Public Policy and Corp Env Behavior

Copyright © 2007 John Wiley & Sons, Ltd and ERP Environment

* Correspondence to: Runa Sarkar, Assistant Professor, Department of Industrial and Management Engineering, Indian Institute of Technology Kanpur, Kanpur, India 208016. E-mail: [email protected]

Corporate Social Responsibility and Environmental ManagementCorp. Soc. Responsib. Environ. Mgmt. (2007)Published online in Wiley InterScience(www.interscience.wiley.com) DOI: 10.1002/csr.167

Public Policy and Corporate Environmental Behaviour: a Broader View

Runa Sarkar*Department of Industrial and Management Engineering, Indian Institute of Technology

Kanpur, Kanpur, India

ABSTRACTCorporate strategies to manage the business–ecological environment interface have evolved against the backdrop of regulatory pressures and stakeholder activism. Despite its relevance with respect to sustainable development, a well developed theory encompassing all aspects of corporate environmental behaviour, especially incorporating incentive compatible public policy measures, is yet to be developed. This paper is a step in this direction, aiming to assimilate contributions related to different aspects of corporate environmental behaviour, capturing the transition from environmental management to environmental strategy. In the process we identify areas where there is a need for further research. We fi nd that there is plenty of scope in developing more complex models to explain a manager’s rationale for adopting sustainable strategies in the backdrop of the policy regime, and in conducting more empirical (both descriptive and quantitative) work to obtain clearer insights into mana-gerial decisions. Copyright © 2007 John Wiley & Sons, Ltd and ERP Environment.

Received 15 July 2006; revised 20 June 2007; accepted 12 July 2007

Keywords: corporate environmental behaviour; public policy; environmental strategy; regulatory response; corporate sustain-

ability; environmental performance

Introduction

CORPORATE STRATEGIES TO MANAGE THE BUSINESS–ECOLOGICAL ENVIRONMENT INTERFACE HAVE evolved against the backdrop of regulatory pressures and stakeholder activism. The literature

on corporate environmental behaviour (referred to as CEB in the rest of this paper) provides

rich insights into this process of evolution and attempts to identify and study the links between

fi rm response and external environmental pressures. Early contributions in this area focussed on devis-

ing economic instruments to correct market failures because of environmental externalities caused by

industry operations. While providing a rigorous assessment of the economics of pollution control instru-

ments, these papers assumed away complexity by considering the fi rm as a rational entity operating in

a market environment with the sole objective of profi t maximization. Subsequent papers looked at

the legal, political and social context in which fi rms are embedded, taking into account some strategic

R. Sarkar

Copyright © 2007 John Wiley & Sons, Ltd and ERP Environment Corp. Soc. Responsib. Environ. Mgmt. (2007) DOI: 10.1002/csr

interactions. More recent papers emphasize managerial aspects in fi rm decision making on environ-

mental issues. However, a well developed theory that encompasses all aspects of CEB does not exist.

The aim of this paper is to survey the growing literature that explores different facets of CEB as a fi rst

step towards developing a holistic understanding of how fi rms internalize environmental externalities.

CEB is defi ned as the set of strategies deployed by a fi rm to manage its business–environment interface,

whether as a response to external pressures or as a proactive measure to mitigate its environmental

impact. For clarity and focus we restrict our attention to environmental issues rather than studying the

literature in the broader area of corporate sustainability management (Salzmann et al. (2005) provide

an excellent review).

We look at CEB from two broad perspectives: the public policy view, where we assess fi rm response

to external stimulus, and the managerial view, where the problem is turned inside out, with the fi rm’s

objectives and constraints determining its behaviour. We feel that this is in line with the manner in

which the literature in this area has evolved and we attempt to bridge these disparate approaches through

this review. The following section discusses the policy perspective, studying the role of the government,

regulators or the general public in infl uencing fi rm response. While the fi rst part of this section focuses

on the effi ciency and/or effectiveness of different traditional policy measures, delving into the feasibility

of implementation and impact of regulatory instruments on fi rm performance, the second part sum-

marizes literature on alternative regulatory approaches. Most of this literature is based on ‘overly ratio-

nal conceptions aiming to formulate coercive mechanisms for fi rms while neglecting their systemic

organisational contexts’ (Hoffman, 2001). The third part of the second section attempts to bring social

coercion in the ambit of public policy by looking at informal regulation. The third section focuses on

fi rm responses to the environmental impact of its direct and indirect activities: the managerial perspec-

tive. Besides summarizing the literature on drivers of fi rm behaviour (fi rst part) and environmental

management tools and techniques (second part), we also cover economic rationale for fi rm strategy in

the third part of the third section, recognizing that the relation between environmental and economic

interests is a balance of purely competitive and purely cooperative factors. The fourth section offers a

fl avour of select descriptive studies on fi rm responses to environmental stimuli to demonstrate the

interplay of policy framework with CEB. These are harbingers of a new holistic trend of analysing CEB,

internalizing external variables into fi rm behaviour. The fi fth section concludes with insights from this

study, identifying future research directions.

