Management, Social Sustainability, Reputation, and Financial


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7 5 6 6 11 OAEXXX10.1177/1086026618756611Organization & EnvironmentSroufe and Gopalakrishna-Remani
research-article2018

Empirical Research Article
Management, Social Sustainability, Reputation, and Financial Performance Relationships: An Empirical Examination of U.S. Firms

Organization & Environment 1­–32
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Robert Sroufe1 and Venugopal Gopalakrishna-Remani2

Abstract With growing evidence of positive relationships between social sustainability and financial performance, there is a critical need for understanding how innovative organizations integrate sustainability and tie theory to practice. The research in this study uses a sample of Fortune 500 firms simultaneously listed in the Newsweek Green rankings, The Corporate Knights Global 100, and the 100 Best Corporate Citizens lists. The analysis from this purposeful sample of leading firms reveals positive relationships between the management of sustainability practices leading to improved social sustainability performance and firm financial performance constructs. The results of this study advance construct and item development involving sustainability management and social sustainability practices while testing relationships to measures of financial performance. Further advances in the field and opportunities for future research involve testing larger cross-sector samples, the development and measurement of social sustainability practices from secondary sources, longitudinal studies, and the evolving nature of organizational performance measurement.
Keywords social sustainability performance, sustainability management, sustainability reputation, firm financial performance
Introduction
Not too long ago, there was virtually no debate in scholarly or management circles over the relationship between environmental practices and firm performance. It was simply taken as a fact that pursuing sustainability goals was antithetical to sound business strategy and, quite possibly, a violation of the fiduciary duty of managers to shareholders (Bower & Paine, 2017; Friedman, 1970; Stout, 2012). Ironically, this same kind of debate is now taking place with the benefits of social sustainability practices. For the purposes of this study,
1Duquesne University, Pittsburgh, PA, USA 2The University of Texas at Tyler, TX, USA
Corresponding Author: Robert Sroufe, John F. Donahue School of Business, Duquesne University, Rockwell Hall 820, 600 Forbes Avenue, Pittsburgh, PA 15282, USA. Email: [email protected]

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social sustainability involves undertaking social analysis and assessment, enabling the identification of social opportunities, as well as the mitigation of social impacts and risks (Social Development, 2013).
Prior conventional wisdom held that any investment in improved environmental performance would contribute to penalties such as increased lead times, reduced quality, or increased costs—all of which reduced profits and decreased returns to stockholders (Walley & Whitehead, 1994). However, Michael Porter at Harvard challenged these entrenched beliefs and sparked a debate with a focus on “America’s Greening Strategy.” This debate increased theoretical and practical interest in the possibility that profitability and sustainability were not mutually exclusive goals. Ultimately, this brought about a dramatic shift in manufacturers’ attitudes toward a new management paradigm enabling environmental management practices (Porter, 1991). This debate has now extended beyond environmental practices into emerging social sustainability practices.
According to Porter, pollution was simply waste and organizations investing in environmental practices to reduce waste will have better performance. As a result, radical change has come about in management’s views on waste, the need for pollution reduction, and better environmental management. Engaging this same logic, social management practices provide new opportunities to reduce waste in the workforce. These social practices in governance and disclosure provide a new opportunity for research. The research presented in this study is one attempt to understand the evolving sustainability paradigm. In doing so, we are trying to understand organizational culture and opportunities for engaging workers to enhance the social performance and the reputation of the organization. The key to understanding these relationships can be elusive given the difficulties in measuring social practices.
With the continued questioning of the relationships between social practices and financial performance comes a burgeoning area of research in the development of social sustainability performance measurement. Proof of international focus on defining and operationalizing social performance can be found in the International Organizations of Standards (ISO) working report on social responsibility (ISO, 2004), and 2010 release of the 26000 certification standard series for social responsibility. ISO 26000 provides guidance on how businesses and organizations can operate in a socially responsible way. This means acting in an ethical and transparent way that contributes to the health and welfare of society. Other acknowledgements of the importance of social performance are within the growing acceptance and recognition of the Global Reporting Initiative (GRI) as the de facto standard for measuring and reporting social practices involved in sustainability reports from corporations with over 10,000 firms using GRI and over 27,000 publicly available reports (GRI, 2017). Predicated on the promise of certain benefits, GRI and ISO have longstanding international acceptance. First, this series of ISO standards was argued to be the next logical step forward given the relationship of quality improvements and firm performance (Adam et al., 1997), and successes of the quality standard ISO 9000 and its automotive industry variant QS 9000 (Caillibot, 1999; Corbett & Kirsch, 2001; Miles & Russell, 1997; Reid, 1999). This was supported by ISO 14000 environmental management standards success and relationships to firm performance (Anwar, 2000; Sroufe, 2003; Albuquerque, Bronnenberg, & Corbett, 2007; Curkovic & Sroufe, 2011; Darnall, Jolley, & Handfield, 2008). Second, ISO 26000 complements criteria found in the GRI. Third, these measurement and reporting standards focus on the processes involved in creating and managing new types of internal practices. Basically, ISO and GRI were set forth as effective tools to guide managers in their efforts to capitalize on the creation of shared value from internal practices. Finally, supporters lauded these measurements and reporting frameworks for their focus on the crucial role played by measurement and management in overall corporate performance.
Continued development of social sustainability is in the evolution of the Natural Step’s Framework for Strategic Sustainability, which now includes eight sustainability principles with

