ADOPTING PROACTIVE ENVIRONMENTAL PRACTICES: THE INFLUENCE OF STAKEHOLDERS AND SIZE Nicole Darnall George Mason University, 4400 University Drive, MSN 5F2, Fairfax, VA 22030
[email protected] Irene Henriques Perry Sadorsky Schulich School of Business, York University, 4700 Keele Street, Toronto, Ontario M3J 1P3
[email protected] [email protected]
ABSTRACT This paper contributes to stakeholder theory by deriving a size moderated stakeholder model and applying it to a facility’s adoption of proactive environmental practices. We show that smaller facilities are more responsive to internal, societal and regulatory stakeholder pressures. The findings suggest that researchers evaluating organizations and the natural environment should be cautious about associating stakeholder pressures directly with organizations’ environmental strategies. Rather, the relationship between stakeholder pressures and environmental strategy tends to vary with size. Key words: strategic environmental management, stakeholders, organizational size, moderation effects, proactive environmental strategy INTRODUCTION AND THEORY In the context of the natural environment, stakeholders can pressure organizations to adopt proactive environmental practices. These practices include intangible managerial innovations and routines that require organizational commitments towards improving the natural environment and which are not required by law [1] such as: implementing environmental policies [2], utilizing internal assessment tools such as benchmarking and accounting procedures [3], establishing environmental performance goals and publicly disclosing environmental performance information [1], performing internal and external environmental audits, training employees in ways to improve the environment, and linking employee compensation to environmental performance [4]. Previous research evaluating the extent to which stakeholders pressure organizations to adopt proactive environmental practices [2], [5] generally has focused on large organizations. This focus, while expanding our knowledge of how larger entities relate to stakeholders, has led some scholars [7], [8] to argue that there is a critical shortage of research examining the environmental management of smaller organizations. This shortage extends to our knowledge of stakeholder theory in that while smaller firms face stakeholder pressures distinct from larger firms, the relationship between external stakeholder pressures and size has not been addressed [9]. Yet small and medium-sized enterprises account for a significant portion of the manufacturing sector. By not considering these entities in our evaluations, we likely have missed important nuances in the relationship between stakeholders and their association with organizations’ proactive environmental practices. Moreover, the stakeholder’s ability to pressure organizations to adopt proactive
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environmental practices is likely to vary with the size of the organization. Because of their size, many small organizations attract clients and employees from the local community. Compared to larger organizations, small organizations also are more embedded in the local community in which they operate [9]. As a good reputation is central to small business success, small businesses therefore are likely to be more responsive to stakeholder concerns [10]. This is especially true at the local level where their success is often related to their degree of legitimacy and approval from local stakeholders [11]. Moreover, many owners of small organizations are entrepreneurs that can integrate environmental responsibility into their organization’s overall mission more easily [11]. Such flexibility exists because smaller organizations are less likely to be committed to their existing products and processes [5]. Because of their deeper pockets, larger organizations, on the other hand, can allocate greater resources towards resisting stakeholder pressure for environmental change rather than yielding to stakeholder concerns [12]. Since size is a good measure of organizational power, larger organizations are better able to resist external stakeholder pressure [13] by investing in lobbying and litigation. For instance, when regulatory stakeholders pursue enforcement actions and penalties against the larger organization, they are more likely to incur greater costs related to prolonged litigation. Greater costs may be one reason why regulatory stakeholders impose fewer civil penalties against the larger organization when they fail to comply with environmental regulations [14]. Regulators instead are more likely to negotiate alternative outcomes or ignore the transgressions altogether. For the same reasons, larger organizations may also endure less threat of legal action from environmental groups. Consequently, increases in stakeholder pressures are anticipated to have a smaller impact on the adoption of proactive environmental practices in larger organizations than in smaller organizations. For these reasons, we hypothesize that size moderates the relationship between stakeholder pressures and the adoption of proactive environmental practices such that the relationship is stronger for small facilities. METHODS To evaluate these relationships, we relied on survey data collected by the Organisation for Economic Co-Operation and Development (OECD) Environment Directorate. In 2003, surveys were sent to individuals who worked in manufacturing facilities having at least 50 employees and who were responsible for the facility’s environmental activities. The response rate was 24.7 percent. More than two-thirds of the sample consisted of enterprises with fewer than 250 employees, and included publicly traded and privately owned facilities. To address potential common method variance (bias), we relied on the post-hoc Harman’s singlefactor test. The results revealed that five distinct factors accounted for the majority of the variance in the variables, offering evidence that this type of bias was not a concern. Moreover, the OECD’s examination of the distribution of its survey respondents by industry representation and facility size relative to the distribution of facilities in the broader population found no statistically significant differences. We examined nine proactive environmental practices: whether the facility 1) had a written environmental policy; 2) benchmarked environmental performance; 3) used environmental accounting; 4) had a public environmental report; 5) had environmental performance indicators/goals; 6) carried out external environmental audits; 7) carried out internal environmental audits; 8) had environmental training programs; 9) used environmental criteria in the evaluation and/or compensation of employees. When accounting for the adoption of multiple environmental
