Business Sustainability

Business Sustainability

Investor, Board, and Management Perspective

Zabihollah Rezaee
Contributing Author Nick J. Rezaee
Business Sustainability: Investor, Board, and Management Perspective

Copyright © Business Expert Press, LLC, 2022.

Cover design by Charlene Kronstedt

Interior design by Exeter Premedia Services Private Ltd., Chennai, India

All rights reserved. No part of this publication may be reproduced,

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First published in 2021 by

Business Expert Press, LLC
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ISBN-13: 978-1-63742-101-7 (paperback)

ISBN-13: 978-1-63742-102-4 (e-book)

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 Description
Business sustainability has become economic and strategic imperative
with potential to create opportunities and risks for businesses. There
have been considerable efforts by regulators and business organizations
to encourage the board of directors and management to pursue prof-
it-with-purpose goals in by focusing on long-term investment and inte-
grating environmental, social and governance (ESG) sustainability into
their strategic and investment decisions. The concept of impact invest-
ing, of focusing on the importance and relevance of corporate investment
strategies in achieving financial economic sustainability performance
(ESP) in creating returns on investment and in obtaining non-financial
ESG sustainability performance of providing positive social and environ-
ment impacts, is gaining acceptance by retail and institutional investors.
Positive effects on the environment and society cannot be achieved
without allocating scarce resources that could otherwise be used to max-
imize firms’ financial economic performance. The role of the board of
directors is to oversee the managerial function of focusing on the long-
term financial ESP and non-financial ESG sustainability performance,
effectively communicating sustainability performance information to all
stakeholders.
This book examines the crucial role of investors both retail and
institutional investors and investment managers, the corporate board of
directors and management in collaborating to achieve financial ESP and
nonfinancial ESG sustainability performance in creating shared value
for all stakeholders. This book also highlights how people, business and
resources collaborate in achieving sustainability performance of creating
shared value for all stakeholders. Anyone who is involved with business
sustainability and corporate governance will be interested in this book.
vi Keywords

Keywords
business sustainability; financial economic sustainability performance;
nonfinancial environmental, ethical, social, and governance sustain-
ability performance; sustainability risk; sustainability disclosure; impact
investing; investor interests in sustainability; board sustainability fidu-
ciary duties; management sustainability commitments; supply chain
sustainability
 Contents
Preface��������������������������������������������������������������������������������������������������ix
Acknowledgments�����������������������������������������������������������������������������������xi

Chapter 1 Introduction to Business Sustainability Gatekeepers�������1

Chapter 2 Business Sustainability and Investors�����������������������������19
Chapter 3 Business Sustainability and the Board of Directors��������31
Chapter 4 Business Sustainability and Management����������������������51
Chapter 5 Business Sustainability and Supply Chain
Management�����������������������������������������������������������������67

Notes���������������������������������������������������������������������������������������������������77
References���������������������������������������������������������������������������������������������79
About the Authors���������������������������������������������������������������������������������81
Index���������������������������������������������������������������������������������������������������83
 Preface
This book defines business sustainability as a process of generating finan-
cial economic sustainability performance (ESP) to create shareholder value
while achieving nonfinancial environmental, ethical, social, and gover-
nance (EESG) sustainability performance in protecting the interests of
other stakeholders including creditors, customers, employees, suppliers,
government, society, and the environment. The primary purpose of sus-
tainability is to create shared value for all stakeholders and as such corporate
gatekeepers including investors, the board of directors, and management
play an important role in continuously improving financial ESP and non-
financial EESG sustainability performance toward achieving the main goal
of creating shared value. Given the global growing attention to business
sustainability, this book examines the emergence of business sustainability
from investors, directors, and management perspective. The role of busi-
ness corporations in our society has evolved from profit maximization to
creating shareholder value and in recent years to create shared value for all
stakeholders. Firm performance is measured not only by financial income,
but also by the mechanisms in which business success and sustainability is
measured in terms of nonfinancial sustainability key performance indica-
tors pertaining to environmental, social, governance, and ethical activities.
Business sustainability enables management to establish synergy and
congruence between the two managerial concepts of cost management and
performance management, and integrate sustainability into the business
environment, corporate culture, and supply chain processes. Cost manage-
ment and performance management practices have recently received consid-
erable attention in management and financial accounting and the business
community. Cost management is defined in the context of enterprise sus-
tainability as a process of planning and controlling the costs of products and
services to promote maximum utilization of scarce resources in generating
revenue and delivering high-quality and environmentally safe products and
services to customers. Performance management, in the context of sustain-
ability, consists of all business activities that generate financial ESP and non-
financial EESG sustainability performance to maximize firm value and create
x preface

