A Cognitive Perspective on the Business Case for Corporate Sustainability

A Cognitive Perspective of the Business Case for Corporate Sustainability 1

A Cognitive Perspective of the Business Case

for Corporate Sustainability

Kai Hockerts, Copenhagen Business School

Forthcoming in Business Strategy and the Environment, 2014

(Penultimate Version)

This paper proposes that a cognitive perspective on corporate sustainability and competitiveness might allow

new insights on the question of the business case. The paper explores how respondents from 12 firms make sense

of their firm’s investments in corporate sustainability activities by analyzing the mental models evoked. The

interviews showed that a business case perspective emerged as the dominant logic. A subsequent analysis of the

content of the knowledge schemas elicited, surfaced four dimensions of corporate sustainability induced

competitive advantages: risk reduction, efficiency gains, brand building, and new market creation. An analysis of

the structure of these knowledge schemas revealed that respondents from firms with lower perceived

sustainability performance drew on less differentiated and less integrated cognitive frameworks (focussing on

risk and efficiency). Respondents from firms with higher perceived performance drew on more complex mental

models to represent the links between corporate sustainability and competitiveness.

This paper proposes a new research agenda for corporate sustainability and competitiveness. Most

studies to date have discussed the topic from an all-or-nothing perspective. Thus corporate

sustainability either does or does not create competitive advantages. The data presented here indicates

that future research might more profitably study the mental models managers employ when thinking

about that relationship. In particular this paper aims to study how respondents in firms that are

perceived as having a high social and environmental performance differ from respondents in firms that

are perceived to have a less high performance.

The term corporate sustainability used in the paper is in line with the definition by Dyllick and

Hockerts (2002), who argue that corporate sustainability entails that firms maintain their economic,

natural, and social capital bases. Thus although there might be short-term exceptions firms should in

the long-run consume only the income from their capital and not the capital stock itself.


The idea that there might be a “business case” for good corporate environmental and social behavior

goes back more than three decades (e.g. Baumol, 1970; Davis, 1973; Dyllick, Belz and Schneidewind,

1997; Hart, 1995; Wallich and McGowan, 1970; WBCSD, 2002). Many scholars, however, remain

skeptical (Palmer, Oates and Portney, 1995; Walley and Whitehead, 1994) doubting the existence of

'win-win' solutions as they are also often called: "Unfortunately, this popular idea is also unrealistic.

Responding to environmental challenges has always been a costly and complicated problem for

managers." (Walley and Whitehead, 1994: 46)

The debate about whether there is a business case at all for corporate sustainability has spurned a

multitude of empirical studies correlating Corporate Financial Performance (CFP) with Corporate

Social or Sustainability Performance (CSP). Meta-analyses by Orlitzky, Schmidt, and Rynes (2003)

and Margolis and Walsh (2001, 2003) find that a majority of studies indicate a slight positive

relationship. However, such studies tend to treat corporate sustainability induced competitive

advantage usually as a single variable.

Compared with the hundreds of CSP/CFP studies there are only a small number of empirical

contributions that unpack corporate sustainability competitiveness (e.g. Dyllick et al., 1997; Reinhardt,

1999, 2000; Székely and Knirsch, 2005). It is the intention of this paper to provide more insights into

the different types of competitive advantages that respondents perceive as springing from their

corporate sustainability activities. Secondly, the paper aims to study the variance in these perceptions.

How do respondents in firms that are seen to perform well in social and environmental activities differ

from respondents in firms that perform less well?

The main contribution of this paper’s findings is to propose that managers use different mental models.

Rather than seeing competitiveness as a single yes/no construct managers tend to perceive it through

numerous lenses. The data from this study indicates that the complexity of these models (i.e. their

differentiation and integration) seems to change with the perceived sustainability performance. Being

based on a small sample qualitative study this finding has to be taken with a grain of salt. However, the

findings might nonetheless indicate a path for future research into the CSP/CFP question.

The findings of this paper finally raise the question of how mental models about corporate

sustainability and competitiveness develop over time. The data being cross-sectional there is no

longitudinal element in this paper. However, the cognitive perspective taken begs the question of how


mental models develop. Is it a generic development path or do mental models of managers in different

settings develop differently? Moreover, this perspective raises the question of whether firms can take

an active role in developing these mental models.

THE BUSINESS CASE FOR CORPORATE SUSTAINABILITY IN THE LITERATURE

Past literature on the business case differentiates four main dimensions through which corporate

sustainability may create competitive advantages. These are risk reduction, efficiency gains, social

branding, and new market creation (Dyllick, 1999; Dyllick et al., 1997; Reinhardt, 1999; Stefan and

Paul, 2008). In the following prior research on each of these four dimensions will be discussed briefly.

Reducing Business Risks

Previous research has identified reduced firm risk as one possible way in which a proactive stance on

corporate sustainability could create competitive advantages. (Davis, 1973; Henisz, 2009; Yaziji, 2004)

Several perspectives are discussed in the literature: accident risk, litigation risk, regulatory risk,

campaign risk, reputation risk as well as the general risk of loss of a firm’s licence to operate.

Accident Risk. Environmental disasters such as the Deepwater Horizon oil spill in the Gulf of Mexico

(Force, Davies and Force, 2010), the Bhopal tragedy in India, or the Love canal contamination have

demonstrated that the costs following an accident (e.g. cleanup cost, production loss) can pose

significant financial risks (Barth and McNichols, 1994; Hamilton and Viscusi, 1999).

Litigation Risk. In addition to direct losses accidents as the ones described also pose considerable

litigation risks. It has, therefore, been hypothesised that a proactive sustainability stance can help to

mitigate litigation risk (Olsen, 2002; Reinhardt, 2000). Kassinis and Vafeas (2002), for example, find

that by bringing in more outside stakeholders on their board of directors, companies can reduce the

risks of being prosecuted for violating environmental laws and having to pay steep penalties.

Regulatory Risk. A third type, regulatory risk, concerns the emergence of stricter regulation over time

(Simons, Pendergrass and Winson-Geideman, 2003). Firms that are hit by new, unanticipated laws are

exposed to potentially huge competitive disadvantages. Thus proactive initiatives can be motivated by a

desire to retain freedom of decision making (Davis, 1973).


