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18 Factors in Firms and Industries Affecting the Outcomes of Voluntary Measures Aseem Prakash* Voluntary programs pertain to policies that firms adopt even though they are not required to do so by law. In the past two decades, such programs have gained prominence in many Organization for Economic Co-opera- tion and Development (OECD) member countries (Gibson, 1999; Haufler, 2001~. In the United States, the Environmental Protection Agency (EPA) has sponsored more than 40 voluntary programs. In the European Union (EU), more than 300 such agreements can be identified, and in Japan 30,000 local-level programs (especially agreements negotiated between a firm and a municipality) have been reported (Borkey et al., 1998~. Voluntary measures have been designed, monitored, and enforced by gov- ernment agencies (the EPA's 33/50 and Project XL programs), nongovernment groups (World Wildlife Fund's Forest Stewardship Council program), industry associations (American Chemistry Council's Responsible Care program), and individual firms (corporate environmental reporting). They vary in their scope, targeting firms at the global level (ISO 14000), regional level (the EU's Environmental Management and Audit System [EMAS] standards), national level (Britain's BS 7750 standards), or subnational level (Ontario's industry-specific pollution prevention projects). Within these levels of aggregation, they could be specific to a firm (the compact between the Inter- national Federation of Building and Wood Workers and IKEA), or an industry (the mining charter of the International Council for Metals and the Environ- *The author would like to express gratitude to Tom Dietz, Paul Stern, Dan Kane, and the two anonymous reviewers for comments on the previous draft. 303

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304 FACTORS IN FIRMS AND INDUSTRIES meet), or cut across industries (the Coalition for Environmentally Responsible Economics initiative). Voluntary measures could be market promoting (such as technical standards that reduce transaction and production costs) or market restricting (such as ratings by the Motion Picture Association of America regarding appropriateness of films for children). Two key issues in studying them as a category of policy instruments include under what conditions they arise (who demands and supplies them) and how effective they are in improving firms' environmental performance. EMERGENCE OF VOLUNTARY CODES Demand for Voluntary Measures The popularity of voluntary measures can be traced to the changing prefer- ences and strategies of a variety of actors on how to deal with negative environ- mental externalities. Voluntary measures enable regulators facing declining bud- gets to implement their mandates at lower costs (see Randall, this volume, Chapter 19~. Unlike command-and-control policies that these measures are sup- posed to replace or supplement, regulators conceivably can achieve their policy objectives without the accompanying acrimony.) Citizens also enjoy an in- creased supply of environmental amenities without increased taxes. Voluntary measures seem to be in consonance with the political climate that calls for "rein- venting government" (Osborne and Gaebler, 1992) and encourages self-regula- tion by the regulatees. The same political climate often leads many to view governments as suffering from competency deficits, thereby making them lag- gards in understanding complexities of modern technologies, let alone in regu- lating them. Firms demand voluntary measures because, compared to command-and-con- trol regulations, they get greater operational flexibility in designing and imple- menting their policies (National Academy of Public Administration, 1995; Ma- jumdar and Marcus, 2001~.2 Voluntary measures that encourage firms to adopt stringent pollution standards also may increase profits inasmuch as pollution represents resource waste (Hart, 1995; Porter and van der Linde, 1995; for a critique, see Walley and Whitehead, 1994~. For example, in the Green Lights program (now merged into the Energy Star program), the EPA provides techni- cal information about efficient lighting practices to participating firms. Many firms have experienced substantial reductions in energy bills, often equivalent to a 50-percent return on investment (Borkey et al., 1998~. Voluntary measures may have marketing payoffs as well if they enable firms to compete on environmental quality (Arora and Cason, 1996; Charter and Polonsky, 1999) especially important for firms that seek to sell "green prod- ucts" (see Th0gersen, this volume, Chapter 5~. Strategically, firms could attempt to preempt and/or shape environmental regulations if they themselves craft vol-

