Nama : Adinda Fajri Lubis

NIM : 40011420650237
DAFTAR ISI

Abstract...................................................................................................................................1
I. INTRODUCTION.........................................................................................................2
II. SUSTAINABILITY LITERATURE REVIEW..........................................................7
III. SUSTAINABILITY THEORIES.................................................................................9
III. 1. Agency/ Shareholder Theory....................................................................10
III. 2. Institutional Theory..................................................................................11
III. 3. Legitimacy Theory....................................................................................11
III. 4. Signaling/Disclosure Theory.....................................................................12
III. 5. Stakeholder Theory...................................................................................17
III. 6. Stewardship Theory..................................................................................18
IV. SUSTAINABILITY STANDARDS...........................................................................19
V. SUSTAINABILITY PERFORMANCE....................................................................20
V. 1. Economic Performance ............................................................................20
V. 2. Governance Performance ........................................................................21
V. 3. Social Performance....................................................................................21
V. 4. Ethical Performance..................................................................................22
V. 5. Environmental Performance....................................................................22
VI. SUSTAINABILITY RISKS........................................................................................23
V1. 1. Strategic Risk.............................................................................................23
V1. 2. Operations Risk.........................................................................................23
V1. 3. Compliance Risk........................................................................................24
V1. 4. Reputation Risk.........................................................................................24
V1. 5. Financial Risks...........................................................................................24
V1. 6. Security Risk..............................................................................................24
VII. SUSTANABILITY REPORTING AND ASSURANCE..........................................25
VIII. BUSINESS POLICY, EDUCATIONAL AND ACADEMIC RESEARCH
IMPLICATIONS.........................................................................................................28
VIII. I. Policy and Managerial Implications........................................................28
VIII. II. Research Implications of Sustainability..................................................29
IX. CONCLUSION............................................................................................................30

1
 BUSINESS SUSTAINABILITY RESEARCH:
A THEORETICAL AND INTEGRATED PERSPECTIVE

Abstract

Global investors demand, regulators require, and companies disclose their sustainability performance
information, and scholars have started to conduct research on sustainability performance, reporting and
assurance. The goal of firm value creation can be achieved when management considers the interests of
all stakeholders and integrates all five economic, governance, social, ethical, and environmental (EGSEE)
dimensions of sustainability performance into managerial strategies, actions and reporting. This paper
provides a synthesis of research on sustainability and presents a theoretical framework consisting of
theories and standards relevant to all five EGSEE dimensions of sustainability performance and risks and
their integration into corporate culture, business models and reporting in creating stakeholder value.

Keywords: Corporate Governance; Integrated Sustainability Reporting; Sustainability Performance;

Sustainability Assurance

2
 I. INTRODUCTION

Business sustainability is gaining considerable attention in the aftermath of the 2007-2009 global
crisis as a means to ensure the long-term sustainability of public companies and their accountability to a
variety of stakeholders. Global investors demand, regulators require, and public companies disclose their
economic, governance, social, ethical, and environmental (EGSEE) sustainability performance (Brockett
and Rezaee, 2012; Rezaee, 2015) 1. The goal of firm value creation can be achieved when management
considers the interests of all stakeholders and integrates all five EGSEE dimensions of sustainability
performance into corporate culture, managerial strategies, business model, actions and reporting.
Business sustainability has evolved from a focus on promoting environmental, social and governance
(ESG) performance to initiatives that can derive revenue growth and high quality financial performance.
International businesses and global investors utilize sustainability performance information and look
beyond a company's financials in making business and investment decisions (Rogers, 2015), and three
quarters of investment professionals use sustainability performance information when making investment
decisions (CFA Institute, 2015).
The academic community recently has shown interest in conducting research on sustainability beyond
more than 100 articles published on corporate social responsibility (CSR) 2. Huang and Watson (2015)
provide a thorough review of research on CSR published in premier accounting journals and suggest a
direction for future research. The primary purpose of this paper is to synthesize academic research on
business sustainability in order to develop a theoretical framework that presents an integrated and holistic
approach to business sustainability performance and reporting. This integrated theoretical framework
examines several theories and standards relevant to all five EGSEE dimensions of sustainability
performance and risks and their integration into corporate culture, business model and reporting in
creating stakeholder value. It also presents some research questions and suggestions for future
sustainability research and the integration of sustainability education into the accounting curriculum.

1
The term sustainability or sustainable development was first defined in the Brundtland Report in 1987 as “…
development that meets the needs of the present without compromising the ability of future generations to meet their
own needs.”(WCED, 1987, p. 43). This definition is criticized for not being adequately specific about whose or
which needs should be addressed and it focuses primarily on environmental sustainability (Starik and Kanashiro,
2013).

2
The terms business sustainability, corporate social responsibility (CSR), triple bottom line of focusing on
environmental, social and governance (ESG) have been interchangeably used in the literature and authoritative
reports. However, business sustainability is regarded as much broader than CSR and even ESG and has recently
gained more acceptance (Brockett and Rezaee, 2012; Kiron et al., 2013; GRI, 2013; UN Global Compact, 2013;
Rezaee, 2015). Tonello and Singer (2015) state that CSR inadequately focuses on corporate responsibility, whereas
sustainability emphasizes strategies for long-term growth and sustainable performance.

3
 Business sustainability is a relatively new concept, which has been defined as “the pursuit of a
business growth strategy by allocating financial or in-kind resources of the corporation to ESG practices”
(Tonello and Singer, 2015: 1), which is basically a process of focusing on the achievement of all five
EGSEE dimensions of sustainability performance (Brockett and Rezaee, 2012; Rezaee, 2015). In this
context, sustainability focuses on activities that generate financial economic sustainability performance
and non-financial ESG sustainability performance through maximizing corporate governance
effectiveness and business opportunities and minimizing environmental and social harms, and, above all,
securing long-term success in creating stakeholder value 3. Recent research suggests that business
sustainability is moving away from isolated and opportunistic efforts with a main focus on CSR and
toward a more integrated, holistic, and strategic approach embracing all dimensions of sustainability
performance and engaging diverse stakeholders (Kiron, Kruschwitz, Haanaes, Reeves, Fuisz-Kehrbach,
and Kell, 2015).
Academic scholars have used CSR, ESG and EGSEE sustainability terms interchangeably with some
exceptions. For example, recent studies (e.g., Ng and Rezaee, 2015, Kiron et al, 2015; Jain, Jain and
Rezaee, 2016) classify sustainability performance into two components: (1) financial economic
sustainability performance, which focuses on achieving long-term financial performance to create
shareholder value, and (2) non-financial CSR/ESG sustainability performance in protecting interests of
non-shareholding stakeholders. Global investors consider various dimensions of sustainability
performance in their investment analysis, as socially responsible investing (SRI) has increased by more
than 22 percent to $3.74 trillion in managed assets during the 2010–2012 period (Social Investment
Forum (SIF), 2012). More than 6,000 European companies will be required to disclose their non-financial
ESG sustainability performance and diversity information for their financial year 2017 (European
Commission, 2014).
Business sustainability requires an understanding of sustainability theories, standards, risks,
performance, and their integration into the corporate culture and business model and academic research as
presented in Figure 14. The framework of Figure 1 depicts the five drivers of business sustainability as
theories, standards, risks, performance, and reporting, and the remainder of this paper reviews research on
these drivers of sustainability. There are four integrated themes of the suggested sustainability framework,
which enable businesses to integrate them into their corporate culture, and business models and scholars
to conduct research on these themes. The first theme posits that the business sustainability framework and
its five EGSEE sustainability performance dimensions are driven by and built on stakeholder theory,
3
The Global Reporting Initiative (GRI) in its G4 sustainability guidelines promotes an integrated reporting on these
five EGSEE dimensions of sustainability performance with the ethical dimension being incorporated into other
dimensions (GRI, 2013).
4
Different components of the framework of Figure 1 are derived from the extant sustainability literature and the
author’s books, research and teaching in business sustainability.