The Public Policy Perspective

Oates and Baumol (1975) provide perhaps the earliest exposition on the spectrum of policy tools avail-

able to the regulator to manage environmental externalities caused by fi rms, discussing each with respect

to administrative issues, information issues and implementation issues. This has been followed by a

plethora of papers examining every aspect of environmental regulation, which has been comprehensively

reviewed by Heyes (2000). A similar, relatively non-technical overview of policy solutions for pollution

control is provided by Anand (2003). Thus, this section only attempts to highlight key insights and

evolution of literature in public policy, which will assist in elucidating how external factors such as

environmental policy, in its broadest sense, are internalized as core objectives of fi rms.

Traditional Regulatory Approaches

Impact on FirmTable 1 summarizes fi ndings from some papers that identify the impact of regulatory instruments on a

fi rm’s decision to adopt pollution abatement technology or innovation. Theoretical models suggest that

Public Policy and Corporate Environmental Behaviour


auctioned permits are most effective and emission standards least effective. With respect to innovation,

a fi rm’s innovative ability, industry structure and benefi t from innovation are critical in determining

which policy tool is most effective. Anex (2000) proposes three different hypotheses on the effect of

industrial structure on innovation: the technology push theory, the demand pull hypothesis and a third

view that innovation follows a predictable life cycle pattern. Downing and White (1986) fi nd that cost–

benefi t motivated regulations lead to private agents doing too little research into clean technologies when

compared to the social optimum. Researching why the explicit costs of fi rm compliance as a fraction of

production cost are fairly low, Roediger-Schluga (2002) uncovers that the stringency of environmental

regulation is determined by the interplay of a number of self-interested stakeholders in a political market.

Since environmental hazards tend to be uncertain, the regulations are such that they do not overburden

industry, leading to incremental improvements in process parameters and diffusion of existing best

available technology.

OptimalityOptimum policy instrument choice is not simple in the presence of information asymmetry. This was

fi rst highlighted by Weitzman (1974), who demonstrated that, depending on the relative steepness of

the marginal cost and damage curves, quantity restrictions could prove superior to incentive compatible

Authors Features Findings

Adopting pollution abatement technologyDowning and White (1986) Single fi rm in a perfectly Marketable permits marginally competitive setting with no more effective followed by non market factors effl uent fees and subsidies. Discrete technology choice Emission standards least effectiveMilliman and Prince (1989) Many identical fi rms with Auctioned permits most effective, no entry or exit options emission taxes and subsidies Discrete technology choice second. Free marketable permits and emission standards (direct controls) least effectiveJung et al. (1996) Industry level, fi rm Auctioned permits, followed by heterogeneity allowed, free emission taxes and subsidies and entry and exit emission standards in descending Discrete technology choice order of effectiveness

InnovationFischer et al. (2003) Perfectly competitive market Ranking of auctioned permits and Endogenous technological change emission taxes depend on fi rms’ innovation imitation ability, innovation costs, environmental benefi t functions and market structureAnex (2000) Qualitative assessment Credible threat of stringent regulation and fl exible implementation favour innovation.Hontou et al. (2007) Empirical study, multicriterion Differentiation capacity and classifi cation of fi rms with increase in production cost respect to dependent on several other factors European policy in addition to policy

Table 1. Impact of regulation on a fi rm’s decision making

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tax regulations. The debate on uncertainty and optimal regulation, summarized by Baumol and Oates

(1988), identifi es two limitations: static analysis and the inherent assumption of independence of the

marginal cost and damage functions.

The dynamics of pollution control and incentive compatibility problems are brought together by

Benford (1998) in a model of many fi rms emitting a persistent pollutant. A mixed effl uent charge and

license scheme is proposed, where it is in the best interest of fi rms to reveal their true costs. Anderson

and Cavendish (2001) develop a dynamic simulation framework for the costs and effects of environmen-

tal policies over time.

When uncertainty about marginal cost and benefi t are correlated Shrestha (2001) suggests that an

emission standard instrument could be better or worse than a nonlinear tax instrument depending on

the nature of correlation. In the presence of external learning effects, Rosendahl (2004) challenges the

optimality of uniform Pigouvian tax across all emission sources. Since most papers represent command

and control regulations as absolute limits, Bauman (2004) cautions that the dynamic superiority of

market based instruments over other types of command and control regulation may not be as clear

cut.

A situation where the accumulation effect due to pollution is stochastic is modelled by Plourde and

Yeung (1989). They fi nd that the option of emission standards unworkable, and suggest a user charge

on inputs. Toman and Withagen (2000) use a simple general equilibrium approach to compare three

options – outright banning, a (static) pollution tax and an inter-temporal trading policy in a situation

where there is a potential for the assimilative capacity of the Earth to get exhausted. They fi nd that an

outright ban would impose a welfare loss and a bankable stock of single-use emission permits would

provide greater dynamic effi ciency than a rigid tax. On a more specifi c note, several authors such as

Kverndokk et al. (2001) examine the welfare implications of technology subsidies and carbon taxes in

a general equilibrium situation to conclude that subsidization of alternative energy could be welfare

worsening if newer technologies are crowded out. Enforcement and monitoring is another dimension

of policy instruments, which is discussed below.

