ABSTRACT. This paper addresses the conflictingenvironmental interests of a firm and the community,an important stakeholder. The short-term profitmaximization objective of a firm may stand in contrastwith what the community wants – a “safe and cleanenvironment”. This paper argues that the informationregarding the environmental impact of a firm’sproducts, processes, and waste may be asymmetricallydistributed between the firm and the community. Theresultant information asymmetry may influence theprobability of a firm acting opportunistically, andultimately, a firm’s ethical behavior. The paper iden-tifies information asymmetry
between a firm and com-munity, as well as that within the community. Theperceived information asymmetry across various com-munity segments may perhaps be a determinant ofenvironmental discrimination. The paper furthercontends that information asymmetry may diminishin the long run. Finally it examines the implicationsof information asymmetry for firms and governmentpolicy.
Introduction
A number of researchers in business and envi-ronmental ethics have argued that a firm needsto meet the objectives of its stakeholders, con-cerning various environmental issues (Clarkson,1995; Freeman, 1984, pp. 102–107; Hargrove,1995; Shrivastava, 1995). This prescription hasimportant implications for corporate environ-mental and social performance (e.g., Epstein,1996; Wood, 1991a, b). It is, however, likely thatthe objectives of a firm – such as short-termwealth maximization, may be in conflict withthose of other stakeholders. For example, thecommunity surrounding a firm’s manufacturingplants, an important stakeholder of the firm,may want a safe and clean environment. This
may constrain a firm’s profitability in the shortrun.
The conflict among the objectives of a firm’sstakeholders regarding environmental issues hasresulted in a number of environmental disputes.Any attempts to resolve such conflicts entail thatthere be “trust” between a firm and its stake-holders (e.g., Bacon and Wheeler, 1984). Theconcept of trust forms a cornerstone of corpo-rate ethics and morality (Barney and Hansen,1994; Kjonstad and Wilmott, 1995). One of thekey reasons for a firm adopting an “ethical codeof conduct” is to reassure the organizationalstakeholders that an “ethical” company can be“trusted” (Robertson and Schlegelmilch, 1993;Waters et al., 1986). In this paper, we identifythe community as an important organizationalstakeholder. We further argue that the level oftrust between a firm and the members of thecommunity may be a function of the informa-tion asymmetry between them regarding thefirm’s environmental practices.
A number of studies in the organizationaleconomics literature have investigated the impli-cations of trust and opportunism, especially in abuyer-seller relationship (cf. Williamson, 1985).However, researchers (cf. Carlin and Strong,1995) have only recently begun to explore thecross-fertilization possibilities between organiza-tional economics and business ethics. This paperattempts to extend the insights gained from theorganizational economics literature to environ-mental ethics, an area of considerable interestand significance to business ethics researchers,executives, and government.
This paper identifies information asymmetrybetween a firm and community, as well as thatwithin the community. It examines some of the
Environmental Ethics and Information Asymmetry among Organizational Stakeholders Subodh P. Kulkarni
potential reasons for why these types of infor-mation asymmetry may arise in the short run.Drawing on the literature in organizational eco-nomics, we argue that an opportunistic firm mayexploit these information asymmetries togenerate rent in the short run. Environmentaldiscrimination may occur if a firm takes advan-tage of the perceived information asymmetryamong various community segments. This paperspecifically discusses implications of the perceivedinformation asymmetry for environmental justice,a type of environmental discrimination.
Several forces may diminish this informationasymmetry, and the accompanying rents, in thelong run. Some of these forces include thepossibility of community retaliation against anopportunistic firm (cf. Axelrod, 1984), as wellas government policies. Our study discusses theimplications for government policy and com-panies in the long run.
Our paper has three principal objectives:
(1) Examine information asymmetry betweena firm and community, an importantorganizational stakeholder, as a source ofconflict regarding environmental issues.
(2) Explore information asymmetry withincommunity, and the potential for dis-criminatory practices by a firm; and
(3) Investigate whether a firm can sustain itsinformational advantage in the long run,and discuss its implications for govern-ment policy and firms.
The first objective is usually a part of thegeneral environmental ethics framework thataddresses the conflict among different organiza-tional stakeholders regarding issues, such as wastedisposal, remediation, and so forth. The secondobjective is an integral part of the environmentaljustice research. The third objective examines thefirst two in a longitudinal context. In this paper,we view the three objectives as interrelated. Weattempt to provide a conceptual framework thataddresses these issues.
This paper is broadly divided into foursections. First, it discusses the conflicting objec-tives of organizational stakeholders, and identifiesinformation asymmetry as a source of conflict.Second, it examines why information may be
distributed asymmetrically between a firm andthe community, as well as across different com-munity segments. Third, it investigates whethera firm can sustain its informational advantage inthe long run. Finally, the paper outlines theimplications for firms and government policy.