shared value for all stakeholders. This book addresses the integrated effects of
both economic factors and managerial incentives on cost behavior and sus-
tainability performance. This book attempts to build a bridge between man-
agerial accounting and financial accounting by focusing on both internal
information systems (cost management) and external information systems
(performance management), as these two functions are interrelated and inte-
grated. This book provides insights into managerial initiatives for advancing
business sustainability from greenwashing and business branding to creat-
ing opportunities for revenue generation, cost management, supply chain,
business growth, and products and services innovation. The integrated cost
management and performance management concepts under business sus-
tainability suggest that a firm must extend its focus beyond maximizing
short-term shareholder profit by considering the impact of its operations on
the long-term interests of all stakeholders, including shareholders, creditors,
customers, employees, the community, society, and the environment.
This book consists of five chapters covering all aspects of business
sustainability with a keen focus on its implications for investors, boards
of directors, and management. Anyone who is involved with business
sustainability and corporate governance, the financial reporting process,
investment decisions, legal and financial advising, audit functions, and
corporate governance education will be interested in this book. Spe-
cifically, corporations, their executives, the boards of directors, board
committees, internal and external auditors, accountants, lawmakers,
regulators, standard-setters, users of financial statements (investors, cred-
itors, and pensioners), investor activists, business schools, and other pro-
fessionals (attorneys, financial analysts, and bankers) will benefit from
this book. Business sustainability structure including principles, theories,
risks, performance, mechanisms and functions presented in this book are
applicable to organizations of all types and size. Profit-oriented, not-for-
profit, and governmental entities can benefit from the book. We hope
you find this book useful and valuable in achieving your personal and
professional goals. The book provides maximum flexibility in presenting
the amount and order of materials on business sustainability.
Sincerely,
Zabihollah (Zabi) Rezaee
Nick J. Rezaee (contributing author)
March 21, 2021
 Acknowledgments
I acknowledge the Securities and Exchange Commission, the Public Com-
pany Accounting Oversight Board, the American Institute of Certified
Public Accountants, the Big Four Accounting Firms and Corporate Gover-
nance Organizations, American Accounting Association, Global Reporting
Initiative (GRI), International Integrated Reporting Council (IIRC), Sus-
tainability Accounting Standards Board (SASB), United Nations, Interna-
tional Business Council (IBC) of the World Economic Forum (WEF), and
other sustainability standard-setting organizations for permission to quote
and reference their professional standards and other publications.
The encouragement and support of my colleagues at the University
of Memphis are also acknowledged. Especially, my graduate assistant,
Ms. Naomi Riley for providing invaluable assistance. I thank the members
of the Business Expert Press team and Exeter team for their hard work and
dedication in editing the book, including, Scott Isenberg, John Wood and
Dhinesh Kumar.
My sincere thanks are due to my wife Soheila and my children Rose
and Nick. Without their love, enthusiasm, and support, this book would
not have come to fruition when it did.
Zabihollah (Zabi) Rezaee
Nick J. Rezaee (contributing author)
March 21, 2021
 CHAPTER 1

Introduction to Business
Sustainability Gatekeepers
Executive Summary
There have been considerable efforts to encourage business organizations
to pursue profit-with-purpose goals in the past decade by focusing on
long-term investment and integrating environmental, ethical, social, and
governance (EESG) sustainability into their strategic and investment
decisions. The concept of impact investing, which focuses on the impor-
tance and relevance of corporate investment strategies in creating returns
on investment and providing positive social and environment impacts is
gaining acceptance by retail and institutional investors. The investment
managers are trying to maximize financial performance as well as to have
positive and measurable effects on the environment and society. Positive
effects on the environment and society cannot be achieved without allo-
cating scarce resources that could otherwise be used to maximize firms’
financial economic performance. Business sustainability can be promoted
and sustained when corporate gatekeepers set a tone at the top and make
commitments to create shared value for all stakeholders. The board of
directors and senior executives and investors play an important role in
promoting business sustainability as presented in this chapter.

Introduction
Business sustainability is advancing from the greenwashing and branding
to, very recently, business imperative as shareholders demand, regulators
require, and companies report their sustainability performance. Sustain-
ability has become economic and strategic imperative with potential to cre-
ate opportunities and risks for businesses. Business sustainability is defined
in this book as a process of generating financial economic sustainability
2 Business Sustainability

performance (ESP) in ensuring desired rate of returns for shareholders

while achieving nonfinancial EESG sustainability performance in protect-
ing the interests of other stakeholders such as creditors, employees, cus-
tomers, suppliers, communities, regulators, society, and the environment.
The business sustainability process is affected by policy makers, regulators,
investors, corporations, and their board of directors and executives, and
the process affects the decisions and actions of these participants. The five
chapters of this book offer guidance to business sustainability gatekeep-
ers including investors, boards of directors, executives, and management
accountants for proper measurement, recognition, and reporting of all
five economic, governance, social, ethical, and environmental (EGSEE)
dimensions of sustainability performance. This book also highlights how
people, business, and resources collaborate in a business sustainability and
accountability model. The five chapters of this book are intended to cover
a variety of issues relevant to business sustainability and their implications
for sustainability gatekeepers including investors, the board of directors,
executives, and management accountants.