Implementing RegulationsMore than the nature of regulation, the way it is implemented has a greater impact on a fi rm’s reaction

and its competitive ability (Anex, 2000). The impact of a credible, renegotiation proof threat of impos-

ing stiff regulatory standards on the fi rm is demonstrated by Cadot and Sinclair-Desgagne (1995) in an

oligopolistic setting. Heyes and Liston-Heyes (1999) develop a model that explores raising the hurdle

for lobbying costs as a means to induce fi rms to exceed regulatory limits. This view is also endorsed

through case studies on widespread land clearing in Australia (Whelan and Lyons, 2005). Earnhart

(2004) examines deterrence generated by inspections and enforcement actions to conclude that the

threat of federal (central) interventions is stronger than the threat of state interventions to induce better

performance. Stafford (2002) concludes that a tenfold increase in penalty increases compliance only by

10–20 per cent.

Harford (2000) examines the trade-off between fi rm abatement costs and regulatory monitoring costs,

to conclude that there is an argument against the use of incentive based instruments on the grounds of

excessive monitoring costs.

The nature of the polity in which a fi rm operates affects policy effectiveness. Rock (2002) concludes

that political economy of a country has a major role to play in determining policy success from studying

the environmental policy regimes in Malaysia and Thailand. This is echoed by Hahn (2000) in a paper

that discusses the impact of economics on environmental policy.

Mylonadis (2002) discusses the limitations of regulators in the context of asymmetric information

and uncertainty, classifying information into two categories: environmental objectives and how to



achieve them. Command and control type legislation works when both types of information are avail-

able, market based instruments are effective when the objective is clear but the means are not and

process based instruments such as environment management systems work when the means are clear

but objectives are not. When both the objective and the means to achieve it are not known, open sourc-

ing the regulation is the best option. This leads us to a discussion on voluntary and fl exible initiatives,

collectively referred to as alternative regulations.

Alternative Regulatory Approaches

Information based voluntary approaches provide the fi rm with the fl exibility to manage the environ-

ment in line with its competitive advantages. Khanna (2001) provides a rich literature survey of this

fi eld and Delmas and Terlaak (2001) summarize the range of American and European voluntary pro-

grammes (also Lyon and Maxwell, 2001). Krehbiel and Erekson (2001) examine four different self

regulating approaches demonstrating how they improve fi rm competitiveness. Fullerton and Wu (1998)

propose (a) that households pay for the social cost of disposal pressurizing producers for ‘green’ prod-

ucts and (b) a subsidy to recyclable designs or a tax on use of packaging. Cerin and Karlson (2002)

advocate a concept of trading product life cycle (PLC) emission rights as a means of bridging the divide

between instruments providing pollution abatement incentives and implementable policy initiatives.

Whether alternative approaches should replace or supplement the existing regulatory instruments is

studied, empirically, by Foulon et al. (2002) (also see Arts, 2002, for a theoretical approach), to conclude

that the positive impact of appearing on the polluter list is greater than that of penalties. They recom-

mend that stringent regulations with credible penalty systems should complement public disclosure

programmes, the former sending appropriate signals to fi rms involved and the latter providing additional

incentives for pollution control, also endorsed by the International Institute for Environment and Devel-

opment (IIED, 2001). Walls and Palmer (2001) compare traditional approaches with advance disposal

fees by modelling a production and consumption process for a fi rm incorporating life cycle externalities,

to conclude that multiple policy instruments are needed.

However, Kennedy et al. (1994) are wary of the role of public disclosure programmes as they cannot

correct for underlying consumption externalities, which is taken care of by levying emission taxes.

IIED (2001) and King and Lenox (2000) have warned against those voluntary practices that may distrib-

ute benefi ts and burdens inequitably, or act as strategic measures akin to anti-competitive practices.

Segerson and Miceli (1998) identify the bargaining power of the fi rm as the determining factor for the

effi cacy of alternative approaches to regulation. Blackman and Boyd (2002) fi nd that, while voluntary

programmes are unambiguously welfare enhancing in monopolistic settings, in a Cournot duopoly there

is a possibility for a reduction in producer surplus, although the regulators policy on technology diffu-

sion determine consumer surplus and environmental impact. As a solution, Gunningham et al. (1999)

explore the role of third parties as regulatory surrogates in place of the government to overcome the

dangers of deregulation. On similar lines, Lyon and Maxwell (2003) suggest the use of voluntary agree-

ments as a weak regulatory tool only when it is infeasible to apply other tools such as taxation. Amid

concerns about the effi cacy of voluntary initiatives, there are situations where the regulatory mechanism

of a country is completely ineffective and the community around a fi rm takes over as custodians; these

situations are explored next.