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five of these focused on social sustainability (Broman & Robèrt, 2017). While these standards and frameworks have helped to guide practices and strategic alignment, there remains considerable difficulty for researchers in measuring these practices when not involved in primary data collection and field studies.
The management of sustainability practices is a topic of prevailing interest to researchers, practitioners, and the public. Brundtland (1987) advocated that social sustainability could not be separate from environmental sustainability (DesJardins, 2016). Against the backdrop of debate over the expanding meaning of social sustainability, recent research has sought to illuminate nuanced relationships between social performance and financial performance. Such studies have established positive relationship between corporate social responsibility (CSR) practices and financial performance (Flammer, 2015; Saeidi, Sofian, Saeidi, Saeidi, & Saaeidi, 2015; Yilmaz, 2016) yet they have overlooked new social sustainability measurement opportunities and the role of reputation when testing relationships. Others have looked at how stocks perform with respect to social performance (Borgers, Derwall, Koedijk, & Ter Horst, 2015; Luo, Wang, Raithel, & Zheng, 2015). Zhao and Murrell (2016) revisited the relationship between social performance and financial performance by conducting a replication of the study by Waddock and Graves (1997) and found the results are inconclusive to support the argument “doing good leads to doing well.” These same authors call for revisiting the relationship with different samples. In taking the evaluation of these relationships further, Hasan, Kobeissi, Liu, and Wang (2016) looked at the mediating influence of productivity in the relationship between social performance and financial performance.
Research in the sustainability domain is not limited to management scholars. Studies in the financial field have also looked at the relationships between social performance and firm performance with respect to stock performance. Most do not look at the role of sustainability management and reputation constructs. Dorfleitner, Utz, and Wimmer (2013) looked at the long-term performance of stocks with respect to social performance measured by environmental, social, and governance (ESG) scores depicting ESG dimensions. They found that there is significant variation in the relationship between social and financial performance with respect to different stock portfolios. European and North American stock portfolios with high ESG scores tend to outperform in the long run with the exception of governance dimensions and European stock portfolios. In the Asia Pacific region, they observed a positive long run return with regard to social scores. While looking at environmental and governance scores, the difference in performance is significantly less.
Other work in finance has looked at green scores, CSR, and eco-efficiency. Work by Prober, Meric, and Meric (2015) look at the influence of Newsweek Green scores and stock price. To their surprise, they found a company’s green score is not determined by the market and no link between variation in stock returns and green scores. Deng, Kang, and Low (2013) found that with respect to low CSR acquirers, high CSR acquirers receive higher merger announcement returns, and larger increases in post-merger long-term operating performance. Additionally, Guenster, Bauer, Derwall, and Koedijk in their 2011 study connecting eco-efficiency scores and financial performance in the end of the 1990s and early 2000s, found a positive relationship of eco-efficiency scores to operating performance and market value.
This brief review of work in the financial domain highlights an important aspect of conducting this type of research, namely the importance of drawing from multiple data sources when trying to understand this evolving phenomenon and its links to performance. Jick (1979) noted that the accuracy of judgements surrounding a phenomenon improves when researchers make inferences based on findings from different sources of data. In this study, we try to both extend prior work and differentiate our approach to testing multiple research questions with a purposeful sample of firms and assessment of emerging performance relationships. The uniqueness our study and opportunities for contributions to this field of research address general questions regarding how

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can we operationalize multiple dimensions of sustainability and has social performance lived up to the promises made on its behalf?
Contemporary research questions continue to involve the extent to which internal sustainability practices and external practices across supply chains contribute to firm performance. There is now a critical need to understand the role and impacts of social practices. For this reason, our study addresses three specific questions while exploring internal sustainability practices of large multinational firms recognized for their leadership positions in sustainability practices:

1. What practices and variables represent constructs for Sustainability Management, Social Sustainability Performance, and Sustainability Reputation?
2. How does the presence of these constructs affect firm Financial Performance? 3. What can we learn from firms with these practices and complex relationships?