Campaign Risk. Environmental or social campaigns against firms may be based on specific behaviour.

However, companies may also find themselves singled out as representatives of a sector. Such “proxy

wars” (Yaziji, 2004) are more likely to be aimed at market leaders, even if these do not have the worst

sustainability performances. Yet, the media attention NGOs can garner from campaigning against an

industry champion means that such firms face a higher risk of being singled out for attack.

Reputation Risk. When hit by either accidents or campaigns firms also run the risk of serious damage

to their corporate brand. Proactive sustainability management has therefore, also been proposed as a

way of brand protection (Barnett and Hoffman, 2008; Bebbington, Larrinaga and Moneva, 2008; Jones

and Rubin, 1999).

License to Operate. An extension of reputation risk is the danger of losing a firm’s license to operate

(DeSimone and Popoff, 1997). Davis describes this as the “iron law of responsibility, which is that in

the long run, those who do not use power in a manner which society considers responsible tend to lose

it” (Davis, 1973: 314). Extant literature knows many examples of the consequences firms have had to

face because of mismanaged stakeholder relations (Kolk and Pinkse, 2006), and typically proposes

extensive stakeholder dialogue as a means to mitigate it (Van Huijstee and Glasbergen, 2008).

Increased Operational Efficiency

Apart from reducing managerial risks corporate sustainability has also been hypothesized to increase

operational efficiency (Dyllick, 1999; Schaltegger and Sturm, 1998). However, building on the

economic law of diminishing returns, past research has emphasized that any double dividends that

firms may gain from environmental management are likely to diminish fast. The idea is that there are

only a limited number of “low hanging fruit” (Bréchet, Germain and van Steenberghe, 2004; Reinhardt,

2000), i.e. investments that pay off quickly and do not require much investment. Once these have been

harvested firms can no longer expect cost advantages from proactive corporate sustainability measures

(Palmer et al., 1995; Walley and Whitehead, 1994). Two perspectives in particular stand out in the

literature when it comes to sustainability-related efficiency gains.

Eco-efficiency. When Porter and Van der Linde (Porter and Van der Linde, 1995a, b) were writing

about double dividends they were primarily thinking of cost reductions that had been prompted by

proactive environmental initiatives. This is the idea, that is at the heart of “eco-efficiency”, a concept


first developed by Schaltegger and Sturm (1990, 1998) and popularized by the Swiss businessman

Stefan Schmidheiny (1992) and the World Business Council for Sustainable Development (Ayres,

Flückiger and Hockerts, 1995; DeSimone and Popoff, 1997; Verfaille and Bidwell, 2000). Typically

eco-efficiency is seen to comprise of efficiency gains from reduced waste management cost and

resource consumption (energy, water, metal) (Stefan and Paul, 2008).

Employee Productivity. A second important element of increased operational efficiency concerns

employee productivity (Branco and Rodrigues, 2006; Morsing, 2006). A good corporate reputation

may help to attract, motivate, and retain employees who care about environmental and social issues.

Henriques and Sadorsky (2007) and Grolleau, Mzoughi and Thomas (2007), for example, find that the

implementation of environmental management is also driven by the desire of firms to motivate their

staff.

Cost of capital. Thirdly, proactive firms have been suggested as benefiting from lower costs of capital.

Sharfman and Fernando (2008), for example have found that improved environmental management is

associated with a lower cost of capital. However, as Stefan and Paul (2008) show in their overview

article, robust empirical proof of this effect is still missing.

Branding

There is a large literature pertaining to social branding, which describes opportunities from

differentiating products along social or environmental lines (e.g. Belz, 2006; Charter and Polonsky,

1999; Hansen and Schrader, 2004; Menon and Menon, 1997; Pedersen and Neergaard, 2006;

Reinhardt, 1998). Four particular branding advantages are discussed in the literature: premium pricing,

customer acquisition, customer retention, and share of wallet.

Premium Pricing. The biggest debate among academics pertaining to whether corporate sustainability

drives product branding hinges on the question of the willingness of clients to pay a premium for

socially or environmentally superior products (Charter and Polonsky, 1999; Wüstenhagen, 1998).

Empirical research suggests that some customers are indeed willing to pay premiums for

environmentally or more socially responsible products, however, there remains a gap between what

consumers say they are willing to do and their actual buying decisions (De Pelsmacker, Driesen and

Rayp, 2005; Moon et al., 2002; Ward et al., 2011).


Customer Acquisition. Research also suggests that a proactive sustainability stance can help to attract

customers. In B2B markets, for example, green sourcing guidelines of public organizations mean that

sustainable performance may well be a means to attract new clients (Christensen, 2008).

Customer Retention. A green product image has also been found to lead to higher customer loyalty, for

example, in liberalized energy markets where green branding can help to retain customers in the face of

growing competition (Cai, Deilami and Train, 1998; Hartmann and Apaolaza Ibáñez, 2007). Similar

findings have been reported from the food sector (Gottschalk and Leistner, 2012; Wettstein, Hanf and

Burggraf, 2011).

Share of Wallet. Finally, the question can be raised, whether offering green products is likely to

increase a retailer’s share of wallet by inducing customers to shop for other products at the same time.

Creating New Market Space

A fourth type of competitive advantage concerns the notion of corporate sustainability also being a

driver for the creation of new market space. Hockerts and Wüstenhagen (2010) for example, describe

how sustainability innovations often start in the NGO or voluntary sector, where they are usually

ignored by business. Only as these innovations grow do they develop their full competitive potential.

Three types of new market space are discussed in the literature: the commercialization of sustainability

competencies, cleantech venturing, and the base of the pyramid.

Commercialization of Sustainability Competencies. Firms excelling at corporate sustainability might

as a first step aim to sell their capabilities to outside customers. Thus they might be able to turn their

internal knowledge about climate change, sustainability reporting, or environmental management

systems implementation into a new market.

Cleantech Venturing. The field of cleantech venturing typically involves the development and

commercialization of environmental technology into new products that either reduce environmental

pollution or the consumption of fossil resources. A large part of cleantech venturing is concerned with

clean energy technologies (Boehnke and Wüstenhagen, 2007; Bürer and Wüstenhagen, 2009; Caprotti,

2008), however, other technologies such as water and waste management have also been covered by

past research (Forester and Skinner, 1992).