The term “environment” denotes different thingsto natural and social scientists. However, there isan increasing consensus to define “environment”as “a dynamic and evolving system of natural andhuman factors in which living organisms operateor human activities take place, and which has adirect or indirect, immediate or long-term effector influence on these living beings or on humanactions at a given time, and in a circumscribedarea” (Vaillancourt, 1995).
We argue that the short-term profit maxi-mization goals of firms may be generally incom-patible with the preservation and enhancementof the environment (e.g., Kaplan and Norton,1992, 1993). A firm may view the expensesincurred on waste disposal, remediation, anddecontamination as detrimental to its profitabilityin the short run. As an example, the AmericanPetroleum Institute has cited environmentalrestrictions as a reason for the loss of 400,000 jobsduring the 1980s (Hong and Yang, 1992).Similarly, the Motor Vehicle ManufacturerAssociation has stated that increasing fueleconomy standards cost approximately 300,000jobs (Linden, 1992).
It may seem apparently contradictory thataccording to some researchers (e.g., Russo andFouts, 1997), the economic objectives of a firmsmay not conflict the environmental objectives.That is, corporate environmental performancemay, in fact, be positively associated witheconomic performance. One of the importantreasons for this is that an environmentallyoriented firm establishes its reputation amongcustomers that are sensitive to environmentalissues. Applying the resource-based theory (cf.Barney, 1991), reputation produces economicrents for a firm, since it is often inimitable. We
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would argue, however, that reputation effectsusually obtain in the long run (e.g., Klein andLeffler, 1981; Shapiro, 1983). Further, wherepressures for short term profit maximization areintense, those situations are likely to resemble thewell-known “Prisoner’s Dilemma” in gametheory (e.g., Axelrod, 1980, 1984), as outlined inthe following section. Therefore, it is likely thata firm would sidestep (or perhaps be indifferent)1
toward environmental issues in the short run.It is conceivable that the objectives of a firm’s
stakeholders may be different from those of afirm.2 A stakeholder is any group or individualwho can affect or is affected by the achievementof the organization’s objectives (Freeman, 1984,p. 46). According to this definition, the com-munity surrounding a firm’s plants, warehouses,and waste disposal sites may be considered animportant organizational stakeholder, since it isaffected by a firm’s environmental practices. Inaddition, the community may also influence afirm by using its leverage in policy-making. Afirm’s customers may also be considered membersof the community, and stakeholders, because oftheir direct involvement with a firm’s products.The community may then influence a firmthrough the attitudes and behavior of itsmembers (e.g., consumers) toward a firm’senvironmental practices.
Information distribution among organizational stakeholders
The short-term profit maximization objective ofa firm may create an incentive for it to act oppor-tunistically, depending on how information isdistributed among stakeholders. Because trust, inmany ways, is the opposite of opportunism(Sabel, 1993), there may be a low degree of trustbetween a firm and the community in the shortrun. According to Barney and Hansen (1994),trust between a firm and the society is a cor-nerstone of corporate ethics and morality.3
Therefore, the existence of information asym-metry and opportunism has important implica-tions for corporate ethics.
Information asymmetry occurs when the com-munity does not have as much information about
the environmental practices of a firm, as the firmitself. The term “environmental practices” is usedhere to include the environmental impact of afirm’s products, processes, and the waste released.For the purpose of this paper, products are enditems that a firm manufactures. Processes implythe methods used by a firm to manufacture aproduct. Waste usually implies the material thatis released by a firm into the environment, andthat cannot immediately be reused (Graedel andAllenby, 1995, pp. 10, 83). Moreover, waste isgenerally considered a function of a firm’sproducts and the manufacturing processes used.Accordingly, we will focus attention on a firm’sproducts and processes as the key organizationalcomponents or activities that affect the environ-ment. Next, we will investigate the influence ofinformation asymmetry between a firm and thecommunity regarding a firm’s products orprocesses.
The significance of information in environ-mental negotiations was recognized in the 1972Stockholm Action Plan (see bibliography).However, this plan or the existing related litera-ture, for the most part, does not clearly definewhat constitutes information. We have, therefore,adapted here the term “information” from thebusiness and economics literature (e.g., seeOrlikowski and Gash, 1992, p. 2) to denoteprocessed facts and data about the environmentalimpact of the products, processes, as well as thewaste released by a firm into the environment.