We examine these questions while simultaneously examining several posited relationships between these practices and financial performance variables. Organization of the remainder of this article is as follows. We start with a review of relevant literature showing the importance of socially sustainable practices in organizations followed by its relationship to financial performance. We then apply theory and observations from extant literature to present the structural model with hypotheses to test proposed relationships in the model. Next, we describe the research methodology and analysis followed by a discussion of the results. The article concludes with implications for managers and opportunities for future research.

Literature Review
Social sustainability involves undertaking social analysis and assessment, enabling the identification of social opportunities, as well as the mitigation of social impacts and risks (Social Development, 2013). For the purpose of this study, we build on this definition with insight from McKenzie (2004), to define social sustainability performance as the social impacts of the organization’s social sustainable practices and policies, and the measure of growth and development enhancing conditions existing within organizations to achieve various social goals for the organization. It is considered a response to growing expectations from organizations on various dimensions of social performance apart from ensuring profitability (Matten & Moon, 2008; Sharma & Henriques, 2005).
Described as the holy grail of social responsibility (Jorgensen & Knudsen, 2006), the relationship between social sustainability performance and financial performance represents one of the most questioned areas of sustainability business practices (Angelidis, Massetti, & Magee-Egan, 2008; Schrettle, Hinz, Scherrer-Rathje, & Friedli, 2014). Though early researches suggest a positive relationship between social and financial performance (R. A. Johnson & Greening, 1999; Kouikoglou & Phillis, 2011; Orlitzky, Schmidt, & Rynes, 2003), the social sustainability and financial performance connection has not been fully developed (Mackey, Mackey, & Barney, 2007; Neville, Bell, & Mengüç, 2005; Park & Lee, 2009; Prado-Lorenzo, Gallego-Álvarez, García-Sánchez, & Rodríguez-Domínguez, 2008). Many factors like market short-termism and internal organizational environments subjugated by a lack of moral engagement and disempowerment can impede sustainability investments (Juravle & Lewis, 2009). The mechanisms through which firm performance (return on assets [ROA], return on investment [ROI], and net profit margin [NPM]) is affected by social sustainability initiatives, that is, social sustainability practices and policies, is not well understood (Doh, Howton, Howton, & Siegel, 2010).
Sustainability initiatives and subsequent discussions of “win–win” situations often ignore social benefits and focus on ecological and economic benefits (Littig & Griessler, 2005; Simola, 2012). Sustainability initiatives in a firm are supposed to improve economic prosperity, environmental

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responsibility, and social justice. This is commonly referred to as a “Triple Bottom Line” (Elkington, 1997). Applying the same logic, an organization can be more sustainable only if it takes steps to secure or improve its competitiveness if its efforts include social aspects of sustainability. Earlier researchers have rarely looked into social sustainability (Hutchins & Sutherland, 2008; Simola, 2012) and its influence on firm performance. This prior oversight of social sustainability practices is changing as management programs and standards provide a foundation for measurement along with the recognition of practices by international awards, indices, and rankings.