Role of Informal RegulationIn a weak regulatory regime, communities use methods such as making demands for compensation,

social ostracism, monitoring and publicizing fi rm emissions etc. to counter irresponsible CEB. This

‘informal regulation’, as defi ned by Pargal et al. (1997), is more effective for communities with higher

R. Sarkar


income, for economies with both well developed and nascent regulatory mechanisms. Synnestvedt

(2001) endorses this fi nding, commenting that the focus of providing environmental information to

stakeholders as a policy instrument should be on quality rather than quality. Becker (2004) demonstrates

empirically that larger per capita income and higher degree of home ownership in a community results

in increased plant level air pollution abatement activity, while the presence of a higher fraction of

employees in the community deters such activity. The positive impact of informal regulation imposed

through public scrutiny and/or trade links is demonstrated empirically by Dasgupta et al. (2000). Thus,

a small but growing body of empirical work suggests that stakeholder involvement, industry character-

istics and ownership of the fi rm are as important as formal regulation (Pargal et al., 1997). Altham

and Guerin (1999) further opine that a ‘seamless web’ framework of regulation is emerging, which

recognizes the role of the fi rm in formulating policy.

The Managerial Perspective

The previous section demonstrates that recent literature has started to accept the fi rm as a social entity

rather than a purely economic entity. This evolution is described by Buchholz (1991), who concludes

that, while we continue the search for reasonable theories to supplement the dominant economic para-

digm, fi rms have to acknowledge the need to protect the environment for their long term existence. In

this backdrop, we fi rst review some literature on typologies of CEB followed by a discussion on environ-

ment management tools. Finally, we consider literature that has incorporated fi rm strategy into its

economic analysis. The approach is different from that of Salzmann et al. (2005), who categorize the

literature into theoretical frameworks, instrumental studies, descriptive studies and environment man-

agement tools. Another thread along which CEB literature has evolved is towards developing tools and

indices to measure environmental performance and sustainability (Lawrence et al., 2002; Toffel and

Marshall, 2004; Singh et al., 2006; etc.); this is beyond our scope.

Typologies and Classifi cation

Kolk and Mauser (2002) provide a comprehensive overview of previous work in the area of CEB encom-

passing linear, nonlinear and continuum stage models, asserting that over time managerial aspects are

given equal importance to regulatory aspects. While Petulla (1987) is perhaps the pioneer in developing

a continuum of environmental management approaches based on an industry wide survey, noteworthy

contributions in this area include those of Roome (1992), Dodge (1997) and Azzone et al. (1997).

Bhargava and Welford (1996) provide a conceptual nonlinear typology of environmental strategies while

Ghobadian et al. (1998) use past literature and an empirical survey to position CEB of fi rms in a non-

linear continuum in relation to the environmental strategy they adopt. Another approach is to group

fi rms into categories, value destroyers, limiters, conservers and creators, based on their environmental

responses (Kemp, 2001).

After a comprehensive review, Rugman and Verbeke (1998) classify corporate environmental deci-

sions in a two by two framework comparing impact on performance due to environmental measures

with time horizon of managerial response. They bring in elements of the resource based view of the

fi rm through another cross-tabulation comparing fl exibility of resources committed (weak, strong) with

fi rm leveraging potential for environmental performance. Child and Tsai (2005) cross-tabulate fi rm

strategies (environmentally responsible, environmentally exploitative) against high and low institutional

constraints, pertaining to the degree of independence of fi rms from regulatory requirements for multi-

national corporations and local fi rms. Jose (1996) contends that the differences in market power of fi rms



and the differences in regulatory framework explain where the fi rm would be. Small fi rms lack market

power and would not over-comply with lax regulations or impossible environmental norms pushing

them into major violations. Leadership and over-compliance is possible only for larger fi rms with market

power. Leung and Tse (2001) also assert that while larger (resource rich) fi rms adopt a technology with

large fi xed costs immediately, smaller fi rms optimally choose to wait before switching, saving at a higher

than normal rate for later investment.

In an empirical study, Banerjee (2001) reviews the CEB of American fi rms, to highlight that a sig-

nifi cantly higher proportion of fi rms in industries such as chemicals, pharmaceuticals and utilities

performed signifi cantly more environmental actions focused on their employees than other fi rms.

Managerial perceptions of environmental issues varied signifi cantly across industries depending on the

extent of external pressures. Siniscalco et al. (2000) develop a relationship between information-based

environmental strategies and fi rm economic and environmental performance by studying responses by

the European oil and gas, petrochemical and power generation industry.

Table 2 summarizes other contributions in the area, listing key features of the studies and the fi nd-

ings. A wide variety of issues emerge as motivators/de-motivators of CEB, ranging from intuitive factors

such as potential cost saving and stakeholder pressure to less obvious ones such as uncertainty and

organizational slack.

