corporate environmental disclosure: contrasting management's perceptions with reality

ABSTRACT. This paper’s purpose is to assess howmanagement’s perceptions regarding certain aspects ofenvironmental reporting relate to the firm’s actualreporting strategy. Toward that end, we propose amodel where a firm’s environmental disclosure isconditional upon executive assessments of corporateconcerns. The study relies on a survey that was sent

to environmental management executives fromEuropean and North American multinational firmsenquiring about the determinants of corporate envi-ronmental disclosure. Responses from these executiveswere then contrasted with their firms’ actual envi-ronmental reporting practices, which was measuredusing a comprehensive multi-criteria grid. Resultsshow that there is a relationship between environ-mental managers’ attitudes toward various stakeholdergroups and how those managers respond to thestakeholders via the decision to disclose and the actualdisclosures made. Our model provides a perspectiveas to how a firm responds to the numerous stake-holders to whom it must be accountable. Thisaccountability in turn relates to how the company

Corporate Environmental Disclosure: ContrastingManagement’s Perceptionswith Reality

Journal of Business Ethics

49: 143–165, 2004.© 2004 Kluwer Academic Publishers. Printed in the Netherlands.

Denis CormierIrene M. Gordon

Michel Magnan

Michel Magnan is Associate Dean and The LawrenceBloomberg Chair in Accountancy at the John MolsonSchool of Business of Concordia University where heteaches both financial and managerial accounting. Dr.Magnan obtained his Ph.D. from the University ofWashington (Seattle) and he is a Fellow CharteredAccountant (Canada). He is the author or coauthor ofseveral articles on topics such as executive compensation,environmental performance and reporting, financial state-ment analysis, accounting ethics and internationalaccounting. His articles have appeared in such journalsas Journal of Accounting and Public Policy,Journal of Accounting, Auditing and Finance,Strategic Management Journal, Journal ofManagement Inquiry, European AccountingReview, Research in Accounting Ethics, Journalof Business Ethics, Ecological Economics,Industrial Relations and Canadian Journal ofAdministrative Sciences. He has also extensive professional publications, both in Canada and in Europe.He is currently Associate Editor of ContemporaryAccounting Research as well as Education Editor forCA Magazine.

Denis Cormier, FCGA, is a Professor of Accounting in theDepartment of Accountancy at the Université du Quebecà Montreal [UQAM]. Dr. Cormier has published inmany journals including Accounting, Auditing andAccountability Journal, Journal of Accounting andPublic Policy, European Accounting Review,Journal of Accounting, Auditing and Finance,Journal of Accounting Literature, Accounting,Business and Financial History, Research inAccounting Regulation, The Journal of FinancialStatement Analysis, Canadian Journal ofAdministrative Sciences, Ecological Economics,Journal of International Accounting, Auditing andTaxation, International Journal of TechnologyManagement. His areas of research include environ-mental accounting, international accounting, financialstatement analysis and corporate governance.

Irene M. Gordon, FCGA, is an Associate Professor ofAccounting in the Faculty of Business Administration,Simon Fraser University. Her publications have appearedin such journals as Contemporary AccountingResearch, Accounting, Auditing and Account-ability Journal, International Journal of SocialEconomics, Land Economics and Issues inAccounting Education. She is also an associate editorof Canadian Accounting Perspectives. Dr. Gordon’sareas of research include accounting for the environmentand sustainable development, corporate social responsi-bility, the accounting-economics interface, accounting education, and performance and success issues related tosmall business.

communicates its actions to society in order to achieveor maintain its social legitimacy.

KEY WORDS: environmental disclosure, legitimacytheory, media exposure, stakeholder theory

Introduction

In this paper we examine how environmentalmanagers perceive the value of various environ-mental stakeholders and how those perceptionsrelate to firms’ environmental reporting. Ourstudy is motivated by views that the stakeholderproblem should be investigated from a perspec-tive that examines the interconnectedness ofactions and reactions:

[A] comprehensive theory of the firm requires notonly an explanation of stakeholder influences butalso how firms respond to these influences.Furthermore, to describe how organizationsrespond to stakeholders, scholars must consider themultiple and interdependent interactions thatsimultaneously exist in stakeholder environments(Rowley, 1997, p. 887).

There are at least two reasons why manage-ment’s perceptions of stakeholders warrant inves-tigation. First, understanding how management’sperceptions directly influence corporate envi-ronmental disclosures will assist standard settersin better comprehending how to effect changein such disclosures. Second, this type of researchprovides insight into the general disclosureprocess. By understanding management’s discre-tionary disclosures as reactions to their environ-ment and stakeholders’ demands, we gain insightinto why certain types of information areprovided by some firms but not by others. Thebasis of our study is provided by the theories oflegitimacy and stakeholders.

Legitimacy and stakeholder theories

A social contract represents an association thatorganizations or individuals freely enter into andthat has the ability to increase society’s welfare(Rousseau, 1762/1975). Such contracts provide

the means for the inclusion of social preferencesinto business performance (Shocker and Sethi,1974; Mathews, 1997). Successfully meetingits social contracts provides evidence that anorganization’s goals are congruent with society’sgoals, thus providing the organization withlegitimacy. To achieve or maintain legitimacy, theorganization must take action and society mustknow what action was taken.

Several authors have categorized the actions anorganization may take to enhance its legitimacy.For example, Dowling and Pfeffer (1975) andLuthans (1985) each provide three categorieswhile Lindblom’s 1992 paper (as cited by Grayet al., 1995) outlines four categories. Dowlingand Pfeffer’s categories are:

First, the organization can adapt its output, goalsand methods of operation to conform to prevailingdefinitions of legitimacy. Second, the organizationcan attempt, through communication, to alter thedefinition of social legitimacy so that it conformsto the organization’s present practices, output,and values. Finally, the organization can attempt,again through communication, to become identi-fied with symbols, values, or institutions whichhave a strong base of social legitimacy (1975, pp.126–127).

In two of Dowling and Pfeffer’s three cate-gories, communication plays an instrumentalrole. A primary source of organizational com-munication takes the form of informationsupplied to society via annual and environmentalreports.

Legitimacy provides a general framework inwhich to examine how a firm responds to itsenvironment and society. However, within thatsociety there are many groupings of individuals.Commonly, these groups have come to be iden-tified as “stakeholders.”

A stakeholder as defined by Freeman (1984)“is any group or individual who can affect or isaffected by the achievement of the organization’sobjectives” (p. 46). Using Boulding’s 1978argument, Husted (1998, p. 647) notes that tosurvive, institutions and organizations must “taketheir legitimacy seriously” and that stakeholdermanagement makes a somewhat vague notionconcrete. It is the coupling of legitimacy theory

144 Denis Cormier et al.

(a macro framework) with stakeholder theory (amicro framework) that helps to explain a firm’sspecific actions. Our model is built on these twotheories.

Background literature

In this section we outline relevant research inthree areas and provide a summary of how thisresearch relates to our model.

1. Legitimacy

Legitimacy theory forms the basis for severalstudies that have examined social responsibilityand environmental disclosures using annual andenvironmental reports (Brown and Deegan,1998). These studies have included examinationsof a single firm over time (e.g., Hogner, 1982;Guthrie and Parker, 1989; Buhr, 1998), a com-parison among firms (e.g., Cormier and Gordon,2001) and how single events have influencedenvironmental disclosures (e.g., Patten, 1992).

