Pertemuan 5 - Li, N. and a. Toppinen, (2011), Corporate Responsibility and Sustainable Competitive Advantage in Forest-based Industry - Complementary or Conflicting Goals

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Corporate responsibility and sustainable competitive advantage in forest-based industry: Complementary or conflicting goals? Article in Forest Policy and Economics · February 2011 DOI: 10.1016/j.forpol.2010.06.002

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2 authors: N. Li

Anne Toppinen

Nanjing Forestry University

University of Helsinki

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Available from: Anne Toppinen Retrieved on: 29 August 2016

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Forest Policy and Economics j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / f o r p o l

Corporate responsibility and sustainable competitive advantage in forest-based industry: Complementary or conflicting goals? N. Li, A. Toppinen ⁎ Department of Forest Sciences, University of Helsinki, P. O. Box 27, 00014 Helsingin Yliopisto, Finland

a r t i c l e

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Article history: Received 7 September 2009 Received in revised form 14 May 2010 Accepted 4 June 2010 Available online 9 August 2010 Keywords: Corporate responsibility Forest-based industry Single- and double-loop organizational learning Resource-based view Competitive advantage Forest certification

a b s t r a c t The growing public interest in and global consciousness of environmental and social issues have intensified pressures on forest industry companies in their efforts to effectively balance potentially conflicting stakeholder demands. In this paper, we conceptually analyze corporate responsibility (CR) in forest-based industry by theoretically differentiating between three approaches driving CR: the “trade-off” hypothesis, the “profitmaximizing” corporate responsibility conjecture, and the “corporate social impact” hypothesis. We use a survey of existing studies to assess the current stage of CR adoption in forest-based industry and to form a basis for evaluating the wider importance of CR in business, as well as to formulate hypotheses for future research. In conclusion, companies covered in previous research in this study appear to have adopted CR activities mainly with the profit-maximizing assumption. As the continued growth of ethical markets and socially responsible investment (SRI) presents both a threat and an opportunity for forest industry companies, a lasting case for CR in business could only be made by embracing CR principles with radical changes in the fundamental values, policy principles and operational procedures through double-loop organizational learning. © 2010 Elsevier B.V. All rights reserved.

1. Introduction In recent years, “socio-economic and social-legal developments have shifted considerable social power to the private economy in general and more specially to large corporations.” (Keinert, 2008, p. 19). The central role of business has extended from that of the traditional economic actor to being a political and social actor. Concerns about corporate responsibility (hereinafter CR) have consequently become an increasingly high profile issue in many countries and globalizing industries. Recent studies have also stressed that, in addition to economic assessments, the environmental and social impact from international operations should also be integrated more closely into corporate strategic decision-making (Christmann, 2004; Vermeulen and Ras, 2006; Locke and Romis, 2007). Market instruments and regulations are evidently not always sufficient to balance the conflicting demands of different stakeholder groups (Amaeshi and Crane, 2006). Numerous corporate scandals in the 1990s, at Shell and Nike, for example, and more recently at Enron and Worldcom, have raised significant public concerns about ethical leadership within corporations. As Maak (2007) observes, such corporate scandals have triggered a broad discussion on the role of business in society, especially their legitimacy, obligations, and responsibility in relation to sustainable global development. Socially responsible investment (SRI) is more wide spread than ever in the U.S., Europe and Asia (Krumsick, 2003). The last half century has ⁎ Corresponding author. Tel.: +358 50 415 0219. E-mail addresses: ning.li@helsinki.fi (N. Li), anne.toppinen@helsinki.fi (A. Toppinen). 1389-9341/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.forpol.2010.06.002

witnessed the evolution of SRI and its associated substantial changes, from the fair labour practices in the 1940s (Martin, 1986), value-based investing in the 1970s (Spencer, 2001), and human rights violations and global labour standards in the 1990s (Rivoli, 2003), to the most recent concerns that involve corporate governance (Moir, 2001). The rising awareness of social consciousness and actions leading to commercial success has also inspired many researchers to study the linkage between CR and financial performance, especially in the area of SRI (Margolis and Walsh, 2001; see also surveys in Orlitzky et al., 2003 and Salzmann et al., 2005). A recent survey by Kurucz et al. (2008) identified four general types of CR as a business case, i.e., the motivation for firms to engage in CR to reduce costs and risks in their operations, to achieve a competitive advantage, to improve their reputation and legitimacy, and to integrate stakeholder interests to create value on multiple fronts (i.e., synergistic value creation). Studies on company efforts to integrate the CR concept into their organizational practices have shown that lack of understanding of the rising demands of stakeholders, ethical values and commitment backed by the top management, among other things, often lead to a failure of CR implementation (see CBSR, 2001; Nattrass and Altomare, 2002; Willard, 2005). This indicates a need to make internal organizational changes in corporate management, and therefore much greater attention to such things as aspects of organizational learning (e.g., Kell, 2003; Waddock, 2003). Among environmentally-sensitive sectors, the forest-based industry has a crucial role in global sustainable development, not only because of its unique raw material basis, but also because of the ongoing globalization of industry. The ever-growing public interest in and global

