Corporate environmental performance and financial performance: a resource-based view

International Business Economics

The Resource-Based View (RBV) theory suggests that a firm must protect its resources which are valuable, rare, inimitable, and non-substitutable in order to transform its short-term competitive advantage into a sustainable competitive advantage. A typical firm possesses four types of resources which play their individual roles in its operational and financial performance. In addition to its day-to-day business operations, a typical firm also expends some amount on environmental protection and social welfare projects. Research studies suggest that good environmental performance leads to or gives significant support to a firm's financial performance. This paper critically discusses the statement that there exists a win-win relationship between corporate environmental performance and corporate financial performance in the light of Resource-based View (RBV) theory.

The paper starts with an introduction to the concept and important arguments found in the literature about the aforementioned statement. After introducing the phenomenon, the paper presents critical discussion on the link between environmental and financial performance in the light of resource-based view theory. Most of the arguments found in the Literature support the statement that a business organization has to expend a certain amount of its resources on the social and environmental welfare of the community in order to prove it a socially and environmentally responsible corporate citizen. The Resource-Based View theory addresses what resources and capabilities an organization possesses and what market opportunities it can avail using these resources and capabilities.

The paper presents supporting arguments in favor of this relationship by explaining the importance of all organizational resources which satisfy the VRIN model conditions (set by RBV theory); as well as different other factors which affect the environmental-financial performance link. These factors include; consumer behavior, top leadership behavior, governmental behavior, legal infrastructure, and impact of environmental performance on new investors' behavior.

INTRODUCTION

The Resource-Based View (RBV) Theory is based on the idea that a business organization can transform its short-term competitive advantage into a sustainable (long-term) competitive advantage by making an effective and efficient use of its valuable resources and capabilities (Hart 1995). In order to make this transformation happen, the resources and capabilities of the firm must satisfy the VRIN model, i.e. The resources must be valuable, rare, inimitable, and non-substitutable for the industry rivals (including both existing and new competitors) (Renard, Maria, & David 2013). These resources and capabilities enable the firm to perform in its industry in a competitive and profitable way (Porter & Van Der Linde 1995).

In addition to showing good financial performance, each firm in the industry is also supposed to play its role in the social and environmental welfare of the community in which it operates (McWilliams & Siegel 2000). That is, each firm has to prove itself as a socially and environmentally responsible corporate entity in order to achieve a sustainable future in the business world (Filbeck & Gorman 2004). Again, the resources and capabilities which a firm possesses largely help it in its socio-environment welfare endeavors (Aerts, Cormier, & Magnan 2008).

It is also widely considered that a firm which shows good economic performance in the industry also possesses a sound track record of good environmental performance (Renard, Maria, & David 2013). In fact, good corporate environmental performance supports the corporate financial performance in a number of ways (Galdeano-Gomez 2008). The literature is full of research studies that have tried to discuss the relationship between corporate environmental and financial performance from different perspectives and in the light of various theories and models (Russo & Fouts, 1997). The following sections present a critical discussion on the statement that there is a win-win relationship between corporate environmental performance and corporate financial performance in the light of Resource-Based View (RBV) theory.

LINK BETWEEN CORPORATE ENVIRONMENTAL AND FINANCIAL PERFORMANCE IN THE LIGHT OF RESOURCE-BASED VIEW (RBV) THEORY

Being a socially and environmentally responsible corporate citizen, a business organization has to expend a certain amount of its resources on the social and environmental welfare of the community in which it operates (Elsayed & Paton 2005). It can take part in different activities that are initiated for the well-being of society members or the environment as a whole (Cormier & Magnan 2007). According to the Resource-Based View (RBV) theory, an organization can perform better in its industry if it makes an effective and efficient utilization of its resources which are valuable, rare, inimitable, and non-substitutable (Hart 1995).

The Resource-Based View theory basically addresses what resources and capabilities an organization has and what market opportunities it can avail using these resources and capabilities (Wagner, Van Phu, Azomahou, & Wehrmeyer 2002). If an organization shows a strong environmental stance in its strategies, it is likely to gain positive response from its prime stakeholders; especially from the customers, investors, governmental bodies, supply chain members, employees; and the community members at large (Molina-Azorin, Claver-Cortes, Lopez-Gamero, & Tari 2009).

The Attitude of Leadership:

The win-win relationship between a firm's environmental performance and financial performance is largely affected by the behavior of its top leadership. According to RBV theory, the resources must be in-imitable and non-substitutable for the company's rivals (Molina-Azorin, Claver-Cortes, Lopez-Gamero, & Tari 2009). It must protect them from these rivals so that their benefits can be realized for a long period of time (Renard, Maria, & David 2013). Therefore, if the Board of Directors shows true concern towards assets security and effective market-orientated practices of the company, there are greater chances that the company's resources will remain inimitable and non-substitutable for a long period of time (King & Lenox 2001). Having these resources (and capabilities) in hand, the company can make better strategic decisions to move forward in the industry (Haanaes, Balagopal, Arthur, Kong, Velken, Kruschwitz, & Hopkins 2011).

