The Impact of Supplier Sustainability Risk on Shareholder Value

• DOI: http://doi.org/10.1111/jscm.12188
• Published date: 01 January 2019
• Date: 01 January 2019

THE IMPACT OF SUPPLIER SUSTAINABILITY RISK ON

SHAREHOLDER VALUE

SEONGTAE KIM AND STEPHAN M. WAGNER

Swiss Federal Institute of Technology Zurich

CLAUDIA COLICCHIA

University of Hull

Business scandals like sweatshop labor have received growing attention in

the field of supply management. Yet little is known about how detrimen-

tal such scandals are to buying firms. This study aims to fill this gap by

examining the magnitude of the consequences of what are termed as sup-

plier sustainability risks (SSRs). To this end, we conduct an event study

analysis followed by regression modeling based on a sample of 196 U.S.

publicly traded firms’SSRs. The results reveal that SSRs are associated

with a 1.00 percent reduction in shareholder wealth. The market reacts

negatively but not differently to the two types of SSR: process-related risks

and product-related risks. Finally, a firm’s moral capital does play a miti-

gating role for SSRs and process-related risks; however, it does not pro-

vide insurance-like protection for product-related risks.

Keywords: supplier sustainability risk; social performance; corporate social responsi-

bility; insurance-like value; shareholder wealth

INTRODUCTION

On the night of Saturday, 27 November 2012, a fire

broke out at the eight-story Tazreen factory on the

outskirts of Dhaka, Bangladesh, killing at least 117

garment workers. Less than a year later, another eight-

story building, the Rana Plaza, collapsed near Dhaka,

causing 1,129 fatalities and more than 2,500 injuries

(Guo, Lee & Swinney, 2016). Placing the blame where

it belongs is debatable. However, soon after both inci-

dents, many western clothing retailers, such as Wal-

Mart and Gap, were found to be involved, and these

multinational firms were accused of having little

regard for safety conditions (Jacobs & Singhal, 2017).

The question still remains: how detrimental are such

supplier scandals to buying firms?

It goes without saying that such scandals can have

negative consequences for the buying firms; but most

of the evidence we have seen is anecdotal (e.g., Foerstl,

Reuter, Hartmann & Blome, 2010; Hofmann, Busse,

Bode & Henke, 2014; Reuter, Foerstl, Hartmann &

Blome, 2010). Indeed, much less is known about the

magnitude and severity of the consequences. In fact,

few studies have presented rigorous evidence. However,

one study is limited to a single event (Jacobs & Singhal,

2017), while others focus only on boycotts or other

outcomes of incidents (Bartley & Child, 2011; King &

Soule, 2007). More importantly, events like the Tazreen

factory fire and the Rana Plaza disaster were often asso-

ciated with suppliers’ unethical behavior; none of these

studies address supplier sustainability (responsibility)

from a risk perspective.

This study aims to fill this gap by examining the mag-

nitude of the financial consequences of what are termed

supplier sustainability risks (SSRs). SSRs are the damaging

effects that a buying firm has to bear when news of its

suppliers’ ethical/moral misconduct become public

(Chen & Lee, 2017). This emerging concept was elabo-

rated by Foerstl et al. (2010); since then, there have

been many scholarly efforts to distinguish SSRs from

supply disruption risks (SDRs) (e.g., Busse, Kach & Bode,

Acknowledgments: We thank the editors, associate editor, and

three anonymous reviewers for their constructive comments and

suggestions. We also thank Brian W. Jacobs and Riccardo Mogre

for their helpful feedback on an early version of this manuscript.

Finally, we thank M. Ramkumar, David B. Grant, Kiran Fernan-

des, David A. Menachof, and participants in conference sessions

at the annual meetings of POMS, ELA and EurOMA for their

useful discussion.

January 2019

71

Journal of Supply Chain Management

2019, 55(1), 71–87

©2018 Wiley Periodicals, Inc.

2016; Giannakis & Papadopoulos, 2016; Hajmoham-

mad & Vachon, 2016). SSRs occur when buying firms

are caught doing something that may trigger adverse

stakeholder reactions (Barnett, 2014; Hofmann et al.,

2014); SDRs normally arise from operational failures

(e.g., delay) or natural/manmade disasters (e.g., a fac-

tory fire) (Kleindorfer & Saad, 2005).

Supplier sustainability risks are part of the wider con-

cept of sustainability risk, which is not limited to eco-

logical issues but also social matters in supply chains.