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consciousness of environmental and social issues have intensified pressures on forest industry companies in their efforts to effectively balance potentially conflicting stakeholder demands, and to rethink their business strategies. While issues such as the distribution of global wealth, human rights, and the preservation of the natural environment are high on the political agenda of governments, business leaders are also expected to play a more active role in furthering positive social goals and countering the new threats of destructive forces by, for example, reducing their environmental footprints, contributing to poverty alleviation, combating climate change, and promoting sustainable forest management (see Vidal and Kozak, 2008a). Such endeavours would require responsible global leaders with responsible mindsets to act as responsible citizens. In the context of forest-based industry, CR has not been explored specifically from a business strategy and financial performance point of view. Our aim here is to approach the CR-financial performance relationship theoretically from three alternative standpoints: first, the neo-classical economic point of view as a trade-off between other activities; second, the profit-maximizing conjecture to reap anticipated benefits and, third, the social impact point of view to meet the needs and expectations of various stakeholders. Next, we synthesize existing empirical evidence of CR in forest-based industry and, based on the literature review and analysis of the dominant industry structure and market characteristics, we formulate a state-of-the-art understanding of the importance of CR in the field and develop hypotheses for further empirical research, followed by conclusions and managerial implications. 2. Theoretical background As anticipated, analysis of the corporate responsibility–financial performance relationship can be approached theoretically from three main standpoints. First, the trade-off hypothesis reflects Friedman's neoclassical argument (1970) that the social responsibility of business is to increase profits and assumes that the increasing cost of CR investment inevitably reduces corporate profitability. The traditional trade-off hypothesis observes a negative relationship between CR and financial performance (see, e.g., Vance, 1975; Palmer et al., 1995; Jaffe et al., 1995). Advocates of such a view insist that the adoption of CR to meet the demands of various stakeholder groups creates additional constraints on the corporate pursuit of success by incurring greater costs (e.g., in terms of management time, capital investment, and operating cost). Accelerated by the ‘win–win’ hypothesis of Porter and van der Linde (1995) and the ‘it depends’ hypothesis of Reinhardt (1998), the CR debate has moved from analysing whether businesses should make a substantial commitment to when and how such a commitment should be made (Hillman and Keim, 2001; King and Lenox, 2001; Wagner et al., 2001; Porter and Kramer, 1999, 2002, 2006; Smith, 1994, 2003; Salzmann et al., 2005; Kotler and Lee, 2005; Husted and Salazar, 2006; Orsato, 2006).1 Consequently, it has been hypothesized that the adoption of CR allows companies to sustain financial performance and should be integrated into corporate strategy (McWilliams and Siegel, 2001; McWilliams et al., 2006). Other theoretical approaches than the trade-off model assume that there is indeed a case for CR. Based on the rapidly-expanding research and media attention related to CR, one might be also tempted to reject the purely neo-classical theory and consequently move on to determine and analyze the types of impact CR has and under what circumstances. According to the profit-maximizing conjecture, the anticipated benefits of actions are a consequence of implementing company strategy and not mere company-level altruism. A rapidly-growing body of research has advocated the argument by Peter Drucker (1984), who endowed CR

1 The strong cultural, social and historical changes in the general context occurring from 1970 to the present have naturally had an impact on the debate.

with new meaning by stressing that profitability and responsibility are compatible, the challenge being to convert business social responsibility into business opportunities. Today, as it has become harder and harder to compete by the traditional means of product differentiation, there is an international convergence on the rise of intangible resources as a source of sustainable competitive advantage (SCA). In line with the prevailing theory of the firm, the resource-based view (RBV) (Wernerfelt, 1984; Barney, 1991) is that such intangible resources include, among other things, reputation, brand value, skilled employees, and creation of innovation and knowledge. The utilization of both tangible and intangible resources creates the basis for company-specific capabilities (Teece et al., 1997), but intangible ones are more likely to lead to innovation and competitive advantage because they are more likely to be rare, valuable, non-imitable and non-substitutable (Barney, 1991). In line with RBV, Branco and Rodriguez (2006) claim that investment in socially responsible activities may have both internal and external benefits by helping a firm to develop new resources and capabilities. Furthermore, Hillman and Keim (2001) stress that the corporate competitive advantages are relationship-oriented, and are influenced by the interaction between key stakeholders and the firm. Because the numerous benefits to be obtained by respectful and proactive social action are tied to product and process advantages, which are in turn linked to corporate reputation, employee loyalty, and stakeholder commitment, the role of intangible resources is indeed paramount in formulating and implementing CR strategy. The application of intangible resources to better capitalize on both market and social opportunities thus represents a unique, dynamic positioning for each firm. Since product differentiation has become more difficult, many companies are adjusting their own identities from the sustainability perspective as a way of building up brand personality and equity. Keim (1978) perceived CR as enlightened self-interest; Russo and Fouts (1997) found that firms with higher levels of environmental performance had superior financial performance; McWilliams and Siegel (2001) sketch a simple firm theory model of profit-maximizing CR by using the RBV framework; Porter and Kramer (2002) assert that corporate philanthropy can contribute to corporate competitive advantage; Prahalad (2003) argues that CR strategies can simultaneously serve the poor and make profits; Kotler and Lee (2005) illustrate how different CSR approaches can combine success and value creation for stakeholders. Husted and Salazar (2006) assert that CR is compatible with Friedman's arguments (1970) if one carefully calculates what the optimal level of social output for maximizing shareholder value is in each situation.2 On this view, a strategic rather than an altruistic CR approach would ultimately be more profitable for the firm (Husted and Salazar, 2006). This leads to the third theoretical perspective, the CR social impact hypothesis, which assumes that meeting the needs and expectations of various stakeholders affects firms positively, for instance, though better employee retention, decreased business risk or providing access to ethical investment funds. A growing body of research has taken different approaches, aiming to provide practical and feasible frameworks for social performance evaluation. Numerous recent studies have provided indications of the positive influence of CR on different stakeholder groups (e.g., Pave and Krausz, 1996; Preston and O'Bannon, 1997; Brown and Dacin, 1997; Green and Turban, 2000; Backhaus et al., 2002; Orlitzky et al., 2003). Social performance and impact are, however, difficult to measure because good social performance often results in intangible assets that materialize in the long-term, and they are more complex in evaluation and quantification than the tangible resources.

2 A recent study by Lankoski (2008) suggests that the optimal level of CR outcomes for a profit-maximizing firm is a moving target that requires constant monitoring of stakeholder preferences, technological solutions and regulatory developments. Despite the mixed empirical evidence obtained from the accumulating studies on the relationship between CR and economic performance, Lankoski proposes that this relationship is case-specific; a win–win situation does exist, but not always.