In economics, game theorists usually make adistinction between incomplete and asymmetricinformation (Milgrom and Roberts, 1987, p.184). The information is incomplete (althoughsymmetric) when only part of the informationis public, but each player (the firm and the com-munity) has the same amount of information. Onthe other hand, information asymmetry impliesthat each player has private information about hisor her strategies. Situations involving asymmetricinformation are, by far, the more interesting froma strategic point of view.
Two types of information asymmetry4 mayusefully be distinguished: (1) information asym-metry between a firm and the community; and (2)information asymmetry within community.
Environmental Ethics and Information Asymmetry among Organizational Stakeholders 217
Information asymmetry
between a firmand community
We would argue that the information asymmetrybetween a firm and the community arises becausea firm typically knows more about the environ-mental impact of its products, processes (and thewaste it releases into the environment) than thecommunity. This may be because many times afirm’s products and processes are protected bypatents, where the community may not have fullknowledge of a firm’s manufacturing practices.The release of such information is frequentlyregarded by corporations as competitively impor-tant (Graedel and Allenby, 1995, p. 83). It is alsoobvious that a firm usually contemplates themanufacture of a product much before it actuallymanufactures it or sells it to customers.Therefore, it is likely to possess unique knowl-edge about the environmental impact of itsproducts and processes before the communityknows anything about it. Further, where themanufacturing knowledge is tacit (e.g., Polanyi,1962), it is expected that any idiosyncrasiesregarding the environmental impact of a productor process will be revealed to the firm beforeanyone else.
The information asymmetry between a firmand the community may be further reinforced bya firm’s desire to act opportunistically. Therationale here is derived largely from two streamsof literature in industrial organization: (1) adverseselection (cf. Akerlof, 1970), and (2) moralhazard (cf. Arrow, 1971). Both, adverse selec-tion and moral hazard are considered types ofopportunism. Opportunism implies “self-interestseeking with guile” (Williamson, 1985). In thecontext of this paper, adverse selection (or hiddenknowledge) implies that a firm may, for instance,deliberately withhold information about theenvironmental impact of its products, processes,and waste from the community. It may alsoperhaps omit references to some of the environ-mentally sensitive attributes of its products,processes, and wastes, while disclosing the infor-mation to the community. Moral hazard (orhidden action), on the other hand, refers to thetendency of a firm to deliberately manipulate ordistort the information.
Although information asymmetries may ariseout of hidden knowledge or hidden action, wedo not differentiate between the two. Anelaborate discussion of the differential effects ofadverse selection and moral hazard on the firm-community relationship is outside the scope ofthis paper. We also recognize the possibility ofthe community acting opportunistically. Forexample, it may file counterfeit claims against acompany (Katzman, 1988) regarding exposure toenvironmental hazards. However, this paperfocuses primarily on a firm’s opportunisticbehavior, and its implications for organizationalethics.
A firm’s opportunistic behavior produces rentsin the short run, because the firm saves on thecosts of waste disposal, remediation and envi-ronmental clean-up. Additional insights about afirm’s opportunistic behavior may be gained fromgame theory. Consider, for example, the“Prisoner’s Dilemma”. In the basic scenario, theplayers (e.g., a firm and the community) havetwo choices: to cooperate and trust each otheror to act opportunistically. Information asym-metry is especially important here, because eachplayer must make a choice without knowingwhat the other will do. In a game played for oneperiod, opportunism is usually the dominantstrategy for players, since it maximizes theirpayoffs (e.g., Hill, 1990). Even in finitelyrepeated (short-run) games subject to oppor-tunism, the outcome usually is the same as theone-shot game. In the last repetition, forexample, the subgame is identical to the one-shotgame, so the firm acts opportunistically, and theargument can be carried back to the firstrepetition. This is termed the “chainsawparadox” (Selten, 1978).
The upshot of our arguments is that a firm,driven by short-term gains, is likely to exploitthe information asymmetry between the com-munity and itself. This may result in environ-mental malpractice. As an example, syntheticdetergents rapidly replaced traditional soaps inthe late 1940s and 1950s. By early 1960s, manycommunities began to report excessive algalgrowth in lakes and rivers. This was linked to thepresence of phosphates in detergents. There isevidence that detergent companies in the United
218 Subodh P. Kulkarni
States were aware of the role of phosphates inpromoting algal growth in rivers and lakes asearly as 1950s (McGucken, 1995). Many com-panies were, in fact, privately seeking a substitutefor phosphates in detergents. However, thesecompanies publicly denied that phosphorus wasthe element responsible for algal growth.