This concept builds on the triple bottom line view of

sustainability, emphasizing the combination of people

(i.e., social), planet (i.e., environmental), and profit

(i.e., economic) for continuous development (Elking-

ton, 1997). In fact, sustainability research in the field

of operations and supply chain management (OSCM)

has traditionally focused on the planet. However, this

one-sided focus makes it difficult to examine the aggre-

gated impact of sustainability issues on a firm’s perfor-

mance (Shafiq, Klassen, Johnson & Awaysheh, 2014).

Indeed, Klassen and Vereecke (2012) asserted that

social issues in supply chains lag far behind, making

firms struggle with an understanding of their causes

and effects. For this reason, we focus on the people-

side of sustainability risks under the name of SSRs.

In this study, we adopt the concept of stakeholder

reaction and efficient market hypothesis to explain

how SSRs can be punished by the capital market. In

particular, we consider stakeholder salience, a stake-

holder whose attributes might be strong enough to

sustain actions against SSRs, thereby shaping stock

market behavior. Social issues in supply chains can be

defined as “product- or process-related aspects of

operations that affect human safety, welfare and com-

munity development” (Klassen & Vereecke, 2012, p.

103). Building on this definition, we examine whether

there are differential effects between the types of SSR.

Finally, managers can protect themselves against SSRs

by obtaining and maintaining moral capital from

stakeholders (Godfrey, 2005). We thus introduce the

buffering effect of corporate social responsibility

(CSR), and test if this effect could play a mitigating

role during SSRs.

This paper contributes to research and practice in the

following manner. First, it increases our knowledge

about how detrimental SSRs are to buying firms.

Beyond the anecdotal evidence (e.g., Foerstl et al.,

2010) more research is needed to investigate the mag-

nitude of the SSR. Second, this study advances the

understanding of CSR as insurance during SSRs. This

idea is designed to reduce the potential damage to a

firm’s reputation, something which has yet to be

addressed in the literature. Third, this study balances

the social aspects of sustainability research, where most

prior studies have focused on environmental issues

(Kim, Colicchia & Menachof, 2018). This study reviews

SSR-related studies based on the process/product dis-

tinction to arrive at deeper insights into the literature.

SUPPLIER SUSTAINABILITY: A RISK

PERSPECTIVE

Concept of SSR

Supply chain scholars have been concerned with

typical, ordinary risks (e.g., parts delays or shortages)

that often trigger disruptions (Kleindorfer & Saad,

2005). A supply chain disruption can be defined as

the combination of “(1) an unintended, anomalous

triggering event that materializes somewhere in the

supply chain or its environment, and (2) a conse-

quential situation which significantly threatens normal

business operations of the firms in the supply chain”

(Wagner & Bode, 2008, p. 309). There have been

many typologies/taxonomies of disruption risks; how-

ever, for our purposes, this study compares SSRs with

“pure” issues that occur in the upstream side of sup-

ply chains, and thus SDRs (Harland, Brenchley &

Walker, 2003; Wagner & Bode, 2008; Zsidisin, Ellram,

Carter & Cavinato, 2004).

In contrast to SDRs, a SSR builds on the concept of

sustainability risks, defined as “a condition or a

potentially occurring event that may provoke harmful

stakeholder reactions” (Hofmann et al., 2014, p.

168). In fact, as pointed out by Foerstl et al. (2010, p.

119), SSRs “are generally not, or at least not in their

entire content breadth, part of the supply risk man-

agement discussion.” However, this concept has

recently attracted much attention, given that SSRs can

compensate for the limitations of SDR management

(Busse et al., 2016; Foerstl et al., 2010; Reuter et al.,

2010). To illustrate this point: today’s multinational

firms enjoy a renowned ability to govern their global

supply chains for SDRs. Nevertheless, plenty of evi-

dence still shows the limited effect when a buying

firm encounters negative developments like SSRs (e.g.,

Apple-Foxconn’s suicide scandals).

Consequently, SSRs “lie at the intersection of sus-

tainable supply chain management and research on

global supply chain risks” (Busse et al., 2016, p. 313).

In this regard, it is inevitable that SSRs may overlap

with SDRs. As an example, consider the Rana Plaza

case. Jacobs and Singhal (2017) argued that global

apparel retailers sourcing from Rana Plaza may face

not only damage to their reputation, but also supply

disruption. Therefore, while concentrating mainly on

SSR-only event, this study also considers such overlap-

ping issues. In robustness checks, yet, we will show if

our results are driven by these kinds of SSRs (see

‘overlapping cases’ in Table 5).

Two conditions are essential for harmful stakeholder

reactions to occur and thus for SSRs to materialize

(Barnett, 2014; Hofmann et al., 2014). First,

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