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Recent studies have suggested a convergence between corporate governance and social responsibility (see, e.g., Mitchell, 2007; Aguilera et al., 2006). On the one hand, shifting from shareholder primacy and a focus on profit-maximizing, corporate governance has recently become increasingly driven by ethical norms and the need for accountability, transparency, and disclosure. On the other hand, the evolution of CR has adapted to prevailing business practices (e.g., promoting stakeholder theory, incorporating various stakeholder interests, practising self-regulation such as adhering to a code of conduct, taking environmental protection initiatives, and voluntary non-financial reporting) and made corporate governance more attuned to constituency concerns by reconciling the growing tension between shareholder and stakeholder interests (Gill, 2008). Because all businesses competing in dynamic and turbulent environments undergo substantial change due to the constant pressure imposed by different stakeholders (Williams, 1992), two interchangeable concepts, organizational learning (OL) and learning organization (LO), have been strategically accentuated by practitioners and researchers. From a cognitive and behavioural perspective, OL is the development of new knowledge or insights that have the potential to influence behaviour (see Fiol and Lyles, 1985; Huber, 1991; Sinkula, 1994). An LO is simply one which is good at OL. Stata argues that “the rate at which individuals and organizations learn may become the only sustainable competitive advantage, especially in knowledge-intensive industries” (1989, p. 64). Adler and Cole (1993) p. 85 foresee that “(a) consensus is emerging that the hallmark of tomorrow's most effective organizations will be their capability to learn”. The adoption of CR is also bound to have an impact on a firm's corporate culture (Cramer, 2005). Many studies have stressed the importance of learning and education to organizational development in the context of CR (e.g., Nattrass and Altomare, 2002; Willard, 2005; Fenwick, 2007). Heslin and Ochoa (2008) contend that strategic CR initiatives can form a cognitive learning laboratory, which not only provides a fertile ground for organizational learning, innovation and core competence formulation, but also knowledge from which the organization benefits in educating its people about CR. Vilanova et al. (2009) also find that CR and competitiveness integrate through a learning and innovation cycle which allows corporate values, policies and practices to be defined and redefined. Substantial and radical changes in organizational attitude could only be made by a continued focus on organizational learning which is designed to promote and sustain understanding and active participation in CR initiatives. How to nurture people to become CR-oriented thus remains critically challenging in the genuine learning about CR (Fenwick, 2007). Among the most important forms of learning, the single-loop and double-loop learning identified by Argyris (1977) are worthy of note.3 Single-loop learning is linked to more practically oriented and incremental changes in which an organization tries new methods and CR tactics and attempts to get rapid feedback on their consequences in order to be able to make continuous adjustments and adaptations (Cramer, 2005). Cramer (2005) thus insists that embracing the principles of CR indeed requires a ‘double-loop’ learning designed by Argyris and Schön (1996), because double-loop learning consists in an ‘in-depth questioning of the theories underlying action and … of the value system and interpretation frameworks required for action’ (Gond and Herrbach, 2006, p. 361), and therefore involves a major change in corporate strategy setting, which will lead to radical changes in the

3

According to Argyris (1977), single-loop learning occurs when errors are detected and corrected and firms continue with their present policies and goals. Double-loop learning occurs when, in addition to detection and correction of errors, the organization questions and modifies its existing norms, procedures, policies, and objective. Both forms of learning only occur if the organizations are aware that learning must occur. Double-loop learning is concerned with the why and how of changing the organization, while single-loop is concerned with accepting change without questioning underlying assumptions and core beliefs.

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fundamental values, policy principles and operational procedures of an organization. Sharma and Vredenburg (1998) have argued that higherorder learning associated with proactive sustainability strategy not only leads to capability development within companies, but also builds corporate capabilities that lead to competitive benefits in terms of improved efficiency and productivity, as well as triggering a capacity for continuous innovation. The most obvious mechanisms for linking corporate governance and CR, a code of conduct and voluntary non-financial reporting have gained overwhelming attention in public debate on self-regulation. Both mechanisms, particularly the code of conduct, are particularly important for multinational companies with a strong presence in developing countries where regulatory systems are weak. For companies that have already introduced a code of conduct, improving on current ways of doing things (single-loop learning) would be appropriate for producing, verifying, and communicating data on performance in corresponding domains. Other than the internal detection and correction of errors, in response to the major critiques recently made of codes of conduct (see Blackett, 2001 for detail), these firms can carry out double-loop learning by questioning longheld assumptions about their mission, strategies, customers, etc., and develop a new way of understanding the existing systems, which might lead to revision or supplementation. In terms of voluntary nonfinancial reporting, companies that have until now primarily reported on economic performance need to broaden their reporting domains by taking environmental and social performance into account. In order to enhance the transparency, accuracy, clarity, and comparability, etc. of their reporting, companies that have disclosed their economic, environmental and social performance can adopt international comprehensive reporting guidelines such as Global Reporting Initiative (GRI), United Nations Global Compact (UNGC), and employ theirparty verification. Fig. 1 shows our framework regarding interaction between CR and corporate sustainable competitive advantage as modified from Gugler and Shi (2009). The adoption of CR initiatives, in terms of the operationalisation of RBV, is driven by better access to markets and finance, reducing cost and risk, differentiating through enhanced corporate intangible assets (such as reputation and communication with stakeholders), corporate legitimacy (such as avoiding moral and regulatory sanctions and customer boycotts). Consequently, there is an interactional relationship between a CR initiative and its potential outcome, implying that both CR initiatives and the potential outcome are double-acting. The adoption of CR initiatives as the input can result in a number of changes in corporate performance, including improved efficiency and technology, improved atmosphere for organizational learning, and innovations inspired by CR issues. Improved efficiency and technology, organizational learning, and management of innovations as the input can lead to cost and risk reduction, differentiation through enhanced corporate intangible assets, better access to markets and finance, and maintenance of corporate legitimacy. Similar feedback can also be found between the adoption of CR initiatives and corporate sustainable competitive advantage (SCA). Temporal issues also play an important role in analysing the proposed linkages between CR and SCA, but they have been simplified from the framework in Fig. 1. 3. Material and methods To explore the current state of CR strategies and practices in the global forest-based industry, this study utilizes a literature review in the first phase to summarize the findings of existing research. A stateof-the-art-understanding of CR in the field is formulated from a literature review and an analysis of the structural characteristics in the forest industry, such as the recent development of trade and investment flows in forest-based industry, development of the markets for certified forest products, a customer structure in forest products markets, and

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Fig. 1. Theoretical framework of the interaction between CR and corporate sustainable competitive advantage (modified from Gugler and Shi, 2009).

