Sustainability Performance Management in Hotel Industry PDF

ISBN 978-9984-705-26-2 SUSTAINABLE PERFORMANCE MANAGEMENT IN HOTEL INDUSTRY – A LITERATURE REVIEW Katarina Poldrugovac University of Rijeka, Faculty of tourism and hospitality management, Primorska 42, 51410 Opatija, Croatia E-mail: [email protected] Metka Tekavčić, Ph.D., Full Professor...

ISBN 978-9984-705-26-2 SUSTAINABLE PERFORMANCE MANAGEMENT IN HOTEL INDUSTRY – A LITERATURE REVIEW Katarina Poldrugovac University of Rijeka, Faculty of tourism and hospitality management, Primorska 42, 51410 Opatija, Croatia E-mail: [email protected] Metka Tekavčić, Ph.D., Full Professor University of Ljubljana, Faculty of Economics, Kardeljeva ploscad 17, 1000 Ljubljana, Slovenia E-mail: [email protected] Abstract Purpose: The purpose of this study is to investigate the current level of development of sustainable performance management and compare it to the level of implementation in the hotel industry. Special emphasis is placed on all aspects of sustainability and on the management systems that integrate them. Design/methodology/approach: The paper uses the method of literature review to examine the models of integrated sustainability performance management that are used, especially in the hotel industry. The analyzed papers are published by prominent journals, organizations or companies and are classified according to the sustainability issues that they address. Findings: Research results reveal a lack of literature on integrated sustainable performance management systems in the hotel industry in comparison to other industries. There is great inconsistency in the performance management systems used and there is a great need for sustainable performance management systems and tools that would embed all features of sustainability in the hotel industry. Practical implications: The practical implications of the research are to emphasize the importance of sustainable performance management systems and the benefits that hotel managers could have in applying them in their business and as a result enhance their operational and strategic decision-making. Social implications: Sustainable performance management systems besides economic include social responsibility and environmental performance and by using them they increase the economic potential of environmental and social activities. Consequently they raise the quality of life not only for the hotel company but also for all stakeholders. Originality/value: The research provides an extensive literature research and a systematic review of recent developments in sustainable performance management systems. The paper also provides a background for identifying further research and development of sustainable performance management systems in the area of hotel industry. Keywords: Performance management and measurement, sustainability, Sustainability Balanced Scorecard, Integrated reporting, hotel industry Paper type: Literature review Introduction Tourism and hotel industry have been rapidly growing in the past two decades (World Tourism Organization, 2010). With this growth, the environmental, economic and social impact rises simultaneously. The recent trends and expectations from shareholders are that these impacts should be minimized as much as possible. Sustainability has to reach a point where it has to be stopped considered as an additional cost to the company and be seen as an approach that can improve overall performance and bring benefits not only to the company but also to all stakeholders. In order to fulfill these anticipations hotel companies need to implement sustainability performance management into their business. This study has been done with the purpose of examining the development of sustainability performance management methods and the level of their implementation and usage in the hotel industry. The main research question of this paper is: ‘What level of development have sustainability performance management methods that integrate sustainability performance with financial performance reached?’. There is a wide range of different performance management systems, methods, tools and techniques that deal with sustainability. In this paper we will analyze the Sustainability Balanced Scorecard and Integrated reporting. Although this is not a complete list of tools for sustainable performance management, these two are some of the most important for embedding sustainability into the core of a business. From the literature review it can be seen that these two methods are not sufficiently researched and there is a need for further research. The methodology for both the Sustainability balanced scorecard and Integrated reporting is not clearly developed and there are no guidelines that users can follow in the implementation of these methods and for the preparation of reports. Further research should be conducted towards preparing specific guidelines and examining the correlation between sustainability performance and financial performance and all the benefits that this can bring. 