Environment Management Tools and Techniques

An evaluation of environmental management approaches logically follows from the recognition that

environmental response could be a strategic initiative. To this end, Vastag et al. (1996) characterize these

approaches depending on the extent of risk arising from fi rm internal operation and exogenous risk

through empirical tests on 141 Hungarian fi rms. They conclude that strategic environmental manage-

ment may not be the most profi table approach, with proactive or crisis preventive strategies being better

suited to prevailing risk conditions. McWilliams and Siegel (2001) develop a supply and demand model

of corporate social responsibility (CSR), to conclude that cost–benefi t analysis leads to an ideal level of

CSR.

Rondinelli and Berry (2000) list proactive corporate environment management techniques in use

today, linking them with policy. They conclude that further expansion of command and control regula-

tion would yield diminishing returns, emphasizing the need for alternative policies. Newman and

Breeden (1992) review the experiences of leaders in CEB to observe that they are more proactive, more

often driven by opportunity than threat and more likely to integrate environmental management into

mainstream business compared with average fi rms. Using survey research, Florida and Davison (2001)

report that larger plants and plants more committed to quality and/or innovation tend to adopt EMS

(also see Rivera-Camino, 2001). The paper by Leal et al. (2003) concluding that environment manage-

ment systems increase fi rm competitiveness is encouraging after Stanwick’s (1998) past conclusion that

end of pipe technologies are more profi table than process based technologies.

The limitations of traditional EMS highlighted by Greeno and Robinson (1992) include a lack of

resources, attitudinal and cultural hurdles and too few motivators to implement environmental excel-

lence. Bryant and Wilson (1998) point out the underlying defi ciencies of the concept of EMS as a techno-

centric problem solving incentive and urge an immediate reassessment. On the other hand, the

changing views on the role of technology have been documented by Chertow (2001), who tracks the

IPAT equation over the last 30 years to reveal how there is tremendous optimism now on technology

as the single factor to reverse adverse environmental effects.

Given these limitations, Welford et al. (1998) propose a model for sustainable development in

the service sector. Another approach is that of industrial ecology: mimicking the natural ecosystem

R. Sarkar


Authors Features Determinants of CEB

Segerson and Miceli (1998) Theoretical model of interaction Potential cost savings between regulator and polluterLyon and Maxwell (2001) Survey of theoretical and empirical Improved productivity literature ‘Green’ demand Pre-empt/weaken forthcoming tougher regulations As an entry barrierAzzone et al. (1997) Firm modelled as a green engine, Environmental culture where the drivers identifi ed lead to Strategic attitude the adoption of different types of Infrastructural resources environmental strategy CompetenciesFernandez et al. (2003) Survey of literature Human resources Organization cultureThornton et al. (2003) Empirical study of 14 pulp and Social pressure paper industries Environmental management styleHenriques and Sadorsky (1996) Framework developed to Customer pressure empirically test importance of Shareholder pressure pressure group incentives for fi rm Regulator pressure responsiveness to environmental Community pressure pressures Sales to asset ratio ‘Other’ lobby group pressuresBansal and Roth (2000) Qualitative assessment of ecological Motivating factors: competitiveness, responses of fi rms in the UK compliance, social responsibility Contextual issues: individual concern of employees, convincing scientifi c evidence, availability of appropriate technology, breadth and depth of networks with stakeholdersAragon-Correa and Sharma (2003) Development of environmental Uncertainty strategy as a dynamic capability Complexity studied by extending the resource Munifi cence based view of the fi rm to include a contingency perspectiveKhanna and Anton (2002) Behavioural model of fi rm decision Market based incentives making developed to obtain econometrically testable hypothesesStannengard (2000) Case study conducted of one of External pressures becoming internalized Sweden’s largest manufacturing Pressures matching with available tools fi rmsVideras and Alberini (2000) Bivariate probit model with data Publicity from three EPA voluntary Access to new information programmes developed ReputationKhanna and Damon (1999) Empirical study of 33/50 program of the EPAArora and Cason (1995) Empirical study of 33/50 program Improved long run profi tability of the EPA, current ROI adversely affected by participationKonar and Cohen (2001) Impact of declaration of the Toxics Decline in market value if environmental Release Inventory Report on improvements not made company stocks studied