Information asymmetry within community
Our previous arguments implicitly assume thatthe community is homogeneous. That is, at anygiven point in time, all individuals in the com-munity have the same amount of information. Itis possible, though, that the informationregarding a firm’s products or processes may notbe evenly distributed within a community. Thishas significant implications for environmental dis-crimination. Adapting Becker (1971), we definediscrimination as “unequal treatment (of indi-viduals) based on criteria irrelevant to the activityinvolved”. Where a firm’s environmental prac-tices are the activity in focus, perhaps the mostimportant, and relevant criterion is the under-lying hazard to the environment or any partthereof (e.g., members of a community).Therefore, potential for discrimination exists inthe short run when a firm adopts differentenvironmental practices across communitysegments, based on its perception of how infor-mation is distributed within a community.
Sometimes, it becomes difficult to differentiate“discrimination” from an expression of tastes andpreferences (e.g., Becker, 1971). A firm mayadopt different environmental practices if itperceives different environmental preferencesamong community members. As an example, afirm may carefully monitor and control therelease of waste in communities that are per-ceived as having “high concern for environ-ment”, as opposed to those having “low concernfor environment”. Therefore, it is important tocontrol for the environmental preferences amongcommunity members, while defining discrimi-nation.
We argue that the information level of a com-munity segment may be a function of its concernfor environment, and the resources available to
the segment, among other things (cf. Newell andGreen, 1997). Where there are insignificantdifferences in the levels of environmental concernamong community members, information asym-metry may arise because of differences in theavailability of resources. We will discuss this atsome length below.
Environmental concern is a broad constructthat usually encompasses multiple dimensions,such as concern for conservation, population,pollution, and so on (e.g., Zimmer et al., 1994).Concern for conservation reflects an efficient useof natural resources. Concern for populationindicates that overpopulation may severely con-strain the natural resources. Concern for pollu-tion involves the input of man-made syntheticsubstances into the air, land or water in sufficientamounts to be significantly harmful to any partof the web of life. In this paper, we use the term“environmental concern” to denote a commu-nity’s concern about the pollution potential of acompany’s products and processes.
The racial differences regarding environmentalattitudes (e.g., the level of environmentalconcern) and behavior have received consider-able attention (e.g., Lahart, 1978; Murphy et al.,1978; Ostheimer and Ritt, 1976; Taylor, 1989).Some of these studies have indicated that theremay be a significant difference in the environ-mental concern displayed by minorities and themajority, because of different values, beliefs, andcultural traditions. However, some researchershave argued that these differences are likelyto disappear because of “acculturation” (e.g.,Russo and Fouts, 1997). Acculturation is theextent to which ethnic minorities mirror thevalues, beliefs, and cultural traditions of themajority white society (Landrine and Klonoff,1994). It has also been referred to as culturalassimilation – “a change of cultural patterns tothose of the host society” (Williams and Ortega,1990). Therefore, the acculturated minorities areexpected to exhibit attitudes and behaviorregarding the environment similar to the majori-ties.
It is possible that the minorities may just beas concerned about the environment as themajority (e.g., Dunlap and Jones, 1987) but lackthe resources to obtain information about the
Environmental Ethics and Information Asymmetry among Organizational Stakeholders 219
impact of industrial practices on the environ-ment. Individuals in the lower socio-economicstrata, with their limited income and resources,may place priority on spending on basic needs,such as food and shelter rather than on obtaininginformation about environmental matters (e.g.,Commoner, 1971; Howenstine, 1993).
Some researchers have asserted that a high levelof environmental concern may motivate anindividual to acquire environmental education(e.g., see Palmer and Neal, 1994, pp. 3–10; Orr,1995). Environmental education implies a studyof the interrelationship between natural andhuman systems, among other things (Sterling,1992). For example, an individual with highconcern for environment is likely to acquiremore knowledge about industrial pollution, andits impact on the ecological system than anindividual with low environmental concern.Further, this knowledge may be acquiredformally through the completion of environ-ment-related courses at schools and colleges, aswell as informally through family, friends,outdoor activities, and so forth (Palmer and Neal,1994). However, as posited earlier, it is impor-tant to have the means and resources to obtainthe necessary information. As an example, theminorities that had income and education levelssimilar to the majority were found to be equallyconcerned and informed about environmentalissues as the majority (cf. Newell and Green,1997).
A firm driven by short-term wealth maxi-mization may exploit the perceived informationasymmetry across various community segments.Communities that are perceived as not havinghigh levels of environmental concern or resources(Horvat, 1974; Taylor, 1989) and information(Lahart, 1978) are likely to be subject to envi-ronmental discrimination. Recently, severalresearchers (cf. Arora and Cason, 1999) havefound that there is a disproportionately highconcentration of toxic waste and chemicals inareas that are predominantly inhabited by peoplefrom lower socio-economic strata. It is possiblethat firms often perceive the segments from alow socio-economic background as less knowl-edgeable about environmental issues (Bryant,1995).
