary ESG

collaboration, plans, practices, initiatives and performances, if they are core competencies.

Moreover, if they are valuable, rare, costly to imitate, and non-substitutable, and create

competitive strategic advantages that commands higher returns, firms may resist showing

102
any ESG information, altogether. Fifth, since there is no regulatory requirement for

publically traded firms to disclose and communicate initiatives pertaining to ESG, as exists

with information in traditional financial statements, publically traded firms may be

reluctant to voluntarily reveal key ESG initiatives that differentiate it from its peers.

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 ESG Figures

ESG Collaboration – Performance Link List of Figures

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132
Figure 2d - Indicator Data (Squared Correlations) - (Operational Performance)
(Partial display due to large number of items)
For indicator reliability, standardized indicator loadings > = 0.70 is the goal, however,
in exploratory studies, loadings of 0.40 are acceptable (Hulland 1999).

EAP0 EAP0 EAP0 EAP0 EAP0 EAP0 EAP0 EAP0 EAP0

1_IOU 2_IOU 3_IOU 4_IOU 5_IOU 6_IOU 7_IOU 8_IOU 9_IOU
EAP01
_IOU
1.000 0.870 0.906 0.959 0.947 0.793 0.924 0.899 0.943
EAP02
_IOU
0.870 1.000 0.918 0.870 0.911 0.838 0.896 0.874 0.873
EAP03
_IOU
0.906 0.918 1.000 0.928 0.954 0.871 0.926 0.951 0.881
EAP04
_IOU
0.959 0.870 0.928 1.000 0.953 0.800 0.942 0.908 0.945
EAP05
_IOU
0.947 0.911 0.954 0.953 1.000 0.822 0.929 0.920 0.935
EAP06
_IOU
0.793 0.838 0.871 0.800 0.822 1.000 0.860 0.857 0.785
EAP07
_IOU
0.924 0.896 0.926 0.942 0.929 0.860 1.000 0.914 0.963
EAP08
_IOU
0.899 0.874 0.951 0.908 0.920 0.857 0.914 1.000 0.881
EAP09
_IOU
0.943 0.873 0.881 0.945 0.935 0.785 0.963 0.881 1.000
EAP10
_IOU
0.937 0.904 0.968 0.944 0.969 0.848 0.935 0.971 0.915
EAP11
_IOU
0.910 0.858 0.856 0.938 0.893 0.759 0.950 0.834 0.950
EAP12
_IOU
0.876 0.812 0.865 0.914 0.877 0.792 0.904 0.842 0.894
EAP13
_IOU
0.725 0.752 0.806 0.757 0.765 0.960 0.783 0.786 0.730
EAP14
_IOU
0.889 0.874 0.835 0.887 0.869 0.784 0.910 0.830 0.919
EC01 0.461 0.439 0.463 0.470 0.465 0.404 0.472 0.479 0.460
EC02 0.482 0.474 0.497 0.502 0.490 0.449 0.498 0.503 0.478
EC03 0.461 0.430 0.452 0.470 0.457 0.391 0.460 0.469 0.454
EC04 0.435 0.401 0.436 0.438 0.432 0.383 0.441 0.451 0.429
EC05 0.414 0.407 0.418 0.420 0.419 0.403 0.432 0.419 0.417
EP01_
IOU
0.729 0.735 0.764 0.735 0.754 0.786 0.792 0.698 0.765
EP02_
IOU
0.651 0.738 0.692 0.668 0.687 0.745 0.743 0.612 0.698
EP03_
IOU
0.795 0.771 0.806 0.798 0.788 0.794 0.833 0.762 0.804
EP04_
IOU
0.736 0.744 0.753 0.759 0.761 0.783 0.820 0.709 0.786
EP05_
IOU
0.758 0.811 0.770 0.786 0.785 0.760 0.832 0.692 0.813
EP06_
IOU
0.757 0.809 0.773 0.788 0.788 0.761 0.828 0.689 0.808

133
EP07_
IOU
0.851 0.892 0.873 0.886 0.891 0.790 0.898 0.802 0.891
EP08_
IOU
0.836 0.896 0.859 0.868 0.870 0.786 0.890 0.779 0.868
EP09_
IOU
0.756 0.892 0.871 0.821 0.843 0.765 0.812 0.816 0.769
EP10_
IOU
0.784 0.902 0.858 0.827 0.860 0.757 0.807 0.779 0.788
GAP0
1_IOU
0.920 0.858 0.852 0.945 0.894 0.756 0.943 0.835 0.948
GAP0
2_IOU
0.833 0.793 0.774 0.836 0.801 0.565 0.838 0.750 0.854
GAP0
3_IOU
0.821 0.800 0.874 0.818 0.827 0.907 0.857 0.912 0.797
GAP0
4_IOU
0.864 0.774 0.824 0.853 0.824 0.717 0.885 0.812 0.872
GAP0
5_IOU
0.829 0.736 0.789 0.856 0.814 0.728 0.855 0.789 0.855
GAP0
6_IOU
0.913 0.933 0.906 0.936 0.934 0.824 0.953 0.869 0.946
GAP0
7_IOU
0.956 0.874 0.931 0.955 0.963 0.828 0.941 0.893 0.943
GAP0
8_IOU
0.866 0.774 0.816 0.852 0.819 0.740 0.877 0.816 0.866
GAP0
9_IOU
0.812 0.742 0.742 0.802 0.783 0.546 0.812 0.722 0.832
GAP1
0_IOU
0.917 0.909 0.943 0.913 0.964 0.871 0.930 0.917 0.917
GAP1
1_IOU
0.850 0.787 0.821 0.856 0.813 0.735 0.863 0.822 0.843
GAP1
2_IOU
0.895 0.813 0.900 0.915 0.879 0.816 0.911 0.899 0.882
GC01 0.677 0.710 0.703 0.703 0.704 0.662 0.724 0.697 0.704
GC02 0.646 0.667 0.697 0.677 0.679 0.723 0.712 0.696 0.673
GC03 0.702 0.710 0.755 0.739 0.738 0.752 0.753 0.743 0.712
GC04 0.687 0.722 0.749 0.730 0.729 0.765 0.756 0.739 0.712
GC05 0.659 0.706 0.712 0.695 0.692 0.735 0.718 0.700 0.683
GP01_
IOU
0.887 0.773 0.856 0.881 0.871 0.666 0.796 0.844 0.803
GP02_
IOU
0.673 0.649 0.733 0.686 0.705 0.831 0.694 0.695 0.641
GP03_
IOU
0.861 0.829 0.873 0.884 0.863 0.733 0.829 0.835 0.805
GP04_
IOU
0.833 0.781 0.856 0.833 0.849 0.798 0.826 0.859 0.800
GP05_
IOU
0.830 0.812 0.889 0.846 0.865 0.774 0.830 0.842 0.781
GP06_
IOU
0.781 0.713 0.804 0.744 0.748 0.845 0.751 0.786 0.695
GP07_
IOU
0.852 0.824 0.888 0.832 0.852 0.809 0.830 0.844 0.779
GP08_
IOU
0.823 0.821 0.889 0.834 0.860 0.782 0.822 0.833 0.774

134
GP09_
IOU
0.724 0.684 0.766 0.722 0.721 0.855 0.714 0.735 0.657
GP10_
IOU
0.836 0.790 0.890 0.839 0.842 0.818 0.815 0.865 0.758
SAP01
_IOU
0.892 0.908 0.978 0.919 0.954 0.868 0.920 0.957 0.885
SAP02
_IOU
0.830 0.769 0.791 0.859 0.811 0.650 0.834 0.766 0.846
SAP03
_IOU
0.795 0.751 0.764 0.788 0.780 0.574 0.798 0.743 0.799
SAP04
_IOU
0.800 0.691 0.725 0.800 0.780 0.519 0.760 0.713 0.798
SAP05
_IOU
0.960 0.856 0.895 0.953 0.926 0.803 0.940 0.878 0.946
SAP06
_IOU
0.819 0.740 0.791 0.851 0.816 0.723 0.864 0.789 0.855
SAP07
_IOU
0.788 0.899 0.904 0.832 0.850 0.820 0.859 0.885 0.789
SAP08
_IOU
0.581 0.712 0.706 0.618 0.670 0.873 0.715 0.653 0.646
SAP09
_IOU
0.801 0.685 0.711 0.804 0.773 0.499 0.768 0.700 0.814
SC01 0.500 0.476 0.515 0.504 0.500 0.540 0.524 0.536 0.497
SC02 0.484 0.480 0.505 0.492 0.496 0.550 0.527 0.519 0.500
SC03 0.424 0.442 0.449 0.427 0.436 0.491 0.465 0.446 0.439
SC04 0.532 0.500 0.546 0.536 0.535 0.582 0.556 0.551 0.530
SC05 0.561 0.565 0.586 0.576 0.582 0.603 0.595 0.591 0.571
SP01_
IOU
0.791 0.801 0.859 0.794 0.804 0.908 0.822 0.849 0.748
SP02_
IOU
0.759 0.782 0.824 0.774 0.774 0.912 0.782 0.806 0.716
SP03_
IOU
0.853 0.825 0.912 0.856 0.858 0.868 0.865 0.934 0.799
SP04_
IOU
0.844 0.830 0.916 0.852 0.867 0.889 0.871 0.919 0.802
SP05_
IOU
0.856 0.837 0.914 0.869 0.883 0.861 0.917 0.909 0.865
SP06_
IOU
0.857 0.850 0.874 0.875 0.888 0.785 0.926 0.842 0.917
SP07_
IOU
0.808 0.728 0.788 0.838 0.800 0.717 0.837 0.762 0.830
SP08_
IOU
0.700 0.734 0.760 0.737 0.728 0.819 0.768 0.824 0.718
SP09_
IOU
0.801 0.923 0.865 0.840 0.876 0.752 0.829 0.814 0.814
SP10_
IOU
0.822 0.937 0.879 0.850 0.889 0.763 0.846 0.830 0.830

135
Figure 2e - Cross Loadings (Squared) - (Operational Performance)
For discriminate validity, based on correlations, presenting the square of the loadings and cross
loadings gives a more intuitive interpretation since it represents the percentage overlap between
an item and any construct (Chin 2010).
For discriminate validity, each indicator cross loading should load highest on the construct it is
intended to measure (Chin 1998; Gregoire and Fisher 2006).

EAP EC EP GAP GC GP SAP SC SP

EAP01_IOU 0.956 0.456 0.817 0.944 0.681 0.860 0.921 0.507 0.876
EAP02_IOU 0.931 0.435 0.873 0.882 0.711 0.815 0.892 0.499 0.891
EAP03_IOU 0.962 0.459 0.855 0.917 0.731 0.896 0.925 0.527 0.929
EAP04_IOU 0.968 0.466 0.847 0.949 0.717 0.860 0.943 0.514 0.897
EAP05_IOU 0.968 0.458 0.857 0.929 0.716 0.868 0.936 0.516 0.905
EAP06_IOU 0.892 0.411 0.824 0.813 0.735 0.836 0.803 0.561 0.892
EAP07_IOU 0.976 0.466 0.881 0.961 0.740 0.839 0.949 0.541 0.916
EAP08_IOU 0.947 0.470 0.782 0.905 0.723 0.864 0.901 0.536 0.918
EAP09_IOU 0.958 0.453 0.853 0.950 0.704 0.795 0.937 0.514 0.870
EAP10_IOU 0.972 0.473 0.834 0.931 0.733 0.886 0.935 0.530 0.928
EAP11_IOU 0.937 0.447 0.877 0.949 0.702 0.796 0.929 0.496 0.875
EAP12_IOU 0.927 0.450 0.890 0.947 0.714 0.819 0.952 0.521 0.882
EAP13_IOU 0.835 0.380 0.770 0.742 0.707 0.766 0.738 0.543 0.827
EAP14_IOU 0.926 0.446 0.880 0.954 0.713 0.765 0.949 0.514 0.868
EC01 0.479 0.993 0.407 0.477 0.572 0.414 0.478 0.632 0.452
EC02 0.515 0.985 0.459 0.509 0.606 0.452 0.514 0.635 0.498
EC03 0.472 0.991 0.397 0.466 0.532 0.402 0.467 0.578 0.443
EC04 0.448 0.988 0.371 0.446 0.543 0.393 0.441 0.611 0.421
EC05 0.441 0.985 0.398 0.429 0.561 0.386 0.426 0.659 0.424
EP01_IOU 0.808 0.365 0.929 0.823 0.631 0.768 0.825 0.478 0.831
EP02_IOU 0.752 0.335 0.934 0.764 0.617 0.700 0.773 0.444 0.800
EP03_IOU 0.856 0.405 0.938 0.891 0.668 0.815 0.886 0.497 0.883
EP04_IOU 0.823 0.380 0.931 0.841 0.655 0.746 0.848 0.489 0.849
EP05_IOU 0.838 0.377 0.977 0.854 0.661 0.765 0.856 0.463 0.862
EP06_IOU 0.837 0.371 0.976 0.852 0.657 0.768 0.853 0.458 0.860
EP07_IOU 0.912 0.416 0.965 0.897 0.694 0.845 0.896 0.477 0.922
EP08_IOU 0.899 0.408 0.967 0.885 0.687 0.832 0.883 0.470 0.913
EP09_IOU 0.852 0.402 0.867 0.800 0.681 0.803 0.825 0.443 0.898
EP10_IOU 0.857 0.396 0.895 0.810 0.671 0.806 0.832 0.437 0.886
GAP01_IOU 0.934 0.444 0.856 0.933 0.691 0.790 0.912 0.491 0.860
GAP02_IOU 0.818 0.402 0.753 0.881 0.571 0.691 0.872 0.386 0.743
GAP03_IOU 0.890 0.436 0.763 0.844 0.711 0.836 0.819 0.557 0.901
GAP04_IOU 0.879 0.430 0.835 0.956 0.656 0.770 0.943 0.477 0.828
GAP05_IOU 0.870 0.431 0.832 0.937 0.687 0.752 0.927 0.495 0.834
GAP06_IOU 0.958 0.445 0.897 0.930 0.715 0.818 0.925 0.512 0.892
GAP07_IOU 0.964 0.455 0.855 0.947 0.710 0.864 0.943 0.519 0.891