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ASEEM PRAKASH 305 untary policies (Nehrt,1998~. If higher standards incorporated in voluntary mea- sures lead to stringent regulations, technologically advanced firms could raise the cost of entry for their rivals (Salop and Scheffman, 1983; Barrett, 1991~. Furthermore, if firms may require their suppliers to adhere to voluntary pro- grams (for example, Ford requiring its suppliers to become ISO 14001 certified), joining a voluntary program may become a business necessity (see Rejeski and Salzman, this volume, Chapter 2, on this subject).3 In demanding voluntary measures, firms are driven by other critical mo- tives as well. Most importantly, firms often adopt them to seek legitimacy from external stakeholders. Reputational benefits of being a good corporate citizen serve their long-term profit and nonprofit objectives (Hoffman, 1997~. Of course, it is difficult to quantify reputational benefits. Consequently, top management' s commitment as reflected in their values, beliefs, and attitudes is important because many voluntary measures cannot be justified on traditional economic criteria that require estimating rates of return and comparing them with a compa- ny's cost of capital (Prakash, 2000a; Nakamura et al., 2001~. The need for legitimacy varies across industries. Arguably, firms in pollu- tion-intensive industries or industries with bad reputations of complying with environmental laws are more likely to demand voluntary measures (see Nash's discussion on Responsible Care, this volume, Chapter 14~. In some cases, volun- tary policies may be adopted simply because top managers consider them the "right things to do." Thus, economic explanations are often underspecified in explaining firms' responses to voluntary programs. Voluntary measures also have their critics. Many environmental groups are suspicious of voluntary codes, viewing them to be outside public scrutiny. U.S.- based groups are accustomed to a policy environment shaped by the 1946 Ad- ministrative Procedures Act (APA), which provides for public involvement in the regulatory process. These groups fear that the processes of establishing vol- untary codes are not adequately inclusive and transparent; this is a major concern if such measures replace or dilute traditional policy instruments whose develop- ment followed APA procedural guidelines. Voluntary measures also may lack teeth: To monitor compliance, they often involve self-audits by regulatees, not external audits by credible third or fourth parties.4 Furthermore, by making laws and policy processes less adversarial, voluntary policies may lessen the recourse to the judicial setting, the arena of choice of environmental groups who view it as relatively "liberal" and certainly not "captured" by the industry (Vogel, 1995~. Supply of Voluntary Programs Voluntary measures can be supplied designed, established, and promot- ed by governments (see Mazurek, this volume, Chapter 13), industry groups, nongovernment groups, or individual firms. An important factor influencing firms' incentives to adopt voluntary measures is whether their reputational bene-

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306 FACTORS IN FIRMS AND INDUSTRIES fits manifest as public, impure public, or private goods.5 Based on the twin attributes of consumption, excludability and rivalry, products can be classified in four stylized categories: private goods (rival, excludable), public goods (nonri- val, nonexcludable), common-pool resources (rival, nonexcludable), and impure public goods (nonrival, excludable) (Ostrom and Ostrom, 1977; National Re- seach Council, 2002~. Rivalry implies that it is difficult for two or more consum- ers to simultaneously consume (or enjoy the benefits of) a given quantity of a product. In contrast, multiple users can use nonrivalrous products such as roads, movie theatres, and public parks at the same time. Excludability implies that Consumer A, who has paid for the product, can prevent other consumers (who have not paid for it) from enjoying a product's benefits. If excludability were not possible, Consumer A would not be able to prevent "free riding" by others. As a result, the consumer would have few incentives to pay for the product in the first place. Thus, for the market mechanism to function, it is necessary that goods be excludable (Olson, 1965; Hardin, 1968~. Voluntary codes can be viewed as a category of impure public goods of two kinds: toll and club (Prakash, 2000b; for an extended discussion on impure pub- lic goods, see Comes and Sandier, 1996~. Toll goods such as movie theaters can be unitized; that is, consumers can reveal their preferences by paying for every additional unit. They are provisioned by levying a user toll (such as a movie ticket). In contrast to toll goods, the discrete consumption units of club goods cannot be priced (because it is difficult to estimate their marginal costs), and membership fees (that are based on average costs) finance their collective provi- sion. Many voluntary measures can be conceptualized as club goods whose reputational benefits are nonrival and potentially excludable, and it is difficult to price their discrete units. From a firm's perspectives, voluntary policies create excludable benefits (re- duce resource waste, shape regulations and so on) as well as nonexcludable bene- fits (improve environmental quality), but impose private costs on them. Reputa- tional benefits, often the key motivation to subscribe to a voluntary measure, are often nonexcludable, spilling over to other firms. Therefore, making reputational benefits excludable becomes a key issue in the institutional design. This can be accomplished by establishing boundary features (such as participation logo or cer- tificate) that enable stakeholders to differentiate adopting firms from nonadopters, thereby transforming reputational benefits into excludable club goods. However, akin to Olson's (1965) "privileged groups," leading firms unilat- erally may supply voluntary clubs that create reputational benefits for the whole industry. This is because the gains accruing to them are significant enough that they are willing to tolerate free riding by others. For example, the Responsible Care program has been designed, adopted, and promoted predominantly by large chemical firms because they perceive themselves to be receiving most of the goodwill benefits that the program generates for the chemical industry (Nash, this volume, Chapter 14; Prakash, 2000b).

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ASEEM PRAKASH 307 As examined by Mazurek (this volume, Chapter 13), some voluntary mea- sures (such as Project XL) that are supplied by government agencies grant regu- latory flexibility to firms that join them. In return, firms often agree to adhere to more stringent regulatory standards than those required by the statute. Thus, firms reap excludable benefits (regulatory flexibility, better relationships with stakeholders), but bear higher excludable costs. The problem arises as some stake- holder groups, being skeptical of such business-government relationships, oppose these policies. This reduces goodwill benefits accruing to firms, thereby making these voluntary clubs less attractive to them. Consider the tepid response of U.S. firms (as compared to European and Asian firms) to ISO 14000 standards. As of March 2001, 6,261 Japanese, 2,400 German, 2,010 British, 1,441 Spanish, 1,420 U.S., 1,370 Swedish, and 881 Taiwanese facilities were ISO 14000 certified (ISO World, 2001~. If controlled for the size of the economy, the low levels of American acceptance become even starker. This voluntary code is sponsored by a nongov- ernment organization, the International Organization of Standardization, which seeks to promote uniform environmental standards across countries. To get the ISO 14001 seal (the membership card to this club), firms are required to have a third-party certification (at a sizable cost) of their environmental management sys- tems. One would expect that the requirement of third-party audits would make ISO 14001 legitimate to stakeholder groups. Firms, of course, want these audits to be protected by attorney-client privileges, lest these audits uncover incriminating in- formation. Many environmental groups oppose granting attorney-client privilege to these audits because firms may abuse this privilege. The EPA, therefore has, not granted this privilege, and as a result, U.S. firms have been lukewarm toward ISO 14000 standards (Kollman and Prakash, 2001~. DO VOLUNTARY CODES MATTER? As with any policy instrument, voluntary codes should be examined in terms of their efficacy. This can be done at two levels: first, their adoption rates, given that firms are not obliged by law to join them, and second, how they influence firms' environmental performance.6 The first dimension was discussed earlier in terms of demand and supply