Social Sustainability Linkages Within the Firm
Social sustainability has been part of management for some time now. In order to improve financial performance, organizations have included social sustainability measurements in their quality management programs. It has been noted that Deming’s 14-point program focused on quality improvement through social sustainability practices (Wicks, 2001). If you look at all the measures to improve quality and financial performance suggested by “The Baldridge National Quality Program” (2009), 15% are social sustainability measures (Pullman, Maloni, & Carter, 2009).
Previous social sustainability studies have used social goals, that is, how companies perform with respect to their citizenship, philanthropy, legislative issues, employment compensation, human health, and safety issues (Carroll 1994, 1998, 1999; Kleindorfer, Singhal, & Wassenhove, 2005; Rajak & Vinodh, 2015; Seuring, 2004) to measure social sustainability performance. The United Nations Environmental Program has partnered with Society of Environmental Toxicology and Chemistry to develop and disseminate tools that can help in achieving sustainable development. The tools developed by this collaboration helps to evaluate opportunities, risks, and tradeoffs linked to products and services over their entire life cycle (United Nations Life Cycle Initiative, 2001). This collaboration has indicated that further consideration should focus on social and ethical dimensions of sustainability.
Willard (2005) argued that pressure for social responsibility from green consumers, governmental, and nongovernmental organizations has increased the focus of researchers on the social sustainability performance of companies, both in developing and developed countries. With the recent introduction of the Blueprint for Corporate Sustainability Leadership, the UN Global Compact is investing their fair share of resources for encouraging corporate social sustainability performance (Kell, 2013) and this evident in the recent UN Sustainable Development goals. Even with a global movement toward considering social practices when performing sustainability analysis, the business community has not given social dimensions of sustainability equal importance as that of economic benefits. This may be due to the social and ethical benefits being less tangible (Remmen, Jensen, & Frydendal, 2007). Other researchers have called for integrating human resource considerations into existing life cycle analysis. The linkage here is to improve internal social performance by including social and political factors (O’Brien, Doig, & Clift, 1996), promotion of human health, along with human dignity and basic needs fulfillment (Dreyer, Hauschild, & Schierbeck, 2006).
Social sustainability can be linked to recognizing, valuing, and promoting the capability of employees with appropriate policies and practices within organizations (Daily & Huang, 2001; Wilkinson, Hill, & Gollan, 2001). Social sustainability practices not only focus on internal communications but also on external and internal communities. Practices include providing equal opportunities, ensuring quality of life, encouraging diversity, providing demographic process, and accountable governance structures (Elkington, 1994; Pullman et al., 2009). Richardson & Welker (2001) found that social disclosure positively influences the cost of equity capital. They measured social performance in terms of social disclosure and argued that social disclosure as a measure of social sustainability performance works in the same way as “financial disclosure.” Epstein (2004) also used social disclosure as a social performance measure.

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Social Sustainability Performance
In 2009, Bloomberg added ESG data to its information offerings that cover thousands of public companies (Eccles & Saltzman, 2011). For the purposes of this study, we used the early years of Bloomberg’s social disclosure score and governance disclosure score as proxies of social sustainability performance. The start of integrated reporting, later followed by ISO standards for social sustainability, and Bloomberg providing information on nonfinancial and financial information in one place (Eccles, & Saltzman, 2011) were catalysts for several elements of this study. Cochran and Wood (1984) also used social disclosure measures and found positive correlation between social disclosure and two of three economic performance measures. The “social disclosure score” from Bloomberg specifically assesses performance with regard to social sustainability policies and practices (a KPI comprised of diversity, gender, minorities, incident rates, accidents, safety, and extensions of social practices to supply chains) within the organization (The Adventure Capitalists, 2014). We propose this as a parsimonious measure for use in this study. Another important attribute to assess the extent of social sustainability practices and policies is governance as a measure of social sustainability.
There is a growing consensus among large corporations that governance and resulting social sustainability performance are not only expected, but are of value to the business (Klettner, Clarke, & Boersma, 2014). The use of a governance disclosure score, as a measure of social sustainability performance, stems from the idea that governance helps in transforming a company into a socially sustainable enterprise (Szekely & Knirsch, 2005). The authors also observed that governance plays an important role in improving social sustainability in organizations by growing intangible assets such as management skills, reputation, human/intellectual capital, and ability to work in partnership with stakeholders. Khan, Muttakin, and Siddiqui (2013) found that corporate governance attributes play a vital role in ensuring organizational legitimacy and social performance while examining relationships between governance and the extent of disclosure in the annual report of Bangladeshi companies. Furthermore, Belal and Roberts (2010) observed that companies committed to social sustainability performance encourage more governance disclosure than those who are less committed to the social sustainability performance. This improved performance can be attributed to ethical management promoting corporate governance mechanisms such as greater board independence and audit committee and CSR initiatives for higher social performance coupled with higher disclosure (Khan et al., 2013). A governance score as a measure of social sustainability performance can be attributed to the logic that better governance results in better social partnerships, multistakeholder engagement processes, and impact assessment (Muthuri, Moon, & Idemudia, 2012). In order to capture resulting social sustainability performance from measures existing within the organization, we used Bloomberg’s ESG governance disclosure score (a KPI comprising measures of board structure, diversity, gender, independence, CEO gender, executive diversity, committee composition, and shareholder rights) collected from Bloomberg. Thus, the social sustainability performance construct is reflected on two “Bloomberg” provided measures: governance disclosure score and social disclosure score. We posit that governance and social disclosure scores help to create a new social sustainability construct for organizations in accordance to the proposal by United Nations Life Cycle Initiative (2001) by focusing on the social and ethical dimensions of sustainability to measure social sustainability performance.

