When do appointments of corporate sustainability executives affect shareholder value?

• Author: Manpreet Hora,Priyank Arora,Ravi Subramanian,Vinod Singhal
• Published date: 01 June 2020
• Date: 01 June 2020
• DOI: http://doi.org/10.1002/joom.1074

RESEARCH ARTICLE

When do appointments of corporate sustainability executives

affect shareholder value?

Priyank Arora

1

| Manpreet Hora

2

| Vinod Singhal

2

| Ravi Subramanian

2

1

Isenberg School of Management,

University of Massachusetts Amherst,

Amherst, Massachusetts

2

Scheller College of Business, Georgia

Institute of Technology, Atlanta, Georgia

Correspondence

Manpreet Hora, Scheller College of

Business, Georgia Institute of Technology,

Atlanta, GA 30308.

Email: manpreet.hora@scheller.gatech.edu

Handling Editor: Michael Galbreth

Abstract

Over the last two decades, firms have been appointing corporate sustainability

executives (CSEs) to be part of their top management teams. Although there is a

vast literature on sustainable practices and their relationships with various measures

of firm performance, little is known about the nature of the empirical link between

CSE appointments and financial performance. We add to the understanding of this

link by estimating the stock market reactions to a sample of 115 announcements of

CSE appointments made by firms during the period 2000–2018. Our findings using

event study methodology, followed by regression analyses, suggest that although

the stock market reaction to CSE appointments is not significantly different from

zero, the stock market reacts more, or less positively under certain firm- and

industry-specific conditions. We find that the stock market reaction is more posi-

tive in instances where the announcing firms faced a prior adverse sustainability-

related incident, and less positive for announcing firms that operate in industries

that face relatively higher levels of regulatory sanctions. Also, we find that the

stock market reaction is more positive when firms announce CSE appointments

with focused as compared to broad responsibilities. Additionally, we find that CSE

appointments are associated with subsequent improvements in operating

performance—partly driven by a decrease in total costs and partly by an increase in

sales. Overall, our findings support the strategy of appointing CSEs to top manage-

ment teams and enable executives and stakeholders to more deeply understand the

shareholder value and operating performance effects of appointing CSEs.

KEYWORDS

corporate sustainability executives, event study, operating performance, prior adverse incident,

regulatory sanctions, stock market reaction, sustainability leadership

1|INTRODUCTION

Over the last two decades, firms have been appointing sus-

tainability executives to be part of their top management

teams (TMTs). Denning (2011) labels this trend as “sustain-

ability reaching the C-suite,”and attributes it to the breadth,

complexity, and rapid evolution of sustainability issues. For-

bes (2016) lists sustainability leadership that couples opera-

tional excellence with optimal resource use, as one of the

top four supply chain career paths for 2025. Titles for sus-

tainability executives include Chief Sustainability Officer,

Chief Responsibility Officer, Corporate Social and Environ-

mental Officer, and Executive or Senior Vice-President of

Sustainability (Strand, 2013). For the purpose of our study,

we refer to these executives as corporate sustainability exec-

utives (CSEs), and consider sustainable practices to be those

that enable a firm to mitigate the negative impacts and

enhance the positive impacts of its operations on the

Received: 30 August 2018 Revised: 22 August 2019 Accepted: 17 October 2019

DOI: 10.1002/joom.1074

464 © 2019 Association for Supply Chain Management, Inc. J Oper Manag. 2020;66:464–487.wileyonlinelibrary.com/journal/joom

environment and society (Chen & Delmas, 2011;

Kleindorfer, Singhal, & Van Wassenhove, 2005).