4
while other theories (shareholder, legitimacy, signaling, stewardship, and institutional) are relevant in
providing justification for engaging in sustainability performance and reporting sustainability
information.
The second theme indicates that the main goal and objective function for business organizations is to
maximize firm value. The goal of firm value maximization can be achieved under business sustainability
by protecting the interests of all stakeholders including investors, creditors, suppliers, customers,
employees, the environment, and society. Business organizations are being criticized for primarily
focusing on profit maximization and shareholder value creation with less attention to the impacts
of their operations on society and the environment (Porter and Kramer, 2011). Thus, the concept
of “shared value” has been introduced as ““policies and practices that enhance the
competitiveness of a company while simultaneously advancing the economic and social
conditions in the communities in which it operates” (Porter and Kramer, 2011, 65). Nonetheless,
the business sustainability model, while maximizing profitability in creating shareholder value,
optimizes business, environmental and social activities in protecting interests of all stakeholders.
This model acknowledges that sustainability decision-making is also complex and fraught with
uncertainty, just as decision-making for shareholder value, because sustainability is also about
making investments in an uncertain future that may or may not create value for shareholders.
This perceived heterogeneity of businesses’ commitments to “shared value creation” for all
stakeholders is apparent as all firms do not make the same decisions in integrating business
sustainability into their business model and corporate culture.
The third theme is the time horizon of balancing short-term and long-term performance in all five
EGSEE dimensions of sustainability performance. The final theme is the multidimensional nature of
sustainability performance in all EGSEE areas. The relative importance of the EGSEE dimensions of
sustainability performance with respect to each other and their contribution to firm value creation is
affected by whether these sustainability performance dimensions are viewed as competing with,
conflicting with, or complementing each other.
Insert Figure 1 Here

This paper proceeds as follows: Section II reviews sustainability literature. The theoretical framework
discussing agency/shareholder, stakeholder, signaling/disclosure, institutional, legitimacy, and
stewardship theories and their implications for sustainability is discussed in Section III. Section IV
presents sustainability standards. The five EGSEE dimensions of sustainability performance and related

5
risks are presented in sections V and VI, respectively. Integrated sustainability reporting and assurance is
presented in section VII .Section VIII discusses educational, policy, and academic implications of
business sustainability with suggestions for future research, and the last section concludes the paper.

6
 II. SUSTAINABILITY LITERATURE REVIEW
Much of prior research has focused on non-financial CSR/ESG dimension of sustainability
performance, its drivers, and impacts on financial and market performance (Huang and Watson, 2015).
However, as stated by Rehbein (2014), the role that management plays in determining CSR investment
and drivers as a subset of business sustainability deserves more academic inquiry. This paper views
CSR/ESG as an integral component of business sustainability and often uses CSR/ESG and the five
EGSEE dimensions of sustainability performance interchangeably. This view is shared by other
researchers (e.g., Ng and Rezaee, 2015; Rezaee, 2015; Kiron et al., 2015; Jain et al., 2016), and thus the
remainder of this section focuses on reviewing five streams of research relevant to business sustainability
performance, reporting and assurance.
One stream of research addresses the theoretical foundation of business sustainability and its
implications and relevance to sustainability research, education and practice. For example, Connelly,
Certo, Ireland, and Reutzel (2011a), Connelly, Ketchen, and Slater (2011b), and Carter and Easton (2011)
present multiple theories in establishing frameworks for advancing sustainability research, education and
practice as well as managerial strategies and processes focusing on business sustainability. Pagell and
Shevchenko (2014) state that prior research on sustainability has primarily focused on the synergistic and
conventional shareholder theory of sustainability rather than trade-offs and radical innovation among the
competing stakeholder theory. Spence and Rinaldi (2014) present theoretical and empirical insights into
the ways that business sustainability relevant to CSR/ESG can influence supply chain practices. The
multiple theories include shareholder, stakeholder, institutional, signaling, legitimacy, and stewardship,
and their applications to sustainability research, education and practice, particularly managerial processes
and reporting, are discussed in detail in section III.
The second stream of research discusses the relevance of the International Organization for
Standardization (ISO) standards and required certifications in moving all five EGSEE dimensions of
sustainability performance, reporting and assurance. The applications and relevance of several ISOs
(9000, 14000, 20121, 26000, 27001, 31000) to business sustainability research, education and practice
and their implications for management are presented in section IV. Several studies consisting of Bansal
and Hunter (2003), Potoski and Prakash (2005), and Rondinelli and Vastag (2000) examine the
implementation of certifications under ISO 14000 environmental standards to business sustainability and
suggest that such certifications can promote compliance with environmental regulations and social
standards. Ioannou and Serafeim (2012) develop an annual composite CSP index for individual firms
using the national business systems institutional framework consisting of many of these ISOs including
ISO 26,000 on triple bottom line of profit, people and planet.

7
 The third stream of research examines sustainability risks and performance and their integrated
effects on cost of capital. Rezaee (2015) discusses six sustainability-related risks of strategic, operations,
compliance, financial, security, and reputation and their relevance to sustainability performance, practice
and research as presented in section VI. The relationship between various dimensions of sustainability
performance and firms’ risk and thus the cost of capital including debt and equity capital has been
examined in prior studies. Spicer (1978) argues that there is a moderate to strong relation between a
firm’s common shares and its CSR performance with respect to environmental risk. Other studies (e.g.,
Corbett and Klassen, 2006; Pagell, Wu, and Murthy, 2006) report the relevance of green and social
initiatives to supply chain management by investigating whether it pays to be green and socially
responsible. Dhaliwal, Li, Tsang, and Yang (2011), Ng and Rezaee (2015) and Jain et al. (2016) address
some of these six sustainability-related risks and their association with financial and market performance
through their impacts on the cost of capital and short selling activities.
The fourth stream of research examines the relation between financial economic sustainability
performance and non-financial CSR/ESG dimensions of sustainability performance and the impact on
firms’ financial and market performance. Dhaliwal et al. (2011) report that corporations that disclose their
CSR programs and performance exhibit better financial and market performance. Other studies (e.g.,
Kleindorfer, Singhal, and Van Wassenhove, 2005; Golicic and Smith, 2013) suggest that sustainability
results in improved firm performance by reporting an association between conventional financial KPIs
such as earnings and return on investment and conceptualization KPIs such as social and environmental
performance. These studies provide empirical evidence that suggests that CSR/ESG programs improve a
firm’s future financial performance. Several studies examine the benefits of sustainability and whether
sustainability investments in environmental and social issues pay off in terms of customers’ perceptions
toward products and services (Bansal and McKnight, 2009; Carter and Easton, 2011; Fawcett and Waller,
2011; Luchs, Naylor, Irwin, and Raghunathan, 2010). Ng and Rezaee (2015) find that both financial
economic and non-financial ESG sustainability performance are negatively associated with cost of equity
capital, and the link between financial performance and cost of equity is stronger in the presence of ESG
sustainability performance. Jain et al. (2016) report that financial economic sustainability performance
and non-financial CSR/ESG sustainability performance dimensions are linked and that short sellers avoid
firms with high CSR/ESG scores and tend to target firms with low CSR/ESG scores.
The final stream of research examines sustainability reporting and assurance and their role in
communicating financial economic sustainability and non-financial CSR/ESG sustainability information
to stakeholders. Several studies consisting of Verrecchia (1983), Verrecchia (2001) Einhorn, (2005)
Beyer, Cohen, Lys, and Walther (2010), Rezaee and Homayoun (2014) and Rezaee and Tuo (2016)
examine the voluntary (nonfinancial) and mandatory (financial) dimensions of sustainability performance

8
information and find that voluntary non-financial and mandatory financial sustainability information
complement each other. Furthermore, voluntary disclosure theory, as discussed in the next section,
suggests that firms with good CSR/ESG information make the most exhaustive disclosures and thus
voluntarily disclose such information to reduce information asymmetry and avoid adverse selection (e.g.,
Al-Tuwaijri, Christensen, and Hughes, 2004; Clarkson, Li, Richardson, and Vasari, 2011; Verrecchia,
2001). Other studies (e.g., Hopwood, 2009; Gray, 2010; Bebbington and Larrinaga, 2014;) examine the
importance of the proper accounting, reporting, and assurance of sustainability information in disclosing
relevant financial and non-financial information to all stakeholders. Selmier, Newenham-Kahindi and Oh
(2015) propose a business model of language resource acquisition policy to communicate non-financial
CSR/ESG sustainability performance information to stakeholders.
Taken together, these five streams of research primarily focus on CSR/ESG sustainability issues in an
isolated fashion. These studies report a U-shaped relation between financial and non-financial dimensions
of sustainability performance where very small and very large firms are more likely to engage in CSR
activities and performance. These studies, while indirectly examining several aspects of business
sustainability, have not sufficiently addressed a holistic approach of integrating all five EGSEE
dimensions of sustainability performance into corporate culture, business models, management processes
and reporting, and value chains from strategic planning by top level management to purchasing,
marketing, and customer services. This study is an attempt to integrate all five EGSEE dimensions of
sustainability into corporate culture, business models and reporting using relevant theoretical framework,
practical standards, and risk management and sustainability reporting guidelines as depicted in Figure 1
and presented in the following sections.