Authors Features Determinants of CEB

Stanwick and Stanwick (2000) Empirical study fi nding relationship Medium fi nancial performers had highest of fi rm environmental disclosure to incidence of environmental disclosure fi nancial performanceKong et al. (2002) Qualitative discussion Pressure from NGOs Customer pressureRamus (2001) Empirical survey of several mid-and Lack of middle management support for lower level employees at 6 MNCs green designAndersson and Bateman (2000) Empirical study Packaging and selling environmental issues to employeesSharma (2000) Empirical study of 99 Canadian Environmental issue perceived as a threat fi rms exploring links between or an opportunity. managerial interpretations of Available discretionary slack environmental issues and corporate Corporate culture choice of environmental strategy Resource availabilityBowen (2002) Conclusions from series of Organizational slack (how a resource is interviews with top managers in used to address an environmental private companies in the UK problem)Eggers et al. (2000) Empirical survey of manufacturing Environmental regulatory barriers to facilities and environmental technological adoption (consultancy consultancy fi rms fi rms) Financial constraints (manufacturing facilities)Boyd (2001) Theoretical review and comprehensive Organizational barriers: inadequate empirical case studies accounting practices, poor management incentive schemes Financial barriers

Table 2. Drivers and determinants of corporate environmental behaviour

to attain effi cient production without generating externalities (Suh and Kagawa, 2005). Ehrenfeld (2000)

reviews the fi eld of industrial ecology, demonstrating that it is objective, measurable and compatible

with standard effi ciency concepts. Welford’s (2000) trilogy of books on corporate environmental man-

agement, ranging from systems and strategies to organizational culture and tools followed by a paradig-

matic shift to sustainable development, aptly summarizes the state of the art knowledge on CEB.

Strategic Behaviour of Firms

Economic theory looking at the fi rm as existing in a market setting embedded in a social and political

milieu (Baron, 1995) diverges from the economics of regulation in its assumption of perfect competition

and identical fi rms, introducing the possibility of strategic interactions. The simplest introduction to

strategic considerations in standard economic theory is provided by Barrett (1992). Lantos (2001) dis-

tinguishes between altruistic, ethical and strategic CSR, to conclude that, while altruistic CSR is not a

legitimate role of business, ethical CSR is mandatory and strategic CSR has benefi ts both for society

and the fi rm. Porter and Kramer (2002) clarify the concept of strategic philanthropy, opining that fi rms

could practice CSR to enhance their competitive advantage. Economic rationales for beyond compliance

behaviour are presented by Reinhardt (1999b), who identifi es three sets of circumstances in which it

could be profi table. These include (a) where there is a possibility for strategic interactions with com-

petitors, (b) where this could be used as a means to differentiate the product and (c) where unexploited

cost saving potential exists because of principle-agent problems within the fi rm.

R. Sarkar


In a repeated game setting of a duopoly Damania (1996) illustrates how pollution tax could act as a

profi t enhancing collusive device, making non-compliance strategic. This is ratifi ed in a sequential game

as well (Damania, 2000). Expressing support for or being instrumental in the introduction of more strin-

gent environmental regulation is explained as strategies to increase market power or create entry barriers.

In a three stage game between two fi rms in a risk neutral oligopolistic setting, Hackett (1995) illustrates

that cleaner technology, developed by one of the fi rms, is used only if regulatory standards are set accord-

ingly. Such strategic R&D rivalry is critical for development of pollution prevention technology. The role

of more stringent regulation as an entry barrier is demonstrated empirically by Dean et al. (2000).

Maxwell et al. (2000) design a three stage game between Cournot oligopolists and regulators, dem-

onstrating that fi rms will self-regulate if the barrier for environmental groups to group and apply pres-

sure is high, backing the fi nding up with empirical evidence. King et al. (2002) study the ‘reputations

commons’ problem, where stakeholders can sanction fi rms for misdemeanours but cannot differentiate

among them. They suggest reducing the threat of sanctions and privatizing the problem by differentiat-

ing fi rms as possible solutions.

Assuming that voluntary over-compliance is a response to ‘green’ consumers, who pay a premium

for ‘green’ products, Arora and Gangopadhyay (1995) rationalize beyond-compliance behaviour in a

vertical product differentiation model for a duopoly involved in a two stage game. However, empirical

support for the notion that green consumerism drives CEB is mixed at best (Lyon and Maxwell, 2003).

This view is also echoed by Newman and Breeden (1992), who note the disconnect between customer

intent and action at the point of sale.

Heinkel et al. (2001) explore the effect of exclusionary ethical investment on CEB in a risk averse

setting to conclude that polluting fi rms face a higher cost of capital. If incremental capital cost exceeds

cost of pollution abatement, then these fi rms will reduce their pollution, but this needs more than 20

per cent of investors to be green. Evidence indicates that this fi gure is below 10 per cent at present.

Prakash (2001) criticizes the above approaches to explain responsible CEB, as the explanations use

only external factors. Hermalin (2001) looks at corporate culture from a game theoretic perspective,

highlighting the paucity of work in this area, perhaps because of its mismatch with the rational agent

methodology.

Cerin (2002) assesses motives behind corporate environment reporting: the driving force behind

reporting is corporate self-interest, leading to a divergence between reporting and actual activity ‘creating

incomparable as well as implausible reporting’. Wheeler et al. (2002) highlight the paradoxical situations

where global intent can clash with local reality by analysing the experiences of Shell and the Ogoni in

Nigeria. The critical issue is whether the intent to be socially responsible can be transferred to operational

reality within acceptable timescales or whether there are barriers, organizational or otherwise, that negate

such a transfer. Rugman and Verbeke (2000) extend Porter’s fi ve forces model for industry analysis to

include government regulation as a sixth force to explain the shift in fi rm level strategy in response to

environmental legislation, and analyse six well known (all Harvard Business School Cases) cases of

corporate strategy using this framework.