aspects and how these affect adoption rates. In operationalizing the second dimension, it is important to assess codes' impact in relation to alternatives that is, to compare environmental performance cross- sectionally (adopters versus nonadopters) and longitudinally (within adopters, proadoption versus postadoption). To provide a concrete example, take the case of the EPA's 33/50 program. Under Section 313 of the 1986 Emergency Planning and Community-Right-to- Know-Act (EPCRA), firms with manufacturing facilities in the United States are required to submit annual reports on their releases and transfers of specified chemicals. Because EPCRA also required the EPA to make these data available to the public, the EPA developed a computerized database known as the Toxics

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308 FACTORS IN FIRMS AND INDUSTRIES Release Inventory (TRI). To encourage firms to reduce the releases of 17 specif- ic TRI chemicals,7 in February 1991, the EPA proposed a voluntary program called 33/50. Under 33/50, firms voluntarily committed to reducing the releases/ transfers of these 17 chemicals by 33 percent by 1992 and by 50 percent by 1995, with 1988 as the baseline. The EPA contacted nearly 10,000 facilities, of which 1,300 (13 percent) agreed to participate in this program. Thus, the adop- tion rates were not high. However, the program did affect environmental perfor- mance: 33/50 chemical releases/transfers reduced by 15.4 percent during 1988- 90, but by 46.9 percent during 1990-95 (1991 is the baseline because the program was launched in 1991~. Furthermore, the releases/transfers of 33/50 chemicals dropped by 46.9 percent during 1990-95 as opposed to a reduction of 25.3 per- cent for TRI chemicals outside the purview of the program. Again, joining this voluntary program seemed to have a positive input on environmental perfor- mance (EPA, 1999~. CONCLUSION Voluntary measures are an exciting development in the environmental poli- cy landscape. They are demanded and supplied by a whole gamut of actors. Their acceptance among firms and stakeholders depends on how they cohere with extant institutions, and more importantly, how managers perceive the costs of adopting them in relation to their excludable reputational benefits. Thus, an important factor in influencing their adoption rates is whether their institutional design transforms reputational benefits from a public good to a club good. Fu- ture research must carefully examine their efficacy on various dimensions in relation to competing policy instruments. NOTES 1 For reference, 70 percent of the EPA's decisions that reflect the command-and-control mode are challenged in courts (Reilly, 1999). 2 Voluntary programs also create positive externalities such as generating awareness and dis- seminating information about best environmental practices. Such externalities may not sufficiently persuade firms to invest resources in adopting them. However, from a policy perspective, the pres- ence of such externalities can serve as a powerful incentive for the regulators to promote them. 3 The corollary then is that sponsors of voluntary programs should focus on recruiting the "big fish" that have extensive forward and backward linkages. Taking advantage of market power en- joyed by such actors, their market power exercised through the value chain networks (that are in- creasingly becoming the defining features of cross-border economic flows) can create significant environmental multipliers. Also see Furger (this volume, Chapter 17). 4 Gereffi et al. (2001) identify four kinds of audits signifying increasing levels of credibility with external stakeholders: first-party or internal audits, second-party audits done by managers from the industry association, third-party audits by external auditors paid for by the firm, and fourth-party audits by external auditors not paid for by the firm. 5 As pointed out earlier, monetary incentives reduced costs or increased sales/profits also