Base of the Pyramid. The assumption of Prahalad and Hart (1999) is that by focusing on the unmet

needs of low-income populations firms can create profitable markets at what they call the base of the

pyramid (BOP), while also helping the poor address some of their most urgent needs (Christensen,

Craig and Hart, 2001; Prahalad and Hammond, 2002; Prahalad and Hart, 2002). Prahalad’s most

notable assumption is that BOP markets have to pay a “poverty premium” (Prahalad and Hammond,

2002). This means that many poor have to pay more for products and services such as food, water,

medication, credit, or telecommunication, than their middle or upper class counterparts. By using BOP

thinking firms are believed to be able to better target their design, as well as improve distribution, thus

bringing down the poverty premium.

COGNITION THEORY

When discussing why firms engage in corporate sustainability activities many authors take

organizational or industry level approaches often drawing on institutional theory (e.g. Brammer,

Jackson and Matten, 2012; Campbell, 2006; Doh and Guay, 2006; Husted and Allen, 2006; Jackson

and Apostolakou, 2010; Julian and Ofori'Dankwa, 2013; Yang and Rivers, 2009). However, little is

known about the cognitive reasoning of the individuals in firms. Do their mental models about the

business case for corporate sustainability differ? And if yes, what could explain this variation? In

simple terms cognitive theory would lead us to expect that increased exposure to corporate sustain-

ability will impact a person’s mental reference frames which they draw on when rationalizing corporate

sustainability. Increased exposure to corporate sustainability might lead to more appreciation of the

business case if it exists. On the other hand if the business case fails to materialize respondents might

exhibit doubts.

In order to inform the debate about the business case this paper explores respondents’ cognitive

representation of the business case for corporate sustainability in firms with varying sustainability

performance. The focus is thus on the knowledge structures that people use to make assessments,

judgments or decisions involving the evaluation of whether corporate sustainability creates competitive

advantages and if yes how.

Cognition theory has emerged from social psychology (Fiske and Taylor, 1991; Fiske, 2013; Reed,

2007) as a means to explain how individuals process information. The underlying assumption is that


prior experiences guide information processing, since the complexity of our information environment

does not allow for a case-by-case decision process in which all data is considered. Instead knowledge

structures are employed as mental templates making decision making more efficient. This theory has

been widely applied in management and organizational theory (Kaplan, 2011; Spicer and Sewell, 2010;

Stubbart, 1989) due to it is inherent ability to explain many managerial phenomena.

Managerial cognition theory sees decision makers as limited information processors. Decisions are thus

usually based on “mental models” (Walsh, 1995: 282) which managers use to give available

information form and meaning. Mental models are organized knowledge structures which originate

from implicit theories derived from past experience (Abelson and Black, 1986; Nisbett and Ross, 1980)

and guide identification, structuring, and analysis of new data (Fiske and Taylor, 1991; Hitt and Tyler,

1991; Sims and Gioia, 1986) that enable interpretation and action in an information environment

(Walsh, 1995).

“The intriguing problem for management researchers has been that while these knowledge structures

may transform complex information environments into tractable ones, they may also blind strategy

makers, for example, to important changes in the business environment. […] The paradox, then, is that

schematic information processing can be at once enabling and crippling.” (Walsh, 1995: 281)

In his overview of managerial cognition research Walsh (1995) identifies three research streams

relating to knowledge structures in organizational contexts:

The content and structure of knowledge representation: What knowledge categories constitute

the content representing managerial information environments and how are these categories

structured into a mental model? (i.e. the mental models used in IT purchasing decisions or in

market research)

The use individuals make of knowledge structures: How does the use of mental models improve

or hinder effective decision making? (i.e. knowledge structures can increase the speed and

effectiveness of decisions making on the one hand, while they also carry the risk of selective

perception)


The development of knowledge structures: How do mental models develop and can this process

be purposefully guided? (i.e. the impact job rotation can have on alleviating the risks of

strategic myopia)

It is believed that more complex mental models facilitate better decision making (Bartunek, Gordon

and Weathersby, 1983; Hambrick and Finkelstein, 1987; Okeefe and Brady, 1980; Streufert and

Swezey, 1986). Research on mental models differentiates between two structural attributes which

together represent the cognitive complexity of a mental model (Bartunek et al., 1983; Streufert and

Nogami, 1989).

1. Cognitive differentiation describes the number of dimensions an individual invokes when

reflecting about an information environment. In other words it is an individual’s ability to

dissect information into smaller units (Green, 2004).

2. Cognitive integration describes the degree of interconnectedness among the knowledge

structure’s dimensions. They are an individual’s ability to form conceptual frameworks that

organize complex situations (Stabell, 1978).

Research suggests that people with less complex cognitive structures tend to grow impatient with

complex trade-offs and thus tend to prefer monistic rather than pluralistic ideologies (Tetlock, 1984). In

the context of corporate sustainability this might imply that managers with less complex mental models

are likely to be less attuned towards the conflicting demands of multiple stakeholders.

In the past cognition theory has been used to analyze entrepreneurial opportunity identification

(Krueger, 2007; Mitchell et al., 2000), as well as organizational learning (Barr, Stimpert and Huff,

1992; Spender, 2008). The first study to mention cognitive models in the context of this paper goes

back three decades. In their study on the cognitive structures of corporate social responsibility Boal and

Peery (1985) illustrate three content dimensions underlying ethical reasoning about corporate social

responsibility: An acceptable decision had to be perceived as economically worthwhile, as justly

affecting all stakeholders, and as protecting or promoting the rights of those affected.

Since then quite a number of studies have been carried out looking into the content and impact of

sustainability related knowledge structures. For example, Schlange (2009) uses cognition theory to

explain how sustainability-driven entrepreneurs identify and perceive stakeholders differently than


normal entrepreneurs. Swift (2012) illustrates the potential of mental models as decision support

frameworks in the context of the Future Forest Ecosystem Scientific Council (FFESC) project.

