Darden’s Michael Lenox is an authority on innovation strategies. He heads the school’s Batten Institute, which examines the impact of innovation in improving key sectors of the economy. Today and next week, we’ll hear Lenox’s views on business and the environment.
BNET: You’ve examined how firms “self-regulate” in the environmental arena and also how outside interest groups try to affect corporate environmental performance. What has your research shown you?
Lenox: What I’ve long been interested in is under what conditions do firms basically go beyond the letter of the law? When do they go beyond mere compliance with environmental statutes? Basically, the research was of the flavor of “does it pay to be green?”. What are the financial incentives that firms have to achieve superior environmental performance? Also, recently, I’ve looked at the role of activists and why they target certain types of firms and how those firms respond. At the heart of this is a question of incentives; when are the actions of an activist enough of a motivator to spur firms to any kind of action?
The most interesting thing we found is that there are different groups of stakeholders. Some are really all about bringing attention to the issues they are focused on, especially the big, internationally focused interest groups. The disappointing thing for firms is that those interest groups tend to target firms really regardless to their performance relative to their industry; they target them just because they are big and visible. If you are Dupont in the chemical industry—which is a firm that I think has done quite a bit and been progressive on their environmental performance—you’re going to get targeted. Some groups are smaller and more localized…they really care about a narrower set of environmental interests and would only target a company if, say, it was actually polluting a river that they cared about. They tend to target companies with much poorer records of environmental performance and seek to change behavior on certain specific matters.
BNET: Should self-regulation be a big part of environmental standard-setting? Is it effective?
Lenox: We looked at private, industry-led codes of conduct, one of the most known being the Responsible Care Program out of the chemical industry. A set of big chemical firms in the US got together and said, “We are going to hold ourselves to a higher standard on environmental performance.” Usually, this kind of action is a pretense to forestall governmental regulation. “There’s no need to step in with additional regulations. We’ll put the policies and procedures into place.” We found that these kinds of self-regulatory schemes can work, if you have a few conditions in place. First, monitoring, preferably third-party monitoring. And you need some kind of sanctions to punish people who don’t live up to the standard. This seems kind of obvious, but we’ve seen a lot of these agreements where not only was there self-reporting, there was never really punishment for those who failed to live up to the code of conduct.
BNET: What are some examples of how self-regulation, collective or third-party regulation affects environmental performance?
Lenox: One really interesting example of third party standard-setting is ISO 14000, which is an environmental scheme laid out by this international standards setting organization. This is a standard that requires companies to have certain procedures and systems in place, but not to achieve certain results or reach certain levels, per se. What we found is that those kinds of standards did improve environmental performance and reduced emissions. But we also saw that most of the firms attracted to getting that type of certification tended to be the dirtier types of facilities. My co-author came up with this analogy: think of two people, one with a 1980 Buick, and the other with a brand new BMW. Who is more likely to need some sort of maintenance program more? The person with the 1980 Buick, because that’s the person whose car will be breaking down more. What we observed was that it was the older dirtier facilities that were attracted to the ISO 14000 and found a lot of value in putting some sort of management system in place for their wastes. Cleaner sectors and cleaner industries needed this less. But the interpretation is that ISO 14000 means a cleaner facility, which is not exactly right. They may be comparatively cleaner than the baseline if they didn’t have the processes required by ISO 14000, but probably not nearly as clean as other newer facilities in their industry that didn’t even seek out that certification.
Next week, we’ll wrap up our discussion with Prof. Lenox and hear his views on how companies are innovating technologies and practices to improve the environment.
