ERASMUS UNIVERSITY ROTTERDAM
ERASMUS SCHOOL OF ECONOMICS
MASTER ACCOUNTING, AUDITING AND CONTROL
Factors that affect Corporate Sustainability Practices:
The Case of the Banking Sector
Written by:
T.Z.N. Billar
Published: 29th of June 2010, Rotterdam
Erasmus University Rotterdam
Erasmus School of Economics
Master Accounting, Auditing & Control
This thesis was written at KPMG (Rotterdam)
Contact information of the author:
Supervisor at Erasmus: Prof. M.W. Guah, PhD
Co-reader at Erasmus: Prof. K.E.H. Maas, PhD
Co-supervisor at KPMG: C.P.G.H. Hijszeler
Abstract
This thesis is focused on corporate sustainability practices of the banking sector. Recently much emphasis is on CSR from business as well as society, which results in an increasing trend of corporate sustainability practices. This research is specifically aimed at the banking sector, because they are believed to have the ability to induce other companies to engage in CSR due to their widespread influence. The main research question of this thesis is: what are the reasons for banks to engage in corporate sustainability and how are their CSR practices affected by several factors? From the literature review several factors are identified which might have an influence on corporate sustainability practices. With the help of a qualitative research method it is examined which factors in fact have an effect of CSR practices of banks. For this research three banks are included as well as two audit firms to be able to use different approaches to the research questions. The main findings of this thesis are that the corporate sustainability practices of banks are mainly influenced by the most powerful stakeholders such as clients, employees and NGO’s. Furthermore corporate sustainability will not be pursued by the banking sector unless it leads to certain benefits. Finally, since much is yet unclear about the meaning of CSR this results in different views and therefore different corporate sustainability practices. Nevertheless, the results of this research show that the attention for CSR is increasing.
Keywords: Corporate sustainability, CSR, banks, stakeholders, transparency.
Acknowledgements
Rotterdam, June 29th 2010
This Master thesis is the final part of my Master Accounting, Auditing & Control. During the past few months I have been working on this thesis and I hereby wish to use the opportunity to thank a few people who helped me during my writing and research process.
First of all, I would like to gratefully acknowledge the supervision of Professor Matthew W. Guah who was pleased to become my supervisor for the second time after my Bachelor thesis. During my research he helped me through another invaluable learning process. Many thanks to this amazing person who has introduced me into qualitative research.
I also want to thank KPMG in particular, who provided me the opportunity to write my Master thesis at the office in Rotterdam. I thank my co-supervisor at KPMG for his comments and advice during writing my thesis.
Certainly I owe many thanks to ABN Amro, Rabobank, Van Lanschot, KPMG and PWC who were willing to participate in this research. Without them I could not have done this research.
Furthermore I would like to thank my friends who always kept confidence in me and who have motivated me during this period.
Finally I thank my parents, who have been my inspiration. I would like to thank my family for their ongoing love and support and for having faith in me, which have certainly contributed to successfully completing my Masters.
Hereby I proudly present to you the result of four months of effort.
T.Z.N. Billar
Table of content
Abstract III
Acknowledgements iv
1 Introduction 7
1.1 Thesis background 7
1.2 Research objectives 9
1.3 Research questions 10
1.4 Thesis structure 10
1.5 Chapter summary 11
2 Literature review 12
2.1 Defining corporate sustainability 12
2.1.1 Key principles 13
2.2 Institutional theory 15
2.2.1 Stakeholder theory 16
2.2.2 Legitimacy theory 17
2.3 Alternative perspectives 17
2.4 Complexity theory 18
2.4.1 Economic implications 20
2.4.2 Social implications 21
2.5 Chapter summary 22
3 Research method 24
3.1 Methodology 24
3.2 Selection of participants 25
3.3 Triangulation method 26
3.4 Research scope 27
3.5 Chapter summary 27
4 Case I: ABN Amro 28
4.1 CSR Policy 28
4.2 Stakeholders influence 30
4.3 Financial crisis 31
4.4 Sustainability performance 31
4.5 Developments of CSR 32
4.6 Chapter summary 33
5 Case II: Rabobank 34
5.1 CSR Policy 34
5.2 CSR information 35
5.3 CSR developments 36
5.4 External influences 37
5.5 Sustainability performance 38
5.6 Sustainable products 39
5.7 Chapter summary 40
6 Case III: Van Lanschot Bankiers 41