136
GAP08_IOU 0.881 0.431 0.838 0.957 0.665 0.778 0.937 0.488 0.839
GAP09_IOU 0.800 0.396 0.771 0.899 0.565 0.667 0.900 0.387 0.730
GAP10_IOU 0.964 0.455 0.881 0.922 0.736 0.880 0.917 0.537 0.932
GAP11_IOU 0.880 0.440 0.846 0.939 0.671 0.789 0.940 0.485 0.846
GAP12_IOU 0.935 0.466 0.844 0.965 0.733 0.851 0.954 0.529 0.907
GC01 0.737 0.575 0.674 0.716 0.979 0.630 0.722 0.780 0.707
GC02 0.729 0.558 0.672 0.699 0.990 0.637 0.698 0.802 0.717
GC03 0.779 0.566 0.726 0.749 0.991 0.715 0.747 0.787 0.772
GC04 0.778 0.559 0.727 0.742 0.993 0.698 0.745 0.781 0.773
GC05 0.746 0.560 0.697 0.709 0.991 0.645 0.713 0.796 0.731
GP01_IOU 0.849 0.416 0.733 0.847 0.603 0.897 0.839 0.419 0.827
GP02_IOU 0.740 0.327 0.745 0.676 0.594 0.882 0.661 0.453 0.791
GP03_IOU 0.871 0.415 0.824 0.860 0.645 0.944 0.853 0.432 0.875
GP04_IOU 0.865 0.410 0.804 0.835 0.662 0.966 0.814 0.473 0.901
GP05_IOU 0.865 0.410 0.822 0.840 0.656 0.969 0.837 0.445 0.888
GP06_IOU 0.798 0.364 0.755 0.760 0.607 0.930 0.724 0.471 0.835
GP07_IOU 0.867 0.405 0.823 0.846 0.640 0.974 0.829 0.456 0.884
GP08_IOU 0.861 0.402 0.835 0.835 0.651 0.968 0.828 0.443 0.882
GP09_IOU 0.773 0.347 0.761 0.720 0.622 0.922 0.692 0.463 0.826
GP10_IOU 0.862 0.410 0.795 0.837 0.654 0.978 0.816 0.471 0.897
SAP01_IOU 0.957 0.461 0.851 0.910 0.732 0.889 0.921 0.532 0.933
SAP02_IOU 0.853 0.422 0.829 0.930 0.647 0.727 0.936 0.443 0.798
SAP03_IOU 0.800 0.399 0.784 0.869 0.568 0.684 0.897 0.404 0.735
SAP04_IOU 0.774 0.388 0.720 0.843 0.531 0.646 0.873 0.382 0.686
SAP05_IOU 0.956 0.460 0.861 0.970 0.704 0.853 0.953 0.517 0.889
SAP06_IOU 0.869 0.431 0.834 0.937 0.684 0.746 0.934 0.491 0.835
SAP07_IOU 0.886 0.440 0.788 0.840 0.719 0.785 0.860 0.488 0.867
SAP08_IOU 0.728 0.319 0.737 0.633 0.637 0.617 0.640 0.490 0.729
SAP09_IOU 0.769 0.387 0.706 0.865 0.532 0.636 0.874 0.369 0.683
SC01 0.541 0.630 0.474 0.522 0.763 0.480 0.513 0.988 0.532
SC02 0.537 0.618 0.477 0.507 0.798 0.451 0.503 0.996 0.519
SC03 0.474 0.596 0.433 0.447 0.756 0.387 0.446 0.981 0.450
SC04 0.575 0.624 0.518 0.554 0.768 0.511 0.547 0.988 0.558
SC05 0.614 0.643 0.547 0.577 0.852 0.538 0.576 0.984 0.596
SP01_IOU 0.865 0.408 0.848 0.818 0.701 0.891 0.794 0.526 0.946
SP02_IOU 0.840 0.392 0.842 0.783 0.696 0.871 0.765 0.515 0.926
SP03_IOU 0.901 0.440 0.825 0.868 0.705 0.912 0.851 0.514 0.958
SP04_IOU 0.906 0.437 0.849 0.867 0.711 0.918 0.851 0.528 0.968
SP05_IOU 0.922 0.443 0.885 0.902 0.712 0.892 0.887 0.521 0.962
SP06_IOU 0.917 0.430 0.934 0.927 0.688 0.819 0.923 0.499 0.918
SP07_IOU 0.853 0.414 0.881 0.920 0.663 0.784 0.911 0.475 0.862
SP08_IOU 0.799 0.396 0.743 0.739 0.679 0.750 0.727 0.494 0.890
SP09_IOU 0.872 0.411 0.884 0.827 0.679 0.799 0.847 0.449 0.904
SP10_IOU 0.886 0.416 0.889 0.842 0.682 0.812 0.858 0.458 0.915

137
Figure 2f - Latent Variable Squared Correlations (Fornell-Larcker Criterion) -
(Operational Performance)
For internal consistency reliability, composite reliability > = 0.70 is the goal, however, in
exploratory research 0.60 is considered acceptable (Bagozzi and Yi 1988).
For convergent validity, Average Variance Extracted
(AVE) > = 0.50 is the goal (Bagozzi and Yi 1988).
For discriminate validity, use Fornell-Larcker criterion. Each construct's AVE should be
higher than its squared correlation with any other construct (Fornell and Larcker 1981).

Composite Latent
AVE EAP EC EP GAP GC GP SAP SC SP
Reliability Variable
0.995 0.940 EAP 1.000
0.998 0.988 EC 0.477 1.000
0.993 0.938 EP 0.900 0.411 1.000
0.993 0.926 GAP 0.971 0.471 0.898 1.000
0.998 0.989 GC 0.762 0.570 0.706 0.731 1.000
0.994 0.943 GP 0.886 0.415 0.837 0.855 0.672 1.000
0.985 0.876 SAP 0.966 0.471 0.905 0.989 0.733 0.838 1.000
0.997 0.987 SC 0.556 0.630 0.496 0.528 0.798 0.479 0.524 1.000
0.992 0.925 SP 0.948 0.453 0.929 0.920 0.748 0.913 0.911 0.538 1.000

138
Figure 2g - Summary of Theoretical Level (inner or structural ) Model Results -
(Operational Performance)
The R Square displayed, for each hypothesized relationship,
is the R Square for the dependent variable in that
relationship.
For R Square, acceptable levels depend on research context.
R Square > 0.25 Weak, 0.50 Moderate, 0.75 Strong (Hair et
al. 2010).
For Effect size, f Square, of 0.02, 0.15, or 0.35 is indicative
of weak, moderate, or strong effects, respectively (Cohen
1998).
For path coefficient estimates, use bootstrapping to
assess significance (Chin 1998, Hensler et al. 2009).
For predictive relevance, Q Square and q square, use blindfolding. Q Square > 0 is indicative of
predictive
relevance; q-square of 0.02, 0.15, 0.35 for weak, moderate, or strong degree of predictive
relevance
(Chin 1998, Hensler et al. 2009).
*** All direct path coefficients are significant at p < 0.01

Direct
Path Standa The Predicti
Hypothesiz T Depen
Coeffici Sampl rd P Effect ve Num
Hypot ed R Statistics Support dent
ents - e Mean Error Valu Size (f Relevan ber of
hesis Relationshi Square (|O/STE ed Variab
Original (M) (STER es Square ce Q Items
p RR|) le
Sample R) ) Square
(O) ***

GC -> 0.00
H1a 0.755 0.570 0.754 0.050 15.162 1.325 Strong 0.562 15 EC
EC 0
GC -> 0.00
H1b 0.893 0.798 0.895 0.040 22.171 3.949 Strong 0.787 15 SC
SC 0
EC -> 0.00
H2a 0.690 0.477 0.687 0.060 11.493 0.911 Strong 0.447 14 EAP
EAP 0
SC -> 0.00
H2b 0.724 0.524 0.724 0.058 12.410 1.100 Strong 0.453 9 SAP
SAP 0
GC -> 0.00
H2c 0.855 0.731 0.854 0.041 20.953 2.717 Strong 0.674 12 GAP
GAP 0
EAP -> 0.00
H3a 0.949 0.900 0.948 0.016 58.980 9.000 Strong 0.841 10 EP
EP 0
SAP -> 0.00 10.24
H3b 0.955 0.911 0.955 0.014 70.151 Strong 0.839 10 SP
SP 0 5
GAP -> 0.00
H3c 0.925 0.855 0.926 0.017 55.189 5.903 Strong 0.804 10 GP
GP 0
EP ->
H4a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
FP
SP ->
H4b n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
FP
GP ->
H4c n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
FP

139
Figure 2h - Path Coefficients - Total Effects - (Operational Performance)
*** All total effects path coefficients are significant at p < 0.01
Mean, STDEV, T-Values,
P-Values
Sample Standard
Original T Statistics
Mean Error P Values
Sample (O) (|O/STERR|)
(M) (STERR)
EAP -> EP 0.949 0.948 0.016 58.980 0.000
EC -> EAP 0.690 0.687 0.060 11.493 0.000
EC -> EP 0.655 0.651 0.060 10.985 0.000
GAP -> GP 0.925 0.926 0.017 55.189 0.000
GC -> EAP 0.521 0.521 0.077 6.793 0.000
GC -> EC 0.755 0.754 0.050 15.162 0.000
GC -> EP 0.494 0.494 0.074 6.641 0.000
GC -> GAP 0.855 0.854 0.041 20.953 0.000
GC -> GP 0.791 0.791 0.040 19.718 0.000
GC -> SAP 0.646 0.650 0.074 8.763 0.000
GC -> SC 0.893 0.895 0.040 22.171 0.000
GC -> SP 0.617 0.621 0.071 8.741 0.000
SAP -> SP 0.955 0.955 0.014 70.151 0.000
SC -> SAP 0.724 0.724 0.058 12.410 0.000
SC -> SP 0.691 0.692 0.056 12.339 0.000

140
141
142
143
144
Figure 3d - Indicator Data (Squared Correlations) - (Financial Performance) (Partial
display due to large number of items)
For indicator reliability, standardized indicator loadings > = 0.70 is the goal,
however, in exploratory studies, loadings of 0.40 are acceptable (Hulland 1999).

EAP EAP EAP EAP EAP EAP EAP EAP EAP EAP
EAP11 EAP12
01_I 02_I 03_I 04_I 05_I 06_I 07_I 08_I 09_I 10_I
_IOU _IOU
OU OU OU OU OU OU OU OU OU OU
EAP01
1.000 0.802 0.839 0.940 0.903 0.758 0.906 0.864 0.935 0.904 0.936 0.872
_IOU
EAP02
0.802 1.000 0.933 0.872 0.938 0.871 0.944 0.902 0.903 0.939 0.900 0.850
_IOU
EAP03
0.839 0.933 1.000 0.922 0.953 0.868 0.939 0.946 0.863 0.952 0.856 0.853
_IOU
EAP04
0.940 0.872 0.922 1.000 0.951 0.806 0.942 0.918 0.929 0.951 0.941 0.918
_IOU
EAP05
0.903 0.938 0.953 0.951 1.000 0.865 0.985 0.893 0.954 0.938 0.941 0.915
_IOU
EAP06
0.758 0.871 0.868 0.806 0.865 1.000 0.864 0.869 0.809 0.841 0.794 0.819
_IOU
EAP07
0.906 0.944 0.939 0.942 0.985 0.864 1.000 0.906 0.971 0.953 0.959 0.900
_IOU
EAP08
0.864 0.902 0.946 0.918 0.893 0.869 0.906 1.000 0.858 0.979 0.879 0.843
_IOU
EAP09
0.935 0.903 0.863 0.929 0.954 0.809 0.971 0.858 1.000 0.922 0.983 0.901
_IOU
EAP10
0.904 0.939 0.952 0.951 0.938 0.841 0.953 0.979 0.922 1.000 0.941 0.879
_IOU
EAP11
0.936 0.900 0.856 0.941 0.941 0.794 0.959 0.879 0.983 0.941 1.000 0.909
_IOU
EAP12
0.872 0.850 0.853 0.918 0.915 0.819 0.900 0.843 0.901 0.879 0.909 1.000
_IOU
EAP13
0.697 0.823 0.813 0.789 0.815 0.956 0.803 0.812 0.762 0.791 0.755 0.808
_IOU
EAP14
0.904 0.904 0.837 0.929 0.923 0.787 0.937 0.860 0.964 0.923 0.983 0.896
_IOU
EBIT 0.041 0.174 0.152 0.110 0.128 0.178 0.109 0.147 0.067 0.123 0.092 0.081
EBIT
0.038 0.121 0.103 0.086 0.095 0.120 0.078 0.102 0.056 0.089 0.076 0.080
DA
EC01 0.635 0.614 0.662 0.693 0.657 0.566 0.665 0.672 0.645 0.687 0.672 0.655

EC02 0.597 0.601 0.644 0.672 0.633 0.552 0.632 0.664 0.618 0.674 0.653 0.675

EC03 0.623 0.588 0.635 0.679 0.630 0.539 0.642 0.655 0.629 0.674 0.661 0.659

EC04 0.538 0.508 0.550 0.567 0.554 0.495 0.551 0.546 0.537 0.560 0.560 0.566

EC05 0.558 0.595 0.591 0.606 0.614 0.573 0.618 0.588 0.610 0.611 0.631 0.622
EP01_
0.754 0.865 0.790 0.764 0.864 0.826 0.848 0.728 0.831 0.771 0.811 0.885
IOU

145
EP02_
0.695 0.896 0.764 0.742 0.847 0.811 0.850 0.724 0.846 0.779 0.833 0.865
IOU
EP03_
0.875 0.884 0.842 0.865 0.903 0.849 0.893 0.833 0.892 0.869 0.898 0.941
IOU
EP04_
0.782 0.878 0.819 0.834 0.897 0.835 0.908 0.778 0.893 0.828 0.874 0.923
IOU
EP05_
0.763 0.934 0.804 0.803 0.898 0.821 0.903 0.766 0.908 0.832 0.898 0.873
IOU
EP06_
0.759 0.921 0.814 0.809 0.908 0.817 0.884 0.751 0.885 0.813 0.874 0.882
IOU
EP07_
0.813 0.985 0.888 0.866 0.943 0.851 0.948 0.855 0.933 0.911 0.929 0.866
IOU
EP08_
0.814 0.985 0.888 0.867 0.943 0.852 0.949 0.855 0.933 0.911 0.929 0.865
IOU
EP09_
0.666 0.916 0.886 0.816 0.848 0.775 0.843 0.857 0.790 0.877 0.795 0.775
IOU
EP10_
0.727 0.961 0.891 0.851 0.898 0.813 0.896 0.859 0.862 0.898 0.864 0.827
IOU
GAP0
0.936 0.901 0.856 0.941 0.941 0.795 0.959 0.879 0.983 0.941 1.000 0.908
1_IOU
GAP0
0.885 0.783 0.800 0.871 0.839 0.562 0.845 0.795 0.852 0.868 0.876 0.763
2_IOU
GAP0
0.789 0.802 0.829 0.817 0.819 0.953 0.822 0.874 0.786 0.842 0.793 0.831
3_IOU
GAP0
0.972 0.819 0.851 0.930 0.906 0.686 0.910 0.846 0.931 0.906 0.929 0.843
4_IOU
GAP0
0.961 0.794 0.833 0.959 0.901 0.731 0.895 0.855 0.933 0.900 0.940 0.889
5_IOU
GAP0
0.856 0.961 0.909 0.901 0.960 0.853 0.971 0.877 0.949 0.929 0.942 0.901
6_IOU
GAP0
0.913 0.850 0.920 0.942 0.955 0.825 0.949 0.864 0.908 0.896 0.889 0.871
7_IOU
GAP0
0.984 0.809 0.844 0.934 0.904 0.732 0.907 0.867 0.932 0.903 0.932 0.858
8_IOU
GAP0
0.878 0.742 0.733 0.842 0.816 0.521 0.823 0.726 0.857 0.816 0.879 0.754
9_IOU
GAP1
0.856 0.939 0.878 0.874 0.939 0.916 0.946 0.874 0.937 0.909 0.936 0.893
0_IOU
GAP1
0.913 0.800 0.816 0.902 0.850 0.749 0.849 0.869 0.858 0.884 0.886 0.911
1_IOU
GAP1
0.952 0.821 0.887 0.972 0.908 0.761 0.902 0.911 0.912 0.938 0.921 0.883
2_IOU
GC01 0.825 0.935 0.921 0.920 0.928 0.856 0.946 0.922 0.919 0.950 0.918 0.875

GC02 0.827 0.907 0.894 0.898 0.913 0.925 0.917 0.926 0.902 0.923 0.907 0.891

GC03 0.836 0.936 0.925 0.919 0.942 0.909 0.936 0.926 0.916 0.940 0.919 0.906

GC04 0.796 0.928 0.911 0.902 0.925 0.898 0.923 0.906 0.894 0.924 0.899 0.889

GC05 0.784 0.909 0.886 0.885 0.901 0.914 0.902 0.889 0.878 0.900 0.876 0.889
GP01_
0.796 0.685 0.807 0.835 0.735 0.628 0.724 0.854 0.689 0.839 0.725 0.709
IOU
GP02_
0.572 0.702 0.675 0.618 0.684 0.815 0.674 0.647 0.630 0.635 0.612 0.681
IOU