Sustainability Management
Our planet and society is witnessing organization-induced changes negatively affecting a sustainable future. Shrivastava (1995) found the problems associated with organizational practices have increased significantly and argued for increased management of sustainability practices within

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organizations to attain sustainable development. To this end, Sroufe (2017) has called for the integration of sustainability management into decision making and value creation with customized approaches to sustainability, goals, and integrated bottom line (IBL) measurement. These in turn enable change management and improved performance.
To try to capture sustainability management, we first looked for social sustainability management KPIs from Bloomberg and other sources. We did not find available constructs. This lead us to the development of sustainability management measures for use in this study. We used two measures of sustainability management from Newsweek Green Rankings “environmental management” and “green policy” scores as proxies to measure the management of sustainability practices. The environmental management score is an assessment of how a company manages its practices through, programs, targets, certifications, and the like. To account for a company’s overall environmental footprint, Sustainalytics (who partnered with Newsweek to do the rankings) focuses on distinct spheres of influence: company operations, contractors, and suppliers, along with products and services. An analysis of positive performance-related criteria is counterbalanced by their including a detailed assessment of controversies and incidents, which often indicate the extent to which management systems are effectively implemented.
Holistic planning for sustainability management requires the existence of green policies in organizations. These policies and the ability to avoid fines with green policies are indicators of commitment to sustainability and continued profitability (R. A. Johnson & Greening, 1999). To this end, we used a “green policies score” from Newsweek Green Rankings as the second reflective measure of sustainability management. The calculation of a green policies score is based on sustainability measures developed by the social investment from KLD Research and Analytics (Lyon & Shimshack, 2012). The KLD index is one of the most widely used resource to assess the relationship between social performance and financial performance (Jayachandran, Kalaignanam, & Eilert, 2013; Montiel & Delgado-Ceballos, 2014). The green policy score captures sustainability management measures such as proactive sustainability management, climate change policies and performance, pollution policies and performance, and products impacts relative to others within the same industry (Lyon & Shimshack, 2012). Again, taking a parsimonious approach to construct development, sustainability management is reflected on two measures: environmental management score and green policies score.

Firm Sustainability Reputation
Wiley and Zald (1968) argued that reputation creates a desirable image for organizations, and helps to garner resources, and helps in their survival. Rao (1994) observed that reputation is an outcome of the process of legitimation. According to a resource-based view, intangible resources such as reputation significantly contribute to firm performance because they are rare, inimitable, nonsubstitutable, and valuable (Amit & Schoemaker, 1993; Barney, 1991). The endorsement by external organizations embeds an organization in a status hierarchy. This difference in status leads to different levels of reputation for an organization (Scott, 1994). Third parties such as professional societies, auditors, rating agencies, and government regulators may endorse an organization. In this study, we used “‘Newsweek Green Rankings measures’ ‘reputation’ and ‘green score’ as indicators of firm level sustainability reputation. Reputation score is “calculated from CorporateRegister.com surveys of CSR professionals, academics, environmental experts, and industry executives” (Lyon & Shimshack, 2012, p. 3) and was used as an indicator of sustainability reputation. Reputation scores reflects various perceptions about a firm such as whether the firm is a leader or laggard within its sector on sustainability performance, commitment, and communications relative to others within the same industry (Lyon & Shimshack, 2012). Calculation of the green score is from three component scores: An Environmental Impact Score, an Environmental Management Score, and an Environmental Disclosure Score, weighted at 45%,

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45%, and 10%, respectively (Lyon & Shimshack, 2012). This sustainability construct is an indication of how external organizations perceive social and environmental reputation relative to other firms.