Business Sustainability Definition

and Book Objectives
As mentioned previously, this book defines business sustainability as a
process of generating financial ESP to create shareholder value, while
achieving nonfinancial EESG sustainability performance in protecting
the interests of other stakeholders.1 The primary purpose of sustainability
is to create shared value for all stakeholders and as such management
accountants play an important role in continuously improving financial
ESP and nonfinancial EESG sustainability performance toward achieving
the main goal of creating shared value. Given the global growing attention
to corporate sustainability, this book examines the emergence of business
sustainability from investors, directors, and management perspectives.
The role of business corporations in our society has evolved from profit
maximization to creating shareholder value and in recent years to create
shared value for all stakeholders. Firm performance is measured not only
by financial income but also by the mechanisms in which business success
and sustainability is measured in terms of nonfinancial sustainability key
 Introduction to Business Sustainability Gatekeepers 3

performance indicators (KPIs) pertaining to environmental, social, gov-

ernance, and ethical activities.
This book consists of five chapters covering all aspects of business sus-
tainability with a keen focus on its implications for sustainability gate-
keepers including investors, boards of directors, and management. Anyone
who is involved with business sustainability and corporate governance, the
financial reporting process, investment decisions, legal and financial advis-
ing, audit functions, and corporate governance education will be inter-
ested in this book. Specifically, corporations, their executives, the boards
of directors, board committees, internal and external auditors, accoun-
tants, lawmakers, regulators, standard-setters, users of financial statements
(investors, creditors, and pensioners), investor activists, business schools,
and other professionals (attorneys, financial analysts, and bankers) will
benefit from this book. Business sustainability structure including prin-
ciples, theories, risks, performance, mechanisms, and functions presented
in this book are applicable to organizations of all types and size. Prof-
it-oriented, not-for-profit, and governmental entities can benefit from this
book. This introductory chapter defines business sustainability and pro-
vides a synopsis of what sustainability means for business sustainability
gatekeepers including investors, the board of directors, and management.
Other chapters present more detail of business sustainability for business
organizations, their investors, directors, and executives.

Sustainability Performance
Sustainability performance is broadly referred to as financial ESP and non-
financial EESG sustainability performance.2 This section examines each
of the ESP and EESG sustainability performance dimensions. The World
Economic Forum (WEF) provide guiding principles and metrics for
focusing on the ESG sustainability performance relevant to governance,
people, planet, and prosperity as discussed in the following subsection.3
The International Business Council (IBC) of the WEF, in collaboration
with the big 4 accounting firms, has released its final recommendations
for a set of financial ESP and nonfinancial EESG sustainability perfor-
mance metrics and disclosures that can be globally accepted and imple-
mented.4 These metrics are relevant to both financial and nonfinancial
4 Business Sustainability

sustainability performance and also determine a company’s adoption of

the Sustainable Development Goals (SDGs) that have been promoted
by the United Nations. The recommendations encourage companies to
disclose their core ESP and EESG metrics using a “disclose or explain”
approach by focusing on a “materiality test” of reporting sustainability
performance information as discussed in the following.

Financial Economic Sustainability Performance

The most important and commonly accepted dimension of sustainability

performance is financial ESP, which is the cornerstone of business sus-
tainability. The main objective function for any business organization is
to achieve economic performance in creating financial returns and value
for shareholders. Economic sustainability disclosure is any financial infor-
mation related to the profitability and growth of business organizations.
Traditionally, business organizations have focused on maximizing profit
without much consideration of the social and environmental impacts of
their operations and whether they are producing goods and services that
the society needs. Some of the KPIs of financial ESP are reported earnings,
cash flows, return on assets, return on investment, growth, research and
development, total amount of spending on R&D, total amount of spend-
ing on Information Technology, and net investment (capital expenditure
less depreciation). These KPIs should be used as benchmarks against which
ESP is evaluated, and directors and executives are held accountable.

Environmental Sustainability Performance

Environmental sustainability is based on the simple concept of leaving

a better environment for future generations. Stakeholders are expecting
business organizations to provide clearer and more complementary infor-
mation beyond what is legislated by law. Interest in the environmental
sustainability performance is increasing as investors are becoming more
concerned about climate change and global warming and current Demo-
crat administration is more in favor of focus on environmental issues than
the previous administration. The United Nations Climate Change Con-
ferences are typically conducted annually to address climate change and
global warming. President Biden has already issued an executive order I
 Introduction to Business Sustainability Gatekeepers 5

January 2021 to rejoin the Paris Agreement to address climate change and
global warming. For example, greenhouse gas (GHG) emissions in tons
of carbon dioxide equivalent (tCO2e), estimate of upstream and down-
stream GHG emissions are important environmental KPIs.
The environmental sustainability performance dimension includes
reducing an organization’s carbon footprint, creating a better work environ-
ment, addressing climate change, and improving the air and water quality
of the property and the surrounding community. Examples of environmen-
tal sustainability performance indicators are: (1) proper air and water pol-
icies; (2) beneficial products and services; (3) pollution policies and ozone
depleting chemicals; (4) recycling; (5) clean energy; (6) hazardous waste;
and (7) climate changes.
Energy efficiency and climate change strategies, policies, and proce-
dures should consist of the following:

• Identify and select relevant factors related to energy efficiency

and climate change risks and opportunities based on an assess-
ment of company performance.
• Create a methodology for developing KPIs energy efficiency
and climate change.
• Implement energy efficiency and climate change strategy.
• Periodically review and revise the climate change and energy
efficiency policies and procedures.