A firm may exploit its informational advantagein the short run. However, it is important toexamine whether this advantage may last in thelong run.
Information asymmetry in the long run
In this section, we argue that several forces tendto reduce the information asymmetry (and theaccompanying potential for opportunism)between a firm and community, and that withinthe community in the long run.
Our principal rationale for the above argumentis threefold: First, we adapt the arguments under-lying the “long-run equilibrium” in game theory.Second, we examine the influence of externali-ties by the informed members of the community.Third, we examine how government policieshelp reduce the information asymmetry.
(1) Game Theoretic Rationale. For thepurpose of this paper, the time horizon for a“long-run” is the same as that for an infinitelyrepeated game in game theory (e.g., see Kleinand Leffler, 1981). Following Klein and Leffler(1981), one might argue that in an infinitelyrepeated game, co-operation rather than oppor-tunism emerges as the norm for players (e.g., thefirm and the community).
Consider the Prisoner’s Dilemma, discussedearlier. Using an iterative prisoner’s dilemma,Axelrod (1980, 1981, 1984) demonstrated thatplayers predominantly used a “tit-for-tat” strategyin the long run to be nice, retaliatory, forgiving,and clear. The player was nice because (s)he wasnever the first to act opportunistically. The playerwas retaliatory because (s)he retaliated in kindto the other player’s opportunism. The player wasforgiving because (s)he reverted back to co-operation if the other player did so. The playerwas clear because (s)he sent an unambiguoussignal to the other player. Axelrod found thatplayers that deliberately tried to exploit others byacting opportunistically always faired poorly inthe long run.
It has also been argued that the “chainsawparadox”, mentioned earlier in this paper, doesnot apply to infinitely repeated games, becausethese games do not have an “ending time
220 Subodh P. Kulkarni
period”. Further, reputation effects play animportant role in the equilibrium in the longrun. That is, a firm’s reputation regarding itsenvironmental practices may matter in the longrun. According to some researchers (e.g., Krepsand Wilson, 1982; Milgrom and Roberts, 1982),reputation effects are obtained even in finitegames where the time horizon is “sufficientlylong”.
Hill (1990) has argued that the “invisible handof the market” will delete actors who are habit-ually opportunistic. Because opportunism resultsin low payoffs for a firm in the long run, it mayreduce the value of a firm’s investment in assets.In addition, a firm may also invest significantlyin governance mechanisms to protect itselfagainst retaliatory acts of opportunism. Theelevated costs often limit a firm’s ability tocompete and survive in markets.
(2) Externalities by Informed CommunityMembers. In the short run, it is possible thatinformation about the environmental impact ofa firm’s products or processes may be known onlyto a few members of the community (e.g., somescientists, engineers, etc.). The rest of the com-munity is largely unaware of this information.However, in the long run, the informedmembers of the community may impart exter-nalities on the uninformed ones. The dissemi-nation of information may occur throughnewspapers, magazines, trade journals or schol-arly journals. It may also take place throughword-of-mouth communication or socialnetworks within the community (e.g., seeGranovetter, 1985).
Several environmental organizations thatoperate at the grassroots level use public educa-tion to disseminate information about industrialwaste to the community at large. As an example,Environmental Action is an environmental lobbythat educates citizens about substances being usedand disposed by industries in their communities(Bosso, 1995). It also disseminates informationabout nuclear waste and disposal by nuclearpower plants.
Sometimes the information asymmetry acrosscommunity segments may diminsih over a periodof time because of “social mobilization”. Socialmobilization is defined as the process by which
traditional attitudes and attachments are eroded,and gradually replaced by more modem para-digms (Deutsch, 1961). Consistent with thisnotion, old habits, customs, and commitmentsare first uprooted; second, the mobilized peopleare inducted into new patterns of commitmentsand lifestyles. The individuals once inducted intonew patterns (mobilized), begin to need suchprovisions as safe and clean environment, amongother things. The expanding number of themobilized population and the greater urgencyof their needs for political decisions tend totranslate into increased political participation(e.g., crowds, meetings, and demonstrations), andenvironmental activism.
Recently, the World Wide Web has becomean extensive source of information on environ-mental matters. A number of environmentalorganizations and government agencies activelydisseminate information on the Web aboutenvironmental practices adopted by various firms(Skow and Barrett, 1999). The Internet hasconsiderably reduced the costs of informationdissemination and acquisition (Dern, 1997).Therefore, it may be possible for environmentalorganizations to transmit more information at acost the same as or perhaps lower than that in thepast. In a similar vein, it is likely that the com-munity members can acquire information moreefficiently than before.