Porter’s major contribution to the fi eld of strategic CEB is the Porter hypothesis (Porter, 1991), which

compulsively asserts that tough environmental regulation results in a more competitive fi rm in the long

run as regulations signal companies about likely resource ineffi ciencies and technological improvements

(Porter and Van der Linde, 1995b). Further support of the hypothesis is evident in papers by Porter and

Van der Linde (1995a), Hjeresen et al. (2002), Hart (1997), Lovins et al. (1999) and Biddle (1993). The

need for corporate managers and government policy makers to work as partners rather than adversaries

is underscored by Biddle (1993) as well as Marcil (1992).

On the other hand, Walley and Whitehead (1994) argue that in reality few win–win opportunities

exist, and in general there is a trade-off in internalizing environmental externalities. The analysis by



Wagner et al. (2002) of the European paper industry as well as the analysis by King and Lenox (2002)

of waste prevention programmes support this traditionalist reasoning. King and Lenox (2001) assert that

the association between lower pollution and higher fi nancial valuation may be spurious and Xepapadeas

and De Zeeuw (1999) question the validity of the Porter hypothesis with a theoretical model that con-

siders synergistic effects of environmental regulation. From an institutional economics angle dealing

with nondeterministic environmental externalities, Sinclair-Desgagne (1999) concludes that the Porter

hypothesis cannot be rejected outright. Perspectives (1994) sum up the debate with carrying the views

of leading experts.

Thus, Reinhardt (1999a) rephrases the Porter debate of ‘does it pay to be green’ to ‘under what

circumstances it pays to be green’, emphasizing through anecdotal evidence that companies should

treat environmental issues just like other business issues. Allenby (2000) echoes a similar view, where

he laments that ‘green’ technology ‘embeds within it the mental model of environmental issues as

peripheral to general economic and political activity’. A succinct summary of strategic environmental

behaviour is provided by Rosen (2001).

Thus, a gradual transition from environmental management to environmental strategy is evident from

the literature. Regulatory compliance (environmental issues acting as a constraint) and social responsi-

bility to address environmental damage are components of corporate environmental management,

which is driven by legal and/or social sanctions. However, the underlying thread in the literature on

environmental strategy is that through a complex web of constituents, whether customers, shareholders,

investors or employees, environmentalism becomes transformed from something external to the market

environment to a core objective of the fi rm. Therefore, the challenge before us is to merge the social

and economic aspects of environmentalism (the policy perspective) with business decisions and practice

(the managerial perspective) to provide a broader understanding of CEB.

Bridging Public Policy with Environmental Management

Empirical Corporate Environment Behaviour Research

In order to successfully bridge environmental policy with CEB, there is a need to empirically analyse

the inner workings of the fi rm in the context of economic assessments of environmental policy. In his

edited book on Environmental Policy and Corporate Behaviour, Johnstone (2007) presents an in-depth

empirical analysis of 4000 industrial facilities, elucidating the public policy implications of fi rm level

environmental practices. The limitations of the book with respect to studying a single cross section at a

single point of time are overcome by Kawamura (2000). The analysis of environmental performance of

Spanish fi rms by Junquera and Ordiz (2002) is useful; however, it lacks the policy perspective. Levy and

Rothenberg (2002) apply institutional theory to study American and European auto manufacturers; they

conclude that strategic choices are premised on assumptions and forecasts about climate science, regu-

latory responses, technological and market prospects etc., which are endogenous to the fi rm and its

interaction with the institutional environment. Perry and Singh (2001) explore the CEB of multinational

companies in Singapore to conclude that the absence of citizen, government and NGO pressure is

reducing the extent of voluntary environmental action of these fi rms. That formal policy has a signifi -

cantly greater infl uence when compared with the broader social and informal regulatory milieu on CEB

is deduced by Kusku (2007) from a study of Turkish industry.

At a more micro level, Preston (2001) studies the transition of environmental management practices

at Hewlett Packard. Through an interview with the CEO of chemical giant Monsanto, Magretta and

Shapiro (1997) report that sustainability is an important component in Monsanto’s strategic thinking.

R. Sarkar


Conoco’s response to regulations is documented by Sharfman et al. (1999), where their innovation to

form a closed loop vapour recovery project was a win–win proposition. The role of stakeholder consulta-

tion in infl uencing CEB and consultation methodology is documented for the nuclear industry by Collins

and Usher (2004). The evolution of laundry detergent and its impact on the environment has been

studied by Saouter and White (2002), in the perspective of European policy. Robbins (2001) summarizes

recent literature and studies the greening efforts of The Body Shop and Arco Chemicals. Utting (2002)

describes the environmental record of the private sector in several developing countries, following it up

with discussions on regulatory issues to promote responsible CEB. Sarkar (unpublished thesis) develops

a time line for environmental responses linked with the policy life cycle for some steel and paper

manufacturers in India.