Bundy, Shropshire and Buchholtz (2012) address the usage of knowledge structures and how they can

impact the choice of a firm’s stakeholder responsiveness. They find that firms will respond more

substantially to those issues perceived as salient to multiple cognitive logics and more symbolically to

those issues salient to only one logic.

Taking the discussion from Walsh’s first two levels (content and use of knowledge structures) to the

third level (development of knowledge structures) Branzei, Ursacki-Bryant, Vertinsky, and Zhang

(2004) focus on the evolution of corporate sustainability related knowledge structures over time. They

develop a dynamic model of corporate greening showing how satisfactory or unsatisfactory results

strengthen or weaken managers’ cognitive models.

This paper extends prior research in two ways; First it studies not the knowledge representation of

corporate sustainability itself, but rather the respondents’ representation of how corporate sustainability

interacts with competitive advantage. In other words the focus is on peoples’ perceptions of the

business case for corporate sustainability. This is important since most research into the business case

for corporate sustainability fails to take it apart and analyze its different elements.

Specifically, this paper aims to address the following two research questions:

How cognitively differentiated and integrated are the mental models managers use when

representing their perception of the link between corporate sustainability and competitiveness?

How does the cognitive complexity of these models differ between managers in firms which are

perceived as having a higher or lower corporate sustainability performance?


METHODS

Research Design

The research design of this paper follows a multiple-case “replication” logic, which treats the cases as a

series of independent experiments that substantiate or refute emerging insights (Eisenhardt, 1989). All

12 companies were multinationals included in the Euro Stoxx list of the 600 largest European firms.

Cases were chosen following theoretical sampling (Eisenhardt, 1989; Yin, 1989). Three types of

companies were identified in the following categories:

top performance (firms with outstanding perceived sustainability performance),

runner-ups (firms with above average perceived sustainability performance), and

followers (firms with average to low perceived sustainability performance).

Two public sustainability rating indices were used as proxies for perceived corporate sustainability

performance: the Dow Jones Sustainability Index (DJSI) STOXX, and the Ethibel Sustainability Index

(ESI) Europe Pioneer. Beloe et al. (2004) have identified Sustainable Asset Management (SAM), the

provider of the Dow Jones Sustainability Index (DJSI), as a clear leader with a ‘best practice’ mention

in four of six categories. Launched in 1999, the DJSI is the first global index tracking the financial per-

formance of the leading sustainability-driven companies worldwide. Its index of European firms, the

DJSI STOXX is made up of the top 25% firms of the Dow Jones STOXX 600 Index (150 firms)

considered to be leading in terms of social and environmental performance in Europe. Eight out of the

twelve firms considered in this study were included in the DJSI STOXX (see Table 1).

The second sustainability rating index used in this study, the Ethibel Sustainability Index (ESI), has

been named as best practice in one of the six categories assessed by Beloe et al. (2004). The ESI

contains two public indices, the ESI Europe Excellence index which is similar in ambition to the DJSI

STOXX (aiming to identify firms with good corporate sustainability practice), and the ESI Europe

Pioneer index a much more selective measure. For this study the more demanding ESI Europe Pioneer

index has been chosen, containing only 86 European firms that are seen by Ethibel to be not just above

average but belonging to a more proactive group of “pioneers” in terms of social and environmental

performance. Of the 86 firms cited as pioneers on the ESI 37 firms are not included in the DJSI. This


leaves an overlap of 49 firms that are covered by both indices (about 8% of the Euro STOXX 600 or

roughly a third of the DJSI STOXX).

TABLE 1 Description of Case Data

Name Industry Focus

DowJones Sustainability

IndexEthibelIndex

Dandelion Consumer no no

Rose Technology no no

Hyacinth Raw Material no no

Tulip Services no no

Magnolia Consumer yes no

Rhododendron Technology yes no

Azalea Raw Material yes no

Lavender Services yes no

Maple Consumer yes yes

Oak Technology yes yes

Sequoia Raw Material yes yes

Hemlock Services yes yes

Fo

llow

ers

Ru

nn

er-

up

sT

op

P

erfo

rmer

s

Based on the data from DJSI and ESI four firms were selected for inclusion in this study in three

categories each, resulting in a total of twelve studied firms (see Table 1). The paper considers firms as

‘top performers’ if they were included in the DJSI STOXX and the ESI Pioneer Europe. ‘Runner-up’

firms had to be included in the DJSI STOXX, however, had to be absent from the more exclusive ESI

Pioneer Europe. ‘Follower’ firms had to be absent from both indices but still be part of the Euro Stoxx

universe.

It is important to note that the term corporate sustainability performance is not unproblematic. There

exists a body of literature that highlights how difficult it is for external rating companies to

approximate a firm’s objective corporate sustainability performance (Chatterji, Levine and Toffel,

2009; Sharfman, 1996). It is for this reason that this paper talks about perceived corporate sustainability

performance. In that sense it might be fairer to conclude that what we term ‘top performers’ here are


those companies that have the best ability to present themselves as sustainable to external rating firms

such as DJSI or ESI.

In order for the study to cover a wide range of corporate sustainability issues firms were selected in

four sectors: consumer, technology, raw material extraction, and services. Each of these four sectors

faces unique corporate sustainability issues thus providing a broad and yet balanced sample of firms. In

order to protect the confidentiality of informants firm names are masked with code names in this

publication.

Data Collection

Data was collected through 12 semi-structured individual interviews of about an hour. Interviews were

recorded and transcribed. Interviews first probed respondent’s awareness of corporate sustainability

issues. The interview then focused on the firm’s motivation to engage in corporate sustainability, and

the perceived link with competitiveness.

Research into similar questions has often used dedicated corporate sustainability managers as

informants (see for example an overview of 24 studies by Steger, 2000). These respondents have the

advantage of hands-on experience with the topic in question. However, they will also be tempted to

present their own achievements in a particularly favourable light since this might mean more resources

and better career options in their own firm. To avoid this kind of bias this research project has

approached investor relations (IR) directors as the main source of information. Due to their position IR

directors are usually familiar with activities all across the firm. Thus they are well placed to assess

whether a firm’s action advances its competitiveness or not.

