'Large and dirty' companies adopting greener strategies to earn more green

Rebutting the image of such companies as careless polluters, the study recently published in Strategic Management Journal found that big industry has begun introducing more efficient production methods and other strategies kinder to the natural environment. Government regulations, advances in technology, and public demand for ecologically sound products and practices account in part for this change, but so does the companies' realization that getting greener and cleaner makes good economic sense, said Phillip H. Phan, a professor at the Johns Hopkins Carey Business School in Baltimore.

"The news is pretty good in terms of American corporations and their concern for the environment. It's becoming more a part of the DNA of corporate decision making," said Phan, who conducted the research with Judith L. Walls of Concordia University in Montreal and Pascual Berrone of the University of Navarra in Madrid.

"We noticed a major paradigm shift in the attitude of the so-called 'large and dirty' industrial companies. They went from seeing environmental safeguards as an unwanted cost of business to regarding them as a business opportunity. These companies are no longer being dragged kicking and screaming to compliance. Now they view concern for the environment as an opportunity to embed innovations that save production costs in the long term and that also improve their standing as good corporate citizens in the public mind. Overall, the companies' chief goal is to create value," said Phan, who is also the executive vice dean of the Carey Business School.

The researchers examined data from 1997 through 2005 for 313 companies in the Standard & Poor's 500. Generally these were big firms in industries associated with high levels of pollution, making products such as chemicals, electronics, furniture, paper, tobacco, leather and gasoline. Phan and his colleagues were particularly interested in determining how the interactions among the companies' governance groups -- management, board of directors, and shareholders -- influenced environmental policy.

Performance by the companies was measured by how often they took steps that had either a positive or negative impact on the environment.

This is the first study to provide such a comprehensive analysis, in contrast with previous papers that looked only at the actions of one of the three governance groups, said Phan. "Previous research would start with a theory and look for the data that might prove it. We were completely agnostic in our approach; we wanted to look at this large pool of data, analyze the interactions among the three groups, and then see what the data had to tell us," he added.

Among the findings, strong performance was seen in companies that combined:

* Non-activist shareholders and an independent board (that is, a board mainly of directors who did not work for the firm).

* Institutional investors as the majority of shareholders and a CEO receiving a high salary or minimal stock options.

Weaker environmental performance was observed in companies that had:

* Activist investors and a CEO receiving a large bonus.

* An independent group of directors and a CEO who is not board chairman.

From these and other interactions, the researchers drew conclusions about the ways each governance group can affect environmental performance. Companies with activist shareholders, for example, are probable bets to be poor performers, because activism often reflects problems such as environmental violations incurred by the companies. Large and independent boards, by their unwieldy nature, also are associated with poor performance, because they are less likely to mitigate problems in an efficient manner.

In a possibly surprising finding, firms that had one person as both CEO and board chair, along with directors mostly from inside the company, showed strong environmental performance. Organizations with such a concentration of power might be perceived as being indifferent to philosophical shifts. However, the authors said in the paper that their discovery "suggests that powerful CEOs may be important for environmental outcomes, and that the vision of such CEOs can be fostered by boards consisting of supportive inside directors. Indeed, since environmental activities can be highly technical and industry-specific, insider board members may possess relevant expertise to support the CEO in this context."

Phan noted that the study comes too soon to confirm whether green corporate strategies improve financial performance. More research will be needed in the next 10 to 20 years to determine the impact of the new processes and technologies that companies have begun implementing.

Yet, he said, "We know there are benefits for the companies in terms of increased satisfaction among customers and improved compliance with regulation. It may be hard to put a financial value on those things, but we maintain that the value is not trivial."

For the Johns Hopkins professor, one of the most significant results of the research was observing that "every company we looked at is now environmentally conscious. None of them is ignoring the issue. There's always more they can be doing, of course, but overall they are becoming proactive in their thinking about environmental performance. They're smart about the potential costs and benefits of engaging in this kind of activity. They now understand it makes sense economically. All of these companies want to make money, right? They know that taking this approach will help them do just that."

The paper, titled "Corporate Governance and Environmental Performance: Is There Really a Link?" was published in the August 2012 issue of Strategic Management Journal.