146
GP03_
0.824 0.818 0.840 0.859 0.821 0.713 0.825 0.864 0.801 0.883 0.824 0.773
IOU
GP04_
0.746 0.787 0.772 0.781 0.786 0.803 0.800 0.821 0.785 0.816 0.796 0.764
IOU
GP05_
0.755 0.847 0.846 0.824 0.843 0.730 0.838 0.812 0.800 0.843 0.800 0.786
IOU
GP06_
0.743 0.730 0.762 0.723 0.746 0.846 0.725 0.783 0.689 0.746 0.694 0.720
IOU
GP07_
0.775 0.829 0.823 0.791 0.826 0.795 0.804 0.795 0.766 0.799 0.763 0.774
IOU
GP08_
0.749 0.863 0.848 0.798 0.850 0.746 0.820 0.791 0.783 0.821 0.782 0.767
IOU
GP09_
0.685 0.701 0.716 0.717 0.704 0.824 0.691 0.758 0.667 0.728 0.682 0.714
IOU
GP10_
0.786 0.769 0.852 0.830 0.819 0.837 0.794 0.851 0.741 0.819 0.743 0.777
IOU
GPM 0.037 0.091 0.065 0.057 0.069 0.092 0.077 0.068 0.074 0.070 0.071 0.067

GPR 0.037 0.089 0.061 0.053 0.067 0.093 0.080 0.064 0.080 0.069 0.072 0.065

MV 0.002 0.002 0.004 0.002 0.003 0.007 0.001 0.002 0.001 0.000 0.000 0.000
NI_(L
0.042 0.133 0.102 0.078 0.096 0.141 0.102 0.106 0.084 0.099 0.087 0.084
OSS)
OPM 0.049 0.137 0.097 0.078 0.101 0.137 0.114 0.098 0.106 0.101 0.100 0.090
PRCC
0.030 0.110 0.080 0.070 0.082 0.099 0.100 0.089 0.081 0.087 0.085 0.067
_F
REVE
0.031 0.092 0.054 0.039 0.061 0.092 0.087 0.054 0.093 0.065 0.071 0.057
NUE
ROA 0.050 0.133 0.099 0.082 0.097 0.130 0.109 0.107 0.097 0.107 0.098 0.089

ROE 0.042 0.116 0.088 0.072 0.084 0.110 0.094 0.091 0.084 0.092 0.083 0.077

ROIC 0.043 0.122 0.089 0.073 0.087 0.118 0.098 0.095 0.087 0.096 0.089 0.081

ROS 0.075 0.212 0.152 0.122 0.155 0.218 0.175 0.157 0.161 0.159 0.154 0.143
SAP01
0.814 0.947 0.958 0.886 0.920 0.908 0.928 0.957 0.865 0.948 0.864 0.859
_IOU
SAP02
0.908 0.787 0.813 0.935 0.866 0.624 0.863 0.834 0.887 0.896 0.922 0.839
_IOU
SAP03
0.793 0.756 0.782 0.797 0.784 0.576 0.787 0.771 0.770 0.819 0.787 0.826
_IOU
SAP04
0.800 0.651 0.694 0.803 0.743 0.507 0.750 0.682 0.755 0.743 0.766 0.815
_IOU
SAP05
0.973 0.835 0.860 0.952 0.932 0.792 0.930 0.857 0.935 0.902 0.940 0.888
_IOU
SAP06
0.944 0.809 0.836 0.952 0.910 0.750 0.932 0.858 0.944 0.909 0.956 0.880
_IOU
SAP07
0.758 0.947 0.930 0.863 0.872 0.776 0.886 0.923 0.826 0.943 0.837 0.782
_IOU
SAP08
0.457 0.745 0.648 0.539 0.678 0.815 0.666 0.586 0.620 0.591 0.589 0.637
_IOU
SAP09
0.873 0.716 0.774 0.882 0.805 0.530 0.815 0.768 0.815 0.833 0.835 0.745
_IOU

147
SC01 0.846 0.808 0.846 0.875 0.858 0.906 0.866 0.877 0.846 0.868 0.847 0.894

SC02 0.673 0.796 0.778 0.722 0.783 0.925 0.789 0.779 0.753 0.763 0.736 0.771

SC03 0.762 0.879 0.847 0.805 0.874 0.938 0.873 0.829 0.842 0.832 0.825 0.860

SC04 0.845 0.833 0.878 0.874 0.896 0.942 0.893 0.874 0.862 0.868 0.850 0.899

SC05 0.807 0.887 0.887 0.878 0.893 0.921 0.913 0.897 0.885 0.902 0.872 0.865
SP01_I
0.782 0.869 0.858 0.824 0.846 0.980 0.846 0.905 0.810 0.871 0.818 0.830
OU
SP02_I
0.742 0.829 0.806 0.789 0.799 0.957 0.797 0.851 0.767 0.822 0.777 0.802
OU
SP03_I
0.850 0.865 0.910 0.895 0.865 0.887 0.877 0.988 0.834 0.947 0.856 0.831
OU
SP04_I
0.826 0.907 0.926 0.879 0.899 0.957 0.905 0.951 0.853 0.926 0.855 0.869
OU
SP05_I
0.838 0.917 0.906 0.883 0.918 0.934 0.925 0.930 0.889 0.917 0.888 0.883
OU
SP06_I
0.855 0.960 0.909 0.901 0.960 0.852 0.970 0.876 0.949 0.928 0.941 0.901
OU
SP07_I
0.936 0.867 0.867 0.966 0.949 0.784 0.938 0.860 0.955 0.916 0.969 0.943
OU
SP08_I
0.641 0.740 0.716 0.729 0.707 0.847 0.741 0.805 0.722 0.780 0.739 0.731
OU
SP09_I
0.727 0.961 0.890 0.850 0.898 0.813 0.896 0.859 0.862 0.898 0.863 0.826
OU
SP10_I
0.727 0.961 0.891 0.850 0.898 0.813 0.896 0.859 0.862 0.898 0.863 0.826
OU

148
Figure 3e - Cross Loadings (Squared) - (Financial Performance)
For discriminate validity, based on correlations, presenting the square of the loadings and
cross loadings gives a more intuitive interpretation since it represents the percentage overlap
between an item and any construct (Chin 2010).
For discriminate validity, each indicator cross loading should load highest on the construct it is
intended to measure (Chin 1998; Gregoire and Fisher 2006).

EAP EC EP FP GAP GC GP SAP SC SP

EAP01_IOU 0.924 0.601 0.801 0.053 0.974 0.821 0.801 0.930 0.807 0.848
EAP02_IOU 0.950 0.593 0.969 0.155 0.897 0.931 0.833 0.925 0.863 0.951
EAP03_IOU 0.949 0.628 0.880 0.110 0.910 0.916 0.856 0.937 0.870 0.930
EAP04_IOU 0.967 0.656 0.862 0.091 0.974 0.913 0.838 0.971 0.852 0.918
EAP05_IOU 0.980 0.630 0.939 0.114 0.962 0.930 0.842 0.964 0.884 0.936
EAP06_IOU 0.897 0.555 0.866 0.155 0.812 0.909 0.830 0.806 0.950 0.943
EAP07_IOU 0.983 0.634 0.936 0.127 0.965 0.934 0.829 0.970 0.890 0.942
EAP08_IOU 0.946 0.637 0.840 0.115 0.917 0.922 0.860 0.928 0.874 0.951
EAP09_IOU 0.963 0.619 0.920 0.119 0.970 0.910 0.792 0.950 0.860 0.911
EAP10_IOU 0.975 0.653 0.891 0.117 0.961 0.936 0.855 0.971 0.869 0.954
EAP11_IOU 0.964 0.648 0.913 0.115 0.977 0.912 0.800 0.959 0.848 0.918
EAP12_IOU 0.934 0.648 0.912 0.104 0.923 0.898 0.804 0.931 0.880 0.904
EAP13_IOU 0.857 0.538 0.834 0.211 0.757 0.905 0.770 0.756 0.937 0.916
EAP14_IOU 0.952 0.632 0.918 0.124 0.957 0.916 0.795 0.945 0.832 0.915
EBIT 0.125 0.066 0.141 0.245 0.082 0.167 0.090 0.097 0.130 0.176
EBITDA 0.095 0.066 0.110 0.490 0.067 0.126 0.011 0.080 0.126 0.127
EC01 0.680 0.991 0.615 0.052 0.698 0.699 0.594 0.707 0.706 0.659
EC02 0.665 0.978 0.618 0.075 0.671 0.714 0.563 0.691 0.703 0.655
EC03 0.663 0.987 0.599 0.071 0.682 0.688 0.549 0.697 0.702 0.638
EC04 0.569 0.975 0.525 0.038 0.586 0.585 0.504 0.585 0.640 0.551
EC05 0.634 0.978 0.623 0.080 0.629 0.680 0.537 0.631 0.716 0.633
EP01_IOU 0.853 0.551 0.933 0.099 0.818 0.794 0.756 0.831 0.833 0.835
EP02_IOU 0.851 0.554 0.969 0.165 0.793 0.850 0.713 0.820 0.828 0.854
EP03_IOU 0.924 0.617 0.936 0.086 0.914 0.857 0.820 0.913 0.872 0.890
EP04_IOU 0.899 0.594 0.949 0.141 0.857 0.870 0.746 0.882 0.875 0.877
EP05_IOU 0.898 0.575 0.986 0.160 0.855 0.882 0.748 0.869 0.838 0.888
EP06_IOU 0.891 0.556 0.980 0.143 0.847 0.872 0.758 0.858 0.824 0.876
EP07_IOU 0.946 0.607 0.986 0.155 0.905 0.924 0.808 0.920 0.859 0.936
EP08_IOU 0.946 0.602 0.986 0.155 0.905 0.924 0.808 0.920 0.858 0.936
EP09_IOU 0.864 0.554 0.870 0.199 0.789 0.919 0.750 0.839 0.779 0.893
EP10_IOU 0.910 0.578 0.938 0.194 0.844 0.943 0.778 0.883 0.819 0.927
GAP01_IOU 0.965 0.636 0.913 0.115 0.977 0.911 0.800 0.958 0.845 0.918
GAP02_IOU 0.834 0.578 0.748 0.038 0.909 0.715 0.700 0.911 0.620 0.732
GAP03_IOU 0.879 0.586 0.796 0.127 0.814 0.880 0.821 0.792 0.945 0.921
GAP04_IOU 0.908 0.629 0.806 0.048 0.970 0.797 0.771 0.949 0.749 0.813
GAP05_IOU 0.923 0.655 0.804 0.075 0.962 0.869 0.779 0.930 0.806 0.857
GAP06_IOU 0.961 0.618 0.961 0.137 0.933 0.917 0.819 0.944 0.876 0.940

149
GAP07_IOU 0.938 0.620 0.845 0.081 0.941 0.870 0.817 0.936 0.849 0.875
GAP08_IOU 0.917 0.639 0.803 0.050 0.974 0.815 0.791 0.941 0.783 0.837
GAP09_IOU 0.804 0.565 0.735 0.035 0.893 0.681 0.654 0.881 0.590 0.692
GAP10_IOU 0.957 0.622 0.955 0.145 0.915 0.932 0.827 0.901 0.927 0.956
GAP11_IOU 0.896 0.629 0.822 0.056 0.929 0.819 0.798 0.927 0.790 0.846
GAP12_IOU 0.937 0.659 0.803 0.078 0.963 0.889 0.813 0.944 0.823 0.883
GC01 0.958 0.690 0.913 0.172 0.913 0.984 0.812 0.934 0.900 0.960
GC02 0.954 0.690 0.908 0.169 0.900 0.989 0.833 0.896 0.949 0.982
GC03 0.968 0.691 0.933 0.166 0.915 0.996 0.842 0.919 0.939 0.983
GC04 0.952 0.664 0.925 0.187 0.887 0.996 0.821 0.899 0.924 0.974
GC05 0.939 0.666 0.916 0.216 0.867 0.989 0.796 0.880 0.953 0.969
GP01_IOU 0.778 0.556 0.617 0.001 0.803 0.720 0.860 0.801 0.631 0.741
GP02_IOU 0.703 0.440 0.718 0.009 0.624 0.705 0.853 0.617 0.738 0.752
GP03_IOU 0.855 0.565 0.768 0.002 0.863 0.797 0.950 0.865 0.690 0.823
GP04_IOU 0.829 0.528 0.775 0.006 0.793 0.825 0.950 0.777 0.749 0.849
GP05_IOU 0.846 0.541 0.818 0.005 0.827 0.805 0.946 0.844 0.698 0.827
GP06_IOU 0.779 0.489 0.715 0.002 0.746 0.725 0.929 0.713 0.759 0.794
GP07_IOU 0.832 0.522 0.809 0.002 0.816 0.756 0.956 0.813 0.724 0.817
GP08_IOU 0.837 0.512 0.837 0.003 0.814 0.782 0.947 0.823 0.689 0.813
GP09_IOU 0.760 0.486 0.695 0.005 0.707 0.768 0.926 0.679 0.751 0.800
GP10_IOU 0.840 0.557 0.741 0.003 0.811 0.807 0.970 0.799 0.774 0.839
GPM 0.077 0.039 0.094 0.898 0.054 0.107 0.002 0.065 0.136 0.095
GPR 0.076 0.036 0.094 0.928 0.053 0.109 0.003 0.062 0.140 0.094
MV 0.001 0.001 0.000 0.232 0.002 0.003 0.042 0.002 0.002 0.001
NI_(LOSS) 0.105 0.041 0.126 0.080 0.070 0.141 0.146 0.078 0.103 0.138
OPM 0.111 0.053 0.137 0.976 0.075 0.156 0.000 0.090 0.181 0.139
PRCC_F 0.088 0.026 0.103 0.083 0.060 0.122 0.104 0.073 0.068 0.115
REVENUE 0.073 0.029 0.097 0.812 0.045 0.111 0.000 0.055 0.141 0.090
ROA 0.109 0.040 0.128 0.075 0.076 0.143 0.144 0.085 0.102 0.137
ROE 0.094 0.034 0.111 0.066 0.065 0.124 0.129 0.074 0.086 0.117
ROIC 0.099 0.035 0.118 0.067 0.068 0.130 0.134 0.076 0.091 0.125
ROS 0.172 0.073 0.212 0.704 0.116 0.238 0.056 0.134 0.228 0.218
SAP01_IOU 0.946 0.646 0.902 0.133 0.895 0.928 0.858 0.918 0.905 0.962
SAP02_IOU 0.881 0.645 0.776 0.065 0.937 0.816 0.734 0.929 0.701 0.803
SAP03_IOU 0.792 0.561 0.767 0.040 0.837 0.690 0.680 0.882 0.640 0.710
SAP04_IOU 0.746 0.535 0.693 0.026 0.815 0.631 0.613 0.848 0.592 0.639
SAP05_IOU 0.941 0.626 0.843 0.064 0.974 0.849 0.817 0.946 0.827 0.869
SAP06_IOU 0.931 0.673 0.818 0.090 0.962 0.876 0.768 0.941 0.824 0.866
SAP07_IOU 0.901 0.590 0.869 0.140 0.859 0.893 0.799 0.909 0.780 0.901
SAP08_IOU 0.673 0.402 0.779 0.294 0.552 0.738 0.552 0.568 0.781 0.749
SAP09_IOU 0.803 0.602 0.685 0.029 0.885 0.686 0.672 0.891 0.604 0.694
SC01 0.910 0.724 0.828 0.141 0.873 0.907 0.780 0.861 0.977 0.916
SC02 0.821 0.630 0.810 0.282 0.732 0.869 0.663 0.727 0.963 0.877
SC03 0.897 0.689 0.909 0.226 0.831 0.915 0.729 0.836 0.977 0.920
SC04 0.924 0.695 0.858 0.145 0.878 0.923 0.799 0.865 0.984 0.927
SC05 0.936 0.706 0.882 0.198 0.874 0.972 0.798 0.878 0.972 0.958
SP01_IOU 0.905 0.589 0.855 0.147 0.831 0.921 0.846 0.818 0.946 0.957
SP02_IOU 0.865 0.558 0.823 0.151 0.785 0.895 0.816 0.770 0.924 0.924
SP03_IOU 0.926 0.617 0.812 0.114 0.894 0.909 0.851 0.893 0.877 0.945

150
SP04_IOU 0.942 0.625 0.878 0.135 0.883 0.931 0.867 0.886 0.944 0.973
SP05_IOU 0.948 0.629 0.906 0.136 0.903 0.929 0.850 0.903 0.923 0.968
SP06_IOU 0.961 0.633 0.961 0.136 0.933 0.918 0.818 0.944 0.879 0.940
SP07_IOU 0.956 0.677 0.891 0.093 0.975 0.902 0.812 0.957 0.847 0.906
SP08_IOU 0.793 0.520 0.731 0.228 0.703 0.885 0.689 0.700 0.857 0.872
SP09_IOU 0.910 0.560 0.936 0.195 0.843 0.941 0.778 0.882 0.814 0.926
SP10_IOU 0.910 0.565 0.937 0.195 0.844 0.941 0.778 0.883 0.815 0.926

151
Figure 3f - Latent Variable Squared Correlations (Fornell-Larcker Criterion) - (Financial
Performance)
For internal consistency reliability, composite reliability > = 0.70 is the goal, however, in exploratory
research 0.60 is considered acceptable (Bagozzi and Yi 1988).
For convergent validity, Average Variance Extracted (AVE) >
= 0.50 is the goal (Bagozzi and Yi 1988).
For discriminate validity, use Fornell-Larcker criterion. Each construct's AVE should be higher than its
squared correlation with any other construct (Fornell and Larcker 1981).