Moreover, as one of the main conduits between socially responsible investors and a firm’s corporate

sustainability department (Hockerts and Moir, 2004) they can be expected to be aware of corporate

sustainability issues in their respective firms. While reducing the bias towards corporate sustainability

this choice does, however, introduce a bias towards shareholder value creation. When interpreting

responses from the IR managers it must be kept in mind that they tend to look for ways of how to

present their firms as having competitive advantages.


Prior to the principal data collection desk research was carried out for each firm. In this process each

company’s website was reviewed for material pertaining to corporate sustainability. Of the twelve

firms studied all (even the followers) had a link to their corporate sustainability website (or an

equivalent title) on their corporate front page. Furthermore, web searches for media articles were

carried out pertaining to corporate sustainability issues. This data was used as preparation for the

interviews and also for triangulation in the analysis section.

The interview data was supplemented with material from the desk research to verify the reliability of

the information received from the respondents. This analysis revealed some small inconsistencies with

regard to dates of events and names. However, no considerable discrepancies were found between the

publicly reported corporate sustainability strategies and the IR directors account thereof.

Data Analysis

Data analysis used approaches common to qualitative research studies (Eisenhardt, 1989; Lee, 1998;

Miles and Huberman, 1984; Yin, 1989). For each interview a transcript was prepared and studied

regarding the key research issue. Codes and sub-codes were developed as the analysis progressed.

These codes were developed after a close reading of prior literature as laid out earlier in this paper.

Codes were then represented in mental maps (Eden, 1992; Eden, Ackermann and Cropper, 1992). The

value of mental maps as a data analysis tool has been demonstrated by a number of authors over the

past years (Eden et al., 1992; González, Calderón and González, 2012; Ojastu, Chiu and Olsen, 2011),

and is also increasingly used in sustainability related studies (Figge et al., 2002; Mendoza and Prabhu,

2006; Parisi and Hockerts, 2011).

For this study separate mental maps were created for each of the twelve respondents. These maps were

then integrated into three collective maps (Fairweather and Hunt, 2011; Klimoski and Mohammed,

1994; Langfield-Smith, 1992; Mohammed, Ferzandi and Hamilton, 2010) which represent the key

schemata used by respondents from the followers, the runner-ups, and the leaders group. The results of

these three maps will be discussed in the next section.


FINDINGS

The insights that emerged from the data linked perceived corporate sustainability performance with a

set of competitive advantages. The respondents usually identified certain positive attributes (e.g.

philanthropy, good governance) and negative attributes (e.g. pollution, discrimination, child labor) of

sustainability performance as relevant to their firm. As part of the semi-structured interview guide

respondents were then prompted to comment on why they thought their company should or should not

take action on these corporate sustainability issues. A second question probed further into whether they

felt that such activities created competitive advantages.

The data presented in the following contains quotes that were selected to best represent a respondent’s

cognitive representation of the business case for corporate sustainability. Each quote corresponds to

longer statements that may run over two or three paragraphs. In some cases several quotes are

attributed to one respondent; this signifies that the informant has come back to the theme at a later point

in the interview.

A first insight from the data concerns the general question of why some firms invest more in corporate

sustainability than others? Previous research suggests different explanations. Bansal and Roth (2000)

identify both extrinsic factors (such as competitiveness and legitimization), as well as intrinsic factors

(such as individual responsibility and ethical motives). This would suggest that the knowledge

structures of respondents in firms with a lower sustainability performance should exhibit both less

intrinsic and extrinsic motivation. Cognitive structures of respondents in firms with a higher

sustainability performance on the other hand should be expected to contain both more competitiveness

arguments and more ethical motives.

Walley et al. (1994), on the other hand, postulate that competitive advantage is only a temporary effect.

Thus one might also expect that respondents in firms from the “runner-up” group would be more likely

to perceive competitive advantages than managers in firms from the “leaders” group (since the leaders

have presumably already exhausted all “low-hanging fruits” (Walley and Whitehead, 1994) and win-

win solutions, and consequently are now facing more trade-offs. According to this logic one would

expect that respondents from firms in the “leader” group would cite ethical arguments and corporate

values more often as drivers of corporate sustainability than competitive advantage.


At a first glance the evidence from this study does not fully support either Bansal and Roth (2000) or

Walley and Whitehead (1994). In fact, the results are eerily undifferentiated. Respondents in all three

categories claimed that corporate sustainability increases competitiveness. Ethical motives and

individual responsibility on the other hand were hardly ever mentioned. This finding does not exclude

the possibility that firms and managers act upon certain sustainability issues out of a conviction that

this is the ethical right thing to do, even if it comes at a prize. However, the data suggests that the

business case for corporate sustainability has so far permeated the consciousness of respondents, that

the respondents would not admit to any other motivation for addressing corporate sustainability. In

other words professing to ‘Good Ethics is Good Business’ has become an organisational “dogma”

(Hoffman, 1999) in itself.

Proponents of corporate sustainability may be heartened by the fact that managers seem to have

knowledge structures that positively link corporate sustainability with the business case. However, it is

also interesting to note that respondents were reticent when asked whether there might not at least be

some sustainability activities that lead to competitive disadvantages. It seems that considering

sustainability in a business case perspective has become the dominant logic (Prahalad and Bettis,

1986).

However, such dominant mental models may be deleterious if they become dogmatic and simplistic.

An unreflective perception that all sustainability activities will eventually pay off may lead to an

impoverished view of the complex challenges corporate sustainability poses. Weick (1979) and Gioia

(1986) point to the fact that simplified knowledge structures may actually turn out to be liabilities if

they incorrectly simplify highly complex issues. In his later work Prahalad similarly warned against the

dangers of dominant logics becoming “blinders” (Prahalad, 2004: 171).

DeNisi, Cafferty and Meglino (1984), for example, have found in their study of performance appraisal

that supervisors who have a positive perception of a subordinate may feel it unnecessary to collect

more information. They may also interpret a person taking a break more positively (i.e. as planning

time rather than loafing).

In the context of corporate sustainability this might mean, that an unreflective appreciation of corporate

sustainability as always in the long-term interest of the firm, may lead to a simplistic view of corporate

sustainability. Managers may run the risk of ignoring any issues that fall outside this stereotype. Thus


any discussion of “corporate sustainability beyond the business case” (Dyllick and Hockerts, 2002) is

seen as heresy and becomes impossible.