III. SUSTAINABILITY THEORIES

A number of sustainability theories consisting of agency/shareholder, stakeholder,
signaling/disclosure, institutional, legitimacy, and stewardship have been developed in examining the role
of business organizations in society and their interactions with their constituencies including shareholders,
creditors, suppliers, customers, employees, government, society and the environment. These theories
attempt to address the integration among various dimensions of sustainability performance, their
interactions, their possible tensions and constraints imposed on the main business objective of
creating shareholder value. These theories are interrelated and compatible and thus individually and
collectively address different EGSEE dimensions of sustainability performance in creating stakeholder
value as presented in alphabetical order in the following subsections.

9
III.1 Agency/ Shareholder Theory
Agency/shareholder theory, initially developed by Jensen and Meckling (1976), addresses firms’
management by suggesting that the interests of principals (owners) and their agents (executives) are often
not aligned. Agency/shareholder theory focuses on risk sharing and agency problems between
shareholders and management and the related three agency costs (monitoring, bonding, and residual) that
are assumed by shareholders (Fama and Jensen, 1983). In the context of agency theory, moral hazards
occur in the presence of information asymmetry where the agent (management) acting on behalf of the
principal (shareholders) knows more about its actions and/or intentions than the principal does due to a
lack of proper monitoring of the agent. The implications of shareholder theory for sustainability
performance are that management incentives and activities often focus on short-term earnings targets
which are normally linked to executive compensation and detract from achieving sustainable and long-
term performance for shareholders.
Shareholder/agency theory suggests that management can maximize the interests of shareholders
by engaging in projects with positive net present value (NPV) future cash flows that create shareholder
value. Shareholder wealth maximization theory specifies that shareholders are the owners of the firm and
managers have a fiduciary duty to act in their best interests to maximize their wealth (Shleifer and
Vishny, 1997). Under this theory, non-financial CSR/ESG sustainability activities may be viewed as the
allocation of firm resources in pursuit of activities that are not in the best interest of shareholders, even
though they may create value for other stakeholders. Thus, firms should focus on creating shareholder
value and leave the decisions about social responsibility to their shareholders. There is information
asymmetry between management and shareholders, as only senior management knows the true and
complete representation of financial reports and have incentives to withhold some information,
particularly bad news, from investors. Thus, to mitigate the perceived information asymmetry,
management may choose to voluntarily disclose non-financial CSR/ESG performance information.
In conclusion, agency/shareholder theory views management as only accountable to shareholders
for creating shareholder value and whose interests may diverge from those of their shareholders and has
traditionally been the dominant theory of corporate finance, management, and governance research
(Jensen and Meckling, 1976). Agency/shareholder theory addresses a narrow and parochial aspect of
business sustainability by primarily focusing on financial economic sustainability performance
information and disclosure of such information mainly for shareholder purposes. While agency theory has
traditionally been used to explain the principal-agent relation and interest divergence for individualistic
utility maximization and motivation, this theory may be irrelevant and undesirable under the emerging
sustainability performance reporting.

10
III.2 Institutional Theory
Institutional theory, considering a firm as an institutional form of diverse stakeholders pursuing
common goals, is relevant to business sustainability even though it was initially intended for the political
process. The seminal article published by Meyer and Rowan (1977) sets the foundation for the application
of institutional theory to personal politics, (Edelman, 1992; Tolbert and Zucker, 1983), to domestic and
international governmental policies (Strang, 1990), and to the development of organizational missions
and forms (DiMaggio, 1991; Fligstein, 1985). Institutional theory focuses on the role of normative
influences in decision-making processes that affect organizational structure and offer a structural
framework that can be useful in addressing many issues, conditions, and challenges that lead the structure
to institutionalization. It focuses on the social aspects of decision-making (such as the decision to invest
in CSR expenditures), the conditions under which the investment decisions on CSR or environmental
initiatives are made, and their possible impacts on the environment and society.
Institutional theory views a firm as an institutional form of diverse individuals and groups with unified
interests, transaction governance, values, rules, and practices that can become institutionalized. Jennings
and Zandbergen (1995, p. 1015) state that “institutional theory helps to understand how consensus is built
around the meaning of sustainability and how concepts or practices associated with sustainability are
developed and diffused among organizations.” Institutional theory suggests that the institutional
environment, internal corporate governance mechanisms and corporate culture can be more effective than
external measures (laws, regulations) and external corporate governance mechanisms in achieving all five
EGSEE dimensions of sustainability performance. A more pragmatic institutional theory promotes
business sustainability by viewing a firm as an institution to serve human needs and protect all relevant
interests (Roberts, 2004). However, this theory fails to address the potential tensions in achieving
potentially conflicting dimensions of sustainability performance. A firm as an institution is sustainable as
long as it creates value for all stakeholders including shareholders and promote synergies among all
stakeholders.
III.3 Legitimacy Theory
Legitimacy theory is built on a socio-political view and suggests that firms face social and
political pressure to preserve their legitimacy by fulfilling their social contract. Firms disclose their
relevant financial economic sustainability performance information and engage in non-financial
CSR/ESG sustainability activities to obtain and sustain legitimacy and thereby fulfill the “social contract”
and gain the support of society (Guthrie and Parker, 1989; Tilling, 2004). Legitimacy theory suggests that
social and environmental sustainability initiatives and related performance are desirable by all
stakeholders, including customers, society and the environment. The theory suggests that non-compliance
with social norms and environmental requirements can be detrimental to organizational legitimacy and its

11
financial sustainability, and thus organizations use environmental and social disclosures to satisfy
society’s demands (Guthrie and Parker, 1989; Tilling, 2004).
Legitimacy theory is relevant and important to the achievement of EGSEE sustainability
performance as it solidifies the company’s reputation and as its products and services must be desirable
and beneficial to all stakeholders rather than harm the environment and society (Suchman, 1995).
Business sustainability is considered as an integral component of management strategies, particularly
when there is conflict between the corporate goals of maximizing financial and social goals of fulfilling
CSR. The existence and persistence of such conflicts require corporations to establish an “appropriate
tone at the top,” promoting achievement of all five EGSEE sustainability performance in benefiting all
stakeholders and in taking sustainability and the social interest seriously, and requiring their suppliers to
adhere to product quality and social and environmental requirements. Legitimacy theory suggests that
social and environmental sustainability performance is desirable by all stakeholders, including customers,
without providing any solutions for shared value creations among diverge stakeholders (Rezaee, 2015).