identification of the CR strategies of the biggest companies. For the literature review, we selected the study period starting in 1997, when the trail-blazing paper by Näsi et al. (1997) was published as the first to explore CR in the case of two boreal forestry countries. This time frame was also assumed to be most relevant for our purposes in the highly dynamic and turbulent business environment of the forest-based industry. In addition, many unpublished M.Sc theses (see e.g., Panwar et al., 2006) and discussion papers exist in various countries, but they are not covered here.4 We collected key details on the research methodology and the empirical data used (such as number of interviews, the main aspects and numbers of returned questionnaires and to whom they were addressed) in Tables 1 and 2. For a fuller account of the contents, original papers should be consulted. The composition of research methodologies found in the CR literature focusing on the forest industry and forestry justified dividing the papers based on their use of qualitative or quantitative and mixed-method analysis. To build a more comprehensive understanding of the state-of-the-art of CR in the forest-based industry, we compiled research findings from industry statistics on the current market development of certified forest products and structural features of the forest-based industry (such as FAO, 2009; UNECE/FAO Forest Products Annual Market Review, 2009). Data collected in the previous study (Mikkilä and Toppinen, 2008) on the implementation and disclosure of CR in the world's ten largest companies also served as one solid starting-point for this paper. 4. The state-of-the-art of CR in forest-based industry Altogether, 23 studies between 1997 and 2009 were identified (see Tables 1 and 2), among which two are less scientific assessment reports (WWF, 2006; PWC, 2007). Methodologically, it appears that the qualitative approach and the use of case studies have become more common in recent years, whereas the more quantitativelyoriented studies have focused on more limited and issue-specific regional or sector-specific aspects (e.g., Halme and Niskanen, 2001; Mikkilä et al., 2005). Imminent conflicts due to either industry expansion into emerging markets and production areas, or disputes regarding the rights of aboriginal people have also fuelled investigations of the consequences from a CR point of view (e.g., Joutsenvirta,

4 We also apologize if we have omitted any relevant publications. The papers listed in Tables 1 and 2 is a compilation of research as comprehensive as we were able to mark it, based on the data sources available between February and September 2009 at our university.

2009; Lawrence, 2007). From the regional perspective, the majority of the studies have focused on companies headquartered in Europe or North America, which is obvious since CR as a phenomenon is predominantly driven by the market demand of the environmentally and socially conscious and organizationally well-resourced part of the population in these economically developed regions. Interestingly, the data used in the previous studies mainly covers the largest forest industry companies; none of which has specifically focused on the vast number of small and medium-sized companies. The main published data sources of individual studies in Tables 1 and 2 are corporate reports (e.g., environmental reports, annual reports, CR and sustainability reports, project reports, and company websites) and information on CR disclosure has been analysed mainly using content analysis. The main body of evidence on CR in forest-based industry is nevertheless based on the data obtained from personal interviews (either in-depth thematic interviews or using structured questionnaires) and in the case of quantitative studies from the use of mail or email surveys. Regarding the selection of the methods of quantitative analysis, multivariate analysis of interview data and event studies of the time series character have been used most often. In the qualitative studies, multiple case studies through thematic interviews and qualitative analysis using specific criteria or metrics have been used. Despite the quite extensive record of scientific research on CR in the forest industry since 1997, the evidence can be claimed to be partial still, although some key trends have become apparent. First, following the generally increasing trend to showing accountability, forest industry has also faced the growing need to acknowledge the social impact it has, which has made individual companies justify their existence to a wider set of stakeholders and document their performance through the improved disclosure of social and environmental information. Second, as societal demands change with respect to the world's forest resources, the large forest companies have understood and defined their CR largely based on activities related to sustainable forest management (SFM) and accountability among a number of emerging economic, environmental and social issues (see Wang, 2005; Panwar et al., 2006; Vidal and Kozak, 2008a). Third, the global forestry sector has moved towards a more holistic and encompassing approach to CR and sustainability initiatives (e.g., Panwar et al., 2006; Vidal and Kozak, 2008a,b), where large forest companies shape their social performance strategies to fit their geographical profiles (Mikkilä and Toppinen, 2008). Fourth, it is apparent that large companies, or companies with a strong financial performance, tend to pay greater attention to their overall strategy. This includes planning their environmental and communication strategy, or adopting a more comprehensive risk management strategy, and engaging a broader array of CR activities with more resources (including funds and

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Table 1 Data, methods and major findings of qualitative studies on CR in forest-based industry. Study

Data

Näsi et al. (1997)

Case study of issues management Data from qualitative and quantitative content analyses over a 16-year period of annual reports by the four largest forestry companies in Finland and Canada Top 38 landholding timber companies in A standardized telephone survey North America compiled by the Bank of America

Dyke et al. (2005)

Mikkilä (2005)

130 interviews at 4 mills belonging to a Scandinavian pulp and paper company

WWF (2006)

Corporate reports for 2004–05 of the top 25 European companies 10 interviews from the US and 8 from India

Panwar and Hansen (2007) PWC (2007) Joutsenvirta (2009)

Lawrence (2007)

Corporate reports for 2004 through 2006 by PWC Top 100 forestry companies 43 environmental texts from Enso and Greenpeace during 1985–2001 Logging conflict on Saami reindeer herding territory

Mikkilä and Toppinen Annual, environmental, CSR and sustainability (2008) reports for 2005 from the 10 largest pulp and paper companies Kourula and Halme Sustainability reports, project reports and (2008) company websites Ketola (2009)

Söderholm (2009)

Stora Enso and UPM's corporate actions, words and values on biodiversity, cultural diversity and individual diversity issues A conflict in the early 20th century over a Swedish pulp mill and the company's responses to the complaints and the court order

Methodology

Major results/conclusion Life cycle theory, legitimacy theory, and stakeholder theory all have value but differ in the level of analysis and time frame to which they apply