(3) Government Policies. Several laws andgovernment regulations also help reduce theinformation asymmetry between a firm and thecommunity regarding environmental issues. Forexample, the Emergency Planning andCommunity’s Right-to-Know Act of 1986specifically requires manufacturing facilities todisclose information about a number of toxicsubstances and chemicals to the community. Thespecific provisions of this and other Acts will bediscussed in the following section.
In the short run, it may be possible for a firmto stay within government regulations, andengage in environmental practices that may beunacceptable to some segments of the commu-nity. However, in the long run, the governmentmay eventually adopt and enforce more stringentcriteria. For instance, industries have beenrequired by law to report the levels of persistent
Environmental Ethics and Information Asymmetry among Organizational Stakeholders 221
bioaccumulative toxic chemicals, includingdioxins and mercury, that they release into theenvironment. However, the government hasrecently lowered the reporting threshold levelsfor some of these chemicals, forcing many com-panies to adopt better environmental practices(Hileman, 1999).
Policy implications
There are several government policies that aim atdisseminating information to the communityregarding the environmental impact of a productor process. We discuss two of them specifically:(1) the Emergency Planning and Community’sRight-to-Know Act of 1986 (EPCRA), and(2) the Presidential Executive Order onEnvironmental Justice, 1993. The EPCRA hasimplications for the information asymmetrybetween a firm and community, as well as thatwithin the community. The executive order onenvironmental justice has implications for howinformation may be distributed within commu-nity.
Implications of the EPCRA
The EPCRA usually refers to a community’sright to access information about environmentalhazards to human health, especially those posedby toxic or hazardous chemicals. It requiresmanufacturing facilities to submit to theEnvironmental Protection Agency (EPA) annualreports of their releases of a list of about 350toxic chemicals. This toxic release inventory(TRI) is available to the public in several forms,including an electronic database.
Recently, several environmentalists and com-munities have demanded that the EPA expandthe list of toxic chemicals currently reported. Theexpanded list will force companies to reveal manymore chemicals that are potentially hazardous tothe environment. Further, there is also a demandfor lowering the reporting threshold for some ofthe chemicals, that are currently included in theTRI. For example, some activists want com-panies to lower the reporting threshold for
dioxin, a potentially hazardous chemical(Hileman, 1999). This will reduce the informa-tion asymmetry between a firm and the com-munity.
The EPA is planning to make the TRI avail-able on the Internet in an effort to disseminateinformation to the community at large in anefficient and timely fashion. However, it isimportant to ensure that this information is avail-able to all sections of the community, so that itdoes not affect information asymmetry acrosssegments adversely.
Implications of the executive order on environmentaljustice
Environmental (in)justice may be considereda form of environmental discrimination.Environmental justice incorporates the principleof the “right” of all individuals to be protectedfrom environmental degradation (e.g., Bullard,1995). It also targets the industrial practices thatresult in a disproportionate environmental impacton the poor and the minorities. Numerousstudies have indicated that lower income persons,working class individuals, and people of colormay be disproportionately exposed to elevatedhealth risks (cf. Arora and Cason, 1999). The dif-ferential impact on the community segments isreflected in the distribution of air pollution, toxicwaste release, location of municipal landfills andincinerators, cleanup of Superfund sites, and leadpoisoning in children (Bullard, 1995).
The concept of environmental justice is relatedto the notion of distributive justice. Moreover,it stands in contrast with the utilitarian principleof justice (Brown, 1995). The utilitarian prin-ciple or “greatest good for the greatest number”usually remains silent on the issue of how acertain good be distributed.
Environmental justice concerns have recentlypermeated the federal government. In June,1993, for example, the EPA began drafting a“Presidential Executive Order on EnvironmentalJustice” for implementing Title VI of the 1964Civil Rights Act, a provision that outlawsdiscrimination in the provision of federal funds.The Executive Order on Environmental Justice
222 Subodh P. Kulkarni
calls for an Interagency Task Force to setguidance for social and economic impact reportsunder the National Environmental Policy Act(NEPA) and Clean Air Act (CAA), and datacollection and analysis on disparate risks andhealth effects. Environmental justice concerns arealso being voiced at the state level. Several states,including Arkansas, Louisiana, and Virginia havealready passed environmental justice laws orresolutions.
As outlined in earlier, environmental(in)justice may be a concern, when informationabout a company’s product or process is perceivedto be asymmetrically distributed within a com-munity. Several government regulations recog-nize the significance of providing information toall segments of a community as a measure againstpotential environmental discrimination. Forexample, according to the executive order onenvironmental justice, “each federal agency shallensure that the public, including minority com-munities and low-income communities, hasadequate access to public information relating tohuman health or environmental planning, regu-lations, and enforcement when required underthe Freedom of Information Act, 5 U.S.C.section 552, the Sunshine Act, 5 U.S.C. section552b, and the Emergency Planning andCommunity Right-to-Know Act, 42 U.S.C.section 11044”.