6.1 CSR practices 41
6.2 Transparency 42
6.3 Governmental influence 44
6.4 Stakeholders influence 45
6.5 CSR development 46
6.6 Chapter summary 48
7 Case IV: KPMG 49
7.1 Perception of CSR 49
7.2 CSR reporting 50
7.3 CSR policies 51
7.4 CSR investments 52
7.5 CSR developments 52
7.6 Chapter summary 53
8 Case V: PWC 55
8.1 Involvement of auditors 55
8.2 Governments influence 56
8.3 Stakeholders influence 57
8.4 CSR performances 57
8.5 Developments of CSR 58
8.6 Chapter summary 59
9 Analysis 61
9.1 Development of CSR 61
9.1.1 CSR policy 61
9.1.2 CSR reporting 62
9.2 Stakeholders influence 63
9.2.1 Governments 63
9.2.2 Other stakeholders 64
9.3 Financial crisis 65
9.4 Transparency 66
9.5 Future trend 67
9.6 Chapter summary 69
10 Conclusion 70
10.1 Main findings 70
10.2 Lessons learnt 74
10.3 Research limitations 74
10.3.1 Limitations of the research method 74
10.3.2 Limitations of data 75
10.3.3 Data analysis 75
10.4 Thesis conclusion 76
Appendices 85
Appendix A: Transparency Benchmark 86
Appendix B: Fair Bank Guide 87
Appendix C: Triple E Model (Van Lanschot Bankiers) 88
Appendix D: Figures on CSR 90
Transparency benchmark 2009 90
Survey KPMG 2008 92
Appendix E: Interview questions 94
1 Introduction
Over the past two decades business’ focus has been broadening from wealth maximization for the stakeholders to fulfilling the needs for other stakeholders as well. The traditional way of doing business was maximizing profit and accordingly, maximize the utility of shareholders. As stated by Adam Smith: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” (A. Smith, 1776). Nowadays there is a trend of companies to behave in a social and sustainable way and their aim goes beyond creating economic value (Lougee & Wallace, 2008b; Michelon, 2007). This behavior is also reflected in the voluntary information disclosures of companies. Since the late 20th century, the emphasis of business on CSR increased dramatically and companies started to disclose information voluntarily with regard to social and environmental matters (Regester & Larkin, 2005). This practice resulted in social and environmental disclosures in annual reports and additionally separate sustainability reports (Deegan & Unerman, 2006; May, Cheney, & Roper, 2007). This thesis explores factors that affect corporate sustainability practices of companies. Companies engage in CSR practices to fulfill the needs of their stakeholders (Deegan & Unerman, 2006). Therefore, this study is focused on the quality of sustainability disclosures and how it differs among companies and the development over time.
1.1 Thesis background
Recently business has begun to attach greater value to CSR. More companies are becoming aware of their impact on their environment and look beyond fulfilling their self-interest which is expressed in (int. al.) voluntary disclosures. It seems like a self-regulating process in a sense that companies should care for society and the environment since they do not operate solely. However, it is rather remarkable that after economic crises and scandals, the emphasis on voluntary disclosures (including CSR disclosures) increases (Marsiglia & Falautano, 2005; Weitzner & Darroch, 2009). Although the environmental impact of financial institutions seems to be minimal, the concept of CSR is related to industry-specific considerations and therefore it also applies for financial institutions (Commission of EU Communities, 2002; Decker, 2004). Several reasons exist for choosing the banking sector as the main area of interest for this research. Like any other type of business, the main function of banks is to provide goods and services that are demanded by society. This implies that the banks’ business activities should be in accordance with the needs of society. According to Decker (2004) the banking sector is characterized by information asymmetry. There is a mutual contract between the client and the bank, but the promises made in those contracts are often difficult to assess for clients when they do not have access to full information. Therefore banks carry the responsibility to provide sound advice to their clients. The banking sector has realized that they can play an active role in promoting sustainability disclosures (PWC, 2001). Banks might for instance be able to induce other companies to adopt corporate sustainability practices since the financial system affects other businesses by allocation of capital (Marsiglia & Falautano, 2005). Financial institutions are also important in facilitating transactions between individuals and therefore they affect businesses as well as the society as a whole (Day & Woodward, 2009).