Bridging the Divide

Drawing from their observations of various fi rms, Lyon and Maxwell (2004) provide an articulate linkage

of stage models of CEB with the policy life cycle: a pioneering effort to contextualize CEB in public

policy. However, their treatise is limited to voluntary corporate environmental initiatives only. The

importance of understanding the fi rm’s commercial motivation decision-making procedures and orga-

nizational structure while designing environmental policy has been highlighted by DeCanio (1998),

while Larsson et al. (1996) have demonstrated how initial orientation of a fi rm infl uences its response

to legislative push or market pull. Vatn (2005) demonstrates the role of institutional factors in the for-

mation of environmental preferences and the potency of environmental stimuli. Towards this end,

Hontou et al. (2007) provide an environment–competitiveness matrix in the EU policy context, which

can be used to establish sustainable strategies and design effective policies.

The need for integrating policy research and fi rm behaviour is underscored by Clark (2005), who

opines that this would ‘suggest new approaches to environmental protection, including integrated strat-

egies that make synergistic use of multiple tools’. For environmental policy to be more effective, it is

important to expand the domain of enquiry further to the political economy of environmental regula-

tions: the feasibility of implementation, process of decision making, reaction of industry to regulation

etc. (Hahn, 2000). There is a need to understand the policy framework in its broadest sense, including

self-regulation, and this has numerous threads – regulators and regulatory mechanisms, NGOs, indus-

try peers, investors and consumers (Altham and Guerin, 1999).

Conclusion

As discussed above, a substantive amount of work has been done to broadly understand the need for

and nature of public policy interventions to infl uence CEB. Similarly, specifi c issues such as drivers of

environmental strategy and effi cacy of environmental management tools have been adequately dis-

cussed. However, literature on the effects of environmental policy on the inner workings of the fi rm is

scarce. Through reviewing and organizing relevant contributions in the area of public policy and CEB,

this paper paves the way towards a building a general theory to develop suitable policy tools to ensure

that fi rms evolve as custodians of their ecological environment. Such a theory could start by reviewing

the process of interaction and negotiation between policy makers and fi rms (or their representative

interest groups) to arrive at suitable policy initiatives, which would yield mutually agreed environmen-

tally benefi cial outcomes. This could be followed by an analysis of the process of policy implementation

itself, where due to political or procedural compulsions there are some deviations from the agreed policy

initiative. The focus could then shift to CEB of the fi rm with respect to the stated policy intervention.



Factors that need to be taken into account at this stage are the relative importance of fi rm capability

(irrespective of willingness), market related factors, competitor responses, supply chain opportunities

or restrictions, political and legal environment, pressure from NGOs, employees and the social environ-

ment, customer preferences and the long term goals of the fi rm. The dynamic nature of all these factors

must be taken into account as well. The environmental outcome of the fi rm response to the policy

intervention would then be taken as feedback for further interaction between the regulators and regu-

latees (the fi rm). Figure 1 summarizes the conceptual model described.

Within this framework, there is scope to develop nonlinear multidirectional models where the impli-

cations of each factor on CEB could be studied relative to the other interrelated factors. With respect to

the nature of the fi rm, the impact of the policy framework on CEB of small and medium enterprises,

which employ far more people than large fi rms, has not been adequately examined in the literature,

providing a promising avenue for research. Moreover, more empirical research is needed to develop

deeper insights into which conditions are conducive for specifi c regulatory measures, which would then

contribute towards generalizing the results for a holistic theory.

Another interesting trend highlighted through this review is the changing nature of CEB from react-

ing to governmental pressures to raising the bar for the rest of the industry. Even similar fi rms react

very differently to environmental stimuli depending on their social, regulatory and market milieu. This

Expected goal of policy initiative

Policy intervention

Environmentaloutcome

Internal characteristics Firm strategy

Policymaker

Firm or its interestgroup

Market (risk, finance etc.)

Competitorresponse

Supply chain

Social/employeepressure

Customer

Political & legalenv.

Bureaucracy

Firmcharacteristics

Figure 1. A conceptual model for theory building on corporate environmental behaviour

R. Sarkar


is because increased economic integration coupled with rapid strides in technology development have

led to greater uncertainty, due to which environment management has become a part of core business

strategy for the fi rm. Environmental issues have become an important trigger for market or industrial

transition through a diverse set of sensitive business stakeholders ranging from environmental NGOs

to competitors. They are warnings of the need to diversify, innovate and change to ensure business

sustainability and now constitute core strategic decisions. We can assertively state than the environment

has now evolved from being a necessary evil to taking a strategic dimension for the fi rm.

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