Composite Latent
AVE EAP EC EP FP GAP GC GP SAP SC SP
Reliability Variable
0.996 0.946 EAP 0.946
0.996 0.982 EC 0.655 0.982
0.995 0.953 EP 0.943 0.607 0.953
0.139 0.435 FP 0.126 0.063 0.155 0.435
0.994 0.932 GAP 0.978 0.666 0.895 0.085 0.932
0.998 0.991 GC 0.963 0.686 0.928 0.183 0.904 0.991
0.992 0.929 GP 0.869 0.560 0.806 0.004 0.841 0.828 0.929
0.984 0.870 SAP 0.977 0.675 0.917 0.101 0.985 0.914 0.833 0.870
0.995 0.975 SC 0.922 0.707 0.879 0.199 0.860 0.942 0.774 0.856 0.975
0.993 0.934 SP 0.977 0.639 0.935 0.161 0.920 0.983 0.868 0.925 0.944 0.934

152
Figure 3g - Summary of Theoretical Level (inner or structural ) Model Results - (Financial
Performance)
The R Square displayed, for each hypothesized relationship, is the R
Square for the dependent variable in that relationship.
For R Square, acceptable levels depend on research context. R Square
> 0.25 Weak, 0.50 Moderate, 0.75 Strong (Hair et al. 2010).
For Effect size, f Square, of 0.02, 0.15, or 0.35 is indicative of weak,
moderate, or strong effects, respectively (Cohen 1998).
For path coefficient estimates, use bootstrapping to
assess significance (Chin 1998, Hensler et al. 2009).
For predictive relevance, Q Square and q square, use blindfolding. Q Square > 0 is indicative of
predictive relevance; q-square of 0.02, 0.15, 0.35 for weak, moderate, or strong degree of predictive
relevance (Chin 1998, Hensler et al. 2009).
*** All direct path coefficients are significant at p < 0.01

Direct
Path
Predi
Coeffi
Stand T The ctive Nu
Hypoth cients Sampl Depe
Hyp R ard Statisti P Effect Relev mbe
esized - e Suppor ndent
othe Squa Error cs Value Size (f ance r of
Relatio Origin Mean ted Varia
sis re (STE (|O/ST s Squar Q Item
nship al (M) ble
RR) ERR|) e) Squa s
Sampl
re
e (O)
***
GC ->
H1a 0.829 0.686 0.825 0.106 7.794 0.000 2.189 Strong 0.664 15 EC
EC
GC ->
H1b 0.970 0.942 0.971 0.010 94.744 0.000 16.115 Strong 0.922 15 SC
SC
EC ->
H2a 0.809 0.655 0.798 0.140 5.783 0.000 1.897 Strong 0.574 14 EAP
EAP
SC ->
H2b 0.925 0.856 0.929 0.023 40.459 0.000 5.928 Strong 0.689 9 SAP
SAP
GC ->
H2c 0.951 0.904 0.955 0.013 71.476 0.000 9.464 Strong 0.812 12 GAP
GAP
EAP ->
H3a 0.971 0.943 0.971 0.013 75.963 0.000 16.446 Strong 0.885 10 EP
EP
SAP ->
H3b 0.962 0.925 0.967 0.009 106.094 0.000 12.369 Strong 0.866 10 SP
SP
GAP ->
H3c 0.917 0.841 0.917 0.047 19.434 0.000 5.302 Strong 0.774 10 GP
GP
EP ->
H4a 0.013 0.905 -0.018 0.561 0.023 0.981 0.000 Little 0.062 13 FP
FP
SP ->
H4b -2.622 0.905 0.992 2.975 0.881 0.379 3.205 Strong 0.062 13 FP
FP
GP ->
H4c 2.371 0.905 -0.786 2.901 0.817 0.414 7.869 Strong 0.062 13 FP
FP

153
Figure 3h - Path Coefficients - Total Effects - (Financial Performance)
*** All total effects path coefficients are significant at
p < 0.01
Mean, STDEV, T-Values,
P-Values
Sample Standard
Original T Statistics P
Mean Error
Sample (O) (|O/STERR|) Values
(M) (STERR)
EAP -> EP 0.971 0.971 0.013 75.963 0.000
EAP -> FP 0.013 -0.019 0.543 0.023 0.981
EC -> EAP 0.809 0.798 0.140 5.783 0.000
EC -> EP 0.786 0.775 0.139 5.653 0.000
EC -> FP 0.010 -0.023 0.441 0.023 0.981
EP -> FP 0.013 -0.018 0.561 0.023 0.981
GAP -> FP 2.175 -0.745 2.746 0.792 0.429
GAP -> GP 0.917 0.917 0.047 19.434 0.000
GC -> EAP 0.670 0.673 0.181 3.696 0.000
GC -> EC 0.829 0.825 0.106 7.794 0.000
GC -> EP 0.651 0.654 0.178 3.652 0.000
GC -> FP -0.187 0.130 0.328 0.571 0.568
GC -> GAP 0.951 0.955 0.013 71.476 0.000
GC -> GP 0.872 0.876 0.050 17.508 0.000
GC -> SAP 0.898 0.903 0.029 31.098 0.000
GC -> SC 0.970 0.971 0.010 94.744 0.000
GC -> SP 0.863 0.873 0.032 26.695 0.000
GP -> FP 2.371 -0.786 2.901 0.817 0.414
SAP -> FP -2.522 0.961 2.875 0.877 0.381
SAP -> SP 0.962 0.967 0.009 106.094 0.000
SC -> FP -2.333 0.893 2.687 0.868 0.386
SC -> SAP 0.925 0.929 0.023 40.459 0.000
SC -> SP 0.890 0.899 0.027 32.428 0.000
SP -> FP -2.622 0.992 2.975 0.881 0.379

154
 ESG Tables

ESG Collaboration – Performance Link List of Tables

155
Table 1 — Foundational Theories Impacting a Focal Firm’s Strategy for Collaborating on
Environmental Social Governance Risk Factors in a Supply Chain Context
Internal Supplier Customer
ESG ESG ESG
Theory Internal Supplier Customer
Key Principles
(Citation) Collaboratio Collaboratio Collaboratio
n n n
Companies produce externalities
Stakeholder that affect many parties, which
(Freeman are both internal and external to X X X
1984) the firm, including members of
the supply chain.
Agency
Principals (owners of resources)
(Holmstrom
retain agents (those who perform
1979, 1987;
the work) to reduce risk or
Jensen and X
exposure, and costs, while
Meckling
increasing returns and value for
1976; Ross
the firm.
1973)
Strategists are risk-seeking when
Prospect
recent performance has been
(Kahneman
unsatisfactory, and risk-averse X
and Tversky
when recent performance levels
1979)
have been attained or surpassed.
Firms use differentiation strategy
Rising
to secure a unique reputation and
Rivals’ Costs
public recognition as a high X
(Director and
status firm, which increases the
Levi 1956)
cost of their rivals.
Resource Resources combined in unique
Based View ways can create sets of
(Barney capabilities that are valuable,
1991; Rumelt rare, inimitable and non- X
1984; substitutable as the primary
Wernerfelt source of differentiation and
1984) sustained competitive advantage.
Organizational capabilities can
Relational
be developed by the combination
View
of resources existing in different X X X
(Dyer and
organizations in the supply
Singh 1998)
chain.

156
Institutional Institutional pressures influence
(DiMaggio organizations, in the supply
and Powell chain, to adopt certain X X X
1983; Scott management activities and
1992) practices.

Table 2 — Definition of ESG Collaboration and Associated Sub-Constructs

Construct Definition Literature

Environmental Social Environmental Social Governance (ESG)
Governance (ESG) is defined as a set of activity or processes
associated with an organization’s
relationship with its ecological
surroundings, its coexistence and
interaction with human organisms and
other populations, and its corporate
system of internal controls and
procedures (such as processes, customs,
policies, laws, rules and regulations, etc.)
to direct, administer and manage all the
affairs of the organization, in order to
serve the interests of stockholders and
other stakeholders.

ESG Collaboration (ESGC) ESG Collaboration is defined as the direct

involvement of an organization with its
internal departments, both functional and
operational, and with its key Suppliers
and major Customers in planning jointly
for ESG solutions. ESG Collaboration
can include, in addition to joint ESG
planning, joint ESG goal-setting, joint
ESG decision-making, joint reduction of
negative ESG impacts, and shared ESG
know-how or shared ESG knowledge.

157
Environmental Environmental Collaboration (EC) is
Collaboration (EC) defined as the direct involvement of an
organization with its internal
departments, both functional and
operational, and with its key Suppliers
and major Customers in planning jointly
for environmental solutions. EC can
include, in addition to joint
environmental planning, joint
environmental goal-setting, joint
environmental decision-making, joint
reduction of negative environmental
impacts, and shared environmental know-
how or shared environmental knowledge.

Social Collaboration (SC) Social Environmental Collaboration (SC)

is defined as the direct involvement of an
organization with its internal
departments, both functional and
operational, and with its key Suppliers
and major Customers in planning jointly
for social solutions. SC can include, in
addition to joint social planning, joint
social goal-setting, joint social decision-
making, joint reduction of negative social
impacts, and shared social know-how or
shared social knowledge.

Governance Collaboration Governance Collaboration (GC) is

(GC) defined as the direct involvement of an
organization with its internal
departments, both functional and
operational, and with its key Suppliers
and major Customers in planning jointly
for governance solutions. SC can include,
in addition to joint governance planning,
joint governance goal-setting, joint
governance decision-making, joint
reduction of negative governance
impacts, and shared governance know-
how or shared governance knowledge.

158
 Table 3 — Definition of ESG Activity/ Practice and Associated Sub-Constructs
Construct Definition Literature

Environmental Social Environmental Social Governance

Governance Activity/ Activity/ Practice (ESGAP) refers to
Practice (ESGAP) investment of resources in routines,
processes, practices or activity for the
continuous improvement of firm
performance in the area of ESG
concerns. These routines, processes,
practices or activity are implemented to
minimize potential negative impacts on
the environment, on society and on
corporate governance. This dimension
addresses how a company manages a
broad range of ESG operational issues
in their company. It expresses actually
what the firm does, regarding its ESG
activity.

Environmental Activity/ Environmental Activity/ Practice (EAP)

Practice (EAP) refers to investment of resources in
routines, processes, practices or activity
for the continuous improvement of firm
performance in the area of ecological
concerns. These routines, processes,
practices or activity are implemented to
minimize potential negative impacts on
the environment. This dimension
addresses how a company manages a
broad range of environmental
operational issues in their company. It
expresses actually what the firm does,
regarding its environmental activity.

Social Activity/ Practice Social Activity/ Practice (SAP) refers to

(SAP) investment of resources in routines,
processes, practices or activity for the
continuous improvement of firm
performance in the area of coexistence
and interaction with human organisms.
These routines, processes, practices or
activity are implemented to minimize
potential negative impacts on society.

159
 This dimension addresses how a
company manages a broad range of
social operational issues in their
company. It expresses actually what the
firm does, regarding its social activity.

Governance Activity/ Governance Activity/ Practice (GAP)

Practice (GAP) refers to investment of resources in
routines, processes, practices or activity
for the continuous improvement of firm
performance in the area of internal
controls and procedures (such as
processes, customs, policies, laws, rules
and regulations, etc.) to direct,
administer and manage all the affairs of
the organization, in order to serve the
interests of stockholders and other
stakeholders. These routines, processes,
practices or activity are implemented to
minimize potential negative impacts on
the organization, and ensure that the
interests of stockholders and other
stakeholders are served with the highest
standards of responsibility, integrity and
compliance with all laws. This
dimension addresses how a company
manages a broad range of governance
operational issues in their company. It
expresses actually what the firm does,
regarding its governance activity.

160
 Table 4 — Definition of ESG Performance and Associated Sub-Constructs
Construct Definition Literature

Environmental Social Environmental Social Governance

Governance Performance Performance (ESGP) is defined as the
(ESGP) achievement or accomplishment of
given ESG tasks measured against
preset known ESG benchmarks or
standards of accuracy, completeness,
costs, and speed.

Environmental Environmental Performance (EP) is

Performance (EP) defined as the achievement or
accomplishment of given environmental
tasks measured against preset known
environmental benchmarks or standards
of accuracy, completeness, costs, and
speed.

Social Performance (SP) Social Performance (SP) is defined as

the achievement or accomplishment of
given social tasks measured against
preset known social benchmarks or
standards of accuracy, completeness,
costs, and speed.

Governance Performance Governance Performance (GP) is

(GP) defined as the achievement or
accomplishment of given governance
tasks measured against preset known
governance benchmarks or standards of
accuracy, completeness, costs, and
speed.

161
 Table 5 — Definition of Business Performance and Associated Sub-Constructs
Construct Definition Literature

Financial Performance Financial Performance (FP) is the

(FP) quantitative result obtained from
investing in routines, processes,
practices or activity that are
implemented to minimize potential
negative impacts on the organization. It
also refers to high acts of a firm where
its business results are superior to that of
directly comparable organizations.

Operational Performance Operational Performance (OP) refers to (Edgar Online,

(OP) Firm Gross Margin and Operating 2010; Clark,
Margin. 1999).

Market Performance (MP) Market Performance (MP) refers to Firm (Edgar Online,
Revenue, Market Value and Common 2010;
Stock Price. Marketing
Science
Institute, 2000;
Murphy et al.,
1996, p. 16);

(Edgar Online,
2010; Otley and
Pollanen, 2000;
Clark, 1999;
Srivastava et
al., 1998;
Kaplan and
Norton, 1996).
Financial Performance Financial Performance (FP) (Edgar Online,
(FP) encompasses the sub-constructs, EBIT, 2010; Otley and
EBITDA, Net Income (Loss) Pollanen, 2000;
(NI_(LOSS)), Gross Profit (GPR), Srivastava et
Gross Profit Margin (GPM), Operating al., 1998;
Profit (OP), Operating Profit Margin Kaplan and
(OPM), Revenue, Return on Assets Norton, 1996;
(ROA), Return on Equity (ROE), Return Reese and Cool,
on Invested Capital (ROIC), Return on 1978, p. 28)
Sales (ROS), Market Value (MV), and
Stock Price (PRCC_C).

162
 Table 6 - Comparison of Partial Least Squares and Covariance-Based Analysis
Criterion PLS-SEM Approach CB-SEM Approach
Objective Prediction oriented Parameter oriented
Approach Variance based Covariance based
Assumptions Nonparametric Parametric
Parameter estimates Consistent at large Consistent
Latent variable scores Explicitly estimated Indeterminate
Model complexity High complexity Small to moderate
allowed
Minimum sample size 20–100 200–800

Note: Adapted from Chin and Newsted (1998) and Hulland et al. (2010)

163
 Table 7 - Rules of Thumb for Selecting CB-SEM or PLS-SEM (Hair et al., 2011b)

Research Goals
• If the goal is predicting key target constructs or identifying key “driver” constructs,
select PLS-SEM.
• If the goal is theory testing, theory confirmation, or comparison of alternative theories,
select CB-SEM.
• If the research is exploratory or an extension of an existing structural theory, select
PLS-SEM.