With respect to legitimacy, the findings fromthese studies are mixed as to how well the theoryexplains firms’ social and environmental disclo-sures. In his study of U.S. Steel Corporation,Hogner (1982) found a link between social dis-closures and the community’s expectations aboutthe firm’s social performance. Patten’s (1992)study found that when the Exxon Valdez oil spilloccurred, this event resulted in oil companiesincreasing their environmental disclosures in theirannual reports. However, Gurthrie and Parker(1989) found in their examination of oneAustralian company that except for environ-mental social reporting, legitimacy theory failedto explain most social disclosures.

Two studies that examined environmental dis-closures in a legitimacy context have both foundsome support for legitimacy as a reason formaking environmental disclosures. In a Canadiancontext, Neu et al. (1998) examined three mainissues: the influence of external groups on envi-ronmental disclosures as measured by the amountand types of these in annual reports; the rela-tionship of environmental disclosures to envi-

ronmental performance; and the relationship ofenvironmental to other social disclosures. Neu etal. (p. 279) indicate that their findings supportthe view that “in situations of conflicting inter-ests, organizations attempt to communicate legit-imating characteristics to the most importantrelevant publics and to defy or ignore less impor-tant publics.”

In a study of Australian CFOs, Wilmshurst andFrost (2000) found significant correlationsbetween their companies’ environmental disclo-sures and factors these managers rated as impor-tant. As an explanation of the relationshipbetween managers’ decision processes andthe companies’ environmental disclosures,Wilmshurst and Frost concluded that limitedsupport for legitimacy theory was provided bytheir findings.

2. Disclosures in a stakeholder context

Several studies have empirically examined thedeterminants of social disclosures in a stakeholdercontext. Using Ullman’s 1985 stakeholder frame-work, Roberts (1992) provided evidence on therelationship between a firm’s overall strategy andthe level of its social responsibility disclosures.Roberts’ findings indicate that stakeholder theoryallows the analysis of “the impact of prioreconomic performance, strategic posture towardsocial responsibility activities, and the intensityof stakeholder power on levels of corporate socialdisclosure” (1992, p. 610).

Ruf et al. (2001) investigated the relationshipbetween a corporation’s social performance (theindependent variable) and its financial perfor-mance (the dependent variable). Using a four-year period (1991 through 1995), the changes inthese two variables were examined using regres-sion analysis for 488 firms. The findings suggestthat there is a relationship between these twoperformance indicators. Ruf et al.’s interpretationof their results is that shareholders, the primarystakeholders, benefit when managers meet theconcerns of other stakeholder groups.1

Corporate Environmental Disclosure 145

3. Management’s perception of stakeholders

Stakeholders have the ability to affect a firm’sactivities or plans and managers must respond tothese groups. This response is called “stakeholdermanagement” (Husted, 1998, p. 647) and resultsin a structure where specific managers are maderesponsible for ensuring that certain stakeholdergroups’ needs and views are continually broughtto the attention of the organization (Freeman,1984, p. 233). This structure calls for individualmanagers to be assigned responsibility for specificstakeholders. In this setting it is reasonable toassume that a manager’s reactions will betempered by her/his attitudes toward the stake-holders.

The stakeholder theory-based research hasprovided some examinations of managers’ atti-tudes toward stakeholders’ perceptions. Lernerand Fryxell (1994) explored CEOs’ attitudestoward stakeholders that affect the actions under-taken by a firm with respect to social activities.The overall findings were weaker than anticipatedwith only corporate philanthropy showing apositive relationship with CEO’s attitude towardthe community.

Two stakeholder studies have analyzed thespecific relationship between managers and theirenvironmental commitment. Henriques andSadorsky (1999) classified 400 Canadian firmsinto four categories (proactive, reactive, accom-modative and defensive) based on the environ-mental profile of each firm. These profiles werethen used to determine whether the sample firmsdiffered with respect to the perceived relativeimportance of stakeholders. The major findingwas that more environmentally proactive firmsdiffered from their less proactive counterparts inthe perception of the relative importance ofstakeholders. In another study, Harvey andSchaefer (2001) used a comparative case studyapproach to examine the relationship of six U.K.water and electrical utilities with their “green”stakeholders. Institutional stakeholders (e.g., gov-ernment and regulators) were found to be themost influential groups although customers andthe general public were also considered impor-tant. However, Harvey and Schaefer found thateconomic stakeholders were not considered to be

interested in the utilities’ environmental perfor-mance. Generalizability of both these studies’findings is limited by their national contexts.Additionally, neither study provides a model thatmay be used in future studies.

4. Summary

For our research, the macro framework isprovided by legitimacy theory through the ideathat contracts exist between firms and society.This leads to the necessity for firms to commu-nicate their performance to various societalgroups in order to achieve or maintain theirlegitimacy. These points are relevant to our paperbecause we are interested in modelling whataffects a firm’s environmental performance andthe reporting of that performance to society.While previous research studies have exploredsome aspects of this relationship, there remainsthe task of modelling this relationship in a stake-holder, multi-national setting.

Stakeholder theory provides the micro frame-work in which specific, identifiable groupsmay be interested in a firm’s environmental activ-ities. This is pertinent to our study becausedepending on what is examined, the relevantstakeholders differ both in definition and impor-tance. For example, Agle et al. (1999, p. 520) findthat:

[T]he salience of stakeholders that are part of thetraditional production function view of the firm –shareholders, employees, and customers . . . – ishigher than that of stakeholders that are part of theexpanded stakeholder view of the firm: govern-ments and communities.

Other researchers, such as Harvey and Schaefer(2001), rate government and regulators abovecustomers in importance.

While relevance of individual stakeholdergroups varies across studies, stakeholderresearchers agree on two fundamental points.First, organizations must address stakeholderexpectations (Rowley, 1997) and second, “stake-holder management requires, as its key attribute,simultaneous attention to . . . all appropriatestakeholders” (Donaldson and Preston, 1995,


p. 67; see also Freeman, 1984; Lerner andFryxell, 1994). The balancing of stakeholderinterests will affect management’s decisions(Rowley, 1997, p. 889). In our model, severalstakeholders are included as parties likely to beinterested in firms’ environmental activities.Environmental managers will need to be cog-nizant of these groups and their interests tomaintain the legitimacy of their firms.

Lerner and Fryxell (1994) have argued andprovided evidence that managers’ attitudestoward various stakeholder groups provide anindication of how the managers’ will respond tothese groups. For our model this means that howmanagers perceive each stakeholder group’s valuewill be an important consideration.

Rowley (1997, p. 889), citing research byBrenner and Cochran (1991), indicates that acomplete stakeholder theory should describe andpredict firms’ operations under differing condi-tions. We think our model provides a way toexplore these aspects of management-stakeholderrelationships.

A stakeholder model of environmentalreporting

From the legitimacy and stakeholder theories, wesee that a firm’s managers must communicate tovarious groups to achieve, or protect, legitimacy.According to Rowley (1997, p. 890) “the mainobjectives in stakeholder research have been toidentify who a firm’s stakeholders are and todetermine what types of influences they exert.”In our model we shift the focus with respect toenvironmental disclosures to ask: “How is man-agement’s decision to make environmental dis-closures related to groups of stakeholders andmanagement’s perceptions of those groups’importance?”