III.4 Signaling/Disclosure Theory

Signaling/disclosure theory enables companies to communicate and explain management
incentives for achieving all five EGSEE dimensions of sustainability performance and investors’ reaction
to the disclosure of sustainability performance information (Grinblatt and Hwang, 1989). Signaling theory
suggests that firms may attempt to signal “good news” through the use of mandatory financial reports and
voluntary reporting of non-financial CSR/ESG sustainability performance. However, the expected
association between a firm’s voluntary non-financial CSR/ESG sustainability performance reporting and
the use of these signals communicated through mandatory financial reports is ambiguous. Healy and
Palepu (2001) argue that firms’ voluntary reporting may act as a complement to signal information about
expected future financial performance. Alternatively, these signaling mechanisms could be substitutes,
suggesting a negative relationship between the probability of voluntary disclosures and the use of these
signals (Grinblatt and Hwang, 1989). However, firms with good sustainability performance are motivated
to signal their superior sustainability performance through sustainability CSR/ESG disclosures according
to signaling/voluntary disclosure theory (Lys, Naughton and Wang 2015).
Signaling/disclosure theory suggests that firms with superior sustainability financial and non-
financial performance have more incentive to disclose their superior performance and choose to signal
their sustainability achievement by issuing sustainability CSR/ESG reports in addition to their mandatory
financial statements. Signaling theory refers to the ability to communicate with all stakeholders the
achievement of all five EGSEE dimensions of sustainability performance (Connelly et al., 2011 a, b;
Dainelli, 2013). Thus, in compliance with signaling theory, good firms (those with high sustainability

12
performance) differentiate themselves from bad firms (those with low sustainability performance) and
signal their sustainability as good corporate citizens. Signaling theory helps explain management
incentives for achieving both financial economic and non-financial CSR/ESG sustainability information
and thus is most relevant to sustainability disclosure rather than sustainability performance.

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III.5 Stakeholder Theory

Under stakeholder theory, stakeholders are classified as internal stakeholders and other external
stakeholders. Stakeholders have a reciprocal relationship with a firm in the sense that they contribute to
the firm’s value creation, and the firm’s performance affects their well-being. Freeman’s (1984)

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stakeholder theory and Jensen’s (2001) “enlightened value maximization” theory recognize maximization
of firm performance and the long-term value of the firm as the criterion for balancing interests of all
stakeholders. Furthermore, according to Denis and McConnell (2003, p. 6), “In many European countries,
shareholder wealth maximization has not been the only - or even necessarily the primary - goal of the
board of directors.” Stakeholder welfare maximization includes the interests of employees, customers,
and the broader community within which a firm operates. For example, Schmidt (2004) reports that in
Germany, firms are legally required to protect the interests of all stakeholders according to the system of
co-determination that enable employees and shareholders to have an equal number of seats on the
supervisory board of the company.
In the context of shareholder wealth maximization and stakeholder welfare maximization, non-
financial ESG sustainability activities create both synergies and conflicts. Stakeholder theory suggests
that sustainability activities and performance enhance the long-term value of the firm by fulfilling the
firms’ social responsibilities (Campbell, 2007), meeting their environmental obligations (Clarkson et al.,
2011), and improving their reputation (Weber, 2008). However, these sustainability activities may require
considerable resource allocation that could conflict with shareholder wealth maximization objectives and
force management to solely invest in sustainability initiatives that would result in long-term financial
sustainability. Stakeholder theory applies to all managerial processes in the sense that the synergy and
integration among all elements of the business model and its processes are essential in achieving overall
sustainable performance objectives (Donaldson and Preston, 1995; Freeman, 2010). Cormier (2005)
argues that management’s consideration of stakeholders’ interests is a key determinant of focus on social
and environmental sustainability performance and disclosures. Thus, according to stakeholder theory, all
five EGSEE sustainability performance dimensions are viewed by stakeholders as value-added activities
that create stakeholder value. Nonetheless, stakeholder theory has failed to address the possible tensions
among achieving all five EGSEE dimensions of sustainability performance and their potential impacts on
the perceived conflicts of interest among internal and external stakeholders.
III.6 Stewardship Theory
Stewardship theory stems from sociology and psychology and views management as considering
the long-term interests of a variety of stakeholders rather than its own self-serving and short-term
opportunistic behavior under agency theory. Specifically, Hernandez (2008:122) states that stewardship
theory promotes “the long-term best interests of a group ahead of personal goals that serve an individual’s
self-interests”. Stewardship, as defined by Hernandez (2012:174) is “the extent to which an individual
[management] willingly subjugates his or her personal interests to act in protection of others’
[stakeholders] long-term welfare”, is very applicable to the emerging corporate sustainability. Two
aspects of this definition, long-term orientation and protection of interests of all stakeholders, are the main

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drivers of corporate sustainability. Stewardship theory is applicable to corporate sustainability because it
considers management’s strategic decisions and actions as stewardship behaviors that “serve a shared
valued end, which provides social benefits to collective interests over the long term” Hernandez (2012:
186). The underlying tenets and assumptions of stewardship theory are aligned with the attributes of
corporate sustainability in the sense that “…organizational and employee interests align because a sense
of connection exists” (Hernandez, 2012: 186). Although stewardship theory requires management to
exercise due diligence and be accountable in improving financial and non-financial KPIs in protecting
interests of all stakeholders, it does not offer any suggestions as to how management should manage
potentially conflicting EGSEE sustainability performance dimensions.
Taken together, the above six theories have implications for business sustainability in the sense
that firms should realize that their main objective function is to create shareholder value in compliance
with agency/shareholder theory while protecting the interests of shareholders and other stakeholders
under stakeholder theory, focusing on the long-term interests of a variety of constituencies under
stewardship theory, contributing to the society and human needs in accordance with institutional theory,
securing their legitimacy under legitimacy theory, and differentiating themselves from low ESG/CSR
firms through disclosure/signaling theory. All the above discussed theories are relevant to business
sustainability, and international businesses should utilize one or several (as an integrated theory) that can
be tailored to their mission, strategies, business model, and reporting processes. In summary, stakeholder
theory has been (and continues to be) the prevailing theory of business sustainability since 1984 when
Freeman published his book, Strategic Management: A Stakeholder Approach (Freeman, 1984). In the
context of business sustainability, stakeholders are those who have vested interests in a firm through their
investments in the form of financial capital (shareholders), human capital (employees), reputational
capital (customers and suppliers), social capital (the society), environmental capital (environment), and
regulatory capital (government). This study provides the above synthesis of sustainability theories and
their future research implications for the academic community and scholars. Regardless of which theory
(theories) is (are) more relevant to a particular international business, there should be a set of globally
accepted standards to guide business organizations worldwide in advancing their sustainability initiatives
and in trading with international partners that share their EGSEE sustainability performance and
practices, as discussed in the next section.

IV. SUSTAINABILITY STANDARDS

Sustainable development for organizations means not only providing products and services that
satisfy the customer without jeopardizing the environment, but also operating in a socially responsible
manner and presenting reliable and transparent sustainability reports. Prior studies (e.g., Bansal and

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Hunter, 2003; Potoski and Prakash, 2005; Rondinelli and Vastag, 2000) suggest the use of sustainability
standards developed by the International Organization for Standardization (ISO) in certifying
achievement of ESGEE sustainability performance and in providing assurance on sustainability
performance reports. The ISO certifications can ensure high-quality products, promote effective corporate
governance and compliance with environmental regulations and social standards, and develop uniformity
in focusing on all five EGSEE dimensions of sustainability performance by international trading partners.
Table 1 summarizes several ISO standards relevant to quality controls, CSR and environmental activities,
risk management, and sustainability events. These ISO standards are linked to sustainability theories and
all five EGSEE dimensions of sustainability performance in Figure 1.
Insert Table 1 Here
Taken together, the ISO standards establish practical foundations that can be built up based on the
sustainability theoretical framework. Sustainability reports reflecting all five EGSEE dimensions of
sustainability performance are deemed to be useful when they are complete, accurate, and their reliability,
objectivity, and credibility are affirmed by ISO certifications. Thus, high-profile international firms can
demand that their trading partners comply with ISO 9000 quality control, ISO 14000 environmental, and
ISO 26000 CSR standards. These ISO certifications of sustainability performance reports provide external
assurance about the credibility and legitimacy of management processes and effective communication of
sustainability performance to all stakeholders through the integrated sustainability reporting discussed in
Section VII.