Firm Financial Performance
McGuire, Sundgren, and Schneeweis (1988) used ROA, total assets, sales growth, asset growth, and operating income growth to compare the social performance to the financial performance. Preston and O’Bannon (1997) also used the traditional financial indicators ROA, ROI, and return on equity to compare corporate social indicators and financial performance and found a strong positive correlation in contemporaneous and lead lag formulations. We have used traditional financial indicators ROI, ROA, and NPM to capture the financial performance relationship (Gallego-Álvarez, Segura, & Martínez-Ferrero, 2014; McGuire et al., 1988; Preston & O’Bannon, 1997; Vickery, Jayaram, Droge, & Calantone, 2003). We take this traditional approach as a proxy for firm performance, yet also caveat this with a call for more holistic measurement necessary in the future to capture nonfinancial indicators of performance. Measures can include a firm’s extent of GRI reporting, rankings, and scoring within industry indices, along with environmental value and social value created by organizations, which goes well beyond traditional financial data.

Hypotheses
Stakeholders are continuously asking companies to provide more information on how they identify and manage sustainability issues. It is not a one-time management decision and it requires continuous assessment and management of sustainability practices (Szekely & Knirsch, 2005). Epstein and Roy (2001) argued that by “identifying and articulating the drivers of social performance and measuring and managing the broad effects of both good and bad performance on the corporation’s various stakeholders, managers can make a significant contribution both to their company and to society” (p. 585). They suggested a framework with detailed systems, structures, and measures for sustainability management are necessary to change organizational culture and processes which can positively influence social sustainability and financial performance.
Social sustainability frameworks and metrics are helpful to measure sustainability, manage for success, and improve performance. Many organizations now have dedicated sustainability managers who are required to have the knowledge and tools to help create a strategic social management system. These tools aim to help them effectively measure and report the value created through more effective stakeholder management and improvement of social sustainability performance (Epstein & Buhovac, 2014). Both the Baldridge National Quality program (2009) and Deming’s (1986) program contains sustainability management measures that focuses on improving social sustainability performance of companies implementing those programs (Pullman et al., 2009; Swiss, 1992). The management of sustainability practices should improve social sustainability performance in companies. Hence, we hypothesize,
Hypothesis 1a: Sustainability management has a positive direct relationship with social sustainability performance.
Schaltegger and Synnestvedt (2002) proposed that not only the level of sustainability performance, but also the kind of sustainability management, influences the financial outcome of the organizations. Figge, Hahn, Schaltegger, and Wagner (2002) suggested that sustainability management with a balanced scorecard may help in integrating the three pillars of sustainability into a single and overarching strategic management tool that significantly affects the economic success of a business. Wagner’s study found that managing sustainability practices aimed at

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improving social aspects like worker satisfaction, recruitment, and retention, can lead to reduced intra-firm conflicts between functions or goals of different departments, internal stakeholders, shareholders, and managers. It can also lead to better financial performance (Wagner, 2007). This improved financial performance from sustainability management can be attributed to better product image, sales, and new market opportunities. Hence, we hypothesize,

Hypothesis 1b: Sustainability management has a positive direct relationship with firm financial performance.

Organizations undertake sustainability management to address the demands and expectations of the society (Szekely & Knirsch, 2005). Reputation can be viewed as an intangible resource or the outcome of a shared socially constructed impressions of a firm (Fombrun & Van Riel, 1997; Scott & Walsham, 2005). The practitioners of reputation management and its manifestations such as sustainability reputation were always trying to capitalize on reputation around which to build new services and products for the market (Bennett & Kottasz, 2000). For the same reason, sustainability management and its relation to reputation deserves our attention in research and practice. Bebbington, Larrinaga, and Moneva (2008) argued that
good quality management would entail an ability to identify current and future challenges to the successful operation of the entity (including employee, community and environmental challenges) and to ensure that the organization is well placed to deal with these challenges. (p. 349)

Reputation “is a fragile resource; it takes time to create, it cannot be bought, and it can be damaged easily” (Hall, 1993, p. 616). The reputational “capital” of an organization is at risk from everyday interactions between organizations and their stakeholders with risks from many sources, for example, strategic, operational, compliance, and financial (Fombrun, Gardberg, & Barnett, 2000). Hence, managing the sustainability initiatives in organizations becomes extremely important. Previous research on management and reputation suggests a positive relationship between the two (Bebbington et al., 2008). The Elkington and Kuszewski (2002) Survey of Corporate Sustainability Reporting mentioned the management of sustainability practices has a major role in achieving the alignment of brand, reputation, and reporting (Elkington & Kuszewski, 2002). Additionally, the GRI guidelines also highlight the role of managing sustainability practices in building reputation for organizations (GRI, 2002). Hence, we hypothesize,

Hypothesis 1c: Sustainability management has a positive direct relationship with sustainability reputation.