With increasing globalization, multinational corporations are more flexible in shifting resources across countries. However to be able to do so, financial institutions are often needed since they are an intermediary of capital (Jeucken & Bouma, 1999). Financial institutions can therefore affect business and societies worldwide (Day & Woodward, 2009; Gray et. al., 2006). Several reports (CCMR, 2009; Delphi International, 1997; UNEP FI, 2006; UNEP, 2006) have emphasized the role of financial institutions to participate in and encourage corporate sustainability globally. Due to their widespread influence, financial institutions are considered to have a leading role in providing sustainability disclosures. However, prior studies do not show similar results on the expected active participation of financial institutions in corporate sustainability. Some studies have shown that financial institutions do not (yet) recognize the value of corporate sustainability disclosures. One of the causes is that investors do not find CSR disclosures useful in a sense that it is not comparable, e.g. too little detailed and disclosures provide selective information (Brown, de Jong, & Levy, 2009). Hence, financial institutions have less incentive to disclose information on corporate sustainability. Other reasons are more skeptical and question whether sustainability disclosures by financial institutions are beneficial at all since more disclosure doesn’t necessarily means greater transparency because there are no specific standards according to which sustainability performance can be measured clearly. Consequently companies are able to provide disclosures at their own discretion. Another issue is whether the costs of producing a sustainability report, outweigh the benefits of it (Baumann & Nier, 2004). Moreover, sustainability disclosures are considered as self-promotion of firms, indicating that positive performances are emphasized in the disclosures and negative performances are barely mentioned (Moneva & Cuellar, 2009; Richardson & Welker, 2001). Despite this criticism, other studies find positive effects of corporate sustainability disclosure. Baumann & Nier (2004) find that banks that provide more voluntary disclosures show a lower stock volatility, which indicates that this information is useful for investors. As a result, the cost of capital might decrease, because the financial performance of the company is more stable. Voluntary disclosures might also be used for risk management (Malovics, Csigene, & Kraus, 2008). Because banks can make better assessments of market participants they are able to spread risks, therefore, banks are able to reduce information asymmetries between market participants (Day & Woodward, 2009; Jeucken & Bouma, 1999). Overall a common reason for companies to engage in sustainability practices is that it yields them competitive advantages (Heal, 2005; Murray et al., 2006; PWC, 2001).
1.2 Research objectives
The first difficulty with regard to CSR arises from the meaning of ‘Corporate Social Responsibility’. Since there is no universal agreement on the definition of CSR, it can have different meanings for different people. Also for different industries, the implications on CSR might differ significantly. As shown in the previous section, the public’s perception on CSR practices can be rather skeptical as well. Although it is a widely accepted belief that CSR is important for business to meet stakeholders’ demands, many aspects of CSR remain unresolved. Despite the different interpretations of CSR, it is rapidly developing worldwide. The interest in corporate sustainability practices of the banking sector is considered important due to the fact that they are an integrated part of the economy and their influence on other companies.
One of the objectives is to examine how corporate sustainability is valued by the banking sector and how they engage in CSR. For this purpose it is also important to consider whether banks engage in CSR from their own sense of responsibility or because they experience pressure from stakeholders. Considering the emphasis on corporate sustainability, it is examined how CSR practices of the banking sector have developed over time. Furthermore, this research is aimed at gaining an understanding of how the banking sector attempts to fulfill demands from stakeholders with regard to corporate sustainability.
Another characteristic of corporate sustainability is that it is not specifically required by law and therefore it often concerns voluntary practices. Some countries might have environmental regulations that companies should comply with, but that is merely an aspect of CSR. Despite the lack of regulations concerning CSR, governments might still take measures to encourage corporate sustainability practices within the banking industry due to their influence on business and society. Another objective of this research is therefore to examine whether governments affect corporate sustainability practices of banks and if so, in what manner.
Due to the financial crisis in 2008 there is a great demand for more transparency and improving regulation and supervision with respect to disclosures of banks and other non-bank financial institutions (CCMR, 2009; Hennigan, 2009). In general the banking sector is often accused for acting irresponsibly which has contributed to the financial crisis (Thomé, 2009). Furthermore public trust in banks has collapsed after the financial crisis and CSR could be used as a tool to restore trust again. Considering the current situation and the increasing demand for transparency, the effect of the financial crisis on corporate sustainability practices is examined as well.