Climate performance indicators are:

• GHG emissions. An emissions assessment should evaluate the

company’s emissions compared to peers, industry, or regula-
tory requirements.
• Industry climate risk. Some companies are more vulnerable to
the future implications of climate change, given the nature of
their businesses, industry, or the location of their operations.
Thus, be aware of your industry best practices.
• Climate risk outlook. Forward-looking KPIs of climate risk
performance and disclosure include the company’s corporate
policies and strategy on climate change and climate change
resilience in general.
6 Business Sustainability

• Energy efficiency and climate change strategies, policies, and

procedures should consist of the following:
• Identify and select relevant factors related to energy efficiency
and climate change risks and opportunities based on an assess-
ment of company performance.
• Create a methodology for developing KPIs energy efficiency
and climate change.
• Implement energy efficiency and climate change strategy.
• Periodically review and revise the climate change and energy
efficiency policies and procedures.
• Communicate with all stakeholders the assessment and
management of climate change and global warming risks and
actions taken to control and minimize such risks.
• Conduct climate risk scenario assessment and planning, and
design and implement policies and procedures to manage
climate-related risks.

Ethical Sustainability Performance

Ethical sustainability performance is often integrated to the other dimen-

sions of sustainability performance and it relates to how ethically an orga-
nization is conducting its business. Ethical sustainability performance is
a function of business culture of integrity and competency, employee’s
integrity, and begins with the tone management sets at the top and work-
place ethics. Attributes of an ethical corporate culture are driven from
the existence of codes of conduct, appropriate tone at the top, sense of
employee responsibility, accountability, honesty, fairness, mutual respect,
and freedom to raise concerns.
The ethical dimension of sustainability performance reflects a compa-
ny’s policies and procedures relevant to integrity and competency of all
individuals within the company, as well as workforce diversity activities
and other equity and inclusion-related issues. Corporations should evalu-
ate and properly manage their progress on diversity, equity, and inclusion
issues by: (1) ensuring oversight of diversity commitment; (2) evaluating
diversity-related risks and effectively managing such risks of pay ineq-
uity among diverse groups; and (3) disclosing of workplace diversity,
 Introduction to Business Sustainability Gatekeepers 7

inclusion, and equity to all stakeholders. On December 17, 2020, the

Institute of Business Ethics (IBE) released its report entitled The Ethics
of Diversity, which provides guiding principles and a practical guide as
to why diversity matters business organizations and their boards, exec-
utive, and stakeholders.5 The IBE report underscores the importance of
the ethical dimension of business sustainability in the context of diver-
sity and provides business organizations and their boards and executives.
Proper ethical policies and procedures in the workplace can affect the
integrity and quality of operations and performance. Some of the exam-
ples of ethical sustainability performance are: (1) diversity and inclusion;
(2) strong union relation; (3) no-layoff policy; (4) employee involvement,
engagement, and participation; (5) gender pay equity; (6) health, safety,
and well-being of employees, customers, and suppliers; (7) human right
strength; (8) monetary value of training and development expenditures;
(9) healthy and safety policies; and (10) retirement benefits.

Social Sustainability Performance

Social sustainability performance measures the maximization of positive

impacts and minimization of negative impacts on society and how well a
company has translated its social goals into practice. Social sustainability
performance is about making the company’s social purpose a reality and
aligning it with interests of the society. Social sustainability performance
should be linked to the existence of corporate policies that are predomi-
nantly community-service driven to improve social conditions. The per-
ceived social injustice and social unrest in recent years encourage business
organizations to focus on their racial and ethnic diversity beyond the
board of directors and into the broader workplace and integration into
their social sustainability performance. Examples of social sustainability
performance are: (1) charitable giving; (2) supports of communities; (3)
innovative giving; (4) support for housing for low-income individuals;
(5) support for education; (6) net employment created; (7) number of
new employee hires; (8) number of employee terminations; (9) women
and minority contracting; (10) employment of the disabled; and (11)
employee diversity policies. The social sustainability performance dimen-
sion ranges from safety, health, and well-being of employees, customers,
8 Business Sustainability

and suppliers, better employee health and well-being to becoming a

positive contributor to the sustainability of the planet and improving
the quality of life for future generations. While the 2020 COVID-19
pandemic brought on many challenges including remote work and the
disruption, stress, and uncertainty, it did cause business organization to
pay attention in rethinking their approach to human capital management
including employee health, safety, and well-being. Investors are also inter-
ested in knowing how companies are responding to the perceived social
injustice and changes in employee recruitment, training, development,
and retention policies and practices, as well as any changes in corporate
culture, business environment, and corporate purpose.

