12 March 2008
The Rise of Corporate Stakeholders
By Vasanthakumar N. Bhat
In recent years, U.S. corporations have reduced environmental emissions and — in response to pressures from governments, investors, environmental groups, customers, and employees — are developing “cradle-to-grave” pollution prevention strategies. Increasingly, corporate leaders see that managing environmental issues effectively can be a significant source of competitive advantage and sustainable growth.
Vasanthakumar N. Bhat is an associate professor at the Lubin School of Business, Pace University, New York. He is the author of The Green Corporation: The Next Competitive Advantage and Total Quality Environmental Management: An ISO 14000 Approach, as well as several articles on environmental management.
Why do American companies choose to “go green” — that is, institute a set of corporate policies that favor environmental concerns? This is a complex story that requires some understanding of how the environmental movement arose in the United States, the long debate between advocates of regulatory approaches and voluntary compliance, and the current influence of corporate stakeholders such as customers, investors, employees, environmental groups, and government officials. The bottom line is that most American corporations now believe they can create a significant source of competitive advantage and sustainable growth by having effective environmental management. Being “green,” in short, is seen as good business.
The Debate Over Environmental Policy
Traditionally, from the perspective of policy makers, the environment represents what economists call “a public good” — a shared benefit like national defense from which no member of society can be excluded. Because market systems do not easily produce public goods, many in the U.S. environmental movement have believed that government intervention is necessary to motivate corporations to minimize the environmental impacts of their activities. In recent years, many have also come to believe that market-based approaches, by encouraging investment and technological innovation, are likely to reap greater environmental benefits in the end. The debate over the merits of these two approaches has continued from the inception of the U.S. Environmental Protection Agency (EPA) in 1970 right to the present.
When the environmental movement started in the United States in the 1960s and 1970s, the focus was on compliance with laws and regulations. Consequently, the traditional foundation for U.S. environmental policy has been “command and control” regulations. These regulations aim to prevent environmental problems by spelling out how a company will deal with its pollution. They are implemented using enforcement, compliance, and financial incentives. Since the regulations are mandatory, command and control regimes have been very effective. They have also increased awareness among companies about the environmental impacts of their activities.
These regulations have not been without costs, however. One negative outcome has been to encourage “end-of-pipeline” solutions that reduce pollutants after they have been produced, rather than eliminate them in the first place. In addition, the regulatory approach has led to extensive litigation.
In recent years, policy makers in the United States have increasingly emphasized economic analysis to decide what type of policy instrument to choose. Flexible policy instruments allow companies to choose the most efficient alternatives to achieve policy goals. They have been used to reduce compliance costs and to achieve superior performance at a faster pace. Market-based measures such as emissions trading — a system in which government sets a total limit on a pollutant and then allows market forces to determine how individual companies will meet their share of the limit — have been introduced in the United States for emissions of sulfur dioxides and nitrous oxides, the pollution that causes acid rain. However, these measures are still based on a single media — air, water, groundwater, or land.
More than any other country, the United States uses economic analysis to fine-tune environmental policies, and it has used this analysis to require reduced emissions by several pollution sources, including power plants and diesel engines. The United States does subsidize some aspects of waste minimization, even though, in general, a polluter-pays principle — requiring industry to bear the cost of protecting the environment — is the norm.
New Strategies
From the early days of environmental concern, then, U.S. companies pursued compliance using end-of-pipe abatement-reducing pollution by cleaning up the waste produced. As cleanup became more expensive, companies started working toward pollution prevention — using materials, processes, and equipment to eliminate the production of waste.
However, pollution prevention by itself did not improve financial performance. The total quality environmental management (TQEM) approach was needed to reap the financial benefits of improved environmental performance. As part of the TQEM approach, companies implemented the environmental management system (EMS), which provides a framework to manage environmental impacts and incorporate environmental concerns into decision making throughout an organization.
More than one in five facilities have implemented EMS, according to a recent survey. In addition, 5,585 facilities have received ISO 14000 certifications that vouch for their compliance with good management practices identified by the International Organization for Standardization (ISO). And some companies are using a range of environmental tools, including environmental auditing and life-cycle analysis. By transferring their environmental expertise to their foreign affiliates and exporting environmentally beneficial technologies, companies are also reducing the global impacts of pollution.
In 2004, the United States consumed energy equivalent totaling about 17 billion barrels of oil, or 60 barrels per capita. About 86 percent of the nation’s energy came from oil, coal, and natural gas. Only 14 percent came from nuclear and renewable energy. Rising oil prices and dependence on foreign sources for almost for 65 percent of crude oil have intensified the need for energy conservation and efficiency and for new sources of energy. In addition, burning fossil fuel generates carbon dioxide and other greenhouse gases. So it is imperative for U.S. companies to prepare for a carbon-constrained world.
Currently, the United States generates more than 50 percent of its electricity from coal-fired power plants and has a plentiful supply of coal. American Electric Power is pursuing innovative methods to burn coal cleanly and to sequester carbon dioxide. This will help the industry increase power production with less damage to the environment. Florida Power and Light reduced the need for 10 new power plants by increasing energy efficiency and investing in 42 wind facilities. General Motors is working on developing hydrogen-powered cars that do not produce carbon dioxide. And IBM is working on plans to conserve energy, reduce perflurocompound (PFC) emissions, use renewable energy, encourage alternate employee commuting choices, and improve the efficiency of the company’s supply chain.