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practices, a common practice is to sum them [15], which is the approach followed in this paper. Organizational size was measured by determining how many full-time workers were employed at the facility. Pressures from value chain and internal stakeholders and societal stakeholders were assessed by relying on OECD survey data that asked facility managers: How important do you consider each of the following influences on the environmental practices of your facility? Respondents considered the importance of household consumers, commercial buyers, suppliers, management employees, nonmanagement employees, head office, environmental groups, community organizations, labor unions, and industry or trade associations. They indicated whether these stakeholder pressures were “not important,” “moderately important,” or “very important” using a 3-point Likert scale where “not important”=1, “moderately important”=2 and “very important”=3. The ten stakeholder pressures were entered into a common factor analysis. Three factors emerged with large positive eigenvalues (4.263, 1.116, and 1.068) and that accounted for 64.5 percent of the total variance (with subsequent varimax rotation), and represented respondents’ perceptions of value chain stakeholders, internal stakeholders, and societal stakeholders. For each scale, alpha was above the recommended value of .70. Pressures from regulatory stakeholders were measured by relying on OECD survey data that asked facility managers “how many times has your facility been inspected by public environmental authorities (central, state/province and municipal governments) in the last 3 years?” To control for potential heterogeneities, we accounted for whether or not facilities were publicly traded, foreign owned and had investments in environmental research and development. Further we controlled for facility age, their use of natural resources in their manufacturing processes, manufacturing sector and country. The highest correlation among our independent variables was .32, and variance inflation factors (VIFs) were each close to one less than the recommended maximum thresholds. Variables involved in moderation effects were centered (converted to Z scores) to avoid problems with possible multicollinearity. To estimate our relationship of interest, we relied on a count model. RESULTS Model 1 is the restricted model and included for comparison purposes (see Table 1). Model 2 incorporates perceived stakeholder pressures and shows an improvement in model fit. The estimated coefficient on each of the stakeholder variables is positive and statistically significant indicating that increases in perceived stakeholder pressure are associated with greater numbers of proactive environmental practices. These findings support the commonly held idea that there is a positive relationship between stakeholder pressures and the adoption of proactive environmental practices. Interaction effects for stakeholder pressures and facility size are included in Model 3. The fit of Model 3 is significantly better than the fit of Model 2, as indicated by the significance of the likelihood ratio statistic. These findings indicate that size is an important factor in moderating the effect of internal, societal and regulatory stakeholder pressures. To explore the magnitude of the moderation effects, in Table 2 we computed marginal effects for each perceived stakeholder pressure variable. For an average smaller facility (the first quartile in facility size), a one unit increase in perceived internal stakeholder pressures increases the count of proactive environmental practices by 0.223. By contrast for an average larger facility (the fourth quartile in facility size), a one unit increase in perceived internal stakeholder pressures increases the count of proactive environmental practices by 0.155. Notice that for an average smaller facility, the direct and indirect effects are both positive while for an average larger facility, the direct effects are
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positive but the indirect effects are negative. Moreover, for smaller facilities, the minimum value of the indirect effect is positive for each of the perceived stakeholder pressures, which indicates that the total marginal effect is greater than the direct effect (since the direct effect is always positive). For larger facilities, the minimum value of the indirect effects is negative for each of the perceived stakeholder pressures, which means that the total marginal effect is less than the direct effect (since the direct effect is always positive). These results illustrate that increases in perceived stakeholder pressure lead to a greater total marginal effect for small facilities. DISCUSSION AND CONCLUSIONS This research offers empirical evidence supporting the notion that facility size has a much more nuanced relationship with managerial perceptions of stakeholders and their association with proactive environmental practices than previously considered. These findings have significant implications for future research in environmental strategy. We hope that demonstrating this relationship stimulates management scholars to consider the extent to which size moderates stakeholder pressures in other research areas as well. References [1] Hart S. 2005. Capitalism at the Crossroads: The Unlimited Business Opportunities in Solving the World's Most Difficult Problems. Upper Saddle River, NJ: Wharton School Publishing. [2] Henriques I, Sadorsky P. 1996. The determinants of an environmentally responsive firm: An empirical approach. Journal of Environmental Economics and Management 30: 381-395. [3] Nash J, Ehrenfeld J. 1997. Codes of environmental management practice: assessing their potential as tools for change. Annual Review of Energy and Environment 22: 487-535. [4] Welford R. (ed.). 1998. Corporate Environmental Management 1. London: Earthscan Publications, Ltd. [5] Sharma S, Henriques I. 2005. Stakeholder influences on sustainability practices in the Canadian forest products industry. Strategic Management Journal 26: 159-180. [6] Noci G, Verganti R. 1999. Managing “Green” product innovation in small firms, R&D Management 29: 3-15. [7] Lepoutre J, Heene A. 2006. Investigating the impact of firm size on small business social responsibility: A critical review. Journal of Business Ethics 67: 257-273. [8] Lefebvre E, Lefebvre LA, Talbot S. 2003. Determinants and impacts of environmental performance in SMEs, R&D Management 33: 263-283. [9] Perrini F. 2006. SMEs and CSR theory: evidence and implications from an Italian perspective. Journal of Business Ethics 67: 305–316. [10] Besser TL. 1999. Community involvement and the perception of success among small business operators in small towns, Journal of Small Business Management 37: 16-29. [11] Larson AL. 2000. Sustainable innovation through an entrepreneurship lens. Business Strategy and the Environment 9: 304-317. [12] Bowen FE. 2002. Organizational slack and corporate greening: Broadening the debate. British Journal of Management 13: 305-316. [13] Meznar MB, Nigh D. 1995. Buffer or bridge? Environmental and organizational determinants of public affairs activities in American firms, Academy of Management Journal 38: 975-996. [14] Firestone J. 2002. Agency governance and enforcement: The influence of mission on environmental decision making. Journal of Policy Analysis and Management 21: 409-426. [15] Khanna M, Anton WRQ. 2002. Corporate environmental management: Regulatory and marketbased incentives. Land Economics 78: 539-558.