Drivers for participating in collaborative EMIs are identified and the participation is financially beneficial because of its positive impact on PR Holistic multiple case study through The mill's contribution to the local economy and thematic interview environmental impacts were the most important elements of the acceptability concept Benchmarking using a list of Lack of detail in independent verification is the WWF criteria major weakness in reporting Exploratory study through Economic, environmental and social issues and their in-depth interviews management differ between the US and Indian companies Assessment using a reporting The current status of CR adoption in the pulp, paper metrics template and packaging companies A longitudinal discourse analysis Different ways of communicating CR may hinder or facilitate efforts to steer corporate actions into a more balanced relationship with nature and society Case study A critique of the conceptual division of responsibility between ‘state’ and ‘market’ actors, as well as the politically ambivalent roles of state-financed companies in global CSR dialogues on the rights of indigenous people Analysis on both quantitative and The dominating North American–Nordic type of CR qualitative metrics from CR reports leaves little flexibility for company-specific diversification in reporting Multiple case study on company Compared with philanthropy and CR integration, CR engagement with NGOs, Stora Enso innovation seems to have the highest potential in creating local income-generating mechanisms and 2 non-forest sector companies Case study Forest companies tend to react to external pressure in diversity issues and often take a confrontational or minimum legal compliance approach Case study The long-term economics of a number of pollution abatement investments turned out to be more favourable than anticipated prior to the court verdict

Table 2 Data, methods and major findings of previous mixed-method and quantitative studies on CR in forest-based industry. Study

Data

Halme and Niskanen (2001)

Regression analysis Stock market data and newspaper articles (1970–1996) on 64 environmental investments by 10 listed Finnish companies Regression analysis Environmental performance and the matching economic performance data of companies in Germany, Italy, the Netherlands and the UK Factor analysis 454 interviews covering the forest industry value chain, including companies in the UK, Finland, Germany and Sweden

Wagner et al. (2002)

Kärnä et al. (2003)

Henriques and Sharma (2005) Sharma and Henriques (2005) Doonan et al. (2005) Mikkilä et al. (2005)

63 facility-level surveys in the Canadian forestry industry 38 companies' annual reports, environmental reports, company websites (1999–2000) and 63 facility-level surveys Phone interviews with 86 environmental directors of Canadian pulp and paper plants 130 pair-wise comparisons of 21 sustainability criteria and 8 stakeholder groups at 4 mills

Vidal and Kozak (2008a) Sustainability reports for both 2005 and 2006 published by the top 20 forest and paper companies Vidal and Kozak (2008b) Annual report, sustainability or CR reports (2000–2005) and company websites of 51 top forest companies Vihervaara and Semi-structured interviews with 12 experts Kamppinen (2009) on environmental and CR affairs from the two largest companies and the Finnish forest Industries Federation Panwar et al. (2010) A random sample of 282 total residence aged 18 and above within the states of Washington, Oregon, Idaho, and Montana

Methodology

Factor analysis and the general linear model (GLM) Factor analysis and the general linear model (GLM)

Major results/conclusion Environmental investments create goodwill for the investing firms and thus are not negative net present value investments Findings predict a negative relationship between environmental and economic performance Proactive markers have the highest potential in implementing environmental marketing voluntarily and seeking competitive advantage through environmental friendliness The indirect stakeholders can enhance their power over a firm's operations via the direct stakeholders of the firm The stakeholder influence focuses heavily on intermediate sustainability practices in the Canadian firms

Linear structural equation model The government and the public were the most important sources of pressure to improve firms' environmental performance Regression analysis CR was based on legislation, regulations and standards in Finland, Germany and Portugal, while it was understood as social duties of business enterprises in China (in the Suzhou area) Mixed-method and content The global forestry sector is moving towards a greater balance analysis by TEXTPACK software among economic, environmental and social responsibilities Mixed-method and content analysis by TEXTPACK software Mixed-method study

Factor analysis

The degree to which companies emphasize certain CR activities is determined by the specific contexts companies operate in and the priories they establish How the ecosystem approach is implemented in the Finnish forest industry and the mental models of environmental experts of corporations and their conceptualization of some key terms of ecosystem thinking Differences exist in different demographic categories (gender, education level, place of residence, and age)

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independent verification and evidence in CR reporting represents an opportunity for companies to demonstrate their sustainability commitment and achievements more fully. Panwar and Hansen (2007) suggest that the adoption of a consistent external reporting standard such as the Global Reporting Initiative (GRI) framework could provide comprehensive guidelines and help to deal with the criticisms currently made of CR disclosure. They propose that the forest-based industry could either develop country-specific standards within the GRI guidelines or develop a sector supplement within the GRI provisions, but this has not yet been done.

staff) to deal with emerging sustainability issues (Vidal and Kozak, 2008a, 2008b). In light of the social impact hypothesis discussed in the theoretical section, Halme and Niskanen (2001) found in examining the share price effects of environmental investment by the Finnish forest industry that environmental investment creates goodwill for the investing firms. This suggests that socially responsible decisions by forest companies may improve the preference of investors, which may lead to long-term economic success. Subsequently, Dyke et al. (2005) reported that companies believe that improved environmental performance can generate financial benefits through a positive impact on public relations, and their participation in collaborative ecosystem management initiatives are driven by a number of motives, including improving current relationships with stakeholders, obtaining performance data, and reducing governmental regulation. Corporate legitimacy has become a sensitive issue in corporate strategic management and operation. Studies by Mikkilä (2005) and Mikkilä et al. (2005), for instance, indicate that perception of CR varies according to context: CR has been driven by legislation, regulations and standards in Finland, Germany and Portugal, whereas it has been conceived as the social duty of business enterprises towards society in China (within the Suzhou area). The pulp and paper mill's contribution to the local economy and environmental impacts are found to be the most important elements of the acceptability concept at the local level, while the reputation of the entire sector is perceived as a major influence at both the national and global levels. Regarding CR and the engagement with NGOs, Kourula and Halme (2008) suggested that CR integration and CR innovation have greater potential for longterm positive business outcomes than philanthropy, whereas CR innovation has the highest potential in creating local income-generating mechanisms and supporting local self-sufficiency.5 Apart from scientific studies, PricewaterhouseCoopers (PWC, 2007) and the World Wildlife Foundation (WWF, 2006) have conducted reviews on sustainability reporting to assess the current status of CR adoption in forest-based industry. Common CR activity themes emerging among forest-based companies operating in different contexts were found to include employment, health, recycling, certification, community, air, water, energy, procurement, R&D, safety, education, stakeholders, consumption, culture, philanthropy, and indigenous peoples. Altogether, 61 companies of the PWC Top 100 were found to disclose some information on their CR and, by regional comparison, North American companies produced relatively fewer sustainability reports than EUbased companies. According to these two assessments, forest industry companies tend to report data at the consolidated corporate level for selective rather than a full range of metrics. Environmental indicators were more likely to be reported than either social or economic indicators, air emissions and energy consumption being the most reported followed by water consumption and discharges to water. Some reluctance to provide detailed economic sustainability information related to company operations beyond regulatory requirements was identified. All in all, the forest industry companies covered in the previous studies appear to have adopted CR activities mainly on a profitmaximizing motive with a more limited emphasis on social and stakeholder impacts. They perceive CR initiatives as a worthy investment that serves to demonstrate their commitment to sustainability and secure their legitimacy, whether for ethical reasons or for the achievement of strategic and economic objectives. This could be explained by the business nature of the industry: its manifold significance for humanity in culture, religion, the economy and the environment; its high visibility and vulnerability to public criticism and the potential damage to the public image. The lack of detail in an