18 ISBN 978-9984-705-26-2 1.Sustainability performance management Sustainability performance management includes all the activities that are focused on sustainability and financial performance and that help achieve a company’s goals. It is a newly emerging term that integrates environmental and social information with economic business information and sustainability reporting (Schaltegger & Wagner, 2006, p. 681). Sustainability performance management has to be strategic and decision-focused in order to contribute to long term performance and value creation (Satish & Ranjani, 2010). Many hotel companies are trying to implement sustainable performance management systems in order to meet sustainability goals and enhance their performance. To avoid difficulties in the implementation process there is a need for standardized, systematic and unified guidelines that will guide the process (Asif et all., 2011). 2. Methodology For the purpose of this research, extensive literature review in the field of Sustainability Balanced Scorecard and Integrated reporting was carried out. The papers date from 1997 to 2012. The literature search was conducted in electronic databases (EBSCOhost, Emerald, ProQuest, Sage Journals Online, Science Direct and Wiley Online Library), on the internet, as well as in the library. The aim of this search was to investigate to which extent the literature on Sustainability Balanced Scorecard and Integrated reporting has been explored. We identified 16 papers in the area of Sustainability Balanced Scorecard and 28 papers on Integrated reporting. From a total of 44 papers in these two fields, 23 were published in journals, 5 presented at conferences and 16 were found on web pages. The papers were systemized chronologically, the ones dealing with different approaches towards integrating sustainability into the Balanced Scorecard are presented in Table 1, and papers concerning Integrated reporting are presented in Table 2. 3. Sustainability Balanced Scorecard Sustainability Balanced Scorecard (SBSC) is a strategic performance management tool that is based on the concept of Norton and Kaplan’s (1997) Balanced Scorecard (BSC) and it integrates and combines sustainability with existing perspectives (financial, customer, internal business processes and learning and growth). One of the characteristics of the BSC is that it presents financial and nonfinancial measures in a single unified report. This is why the BSC is suitable as a framework for incorporating sustainability into company planning and management and as a foundation for aligning sustainability with business strategy. Although the concept of SBSC has emerged at the beginning of the 21st century, the literature on this topic is not abundant. The majority of the literature offers overviews, emphasizes benefits and different visions of SBSC. One of the benefits of SBSC is in making a systematic approach to strategic sustainability management and structuring the framework for sustainability management control (Schaltegger, 2011) in addition to improving corporate responsibility (Epstein & Wisner, 2001). There is some evidence that sustainability has a positive relation to financial performance (Crawford & Scaletta, 2005, Chalmeta & Palomero, 2011). There is no global consensus on how to incorporate sustainability in the BSC. Different authors propose different methods. The literature review has identified 9 approaches (Table 1). 19 ISBN 978-9984-705-26-2 Table 1 Different approaches of integrating sustainability into the Balanced Scorecard Author Zingales, O’Rourke & Orssatto (2000) Approach Environmental BSC, socio-related scorecard Bieker, T. & Gminder, C. (2001) Five different approaches according to different strategies employed by the respective companies. Three approaches of integrating sustainability Figge, F., Hahn, T., Schaltegger, S., & Wagner, M. (2002a) Bieker, T., & Waxenberger, B. (2002) White, G.B. (2005) Ahmad, A.R., Hamid, N.A.A., Yusoff, N.H. & Ramlan, R. (2007) Hubbard, G. (2009) Soriano, R.L., Munoz-Torres, M. J., & Chalmeta-Rosalen, R. (2010), Chalmeta, R. & Palomero, S. (2011), Society perspective BSC upgraded with GRI indicators Incorporate CSR in learning and growth perspective. Social performance perspective; environmental performance perspective; organizational sustainable performance indicator New model based on Norton and Kaplan’s BSC, Sustainability perspective Upgraded perspectives, Social/Occupational perspective, Environmental perspective Source: Author Zingales, O’Rourke & Orssatto (2000) made a distinction between social and environmental responsibilities of a company and propose building two separate environmental and social scorecards. Bieker and Gminder (2001) identified five different possibilities of structuring a Sustainability Balanced Scorecard: a. ‘Partial approach’ - One or two sustainability indicators should be integrated into one of the classical perspectives (most likely perspectives of internal processes or customers). b. ‘Additive SBSC’ – A fifth perspective is added for environmental and social sustainability. c. ‘Total SBSC’ – Sustainability indicators are added into all of the four BSC perspectives. d.