Measurement Model Specification

• If formative constructs are part of the structural model, select PLS-SEM.
Note that formative measures can also be used with CB-SEM, but to do so requires
accounting for relatively complex and limiting specification rules.
• If error terms require additional specification, such as co-variation, select CB-SEM.

Structural Model
• If the structural model is complex (many constructs and many indicators), select PLS-
SEM.
• If the model is non-recursive, select CB-SEM.

Data Characteristics and Algorithm

• If your data meet the CB-SEM assumptions exactly, for example, with respect to the
minimum sample size and the distributional assumptions, select CB-SEM; otherwise,
PLS-SEM is a good approximation of CB-SEM results.
• Sample size considerations:
– If the sample size is relatively low, select PLS-SEM. With large data sets, CB-
SEM and PLS-SEM results are similar, provided that a large number of indicator
variables are used to measure the latent constructs (consistency at large).
– PLS-SEM minimum sample size should be equal to the larger of the following:
(1) ten times the largest number of formative indicators used to measure one
construct or (2) ten times the largest number of structural paths directed at a
particular latent construct in the structural model.
– If the data are to some extent non-normal, use PLS-SEM; otherwise, under normal
data conditions, CB-SEM and PLS-SEM results are highly similar, with CB-SEM
providing slightly more precise model estimates.
– If CB-SEM requirements cannot be met (e.g., model specification, identification,
non-convergence, data distributional assumptions), use PLS-SEM as a good
approximation of CB-SEM results.
– CB-SEM and PLS-SEM results should be similar. If not, check the model
specification to ensure that CB-SEM was appropriately applied. If not, PLS-SEM
results are a good approximation of CB-SEM results.

Model Evaluation

164
• If you need to use latent variable scores in subsequent analyses, PLS-SEM is the best
approach.
• If your research requires a global goodness-of-fit criterion, then CB-SEM is the
preferred approach.
• If you need to test for measurement model invariance, use CB-SEM

165
 Table 8 – Structural and Measurement Model Characteristics (81 Samples)
Latent Constructs Internal Key Major Tota
Operatin Supplie Custom l
g Units rs (KS) ers
(IOU) (MC)
Environmental Collaboration (EC) x x x 3
Social Collaboration (SC) x x x 3
Governance Collaboration (GC) x x x 3
Environmental Activity/ Practice (EAP) x 1
Social Activity/ Practice (SAP) x 1
Governance activity/ practice (GAP) x 1
Environmental Performance (EP) x 1
Social Performance (SP) x 1
Governance Performance (GP) x 1
Financial Performance (FP)
Total Latent Constructs 15

Structural Model Relationships

Dyadic Structural Model Relationships
GC  EC x x x 3
EC  EAP x x x 3
EAP  EP x x x 3
EP  FP
GC  SC x x x 3
SC  SAP x x x 3
SAP  SP x x x 3
SP  FP
GC  GAP x x x 3
GAP  GP x x x 3
GP  FP
Total Dyadic Relationships 24

Composite Structural Model

Relationships
GC  EC EAP  EP x x x 3
GC  SP  SAP  SP x x x 3
GC  GAP  GP x x x 3
Composite Relationships 9

Total Structural Model Relationships 33

Measurement Model Indicators

166
Environmental Collaboration (EC) 5 5 5 15
Indicators
Social Collaboration (SC) Indicators 5 5 5 15
Governance Collaboration (GC) 5 5 5 15
Indicators
Environmental Activity/ Practice (EAP) 14 14
Indicators
Social Activity/ Practice (SAP) Indicators 9 9
Governance activity/ practice (GAP) 12 12
Indicators
Environmental Performance (EP) 10 10
Indicators
Social Performance (SP) Indicators 10 10
Governance Performance (GP) Indicators 10 10
Financial Performance (FP) Indicators
Total Measurement Model Indicators 110

Table 9 – Structural and Measurement Model Characteristics (20 Samples)

Latent Constructs Internal Key Major Tota
Operatin Supplie Custome l
g Units rs (KS) rs (MC)
(IOU)
Environmental Collaboration (EC) x x x 3
Social Collaboration (SC) x x x 3
Governance Collaboration (GC) x x x 3
Environmental Activity/ Practice (EAP) x 1
Social Activity/ Practice (SAP) x 1
Governance activity/ practice (GAP) x 1
Environmental Performance (EP) x 1
Social Performance (SP) x 1
Governance Performance (GP) x 1
Financial Performance (FP) x 1
Total Latent Constructs 16

Structural Model Relationships

Dyadic Structural Model Relationships
GC  EC x x x 3
EC  EAP x x x 3
EAP  EP x x x 3
EP  FP x x x 3
GC  SC x x x 3

167
 SC  SAP x x x 3
SAP  SP x x x 3
SP  FP x x x 3
GC  GAP x x x 3
GAP  GP x x x 3
GP  FP x x x 3
Total Dyadic Relationships 33

Composite Structural Model

Relationships
GC  EC EAP  EP  FP x x x 3
GC  SP  SAP  SP  FP x x x 3
GC  GAP  GP  FP x x x 3
Composite Relationships 9

Total Structural Model Relationships 42

Measurement Model Indicators

Environmental Collaboration (EC) 5 5 5 15
Indicators
Social Collaboration (SC) Indicators 5 5 5 15
Governance Collaboration (GC) 5 5 5 15
Indicators
Environmental Activity/ Practice (EAP) 14 14
Indicators
Social Activity/ Practice (SAP) Indicators 9 9
Governance activity/ practice (GAP) 12 12
Indicators
Environmental Performance (EP) 10 10
Indicators
Social Performance (SP) Indicators 10 10
Governance Performance (GP) Indicators 10 10
Financial Performance (FP) Indicators 13 13
Total Measurement Model Indicators 123

168
 Table 10 - Suggested Sample Size in a Typical Marketing Research

Maximum # of arrows pointing at a latent

Minimum sample size required
variable in the model*

52 2
59 3
65 4
70 5
75 6
80 7
84 8
88 9
91 10
* Note: The structural and measurement models, in the ESGC—FP framework, have
the maximum of three arrows pointing to a latent variable.

169
 Table 11 - Rules of Thumb for Model Evaluation (Hair et al., 2011b)
Reflective Measurement Models
• Internal consistency reliability: Composite reliability should be higher than 0.70 (in
exploratory research, 0.60 to 0.70 is considered acceptable).
• Indicator reliability: Indicator loadings should be higher than 0.70.
• Convergent validity: The average variance extracted (AVE) should be higher than
0.50.
• Discriminant validity:
– The AVE of each latent construct should higher than the construct’s highest
squared correlation with any other latent construct (Fornell–Larcker criterion).
– An indicator’s loadings should be higher than all of its cross loadings.

Formative Measurement Models

• Examine each indicator’s weight (relative importance) and loading (absolute
importance) and use bootstrapping to assess their significance. The minimum number
of bootstrap samples is 5,000, and the number of cases should be equal to the number
of observations in the original sample. Critical t-values for a two-tailed test are 1.65
(significance level = 10 percent), 1.96 (significance level = 5 percent), and 2.58
(significance level = 1 percent).
– When all the indicator weights are significant, there is empirical support to keep all
the indicators.
– If both the weight and loading are non-significant, there is no empirical support to
retain the indicator and its theoretical relevance should be questioned.
• Multi-collinearity: Each indicator’s variance inflation factor (VIF) value should be less
than 5.
• Indicator weights should be examined to determine if they are affected by (observed or
unobserved) heterogeneity, which results in significantly different group-specific
coefficients. If theory supports the existence of alternative groups of data, carry out
PLS-SEM multi-group or moderator analyses. If no theory or information is available
about the underlying groups of data, an assessment of unobserved heterogeneity’s
existence must be conducted by means of the finite mixture PLS (FIMIX-PLS) method.
• When many indicators are used to measure a formative construct, with some being non-
significant, establish two or more distinct constructs, provided there is theoretical
support for this step.

Structural Model
• R ² values of 0.75, 0.50, or 0.25 for endogenous [dependent] latent variables in the
structural model can be described as substantial, moderate, or weak, respectively.
• Use bootstrapping to assess the path coefficients’ significance. The minimum number
of bootstrap samples is 5,000, and the number of cases should be equal to the number
of observations in the original sample. Critical t-values for a two-tailed test are 1.65
(significance level = 10 percent), 1.96 (significance level = 5 percent), and 2.58
(significance level = 1 percent).
• Predictive relevance: Use blindfolding to obtain cross-validated redundancy measures
for each construct. Make sure the number of valid observations is not a multiple integer
number of the omission distance d. Choose values of d between 5 and 10.

170
• Resulting Q ² values of larger than zero indicate that the exogenous [independent]
constructs have predictive relevance for the endogenous [dependent] construct under
consideration.
• Heterogeneity: If theory supports the existence of alternative groups of data, carry out
PLS-SEM multi-group or moderator analyses. If no theory or information about the
underlying groups of data is available, an assessment of unobserved heterogeneity’s
existence must be conducted by means of the FIMIX-PLS method, which is available
in the SmartPLS software package.

171
 Table 12 - Guidelines for applying PLS-
SEM
(Hair et al., 2012)

Suggested
Criterion Recommendations / rules of thumb
references
Data
characteristics
General description Use “ten times rule” as rough guidance for Barclay et al.
of the sample minimum sample size. Use a minimum 1995
sample size of ten times the maximum
number of paths aiming at any construct in
the outer model (i.e., the number of
formative indicators per construct) and inner
model (i.e., the number of path relationships
directed at a particular construct).
Distribution of the Robust when applied to highly skewed data; Cassel et al.
sample report skewness and kurtosis 1999, Reinartz
et al. 2009
Use of holdout 30% of original sample Hair et al. 2010
sample
Provide correlation
/ covariance matrix
(or raw data in
online appendix)
Measurement Do not use categorical variables in
scales used endogenous constructs; carefully interpret
categorical variables in exogenous constructs
Model
characteristics
Description of the Provide graphical representation illustrating
inner model all inner model relations
Description of the Include a complete list of indicators in the
outer models appendix
Measurement mode Substantiate measurement mode by using Diamantopoulos
of latent variables CTA-PLS et al. 2008;
Gudergan et al.
2008; Jarvis et
al. 2003
PLS-SEM
algorithm settings
and software used

172
Starting values for Use an uniform value of 1 as an initial value Henseler 2010
weights for initial for each
approximation of of the outer weights
the latent variable
scores
Weighting scheme Use path weighting scheme Henseler 2010;
Henseler et al.
2009
Stop criterion Sum of the outer weights’ changes between Wold 1982
two iterations < 10^−5
Maximum number 300 Ringle et al.
of iterations 2005
Software used Report software, including version to
indicate default settings
Parameter settings
for procedures
used to evaluate
results
Bootstrapping Efron 1981
Sign change option Use individual sign changes Henseler et al.
2009
Number of 5,000; must be greater than the number of Hair et al.
bootstrap samples valid observations 2011b
Number of Equal to the number of valid observations Hair et al.
bootstrap cases 2011b
Blindfolding Use cross-validated redundancy Chin 1998;
Geisser 1974;
Stone 1974
Omission distance Number of valid observations divided by d Chin 1998
d must not be
an integer; choose 5 ≤ d ≤ 10
CTA-PLS 5,000 bootstrap samples; rejection of Coltman et al.
reflective measurement approach if a non- 2008; Gudergan
redundant vanishing tetrad is significantly et al. 2008
(bias-corrected confidence interval) different
from zero (Bonferroni correction for
multiple tests)
Multigroup Use distribution-free approaches to Sarstedt et al.
comparison multigroup comparison 2011b
FIMIX-PLS Hahn et al.
2002; Sarstedt
et al. 2011a
Stop criterion ln(L) change < 10^−15 Ringle et al.
2010a
Maximum number 15,000 Ringle et al.
of iterations 2010a

173
Number of Use AIC3 and CAIC jointly; also consider Sarstedt et al.
segments EN 2011a
Ex post analysis Use multinomial or binary logistic Sarstedt and
regression, CHAID, Ringle 2010
C&RT, crosstabs
Outer model
evaluation:
reflective
Indicator reliabilityStandardized indicator loadings ≥ 0.70; in Hulland 1999
exploratory studies, loadings of 0.40 are
acceptable
Internal consistency Do not use Cronbach’s alpha; composite Bagozzi and Yi
reliability reliability ≥ 0.70 1988
(in exploratory research 0.60 is considered
acceptable)
Convergent validity AVE ≥ 0.50 Bagozzi and Yi
1988
Discriminant
validity
Fornell-Larcker Each construct’s AVE should be higher than Fornell and
criterion its squared Larcker 1981
correlation with any other construct
Cross loadings Each indicator should load highest on the Chin 1998;
construct it is Grégoire and
intended to measure Fisher 2006
Outer model
evaluation:
formative
Indicators’ relative Report indicator weights
contribution to the
construct
Significance of Report t-values, p-values or standard errors
weights
Multicollinearity VIF < 5 / tolerance > 0.20; condition index Hair et al.
<30 2011b
Inner model
evaluation
Coefficient of Acceptable level depends on research Hair et al. 2010
determination (R²) context
Effect size f² 0.02, 0.15, 0.35 for weak, moderate, strong Cohen 1988
effects
Path coefficient Use bootstrapping to assess significance; Chin 1998;
estimates provide Henseler et al.
confidence intervals 2009

174
Predictive Use blindfolding; Q² > 0 is indicative of Chin 1998;
relevance Q² and q² predictive relevance; Henseler et al.
q²: 0.02, 0.15, 0.35 for weak, moderate, 2009
strong degree
of predictive relevance
Observed and Consider categorical or continuous Henseler and
unobserved moderating variables Chin 2010;
heterogeneity using a priori information or FIMIX-PLS Rigdon et al.
2010; Sarstedt
et al. 2011a, b

175
 Table 13a - Descriptive Statistics (81 Samples)
Ratio of
Cou Mea Std Varianc Skewne Kurtos Missing Missing
Variable
nt n Dev e ss is Data to Total
Data
EC01_MC 81 4.04 1.86 3.46 -0.11 -0.98 0 0.00
EC02_MC 81 4.36 1.90 3.61 -0.21 -1.02 0 0.00
EC03_MC 81 3.89 1.87 3.50 0.04 -0.91 0 0.00
EC04_MC 81 3.94 1.98 3.93 -0.01 -1.01 0 0.00
EC05_MC 81 4.31 1.99 3.94 -0.21 -1.01 0 0.00
SC01_MC 81 3.23 1.80 3.23 0.42 -0.46 12 0.15
SC02_MC 81 3.26 1.91 3.67 0.50 -0.64 12 0.15
SC03_MC 81 3.36 1.82 3.30 0.46 -0.39 12 0.15
SC04_MC 81 3.25 1.75 3.06 0.22 -0.69 12 0.15
SC05_MC 81 3.78 1.90 3.62 0.06 -0.80 12 0.15
GC01_MC 81 3.75 1.70 2.90 0.05 -0.40 16 0.20
GC02_MC 81 3.51 1.92 3.68 0.29 -0.82 16 0.20
GC03_MC 81 3.86 1.84 3.37 -0.18 -0.79 16 0.20
GC04_MC 81 3.95 1.96 3.86 0.00 -0.77 16 0.20
GC05_MC 81 3.97 1.86 3.47 -0.04 -0.57 16 0.20
EC01_KS 81 3.98 1.82 3.30 -0.24 -0.64 0 0.00
EC02_KS 81 3.98 1.77 3.12 -0.39 -0.56 0 0.00
EC03_KS 81 3.94 1.71 2.93 -0.18 -0.30 0 0.00
EC04_KS 81 3.67 1.75 3.05 -0.15 -0.73 0 0.00
EC05_KS 81 3.78 2.06 4.23 -0.03 -1.17 0 0.00
SC01_KS 81 3.36 1.70 2.90 0.10 -0.48 12 0.15
SC02_KS 81 3.45 1.97 3.89 0.29 -0.80 12 0.15
SC03_KS 81 3.20 1.95 3.79 0.63 -0.46 12 0.15
SC04_KS 81 3.48 1.81 3.27 -0.07 -0.92 12 0.15
SC05_KS 81 3.61 2.07 4.28 0.15 -1.12 12 0.15
GC01_KS 81 3.88 1.64 2.69 -0.28 -0.29 16 0.20
GC02_KS 81 3.51 1.94 3.75 0.28 -0.90 16 0.20
GC03_KS 81 3.48 1.85 3.43 0.12 -1.10 16 0.20
GC04_KS 81 3.88 2.03 4.14 0.07 -1.00 16 0.20
GC05_KS 81 3.89 2.09 4.35 -0.03 -1.11 16 0.20
EC01_IOU 81 5.40 1.74 3.04 -1.25 0.76 0 0.00
EC02_IOU 81 5.89 1.37 1.88 -1.50 2.47 0 0.00
EC03_IOU 81 5.80 1.49 2.21 -1.41 1.41 0 0.00
EC04_IOU 81 5.33 1.77 3.15 -1.21 0.64 0 0.00
EC05_IOU 81 5.10 1.79 3.19 -0.83 -0.09 0 0.00
SC01_IOU 81 5.43 1.37 1.89 -0.97 1.05 12 0.15
SC02_IOU 81 5.39 1.46 2.13 -1.03 0.82 12 0.15