Governance Sustainability Performance

Corporate governance has been and will continue to be the theme of the
21st century in response to the existence and persistence of financial scan-
dals, the 2017–2019 global financial crisis, business misconducts, and the
2020 global COVID-19 pandemic. Corporate governance mechanisms
and measures have been established by policy makers, regulators, and
corporations to promote economic stability, public trust, and investor
confidence in financial reports in response to financial crises. Corporate
governance is defined as a process of managing the organization for the
benefit of its stakeholders. Governance sustainability performance reflects
how well corporate governance participants from the board of directors
to executives, accountants, auditors, legal counsel and financial advisors
fulfill their responsibilities.
Some KPIs relevant to governance are: (1) board independence; (2)
reasonable compensation for directors and executives; (3) composition of
the highest governance functions; (4) ownership structure; (5) transpar-
ency; (6) composition of company share ownership and voting rights; (7)
stock ownership by directors and officers; and (8) executive compensa-
tion disclosures (ratio of chief executive officer (CEO) compensation to
non-CEO). While these corporate governance KPIs have been adapted
by business organizations in the past several decades, many of these KPIs
are descriptive and historical, and thus stakeholders, especially inves-
tors, expect a move toward forward-looking corporate governance KPIs
 Introduction to Business Sustainability Gatekeepers 9

that demonstrate accountability, commitment, and progress toward best

practices of business sustainability. Corporate governance measures and
effectiveness are gaining attention of policy makers, regulators, investors,
other stakeholders, and the business community. The board of directors,
as representative of shareholders in fulfilling their fiduciary duties, should
be engaged in effective corporate governance strategies and adopt strat-
egies beyond just compliance with some rules and regulations. Public
companies in improving the quality and effectiveness of their corporate
governance framework should consider the following measures:

• Focus on long-term and sustainable strategic plans.

• Ensure compliance with all applicable laws, rules, regulations,
and standards.
• Improve board diversity and representation.
• Engage stakeholders in the board oversight function.
• Address sustainability factors of performance, risk, and
disclosure.

Sustainability and Investor Sentiment

A growing number of investors are now considering impact investing
with a keen focus on financial ESP and nonfinancial EESG sustainability
factors and integrating nonfinancial EESG sustainability factors into their
investment strategies. Prior research provides mixed results regarding the
link between financial/market performance and EESG factors of perfor-
mance, risk, and disclosure.6 The quality and reliability of public financial
information improves the integrity and efficiency of capital markets. The
quality of financial disclosures also improves market liquidity by reduc-
ing information asymmetry across traders. Sustainability disclosures are
expected to affect market liquidity when such disclosures cause informa-
tion asymmetry that induces adverse selection into share markets. Non-
financial EESG sustainability disclosures are expected to be value-relevant
to both external and internal users of such disclosures. Investors and other
stakeholders, including suppliers, customers, governments, and society
can have more transparent information about EESG performance, which
enables them to make more informed decisions. EESG sustainability
10 Business Sustainability

disclosures can also improve internal management practices by enabling

companies to establish better relationships with investors, customers, sup-
pliers, employees, regulators, and society.
The relationship between financial performance and EESG perfor-
mance has been extensively yet inconclusively debated in the literature
in the past decade, which has caused investors not paying enough atten-
tion to sustainability factors of performance and disclosure. However, a
growing number of investors are now considering impact investing with a
keen focus on financial return and EESG sustainability factors, regulators
mandate ESG sustainability performance disclosure, and public compa-
nies prepare and disseminate sustainability reports. In this era of sustain-
ability-oriented investors, directors, and executives, a major challenge is
to determine whether management’s optimistic expectations about future
financial performance are associated with better EESG performance and
higher EESG disclosure.
The two measures of firm value namely the economic value and mar-
ket value may diverge, and this divergence can be caused by many factors,
including the quality and quantity of earnings and other financial ESP and
nonfinancial EESG sustainability performance information disseminated
to the market. Investors may trade shares based on expectations about
the company’s future growth and performance and based on short-term
considerations of quarterly earnings guidance that may cause changes
in stock prices independent of changes in the company’s true condition
and long-term performance. Management, assets managers, equity ana-
lysts, and even shareholders are motivated and thus their behaviors are
biased toward short-term financial performance. The enlightened value
maximization concept of sustainability performance suggests that non-
financial EESG sustainability can provide both opportunities and chal-
lenges for investors. More sustainability information can lead to a better
understanding of the link between management expectations and actions
and sustainable performance, and thus could possibly reduce noise in the
corporate reporting process as well as short-termism attributes, and thus
enables investors to make more informed investment decisions.
Investors expect to receive financial ESP information to ensure desired
rate of returns on their investment and nonfinancial EESG sustainability
information to obtain social and environmental impacts. Sustainability
information is considered value relevant to investors when it is relevant,
 Introduction to Business Sustainability Gatekeepers 11