What then is the true impact of CR in forest-based industry? In Table 3, we combine the evidence from existing research findings and information on the structural and operational features of forest-based industry to draw some preliminary conclusions on the current state and impact of CR on the industry. We have divided the issues thematically into 1) the industry structure; 2) the development of the industry internationalization; 3–5) the main stakeholder groups acting as drivers for CR (namely customers, NGOs, and investors); 6) the nature of CR disclosure and practices; and 7) CR as a potential source of competitive advantage. We will categorize each aspect of the hypothesized impact and discuss the impact of CR (either as impeding or enhancing) in the forest industry business, providing a basis for further empirical research through generation of three hypotheses. The first conclusion from Table 3 suggests that a variety of factors seem to be enforcing the importance of CR, while simultaneously a number of factors are likely to impede the true capitalization of CR in forest-based industry. Fuelled by the continuing movement toward trade liberalization and economic growth in developing countries, large forest industry companies have accelerated their internationalization, for example, by penetrating foreign markets through off-shore production in low-cost regions, adopting a predominately low-cost strategy in commodity forest products for survival, gaining access to updated technologies, or practising global sourcing for raw materials or components for their production. Since the operating countries in the world are not homogenous, largely driven by the country's characteristics, such as political system, culture, regulation, education, and industry structure, they desire an awareness of divergence in regional and national management, in addition to international convergence of management approaches and production technologies at company and industry level (Kogut and Singh, 1988). Increasing media attention and growing NGO activity and consumer awareness have been feeding each other, resulting in stakeholder claims targeted at forest industry companies. As LaFrance and Lehmann (2005) observe, partnerships have become common as companies react to mounting pressure from corporate stakeholders. One recent example is the partnership between Stora Enso and the United Nations Development Programme (UNDP) China. UNDP China was entrusted by Stora Enso with an integrated environmental and social impact analysis of Stora Enso's plantation project in Guangxi (UNDP, 2006), which however did not prevent escalation of local land ownership conflicts in the affected areas in spring 2009 (Helsinki Daily, 2009).6 In accordance with the findings of L'Etang (1994) and Vogel (2005), which argue that companies are primarily reactive with respect to CR, responding to external pressures rather than through proactive defining, Ketola (2009) has been more pessimistic on the CR on the company agenda in observing that forest companies have tended to react mainly to external pressures in biodiversity issues and have often taken a confrontational or minimum legal compliance approach,

5 The findings support the argument that philanthropy is seldom strategic in practice (Burke and Logsdon 1996; Porter and Kramer, 2002, 2006), being able to support core business activities and thereby contribute to the firm's effectiveness in accomplishing its mission.

6 The reporting of Helsinki Daily supports the argument by Lang (2007) that the ESIA report by UNDP China (2006) fails to recognize the serious concerns for environmental and social impacts of affected local communities about the eucalypt monoculture in Guangxi, China.

5. Discussion and generation of hypotheses for further research

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Table 3 Summary of the contextual factors either impeding or enhancing the impact of CR in forest-based industry. Impeding factors: “CR has no true impact or even a negative impact” Enhancing factors: “CR does matter” • • • Internationalization of firms • • Industry structure

Still fragmented Dominant SMEs in some sub-sectors Lack of “responsible leadership” icon companies Divergence in regional and cultural management Continued off-shoring of production to low-cost regions

Customer perception on certification and SFM

• Dominant industrial customers in general • Uneven global distribution of certified forests • Lack of demand/supply of certified wood • Lack of economic incentives from supplier perspective (e.g., current low or non-existent price premiums, unconvincing and (albeit) slowly increased market share and market access associated with certification) Lack of certification knowledge and price sensitivity from final consumer perspective

NGO and other stakeholder pressure

• Resource-intensive (e.g., land, raw material and capital) sector Continued conflicts over local land use

Investors

• Limited level of ethical investment • Positive short-term stock market reactions to employee layoffs in forest industry • Uneven balance between economic and environmental disclosure as compared to social disclosure • Divergence between corporate publicity and actual performance

Disclosure and CR practices

Source of competitive advantage

• Low-cost strategy dominating in commodity pulp, paper, and wood products

attracting NGO concerns. Ketola (2009) lists continuing illegal logging, uncertified wood sourcing, the massive tree plantations by the largest forest companies and the associated conflicts over local land use in South America and Asia as examples of forest sector-specific issues criticised by NGOs, environmentally aware populations in industrial countries, and the indigenous peoples affected. A growing number of forest industry companies have either adopted industrial standardization (e.g., international standards issued by ISO) or certification schemes (e.g., PEFC or FSC forest certification) or participated in international processes and networks such as the United Nations Global Compact (UNGC), the World Business Council for Sustainable Development (WBCSD) as strategic tools to maintain their ‘licence to operate’. For example, WBSCD member companies include many of the largest forest companies, such as Stora Enso, the Metsäliitto Group, Kimberly-Clark, Procter & Gamble, MeadWestvaco, Weyerhaeuser, and the Nippon Paper Group, while some of them are also members of UNGC. More recent statistics have demonstrated a large political and economic force that endorses and promotes forest certification and sustainable forest management (SFM) globally. Nowadays about 8% of the world forests are certified, the two dominant certification systems being FSC and PEFC. According to FSC (2010), more than 125 million ha of forests worldwide are certified under FSC standards and distributed in over 80 countries, while the value of FSC labelled sales is estimated at over 20 billion USD in 2010. On the other hand, 220 million ha of forests are globally certified under PEFC standards, more than 476,000 forest owners have adopted PEFC, and 6399 companies and organizations had achieved PEFC CoC certification worldwide by February 2010 (PEFC, 2010). The traditional and dominant expectation for direct (short-term) benefits over indirect (long-term) benefits and ‘the immature market for certified wood products’ (Humphries et al., 2001) could explain why such products were not realizing direct benefits such as a price premium in the 1990s. The market situation for certified wood products has steadily improved during the 2000s, but with occasional exceptions in