Turning the attention to the content and structure of the mental models employed by respondents, a

more differentiated picture emerges. Whereas, followers mainly employed knowledge structures related

to risk, runner-ups and leaders used more differentiated and integrated mental models. In the following

data for each of the three groups will be presented briefly.

Mental Model Employed by Followers

An analysis of the data shows that the mental models employed by respondents from followers were

not very differentiated, focussing primarily on risk reduction with only minor considerations towards

efficiency gains. Figure 2 represents the data from followers in a collective cognitive map, which

shows that branding and market opportunities were not part of the cognitive repertoire of these firms.

Risk Reduction. Awareness of risk was particularly strong among the followers. The dominant

cognitive model employed by followers is best represented by the respondent from Dandelion who

described sustainability performance as a kind of insurance: “[Corporate sustainability] can protect you

from losing added value.” All four respondents in this category mentioned emerging regulation as a

major motivation for their corporate sustainability programmes. “If you [are not proactive], later on you

could lose money. You may face new regulations and complying with these could be very expensive

and difficult,” stated for example, Dandelion. Rose concurs with this when stating that if “you don't

have a strong policy [...] you can become the subject of lawsuits (such as for example in the case of

asbestos). This could actually eat up shareholder value.”

Both Rose and Hyacinth reported that product and production standards have been constantly

tightening. Being aware of this trend, both firms stated that their aim was to stay several years ahead of

legislation in order to safeguard managerial options. The respondent from Rose, for example,

concludes: “We know we won't be able to sell [products] if we don't meet these standards […] on

things like noise pollution and emissions.”

The respondent from Tulip confessed to a fear of being “named and shamed by the environmental

minister.” And Rose cited its social HR policies as the main reason the company hadn't had a serious


strike for 12 years, while its largest competitor was regularly subject to strikes. The risk of losing its

license to operate was a clear motivator for Hyacinth. Owning plants with a long depreciation time they

felt vulnerable to hostility in the local community, as they could not easily delocalise.

Efficiency Gains. At first glance the interviews seem to bear out the assumption that efficiency gains

are limited to only the low-hanging fruits hypothesized by Walley and Whitehead (1994). None of the

followers brought up increased operational efficiency as the first motivation for engaging in corporate

sustainability. Only when probed as to whether they can imagine any further motivations for engaging

in corporate sustainability did two of them (Dandelion and Tulip) mention more as an afterthought:

“And then there are, of course, cost reductions.” This fact would indicate that increased operational

efficiency is not the primary motivation for these firms to engage in corporate sustainability.

An exception is Dandelion, which stressed that for ten years they have worked on “reducing energy

bills and the impact on the environment, [since then we] have become highly successful -- both from an

economic aspect and an environmental point of view” (Dandelion). Tulip also refers to water and

effluent controls as a way of saving costs. Moreover, Tulip points towards its long tradition in people

development and management development. “[This has] been integral to the success of the company.

[…] Can we quantify [the savings from this]? No. But it's been a real factor” (Tulip).


Figure 1: Mental Map of Followers


Mental Model Employed by Runner-ups

The mental models elicited from runner-up companies were both more differentiated and more

integrated than those of the followers. Figure 2 represents the data from runner-ups in a collective

cognitive map, which shows that runner-ups also consider branding and new market opportunities part

of their cognitive repertoire. These knowledge structures are, however, less integrated than those for

risk reduction and efficiency (meaning that there were fewer interconnections among knowledge

structures).

Risk Reduction. All four runner-ups identified risk reduction as a major motivator for corporate

sustainability. The best illustration for managing regulatory risk could be found at Azalea. As the first

player in its industry the company had voluntarily committed to much tougher emission targets than

were required by law. When the national environmental agencies began contemplating tougher laws it

turned to Azalea for help in how to design the law most efficiently. And when the law was extended to

a European level Azalea once again was part of the negotiations as the only firm with several years of

data to draw on.

Azalea also cited the risk of campaigns as a relevant motivator: “Another example is Greenpeace's

[consumer boycott] campaign. [If such a campaign endures] loss of volume starts to have a financial

effect and analysts will start saying: ‘Do something to sort it out.’” The respondent from Azalea also

saw a direct link between being perceived well by local communities and the firm’s ability to deliver

projects on time and budget, “because we won't find ourselves opposed by communities and

governments.”

This line of thought was echoed by Magnolia: “We're [clear] about the risks involved from a PR point

of view. [We] ensure that we're not damaging the value of [our brand].” The respondent from Lavender

felt that his company was doing quite well in this dimension: “We have not been getting a lot of flak

over [social responsibility in the supply chain] because we have a good program in place.” However,

being a market leader Lavender also realized that it was exposed to much more scrutiny from

stakeholders than some of its competitors. According to Rhododendron this attention also includes

certain types of investors who will not invest in a company if it seen as having an unsustainable product

portfolio.


Efficiency Gains. All four respondents also referred to efficiency gains as a reason for investing in

corporate sustainability. Lavender, for example, stated that “the benefits from being environmentally

friendly are extra cost savings.” This was shared by Magnolia, which reported quite a lot of gains the

best being from energy efficiency, as well as by the respondent from Azalea who felt that “for things

like carbon trading, there is an economic benefit.” Azalea also saw the potential for productivity gains

from a lower staff turnover if a firm is seen as responsible. A similar argument was made by Rhodo-

dendron with a view towards hiring staff.

Brand Building. Three of the four runner-ups have reported brand building as a consequence of

proactive corporate sustainability. Magnolia, for example, linked its status as a most trusted brand to its

CSR program: “So people look at us and expect us to be doing the ‘right thing’”.

As for more tangible outcomes, Azalea admitted that in the beginning sustainability might create a

short-term disadvantage: “If you take sulfur out of gasoline products before anyone else, you'll initially

see a financial disbenefit (sic). [However,] the idea is that customers will appreciate what you're doing

and you'll benefit later.”

Lavender agreed that increasingly customers were factoring sustainability criteria into their purchasing

decisions: “The customer has shown a lot of interest in organic products, service levels, diversity in

personnel in stores.”

