Reassessing measures of sustainable firm performance: A consultant's guide to identifying hidden costs in corporate disclosures

Abstract

Strategy, management, corporate social responsibility, critical accounting, and other business researchers frequently utilize financial metrics such as return on assets, return on equity, and return on sales as proxy measures for the financial performance of firms. Large data sets offer convenience but exclude the textual data of corporate disclosures that offers critical insight into specific executive actions and social and environmental outcomes. This study looks at the detrimental consequences of the prevalent practice of relying on macrofinancial metrics as measures of firm performance. Insight from the socioeconomic approach to management (SEAM) is then applied to help an external analyst develop the perspective of an internal consultant to identify hidden costs in corporate disclosures. An extensive case on former CEO Robert Nardelli's tenure at Home Depot is presented as an example of applied SEAM theory to explore how a causal network of dysfunctions can be traced through publicly available financial disclosures. The management discussion and analysis as well as the executive incentive compensation formulas serve as a roadmap to discover hidden costs. The study offers a critical perspective of financial disclosures to allow researchers to externally diagnose dysfunctions sooner rather than years later, an insight formerly only available to internal consultants.

Board gender diversity and environmental performance: An industries perspective

“…Women tend to serve on boards of better performing firms and firms with higher return to shareholders (Farrell & Hersch, 2005). ROA is used in corporate governance studies (such as Boone, Field, Karpoff, & Raheja, 2007;Lee, Cin, & Lee, 2014;Smith, Hillon, & Liang, 2019;Wintoki, Linck, & Netter, 2012). Tobin's Q is also a possible proxy (such as Surroca et al, 2010;Wintoki et al, 2012), but it is redundant with the sales growth variable.…”

Influence of female managers' emotional display on frontline employees' job satisfaction: a cross-level investigation in an emerging economy

“…Actions that shape a sustainable organization may take various forms. In their contribution, Smith et al (2019) and Shrivastava et al (2013) urged business researchers to find new directions that organizations can take to become more sustainable. The challenges that face the meaningful participation of women in the workforce (Makinde et al , 2017) make it crucial to pursue an investigation of female managers in business and strategy studies.…”

The Influence of Corporate Strategy on the Performance of Professional Service Firms under Covid-19 Pandemic

“…Common accounting-based ratios are frequently utilized in firm performance research such as return on assets (ROA), return on equity (ROE), debt-to-assets ratio (D:A), and debt-to-equity ratio (D:E). (Smith et al, 2019) [21] There are other indicators of corporate performance and increasing amount of scholars are paying attention to aspects such as environmental and social factors. In practice, these factors are difficult to be transferred as variables and quantified.…”

“…In practice, these factors are difficult to be transferred as variables and quantified. For example, Smith et al (2019) [21], in his research, did not propose a method to quantify…”