• A highly environmentally-sensitive sector with heavy dependence on wood supply Progress in industry consolidation with increased media exposure • Increased exposure to a broader set of stakeholders led by the increased internationalization and expansion into emerging markets Globalization and rapid transfer of information • Growing demand for certified forest products driven by concern for sustainability of wood supply • Rising power of final consumers and larger retailers of wood products in Europe • Positive government interventions (e.g., public procurement, ban on illegal logging) • Various mechanisms to promote SFM and certification (e.g., national and international policies, alliances between different stakeholder groups, eco-labelling) • Rapidly-growing number of CoC-certified companies worldwide • Increasing environmental and social consciousness among consumers • Efforts by firms to avoid legal, moral and economic sanctions (e.g., adopting industrial standardization and certification, participating in international processes and networks such as GC, WBCSD) Increasing partnership with corporate stakeholders • Positive impact of CR on long-term financial performance Widespread SRI • Improved quality of CR disclosure and adoption of more holistic approach by firms More widespread adoption of international reporting guidelines (e.g., GRI, UNGC, AA1000S Assurance Standard ) • Rise of intangible resources as a source of competitive advantage (e.g., reputation and brand management, quest for skilled labour) Increasing internal and external demands for organizational learning and innovation

the case of tropical hardwoods in the European market, achievable price premiums tend to remain negligible (UNECE/FAO2009). Three types of barriers have been identified by Werndle et al. (2006) as the major constraints on certified timber and paper product uptake; first, supply barriers, which include lack of certified timber available, supply chain complexities, entrenched supplier relationships, and a currently low or non-existent price premium on certified forest products; second, demand barriers, which include lack of certification knowledge on the part of final consumers, price sensitivity, weak market demand; and third, organizational barriers, which include lack of strategic commitment, inadequate management systems, staff skills and financial provision. Since industrial consumers form the main customer base in the forest industry, Werndle et al. (2006) suggested that educating subcontractors about certification and tightening control over procurement by large contractors could be one solution on the demand side. Although recent decades have witnessed a growing demand for certified products driven by concerns for sustainability of supply worldwide, some interesting/noteworthy regional divergences in forest certification may be observed. For example, final consumers and larger retailers of forest products in Europe have become powerful actors in environmental and social movements, whereas in many parts of the world, government and the industrial buyers hold the decisionmaking power. Canadian manufacturers of certified value-added wood products are currently encouraged by ethical motives and already perceive certification as a competitive differentiation tool (Jayasinghe et al., 2007), whereas certified wood product companies in the U.S. still perceive certification as a marketing means of demonstrating their commitment to the environment (Thompson et al., 2009; Aquilar and Vlosky, 2007). Despite the controversy about the benefits of certification for timber producers, Kollert and Lagan (2007) find that certified tropical logs in Malaysia fetch a market premium, particularly high-quality hardwoods destined for the export market. With the growing demand for corporate visibility and accountability, environmental and social reporting has become a necessity of

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CR practice. Current reporting in the forest-based industry reveals an uneven balance between economic and environmental disclosure as compared to social disclosure (e.g., Panwar et al., 2006; Mikkilä and Toppinen, 2008). The substantial divergence between regions and nations, the preaching of companies and their actual performance has raised an urgent need to improve the quality of CR reporting by adopting a reliable universal standard such as GRI or UNGC, or AA1000S Assurance Standards, for example, which are designed to bridge the gaps between environmental, economic and social disclosures for improved robustness, reliability, credibility and consistency. Both PEFC and FSC issue Chain of Custody (CoC) certification to ensure the traceability of timber from forest to user. CoC-certified forest products companies are mainly found in Europe and North America, and the numbers of certificates are increased rapidly to 17,800 in 2009 (UNECE/FAO, 2009). The number of FSC and PEFC CoCcertified companies is still small compared with the total number of companies engaged in the wood sector. Since larger forest industry companies are found to have better knowledge of forest certification, they tend to be more interested in adopting CoC in their production than those of smaller companies without ample financial resources (Vidal et al., 2005). Sustainability can also be used as a means of gaining a competitive edge. The best-known effort towards sustainable development in forestry is forest certification (e.g., PEFC and FSC). As a market mechanism, forest certification is based on the premise that customers are willing to pay a premium for products originating from well-managed forests (Carter and Merry, 1998). Currently, interest in the achieving better comparability of different forest certification schemes is growing in parallel with the interest in the potential applicability of certification for CO2 sink monitoring (UNECE/FAO, 2009; PEFC, 2010). As the final outcome of the question of “whether CR matters in forest-based industry” is inevitably case-specific, it is not possible to assess it without further analysis. We will therefore tentatively propose three research hypotheses that could be tested in future empirical research. First, following the RBV and the claim by Branco and Rodriguez (2006) suggesting that investment in socially responsible activities may have both internal and external benefits by helping a firm to develop new resources and capabilities, we may propose: Hypothesis 1. In line with the RBV, it is possible to enhance the sustainable competitive advantage of forest-based industry with the use of CR as an intangible asset. Second, our understanding suggests that, in addition to the lack of verification in reporting, CR still remains part of business communication with the principal aim of improving corporate reputation (Vidal and Kozak, 2008a; Mikkilä and Toppinen, 2008). This obviously does not require research to say anything about actual CR performance. However, it could be speculated that divergences revealed in the CR disclosure may reflect the varying degrees of CR adoption by forest industry companies in various contexts in terms of, for example, cultural, institutional, economic and environmental conditions, and where companies have directed their CR efforts to date. As suggested by Panwar and Hansen (2007), for instance, the adoption of a consistent external reporting standard such as the GRI framework could help avoid the lack of verification in reporting and alleviate the current criticisms of CR disclosure and the practices of some forest-based industry companies. Consequently, we propose the second hypothesis: Hypothesis 2. The adoption of global standardized procedures in CR disclosure in the forest-based industry is likely to positively impact financial performance. As was mentioned in the theoretical background section, CR and competitive advantage interact through the learning and innovation