The GRI is an accepted framework available for reporting social sustainability performance (H. S. Brown, De Jong, & Levy, 2009). Proponents of sustainability performance reporting claim the enhancement of the disclosing firm’s reputation as a major benefit to issuing the report (D. L. Brown, Guidry, & Patten, 2010). Simnett, Vanstraelen, and Chua (2009) suggested that companies can enhance the credibility of their sustainability reports and may build their reputation by assuring their sustainability reports from independent assurers. Research by Kolk (2005a, 2005b) and Palenberg, Reinicke, and Witte (2006), suggested that reporting sustainability performance positively influences brand recognition. A study by Michelon (2011) found that companies use disclosure to communicate “legitimacy to operate” to stakeholders. Therefore, companies disclosing their social sustainability performance and showing their commitment to stakeholders have better chance to improve reputation from media exposure. Hence, we hypothesize,

Hypothesis 2a: Social sustainability performance is positively associated with sustainability reputation.

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Richardson and Welker (2001) pointed out that social disclosure “could influence the cost of equity capital directly through investor preference effects if investors are willing to accept a lower expected return on investments that also fulfills social objectives” (p. 598). Early research concluded that social sustainability practices like employee knowledge enhancement, employee involvement programs, improving employee attitudes and satisfaction have improved quality performance. This in turn leads to financial performance in organizations and sustainable advantage (Flynn, Schroeder, & Sakakibara, 1995).
Daily and Huang (2001) later found human resource and organizational behavior practices improve social sustainability performance in organizations which can result in improved financial performance. Explanations for improved performance from social sustainability include corporate stakeholder theory (Cornell & Shapiro, 1987). From this theoretical perspective, firm resources go beyond the bondholders and stockholders to include employees within the organization. Cornell and Shapiro (1987) noticed that firms with socially sustainable practices have more low-cost implicit claims, leading to higher financial performance. A lack of socially sustainable practices can also discourage investors, as they perceive higher risk in investing such firms (Alexander & Buchholz, 1978; Spicer, 1978).
McGuire et al. (1988) noted that perceptions of low social sustainability decrease a firm’s ability to obtain capital at constant rates and to have a more stable relationship with the financial community and the government. A later study by M. D. Johnson (2006) suggested that social sustainability practices like worker participation and training have a positive effect on social sustainability performance leading to financial performance. We also know social sustainability practices such as better worker safety programs and social sustainability employee programs are likely to improve firm’s financial performance by reducing the cost of production and quality management (S. P. Brown 1996; K. A. Brown, Willis, & Prussia, 2000). Hence, we hypothesize,

Hypothesis 2b: Social sustainability performance is positively associated with firm financial performance. Hypothesis 2c: Social sustainability performance mediates the relationship between sustainability management and firm financial performance.

According to a resource-based theoretical perspective, reputation, a valuable resource leading to improved firm financial performance and creates a sustainable competitive advantage for the firm (Barney, 1991). Roberts and Dowling (2002) confirmed a positive relationship between reputation and firm financial performance. Corporate reputation is a fundamental intangible resource created by investing in social sustainability practices and disclosure (Branco & Rodrigues, 2006). Riordan, Gatewood, and Bill (1997) suggested that employees’ reactions to the firm’s actions is often based on the image of the firm. Furthermore, firms with a reputation for sustainability can attract better job applicants, increase employees’ motivation, morale, commitment, and loyalty to the firm which in turn improve financial performance (Branco & Rodrigues, 2006). Datta, Gopalakrishna-Remani, and Bozan (2015) also points out institutionalized sustainable reporting and transparency positively affect overall business performance. The Economist has shown that in this era of corporate image, “Consumers will increasingly make purchases based on a firm’s whole role in society: how it treats employees, shareholders, and local neighborhoods” (Economist, 1994, p. 71). Based on this logic, an increase in purchases from a firm’s reputation can positively influence firm financial performance. Hence, we hypothesize,

Hypothesis 3a: Sustainability reputation leads to improved firm financial performance. Hypothesis 3b: Sustainability reputation mediates the relationship between social sustainability performance and firm financial performance.

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Management, Social Sustainability, Reputation, and Financial