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«A Resource-Based Perspective on Corporate Environmental Performance and Profitability Author(s): Michael V. Russo and Paul A. Fouts Source: The ...»

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A Resource-Based Perspective on Corporate Environmental Performance and Profitability

Author(s): Michael V. Russo and Paul A. Fouts

Source: The Academy of Management Journal, Vol. 40, No. 3 (Jun., 1997), pp. 534-559

Published by: Academy of Management

Stable URL: http://www.jstor.org/stable/257052.

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http://www.jstor.org This content downloaded from 128.223.17.193 on Fri, 4 Apr 2014 16:55:35 PM All use subject to JSTOR Terms and Conditions Academy of Management Journal t 1997, Vol. 40, No. 3, 534-559.

A RESOURCE-BASED PERSPECTIVE ON

CORPORATE ENVIRONMENTAL PERFORMANCE

AND PROFITABILITY

MICHAEL V. RUSSO University of Oregon PAUL A. FOUTS Golden Gate University Drawing on the resource-based view of the firm, we posited that environmental performance and economic performance are positively linked and that industry growth moderates the relationship, with the returns to environmental performance higher in high-growth industries. We tested these hypotheses with an analysis of 243 firms over two years, using independently developed environmental ratings. Results indicate that "it pays to be green" and that this relationship strengthens with industry growth. We conclude by highlighting the study's academic and managerial implications, making special reference to the social issues in management literature.

Although the basic tenet of corporate social responsibility is that society and business are tightly interwoven (Wood, 1991), scholars are still struggling to specify the precise mechanisms linking firms and society. Within this conversation, a central issue has been the economic impact on a firm of its social policies. In this article, we focus on the economic impacts of environmental performance, a specific social issue that has provoked a very public debate. On the one hand, it has been forcefully argued that environmental regulation enhances economic performance in an efficiencyproducing, innovation-stimulating symbiotic relationship (Gore, 1993; Porter, 1991). On the other hand, regulations are assailed as generating costs that businesses will never recover, representing financial diversions from vital productive investments (Gingrich, 1995; Walley & Whitehead, 1994).

A number of empirical studies performed in this area have returned differing verdicts. Several studies have shown no significant link between measures of environmental performance and profitability (Fogler & Nutt, 1975; Rockness, Schlachter, & Rockness, 1986) or between environmental performance and corporate disclosure practices (Freedman & Jaggi, 1982;

We wish to express our appreciation to the Franklin Research and Development Corporation for allowing us to use their proprietary database and to Roger Chope and Steven Matsunaga for assistance with methodological issues. We also thank Thomas Dean, Neil Fargher, David Levy, John Mahon, Alan Meyer, Peter Mills, Richard Mowday, and the anonymous reviewers for helpful comments.

–  –  –

Wiseman, 1982). But other studies have shown that better pollution performance improved profitability (Bragdon & Marlin, 1972; Spicer, 1978a) and reduced risks (Spicer, 1978b) and that federal compliance liability costs and profitability were negatively related (Holman, New, & Singer, 1985). One can challenge these prior studies on methodological grounds. All but one used small, single-industry samples. More importantly, they have frequently relied on self-reported data, failed to control for other predictors of profitability, and used questionable social responsibility measures (Wood & Jones, 1995). These methodological shortcomings may be responsible for results to date that have shown an equivocal relationship between environmental performance and economic performance.1 Wood and Jones (1995) argued that this inconclusiveness is primarily due to a key conceptual shortcoming, failure to carefully trace how the social policies examined directly influence firms' bottom lines. For example, we would expect that any external imposition of fines or additional compliance costs would drive down profits, thus accounting for the significant effects of these costs found in several of the studies just cited. We agree with Wood and Jones that there are conceptual flaws in prior research, but we also suggest that the relationship is more complex than a simple calculus equating higher costs with lower profits. After all, if the sole driving force for a corporate environmental policy is minimizing tangible pollution costs, then any firm going beyond compliance would forfeit the profits it could gain from simply (and legally) continuing to externalize those costs. Our argument, based on the resource-based view of the firm, highlights the role environmental policy plays in generating broader organizational advantages that allow a firm to capture premium profits. In a sense, it could be said that the same policies that internalize negative environmental spillovers can pay off by simultaneously generating greater positive organizational spillovers that accrue internally and privately to the firm. Thus, for both methodological and conceptual reasons, a careful study of the relationship between environmental performance and economic performance is both timely and potentially of great value.





The resource-based view of the firm offers corporate social responsibility researchers a tool for refining the analysis of how corporate social policy influences the bottom line for two reasons. First, the resource-based view has a strong focus on performance as the key outcome variable. And second, like the social responsibility literature, work adopting the resource-based view explicitly recognizes the importance of intangible concepts, such as knowhow (Teece, 1980), corporate culture (Barney, 1986), and reputation (Hall, 1992). These theoretical complementarities offer a significant opportunity 1 Two working papers (Hart & Ahuja, 1994; Cohen, Fenn, & Naimon, 1995) have also addressed the environment-performance relationship, with mixed results. The equivocality of results in this area extends to other social issues, such as corporate philanthropy and community relations. Ullman (1985), Aupperle, Carroll, and Hatfield (1985), and most recently, Wood and Jones (1995) have offered surveys of empirical work in this area.

–  –  –

that we hoped to exploit in this study, which spotlights the environmental performance-economic performance relationship. Further, we explored industry growth as a moderator of this relationship, theorizing that firms are less likely to reap benefits from increased environmental performance when industry growth is low. But before formally stating these predictions, we briefly outline the resource-based theory of competitive advantage.