Disclosure in our model is defined as theinformation communicated to stakeholders via afirm’s annual and environmental reports. Thereare other strategies available to managers to dealwith a firm’s stakeholders so that a firm achieveslegitimacy. However, we have chosen the com-munication method that is public, widely avail-able and that provides a permanent record of the

activities a firm’s management has chosen toreveal. In any model, the variables used representmethodological choices. The type of disclosureused in our model is one such choice as is themanager of interest.

Lerner and Fryxell (1994) used CEOs asthe management focal point in their studyof managers’ attitudes towards stakeholders.However, their findings were weak. We thinkthat this may have been due to two problems.First, they focused on “social activity” whichmay be too broad to find the manager-stake-holder relationships they hypothesized. Second,while CEOs are ultimately responsible for firmstrategy, we think that studying managers whoare assigned direct responsibility for certain activ-ities of interest to identifiable stakeholder groupsmay provide stronger results (Freeman, 1984).Thus we propose a model to be used to studyexecutives (i.e., environmental managers) whohave been assigned the responsibility to commu-nicate their firms’ environmental activities toexternal stakeholders. Our corporate environ-mental reporting model is provided in Figure 1.

Our focus on environmental managers couldbe challenged because the responsibility to set afirm’s disclosure policies resides in the Board ofDirectors. However, we think that environmentalmanagers should be the focus of attention withrespect to environmental disclosures since theyare the managers who implement the broad dis-closure policies established by the Board andcommunicated by the CEO to other managers.That is, there is a chain of decision-makingbeginning with the Board that considers stake-holders’ interests and then directs the CEO toaddress these concerns. Since the CEO’s perfor-mance is partially a function of her/his successin addressing the Board’s and stakeholders’concerns, she/he has an incentive to directher/his subordinates to take actions that are con-sistent with her/his interests and the Board’sinterests. Once an environmental manager hastaken action in matters of reporting, this flowsback to the CEO and the Board (via the auditcommittee or the environmental committee)who approve what is disclosed externally.Environmental managers then are the individ-uals who make the day-to-day implementation


decisions that ultimately affect the actions takenand are reflected in the disclosures to stake-holders.

In the model, we propose six stakeholdergroups as those most likely to be concerned withthe firm’s environmental record. These groupsare: investors, lenders, suppliers, customers, gov-ernments and public. All of these groups havebeen of interest in one or more previous studies(e.g., Woodward et al., 1996; Agle et al., 1999)and have been argued to be important to com-panies as stakeholders and consumers of company

disclosures (Leighton and Thain, 1997; Lev1992). Our choice of a broad range of stake-holders follows from Leighton and Thain (1997,pp. 42–44). Their argument is that Boards ofDirectors are inherently political and their taskis to balance interests of many stakeholders. Asnoted, it is important to the performance of theenvironmental manager that she/he be seen toaddress the Board’s and CEO’s concerns withrespect to stakeholders.

Each of our stakeholder groups is includedfor specific reasons. Investors, or shareholders,


Figure 1. A model for corporate environmental reporting.

represent a primary stakeholder group who maylose their investment if a firm acts irresponsiblywith respect to the environment. Lenders (cred-itors) are important stakeholders because theyhave the ability to recall loans or prevent theextension of further credit. Suppliers and cus-tomers are important stakeholder groups thatform part of the production chain and whodepend on other firms for their survival or con-sumption. As regulators and overseers of com-pliance with environmental laws and rules,governments form an important stakeholdergroup. Finally, the public represents a broadgroup of stakeholders interested in how firms areusing scarce environmental resources. In ourstakeholder model, we think that the value envi-ronmental managers perceive for each of thesegroups will be reflected in their firms’ environ-mental disclosures. Thus it will be necessary tomeasure the managers’ assessment of thesegroups’ importance.

However, it is nonsensical to examine envi-ronmental managers’ assessments of stakeholdersin a vacuum. Instead we also need to know whatthese managers see as their firm’s corporateconcerns. These concerns cover the generalbusiness environment in which the firm operatesand vary from providing stakeholders with a trueand fair representation of a company’s operationsto reporting on the company’s ability to meet itsobligations or compliance with relevant envi-ronmental regulations (Wilmshurst and Frost,2000). How a manager assesses the importanceof these corporate concerns will affect a firm’senvironmental disclosures.

Related to a manager’s corporate concerns arethe financial conditions under which the firmoperates. In our model there are four variablesused to capture financial condition. The variablesare a firm’s indebtedness (measured as the ratioof debt to equity), the return a firm earns on itsassets (measured as rate of return on assets), thefirm’s size (measured as total assets) and the firm’ssystematic risk (measured using beta). These vari-ables influence environmental disclosure in twoways. First, as a proxy for potential informationand proprietary costs, a firm’s financial conditionhas a direct effect on environmental disclosure.Second, a firm’s financial condition may affect

how its managers assess corporate concerns and,hence, its environmental disclosure.

In our model, we include two additionalcontrol variables. These variables are mediaexposure and the age of fixed assets. Whendirected toward firms, media attention has beenfound to relate to environmental disclosures(Cormier and Gordon, 2001) and needs to beincluded to avoid a missing variable problem. Ifthis variable is omitted, then it may seem thatmanagers’ environmental disclosures are morerelated to corporate concerns and the assessedimportance of certain stakeholders than theyactually are. The age of fixed assets is includedbecause previous work has found a relationshipbetween this variable and a firm’s environmentalperformance (Freedman and Jaggi, 1992). Thatis, the older a firm’s fixed assets, the more diffi-cult it will be for a company to meet environ-mental regulations or laws. In a way similar tofinancial condition, both control variables affectenvironmental disclosure directly and indirectly.

The resulting environmental disclosures affectthe firm’s legitimacy within society. If the dis-closures indicate that the firm has failed to meetits social contract, then society will react nega-tively to the firm. This would lead the firm’sstakeholders to reassess their relationship with thefirm in various ways. For example, consumersmight boycott buying the firm’s products; gov-ernment might fine or investigate the firm’sactivities; and lenders/investors might withdrawtheir support for the firm in the financial marketsdriving up the cost of capital and driving downthe price of shares. Such actions would leadmanagers to re-evaluate their disclosures in futureperiods.

The next section outlines steps taken toexamine the relationships proposed in our model.Our examination employs descriptive statistics,factor analysis and regressions.

Questionnaire development, the sampleand descriptive results

To test the relationships outlined in Figure 1, aquestionnaire was designed to ask corporate envi-ronmental managers their impressions and views


regarding their firm’s environmental reportingstrategy.2 Eight questions were asked using acombination of fill-in the blanks, rankings andfive-point Likert scale questions. Seven of thesequestions are used in this study and are presentedhere.

Two questions addressed background infor-mation such as identifying the respondent andwho was responsible for the selection of envi-ronmental disclosures as well as where thosedisclosures should appear. The third and fourthquestions were based on a theoretical frameworkfound in a 1999 discussion paper by theFédération des experts comptables européens(FEE). The third question provided respondentswith seven statements concerning stakeholdergroups and asked respondents to indicate theirlevel of agreement or disagreement. The fourthquestion called for respondents to provide theirlevel of agreement with five statements regardingthe assumptions (e.g., going concern, timeliness,understandability) behind environmental dis-closures.

Following on the work of Wilmshurst andFrost (2000), the fifth question uses a four-pointscale where respondents were asked to rank tenelements of disclosure relative to environmentaldisclosures.3 The sixth question asked where thefirm reported environmental disclosures whilethe last question asked whether any guidelineswere checked in making those disclosures.