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Table 1. Impact of size and stakeholders on environmental practices Model 1 Model 2 Model 3 Variable Coefficient Std. Error Coefficient Std. Error Coefficient Std. Error Facility size 0.146*** 0.017 0.104*** 0.016 0.147*** 0.019 Firm publicly traded 0.140*** 0.034 0.101*** 0.033 0.106*** 0.031 Firm foreign owned 0.182*** 0.035 0.141*** 0.033 0.134*** 0.032 Facility market scope 0.054*** 0.017 0.047*** 0.016 0.037** 0.017 Facility age 0.006 0.019 -0.009 0.017 -0.007 0.017 Facility business performance 0.042*** 0.016 0.035** 0.015 0.034** 0.015 Impact of natural resources 0.146*** 0.027 0.106*** 0.026 0.104*** 0.026 Facility environmental R&D 0.272*** 0.041 0.175*** 0.041 0.182*** 0.039 Constant 1.004*** 0.127 1.093*** 0.113 1.116*** 0.113 Value chain stakeholders 0.068*** 0.015 0.070*** 0.016 Internal stakeholders 0.139*** 0.017 0.146*** 0.018 Societal stakeholders 0.020*** 0.015 0.058*** 0.016 Regulatory stakeholders 0.024*** 0.015 0.076*** 0.018 Facility size x Value chain stakeholders -0.015 0.015 Facility size x Internal stakeholders -0.042*** 0.016 Facility size x Societal stakeholders -0.021* 0.012 Facility size x Regulatory stakeholders -0.026** 0.012 R-squared 0.326 0.407 0.419 Adjusted R-squared 0.310 0.390 0.399 Log likelihood -2895.47 -2645.00 -2607.43 Goodness of Fit 5790.94 5289.99 5214.86 1388.94*** 1889.90*** 1965.03*** χ2 test for model significancea 2 b 500.95*** 75.13*** χ test for change in model N=883. Unstandardized coefficient estimates and quasi-maximum likelihood standard errors shown. Estimates for manufacturing sector and country effects are available from the authors. *** p < 0.01, ** p < 0.05, * p < 0.10 a Likelihood ratio test of a model against a restricted model that includes a constant and sector & country dummies. b Likelihood ratio test for the change in model significance (Model 2 vs Model 1, or Model 3 vs Model 2).
Table 2. Marginal effects of perceived stakeholder pressures by facility size Facility Size Value Chain Stakeholders Description Direct Indirect Total First Quartile– Small Facilities Mean 0.080 0.020 0.100 Median 0.079 0.018 0.098 Maximum 0.144 0.088 0.198 Minimum 0.011 0.005 0.015 Std. Dev. 0.025 0.010 0.031 Observations 221 221 221 Fourth Quartile– Large Facilities Mean 0.121 -0.034 0.087 Median 0.122 -0.028 0.087 Maximum 0.169 -0.011 0.125 Minimum 0.067 -0.099 0.044 Std. Dev. 0.018 0.019 0.017 Observations 221 221 221
Internal Stakeholders Societal stakeholders Regulatory Stakeholders Direct Indirect Total Direct Indirect Total Direct Indirect Total 0.167 0.165 0.299 0.022 0.051 221
0.057 0.051 0.251 0.013 0.028 221
0.223 0.221 0.461 0.035 0.071 221
0.067 0.066 0.120 0.009 0.021 221
0.028 0.025 0.126 0.007 0.014 221
0.095 0.093 0.210 0.015 0.031 221
0.087 0.086 0.157 0.012 0.027 221
0.035 0.032 0.157 0.008 0.017 221
0.123 0.121 0.267 0.020 0.040 221
0.252 0.253 0.352 0.140 0.038 221
-0.097 -0.079 -0.030 -0.282 0.053 221
0.155 0.155 0.243 0.016 0.043 221
0.101 0.101 0.141 0.056 0.015 221
-0.049 -0.040 -0.015 -0.141 0.026 221
0.052 0.054 0.090 -0.022 0.021 221
0.132 0.133 0.184 0.073 0.020 221
-0.061 -0.049 -0.019 -0.176 0.033 221
0.071 0.072 0.120 -0.020 0.027 221
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