A RESOURCE-BASED VIEW OF ENVIRONMENTAL PERFORMANCE

AND ECONOMIC PERFORMANCE

The Resource-Based View of Competitive Advantage The resource-based view of the firm grew out of a frustration with the structure-conduct-performance paradigm of the industrial organization (IO) view of the firm (Bain, 1959; Porter, 1980). The early resource-based theorists found the IO view-that a firm's success was wholly determined by its external environment-to be unrealistically limited and turned to the seminal work of Penrose (1959) for motivation. To counter the IO view, Wernerfelt (1984), Dierickx and Cool (1989), and Prahalad and Hamel (1990) built resource-based theory around the internal competencies of firms. In these contributions to resource-based theory, competitive advantage is rooted inside a firm, in assets that are valuable and inimitable. A firm's capabilities or competencies and management's abilities to marshal these assets to produce superior performance determine competitive advantage (Grant, 1991). In the drive to add depth and breadth to this internal view, theorists have noted but left somewhat vague the role of a firm's links to its external environment.

Barney's (1986) work addressed this issue by pinpointing the conditions under which a firm's resources become valuable by bringing the external environment into the resource-based picture. In developing the notion of external factor markets, he noted that, contrary to the IO model, external resource analysis alone cannot lead to valuable resources. However, by nurturing internal competencies and applying them to an appropriate external environment, a firm can develop a viable strategy. Thus, for a firm's resource to become valuable, it must allow the firm to "exploit opportunities or neutralize threats" in the firm's environment (Barney, 1991: 106). The link in resource-based theory between the competitive environment and firm capabilities was made more explicit by Conner (1991), in her comparison of the resource-based view and the IO and Chicago models. She observed that all three recognize the external constraints of demand conditions and public policy on strategy. For Conner, the task for resource-based theorists is to discern the appropriate rent-generating inputs given both external (e.g., demand, public policy, and competitor action) and internal (e.g., past history, resource endowments, and corporate culture) constraints.

Thus, in its current state, the resource-based view addresses the fit between what a firm has the ability to do and what it has the opportunity to do.

To quote Collis and Montgomery, "Resources cannot be evaluated in isolation, because their value is determined in the interplay with market forces.

This content downloaded from 128.223.17.193 on Fri, 4 Apr 2014 16:55:35 PM All use subject to JSTOR Terms and Conditions 1997 Russo and Fouts 537 A resource that is valuable in a particular industry or at a particular time might fail to have the same value in a different industry or chronological context" (1995: 120).

In the resource-based view, resources are classified as tangible, intangible, and personnel-based (Grant, 1991). Tangible resources include financial reserves and physical resources such as plant, equipment, and stocks of raw materials. Intangible resources include reputation, technology, and human resources; the latter include culture, the training and expertise of employees, and their commitment and loyalty. As these resources are not productive on their own, the analysis also needs to consider a firm's organizational capabilities-its abilities to assemble, integrate, and manage these bundles of resources. In our application of the resource-based view, we considered resources and capabilities in the following combinations: (1) physical assets and the technologies and skills required to use them, (2) human resources and organizational capabilities, which include culture, commitment, and capabilities for integration and communication, and (3) the intangible resources of reputation and political acumen.

Previous applications of resource-based theory to evaluation of environmental policies and strategy have concentrated on internal analysis of firms (Porter, 1991; Shrivastava, 1995a). However, Hart (1995) expanded the resource-based view of the firm to include the constraints imposed and opportunities offered by the biophysical environment. In his theory, he provided a schema that links the imperative of capturing a competitive advantage with the goal of securing and enhancing social legitimacy. He viewed external stakeholders as playing a pivotal role in moving corporations toward sustainability. The logical extension of this argument is that viewing societal demands as part of the external environment facing a firm trying to develop unique resources leads to expectations about when such resources will be valuable and inimitable. We suggest this is particularly true when society is demanding a cleaner environment.

In developing our theory, we found it useful to bear in mind two modes of environmental policy advanced by Hart (1995). The first is the compliance strategy, wherein firms rely on pollution abatement through a short-term, "end-of-pipe" approach, often resisting the enactment and enforcement of environmental legislation. Firms often fall short of compliance in this mode.

The second mode of environmental policy is going beyond compliance to a focus on prevention, a systemic approach that emphasizes source reduction and process innovation (Hart, 1995). Our position is that firms that tend toward the compliance mode will differ in their resource bases from those that tend toward prevention and that this policy choice will affect firms' ability to generate profits.

Corporate Environmental Performance and Profitability Physical assets and technology. The resources and capabilities required to implement a firm's environmental policy vary radically, depending on whether or not that firm goes beyond compliance to embrace pollution pre

–  –  –

vention. End-of-pipe compliance policies affect only physical asset resources, which consist of the "physical technology used in a firm, a firm's plant and equipment, its geographic location, and its access to raw materials" (Barney, 1991). Compliance is achieved primarily by the addition of pollution-removing or filtering devices to the existing assets of a firm and does not require the firm to develop expertise or skills in managing new environmental technologies or processes. The technology is essentially selfcontained, off-the-shelf hardware. Once such hardware is installed, it does not fundamentally vary production or service delivery processes. Thus, the implementation of this policy is straightforward and leaves a firm essentially in the same resource and capability situation it was in before it adopted the policy (Groenewegen & Vergragt, 1991; Kemp, 1993).



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