V. SUSTAINABILITY PERFORMANCE
This section examines each of the EGSEE sustainability performance dimensions and their financial
and non-financial KPIs as summarized in Table 2. The framework of Figure 1 suggests that the overall
objective function is to maximize firm value by generating sustainable economic (financial) performance
subject to the achievement of non-financial ESG performance as a set of constraints imposed on the
objective function. Sustainability performance measures should be derived from internal factors of
strategy, risk profile, strengths and weaknesses, and corporate culture as well as external factors of
reputation, technology, competition, CSR, globalization, and utilization of natural resources. Integration
of the five EGSEE dimensions of sustainability performance into corporate infrastructure, business
model, and management processes enables companies to conserve scarce resources, optimize production
processes, identify product innovations, achieve cost efficiency and effectiveness, increase productivity,
and promote corporate reputation.
Insert Table 2 Here

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V.1 Economic Performance
Economic sustainability performance reflects the long-term profitability and financial
sustainability of the company as measured in terms of long-term operational effectiveness, efficiency,
productivity, earnings, return on investment, and market value. Economic sustainability performance is
presented in a set of financial statements that enable investors to better assess the risk and return
associated with their investments. Academic research suggests that economic sustainability performance
is essential in creating shareholder value by examining the value-relevance of financial information and
its link to stock prices (e.g., Barth, Landsman, and Lang, 2008; Brown, He, and Teitel, 2006; Jain et al.,
2016).
V.2 Governance Performance
Governance performance reflects the effectiveness of corporate governance measures in
managing the company to achieve its objectives of creating shareholder value and protecting the interests
of other stakeholders. Corporate governance mechanisms are normally established by policymakers,
regulators, and corporations to promote economic stability, public trust, and investor confidence in public
financial information and capital markets. Regulatory reforms such as the Sarbanes-Oxley Act of 2002
(SOX, 2002) and the Dodd-Frank Act of 2010 (DOF, 2010) are intended to strengthen corporate
governance measures by defining roles and responsibilities of corporate gatekeepers, including the board
of directors, management, and auditors. Governance performance is achieved through board oversight of
management, alignment of management interests with those of shareholders, directors’ election, and
linking executive compensation schemes and practices to long-term sustainable performance. The link
between corporate governance and firm performance has been addressed in prior research and the
conclusions are mixed. For example, Gompers, Ishii, and Metrick (2003) find a positive link between
corporate governance performance measures and stock returns during the 1991-1999 period. In contrast,
Bebchuk, Cohen, and Wang (2013) document no association between corporate governance performance
measures and stock market performance during the 2000-2008 period, as investors can differentiate
between firms with high and low corporate governance measures.
V.3 Social Performance
Social performance measures how well a company translates its social goals into practice. Social
performance reflects how and to what extent a company fulfills its social responsibility by making its
social mission a reality and aligning it with interests of society. Social performance ranges from focusing
on delivering high quality products and services that are not detrimental to society to improving employee
health and well-being and becoming a positive contributor to the sustainability of the planet. Social
performance measures corporate activities that contribute to society beyond compliance with applicable
laws, regulations, standards, and common practices. Social performance can increase reputation and

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improve corporate image and may result in sustainable financial performance in the long term. Several
academic studies find that CSR performance increases firm value and reduces cost of capital (Cheng,
Ioannou, and Serafeim, 2013; Dhaliwal et al., 2011; Mackey, Mackey, and Barney, 2007; Richardson and
Welker, 2001; Huang and Watson, 2015).

V.4 Ethical Performance

Ethical performance reflects a company’s culture of integrity and competency set by the
appropriate tone at the top, which can be considered separately and/or infused into other dimensions of
sustainability performance. Attributes of an ethical corporate culture consist of: codes of conduct for
directors, senior executives, and employees; accountability; honesty; mutual respect; fairness;
transparency; and freedom to raise concerns. Appropriate ethical policies and procedures in the workplace
affect the integrity and quality of financial reporting and thus economic sustainability in the long term.
Brockett and Rezaee (2012) argue that ethical performance is linked to economic performance primarily
because firms that conduct business ethically are less susceptible to financial scandals and irregularities
and thus are sustainable in the long-term.
V.5 Environmental Performance
Environmental performance reflects how effectively a company addresses its environmental
challenges in leaving a better environment for future generations. Environmental disasters such as the
Union Carbide, Exxon, and BP Deepwater Horizon incidents have created a bad reputation for businesses
in some industries (chemicals and oil sectors) and required them to pay more attention to their
environmental initiatives. Environmental performance can affect economic performance by reducing the
likelihood of environmental law violations that may have detrimental financial consequences.
Environmental performance is measured in terms of reduction in carbon footprint, creation of a better
work environment, and improvement in the air and water quality of the property and the surrounding
community. Al-Tuwaijri et al. (2004) provide an integrated analysis of factors including environmental
disclosure, environmental performance, and economic performance, and find that good environmental
performance is linked to good economic performance. Clarkson et al. (2011) find significant positive
associations between environmental performance and financial performance.
Taken together, the persistent challenges when sustaining sustainability have been the proper
identification, measurement, recognition, reporting, and assurance of financial and non-financial KPIs.
The accounting and auditing standards as well as reporting and assurance of financial information have
been well-established and uniformly applied, whereas the development of such standards and their
uniform applications for non-financial ESG sustainability information is evolving and yet to be
consistently and vigorously required. Nonetheless, the literature as discussed above presents two views of

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the link between financial and non-financial ESG sustainability performance. One view is that financial
and non-financial sustainability performance dimensions are complementary because a firm that is
governed effectively, adheres to ethical principles, and commits to CSR and environmental obligations is
also sustainable in generating long-term financial performance. Another view is that corporations must do
well financially in the long term to be able to do “good” in terms of CSR and environmental activities.
Thus, financial and nonfinancial sustainability performance are interrelated and should be integrated to
achieve cost-effectiveness (cleaner and cheaper energy; organic, safe, and high-quality products,
recycling, waste reduction), to generate revenue (customer sales and premiums for socially and
environmentally friendly products and services), and to manage sustainability risks, as explained in the
next section.

VI. SUSTAINABILITY RISKS

In recent years, risk-taking by firms and investing banks has become contagious in the sense that
executives are incentivized to take excessive risk (as evidenced by outrageous risk at Enron, WorldCom,
and banks issuing subprime mortgages). Global business constantly changes and becomes more volatile,
unpredictable, and complex. In this challenging business environment, Enterprise Risk Management
(ERM) is vital in turning challenges into opportunities (COSO, 2004). A new survey conducted by the
CFA Institute reveals that 63 percent of respondents consider ESG in their investment decision making
process to help assess and manage investment risks, whereas 38 percent view ESG sustainability
performance as a proxy for management quality (CFA Institute, 2015). Brockett and Rezaee (2012) and
Rezaee (2015) present six risks (strategic, operations, compliance, financial, security, and reputation)
relevant to sustainability performance. Consideration of and proper assessment and management of those
six risks become increasingly important and play an essential role in achieving EGSEE sustainability
performance as discussed in more detail in the following subsections.
VI.1 Strategic Risk
There are several strategic risks related to business sustainability performance, reporting, and
assurance, including the risk of ineffectual corporate governance measures, uncertainty in marketing
position, volatility in stock price, abnormal changes in consumer demand, and portfolio risks related to
strategic investments, stakeholder communications, and investor relations. These strategic risks also
create opportunities for improvements in operating, investing, and financing activities and proper
communication with all stakeholders. Strategic risks should be identified, assessed, and managed. Related
control activities should be implemented to minimize their negative effects and maximize the
opportunities provided by addressing these risks.
VI.2 Operations Risk

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 Operations risks are linked to all five EGSEE dimensions of sustainability performance.
Operating risks are associated with both conventional (financial) KPIs such as earnings, return on
investment, and stock prices, and non-conventional (non-financial) KPIs such as social, ethical,
governance, and environmental performance, which need to be assessed and managed.