Once the questionnaire was pre-tested, it wassent to a group of 195 multinational firms. Theinitial population is comprised of Canadian firmspreviously analysed in Cormier and Magnan(1999) as well as French and German firms listedin the Datastream database. After two mailings ofthe questionnaire, this resulted in a response rateof 21% (or 41 firms). Only one managerresponded for each firm included in the sampleand there is no double counting of firms.

These 41 North American and Europeanmultinational firms represent seven broadlydefined industries. These industries are: chemi-cals, mines and metals, oil and gas, food andconsumer goods, pulp and paper, heavy industry,and technology.

In addition to the environmental managers’responses, further data were collected for each

sample firm. The additional data collectedincluded the firms’ reported financial numbers,firm-specific characteristics, the number of envi-ronmental disclosures made in each firm’s annualand environmental reports for the year 2000 bytype of disclosure and the number of articlespublished about a firm for the five year period1996–2000. The results of the additional datacollected are summarized in Table I, Panel A.

The descriptive statistics in Panel A (Table I)indicate that the sample firms are quite large interms of both sales and assets. There are varia-tions among the sample firms in terms of theirlong-term debt, riskiness (as measured by beta),media exposure, foreign ownership and owner-ship concentration. In terms of Canadian dollarsthe “average” firm had over $11.7 billion in saleswith a net income of $484 million, total assetsof $13.5 billion, and long-term debt of $6.3billion. The average age of assets was 10 years(measured by the ratio of accumulated depreci-ation divided by depreciation expense). In 2000the average number of articles per firm found inthe media was 9.6 and over a five-year periodwas 10.4. The average foreign ownership was29% with 32% of the ownership concentrated onaverage in a single party’s shareholdings.

Panel B supplies information concerned withthe location of the sample companies’ environ-mental disclosures and whether environmentalguidelines were consulted in making these dis-closures. The numbers given are listed as per-centages of responding firms by country. Theannual report is the most common place forCanadian (85%) and French (83%) companies toprovide their environmental disclosures whileGerman companies provide their information ina separate environmental report (100%). Thefinding that 50% of French companies providetheir disclosures in the actual financial statementscompared to only 8% of Canadian and 11% ofGerman companies is consistent with Frenchlaws. In France, firms must make provisions forrisks such as those associated with the environ-ment under the plan comptable général.

With respect to consultation of environmentalguidelines, German companies in this samplewere the most likely to consult. In particular,78% of the German companies indicated con-



TABLE ISample

Descriptive statistics

Panel A

Minimum Maximum Mean Std. deviation

Sales (billions Canadian $) –0,014 191,116 11,776 36,674

Net Income (millions Canadian $) –1,148 003,296 00,484 00,862

Assets (millions Canadian $) –0,074 170,652 13,532 30,639

Long term debt (millions Canadian $) –0,007 058,835 06,359 14,055

Age of fixed assets (years) 01.21 73.34 10.03 12.84

Beta 00.11 01.78 00.55 00.34

Media exposure (number of articles)Year 2000 00.00 102 09.63 23.04Average 1996–2000 (5 years) 00.00 137 10.42 25.29Foreign ownership 00.00 01.00 00.29 00.46Concentrated ownership 00.00 01.00 00.32 00.47

Panel B

Responses in percentages by country Canada Germany France Total and sample for reporting media sampleand guidelines consulted:

Annual report 85 044 83 76

Financial statements 08 011 50 15

Environmental report 35 100 50 51

Internet 61 067 83 66

United Nations Environmental Program 31 044 17 32

Global Environmental Management Initiative, Int’l Chamber of Commerce 15 022 00 15

World Business Council for Sustainable Development 38 044 17 37

Coalition for Environmentally Responsible Economics 15 022 00 15

Public Environmental Reporting Initiative 23 000 00 15

European Union Eco-Management and Audit Scheme 12 078 33 29

Global Reporting Initiative 15 044 17 22

sulting the European Union Eco-Managementand Audit Scheme (EMAS) with 44% consultingeach of the United Nations EnvironmentalProgram (UNEP), World Business Council forSustainable Development (WBSCD) and GRI(Global Reporting Initiatives) guidelines. This iscompared with only 33% of French firms con-sulting the EMAS and 17% consulting theWBSCD. The guidelines consulted by the largestpercentage of Canadian firms were the WBSCDat 38% and the UNEP at 31%.

Table II provides descriptive information aboutthe range and means of the environmentalreporting scores for the sample taken from thefirms’ annual and environmental reports. In thesescores both quality and quantity of disclosures aremeasured. Where information is deemed redun-dant, it is excluded from the score. (See envi-ronmental reporting grid in Appendix 1.) For thetotal sample, the average score was approximately86 with a range from 4 to 205. The total scoreis composed of six categories of reporting. Thesecategories are expenditures and risk, laws andregulation, pollution abatement, sustainabledevelopment, remediation, and environmentalmanagement. The average disclosure by categoryranges from a low of slightly less than four forlaws and regulation disclosure to a high of 19.80for environmental management.

The results from Questions 3 and 5 of thequestionnaire are supplied in Table III. Themeans of the executives’ assessment of stake-holders’ interests provide a ranking of the exec-utives’ preoccupation with the groups. The

highest means are calculated for Lenders [4.34]and the Public [4.34], followed by Investors[4.02] and Customers [4.02]. Governments’interests [3.58] only ranked slightly higher thanthe interests of Suppliers [3.44]. To test whethermanagers’ agreement with the statements indicatethese stakeholders’ interests are significantlyimportant, Bonferonni t-tests were run com-paring the means to 3 (a neutral response). Allof the mean responses are significantly differentfrom the scale mid-point at the 0.01 level.

Table III also provides a summary of the exec-utives’ assessment of corporate concerns. Usingthe mean responses (scale 0 = unimportant to 3= highly important), five of the ten concernswere rated as important to highly important.These concerns were providing a true and fairview of operations [2.56], community concernwith operations [2.24], shareholder/investorrights to information [2.24], financial institutionconcerns [2.07] and fulfilling legal obligations[2.07]. Three means were close to important[= 2]: satisfying due diligence requirements[1.95], customer concerns [1.80] and environ-mental lobby group concerns [1.70]. Pre-empting legally imposed regulations [1.34] andsupplier concerns [1.10] were considered to beof only slight importance. Using Bonferonni t-tests, all the means are significantly different from1 (slightly important) at the 0.05 level or higherwith the exception of supplier concerns. Theseresults indicate that managers thought these itemswere important corporate concerns.


TABLE IIEnvironmental reporting score

Minimum Maximum Mean Std. deviation

Total score 4.00 205.00 86.37 57.06

Components:• Expenditures and risk 0.00 040.00 13.12 11.35• Laws and regulation 0.00 020.00 03.71 05.13• Pollution abatement 0.00 069.00 17.83 17.00• Sustainable development 0.00 039.00 09.88 10.27• Remediation 0.00 036.00 08.44 08.21• Environmental management 0.00 088.00 19.80 20.90

Factor analysis and correlations

To infer general trends, responses are analysedusing several different statistical methods. Weinitially use principal components factor analysisto examine the relationship among theexecutives’ assessment of corporate concerns.Spearman correlations are then used to examinethe relationships between the principal compo-nent factors and the executive’s assessment ofstakeholders’ interests as well as between thefactors and firm-specific financial variables. Usingthe coded environmental reporting strategies(Cormier and Magnan, 2003), the responding

firms’ actual reporting strategy is mapped withthe managers’ responses as proxied by factorscores. Finally, to get a better understanding ofthis mapping, corporate environmental reportingis split into its various components and TOBITregressions run for each component. The resultsfrom these procedures are discussed in detail.