Further, according to section 1103 of theExecutive Order on Environmental Justice, eachfederal agency shall collect, maintain and analyzeinformation on the race, national origin, incomelevel, and appropriate information for areassurrounding facilities or sites expected to have asubstantial environmental effect on the sur-rounding populations. Such information shall bemade available to the public. Section 5.5 ensuresthat the information is disseminated is concise,understandable, and readily accessible to allsections of the community.
The provisions of the Executive Order onEnvironmental Justice broadly conform to thespirit of “democratization of environmentalinformation” (e.g., Bryant, 1995). This wouldreduce the information asymmetry within acommunity.
Implications for companies
The “hand of government” or the environmentalpolicies may guide the corporations’ environ-mental practices. However, the “hand of man-agement” argument states that corporations areexpected to act in ways that protect and improvethe welfare of society, as well as advance corpo-rate economic interests (Goodpaster andMatthews, 1982).
Opportunism may produce rents for com-panies in the short run. However, in the longrun, the probability of opportunism is likely todiminish. How can one then reconcile a firm’sinterest in rent generation, and the diminishinglevels of information asymmetry (and oppor-tunism) over time? Is it possible to reconcile thedifferences between a firm’s and the community’sinterests? In this section, we address thesequestions from a firm’s point of view.
We would argue that diminishing levels ofopportunism between a firm and the communityare expected to result in higher levels of trust.Trust is often considered the opposite of oppor-tunism (Barney and Hansen, 1994), because afirm’s actions are opportunistic to the extent thatthey take advantage of another party’s vulnera-bilities. Considering that informational advantageis a significant source of opportunism (cf.Akerlof, 1970; Arrow, 1971), we may adaptSabel’s (1993, p. 1133) definition of trust forthe purpose of this paper: “Trust is the mutualconfidence that no party to an exchange willexploit its informational advantage”. As arguedearlier, the information asymmetry between afirm and its customers is closely associated withhigh levels of opportunistic behavior on the partof the firm.
Now, the key question is whether a reductionin firm’s opportunism attributable to informationasymmetry (or an increase in the levels of trustbetween a firm and its buyers) can be a sourceof rents. Exchanges between parties characterizedby opportunism are known to incur significantexpenses in the form of setting up appropriateconflict resolution or social governance mecha-nisms (cf. Williamson, 1985). It follows, there-fore, that an increase in the levels of trustbetween a firm and the community would lead
Environmental Ethics and Information Asymmetry among Organizational Stakeholders 223
to substantial reductions in the governancecosts. This is expected to produce rents for afirm.
Recently, Barney and Hansen (1994) haveproposed that there may be three types of trustin a buyer-seller relationship: weak, semi-strongand strong. These types may have differentpotential for producing rents. The weak form oftrust is due to the limited opportunities foropportunism. The semi-strong form of trustusually arises in response to the economic andsocial costs incurred due to the opportunisticbehavior of transacting parties. This form oftrust usually implies a reduction in adverse selec-tion and moral hazard (such as that between afirm and its customers, assumed in this paper). Inthe long run, as argued earlier, several rulesemerge (such as “tit-for-tat”) if any of the trans-acting parties behaves opportunistically. Theserules imply significant payoff losses for bothparties if either one behaves opportunistically.The strong form of trust, on the other hand,arises due to the values and beliefs of the trans-acting parties.
Barney and Hansen (1994) assert that as longas the cost of developing and maintaining strongform trustworthiness in a firm plus the costdiscovering strong form trustworthy partners isless than the cost of exploiting semi-strong (orweak) governance devices, strong form trust-worthy firms will have a competitive advantage overthose with semi-strong or weak forms of trust.The competitive advantage refers to the abilityof a firm to conceive of and implement strate-gies that are different from its competitors in theindustry (Barney, 1991; Porter, 1980). It isusually associated with above-normal economicreturns.
Conclusion
This paper examines the antecedents and conse-quences of information asymmetry among afirm’s stakeholders regarding corporate environ-mental practices. The information asymmetryarises in the short run, because an opportunisticfirm may withhold or manipulate some of theinformation about the environmental impact of
its products and processes. As a result of itsinformational advantage over the community, afirm is likely to generate significant rents.
This paper identifies information asymmetrybetween a firm and community, as well as thatwithin the community. Both kinds of informationasymmetry may decrease in the long run becausethe community may retaliate or the informedmembers of the community may impart exter-nalities on the uninformed ones. The govern-ment policies may also eventually force a firmto disclose more information. For example, theEPCRA 1986 has implications for the commu-nities’ right to know a firm’s environmental prac-tices. The Executive Order on EnvironmentalJustice, on the other hand, has implications forhow the information may be distributed amongvarious community segments. Finally, we arguethat in the long run, transactions characterizedby cooperation and trust between a firm and thecommunity are likely to be a source of rents.