Consumer Behavior:

The performance of a company is directly related with the behavior of its customers. In addition to the cultural, demographic, and economic preferences, customers also make purchase decisions on the basis of firms' environmental and social welfare contributions (Wagner, Van Phu, Azomahou, & Wehrmeyer 2002). Keeping aside the quality of its products and services, a firm which plays an active role in the betterment of the community is more likely to receive a positive consumer perception. As a result, the firm develops its public image as a socially responsible corporate entity which ultimately increases the satisfaction of its investors and other prime stakeholders (Molina-Azorin, Claver-Cortes, Lopez-Gamero, & Tari 2009).

The Role of Organizational Resources in its Environmental Performance:

A typical organization possesses four types of resources: financial, human, informational, and physical (Cormier & Magnan 2007). All these resources have a unique part to play in the organization's environmental performance. In order to discuss up to what extent there exists a win-win relationship between economic and financial performance, it is vital to analyze the significance of each of these resources in the light of Resource-Based View (RBV) theory.

i. Financial Resources:

Starting with the financial resources; an organization always needs sufficient finance to meet its short-term and long-term obligations and support its day-to-day business activities. Like other business affairs and projects, environmental performance also requires the organization to spare some amount from its day-to-day finances and expend on some welfare and environmental protection activities (Dowell, Hart, & Yeung 2000). Finance is considered as the lifeblood of a business (King & Lenox 2001). No organization can survive in its industry if it cannot meet the financial needs of its business in an effective and efficient way (Molina-Azorin, Claver-Cortes, Lopez-Gamero, & Tari 2009). It has to show better financial performance with each passing year in order to win the confidence of its stakeholders. At the same time, it has to prove itself as a socially and environmentally responsible entity (Cormier & Magnan 2007).

Although financial resources do not meet the VRIN criteria as set by the Resource-Based View (RBV) theory; the organization can gain a competitive advantage if it can utilize this important resource better than its industry rivals (Dowell, Hart, & Yeung 2000). That is, if a firm makes effective investment decisions; achieves higher Returns on Investment (ROI) and Returns on Assets (ROA) than its competitors, and succeeds in gaining a higher market share, it is said to have a better financial strength than its competitors (Pahuja 2009). This firm also gains sufficient resources to expend some amount on environmental welfare activities (Hart & Ahuja 1996). It can initiate new environmental or social welfare projects independently or help the Governmental bodies in their large scale projects (King & Lenox 2001).

Based on these arguments, it can be said that financial resources (even not satisfying the VRIN model conditions) can contribute in gaining a competitive advantage for the firm. A firm which has sufficient financial resources to meet its day-to-day business needs also expends on environmental protection programs confidently (Schaltegger, Bennett, & Burritt 2006). It implies that better financial performance can lead to higher contributions in environmental protection projects (Haanaes, Balagopal, Arthur, Kong, Velken, Kruschwitz, & Hopkins 2011).

ii. Human Resources:

Secondly, the employees of an organization also play an important part in its environmental and financial performance. When employees are committed towards their job responsibilities; make an efficient utilization of organizational resources; and avoid subordinating organizational interests over their personal interests, the organization performs better in the marketplace (Hassel, Nyquist, & Nilsson 2005). This better performance enables the organization to spend money on its social and environmental welfare projects which is useful in enhancing its public image as well as its shareholders' satisfaction (Gonzalez-Benito & Gonzalez-Benito 2005).

iii. Physical Resources:

Unlike financial and human resources, physical resources better satisfy the conditions of VRIN model (Hart & Ahuja 1996). That is, they can be more valuable, rare, inimitable, and non-substitutable. Physical resources include each and everything which a company possesses as its tangible assets (Nakao, Amano, Matsumura, Genba, & Nakano 2007; Hart 1995). Its products can also be listed in the physical resources as they are produced and retained (as inventory/stock) unless sold to the final consumers (Sarkis & Cordeiro 2001). A company's products are the greatest tool to achieve exceptional financial performance in the industry (Konar & Cohen 2001).

If a firm offers competitive products that have a high level of acceptability among their ultimate consumers as well as have a big role to play in the company's financial performance, they become a competitive advantage for that firm (Wagner, Van Phu, Azomahou, & Wehrmeyer 2002). By selling these competitive products in the market, the firm is better able to compete with its rivals and grow in its industry in a more profitable and effective way. Above all, these products enhance its public image and also persuade the top leadership to think for social and environment responsibilities instead (Dowell, Hart, & Yeung 2000).

iv. Informational Resources:

Informational resources can help a company in maintaining its competitive advantage and protecting its useful resources from substitutability by its competitors. If an organization keeps an eye on the technological innovations and environmental changes in its business landscape, it is better able to perform the industry in both financial and environmental areas (Hart & Ahuja 1996).