Table IV presents the results of the principalcomponents factor analysis applied to the exec-utives’ assessments of corporate concerns. Using0.50 as the cut-off for component matrix coef-ficients, three factors emerge. The first compo-nent, external concerns, has five variables loadingon it. These variables are true and fair view of


TABLE IIISurvey responses

Descriptive statistics

Executive assessment of stakeholders’ interests and preoccupation(5: Strongly agree; 4: Agree; 3: Neutral; 2: Disagree; 1: Strongly disagree)

Mean1 Std. dev.

Investors 4.02

** 0.791Lenders 4.34** 0.689Suppliers 3.44** 0.838Customers 4.02** 0.724Governments 3.58** 1.094Public 4.34** 0.617

Executive assessment of corporate concerns**(3: highly important; 2: important; 1: slightly important; 0: unimportant)

Mean2 Std. dev.

True and fair view of operations 2.56** 0.634Pre-empt legally imposed requirements 1.34** 1.039Satisfy due diligence requirements 1.95** 1.047Community concern with operations 2.24** 0.830Financial institution concerns 2.07** 0.848Legal obligations fulfilment 2.07** 1.104Supplier concerns 1.10** 0.860Customer concerns 1.80** 1.122Environmental lobby group concerns 1.70** 1.031Shareholder/investor rights to information 2.24** 0.734

1 **p < 0.01. P-value from a one-sample t-test to assess if the mean sample response is different from 3 (i.e.neutral). Test value = 3.2 **p < 0.01; *p < 0.05. P-value from a one-sample t-test to assess if the mean sample response is differentfrom 1 (i.e. slightly important). Test value = 1.

operations, community concern with operations,financial institution concerns, environmentallobby group concerns and shareholder/investorrights to information. The factor labelled legalconcerns is the second component with threevariables loading on it. These variables arepre-empt legally imposed regulations, satisfydue diligence requirements and legal obligationsfulfilment. The third component, productmarkets, has three variables loading on it, oneof which also loaded onto the first factor. Thevariables loading on product markets are supplier,customer and environmental lobby concerns.The three factors in Table IV explain 68 percentof the cumulative variance and all have eigen-values of 1.86 or higher.

To see whether these three factors are relatedto managers’ assessment of stakeholders’ interests,Spearman correlations are then used (Table V).An examination of the significant correlationsmakes intuitive sense. External concerns are sig-nificantly correlated with lenders (0.05), thepublic (0.05) and investors (0.10). Governments(0.05), the public (0.05) and suppliers (0.10) arehighly correlated with legal concerns. The

product markets factor is correlated at a 0.05 levelwith suppliers, customers and lenders.

Regression analyses

Tables VI and VII present the results fromtwo different types of regression, OLS andTOBIT. These regressions allow analysis of therelationships between the three factors and thedisclosure of environmental information. Thepurpose of these regressions is to get a betterunderstanding of how responding firms’ actualreporting strategy mapped with managers’responses as proxied by the factor scores(Table VI). A more precise understanding of thismapping is provided in Table VII where corpo-rate environmental reporting is split into itsvarious components and TOBIT regressions arerun for each component.4

Table VI provides the results of four OLSregressions where the dependent variable is theactual disclosures as coded from the firms’ annualand environmental reports (see Table II). Threesets of independent variables are considered sep-


TABLE IVFirm-specific factors

Principal components factor analysis Varimax rotated component matrix

(correlations > 0.50)

Variable Component 1 Component 2 Component 3External concerns Legal concerns Product markets

True and fair view of operations 00.78Pre-empt legally imposed requirements 00.63Satisfy due diligence requirements 00.82Community concern with operations 00.74Financial institution concerns 00.73Legal obligations fulfilment 00.84Supplier concerns 00.84Customer concerns 00.83Environmental lobby group concerns 00.69 00.52Shareholder/investor rights to information 00.74

Eigenvalue 02.81 02.19 01.86Variance explained 28.06 21.86 18.63Cumulative variance explained 28.06 49.92 68.55

arately and then together through hierarchicalregressions: (1) three firm-specific factorsthat capture executive assessments of corporateconcerns (external concerns, legal concerns andproduct markets), (2) control variables, i.e., theage of the fixed assets (depreciation expense/accumulated depreciation) and media exposure(average number of articles between 1996 to2000), and (3) a firm’s financial condition (returnon assets, indebtedness, logAssets and beta).5

The predicted coefficient signs for the inde-pendent variables are interpreted as follows. Themore concerned a company is about the externalconcerns factor, the more environmental disclo-sures it will make [+]. The legal concerns factoris predicted to have a negative sign because if acompany is facing potential lawsuits or regula-tory hearings, then it would not want to harmits case which would result in fewer disclosures[–]. If a company is concerned with the productmarkets factor, this means that it will want toprotect proprietary information to prevent com-petitors from knowing about its environmentalperformance and thus will make fewer environ-mental disclosures [–].

Freedman and Jaggi (1992, pp. 327–330)provide evidence that there is a relationshipbetween the age of a firm’s plant assets and itsenvironmental performance. If a firm fails toprovide further information, investors may proxyits pollution performance by the relative age ofits property, plant and equipment. The investors’

assumption is that the older these assets are, themore they will pollute compared to newer assets.Firms with older plant, property and equipmentassets will need to provide more extensive envi-ronmental disclosures to ensure investors have aclear understanding of the firms’ performance.The prediction is that age of fixed assets will bepositively related to environmental reporting [+].

Media exposure is an average number ofarticles for the period 1996 through 2000. Thereason we use an average for this variable isbecause disclosures made in one year (e.g., 2000)may be affected by the amount and types ofarticles that have been published in the recentpast about a firm. We expect that as mediaexposure increases, the company will increase itsenvironmental disclosures [+]. This increase indisclosures may be due to the fact that the infor-mation is already in the market and therefore dis-closure in the annual/environmental reports doesnot represent new information. Additionally, thefirm may increase its environmental disclosuresto counteract bad press or to emphasize goodpress.

Finally, for the four variables that proxy for afirm’s financial condition, we do not explicitlypredict the sign of the relationship between thevariable and environmental disclosure. Thesevariables capture potential information and pro-prietary costs faced by a firm and its stakeholderswhen making a disclosure decision (Cormier andMagnan, 1999).


TABLE VSpearman’s correlation matrix

Executive assessment of stakeholders’ interests and preoccupation and executive assessment of corporate concerns

Factor 1 Factor 2 Factor 3External concerns Legal concerns Product markets

Investors 0.260** 0.200** –0.055**Lenders 0.298** 0.143** –0.450**Suppliers 0.196** 0.258** –0.314**Customers 0.162** 0.042** –0.348**Governments 0.110** 0.426** –0.223**Public 0.406** 0.371** –0.140**

** Correlation is significant at the 0.05 level (two-tailed).* Correlation is significant at the 0.10 level (two-tailed).