cycle (Heslin and Ochoa, 2008; Vilanova et al., 2009). As advocated in the theoretical section, proactive sustainability strategies can lead to different paths of learning and innovation at the business environment interface for each firm, being associated with the emergence of unique organizational capabilities (Sharma and Vredenburg, 1998). CR as a source of competitively valuable organizational learning does not rule out of the possibility that other organizational strategies may also lead to the development of such capabilities. However, to become more competitive in CR terms, a forest industry company would essentially need to focus on the generation of its proactive responsibility strategy and its implementation rather than being reactive and merely adapting to the changing business environment and stakeholder needs.7 Therefore, we propose the following as the third hypothesis: Hypothesis 3. A proactive strategic approach involving double-loop organizational learning of CR ensures creation of sustainable competitive advantage in forest-based industry more efficiently than the incremental and reactive strategies of the past. A series of follow-up studies could be carried out to test the three hypotheses proposed in this study. Content analysis on corporate disclosure by the forest-based industry could be designed to test Hypotheses 1 and 2 by answering the questions such as: 1) How do major forest industry companies report their CR practices under the GRI guidelines? 2) Does better reporting have any association with financial performance at company level? Furthermore, the GRI reporting guidelines could be used to evaluate the overall reporting performance in order to capture the state-of-the-art of reporting performance by the industry. Methods such as cluster analysis and regression modelling could be used to test these hypotheses. Conducting an industry survey would be an appropriate tool to gain a better understanding of company or industry perception of CR in action. With the help of multivariate methods such as confirmatory factor analysis, Hypotheses 1 and 3 could be thus explored to answer questions such as: 1) How do companies integrate CR into their organizational learning and innovation management? 2) What differences exist in terms of incentives (social, environmental or economic) for adopting forest certification, and does certification have any impact on profit generation in practical business activities? Because CR is a highly case-specific concept, qualitative techniques such as in-depth interviewing could also be used to supplement the findings from quantitative analysis, by including professional perceptions (e.g., those of managers or specialists of the sample companies) on these questions.

6. Conclusions Corporate responsibility has become increasingly crucial to both business and societal success, because it embraces all aspects of business. The growing recognition of mutually interactive and beneficial interdependence between business and society will make CR even more significantly relevant to our lives in the future. Society makes business possible by providing both direct and indirect resources for a business to succeed. In turn, companies not only create jobs, wealth, and innovations that enable a society at large to prosper, but can aid in reducing negative environmental and social impacts. Therefore, achieving a sustainable level of profitability remains an absolute necessity for companies to survive but not the only rationale

7 As a sector-specific indicator for CR, forest certification could have the potential to build the human, social and natural assets that support low-income people and communities in the south (Karman and Smith, 2009). The accrued benefits of forest certification could be not only market related (e.g., price premiums, increased market share and market access), but also involve organizational learning aspects through operational and management improvements.

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for their existence, because businesses have an obligation to society to operate in ways that are socially responsible and beneficial, and society has the right and the power to define expectations for those who operate within its boundaries. Such interaction and interdependence require companies to adopt a CR perspective to preserve their social legitimacy, because its loss can lead to restrictive legislation, environmental and social activism, penalties, prohibitions, and consumer boycotts, which are costly and restrain companies from pursuing their economic and other goals. Although Friedman (1970) argued that CR can distract companies from financial performance, a currently more common and more balanced view asserts that CR does not repeal the laws of economics under which companies must operate in order to benefit society. Quite the contrary, incorporating CR into strategy formulation and operations offers a potential edge in differentiation and competitive advantage upon which sustainable success can be built, quite apart from avoiding moral, legal, and other sanctions. When compliance with moral expectations is based on socially respected values, CR enables companies to reflect the needs and concerns of their various stakeholder groups, to retain their societal legitimacy, and to maximize their financial viability over the long-term. For the forest industry, the recently increased attention paid to the environmental and social dimensions of CR within business practices requires companies to innovate and change their business settings more proactively. While the continued growth of ethical markets presents both a threat and an opportunity for forest industry companies, a case for CR could only be made by embracing CR principles with radical changes in fundamental values, policy principles and operational procedures through continuing organizational learning. However, it is also worthy of note how little is known regarding CR in the context of small and medium-sized enterprises, which are also important actors in the forest industry sector in many countries. To provide ideas on their positions with respect to CR tools, analysing possible future risks of the growing gap between large companies and SMEs, exploring opportunities for SMEs to improve or maintain their competitive advantages and market share by using CR tools, and the role of innovation and organizational learning within SMEs should be prioritized in future research.8 Loorbach et al. (2010) claim that persistent sustainability issues are too complex and interconnected to be addressed by individual organizations, and business, government and civil society all need to play their roles in shaping sustainability at the societal level. Clearly, the interaction between stakeholders and divergent interests provides both opportunities and threats with respect to how companies position themselves. In order to accrue the greatest benefit, the forestbased industry should approach CR as a business value and integrate it into its core business strategies. However, this will challenge company decision-makers to rethink and redesign their fundamental business models in their endeavours to translate corporate CR rhetoric into actual practice.

Acknowledgements Financial support from Academy of Finland Grant 127889 is gratefully acknowledged. We would like to express our gratitude to the Editor and an anonymous reviewer of this journal as well as to the participants in the “Change in Governance as collective learning process: management, politics and ethics in forestry” conference during 21–24.6.2009, Nancy, France, for their stimulating discussions and comments on our previous version. All errors remain our own.

8 We are grateful for an anonymous reviewer of this journal for clarifying these concepts for us.

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