VI.3 Compliance Risk

Corporations must comply with sets of national and international laws, rules, regulations,
standards, and best practices. Many companies face the challenges of complying with numerous
regulatory measures, and noncompliance generates a significant risk of enforcement actions and penalties
as well as interruption and/or discontinuation of the business. Compliance risks need to be assessed,
managed, and their negative impacts minimized. To achieve this objective, many companies have created
either the board compliance committee or an executive position - compliance and risk officer.
VI.4 Reputation Risk
Maintaining good business reputation and meeting expectations of stakeholders from investors to
creditors, suppliers, customers, and employees, the environment, and society are major challenges for
many businesses. All five EGSEE dimensions of sustainability performance are linked to the business
reputation, customer satisfaction, and ethical workplace. The company’s reputation and its related risk
should be evaluated on an on-going basis, and any damages to reputation must be minimized.
VI.5 Financial Risks
The financial risk of issuing materially misstated financial reports is detrimental to the
sustainability of corporations and has caused the demise of many high-profile corporations such as Enron
and WorldCom. Financial risks are failures of financial reporting and internal control systems to prevent,
detect, and correct material misstatements caused by errors, irregularities, and fraud. To mitigate this risk,
SOX (2002) requires public companies to have their financial statements and internal controls certified by
management (CEOs and CFOs) and audited by independent auditors.

VI.6 Security Risk

Cyber hacking and security breaches of information systems are a harsh reality for many
businesses (e.g., Sony, Target, Morgan Chase), as their risk assessment and controls demand significant
increases in information technology (IT) investment and commitment by companies wishing to prevent
them. Cyber-crime and related attacks are chronic and enterprise-wide risks that pose significant threats to
public companies’ existence and reputations. The potential costs to a company of security and cyber-
attack risks include service and business interruptions, loss of intellectual property, loss of brand value,

24
breach of customer data privacy, response costs, and damage to physical infrastructure. The critical
intellectual property and business data and physical assets must be identified and protected. At a
minimum, companies should maximize protection against security breaches and cyber-risk exposures and
utilize the security guidelines recommended in the new COSO report (COSO, 2015). Furthermore,
management should establish adequate and effective business continuity plans and implement procedures
to quickly recover data from a backup source.
The move toward sustainability reporting underscores the importance of an adequate ERM in
improving the effectiveness of all five EGSEE dimensions of sustainability performance. ERM is a risk-
based approach to managing an enterprise, integrating concepts of strategic planning, operations
management, sustainability, and internal controls. The goal of implementing ERM is to manage overall
risks by identifying and reducing the possibility of events which create operational surprises and losses.
The discussion in this section assists business organizations in developing, implementing, maintaining,
assessing, monitoring, and continuously improving their risk management system to minimize the
negative effects of strategic, operations, financial, compliance, security, and reputation risks. The
development of sustainable programs with proper risk management repositions the company from
reacting to social and government pressures to proactively moving beyond economic performance and
toward EGSEE sustainability performance and risk management.

VII. SUSTANABILITY REPORTING AND ASSURANCE

The role of business organizations in our society started as profit maximization and has evolved
to creating shareholder value. Now, under business sustainability, that role is to protect the interests of all
stakeholders. Public companies must disclose a set of financial information to regulators and shareholders
and may choose to voluntarily disclose other non-financial (environmental, social and governance (ESG))
information. Mandatory financial reporting includes financial statements and audit reports on both
financial statements and the related internal control over financial reporting (ICFR). The global financial
reporting now should be in compliance with the International Financial Reporting Standards (IFRS) and
audited in compliance with the International Auditing and Assurance Standards (IAAS). These mandatory
financial reports are intended to provide shareholders and other investors with relevant, useful, reliable
and transparent financial information in making sound and informed decisions. However, a moral hazard
can occur in the presence of information asymmetry when management knows more about the company’s
actions and decides to withhold relevant financial information from investors.
Voluntary sustainability reports are currently considered as disclosures of any financial and non-
financial information outside of financial statements that are mandatory by regulators and standard-

25
setters. In recent years, many countries (e.g., Australia, Austria, Canada, Denmark, France, Germany,
Malaysia, Netherlands, Sweden, Hong Kong, and the United Kingdom) have adopted stand-alone ESG
sustainability reports. It is expected that regulators in other countries follow suit, moving toward
mandatory sustainability reporting. A recent survey conducted by the CFA Institute shows that 61 percent
of respondents believe that public companies should be required to report on their ESG sustainability
indicators at least annually (CFA Institute, 2015). Global organizations, such as the Global Reporting
Initiative (GRI), the International Integrated Reporting Council (IIRC), and the Sustainability Accounting
Standard Board (SASB) are now developing guidelines for integrated sustainability reporting and
assurance. The Global Reporting Initiative (GRI) (in its G4 sustainability guidelines) promotes integrated
reporting on the five EGSEE dimensions of sustainability performance with the ethical dimension being
incorporated into other dimensions (GRI, 2013). Two commonly used assurance standards released by the
IAASB, namely International Standard on Assurance Engagements “Other Than Audits or Reviews of
Historical Financial Information” (ISAE 3000), and “Assurance Engagements on Greenhouse Gas
Statements” (ISAE ED-3410), provide guidelines for auditors in providing assurance on non-financial
ESG information.
Investors demand sustainability performance information, regulators require disclosure of such
information, and companies prefer to disclose sustainability performance information to differentiate
themselves from less sustainable, less social, and less environmentally responsible companies.
Sustainability reports are deemed to be useful when they are complete, accurate, and their reliability,
objectivity, and credibility are ascertained by assurance providers (auditors). Existing sustainability
reports bear different names (green reporting, corporate social responsibility reporting), serve different
stakeholders in achieving a variety of purposes, and vary in terms of content, structure, format, accuracy,
and assurance. More standardized, integrated, and audited processes are required to make sustainability
reports on EGSEE performance comparable, commonly acceptable, and relevant to all corporate
stakeholders. The GRI recently provided a comprehensive sustainability reporting framework to enable
greater organizational transparency (GRI, 2013). In 2013, the International Integrated Reporting Council
(IIRC, 2013) developed the International Integrated Reporting Framework, which provides guidelines for
companies to integrate financial and non-financial performance information to benefit all stakeholders.
Sustainability Accounting Standards Board (SASB) is currently developing sustainability accounting
standards intended to assist public companies in disclosing material sustainability issues for the purpose
of mandatory filings to the SEC, such as the Form 10-K and 20-F through the first quarter of 2015
(SASB, 2013).
The European Parliament, on May 15, 2014, issued a new directive that requires listed companies
to disclose information on their social, environmental, and diversity performance in addition to financial

26
information on economic performance (European Commission, 2014). Hong Kong Stock Exchange has
required that its listed companies to disclose ESG information since 2015 (HK Ex, 2015) and other stock
exchanges either require or recommend their listed companies to disclose CSR/ESG sustainability and
diversity information (TSX, 2014). It is expected that companies in other countries follow suit, and thus
in the future will publish sustainability reports reflecting both financial and non-financial information
relevant to all five EGSEE dimensions of sustainability performance. The 2015 survey of the CFA
Institute reports that 57 percent of respondents integrate ESG into their investment analysis and decision-
making process, whereas 38 percent use best-practices and best-in-class positive alignment (CFA
Institute, 2015). The number of sustainability reports has significantly grown internationally, and several
global organizations (e.g., GRI; IIRC; SASB) are promoting standardized stand-alone integrated
sustainability reports. For example, the GRI adopted its new GRI guidelines (G4) (the latest version of the
guidelines) to report ten indicators where at least one indicator must be a part of each category: economic,
environmental, governance, and social impact (GRI, 2013). The GRI has compiled two years of data
pertaining to the scope, level, type, and content of sustainability reporting and assurance since the last
GRI framework (G4) was published in in May 2013. The GRI has compiled three years (2012-2014) of
data regarding current global trends in sustainability reporting and assurance practices for an international
sample of 12607 companies across 6 regions around the world (Europe, North America, Asia, Latin
America & the Caribbean, Africa, and Oceania). The GRI database shows that : (1) there is a growing
trend in the international issuance of sustainability reports in the past several years, with 3835 reports
(30%), 4132 reports (33%), and 4640 reports (37%) for 2012, 2013, and 2014, respectively; (2) there is an
increasing global trend in sustainability assurance reports among companies that have a sustainability
assurance report over the three years, with 1132 assurance reports (30%), 1238 assurance reports (33%),
and 1386 assurance reports (37%) for 2012, 2013, and 2014, respectively (GRI, 2014).
The fundamental nature of assurance is that external third parties are deemed more credible if
they have been subjected to an independent examination for information which is provided by companies
(Deegan, Cooper, and Shelly, 2006). Previous studies on the concept of sustainability reporting and
assurance evaluate the content of the assurance statement (e.g., Brockett and Rezaee, 2012; O’Dwyer and
Owen, 2005 and 2007; Simnett, Vanstraelen, and Chua, 2009). At present a number of challenges exist
for assurance of sustainability reports with no statutory or mandatory guidelines to guide the reporting
process (e.g., Cheng et al., 2013; Deegan et al., 2006; Eccles, Ioannou, and Serafeim, 2014; O’Dwyer and
Owen, 2007). No single assurance framework can cover the world’s diverse need for financial and non-
financial sustainability assurance. As sustainability financial and non-financial information becomes more
popular and expected by stakeholders, management should recognize such continuous interest in
sustainability information and integrate it into corporate reporting and assurance. The IAASB revised its