‘Transversal approach’- Sustainability is considered as a value driver of an organization and environmental and social aspects are leading indicators in all perspectives. e. ‘Shared Services SBSC’ – SBSC for only some parts of the organization, with the aim of promoting the idea of sustainability. In 2002 these five approaches were summarized into three ways of integrating sustainability into the BSC. The first method was to integrate environmental and social indicators in the BSC, then to create a fifth perspective and the last method was to make a separate sustainability scorecard which takes into account environmental and social aspects (Figge, Hahn, Schaltegger, & Wagner). Bieker and Waxenberger (2002) propose a new society perspective which relates to external groups and all other sustainability-related issues are included in the four BSC perspectives. White (2005) has found an intersection between BSC and GRI’s economic, environmental and social sustainability indicators and suggests a version of a Sustainability balanced scorecard that incorporates the Global Reporting Initiative’s Sustainability Reporting Guidelines and its indicators into BSC perspectives. Ahmad, Hamid, Yusoff and Ramalan (2007) have proven that when integrating Corporate Social Responsibility into the Balanced Scorecard perspectives, the most effective way is to integrate it into the learning and growth perspective. Hubbard (2009) proposes two new perspectives related to social and environmental performance, the measures in all of the perspectives are indicated in rates (from 1 to 5) in addition to this he integrates Organizational Sustainability Performance Index that is an average of all perspectives rates. A new model was proposed based on Kaplan and Norton’s BSC. This modified Balanced Scorecard, contrary to the classical one, has three perspectives – sustainability, stakeholders and structure that are connected with causal links (Soriano, Munoz-Torres, & ChalmetaRosalen, 2010). In 2011 (Chalmeta & Palomero) research was conducted on 16 companies with the aim of investigating the possibilities of implementing the concepts of sustainability within the strategy and day-today management. Authors upgraded all classical BSC perspectives with sustainability elements and added two new perspectives – the Social/Occupational perspective (social and labour criteria) and Environmental perspective (environmental aspects important for the organization’s processes). There are concerns that environmental and social activities will not be fully reflected in the Scorecard and that the integration will have minimal effects on sustainability practice and overall results (Butler, Henderson, & Raiborn 2011). Finge et al. (2002b) argue that social and environmental measures will ‘crowd 20 ISBN 978-9984-705-26-2 out’ economic measures and that it will communicate just a small part of the company’s performance which is not sufficient. Some examples of SBSC can be found in the literature, but none of them is from the hotel industry. Novartis implemented sustainability in a way that a new Environment, health and safety balanced scorecard was created in addition to the classical BSC (Zingales & Hockerts 2003). Novo Nordisk integrated environmental and social issues into Customer & Society, People & Organization and Internal processes perspectives (Zingales & Hockerts 2003). Royal Duch Shell added a fifth perspective named Sustainable Development (Zingales & Hockerts 2003). Dias-Sardinha, Reijnders and Antunes (2007) tried to implement SBSC into three Portuguese companies, but there were difficulties because the companies were only concerned with the financial effect sustainability will have and despite the willingness for implementation that they had, they did not want to implement it in a short time. As it can be seen, these SBSC have each been made on by adopting a different approach and there is no common ground for comparison. 4. Integrated reporting In August 2010 the International Federation of Accountants (IFAC), the Global Reporting Initiative (GRI), and The Prince's Accounting for Sustainability Project established The International Integrated Reporting Comitee. The aim of the Comitee is to build a globally applicable framework which combines financial, environmental, social and economic information into a comprehensive format. Since this is a new way of delivering company information, literature in this field is scarce. The majority of the examined papers provide only a general overview and theoretical guidelines and steps on how to implement it, most of the papers stress benefits of the implementation and only two papers accent current limitations and criticize it (Table 2). Table 2 Overview of the Integrated reporting literature and what it addresses Author Eccles & Krzus (2010a) Eccles & Krzus (2010b) Armbrester & Clay (2011) Deloitte (2011) Eccles & Saltzman (2011) Obholzer, A. (2011) Phillips, Watson, & Willis (2011) Roberts (2011) The International Integrated Reporting Comitee (2011) Verschoor (2011) Bouie Leuner (2012) Brown Gooding (2012) Davis & Lukomnik (2012) Eccles (2012) KPMG International Cooperative(2012) The International Integrated Reporting Comitee (2012a) The International Integrated Reporting Comitee (2012b) Integrated reporting General guidelines, benefits General guidelines, benefits Overview Overview, general guidelines Overview of history and current state, benefits Overview Benefits, standardization Differences between local and international guidance Overview, general guidelines Overview, critique Overview, benefits, King III Example of implementation, benefits Overview, preparation for integrated reporting Overview, current limitations Detailed overview and guidelines, King III Suggestions for improvement General overview, future directions Sharman (2012) Vaessen & Tant (2012) Overview Steps for implementing Integrated reporting Source: Author Eccles and Krzus were one of the first to address this matter. For them preparing an integrated report creates great benefits to companies in the cases of clarity about relationship and commitments, enhances decision making, deepens the engagement with the stakeholders and lowers reputational risks (Eccles & Krzus, 2010a). It also adds discipline that comes from external reporting to the discipline that stems from internal reporting (Eccles & Krzus, 2010b). In 2011 the International Integrated Reporting Comitee published a discussion paper which explains the essence of Integrated reporting in a concise manner, how to build it and what its content and benefits are, what are the challenges to face and future directions to take, and it also invites all interested parties to get involved in the discussion. Obholzer (2011) gave another definition of Integrated reporting - it is an ongoing search for effective communication that represents a tool for 21 ISBN 978-9984-705-26-2 classifying data (Obholzer, 2011). This specially adapted framework should be made with a set of standards for measuring and reporting nonfinancial information and should not only integrate financial and nonfinancial performance, but also reflect mutual influences between these two (Eccles & Saltzman, 2011). Standardization is one of the benefits that the implementation of integrated reporting ought to bring to companies by obtaining incremental insights and process enhancements for shareholders and stakeholders (Phillips, Watson & Willis, 2011). There are demands that integrated reporting should becom mandatory for all companies that list at stock exchanges (Armbrester & Clay, 2011). As there is currently no generally accepted framework, organizations implementing Integrated reporting could face doubt about relevance, scope, assurance and other issues (Deloitte, 2011). There is some criticism also that Integrated reporting is overwhelming and that it will not be accepted widely (Verschoor, 2011). In 2012 the International Integrated Reporting Comitee published a summary of the responses to the 2011 Discussion paper. There were more than 200 responses with reference to basic concepts and definition of Integrated reporting, its target audience, the values it can bring and the timing of the release of the framework (The International Integrated Reporting Comitee, 2012a). The Comitee is planning to issue a draft version of the framework in late 2013. This version is planned to be the basis for the preparation of an Integrated report and it will be made on a principles-based approach without any specific guidelines (The International Integrated Reporting Comitee, 2012b). The purpose is to give directions on how to create Integrated reports that will be general enough for every industry, but that will at the same time enable comparability. At the same time KPMG International (2012) published its vision of an integrated report that consists of an organizational overview and business model, operating context including risk and opportunities, strategic objectives, performance, future outlook and governance and remuneration. Vaessen and Tant (2012) made a three-block model of building integrated reporting which includes financial and nonfinancial information and relevant details in the short-, medium- and long-term. Davis and Lukomnik (2012) suggest the following steps for the implementation of Integrated reporting: 1. Companies need to understand the connection between sustainability and financial performance; 2. Integrated reporting should be a process of reporting not just the final product, with emphasis on the fact that Integrated reporting is much more than just a disclosure mechanism, but also an internal management tool; 3. The internet should be used to gather data about stakeholders; 4. Companies should be involved in the preparation of the methodology for Integrated reporting. It is considered that Integrated reporting will induce changes in company structures. Furthermore companies that have already embedded sustainability in their