New Market Opportunities. Only one of the runner-ups talked about the possibility of using

sustainability to enter new markets. “We realize greenhouse gases are an issue,” said the respondent

from Azalea: “We [have moved into] gas and renewables. We have research going on carbon

sequestration. We do research […] on the use of hydrogen. We spend money on all of these things.

[They are] a development business. They give us options for the future.”


Figure 2: Mental Map of Runner-Ups


Mental Model Employed by Leaders

Compared to the followers and runner-ups the mental models used by leaders were more complex. In

particular they were more cognitively integrated across the four dimensions of risk reduction,

efficiency gains, brand building, and new markets (see Figure 3).

Risk Reduction. The respondent who evoked risk reduction the most was Sequoia. He saw corporate

sustainability as a means to manage both regulatory and litigation risk as well as maintain Sequoia’s

license to operate and thus safeguard its survival in the long-run. Hemlock referred to risk only in

passing when talking about its carbon risk unit.

“Today the regulatory controls mean that the track record you have with [social and

environmental management] is vital for the way you get permits. If you have a good track

record, then you get permits to exploit new areas more easily.” (Sequoia)

Interestingly two of the leaders (Oak and Maple) did not bring up risk reduction at all as a category to

consider when talking about the business case indicating that their mental models seem more focused

on finding opportunities rather than avoiding threats. In other words they were less cognitively

differentiated.

Efficiency Gains. All four leaders referred to efficiency gains as a motivator for their sustainability

activities. Sequoia, for example, saw much potential in alternative energy: “The use of alternative fuels

[…] is vital not only from an environmental point of view but also to contain the increase in fuel costs.”

Hemlock made a similar statement: “The energy we buy is considered to be very ecological and it is

also at a lower price. So it doesn't always mean you have to spend more to achieve ecological criteria.”

Maple’s main focus on energy efficiency was linked to the use of teleconferencing. “We saved £5-6

million in fuel costs. […] Over the last 10 years our [environmental programme] has saved about £600

million.” Only Oak was somewhat doubtful about the real potential of efficiency gains in the short run:

“[These are] all long term. You have to invest more now to save in the long term.”

In addition to energy efficiency [Hemlock] also stressed the impact its CSR activities have on

employee productivity. “Hemlock is very committed to CSR and we are known as an employer of

choice. We have a reputation as a good employer.”


Brand Building. The support of the corporate brand through sustainability was mentioned repeatedly

by Maple and Oak. Oak admitted that its dedicated eco-products were not a big sales success.

However, the Oak respondent felt that its sustainability activities were driving its overall corporate

brand and its ability to charge a premium price for all Oak products. Oak also felt that it was attracting

and retaining customers by making products that allowed its customers to get tax exemptions due to its

lower emissions.

Maple was very pleased with the way its CSR activities have helped improve the firm’s image which at

one point was that of “a most hated company”. An in-house study found that CSR had an important

impact on improving Maple’s image with its customer base: “[We found that] half of the factors

impacting image are due to CSR.” Public recognition for Maple’s employee diversity program has also

been important in bids with government and other public clients who include such activities in their

sourcing decisions.

New Market Opportunities. Three out of the four leaders interviewed reported seeing new market

opportunities arising from their corporate sustainability activities. Hemlock, for example, has started a

carbon certificates trading unit which it hopes to evolve into a new business. The business idea arose

directly from the fact that Hemlock’s core business was very exposed to carbon risk.

Maple also reported having leveraged its internal environmental management system into a new

product line: “[We sell it] primarily to government departments. […] It is significant revenue for us.

This application uses our core competencies.” Maple also sees cleantech services (such as teleworking

to avoid the environmental impacts of traveling) as a possible growth market.

In this context Oak stressed the importance of cutting edge of green R&D activities and forward

looking eco-design:” [Oak products] are [used] 10 years or more. [So] we are always thinking ahead.

Today we have [the most efficient product in the market], but we also have a [more efficient one in the

conceptual stage].”


Figure 3: Mental Map of Leaders

A Cognitive Perspective of the Business Case for Corporate Sustainability

26

DISCUSSION AND THEORY DEVELOPMENT

As described above the respondents in this study represent information about the business

case for corporate sustainability by drawing on four distinct knowledge structures. They

describe process oriented opportunities such as risk reduction and operational efficiency,

as well as market oriented opportunities such as sustainability branding and new market

creation. These categories mirror broadly findings suggested by prior literature (e.g.

Dyllick, 1999; Dyllick et al., 1997; Reinhardt, 1999, 2000; Schneidewind, 1995).

However, the findings from this study extend our understanding of the business case by

indicating that managers in firms with higher perceived corporate sustainability

performance tend to display more cognitive complexity when discussing the business

case.

Cognitive Differentiation. As a study of the maps shows respondents from firms with a

lower perceived corporate sustainability performance referred to fewer dimensions (only

risk and efficiency) than the runner-ups and leaders (risk, efficiency, brand building, and

new markets). In cognition theory this is referred to as cognitive differentiation which

Feldman and Hilterman (1974) describe as the amount of independent dimensions that a

person employs when talking about different constructs (Bartunek et al., 1983; Green,

2004; Streufert and Nogami, 1989).

Bartunek et al. (1983) argue that a narrow cognitive framework often results in

ineffective managerial behaviour. They thus advise managers to aim for a more complex

understanding of their information environments. In the context of this study this would

mean that managers in firms such as the followers might want to look for more elaborate

mental models.

One obvious concern with such an idea could be that followers evoke fewer business case

dimensions because their firms simply have fewer opportunities to explore, either due to

the legal or market environment they act in, or due to their competency base. This lack of

opportunities might explain why both sustainability ratings such as the DJSI or ESI rate


27

these firms lower and why respondents from these firms did not evoke brand building or

new market opportunities.

However, it might also be possible that the causal relationship is in the opposite direction.

That means because individuals in follower firms have less differentiated mental maps

about the business case they do not see the opportunities and accordingly miss out on

opportunities to create competitive advantage from corporate sustainability activities.