TABLE VIOLS estimate of firm’s specific factors in decision to disclose environmental information

Dependent variable: Environmental reporting

Variable Predicted sign

Intercept –86.37* 66.54 –167.78 –96.88(0.000) (0.000) 0(0.150) (0.532)

Firm-specific factors

Factor 1: External concerns + –25.11 –20.43(0.004) (0.036)

Factor 2: Legal concerns – –12.76 –10.66(0.062) (0.118)

Factor 3: Product markets – –04.90 –00.74(0.275) (0.473)

Control variables

Age of fixed assets + 00.86 –00.61(0.007) (0.209)

Media exposure (5 year avg.) + 01.09 –00.63(0.053) (0.063)

Financial condition variables

Return on assets ? –114.18 ––4.960(0.210) (0.964)

Indebtedness ? –116.56 –06.340(0.166) (0.616)

LogAssets ? –111.50 ––1.090(0.034) (0.879)

Beta ? 0–32.41 –27.400(0.289) (0.379)

Adjusted R-square –19.0% 13.7% –110.2% –16.2%F statistic –04.14 04.18 –102.14 –01.86P-value (0.013) (0.023) 0(0.096) (0.097)

Incremental F statistic:• Control variables –02.09

(0.138)• Financial condition

–00.23 (0.920)

* Coefficient (One-tailed p-value if predicted sign).

For the OLS regression with only firm-specificfactors, the coefficients for both externalconcerns (25.11; p < 0.004) and legal concerns(–12.76; p < 0.062) are as expected. The coef-ficient for product markets is not statistically dif-ferent from zero. Overall, the adjusted R-squareis 19.0% (p < 0.013) suggesting that executiveassessments of corporate concerns are most likelya key determinant of a firm’s environmental dis-closure strategy.

The second OLS regression assesses the rela-tionship between control variables and environ-mental disclosure. The coefficients for both ageof fixed assets (0.86; p < 0.007) and for mediaexposure (1.09; p < 0.053) have the expectedsign. Overall, these two control variables explain13.7% of sample variance in environmental dis-closure (p < 0.023).

The third OLS regression shows the relation-ship between a firm’s financial condition variablesand its environmental disclosure. Only the coef-ficient for firm size, as measured by logAssets, isstatistically significant with larger firms providingmore environmental disclosure (11.50; p <0.034). Overall, these financial condition vari-ables explain 10.2% of total sample variance inenvironmental disclosure (p < 0.096).

The fourth OLS regression pools all variablestogether. The full regression model explains16.2% of overall sample variance in environ-mental disclosure. This suggests that there isoverlap between explanatory variables. Inaddition, incremental F-tests reveal that thecontrol (2.09; p < 0.138) and financial condi-tion (0.23; p < 0.920) variables do not improveon our ability to understand environmental dis-


TABLE VIITOBIT coefficient estimates of firm’s specific factors in decision to disclose environmental information

Dependent variable: Individual environmental reporting components

Variable Expected Expenditure Laws and Pollution Sustainable Remediation Environmentalsign and risk regulation abatement development management

Intercept 0 009.94*, 1 01.08 14.49 05.41 07.19 12.56(0.001)2 (0.488) (0.001) (0.011) (0.001) (0.003)

Factor 1: + 05.66 03.71 06.76 03.79 03.10 07.25External concerns (0.012) (0.001) (0.017) (0.013) (0.026) (0.016)

Factor 2: – 00.38 00.87 –4.61 –2.20 00.14 –9.98Legal concerns (0.858) (0.438) (0.055) (0.080) (0.924) (0.001)

Factor 3: – –1.19 –1.53 00.27 03.27 –3.37 02.91Product markets (0.285) (0.093) (0.925) (0.021) (0.001) (0.355)

Age of fixed assets + –0.05 00.06 00.03 00.16 00.06 00.08(0.376) (0.252) (0.445) (0.094) (0.302) (0.378)

Media exposure + 00.08 –0.01 00.12 00.14 –0.04 00.35(5 year average) (0.162) (0.954) (0.150) (0.016) (0.509) (0.003)

Adjusted R-Square –02.0% 007.1% 001.9% 027.9% 0009.8% 0 033.9%0

Left censored at zero 90 1500 60 0800 80 80

Uncensored 3200 2600 3500 3300 3300 3300

Log likelihood –134.1900 –94.960 –153.9600 –125.8100 –124.3900 –147.9600

* One-tailed p-value if predicted sign and in the right direction, two tailed otherwise.1 Coefficient.2 P-value.

closure when contrasted with firm-specificfactors.

Individual TOBIT regression results are givenin Table VII for the six components of the envi-ronmental reporting score and the same inde-pendent variables used in the OLS regressions(see Table VI). The signs of the coefficientsremain as predicted in Table VI. Since the depen-dent variable (environmental disclosure) iscensored with many observations at zero (espe-cially for different components), an analysis usingTOBIT may provide a powerful specificationcheck. The TOBIT specification assumes that anunobserved latent variable index determines thelevel of the dependent variable so that observedvalues of environmental disclosure scores arecensored at zero whenever the latent variableindex plus the disturbance term is negative (seeYermack, 1995, for an illustration).

All six TOBIT regressions are significant at the0.01 level. The highest R-squares are found forregressions with the dependent variables ofsustainable development and environmentalmanagement.

Sustainable development disclosures are signif-icantly related to all the independent variablesalthough the sign on product markets is oppositeto the predicted direction. External concerns,legal concerns and media exposure are significantin classifying firms with respect to environmentalmanagement disclosures and all have the pre-dicted signs.

Pollution abatement disclosures are relatedsignificantly only to external concerns and legalconcerns. The decision to report on remediationis significantly related to external concernsand product markets. Laws and regulation aresignificantly explained by external concerns andproduct markets. The decision to provide dis-closures concerning expenditures and risk arerelated significantly only to external concerns.

Discussion

An overview of the statistical results from oursample provides preliminary evidence in supportof our model outlined in Figure 1. Table II indi-cates that the sample companies communicate

with society about environmental issues affectingthem. While this result was anticipated, itsupports the idea that companies take actions tomaintain or enhance their social legitimacy(Dowling and Pfeffer 1975; Brown and Deegan,1998).

As proposed in our model, the suggestedstakeholder groups are important to environ-mental managers (Table III). Additionally, ourfindings indicate that environmental managers doperceive different values for various stakeholdergroups and are able to assess the importance ofdiverse corporate concerns (Table III). Thisevidence supports our model and the idea ofstakeholder management where those managerswho have direct responsibility to a given stake-holder group will perceive that group’s value asmore important compared to other groups(Husted, 1998). The managers’ stakeholder grouprankings do vary somewhat from previous studies(e.g., Agle et al., 1999; Harvey and Schaefer,2001). However, we think this is to be expecteddue to the different focus of our model.

Tables IV and V illustrate how individualfirm-specific factors are related to each other.Factor analysis provides a basis for examining theindividual firm-specific items grouped intobroader classifications (Table IV). Using the threecomponents outlined in Table IV, the resultsprovided in Table V indicate how the environ-mental managers’ assessment of various stake-holders’ interests are related to the firms’concerns. Taken together, the correlations amonggroups and factors found in Tables IV and V tellus that the concerns of specific stakeholdergroups overlap (Rowley, 1997) for some, but notfor all, issues.