27
auditing standards to increase auditors’ involvement with information outside audited financial statements
(e.g., sustainability information) that is included in entities’ annual reports. The IAASB also released a
Working Group Publication in July 2015 to address assurance on integrated sustainability reporting
(IAASB, 2015).
The best practices of sustainability reporting and assurance are evolving as more business
organizations voluntarily disclose various five EGSEE dimensions of their sustainability performance.
Businesses that develop best practices of sustainability as a main theme of their business model, corporate
culture, and managerial strategies generate long-term financial performance by controlling costs,
managing risks, attracting the best talent, strengthening brands, maintaining high reputation, satisfying
customers, improving the quality and quantity of products and services, and creating stakeholder value.
Management can use sustainability reports as a communication vehicle to build investor confidence and
public trust, attract and retain talented employees, increase customer satisfaction and reputation, garner
the support of stakeholders, communities, and societies, and earn the license to operate globally.
Management should also utilize external assurance and independent review as an important component of
sustainability reporting to lend credibility to the disclosed sustainability information.

VIII. BUSINESS POLICY, EDUCATIONAL AND ACADEMIC RESEARCH

IMPLICATIONS

VIII.1 Policy and Managerial Implications

The concept of sustainability performance and sustainability theories, standards, risks, and
sustainability reporting and assurance discussed above suggests that management must extend its focus
beyond maximizing short-term shareholder profit by considering the impact of its operation and entire
value chains on all stakeholders including the community, society, and the environment. Disclosure of
EGSEE dimensions of sustainability performance, while signaling management commitments to
sustainability and establishing legitimacy with all constituencies, poses a cost-benefit trade-off with
implications for investors and business organizations. The move toward integrating sustainability
performance information is the first step in incorporating sustainability performance information into
corporate reporting. The type and content of sustainability disclosures can vary across firms and across
countries as investor protection provided by firms and country legal systems varies. Thus, policymakers
(including regulators and standard-setters) must decide whether to promote sustainability performance
reporting and assurance through mandatory requirements, voluntary initiatives by firms as demanded by
their investors, or a combination of mandatory and voluntary initiatives as promoted by the GRI, the IIRC
and the SASB. Non-financial ESG information may be viewed by policymakers and regulators as more

28
conjectural, qualitative, and forward-looking compared to financial information that is more factual,
quantitative, and backward-looking. This paper (by discussing theories, standards, EGSEE sustainability
performance and risks) supports the global move by policymakers and regulators toward sustainability
development, performance, reporting and assurance. Future research should address the cost effectiveness
and efficiency of a move toward integrated sustainability reporting and assurance. Some of the relevant
research questions are: (1) Is management with a more sustainability-related focus more likely to disclose
EGSEE sustainability performance information to signal its superior sustainability performance? (2) Is
management who issues integrated sustainability reports more likely to provide sustainability assurance to
lend more credibility to disclosed sustainability information? and (3) Is mandatory sustainability reporting
and assurance desirable and feasible?
In creating stakeholder value, management should identify potential social, environmental,
governance, and ethical issues worldwide and integrate them into their strategic planning and managerial
processes. There are many reasons and justifications as to why management should integrate
sustainability performance into its processes and reporting, including the pressure of the global labor
movement, development of moral values and social standards, and the change in public opinion about the
role of business, environmental matters, governance, and ethical scandals. Companies which are (or
aspire to be) international leaders in sustainability are challenged by rising public expectations, increasing
innovation, continuous quality improvement, effective governance measures, high standards of ethics and
integrity, and heightened social and environmental problems. Thus, management should develop and
maintain proper sustainability programs that provide a common framework for the integration of all five
EGSEE dimensions of sustainability to their management processes and reporting. Several relevant
research questions are: (1) Is management more likely to invest in social expenditures when they improve
future financial performance and when there are slack resources? (2) Is management with a sustainability-
oriented focus more likely to pay attention to environmental initiatives? (3) What are the main derivers
for the move toward reporting long-term financial economic sustainability performance and non-financial
environmental, social and governance (ESG) sustainability performance? and (4) Is management with a
sustainability-oriented focus more likely to pay more attention to long-term economic sustainability
performance than short-term financial performance.

VIII.2 Research Implications of Sustainability

A widening interest in CSR/ESG in the past several decades has led to the extant literature
addressing various dimensions of sustainability. Earlier studies were in the fields of business ethics and
strategic management (e.g., Waddock and Graves, 1997; Roman, Hayibor, and Agle, 1999; Orlitzky and
Benjamin, 2001). Researchers in the fields of accounting, economics, and finance have examined the link

29
between CSR performance/disclosures and financial performance, earnings management, cost of capital,
and firm value (e.g., Mackey et al., 2007; Dhaliwal et al., 2011; El Ghoul, Geuhami, Kwok, and Mishra,
2011; Clarkson et al., 2011). Aguinis and Glavas (2012) and Huang and Watson (2015) provide a
comprehensive review of CSR literature based on 102 books and book chapters and 588 published papers,
and find significant knowledge gaps in the CSR literature related to micro-foundations and interactions of
CSR and offer suggestions pertaining to CSR research design, measurement, and analysis. While these
studies have contributed to our understanding of the drivers of CSR/ESG, one of the five EGSEE
dimensions of sustainability performance, and its effect on financial and market performance and firm
value, they are often conducted in an isolated fashion and thus do not reflect the integrated impacts of
financial and non-financial sustainability performance measures.
The relation between financial disclosures and cost of capital is well-documented in the
accounting and finance literature (Botosan, 1997; Lambert, Leuz and Verrecchia, 2007). Recent studies
(Dhaliwal et al., 2011; Ye and Zhang, 2011) also find a positive association between disclosure of
CSR/ESG, one dimension of business sustainability and both cost of equity and debt capital. It appears
that prior research in business sustainability is fragmented with a lack of an integrated approach covering
all EGSEE dimensions with different authors addressing one or more components of business
sustainability without a comprehensive framework for interdisciplinary integration. Some of the relevant
research questions are: (1) How should the five EGSEE dimensions of sustainability performance be
integrated into business models and corporate reporting?; (2) Is management with sustainability-related
focus more likely to manage six sustainability strategic, operations, compliance, financial, security, and
reputation risks that affect both financial and non-financial sustainability performance dimensions?; (3)
Are the financial and non-financial components of sustainability performance completing/complementing
or conflicting/competing with each other? (4) Are CSR initiatives viewed by management as either
expenses with no future returns or as investments with payback and future returns? and (5) Are financial
economic sustainability performance and non-financial CSR/ESG sustainability performance interrelated,
and what are their integrated effects on cost of capital, stock prices and market liquidity?
The link between financial and non-financial CSR/ESG sustainability performance and their
integrated effect on market performance, cost of equity, and firm value is yet to be addressed in scholarly
research. Nonetheless, there are numerous research opportunities in business sustainability, including
corporate governance, environmental sustainability, sustainable supply chain management, sustainability
in education, sustainability in economic, social, ethical, governance, and cultural contexts, sustainability
policy and practices, integrated reporting on sustainability performance, assurance on sustainability
reporting and the role of policymakers, standard-setters in the advancement of business sustainability
management.