The work of Guicherd, Dampérat and Jolibert (2011) might shed some light on this

question. They have demonstrated that higher cognitive differentiation impacts the kind

of negotiation strategies people will employ. Negotiators with more differentiated mental

models will tend to be less confrontational and focus less single-mindedly on just profit

maximization. In other words they are less likely to perceive interaction with stake-

holders as a zero sum game. Instead they might perceive win-win scenarios that allow

them to achieve environmental and social goals while at the same time creating

competitive advantages.

Whichever, of these explanations is correct, one can deduce from the data that a positive

relationship seems to exist between cognitive differentiation and corporate sustainability

performance.

Proposition 1: Managers in firms with higher perceived corporate sustainability

performance will tend to have more differentiated mental models about the

business case for corporate sustainability.

Cognitive Integration. A second trend emerging from the data concerns the cognitive

integration of the mental models employed. As explained by Stabell (1978) cognitive

integration describes the degree of interconnectedness among a knowledge structure’s

dimensions. They are an individual’s ability to form conceptual frameworks that organize

complex situations (Stabell, 1978).

An analysis of the collective maps reveals that the map of the followers contains 10

interconnections, that of the runner-ups 15, and the map of the leaders 19. In other words

the map generated from runner-ups data is more cognitively integrated than that of the

followers. It contains more interconnections between corporate sustainability and each of


28

the four business case dimensions. The same is true for the leader map which again

contains more interconnections than that of either the followers or the runner-ups.

Proposition 2: Managers in firms with higher perceived corporate sustainability

performance will tend to have more integrated cognitive mental models about the

business case for corporate sustainability.

Knowledge Structure Content. Another trend emerging from the data concerns the

content categories of the cognitive maps. Here awareness runs from risk reduction (18

mentions) via operational efficiency (13), to brand building (8), and new market creation

(5). These findings indicate that, generally speaking, process oriented opportunities (risk

and efficiency) outweigh market advantages (branding and new markets). This would

indicate the large academic attention paid to sustainability marketing and sustainability

innovations does not match with the actual preoccupations of firms. In general companies

seem to see more potential in operational benefits such as risk and efficiency than in

market opportunities.

Proposition 3: Cognitive models of the business case for corporate sustainability

tend to contain more interconnections regarding risk and efficiency oriented

categories than brand building or new market development.

Cognitive Development. The only content category for which the relationship outlined in

proposition 2 does not hold true concerns risk reduction. Here the follower map contains

more interconnections (7) than that of the runner-ups (6), or the leaders (4). Actually two

leaders didn’t even refer once to risk reduction as a motivation for their corporate

sustainability programmes. A possible explanation for this could be that as firms improve

their sustainability performance their mental models develop from a risk reducing logic

towards an opportunity logic.

Proposition 4: With increased perceived corporate sustainability performance

cognitive mental models of managers regarding risk reduction become less

integrated.


29

CONCLUSIONS

This paper investigates how mental models about the business case for corporate

sustainability differ between firms with different perceived corporate sustainability

performance. It finds that respondents from all firms have mental models in which

corporate sustainability programs are primarily motivated by competitive advantages. In

fact the belief in the business case seems to be the dominant logic among the respondents

of this study. A possible limitation may be found in the selection of respondents. The

mental models of IR managers are obviously attuned towards looking for possible

competitive advantages. The assertion that the business case has become a dogma is not

implausible. However, it will need to be verified through studies with other types of

respondents.

A second finding of this study is a clear bias among respondents from firms with

perceived lower sustainability performance towards measures resulting in risk and cost

reductions. Respondents from perceived high performers on the other hand have more

differentiated and integrated cognitive structures. While this allows some preliminary

speculations, this paper is limited in the sense that is does not actually contain much data

about the development of business model knowledge structures. Future research might, in

particular, study this area.

The conclusions to be drawn from the data in this study are limited in several other ways.

This study only points to a link between more complex mental maps of the business case

and sustainability performance. It does not prove causation. Is it that firms whose

managers have more differentiated models of the corporate sustainability business case

eventually invest more in their sustainability performance? Or is it that managers in such

firms are exposed more to corporate sustainability thinking and therefore have more

complex cognitive models? Intuition would suggest a mix of both effects, but no data is

available as yet to analyze the question.

It is also important to remember that this study does not explore the business case

directly. It only elicits the official discourse of managers about the business case for

corporate sustainability. A competing explanation for the findings of this study could be

that with increasing corporate sustainability expenditure managers feel pressured to


30

justify these investments. This might explain why managers in firms with higher

corporate sustainability performance gave more examples of the business case. Future

research will have to control for the possibility of such an effect.

Furthermore, it would be very interesting to test research by prior scholars related to the

development of knowledge structures. Bartunek et al. (1983), for example, find that the

articulation of a leader’s new vision for an organization may cause the development of

cognitive models in employees. It would, for example, be interesting to see whether

grand sustainability visions such as Jeff Immelt’s Ecomagination strategy for GE or

Philips’ Green Flagship program actually change mental models significantly.

Another promising research venue would be to follow up on Westenholz (1993), who

suggests that by experiencing a paradoxical situation individuals can develop their

reference frames. This raises the interesting question of how far firms should promote a

discourse about the paradoxical challenges of sustainability instead of promoting the

dogma that there is always a business case in the long run.

It would also be interesting to explore what role NGOs and other stakeholders can play in

helping firms reframe their mental models. Sequoia, for example, has gone to

extraordinary lengths to bring its most critical stakeholders into the firm to start a

discussion about the complex issues the firm faces. Similarly Oak has been drawing

inspiration for its conceptual work from the challenges NGOs such as Greenpeace have

leveled against its industry. In this context it would be interesting to see whether, and if

yes how, sustainability rating firms impact the development of mental models.

Another extension of the research begun here would be a study of the creation of group

level cognition about the business case. How does the representation of this issue differ

between managers at HQ level and those in business units? Similarly the construction of

industry wide cognitive maps and their evolution over time offers development options.

If the propositions emerging from this paper survive empirical testing, it will extend our

theories of corporate sustainability beyond the all-or-nothing type of argument underlying

most of the CSP-CFP debate. This in turn will hopefully lead to a more relevant

description of the corporate sustainability challenges faced by most managers.


31

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A Cognitive Perspective on the Business Case for Corporate Sustainability

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