reliable, and transparent based on standardized sustainability reporting

and assurance. Investors prefer to receive sustainability ratings, rankings,
indexes, and matrices assured by independent third party. Investors seek
these standardized and assured sustainability disclosures in assessing a
company’s strategies for securing sustainability and its drivers of long-
term economic growth and prosperity. The content and format of sustain-
ability disclosures and metrics have been debated and considered among
public companies, investors, regulators, and standard setters. Transparent,
qualitative, and quantitative sustainability metrics that are measurable,
assurable, and generally acceptable and applicable are value-relevant to
both retail and institutional investors. There are four criteria and key
considerations for investors in utilizing sustainability metrics. These are:
(1) integration of these metrics into investment strategies; (2) assessment
of the materiality of sustainability metrics; (3) verification of the accuracy
of these sustainability metrics; and (4) utilization of sustainability metrics
that reflect the company’s unique sustainability story.

Board of Directors and Business Sustainability

The board of directors as representative of shareholders is responsible
for protecting the interests of shareholders by overseeing both financial
ESP and nonfinancial EESG information disseminated to shareholders.
Recent events of the 2020 COVID-19 pandemic, the perceived social
injustice and move toward diversity and inclusion and environmental
initiatives have heightened economic turmoil, social unrest, and thus
encourage boards of public companies to address a range of issues in
response to rapidly emerging sustainability risks. These events necessitate
public companies and their board of directors to: (1) renew interest in
the company’s mission of profit-with-purpose in defining its purpose in
society in providing the goods and services that are not detrimental to
society and meet basic needs and innovation;(2) move away from share-
holder primacy and toward stakeholder primacy to protect interests of a
broader set of stakeholders; (3) focus the board interest in both financial
ESP and nonfinancial EESG sustainability performance; (4) address the
value of human capital and related changes in the nature of work and the
workplace; and (5) explore social matters, including issues of racial and
gender equality and social justice.
12 Business Sustainability

The previous events and trends change the board’s strategic planning
and priorities in the foreseeable future with the key focus on:

• Setting a tone at the top in promoting business sustainability

and engage in sustainability initiatives. Defining corporate
purpose of promoting EESG sustainability.
• Encouraging socially responsible investors place in proxy
proposals, a need for the election of at least one director with
sustainability interests and skills.
• Focusing on corporate culture, workforce, and human capital
matters.
• Establishing strategic planning for achieving long-term
sustainable performance and value.
• Establishing of a board sustainability committee consisting
directors with adequate sustainability expertise.
• Requiring the entire board of directors to engage in
sustainability issues and initiatives, being held accountable
for achieving sustainability performance and to provide the
needed sustainability leadership.
• Conducting active oversight function of demanding
sustainability performance from executives.
• Including a sustainability performance target clause in
executive compensation contract.
• Accepting EESG initiatives as major and mainstream
corporate governance issues ranging from financial
performance to climate change and other environmental risks
and impacts, resource management, management of human
capital, labor standards, and consumer and product safety.
• Recognizing that the role of the board in these EESG areas is
generally one of partnership with management and
appropriate oversight.
• Understanding EESG matters often have important
reputational impacts and significant public, investor, and
stakeholder relations dimensions.
• Receiving regular briefings on relevant EESG matters from
executives and the company’s approach to handling them.
 Introduction to Business Sustainability Gatekeepers 13

• Promoting diversity, inclusion, and equity.

• Accepting EESG initiatives may have clear (and positive)
impacts on a company’s bottom line and may provide
business benefits and competitive advantages over peers.
• Considering how the risk oversight role specifically applies to
various EESG-related risks.
• Focusing on corporate strategy and evaluating the quality of
management’s sustainability factors of performance, risk, and
disclosure.
• Understanding the company’s approach to dealing with
investor requests for EESG-related engagement, external
disclosure, and reporting of the company’s approach,
response, and progress on these matters.
• Determining what kind of external communication such as
publicly shared on the company’s website or in other forums
and periodically monitor actions taken by industry peers.

Management and Business Sustainability

The substantial growth in the use of both financial ESP and nonfinancial
EESG by investors in making investment decisions encourages business
organizations and their management to pay attention to sustainability
strategies. Proper attention to all three sustainability factors of perfor-
mance, risk, and disclosure, and effective practices of sustainability strat-
egies enable management to communicate sustainability success stories
to all stakeholders including shareholders. Lack of focus on business sus-
tainability and poor sustainability practices causes management to miss
opportunities to adopt robust sustainability strategies to create shared
value for all stakeholders. Business organizations and their board of direc-
tors and executives should develop financial ESP and nonfinancial EESG
sustainability performance and continuous improvement consisting of
board oversight, strategic alignment, executive monitoring, risk assess-
ment and management, and performance evaluation in promoting and
advancing business sustainability.
Proper management of both financial ESP and nonfinancial EESG
can contribute to sustainability success and lack of commitment to
14 Business Sustainability

sustainability by directors and officers can result in unsustainable business

environment and going concern. Most challenges and problematic prac-
tices of sustainability success is the lack of profit-with-purpose mission
and strategy for achieving sustainability. Management should engage in
both financial ESP and nonfinancial EESG sustainability issues by:

• Monitoring the level of disclosure by competitors and market

cap peers pursuant to disclosure standards organizations with
significant industry backing (such as Sustainability Account-
ing Standards Board (SASB), Global Reporting Initiative
(GRI), and International Integrated Reporting Council
(IIRC)) and determine, in consultation with the board, the
company’s disclosure posture with respect to these or other
emerging approaches.
• Responding to third-party information requests from emerg-
ing EESG-ratings services and existing providers (e.g., the
proxy advisory firm ISS’s new “Environmental & Social
Quality Score” and accompanying list of 300-plus questions
for companies to complete.
• Developing expertise in EESG. Not every director or member
of senior management can be an “EESG expert.”
• Learning about the key EESG issues facing the company and
be able to converse comfortably on those issues that matter or
present significant risks.
• Developing specialized in-house expertise and updating
internal reporting and business unit structures to have greater
capacity in EESG areas.
• The most common sins of EESG sustainability oversight and
management are discussed in the following section.

Cost Management and Performance Management in

Business Sustainability
Management incentives play a significant role in its decision to voluntarily
issue forward-looking and EESG sustainability reports beyond regulatory
financial reporting. Management incentives for voluntary disclosures
 Introduction to Business Sustainability Gatekeepers 15

and the value relevance of such disclosures are intended to lend more
credibility to mandatory reported financial information. Voluntary for-
ward-looking and EESG disclosures should also improve the precision of
the performance signal, and thus result in more informationally efficient
stock prices. Cost management and performance management practices
have recently received considerable attention in management and finan-
cial accounting and the business community. Cost management is defined
in the context of enterprise sustainability as a process of planning and
controlling the costs of products and services to promote maximum utili-
zation of scarce resources in generating revenue and delivering high-qual-
ity and environmentally safe products and services to customers.
Performance management, in the context of sustainability, consists of
all business activities that generate financial ESP and nonfinancial EESG
sustainability performance to maximize firm value and create shared value
for all stakeholders. This section addresses the integrated effects of both
economic factors and managerial incentives on cost behavior and sustain-
ability performance. This section attempts to build a bridge between man-
agerial accounting and financial accounting by focusing on both internal
information systems (cost management) and external information systems
(performance management), as these two functions are interrelated and
integrated. This section provides insights into managerial initiatives for
advancing enterprise sustainability from greenwashing and business brand-
ing to creating opportunities for revenue generation, cost management,
supply chain, business growth, and products and services innovation.
Business sustainability enables management accountants to establish
synergy and congruence between the two managerial concepts of cost
management and performance management and integrate sustainabil-
ity into the business environment, corporate culture, and supply chain
processes. The concept of cost management suggests that management
maximizes the utilization of scarce resources in generating revenue and
delivers high-quality value to customers in improving performance. The
concept of performance management suggests that management strikes
a proper balance between short-term and long-term ESP as well as a
trade-off between financial/quantitative ESP and nonfinancial/qualitative
EESG sustainability performance. The integrated cost management and
performance management concepts under business sustainability suggest
16 Business Sustainability

that a firm must extend its focus beyond maximizing short-term share-
holder profit by considering the impact of its operations on the long-term
interests of all stakeholders, including shareholders, creditors, customers,
employees, the community, society, and the environment.

Conclusions
Business sustainability is gaining attention of regulators as they require
sustainability information on financial ESP and nonfinancial EESG sus-
tainability performance. Investors have also used ESP and EESG sustain-
ability factors of performance, risk, and disclosure in their investment
decisions. Public companies, their board of directors and executives have
responded to the demand by investors and requirement by regulators for
sustainability information by integrating sustainability into their business
environment and corporate culture and decision making. Companies
are now publishing integrated sustainability reports and will continue to
release such reports to signal their superior and high sustainability per-
formance. Sustainability reports present information on the achievement
of financial returns for investors while creating social and environmental
impacts. This chapter synthesizes the role of sustainability gatekeepers
such as investors, boards of directors, and executives, and the next four
chapters expand on this role.