With respect to a firm’s environmental disclo-sures, external concerns, legal concerns andmedia exposure were found to be important inthe decision to disclose environmental informa-tion (Table VI). Hence, the decision to discloseenvironmental information relates directly tothe need to supply information to the market(external concerns) and to a lesser extent toregulatory and legal authorities (legal concerns).Also as indicated in our model, media exposurewas included as a variable that would influencethe decision to disclose and our statistical results


support this relationship. In addition, Table VIprovides some support for our model’s linkagesbetween financial condition and corporateconcerns. For instance, when considered sepa-rately, both financial condition and corporateconcerns are shown to influence environmentaldisclosure. However, when both sets of variablesare considered jointly, it appears that financialcondition does not have any incremental contri-bution over and above corporate concerns inexplaining environmental disclosure. An addi-tional analysis (not reported) reveals that twogeneral concerns, those related to the externalsetting and product markets, are significantlycorrelated with financial condition. That is,managers see a direct link between selling theirproducts and providing information about theircompanies’ performance to the market and theircompanies’ financial outcomes. This finding isconsistent with Ruf et al.’s (2001) finding of arelationship between a firm’s financial perfor-mance and its social performance.

Further support of our model (Figure 1) isfound in the regressions provided in Table VII.Our model indicates that the decision to disclosespecific types of environmental information isrelated to corporate concerns reflective of thestakeholder groups that environmental managersassociate with those concerns. For example inour model, the variable external concerns isfound to be significantly related to the decisionto disclose all six types of environmental infor-mation. Given that lenders, investors and thepublic are the stakeholders that environmentalmanagers associate with a firm’s externalconcerns, this finding reflects the broad basedinterest these groups have in the disclosuresstudied. This finding differs somewhat fromHarvey and Schaefer’s (2001). However, theyemployed a case study approach limited to onlyone industry while our study employs a samplefrom seven industries.

For legal concerns the stakeholders ofinterest (e.g., governments, the public and to alesser extent suppliers) to the managers variedsomewhat from the stakeholders associated withexternal concerns. The “legal concerns” stake-holders would be interested primarily in disclo-sures that reflect on a company’s environmental

performance within its legal and regulatorysetting. Thus, our findings that legal concernsis significantly related to pollution abatement,sustainable development and environmental man-agement disclosures underscores the importanceof these stakeholders. Presumably, if environ-mental disclosures are inadequate or false,then this opens the company up to actions bygovernment (e.g., fines), the public (e.g., throughthe market via public opinion or possiblelawsuits) or suppliers (e.g., finding a differentpurchaser for their goods or services).

One variable we included in our model, ageof fixed assets, was not found to be significantin either the pooled OLS or TOBIT regressionsexcept with respect to sustainable development.This finding of insignificance is contrary toFreedman and Jaggi’s (1992) result. One expla-nation for this finding is that our sample firmswere providing sufficient information to stake-holders to overcome any problems that mighthave been associated with owning and use ofolder fixed assets.

Whereas some previous research (Lerner andFryxell, 1994) has found weak support for a rela-tionship between managers (CEOs) and stake-holders, our research on environmental managers,environmental disclosures and the accountabilityto specific groups of stakeholders finds strongersupport for the manager-stakeholder relationship.Thus as outlined in our model, a relationshipseems to exist between environmental managers’perceptions of the value of various stakeholdergroups and how those managers respond to thestakeholders via the decision to disclose and theactual disclosures made.

Our model provides one further step inexplaining a company’s overall response to thenumerous stakeholders to whom it must beaccountable. This accountability in turn relatesto how the company communicates its actions tosociety in order to achieve or maintain its sociallegitimacy.

Conclusion

In this section we provide a brief summary of ourpaper, its contributions and implications, the


ethical aspects of our findings and the paper’slimitations and suggestions for future research.

1. Summary

As we attempt to understand the actions takenby corporate managers to make their activitieslegitimate to society, we know that managersreact to stakeholder demands. Over time suchreactions lead to an evolutionary process thatresults from managers adapting and changing asthey try to understand what stakeholders thinkis important as well as deciding which stake-holders are most important in a given setting.This evolution may indeed explain why studies’findings have been contradictory and confusingat times. We suggest that understanding whichstakeholder groups are valued and how managersaddress (or fail to address) these groups takes usforward in our understanding of corporate legit-imacy and stakeholder relations.

The purpose of our paper has been to addressseveral aspects of the manager-stakeholder rela-tionship within a legitimacy framework. In par-ticular we modelled the relationship betweenenvironmental managers and their stakeholders.Our model presents the interactions of threeimportant dimensions concerned with the dis-closure of environmental information. Thesedimensions are the evaluation of stakeholdergroups by the manager, the corporate concernsfaced by the manager and the influence of thefirm’s financial performance measures on disclo-sure. Additionally, in our model, media exposureand the age of the firm’s assets (a proxy for afirm’s ability to meet environmental regulations)are included as controls on the manager’s disclo-sure decisions. The resulting disclosures representa component of the necessary communicationsthat provide the firm legitimacy within society.

2. Contributions and implications

The major contribution of this paper to theliterature is our model. The model’s importanceis derived from capturing Freeman’s descriptionof a firm’s structure where specific managers are

assigned responsibilities for certain stakeholders(Freeman, 1984, p. 233) while incorporatingRowley’s (1997, p. 887) perspective that there are“multiple and interdependent interactions” in thestakeholder setting.

As a secondary contribution, we used a ques-tionnaire to gather data from three countriesregarding environmental managers’ valuationsof various stakeholders as well as their firms’corporate concerns. We supplemented thismanager-derived data with information gatheredfrom public sources about the sample firms’environmental disclosures, media exposure andfinancial performance.

There are several implications that may bederived from our model and sample results. First,to examine the stakeholder-manager relationshipfor specific issues, researchers need to go beyondan examination of CEOs to study the managersdirectly responsible for assigned activities.Second, managers will have different perceptionsof various stakeholder groups’ value dependingon the manager’s responsibility and the issuesfacing her/him. Finally, depending on the cor-porate concerns and the type of disclosure to bemade, media exposure is a significant variable inexplaining whether environmental disclosures aremade and the amount and quality of disclosuresmade.

3. Ethical aspects

Our investigation of management’s role in thedetermination of corporate environmental dis-closure raises several ethical issues. For instance,our findings indicate that managers’ perceptionsabout stakeholders’ concerns help to shape afirm’s environmental disclosure. Two contrastingviews of stakeholder relations may providepossible explanations of our findings (Berman etal., 1999). On the one hand, managerial interestin stakeholders’ concerns may reflect a strategicintent where managers pay attention to stake-holders when doing so improves the company’sfinancial performance. On the other hand,managers’ willingness to take stakeholders’concerns into account when determining envi-ronmental disclosure may reflect an intrinsic


commitment toward stakeholders, such commit-ment being based upon moral grounds as to howthe firm does business.

Berman et al.’s (1999) findings are more con-sistent with the strategic management view ofstakeholder relations while our results point intwo different directions. Hence, the relevance ofstakeholders’ concerns as well as the lack of astrong relation between sample firms’ financialcondition and their environmental disclosuresupport the view that sample firms’ managersadopt an intrinsic commitment approach to theirstakeholder relations. In contrast, the importanceof media exposure in determining environmentaldisclosure indicates that firms’ need to achievesocial legitimacy in their environmental man-agement, i.e., their ultimate intent is strategic.More work remains to be done on the under-lying motivation for managerial disclosure deci-sions.