The Power of Stakeholders
The key to modern corporate motivation is a company’s concern for building rapport with its stakeholders. Government policy makers, customers, environmental groups, investors, and employees constitute major stakeholders and exert pressures on shaping a firm’s environmental strategy. To reach out to these groups, companies use public disclosure and consultations about their activities and their impacts on the environment.
Government: Government regulation is a major driver of environmental policy. Exponential growth in environmental laws forces companies to anticipate and make investments to meet new requirements even before the laws are passed. Most major companies have Washington lobbyists and other staff who maintain access to high-level policy making in order to reduce the likelihood of the U.S. Congress enacting harsh regulations or the environmental agencies enforcing them stringently. Studies show that the facilities that perceive environmental regulations as being stringent tend to have a higher environmental performance. In addition, such facilities are likely to opt for pollution prevention rather than end-of-pipe solutions, and to invest in environmental research and development.
But since flexible programs tend to produce superior environmental results, the EPA has also introduced a number of programs such as p2 and partnership programs. These programs encourage businesses to go beyond minimal compliance with regulations voluntarily in return for reduced costs and public recognition as environmental leaders by the EPA.
Customers: Customers, both as voters and as buyers of products and services, have a significant impact on environmental policy. According to a USA Today/Gallup Poll conducted in March 2007, more than 8 in 10 Americans consider that a company’s environmental record should be an important factor in deciding whether to buy its products. Corporate buyers such as IBM and Baxter International, as well as government organizations, use the environmental performance of products to make their procurement decisions.
Environmental Groups: More than one in five Americans consider themselves active participants in the environmental movement. Environmental organizations are using their clout to develop tough regulations and also to extend the areas regulated. In addition to lobbying, these organizations can take other actions that encourage companies to be green.
Many of the U.S. environmental statutes incorporate a “citizen’s suit” provision that allows a private citizen to sue a corporation for violating a statute or the Environmental Protection Agency for not doing its duty under environmental laws. Any citizen can go to the federal court to prevent a company from violating relevant federal laws or permit terms and to force the company’s compliance with these laws. The citizen’s suit has significantly increased the clout of green organizations and has attracted many more members in view of these organizations’ ability to get results.
Investors: Poor environmental performance can increase costs, because companies that produce large quantities of waste tend to have a higher number of spills and hazardous waste sites, and serious compliance problems. Investors can hold corporations accountable for environmental performance by speaking directly with corporate management, filing shareholder resolutions, and voting against the management. If they are still not satisfied, they can withdraw their investment by selling their stocks.
A number of organizations have developed environmental guidelines for companies to follow. Ceres Principles, the Equator Principles for project financing, and the Environment and the OECD Guidelines for Multinational Enterprises are examples of such guidelines.
In addition, large institutional investors such as pension funds are joining forces to consider the environmental performance of companies before they invest. For example, according to a survey by the Principles for Responsible Investment, 88 percent of their signatories and 82 percent of asset owners consider environment-related issues before making an investment decision.
In recent years, shareholders have been successful in convincing major banks to consider the environmental risks of projects they consider financing, persuading computer manufacturers to increase the number of computers they recycle, and encouraging public utilities to invest in renewable energy.
Employees: Employees bear most of the impact of poor environmental practices. Attracting employees to work in unsafe surroundings is expensive, and workers and their unions often pressure companies to reduce pollution. If employees are ignored, they often respond by changing jobs or by mobilizing public support through whistle-blowing. Costs can also rise because of higher employee turnover. Companies respond by providing employee training on environmental health and safety and on environmental management systems.
Moving Toward Sustainability
While there has been significant growth in the U.S. economy in recent decades, environmental performance is mixed, as reported in the Environmental Protection Agency’s 2007 Report on the Environment: Highlights of National Trends.
One area of improvement is release of toxic chemicals. According to the EPA’s 2005 Toxics Release Inventory (TRI): Public Data Release, U.S. industries discharged 4.34 billion pounds of about 650 toxic chemicals in 2005. Two industries, metal mining and electric utilities, accounted for more than half of these releases. Total chemical releases in 2005 by manufacturing facilities fell by 58 percent from those of 1988, even though the number of facilities decreased by only 16 percent and the real value of shipments increased by about 13 percent. In addition, almost half of the production-related waste was either recycled or converted into energy in 2005.
Other signs of improvement: U.S manufacturers spent $14.6 billion on pollution abatement capital and operating expenditures in 1999, representing 0.4 percent of the value of shipments and about 10 percent of new capital expenditures. American companies are beginning to see green technologies as a source of profits, exporting more than $30.4 billion in environmental technologies in 2006.
For centuries, environmental degradation has gone hand-in-hand with industrialization. As a result, over time corporate policy makers have come to the realization that environmental issues are an integral part of a company’s economic well-being. Many corporate executives now feel that environmental protection is essential to sustainable development and to creating a better world. Sustainability — ensuring a better quality of life for everyone, now and for generations to come, as defined by manufacturing giant Procter & Gamble — is being seen as both a business responsibility and a business opportunity in most corporate boardrooms across America.
Even though companies have focused on pollution treatment and pollution prevention in the last decades, attention has now shifted to carbon dioxide emissions and alternate energy, and this trend is likely to continue in the future. The rising price of crude oil and dependence on a significantly high percent of imported crude oil are accelerating the need for quicker solutions to these problems.
The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.