Chapter Takeaways
• More than 1,300 institutional investors worldwide, represent-
ing $59 trillion in assets under management, have signed on
to the UN Principles of Responsible Investing, which seek to
integrate sustainability concerns into investment objectives.
• Asset managers such as Blackrock, State Street, and Vanguard
are now investing in sustainable and CSR companies.
• Now more than 15,000 global public companies disclose
their economic sustainability performance (ESP) and environ-
mental, ethical, social, and governance (EESG) sustainability
performance.
 Introduction to Business Sustainability Gatekeepers 17

• Six thousand European companies have been required to

disclose ESG and diversity, in 2017 and onward.
• Many public companies have either created a board sus-
tainability committee or executive sustainability position to
promote and ensure commitment to business sustainability.
• Business sustainability is expected to continue advancing as
investors are demanding more nonfinancial EESG sustainabil-
ity information, society is more concerned about social injus-
tice, environmental initiatives are gaining more attention, and
corporation are focusing on their human capital, diversity,
and inclusion.
 Index
accountability, 39–41, 48
agency theory, 20–21
asymmetric information risk
(AIR), 20
audit committee, 46–47
board of directors, 11–13, 31–32,
47–48, 54
accountability, 39–41
audit committee, 46–47
climate change, 41–45
diversity, 39
and human capital, 45–46
and management, 74
oversight functions, 35–37
role, 32–37
statement of purpose, 37–39
bottom-line earnings, 24
business judgment rule, 39–41
business sustainability, 1–2, 16
board of directors and, 11–13
cost management and performance
management, 14–16
definition, 2–3
initiatives, 42–43
management and, 13–14
CFA Institute, 22–23
chief financial officer (CFO), 43, 52,
54, 55
chief sustainability officer (CSO),
55–58
climate
change, 41–45
performance, 5–6
Climate Risk Disclosure Act
of 2019, 45
consumer trends, 36
continuous improvement, 61, 68–69,
71–75
corporate governance, 36
Corporate Human Rights Risk
Assessment, Prevention, and
Mitigation Act of 2019, 44
cost management, 14–16, 60–62
COVID-19 pandemic, 8, 11, 23, 37,
38, 41, 42, 51, 52, 54, 60–61,
64, 68, 71–75
Delaware Certification of Adoption
of Transparency and
Sustainability Standards Act
(the “Act”), 33–34
Delaware General Corporation
Law, 33
Delaware Secretary of State, 34
diversity, 39
economic, governance, social, ethical,
and environmental (EGSEE),
24, 25, 44, 55, 64
enterprise risk management
(ERM), 58
environmental, ethical, social, and
governance (EESG), 2–4,
9–11, 13–16, 19–29, 31–32,
56–64, 69, 72–75
environmental sustainability
performance, 4–6
ESG Disclosure Simplification
Act, 44
ethical sustainability performance
(ESP), 1–4, 6–7, 13–16,
19–21, 32, 73
European Commission (EC), 23–24
financial economic sustainability
performance, 4; See also
ethical sustainability
performance (ESP)
84 Index
Global Reporting Initiative (GRI),
42, 44
governance sustainability
performance, 8–9
greenhouse gas (GHG) emissions, 42
holistic and integrated sustainability,
53–54
human capital management
(HCM), 45–46
human capital resources
(HCR), 45–46
impact investing, 9, 10, 20, 22, 28,
35, 36, 47
inherent information imbalance
(III), 20
innovation, 36
Institute of Business Ethics
(IBE), 7
Institutional Shareholder Services
(ISS), 23
International Business Council
(IBC), 3
International Integrated Reporting
Council (IIRC), 44, 62
investors, 9–11, 19–20
EESG disclosure guiding principles,
25–27
European Commission, 23–24
Institutional Shareholder
Services, 23
investment strategy and, 27–29
long-term sustainability
investment, 25
Principles of Responsible
Investment, 24, 29
role, 20–23
ISO 31000, 59
key performance indicators (KPIs), 4,
8–9, 51
lean management, 61–62, 64
long-term sustainability investment,
25, 43
management, 13–14, 51–52
board of directors and, 74
chief financial officer, 43, 52,
54, 55
chief sustainability officer, 55–58
cost, 14–16, 60–62
human capital, 45–46
lean, 61–62, 64
performance, 14–16, 59–60
practices, 62–64
role, 52–55
marketwide effects, 57
nonfinancial metrics, 53
nonvalue-adding and nonessential
activity, 72
nonvalue-adding but essential
activity, 72
performance management system
(PMS), 14–16, 59–60
Principles of Responsible Investment
(PRI), 24, 29, 62
Securities and Exchange
Commission (SEC), 42,
44, 45, 62
Shareholder Protection Act,
The, 44
short-termism, 58
social sustainability
performance, 7–8
stakeholder theory, 21
statement of purpose, 37–39
supply chain management (SCM),
54–55, 67–70, 75
supply chain sustainability (SCS),
68–70, 74–76
sustainability
disclosure, 4, 9–11, 25–26, 56–58,
61–62
and investor sentiment, 9–11
risk, 11, 58, 63
Sustainability Accounting Standards
Board (SASB), 37, 42,
44, 62
 Index 85

Sustainability Development Goals talent, 36

(SDGs), 4, 36, 62 Task Force on Climate-related Financial
sustainability performance, 3–4, Disclosures (TCFD), 42
63–64
commitments to, 53
value-adding and essential activity,
disclosure of, 57
71–72
environmental, 4–6
value-adding but nonessential
ethical, 6–7
activity, 72
financial economic, 4
value creation, 53
governance, 8–9
social, 7–8
strengths and concerns, 53 World Economic Forum (WEF), 3