Another key ethical issue is the mappingbetween a firm’s actual environmental perfor-mance and its environmental disclosure. In otherwords, is there deception in the environmentalinformation being disclosed? Such deceptioncould take many forms. For example, manage-ment could choose to emphasize positive newswhile downplaying negative news. A moreextreme form of deception would be to framedisclosures in such a way that negative newsbecomes good news. While the measurement ofenvironmental performance is a risky endeavour,there is some prior evidence that environmentaldisclosure does not necessarily accurately orunbiasedly reflect a firm’s underlying measuresof environmental performance (Hughes et al.,2001).

Our study does not attempt to directly matchenvironmental disclosure and environmental per-formance. More specifically, our findings (seeTable VI, second regression and Table VII, sus-tainable development regression) provide someweak evidence that the age of fixed assets is asso-ciated with the level of environmental disclosure,thus suggesting that firms with old fixed plantassets, which are presumably more polluting,provide more disclosure than other firms. Thereis no assurance regarding the reliability or com-pleteness of the disclosure.

A closer examination of actual disclosuresreveals that management emphasizes positivenews or pro-environment decisions, with the dis-closure of negative items being limited to manda-tory requirements. In that regard, the emergenceof formal environmental disclosure frameworkssuch as the Global Reporting Initiative is anencouraging sign as they constrain management’sability to downplay the disclosure of unfavourableinformation. Matching disclosure with externalinformation sources such as government reportsor court litigations would provide a way tovalidate the information being disclosed byorganizations.

A more fundamental ethical issue remains.This is the measurement of environmental per-formance itself. In contrast to financial perfor-mance, for which there are well-acceptedsummary and standardized indicators such as netearnings, the concept of corporate environmentalperformance is still tentative. This is becauseit encompasses many dimensions includingair pollution, water pollution, soil pollution,health and safety and sustainable development.Moreover, there is significant managerial discre-tion in the measurement of most environmentalperformance indicators, with external auditingand validation still haphazard in many countries.Such lack of uniformity impedes comparisonsacross firms as well as formal assessments ofoverall environmental performance.

Griffin and Mahon (1997) and Johnson andGreening (1999) explicitly discuss the multidi-mensional nature of corporate social perfor-mance, of which environmental performance isa key part. More specifically, they highlight theinappropriateness of collapsing several dimensionsinto a single unidimensional construct that mayhide important and relevant information items.The alternate approach, which is to focus on asingle well-defined measure that is objective, isalso deficient since it may not fairly reflect afirm’s overall performance (e.g., see Cormier andMagnan, 1997). An example of this is a firmthat has some air pollution problems but is asuperior environmental performer in all otherdimensions.

While ISO 14000 criteria are a step toward thestandardized measurement of corporate environ-


mental performance, the road ahead may containseveral pitfalls. By decomposing environmentaldisclosure into six dimensions, our study partiallyaddresses the multidimensional nature of envi-ronmental performance. However, it does notprovide confidence regarding the measurementof disclosed items.

4. Limitations and future research

The primary limitation of our analysis isthe sample size used to examine our model.However, as an exploratory beginning, thesample provides preliminary evidence on whichto build.

Future research may follow two related paths.One path leads to an expansion of the empiricalwork undertaken for this paper. Such researchcould collect and analyze data on environmentalmanagers and their stakeholder relationships forlarger samples and for different geographicalareas. This research path would either providefurther evidence in support of our model oralternatively could refute it. The second researchpath could examine other managers who areassigned specific responsibilities within the orga-nization and model those managers’ relationshipswith the concerned stakeholder groups. Either ofthese research paths could further our under-standing of manager-stakeholder relationships andthe disclosure a firm makes to legitimize itselfto society.

Acknowledgements

The authors acknowledge the financial supportof the Social Sciences and Humanities ResearchCouncil of Canada and of Fonds FCAR(Quebec). We also appreciate the helpfulcomments made on an earlier version of thispaper by Alan J. Richardson, Linda Thorne andtwo anonymous referees.

Appendix 1Environmental Reporting grid

Expenditures and risks:

– Past and current expenditures for pollution controlequipment and facilities

– Past and current operating costs of pollutioncontrol equipment and facilities

– Future estimates of expenditures for pollutioncontrol equipment and facilities

– Future estimates of operating costs for pollutioncontrol equipment and facilities

– Financing for pollution control equipment orfacilities

– Environmental debt – Risk provision– Provision for charge

Laws and regulation:

– Litigation (present and potential)– Fines – Orders to conform– Corrective actions– Incidents– Future legislation or regulation requirements

Pollution abatement:

– Air emission information– Water discharge information– Solid waste disposal information– Control, installations, facilities or processes

described– Compliance status of facilities– Noise and odours

Sustainable development reporting:

– Conservation of natural resources– Recycling– Life cycle information

Land remediation and contamination:

– Sites– Efforts of remediation (present and future)– Cost/potential liability (Provisions for site reme-

diation)– Spills: (number, nature, efforts to reduce)– Liabilities (actual and potential)


Environmental management:

– Environmental policies or company concern forthe environment

– Environmental management system– Environmental auditing– Goals and targets– Awards– Department or office for pollution control– ISO 14000– Participation in elaboration of environmental stan-

dards– Joint projects with other firms on environmental

management

Rating scale:

3: Item described in monetary or quantitative terms2: Item described specifically 1: Item discussed in general

Notes

1 The results of Ruf et al. (2001) are contrary tothose found by Richardson and Welker (2001).Richardson and Welker examine the relationshipbetween cost of equity capital and financial disclo-sures and the cost of equity capital and social disclo-sures. Using cross-sectional, longitudinal regressionsand a sample of Canadian firms for 1990, 1991 and1992, the authors find that there is a significantnegative relationship between the level of financialdisclosure and cost of equity capital. However, theydo not find a similar relationship between social dis-closures and cost of equity capital. Instead, they finda “statistically significant, positive relation between thelevel of social disclosure and the cost of capital” [i.e.,as social disclosures increase so does the cost of capital](p. 613). This result, however, is moderated for moresuccessful firms that are less penalized by the market.The Richardson and Welker paper is included in thenotes rather than the body of our paper because whileit is an interesting paper, it is not grounded in thestakeholder theory tradition.2 Our questionnaire is available on request.3 While we used most of the Wilmshurst and Frost(2000) variables for executive assessment of corpo-rate concern in our question five, there was onedifference. We did not use “Competitor response toenvironmental issues”. This variable was deletedbecause it was not found to be correlated withthe environmental disclosure score formulated by

Wilmshurst and Frost. However, we control for thischange by including industry dummy variables.Additionally, we control for media exposure that isemployed in our model to help explain the firm’sresponse to environmental issues.4 The OLS regression was run using dummy vari-ables to control for industry classification and countryeffects. The use of industry dummy variables did notsubstantially alter the regression results and no effectsby country were found.5 Multicollinearity between variables was checkedusing the VIF statistic. The highest VIF was for returnon assets and logAssets (both 2.18). A VIF of less than10.0 is normally interpreted to mean that a multi-collinearity problem does not exist.

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Denis CormierDepartment of Accountancy,

UQAM,C.P. 8888, succ. Centre-ville,Montreal, Quebec, H3C 2P8

Canada E-mail: [email protected]

Irene M. GordonFaculty of Business Administration,

Simon Fraser University,8888 University Drive,

Burnaby, B.C. V5A 1S6,Canada

E-mail: [email protected]

Michel MagnanJohn Molson School of Business,

Concordia University,1455, de Maisonneuve West,

Montreal, Quebec H3G 1M8, Canada

E-mail: [email protected]

corporate environmental disclosure: contrasting management's perceptions with reality

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