business will consequently implement it easier and faster than the ones that did not (Bouie Leuner, 2012). Another benefit that is stated is the repositioning of a company ahead of competitors and the creation of integrity and ethical values (Brown Gooding, 2012). In the time to come, there are many challenges mentioned in the terms of time that will be necessary to prepare the guidelines, concerns about making the reports legitimate, universally applied and how to audit them (Eccles, 2012). And for integrated reporting to be complete, it should include reports from the stakeholders as well (Sharman, 2012). Some of the pioneers in applying Integrated reporting are BASF, Dimo, Novo Nordisk, Phillips and United technologies. These reports are made each based on a different methodology since the framework is general and does not provide sufficiently standardized guidelines. The reports are hard to compare in the terms of sustainability, although the sustainability issues are mostly prepared based on the GRI methodology. The sustainability issues do not reflect the financial performance to a satisfactory level. There are no companies in the hotel industry that prepare Integrated reports. A good starting point for the preparation of Integrated reporting is the King III Code of Governance Principles for South Africa that requires that all of the companies that are listed on the Johannesburg Stock Exchange (JSE) to deliver integrated reports. The King III Code works on the principle !!apply or explain why not!! which obligates companies to apply the Code in the way that sustainability impacts financial performance or to provide argumentation why they are not applying it (Institute of Directors Southern Africa, 2009). The differences between Integrated reporting and King III Code can be seen in stakeholder focus, structure of the report, terminology, principles, financial information, length of the report and assurance (Roberts, 2012). In the JSE there are three hotel companies that prepare integrated reports according to King III Code. Cullinan Holdings LTD (2011) delivers only a descriptive explanation about sustainability, City Lodge Hotels Limited (2012) describe and provide sustainability metrics and Hospitality Property Fund Limited 22 ISBN 978-9984-705-26-2 (2011) describes and reports only two kinds of metrics. These three reports are incomparable with regard to sustainability issues and none of them measure the effect that sustainability has on financial performance. Discussion and conclusion From the literature review it can be seen that the research on SBSC and Integrated reporting has not reached a sufficient level. Research results reveal a lack of literature in the field of SBSC and Integrated reporting in all industries and especially in the hotel industry. From all of the examined literature there is no evidence that SBSC and Integrated reporting improve management, nor is it proven that there is interaction between sustainability issues and company strategy. Even though BSC is a widely known concept and a lot of research has been done in this field, SBSC which represents the new enhanced model, is neglected in the scholarly research. Most of the analysed papers have emphasized the benefits of these models, but there is little scientifically proven research that there are real benefits. There is a great need for standardization and harmonization of these two models at a global level. Current guidelines are not sufficient and need a specific, structured framework with details about the implementation process for each industry that will clarify the relationship between sustainability and financial performance. Another important issue is that the preparation and delivery of sustainability information becomes mandatory and that it is controlled and audited, especially while stakeholders have growing expectations. A great concern is that companies in the hotel industry are lagging behind other industries and are not involved in the process of the implementation of the Sustainability Balanced Scorecard and Integrated reporting. This paper provides an extensive literature review of the Sustainability Balanced Scorecard and a systematic review of recent developments in the research field. From the practical point of view, the research emphasizes the importance of sustainable performance management and implementation of its models and the benefits that hotel managers could have in applying them in their business, and thus enhance their operational and strategic decision-making process. Sustainable performance management besides economic includes social responsibility and environmental performance and by using them it increases the economic potential of environmental and social activities. As a consequence it raises the quality of life not only for the hotel company but also for all stakeholders. Further research should be primarily based on directions and guidelines on how to implement SBSC and Integrated reporting in business. 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