176
SC03_IOU 81 5.10 1.44 2.08 -0.57 0.27 12 0.15
SC04_IOU 81 5.09 1.43 2.04 -0.92 1.30 12 0.15
SC05_IOU 81 4.87 1.74 3.02 -0.76 -0.06 12 0.15
GC01_IOU 81 4.88 1.56 2.44 -0.81 0.75 16 0.20
GC02_IOU 81 5.35 1.60 2.56 -1.42 1.80 16 0.20
GC03_IOU 81 5.11 1.61 2.60 -1.04 0.93 16 0.20
GC04_IOU 81 5.17 1.64 2.69 -1.00 0.85 16 0.20
GC05_IOU 81 4.82 1.42 2.02 -0.72 1.03 16 0.20
EAP01_IOU 81 4.97 1.91 3.65 -0.89 -0.04 22 0.27
EAP02_IOU 81 4.19 1.74 3.01 -0.38 -0.25 22 0.27
EAP03_IOU 81 4.49 1.95 3.81 -0.55 -0.53 22 0.27
EAP04_IOU 81 4.80 1.80 3.24 -0.85 0.10 22 0.27
EAP05_IOU 81 4.61 1.85 3.43 -0.70 -0.17 22 0.27
EAP06_IOU 81 3.68 1.97 3.89 0.14 -0.99 22 0.27
EAP07_IOU 81 4.53 1.67 2.78 -0.61 -0.04 22 0.27
EAP08_IOU 81 4.36 1.90 3.59 -0.61 -0.63 22 0.27
EAP09_IOU 81 4.64 1.63 2.64 -0.85 0.42 22 0.27
EAP10_IOU 81 4.53 1.87 3.51 -0.66 -0.40 22 0.27
EAP11_IOU 81 4.78 1.64 2.70 -0.94 0.72 22 0.27
EAP12_IOU 81 5.12 1.48 2.20 -0.92 1.05 22 0.27
EAP13_IOU 81 3.37 1.94 3.77 0.26 -0.91 22 0.27
EAP14_IOU 81 4.68 1.45 2.11 -0.87 1.11 22 0.27
SAP01_IOU 81 4.41 1.92 3.70 -0.51 -0.58 22 0.27
SAP02_IOU 81 5.34 1.51 2.29 -1.58 2.75 22 0.27
SAP03_IOU 81 5.73 1.41 2.00 -1.90 4.15 22 0.27
SAP04_IOU 81 5.88 1.43 2.05 -2.08 4.63 22 0.27
SAP05_IOU 81 5.02 1.75 3.06 -0.90 0.29 22 0.27
SAP06_IOU 81 5.10 1.51 2.27 -1.24 1.87 22 0.27
SAP07_IOU 81 3.73 1.60 2.55 -0.36 -0.28 22 0.27
SAP08_IOU 81 2.83 1.78 3.18 0.69 -0.46 22 0.27
SAP09_IOU 81 5.78 1.61 2.58 -1.98 3.52 22 0.27
GAP01_IOU 81 4.71 1.68 2.83 -0.96 0.67 22 0.27
GAP02_IOU 81 5.47 1.71 2.93 -1.67 2.15 22 0.27
GAP03_IOU 81 3.97 2.00 4.00 -0.30 -1.05 22 0.27
GAP04_IOU 81 5.37 1.60 2.55 -1.34 1.87 22 0.27
GAP05_IOU 81 5.12 1.53 2.33 -1.21 1.71 22 0.27
GAP06_IOU 81 4.47 1.69 2.86 -0.60 0.11 22 0.27
GAP07_IOU 81 4.83 1.82 3.33 -0.74 -0.17 22 0.27
GAP08_IOU 81 5.32 1.60 2.56 -1.26 1.65 22 0.27
GAP09_IOU 81 5.64 1.56 2.44 -1.90 3.47 22 0.27
GAP10_IOU 81 4.39 1.86 3.48 -0.40 -0.54 22 0.27
GAP11_IOU 81 5.39 1.47 2.18 -1.29 1.90 22 0.27
GAP12_IOU 81 4.97 1.68 2.82 -0.83 0.17 22 0.27
EP01_IOU 81 5.02 1.42 2.01 -0.36 0.31 23 0.28
EP02_IOU 81 4.78 1.32 1.75 -0.14 0.70 23 0.28

177
EP03_IOU 81 5.16 1.38 1.90 -0.66 0.93 23 0.28
EP04_IOU 81 4.88 1.29 1.65 -0.48 1.09 23 0.28
EP05_IOU 81 4.64 1.46 2.12 -0.31 0.58 23 0.28
EP06_IOU 81 4.64 1.46 2.12 -0.31 0.58 23 0.28
EP07_IOU 81 4.43 1.64 2.70 -0.38 0.13 23 0.28
EP08_IOU 81 4.40 1.64 2.70 -0.32 0.11 23 0.28
EP09_IOU 81 3.91 1.68 2.83 -0.15 0.00 23 0.28
EP10_IOU 81 4.07 1.70 2.90 -0.18 -0.03 23 0.28
SP01_IOU 81 3.88 2.02 4.08 -0.04 -0.97 23 0.28
SP02_IOU 81 3.72 2.00 4.02 0.11 -0.86 23 0.28
SP03_IOU 81 4.24 1.98 3.93 -0.43 -0.81 23 0.28
SP04_IOU 81 4.14 1.98 3.94 -0.28 -0.89 23 0.28
SP05_IOU 81 4.33 1.80 3.23 -0.35 -0.67 23 0.28
SP06_IOU 81 4.57 1.55 2.40 -0.58 0.27 23 0.28
SP07_IOU 81 5.07 1.52 2.32 -1.10 1.60 23 0.28
SP08_IOU 81 3.31 1.65 2.73 0.29 0.09 23 0.28
SP09_IOU 81 3.95 1.60 2.56 -0.27 0.15 23 0.28
SP10_IOU 81 3.98 1.61 2.59 -0.32 0.11 23 0.28
GP01_IOU 81 4.68 1.86 3.48 -0.90 -0.01 25 0.31
GP02_IOU 81 3.05 1.74 3.04 0.42 -0.73 25 0.31
GP03_IOU 81 4.32 1.71 2.93 -0.52 -0.08 25 0.31
GP04_IOU 81 3.71 1.62 2.62 -0.10 -0.40 25 0.31
GP05_IOU 81 4.11 1.77 3.12 -0.28 -0.36 25 0.31
GP06_IOU 81 3.91 2.13 4.56 0.07 -1.10 25 0.31
GP07_IOU 81 4.27 1.90 3.61 -0.25 -0.61 25 0.31
GP08_IOU 81 4.13 1.80 3.25 -0.21 -0.41 25 0.31
GP09_IOU 81 3.50 1.97 3.88 0.28 -0.79 25 0.31
GP10_IOU 81 4.13 1.91 3.65 -0.25 -0.74 25 0.31

178
 Table 13b - Descriptive Statistics (20 Samples)
Ratio
of
Std Missing Missing
Variable Count Mean Variance Skewness Kurtosis
Dev Variable to
Total
Data
EC01_MC 20 3.650 4.346 2.134 -0.217 -0.546 0 0
EC01_KS 20 3.900 4.618 2.411 -0.473 0.578 0 0
EC01_IOU 20 5.100 5.098 2.937 -1.496 1.655 0 0
EC01 20 4.200 4.472 2.260 -0.911 0.472 0 0
EC02_MC 20 4.100 5.098 2.937 -0.172 -0.235 0 0
EC02_KS 20 3.850 4.346 2.134 -0.838 0.405 0 0
EC02_IOU 20 5.800 4.380 2.168 -2.035 5.175 0 0
EC02 20 4.585 4.459 2.247 -0.882 0.577 0 0
EC03_MC 20 3.600 4.359 2.147 -0.219 -0.570 0 0
EC03_KS 20 3.800 4.485 2.274 -0.340 0.900 0 0
EC03_IOU 20 5.700 4.537 2.326 -1.907 4.032 0 0
EC03 20 4.350 4.201 1.994 -0.948 0.717 0 0
EC04_MC 20 3.600 5.143 2.989 0.288 -0.066 0 0
EC04_KS 20 3.350 4.237 2.029 -0.088 -0.057 0 0
EC04_IOU 20 5.050 4.871 2.682 -1.527 2.259 0 0
EC04 20 4.002 4.608 2.399 -0.386 0.102 0 0
EC05_MC 20 4.100 4.912 2.726 -0.098 0.114 0 0
EC05_KS 20 3.400 5.052 2.884 -0.203 -1.072 0 0
EC05_IOU 20 4.800 4.978 2.800 -0.998 0.895 0 0
EC05 20 4.102 4.796 2.599 -0.356 -0.252 0 0
SC01_MC 20 2.973 4.043 1.847 -0.376 -1.059 0 0
SC01_KS 20 3.086 4.044 1.848 -0.605 -0.865 0 0
SC01_IOU 20 5.293 4.509 2.298 -1.271 2.088 0 0
SC01 20 3.786 4.075 1.877 -0.644 -0.609 0 0
SC02_MC 20 2.926 4.630 2.422 0.221 -1.019 0 0
SC02_KS 20 3.145 4.628 2.420 -0.091 -0.929 0 0
SC02_IOU 20 3.036 4.590 2.381 0.067 -0.960 0 0
SC02 20 3.036 4.590 2.381 0.067 -0.960 0 0
SC03_MC 20 3.036 3.874 1.696 -0.407 -0.879 0 0
SC03_KS 20 2.720 4.235 2.027 0.422 -0.426 0 0
SC03_IOU 20 5.010 4.528 2.317 -0.718 1.114 0 0
SC03 20 3.589 4.043 1.847 -0.155 -0.794 0 0

179
SC04_MC 20 3.025 4.429 2.216 -0.162 -1.322 0 0
SC04_KS 20 3.348 4.529 2.318 -0.673 -0.980 0 0
SC04_IOU 20 4.959 4.036 1.841 -1.327 2.627 0 0
SC04 20 3.778 4.170 1.965 -0.556 -0.846 0 0
SC05_MC 20 3.628 4.645 2.438 -0.312 -0.429 0 0
SC05_KS 20 3.361 5.292 3.165 0.066 -0.989 0 0
SC05_IOU 20 4.787 5.067 2.901 -0.906 0.783 0 0
SC05 20 3.926 4.857 2.666 -0.297 -0.526 0 0
GC01_MC 20 3.775 4.584 2.374 -0.341 0.011 0 0
GC01_KS 20 3.888 4.617 2.409 -0.541 0.083 0 0
GC01_IOU 20 4.888 5.097 2.936 -0.921 1.023 0 0
GC01 20 4.183 4.651 2.445 -0.548 0.264 0 0
GC02_MC 20 3.451 5.127 2.971 0.092 -0.889 0 0
GC02_KS 20 3.401 5.211 3.069 0.151 -1.006 0 0
GC02_IOU 20 5.385 5.120 2.962 -1.779 2.844 0 0
GC02 20 4.079 4.914 2.729 -0.381 -0.396 0 0
GC03_MC 20 3.936 4.775 2.577 -0.475 -0.110 0 0
GC03_KS 20 3.398 5.210 3.068 0.156 -1.004 0 0
GC03_IOU 20 5.061 5.059 2.892 -1.249 1.707 0 0
GC03 20 4.132 4.846 2.654 -0.395 -0.272 0 0
GC04_MC 20 4.095 5.537 3.464 0.066 -0.147 0 0
GC04_KS 20 3.988 6.028 4.107 0.146 -0.888 0 0
GC04_IOU 20 5.117 5.188 3.041 -1.194 1.490 0 0
GC04 20 4.400 5.427 3.329 -0.224 -0.295 0 0
GC05_MC 20 4.047 5.328 3.208 -0.016 0.001 0 0
GC05_KS 20 3.989 6.403 4.633 -0.089 -1.024 0 0
GC05_IOU 20 4.732 4.403 2.191 -0.778 1.197 0 0
GC05 20 4.257 5.183 3.036 -0.130 -0.447 0 0
EAP01_IOU 20 5.447 5.586 3.527 -1.366 1.354 0 0
EAP02_IOU 20 4.569 5.485 3.400 -0.401 -0.282 0 0
EAP03_IOU 20 4.799 5.899 3.932 -0.810 -0.035 0 0
EAP04_IOU 20 5.130 5.406 3.302 -1.145 0.898 0 0
EAP05_IOU 20 4.911 5.423 3.323 -0.775 0.277 0 0
EAP06_IOU 20 4.118 6.507 4.786 -0.097 -1.282 0 0
EAP07_IOU 20 4.853 5.287 3.158 -0.809 0.419 0 0
EAP08_IOU 20 4.786 5.827 3.837 -0.922 0.052 0 0
EAP09_IOU 20 4.964 5.118 2.960 -1.034 1.167 0 0
EAP10_IOU 20 4.903 5.428 3.329 -0.990 0.500 0 0
EAP11_IOU 20 5.028 5.065 2.899 -1.181 1.566 0 0