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ASEEM PRAKASH 309 may serve as motivators. However, many believe that because firms have exhausted opportunities for reducing costs, voluntary measures need to be justified in terms of nonquantifiable benefits. 6 Though not discussed here, the costs of rulemaking, monitoring, enforcing, and sanctioning (the so-called transaction costs) and the dynamic impacts on innovation and productivity also are important in comparing the efficacy of various instrument types. 7 The rationales for targeting these chemicals were that: (1) they have significant adverse impacts on health and the environment; (2) they were used in large quantities by facilities; (3) their releases relative to their total usage were high; and (4) their usage as well as releases could be reduced by employing pollution-prevention technologies and practices. REFERENCES Arora, S., and T.N. Cason 1996 Why do firms volunteer to exceed environmental regulations? Understanding participa- tion in EPA's 33/50 program. Land Economics 72:413-432. Barrett, S. 1991 Environmental regulations for competitive advantage. Business Strategy Review 2: 1-15. Borkey, P., M. Glachant, and F. Leveque 1998 Voluntary Approaches for Environmental Policy in OECD Countries, Paris: Centre d' economic Industrielle. [Online]. Available: [Accessed July 14, 2001]. Charter, M., and M.J. Polonsky, eds. 1999 Greener Marketing. 2nd ed. Sheffield, Eng.: Greenleaf Publishing. Comes R., and T. Sandler 1996 The Theory of Externalities, Public Goods, and Club Goods. Cambridge, Eng.: Cam- bridge University Press. Gereffi, G., R.G. Johnson, and E. Sasser 2001 NGO-industrial complex. Foreign Policy (July-August):5-65. Gibson, R.B., ed. 1999 Voluntary Initiative: The New Politics of Corporate Greening. Toronto: Broadview Press. Hamilton, R.W. 1978 The role of non-governmental standards in the development of mandatory federal stan- dards affecting safety or health. Texas Law Review 56:1329-1484. Hardin, G. 1968 The tragedy of the commons. Science 162:1243-1248. Hart, S.J. 1995 A natural resource-based view of the firm. Academy of Management Review 20: 986- 1014. Haufler, V. 2001 A Public Role for the Private Sector. Washington, DC: Carnegie Endowment for Inter- national Peace. Hoffman, A.J. 1997 From Heresy to Dogma. San Francisco: New Lexington Press. ISO World 2001 The number of ISO14001/EMAS registration of the world. [Online]. Available: http:// www.ecology.orjp/isoworld/english/analyl4k.htm [Accessed March 27, 2001]. Kollman K., and A. Prakash 2001 Green by choice? Cross-national variations in firms' responses to EMS-based environ- mental regimes. World Politics 53:399-430.

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310 FACTORS IN FIRMS AND INDUSTRIES Majumdar, S.K., and A. Marcus 2001 Rules versus discretion: The productivity consequences of flexible regulation. Academy of Management Journal 44:170-179. Nakamura, M., T. Takhashi, and I. Vertinsky 2001 Why Japanese firms choose to certify: A study of managerial responses to environmen- tal issues. Journal of Environmental Economics and Management 42:23-52. National Academy of Public Administration 1995 Setting Priorities, Getting Results. Washington, DC: National Academy of Public Ad- ministration. National Research Council 2002 The Drama of the Commons. Committee on the Human Dimensions of Global Change. E. Ostrom, T. Dietz, N. Dolsak, P.C. Stern, S. Stonich, and E.U. Weber, eds. Washing- ton, DC: National Academy Press. Nehrt, C. 1998 Maintainability of first-mover advantages when environmental regulations differ be- tween countries. Academy of Management Review 23:77-97. Olson, M. 1965 The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, MA: Harvard University Press. Osborne, D., and T. Gaebler 1992 Reinventing Government: How the Entrepreneurial Spirit Is Transforming the Public Sector. Boston: Addison-Wesley. Ostrom, V., and E. Ostrom 1977 Public goods and public choice. Pp. 7-49 in Alternatives for Delivering Public Services, E.S. Savas, ed. Boulder, CO: Westview Porter, M., and C. van der Linde 1995 Toward a new conception of the environment-competitiveness relationship. Journal of Prakash, A. Economic Perspectives 9:97-118. 2000a Greening the Firm: The Politics of Corporate Environmentalism. Cambridge, Eng.: Cambridge University Press. 2000b Responsible care: An assessment. Business & Society 39:183-209. Reilly, W.K. 1999 Foreword. Pp. xi-xv in Better Environmental Decisions. K. Sexton, A.A. Marcus, K. Easter, and T.D. Burkhardt, eds. Washington, DC: Island Press. Rugman, A.R., and A. Verbeke 1998 Corporate strategies and environmental regulations: An organizing framework. Strate- gic Management Journal 19:363-375. Salop, S.C., and D.T. Scheffman 1983 Raising rivals' costs. American Economic Review 73:267-271. U.S. Environmental Protection Agency 1999 The 33/50 Program: Final Record. [Online]. Available: 3350/3350-fnl.pdf [Accessed October 6, 2001]. Vogel, D. 1995 Kindred Strangers. Princeton, NJ: Princeton University Press. Walley, N., and B. Whitehead 1994 It's not easy being green. Harvard Business Review (May-June):46-51.