There is an extensive body of literature that investigates

the shareholder value effects of firms' socially and environ-

mentally responsible actions such as philanthropy and equal

employment opportunities (Margolis & Walsh, 2003); envi-

ronmental management in the form of process redesign,

investment in new environmental technologies, and reduc-

tions in emissions of hazardous pollutants (King & Lenox,

2002; Klassen & McLaughlin, 1996); ISO 14000 certification

(Corbett & Kirsch, 2001); corporate environmental initiatives

and environmental awards and certifications (Jacobs, Sin-

ghal, & Subramanian, 2010); and corporate social responsibil-

ity (CSR) communications (Du, Yu, Bhattacharya, & Sen,

2017). The work by Flammer (2013, 2015) posits that

engagement in ecofriendly corporate initiatives generates new

competitive resources for the firm and finds a positive stock

market reaction when firms announce such initiatives or pass

CSR-related proposals in their annual board meetings. God-

frey, Merrill, and Hansen (2009) show that sustainability ini-

tiatives help develop goodwill and trust that insure the firm

against negativ e social and environmen tal events. Research

has also established a positive link between firms' CSR

engagements and their environmental and social performance

(Kroes, Subramanian, & Subramanyam, 2012; Toffel &

Short, 2011). Although there is a vast literature on CSR prac-

tices and their relationships with variousmeasures of firm per-

formance, little is known about the empirical link between

CSE appointments andfinancial performance.

A related empirical study linking CSE appointments and

financial performance is by Wiengarten, Lo, and Lam (2017),

who examine the association between appointments of chief

officers of CSR and operating performance measured as

change in return on assets. We add to the understanding of

this link between CSE appointments and financial perfor-

mance by examining the stock market reaction attributable to

announcements of CSE appointments. Moreover, we investi-

gate how the stock market reaction depends on the following

firm- and industry-specific factors: (a) appointments

announced subsequent to an adverse sustainability-related

incident (identified using data from news sources); (b) the

sustainability-related performance of the announcing firm

(using data from Kinder, Lydenberg, Domini [KLD]

Research & Analytics, Inc.); (c) the level of regulatory sanc-

tions experienced by the industry in which the announcing

firm operates (using data from the US EPA); and (d) whether

the responsibilities specified for the CSE appointee in the

announcement are focused versus broad. We also examine

firms' operating performance before and after announcement

of CSE appointment.

The TMT of a firm comprises a group of executives who

are usually one or two levels below the CEO and are

responsible for formulating, propagating, and executing the

corporate strategy of the firm. Given that these executives

have a strong influence in firms' strategic decision–making,

it is of interest to study under what conditions do appoint-

ments to TMTs affect financial performance. The extant lit-

erature has examined stock market reactions to appointments

of senior executives in various functional areas, including

Chief Financial Officers (CFOs; Mian, 2001), Chief Market-

ing Officers (CMOs; Boyd, Chandy, & Cunha, 2010, Nath &

Mahajan, 2008), Chief Information Officers (CIOs; Chatter-

jee, Richardson, & Zmud, 2001), and Supply Chain and

Operations Management Executives (SCOMEs; Hendricks,

Hora, & Singhal, 2015). We contribute to this literature by

examining the stock market reaction to appointments

of CSEs.

Our empirical analyses are based on a sample of

115 announcements of CSE appointments made by publicly

listed firms over the period 2000–2018. We find that the

average stock market reaction to CSE appointments is insig-

nificantly different from zero. However, we find that the

stock market reaction is contingent on certain firm- and

industry-specific conditions. Specifically, we find evidence

of a more positive market reaction in instances where the

announcing firms faced a prior adverse sustainability-related

incident. Firms faced with an adverse sustainability-related

incident in the year prior to the announcement of CSE

appointment have a 0.76% higher mean market reaction rela-

tive to announcing firms that did not face such an incident.

We also find evidence of a less-positive market reaction for

announcing firms that operate in industries that face higher

levels of regulatory sanctions. Firms operating in industries

experiencing higher levels of regulatory sanctions have a

0.63% lower mean market reaction compared to announcing

firms in industries with lower levels of regulatory sanctions.

However, the stock market reactions are not significantly

different for announcements by firms with weaker, versus

stronger, sustainability performance. Finally, we find evi-

dence of a more positive market reaction when announcing

firms specify focused as opposed to broad responsibilities

for the CSE appointee. On average, firms announcing CSE

appointments with focused responsibilities have a 0.89%

higher mean market reaction compared to firms announcing

CSE appointments with broad responsibilities. Our findings

continue to hold when we account for potential self-

selection bias.

Additionally, we examine the relationship between CSE

appointment and operating performance for the announcing

firms using the following measures: return on assets (ROA),

return on sales (ROS), total cost over sales (TCOS), and

sales over assets (SOA). We find no evidence of significant

abnormal operating performance (positive or negative) dur-

ing the two-year period before CSE appointment. However,

ARORA ET AL.465