180
EAP12_IOU 20 5.262 4.611 2.403 -1.056 1.597 0 0
EAP13_IOU 20 3.787 6.288 4.468 0.092 -1.097 0 0
EAP14_IOU 20 4.968 5.023 2.852 -1.103 1.524 0 0
SAP01_IOU 20 4.591 5.884 3.913 -0.580 -0.443 0 0
SAP02_IOU 20 5.484 5.132 2.976 -1.883 3.316 0 0
SAP03_IOU 20 5.923 4.371 2.159 -2.277 6.152 0 0
SAP04_IOU 20 6.088 4.309 2.099 -2.588 7.901 0 0
SAP05_IOU 20 5.352 5.482 3.396 -1.308 1.346 0 0
SAP06_IOU 20 5.210 5.159 3.007 -1.437 1.881 0 0
SAP07_IOU 20 4.073 4.630 2.423 -0.870 0.459 0 0
SAP08_IOU 20 2.933 6.364 4.577 0.600 -1.168 0 0
SAP09_IOU 20 5.878 5.451 3.358 -2.135 3.897 0 0
GAP01_IOU 20 5.021 5.068 2.903 -1.165 1.528 0 0
GAP02_IOU 20 5.747 5.342 3.225 -2.054 3.715 0 0
GAP03_IOU 20 4.297 6.695 5.065 -0.412 -1.179 0 0
GAP04_IOU 20 5.587 5.390 3.283 -1.718 2.654 0 0
GAP05_IOU 20 5.312 5.290 3.162 -1.465 1.825 0 0
GAP06_IOU 20 4.747 5.342 3.225 -0.600 0.060 0 0
GAP07_IOU 20 5.133 5.657 3.616 -0.974 0.254 0 0
GAP08_IOU 20 5.532 5.483 3.397 -1.569 2.046 0 0
GAP09_IOU 20 5.814 5.223 3.082 -2.272 4.751 0 0
GAP10_IOU 20 4.589 5.559 3.493 -0.343 -0.563 0 0
GAP11_IOU 20 5.639 4.735 2.534 -1.586 2.654 0 0
GAP12_IOU 20 5.247 5.450 3.357 -1.317 1.144 0 0
EP01_IOU 20 5.102 5.097 2.936 -0.454 -0.151 0 0
EP02_IOU 20 4.828 4.654 2.448 -0.320 0.372 0 0
EP03_IOU 20 5.316 4.828 2.634 -0.904 1.055 0 0
EP04_IOU 20 4.988 4.630 2.422 -0.626 0.696 0 0
EP05_IOU 20 4.764 4.881 2.692 -0.366 0.138 0 0
EP06_IOU 20 4.814 5.041 2.872 -0.319 -0.071 0 0
EP07_IOU 20 4.643 5.291 3.163 -0.448 0.030 0 0
EP08_IOU 20 4.640 5.292 3.165 -0.442 0.023 0 0
EP09_IOU 20 4.291 5.558 3.491 -0.201 -0.123 0 0
EP10_IOU 20 4.407 5.317 3.195 -0.199 -0.065 0 0
SP01_IOU 20 4.238 6.398 4.626 -0.271 -1.086 0 0
SP02_IOU 20 4.122 6.576 4.887 -0.201 -1.160 0 0
SP03_IOU 20 4.724 6.013 4.086 -0.851 -0.292 0 0
SP04_IOU 20 4.464 6.132 4.249 -0.423 -0.893 0 0
SP05_IOU 20 4.583 5.808 3.812 -0.468 -0.695 0 0

181
SP06_IOU 20 4.757 5.338 3.220 -0.620 0.088 0 0
SP07_IOU 20 5.157 5.220 3.080 -1.240 1.505 0 0
SP08_IOU 20 3.781 6.142 4.263 0.171 -0.642 0 0
SP09_IOU 20 4.395 5.325 3.204 -0.177 -0.092 0 0
SP10_IOU 20 4.398 5.323 3.202 -0.183 -0.085 0 0
GP01_IOU 20 5.052 5.881 3.908 -1.254 0.601 0 0
GP02_IOU 20 3.208 5.756 3.745 0.448 -1.028 0 0
GP03_IOU 20 4.698 5.178 3.030 -0.868 0.557 0 0
GP04_IOU 20 4.057 5.206 3.063 0.044 -0.150 0 0
GP05_IOU 20 4.417 5.133 2.977 -0.388 0.156 0 0
GP06_IOU 20 4.287 6.700 5.073 -0.150 -1.215 0 0
GP07_IOU 20 4.591 5.801 3.802 -0.245 -0.607 0 0
GP08_IOU 20 4.470 5.401 3.297 -0.267 -0.200 0 0
GP09_IOU 20 3.875 6.159 4.286 -0.045 -0.904 0 0
GP10_IOU 20 4.420 5.970 4.028 -0.432 -0.695 0 0
REVENUE 20 0.004 0.581 0.038 -2.546 9.172 0 0
NI_(LOSS) 20 0.217 1.472 0.245 4.148 18.021 0 0
EBIT 20 0.106 0.294 0.010 0.120 -1.272 0 0
EBITDA 20 0.103 0.378 0.016 1.921 4.559 0 0
-
GPR 20 1.828 0.378 -4.292 18.872 0 0
0.074
-
GPM 20 4.331 2.120 -4.467 19.966 0 0
0.304
OP 20 0.106 0.294 0.010 0.120 -1.272 0 0
OPM 20 0.221 2.150 0.522 4.264 18.596 0 0
ROS 20 0.353 2.817 0.897 2.877 7.098 0 0
ROA 20 0.202 2.008 0.456 4.325 19.080 0 0
ROE 20 0.212 2.180 0.537 4.386 19.471 0 0
ROIC 20 0.204 2.064 0.481 4.349 19.230 0 0
MV 20 0.102 0.345 0.013 -0.126 -0.766 0 0
PRCC_F 20 0.165 0.741 0.062 3.381 13.332 0 0
-
EMPL 20 0.279 0.009 -1.841 4.721 0 0
0.003

182
 Appendix A

Questionnaire Items - Original

Source: Vachon, S. and Klassen, R.D., (2008). Environmental management and

manufacturing performance: The role of collaboration in the supply chain, Int. J.
Production Economics 111 (2008), p 312.

A.1. Environmental collaboration with suppliers

During the past 2 years, to what extent did your plant engage in the following
environmental activities with your primary suppliers (inks, substrates, equipment)? (1 =
not at all, 4 = moderately, 7 = great extent)

D2a Achieving environmental goals collectively.

D2b Developing a mutual understanding of responsibilities regarding environmental
performance.
D2c Working together to reduce environmental impact of our activities.
D2d Conducting joint planning to anticipate and resolve environmental-related
problems.
D2e Making joint decisions about ways to reduce overall environmental impact of our
products.

A.2. Environmental collaboration with customers

During the past 2 years, to what extent did your plant engage in the following
environmental activities with your major customers? (1 = not at all, 4 = moderately, 7 =
great extent)

E2a Achieving environmental goals collectively.

E2b Developing a mutual understanding of responsibilities regarding environmental
performance.
E2c Working together to reduce the environmental impact of our activities.
E2d Conducting joint planning to anticipate and resolve environmental-related
problems.
E2e Making joint decisions about ways to reduce the environmental impact of our
product.

183
 Appendix B

Typical Environmental Questions during pilot test

ENVIRONMENTAL SOCIAL GOVERNANCE (ESG) COLLABORATION WITH SUPPLY

CHAIN MEMBERS SURVEY

During the past 2 years (2010 thru G G G

2011), to what extent did your firm N M R N M r N M R
engage in the following collaboration O O E O O e O O E
activities with your own (Internal) T D A T D a T D A
departments (such as marketing, sales, E T E t E T
A R A R A R
finance, research and development,
T A E T A E T A E
purchasing, production, quality, and or T X T x T X
logistics, etc.), with your key suppliers A E T A E t A E T
and with your major customers? L L E L L e L L E
L Y N L Y n L Y N
(1 = not at all, 4 = moderately, 7 = T t T
great extent)

with
ENVIRONMENTAL with KEY with MAJOR
INTERNAL
COLLABORATION SUPPLIERS CUSTOMERS
DEPTS
To what extent did your firm engage in
the activity of…
E Achieving environmental goals
1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
1 collectively
Developing a mutual understanding of
E
responsibilities regarding 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
2
environmental performance
Working together to reduce
E
environmental impact of our 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
3
activities
Conducting joint planning to
E
anticipate and resolve 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
4
environmental-related problems
Making joint decisions about ways to
E
reduce overall environmental impact 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
5
of our products

184
 Appendix C

Typical Environmental Questions (Revised) after pilot test

ENVIRONMENTAL SOCIAL GOVERNANCE (ESG) COLLABORATION WITH SUPPLY

CHAIN MEMBERS SURVEY
G G G
N M R N M r N M R
Please answer these questions with respect O O E O O e O O E
to T D A T D a T D A
E T E t E T
Internal Operating Units, Key Suppliers and A R A R A R
Major Customers T A E T A E T A E
T X T x T X
(1 = not at all, 4 = moderately, 7 = great A E T A E t A E T
extent) L L E L L e L L E
L Y N L Y n L Y N
T t T

ENVIRONMENTAL
COLLABORATION
with
During the past year, to what extent did your INTERNAL with KEY with MAJOR
firm engage in activities to … OPERATING SUPPLIERS CUSTOMERS
UNITS
Achieve environmental goals (e.g., reduce
E
packaging, emissions, waste, water, energy, 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
1
steam, solids, fuel, etc.)
Understand responsibilities regarding
environmental performance (e.g.,
E
disclose environmental issues, share 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
2
environmental policies, learn each other’s
operations, etc.)
Reduce adverse environmental impact of
E operations (e.g., pollution from material
1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
3 flows, production processes, chemicals use,
waste, storage, disposal, etc.)

185
 Anticipate and resolve environmental-
E related problems (e.g., develop recovery
1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
4 systems like fuel, waste, reuse, recycle, re-
manufacture, closed-loop solutions, etc.)
Reduce adverse environmental impact of
your products (e.g., use eco-friendly,
E recyclable and substitute materials, bio-
1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7
5 degradable packages, re-manufacture,
recycle, and take-back products at end-of-
life cycle, etc.)

186
 Appendix D

Typical Questions, after pilot test, Included in the large scale web-based survey

ENVIRONMENTAL SOCIAL GOVERNANCE (ESG) COLLABORATION

WITH SUPPLY CHAIN MEMBERS SURVEY

ENVIRONMENTAL SOCIAL GOVERNANCE COLLABORATION (ESGC)

SURVEY

Please answer these questions with respect to

Internal Operating Units, Key Suppliers and Major Customers
(1 = not at all, 4 = moderately, 7 = great extent)

ENVIRONMENTAL COLLABORATION (EC)

During the past year, to what extent did your firm engage in activities to …

EC01 Achieve environmental goals (e.g., reduce packaging, emissions, waste, water,
energy, steam, solids, fuel, etc.)
EC02 Understand responsibilities regarding environmental performance (e.g., disclose
environmental issues, share environmental policies, learn each other's operations,
etc.)
EC03 Reduce adverse environmental impact of operations (e.g., pollution from material
flows, production processes, chemicals use, waste, storage, disposal, etc.)
EC04 Anticipate and resolve environmental-related problems (e.g., develop recovery
systems like fuel, waste, reuse, recycle, re-manufacture, closed-loop solutions, etc.)
EC05 Reduce adverse environmental impact of your products (e.g., use eco-friendly,
recyclable and substitute materials, bio-degradable packages, re-manufacture,
recycle, and take-back products at end-of-life cycle, etc.)

SOCIAL COLLABORATION (SC)

During the past year, to what extent did your firm engage in activities to …

SC01 Achieve social goals (e.g., improve labor practices, employee working conditions,
training, skills development and total wages paid, promote gender and ethnic
equality, reducing work place injury, illness rates, abolish child, forced or
compulsory labor, prevent workplace discrimination, etc.)
SC02 Understand responsibilities regarding social performance (e.g., disclose social
issues, share policies on Remuneration, Health & Safety, Human Rights, Training,
etc.)
SC03 Improve favorable social impact of your operations (e.g., increase local jobs,
develop local workforce skills, improve community relations/development,
schools, housing, infrastructure, etc.)

187
SC04 Anticipate and resolve social-related problems (e.g., develop Code of Conduct,
Supplier Management System, proactively identify and correct possible, human
rights concerns and CSR challenges, etc.)
SC05 Reduce adverse social impact of your products (e.g., provide public service
announcements, training and incentives to return, recycle or reuse 'end of use'
products, promote use of returnable, recyclable packages and containers, etc.)

GOVERNANCE COLLABORATION (GC)

During the past year, to what extent did your firm engage in activities to …

GC01 Achieve governance goals (e.g., align supply chain goals with business objectives,
track performance against goals, translate goals into actionable targets for all
employees across all functions, meet customer and other stakeholder expectations,
meet responsible sourcing requirements, adopt fair and open communications, etc.)
GC02 Understand responsibilities regarding governance performance (e.g., disclose
governance issues, share ethics policies, report annually sustainable performance
to stakeholders, measure and disclose organizational performance against the goal
of sustainability development, etc.)
GC03 Improve favorable governance impact of your operations (e.g., make changes to
improve corporate reputations, rebuild public trust, improve living and working
conditions, make long-term commitments and investments that create trust in the
community, etc.)
GC04 Anticipate and resolve governance-related problems (e.g., implement anti-
corruption, extortion & bribery initiatives, integrate sustainability into Supply
Chain Management decisions, safe-guard reputations, etc.)
GC05 Reduce adverse governance impact of your products (e.g., procure quality raw
material inputs, purchase inputs from ethical and responsible business partners, buy
from sources that embrace human rights, labor standards, the environment and anti-
corruption, etc.)

ENVIRONMENTAL MANAGEMENT (EM) - ENVIRONMENTAL ACTIVITY/

PRACTICE (EAP) SURVEY

Please answer these questions with respect to your

Internal Operating Units
(1 = not at all, 4 = moderately, 7 = great extent)

ENVIRONMENTAL ACTIVITY/ PRACTICE (EAP)

To what extent does your company …

EAP01 disclose Environmental data and practices in annual reports (e.g. Corporate Social
Responsibility, Sustainability, etc.)

To what extent does your company address the following in a policy …

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EAP02 initiatives to protect biodiversity (e.g., trees, vegetation, wildlife, and endangered
species, etc.)
EAP03 initiatives to reduce Greenhouse Gas (GHG) emissions (e.g., from operations,
products, goods, services, etc.)
EAP04 initiatives to use energy more efficiently (e.g., perform energy audit, reduce energy
use, reduce peak-hour use, certify to ISO 5001, etc.)
EAP05 initiatives to reduce its environmental emissions (e.g., to the air, water, soil, etc.)

To what extent does your company …

EAP06 believe it is important to be a signatory of the United Nations Global Compact (e.g.,
ten core values in the areas of human rights, labor standards, environment and anti-
corruption).

To what extent does your company implement the following initiatives …

EAP07 launch products, goods, services which reduce Green House Gas (GHG) emissions
EAP08 make its packaging more environmentally friendly (e.g., improve the recyclability
of packaging, use less environmentally damaging materials in packaging, etc.)
EAP09 reduce the environmental footprint of its supply chain (e.g., introduce
environmental management systems, reduce waste, resource use, environmental
emissions, etc. in the supply chain)
EAP10 certify environmental policies to an independent or third-party assessment (e.g.,
ISO 14001, etc.)
EAP11 introduce environmental management systems to help reduce the environmental
footprint of its operations
EAP12 reduce waste generated during the course of its operations

To what extent does your company…

EAP13 comply with Global Reporting Initiative (GRI) (e.g., Sustainability Reporting
Guidelines)
EAP14 use environmentally-friendly principles in the construction or renovation of its
buildings

SOCIAL MANAGEMENT (SM) - SOCIAL ACTIVITY/ PRACTICE (SAP)

SURVEY

Please answer these questions with respect to your

Internal Operating Units
(1 = not at all, 4 = moderately, 7 = great extent)

SOCIAL ACTIVITY/ PRACTICE (SAP)

To what extent does your company…

189
SAP01 disclose Social data and practices in annual reports (e.g. Corporate Social
Responsibility, Sustainability, etc.)
SAP02 demonstrate, in a remuneration policy, its commitment to pay a fair wage (e.g.,
minimum, living, sustainable, competitive wage, etc.) to all company employees
SAP03 recognize, in a health and safety policy, its risks and responsibilities concerning the
welfare of all employees
SAP04 commit, in an equal opportunity policy, to support non-discriminatory practices
SAP05 identify, in a human rights policy, initiatives to protect of the rights of all employees
SAP06 commit, in a training policy, to instruct new and existing (management and non-
management) employees on career development, education or skills
SAP07 train employees on Corporate Social Responsibility (CSR)

To what extent …

SAP08 are the employees of your company represented by labor unions, or belong to labor
unions
SAP09 is the number of employees, in your company, disclosed in annual reports (e.g.
Corporate Social Responsibility, Sustainability, etc.)