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 IX. CONCLUSION
Business sustainability requires businesses to focus on achieving all five EGSEE dimensions of
sustainability performance by taking initiatives to advance some social good beyond their own interests
and compliance with applicable laws, rules, regulations and corporate governance reforms and
enhancement of shareholder wealth. Simply stated, business sustainability means enhancing corporations’
positive impacts and minimizing their negative effects on society and the environment while creating
value for all stakeholders. The true measure of success for corporations should be determined not only by
their reported earnings, but also by their governance, social responsibility, ethical behavior, and
environmental performance. Business sustainability has received considerable attention from
policymakers, regulators, and the business and investment community over the past decade and it is
expected to remain the main theme for decades to come. Thus, the academic community should also pay
attention to business sustainability by integrating business sustainability education into the business and
accounting curricula and conducting sustainability-related research in all areas of sustainability theories,
performance dimensions, risks, reporting and assurance examined in this paper. The sustainability
theories, standards, policies, programs, activities, risk management, reporting, assurance, and best
practices presented in this paper should assist business organizations worldwide in integrating the five
EGSEE dimensions of sustainability performance into their management processes and scholars to
conduct sustainability-related research.
In conclusion, sustainability performance dimensions and related risk, sustainability theoretical
framework, and practical sustainability standards, performance and reporting presented in this paper
should be useful to global companies and their management, policymakers and regulators, investors,
educators and research scholars. All theories (including agency/shareholder, stakeholder, signaling,
institutional, legitimacy, and stewardship) focus on key measures of sustainable performance such as
operational efficiency, customer satisfaction, talent management, and innovation, and should be derived
from internal factors of strategy, risk profile, strengths and weaknesses, and corporate culture as well as
external factors of reputation, technology, completion, globalization, and utilization of natural resources.
Particularly, stewardship and stakeholder theories fit well with the emerging business sustainability of
guiding management to behave as stewards whose motives are aligned with interests of all stakeholders.
These theories and standards help explain management strategies and practices in generating sustainable
financial performance to create shareholder value and in achieving non-financial ESG sustainability
performance in protecting the interests of all stakeholders. This paper integrates theories, standards, risk
assessment, reporting, and best practices of business sustainability including corporate governance
measures and reforms to mitigate information asymmetry between management and all stakeholders and
to create stakeholder value. The goal of creating stakeholder value under business sustainability provides

31
research opportunities to examine the possibility of information asymmetry between management and
stakeholders and even among stakeholders.

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 Figure 1: Integrated Corporate Sustainability:
Theories, Standards, Risks, Performance, and Reporting

Table 1
ISOs and their relevance to business sustainability: Source, http://www.iso.org
ISO Standards Relevance To Sustainability
ISO 9,000 is the standard that provides a set of requirements for a quality management system
ISO 9,000 and it is the only standard in the family against which organizations can be certified. ISO 9,000
standards are intended to improve quality of products and services and thus directly related in
enhancing economic sustainability performance.
ISO 14,000 addresses various aspects of environmental management from the requirements for
ISO 14,000 an environmental management system (EMS) guideline. The other standards and guidelines of
ISO 14,000 address specific environmental aspects including: labeling, performance evaluation,
life cycle analysis, communication, and auditing. Guidelines provided in ISO 14,000 regarding

33
 environmental performance, reporting, and auditing are relevant to the environmental dimension
of sustainability performance.
ISO 20,121 entitled “Sustainability Events” addresses resources, society, and environment which
ISO 20,121 can generate significant waste. This standard puts a constraint on local resources such as water or
energy and offers guidelines and best practices to help manage events and control their social,
economic, and environmental impact. ISO 20,121 offers benefits for integrating its guidelines in
all stages of management processes including corporate infrastructure and the supply chain
management that promote best business practices and reputational advantages.
ISO 26,000 covers a broad range of an organization’s activity from economic to social, governance,
ISO 26,000 ethics, and environmental issues. ISO 26,000 goes beyond profit-maximization by presenting a
framework for organizations to contribute to sustainable development and the welfare of society. The
core subject areas of ISO 26,000 take into account all aspects of the triple bottom line’s (TBL) key
financial and nonfinancial performance relevant to people, planet, and profit.
The purpose of ISO 27,001 is to offer organizations with guidance on keeping information assets
ISO 27,001 secure by providing guidelines and suggesting requirements for an information security management
system (ISMS). The ISMS is a systematic approach to managing sensitive information and protects
its integrity and helps identify the risks associated with important information and control activities
designed and implemented to manage the risk.
ISO 31,000 standards set out principles, frameworks, and processes for risk assessment and
ISO 31,000 management. Guidelines provided in ISO 31,000 are applicable in the assessment and management
of risks associated with all five EGSEE dimensions of sustainability performance. Implementing
these ISO standards to various dimensions of sustainability performance and certifications of
compliance with these standards promote improvements in quality of products and services that
directly affect earnings, ensure compliance with environmental regulations and social standards, and
strengthen governance measures and ethical value.
ISAE 3000/ The International Auditing and Assurance Standards Board issued ISAE 3000 and 3410. An
3410 assurance engagement (according to ISAE 3000) can be either an attestation engagement or a direct
engagement standard of assurance. ISAE 3410 ‘‘Assurance on a Greenhouse Gas Statement’’ (IFAC
2011) (in reaction to existing and growing request for assurance on greenhouse gas statements) is an
inclusive guidance on these greenhouse gas assurance engagements. The Assurance Framework notes
that an assurance engagement may be either a reasonable assurance engagement or a limited
assurance engagement as appropriate to address the practitioner’s responsibilities in identifying,
assessing, and responding to risks of material misstatement whether due to fraud or error and
contains illustrative assurance reports to express a conclusion conveying that level of assurance
(ISAE 3410).

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Table 2
Financial and Non-Financial Sustainability Key Performance Indicators
Financial Governance Social Ethical Environmental
Economic value Number of board Percent of employees Existence of business Continuous
generated committees who consider that codes of conduct replacement of
Revenues earned Percentage of their business acts Description of social nonrenewable of
Resources consumed board responsibly and ethical activities scarce resources
Costs recognized independence Number of full-time and projects Disclosure of
Resources obtained Full employees (FTE) Diversity and equal ecosystem changes
(assets) independence of dedicated to social opportunities Disclosure of
Capital raised board investment projects Fair wages, contracts, gigajoules of total
Liabilities assumed committees Funds raised per FTE and benefits energy consumed
Expenses incurred Board diversity for non-profit and Employee diversity Disclosure of
Earnings retained in terms of humanitarian based on age, metric tons of total
Earnings distributed ethnic, sex, organizations specialization, gender, CO2 emitted
Compensations paid expertise, Philanthropy as a and ethnicity Disclosure of risk
Financial risk assessed minority percent of (pretax) Number of exposure and
Taxes paid Staggered board profit employees, turnover, opportunities of
Research and Separation of the Percentage of and hiring/firing climate changes
development invested position of the operating income procedures Disclosure of toxic
New products discovered chair of the board dedicated to social Whistleblowing chemical use and
Forecast, projections, and and chief contribution policies, programs, disposal
other technical and executive officer Percent of suppliers and procedures Efficiency
quantitative market (CEO) that affirmed business Employee utilization of
information Board code of conduct productivity unconventional
Financial Statements accountability Social contributions Employee renewable and
(Balance sheet, Income and liability spent per employee satisfaction, nonrenewable
statement, Statement of Number of policy competence, and natural resources
cash flow, Owners’ board meetings Number of initiatives commitment Efficient use of
equity) Number of to promote greater Customer satisfaction, recycled materials
Note Disclosures members in the environmental retention, and loyalty Environmental
Accounting Policies board responsibility Fair competition profitability
Segment Information Percentage of Total investment in Percent of eligible analysis and
Business combination, insider directors the community employees who assessment

35
 discontinued operation on the board Donations and other signed the Code of Measurement of
Earnings Releases Number of social expenses Conduct and Ethics resource depletion
Non-GAAP Financial members in the Fair competition Resolution of Greenhouse gas
Measures audit committee Truthful advertising conflicts of interest emissions in total
Accounting Policies and and their Community and intensity
practices financial experts engagements Total waste
Stock prices emission data

36