Trust among organizational stakeholders hasoften been considered a cornerstone of corpo-rate ethics and morality. Environmental ethics, aspecific domain of corporate ethics that dealswith ethical issues related to the natural envi-ronment, has received increasing attention inrecent years by researchers and practitioners (cf.Enderle, 1997). However, the significance of trustin environmental ethics has not been adequatelyhighlighted. This paper explicitly examines trustbetween a firm and the community regardingcorporate environmental practices.
Our study provides a nexus between environ-mental ethics and organizational economics.Recently, Carlin and Strong (1995) have assertedthat organizational economics provides a signif-icant perspective on organizational ethics.According to these researchers, more studiesare needed to investigate the implications ofopportunism and trust for business ethics.Drawing on the literature in organizationaleconomics, our study proposes that trust, whichin many ways, is the opposite of opportunism,may be contingent on how information is dis-tributed among the stakeholders. It recognizesthe potential for adverse selection and moralhazard in a transaction between a firm and thecommunity.
224 Subodh P. Kulkarni
This paper also examines information asym-metry within community. It argues that anopportunistic firm may exploit the perceivedinformation asymmetry among various commu-nity segments. This, in turn, may contribute tothe environmental discrimination by a firm.Recently, environmental (in)justice, a type ofenvironmental discrimination, has received con-siderable attention by the government, as well asenvironmental activists, and communities. Thispaper provides a conceptual explanation for whyenvironmental injustice may occur in the shortrun.
Our study examines whether a firm can sustainits informational advantage in the long run. Itargues that government regulations may helpreduce the information asymmetry. In addition,the game theoretic rationale suggests that a firmis likely to co-operate with the community inthe long run, because the community may retal-iate if the firm acts opportunistically. The loss ofinformational advantage in the long run hasimportant economic implications for a company.Our paper outlines how it may be possible for afirm to leverage its trustworthiness as a sourceof rent generation.
This paper draws heavily on the literature inorganizational economics for its theory develop-ment. Hence, it is also subject to the samelimitations as some of the other studies (e.g., seethe studies cited in Daly and Cobb, 1989) thatare principally grounded in economics. One ofthe limitations of the economic approaches toenvironmental ethics, in general, is that they arepredominantly anthropocentric as opposed toecocentric (e.g., Shrivastava, 1995). We agreethat the short-term profit maximization objec-tive of the firm may be anthropocentric.However, the community’s interests – to have a“safe and clean environment”, need not neces-sarily be anthropocentric. These may be drivenby the need to protect the environment, asopposed to merely serving human needs. Forexample, a community may be against the heavyuse of pesticides, not merely because the chem-icals may pose risk to human life and health butalso because these chemicals may be harmful tofish, birds, mammals, and other elements of theecosystem. We hope that future researchers will
investigate the implications of the anthropocen-tric and ecocentric objectives of organizationalstakeholders.
Acknowledgement
This research is supported in part by a LucentTechnologies Foundation – NSF IndustrialEcology Grant.
Notes
1 Consider for example, Carroll’s (1987) well-knowntypology of managerial ethics: moral, amoral, andimmoral. There are some obvious parallels betweenan “amoral firm” and a firm that is indifferent towardthe community’s environmental concerns in its pursuitof short-term wealth maximization.2 We acknowledge the importance of examining thedifferences in the environmental objectives of owners(principals) and the management (agent), two of thekey organizational stakeholders. However, any dis-cussion of agency problems and instrumental ethics(e.g., Quinn and Jones, 1995) in the present contextwould shift the attention away from the core problem– information asymmetry between the firm and thecommunity. Accordingly, we focus on a firm that facesstrong pressures for short-term profit maximization.In other words, the differences in the objectives ofthe principal and the agent, and the problem of“incentive alignment” are assumed secondary to thedifferences in the objectives of a firm and the com-munity.3 Much research explores the importance of trust ininterpersonal dyads (e.g., Rotter, 1967). Althoughsome researchers disagree about whether organizationscan be targets of trust, a large stream of literatureemphasizes that people can develop trust in organi-zations (e.g., Doney and Cannon, 1997; Morgan andHunt, 1994).4 Operationalizing information asymmetry may bechallenging, although not impossible. For example,Nayyar (1990) has successfully measured the infor-mation asymmetry between service firms and con-sumers.
Environmental Ethics and Information Asymmetry among Organizational Stakeholders 225
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