GOVERNANCE MANAGEMENT (GM) - GOVERNANCE ACTIVITY/

PRACTICE (SAP) SURVEY

Please answer these questions with respect to your

Internal Operating Units
(1 = not at all, 4 = moderately, 7 = great extent)

GOVERNANCE ACTIVITY/ PRACTICE (GAP)

To what extent does your company…

GAP01 disclose Governance data and practices in annual reports (e.g. Corporate
Social Responsibility, Sustainability, etc.)
GAP02 establish guidelines, in a business ethics/compliance policy, for its
management and non-management employees
GAP03 include women, on its Board of Directors
GAP04 require Directors to attend at least 75% of the board and key committee
meetings on which they sit
GAP05 evaluate the number of Board of Directors meetings per year
GAP06 review the length of a board member's term (in years)

To what extent does your company's Board of Directors …

GAP07 evaluate its leadership structure for justification to combine or separate the
positions of CEO and chairman of the board
GAP08 evaluate itself to ensure that Board Members have appropriate skills and
experience
GAP09 require Audit committee members to meet at least quarterly

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GAP10 commit to increasing the percentage of independent directors
GAP11 commit to maintaining the appropriate number of directors for future
operations and challenges
GAP12 elect independent directors to minimize conflict between management's and
shareholders' interests

ENVIRONMENTAL PERFORMANCE (EP) SURVEY

Please answer these questions with respect to your

Internal Operating Units
(1 = not at all, 4 = moderately, 7 = great extent)

ENVIRONMENTAL PERFORMANCE (EP)

To what extent do you feel that your company's Environmental practice
initiatives…

EP01 reduced the amount of energy consumed in your process

EP02 reduced the price of energy consumed in your process

EP03 reduced the amount of wasted material generated by your process

EP04 reduced the cost of wasted material generated by your process

EP05 reduced the amounts of packaging materials used by your process

EP06 reduced the cost of packaging materials used by your process

EP07 improved product yield in your process

EP08 reduced the cost of raw material used in your process

EP09 increased the amount of repeat business gained by the organization

EP10 increased the amount of new business gained by the organization

SOCIAL PERFORMANCE (SP) SURVEY

Please answer these questions with respect to your

Internal Operating Units
(1 = not at all, 4 = moderately, 7 = great extent)

SOCIAL PERFORMANCE (SP)

To what extent do feel that your company's Social practice initiatives…

SP01 reduced the number of lawsuits for pay imbalances in your organization
SP02 reduced the cost of lawsuits for pay imbalances in your organization

SP03 reduced the number of injuries in your organization

SP04 reduced the cost of injuries in your organization

191
SP05 increased opportunities for advancement
SP06 increased opportunities for training

SP07 increased the brand equity of the firm in the eyes of community members,
customers, employees, and regulators
SP08 increased the firm's ability to obtain higher prices (rents) than its competitors

SP09 increased the amount of repeat business gained by the organization

SP10 increased the amount of new business gained by the organization

GOVERNANCE PERFORMANCE (GP) SURVEY

Please answer these questions with respect to your

Internal Operating Units
(1 = not at all, 4 = moderately, 7 = great extent)

GOVERNANCE PERFORMANCE (GP)

To what extent do feel that your company's Governance practice initiatives…

GP01 reduced incentives for employees to behave inappropriately or unlawfully in your

organization
GP02 increased the number of women on the board of directors in your organization

GP03 increased the attendance rate of board members attending director meetings in your
organization
GP04 increased the frequency of its meetings to recover from poor performance, faster

GP05 increased stability and sustainability by managing the orderly succession of board
members' terms
GP06 increased shareholders' interests and board flexibility by separating CEO and
chairman roles

GP07 increased the quality of board members' skill-sets by appointing and retiring
members as needs of the firm dictate
GP08 increased the frequency of its audit committee meetings to carry out its function of
control

GP09 increased the firm's independence, transparency and ability to obtain higher prices
(rents) than its competitors
GP10 increased the reputational equity of the firm in the eyes of customers, employees,
investors and regulators

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 Appendix E

Cover letter for the large scale web-based survey

From: Vincent G. Whitelock [[email protected]]

Sent: Monday, May 01, 2013 8:00 AM EST

To: President, Chief Executive Officer, or Chief Financial Officer

Subject: 2013 Environmental Social Governance (ESG) Study: Take Our Short
Survey and Get Valuable Information

Dear Executive,

In an effort to uncover the relationship among Environmental Social Governance

(ESG) Management issues and Business Performance, and provide business leaders
with an understanding of a potential causal relationship, I would appreciate your
participation in our 2013 Environmental Social Governance (ESG) Management
Study. In exchange for your participation, you will receive:

 An Executive Summary of all the findings; and

 An Industry Benchmarking Report.

Please take 15 minutes of your time, and share your insights with us. This survey is being
conducted exclusively using the Internet. To access the survey, please click on the
following URL link, or cut and paste this link into your internet browser:

[https://utoledoir.qualtrics.com/SE/?SID=SV_73PkgpxqumiXiUB]

If for any reason you need to leave the survey, you can re-enter by clicking on the link in
this message.

Your participation in this research study is designed to ascertain how leadership in

the top U.S. Listed Corporations drive real and rapid organizational change. Specifically,
how does senior leadership make operational, Collaboration on Environmental Social
Governance (ESG) risk factors, internally, within their own companies, and
externally, with their supply chain partners?
Your company has been identified as producing significant value, and is ranked,
according to Russell Index, among the top 95% of U.S. Listed companies, in terms of
market capitalization.
This research is being conducted at the firm level and seeks to elicit responses to
strategic and operational questions, regarding ESG Collaboration, using an electronic
survey, from the most appropriate senior level executive (e.g. CEO, President, COO,
CFO, Executive Vice President, Chief Sustainability Officer, Corporate

193
Responsibility Officer, Corporate Social Responsibility Officer, Chief Compliance
Officer, etc.). Participation is 100% voluntary, and all participant responses will be kept
confidential. Only aggregated data will be analyzed and published.
The goal of this research is to elicit responses from America’s top performing U.S.
Listed companies in order to identify common principles, methods and practices of how
business leaders can proactively change their organizations and supply chain partners to
achieve successful and sustainable outcomes. The top 3000 U.S. Listed companies
represent a small fraction of the companies in the U.S., but they represent the
overwhelming majority of market capitalization. They confront obstacles that are unique
to this group, and they face similar issues and challenges.
The opportunity to study how the most valued American organizations can
succeed, in an era demanding that leaders increasingly embrace Environmental Social
Governance (ESG) risk factors, in both actions and disclosures,* is the focus of this
research. Their factors of success will, hopefully, be applicable to all U.S. Listed
companies, and their lessons will be instilled in future generations of business leaders.
As a participant, and where a returned questionnaire contains the name and email
address details of the respondent, the researchers will receive this information for the
purposes of sending out to you an executive summary of all the findings, as well as an
industry benchmarking report. Furthermore, researchers will do everything in their
power to prevent anyone who is not on the research team from knowing that you provided
this information, or what that information is.
Thank you for your time and consideration. Please feel free to contact me at (P)
419-884-0210, or via email at (E) [email protected].

Sincerely,
Vincent G. Whitelock, BA, MSIA, MBA, ABD
PH.D. Candidate and Adjunct Professor
College of Business and Innovation
The University of Toledo
2801 West Bancroft Street ST-S 1031B
Toledo, OH 43606-3390
(P) 419-884-0210
(E) [email protected]

* Note: In June 2011, a jointly-signed Ceres letter of 31 shareholder signatories, who

represent more than $1 trillion in total assets under management, asked the CEOs of the
Russell 1000 firms, to actively embrace ESG risks in both their actions and required
investor disclosures. These investors argue that the long-term sustainability of their
portfolio companies is tied to the incorporation of environmental, social, and governance
considerations into business decision-making and communication strategies.

Survey Instructions: This study takes about 15 minutes to complete, and seeks input from
the Chief Executive Officer (CEO) (or his/her direct report with accountability for ESG/
Sustainability reporting), or from other appropriate senior level managers (e.g. CEO,
President, COO, CFO, Executive Vice President, Chief Sustainability Officer,

194
Corporate Responsibility Officer, Corporate Social Responsibility Officer, Chief
Compliance Officer, etc.).

To access the survey, please click on the following URL link, or cut and paste this link into
your internet browser:

[https://utoledoir.qualtrics.com/SE/?SID=SV_73PkgpxqumiXiUB]

If for any reason you need to leave the survey, you can re-enter by clicking on the link in
this message.

For the purposes of this survey: Environmental Social Governance (ESG) is defined as
a set of activity or processes associated with an organization’s relationship with its
ecological surroundings, its coexistence and interaction with human organisms and other
populations, and its corporate system of internal controls and procedures (such as
processes, customs, policies, laws, rules and regulations, etc.) to direct, administer and
manage all the affairs of the organization, in order to serve the interests of stockholders
and other stakeholders.

195
 Appendix F

Follow-up letter for the large scale web-based survey

Dear Executive (in charge of ESG):

On May 6, 2013, we sent you a survey invitation to participate in an Environmental Social

Governance (ESG) Management questionnaire to uncover the relationship among ESG
issues and Business Performance.

We are sending this follow-up note to kindly remind you how important it is to receive
your response.

The opportunity to study how the most valued American organizations can succeed, in
an era demanding that leaders increasingly embrace Environmental Social Governance
(ESG) risk factors, in both actions and disclosures,* with their supply chain partners,
is the focus of this research.

Please take 15 minutes of your time, and share your insights with us. This survey is being
conducted exclusively using the Internet. To access the survey, please click on the
following URL link:

[Take the Survey]

As a participant, and where a returned questionnaire contains the name and email address
details of the respondent, “your anonymity will be preserved,” and the researchers will
receive this information for the purposes of sending out to you an executive summary of
all the findings, as well as an industry benchmarking report.

Thank you for your time and consideration. Please feel free to email me at
[email protected].

Sincerely,

Vincent G. Whitelock, BA, MSIA, MBA, ABD

PH.D. Candidate
College of Business and Innovation
The University of Toledo

* Note: In June 2011, a jointly-signed Ceres letter of 31 shareholder signatories, who

represent more than $1 trillion in total assets under management, asked the CEOs of the
Russell 1000 firms, to actively embrace ESG risks in both their actions and required
investor disclosures. These investors argue that the long-term sustainability of their
portfolio companies is tied to the incorporation of environmental, social, and governance
considerations into business decision-making and communication strategies.

196
 Appendix G

Ceres Letter to the Russell 1000 CEOs

NAME
TITLE
COMPANY
ADDRESS
ADDRESS
DATE

Dear CEO,

As shareowners representing more than $1 trillion in total assets under management, we

believe the long-term sustainability of our portfolio companies is tied to the incorporation
of environmental, social, and governance considerations into business decision-making
and communication strategies. We are writing, therefore, to encourage your management
team and Board of Directors to address sustainability issues across your organization,
which can enhance long-term company and shareholder value, and to consider the enclosed
Ceres Roadmap for Sustainability as an implementation tool.

Globally, investor attention on corporate governance and accountability issues continues

to increase, with the recent collapse of the financial markets and several consecutive
disasters such as the BP oil spill and Massey Energy coal mine collapse. Environmental
and social sustainability issues can no longer be considered off-balance sheet issues. Rather
they are material, financial issues posing both risks and opportunities to the long-term
success of corporations.

This recognition has spurred shareowner demand for enhanced disclosure of all material
business risks having the potential to directly affect both short- and long-term financial
performance, including risks posed by climate change, water scarcity, human rights,
employee health and safety, and other sustainability issues. Many companies have
responded positively to this new reality, expanding their reporting and overall
transparency, as well as establishing new governance structures (for example risk
committees).

To help meet this demand, Ceres—which has worked with investors and companies on
sustainability issues for more than 20 years—developed its Roadmap for Sustainability.

197
The Roadmap is a practical guide detailing key expectations that every company should
strive to meet by 2020, in order to be best positioned to thrive in an increasingly
competitive and resource constrained global economy. Recognizing that many companies
have already embarked on this journey, while others are just getting started, the Roadmap
is designed to demonstrate what is possible now and what is needed in the future, making
it applicable to both new and current reporters: http://www.ceres.org/ceresroadmap.

Addressing issues of governance, stakeholder engagement, disclosure, and performance,

the Roadmap provides a flexible framework companies can use to develop comprehensive
strategies and actions to imbed sustainability into their corporate accountability systems,
and to help realize both cost savings and revenue generation opportunities. The Roadmap
also details strategies and results from companies taking on these challenges, and provides
a robust platform for accelerating best practices and performance for companies at all
stages of the journey toward sustainability.

 Governance. We seek board oversight and executive accountability for

sustainability strategies and performance, as well as integration of sustainability
considerations into risk management systems;
 Stakeholder engagement. We encourage substantive engagement with a diverse
group of stakeholders, as well as incorporation of material sustainability risks into
investor communications and annual meetings;
 Disclosure. We support balanced reporting of measurable performance data,
targets, and goals, as well as integration of material sustainability issues and
opportunities into financial filings and reports; and
 Performance. We look for alignment of sustainability considerations with supplier
standards and performance expectations, as well as measurable improvements in
areas such as GHG emissions, energy efficiency, water management, and human
rights, including worker safety. This is critical for ensuring the effectiveness of
sustainability practices.

As shareowners, we believe companies should be open and transparent with stakeholders

on all material issues, including those often hidden environmental, social, and governance
risks. We encourage you not only to design and implement a robust sustainability strategy,
but also to demonstrate to shareowners and other stakeholders how effectively you are
managing sustainability risks and opportunities.

We ask that you use your standard investor communication vehicles—analyst calls, road
shows, annual meetings—to highlight actions you are taking to address material
sustainability risks and transform them into competitive opportunities.

We look forward to learning about steps you are taking in this area. Please direct responses,
as well as any questions or comments, to Amy D. Augustine, Director, Corporate Program
at Ceres via email at [email protected] or telephone at 617.247.0700, x156.

Sincerely,

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Daniel Pedrotty
Director of the Office of Investment
AFL-CIO

Anne Stausboll
CEO
California Public Employees’ Retirement System

Jack Ehnes
CEO
California State Teachers’ Retirement System

Bill Lockyer
Treasurer
California State Treasurer’s Office

Bennett Freeman
Senior Vice President, Sustainable Research and
Policy
Calvert Asset Management Company

Denise L. Nappier
Treasurer
Connecticut Office of State Treasurer

Adam Kanzer
Managing Director & General Counsel
Domini Social Investments

George Gay
CEO
First Affirmative Financial Network, LLC

Peter Knight
President
Generation Investment Management LLP (US)

Kristina Curtis
Senior Vice President

199
Green Century Capital Management

William Atwood
Executive Director
Illinois State Board of Investment

Steven Falci
Head of Strategy Development – Sustainable
Investment
Kleinwort Benson Investors International Ltd.

Richard Metcalf
Director of Corporate Affairs
Laborers’ International Union of North
America

Ian Greenwood
Chairman
Local Authority Pension Fund Forum

Susan Smith Makos

Director of Social Responsibility
Mercy Investment Services, Inc.

Luan Steinhilber
ESG Analyst/Director of Shareholder
Advocacy
Miller/Howard Investments, Inc.

Michael Kramer
Managing Partner & Director of Social Research
Natural Investments LLC

John Liu
Comptroller
New York City Office of the Comptroller

Thomas DiNapoli
Comptroller
New York State Comptroller

200
Jerome Dodson
President
Parnassus Investments

Julie Gorte
Senior Vice President for Sustainable Investing
Pax World Management Corp.

Bill Somplatsky-Jarman
Associate for MRTI and Environmental
Ministries
Presbyterian Church (USA)

Richard Torgerson
President & Director of Research
Progressive Asset Management

Ron Freund
Duncan Meaney
Social Equity Group

Thomas Ellington
Trust Administrator
The Sustainability Group at Loring, Wolcott and
Coolidge

Vidette Bullock Mixon

Director, Corporate Relations
United Methodist Church General Board of
Pension and Health Benefits

Anders Faijersson Ferguson

Partner
Veris Wealth Partner

Timothy Smith
Senior Vice President, Director of ESG
Shareowner Engagement
Walden Asset Management
201
Matt Diserio
President
Water Asset Management, LLC

Jack Robinson
Founder and Chief Investment Officer
Winslow Management Company,
A Brown Advisory Investment Group

Sonia Kowal
Director of Socially Responsible Investing

202
 Appendix H

Disaggregated Operational Performance Measurement Models

203
204
205
206
 Appendix I

Disaggregated Financial Performance Measurement Models

207
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210
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