Andrew King

It turns out that Hobbes may have been right after all. A Leviathan is needed to prevent our lives from being uncomfortable and brief. Or at least that sentiment could be read into many of the papers at the 3rd Annual ARCS Conference, sponsored by the Initiative for Global Environmental Leadership at the Wharton School at the University of Pennsylvania. Among the topics most discussed were: 1) how a central regulator could prevent social harm; 2) how the regulator can be influenced by firms and stakeholders; 3) whether a regulator could sometimes be circumvented; and 4) what to do when the leviathan did actually impose regulation.

This focus on a central regulator represented a notable turn for the conference. In previous years, most research considered the motivations for (and effect of) unilateral action or communitarian self-regulation. Why the change this year?

One explanation for the shift might be that the ARCS conference was coordinated to overlap with the conference of its (older) brother organization (Strategy and the Business Environment). This may have shifted the discussion toward consideration of central control. Another explanation is that current governing administrations (at least in the US) are more willing to consider regulation. More likely, I think, the change represents growing frustration among ARCS scholars that voluntary action and communitarian self-regulation will get us anywhere near a sustainable future. This is not to say that scholars seem to expect old style command and control regulation to return at a large scale, but it does seem to signal a return to regulation as a primary mechanism of bringing about environmental protection.

Also evident this year was the growing sophistication and maturity of the field. The ARCS membership is larger, more global, and more demanding. Deep training in both economics and sociology is increasingly evident. Expectations for empirical rigor have also grown. The “identification revolution” (as Scott Stern calls it) has swept through the ARCS community. Words like endogeneity and unobserved heterogeneity are now raised in the discussion of many papers. Evident among the papers were the use of natural experiments, matched pairs, difference of differences, and instrumental variables.

Although greater empirical rigor was immediately apparent, the most notable change in the tenor of this year’s conference was in the focus of the papers. This change was evident from the first session. Tim Simcoe (Boston U.) and Mike Toffel (Harvard Business School) presented research evaluating whether or not government procurement could influence the spread of LEED service suppliers and certifications. Kira Fabrizio argued that business response to government-mandated renewable portfolio standards was conditional upon whether regulators had reversed course on previous regulations. If firms had reason to doubt that regulations would be ongoing, they were slower to adjust. Kristin Wilson and Stan Veuger (both Harvard U.) argued that physical proximity to regulators increased the degree to which they were able to influence behavior of bankers.

Other researchers considered when the leviathan can be influenced by the surrounding society and encouraged (or discouraged) from taking action. Desiree Pacheco (Portland State U.), Jeff York (U. Colorado-Boulder), and Timothy Hargrave (U. Washington) considered how regulators combined with social actors from civil society and industry members to jumpstart the creation of the wind industry in Colorado. Wren Montgomery, Jacqueline Corbett and Tina Dacin (all Queen’s University) presented on the ways in which institutional entrepreneurs and social movements can combine in the creation of new social-benefit markets. Shon Hiatt (Harvard Business School) and Sangchan Park (National University of Singapore) argued that reputational concerns of regulators allow firms to influence how regulators enact and enforce regulation.

Several researchers also considered what could be done when regulators fail to act. Daniel Matisoff (Georgia Tech U.) investigated and compared the influence of two voluntary programs, the Chicago Climate Exchange (CCX) and the Carbon Disclosure Project (CDP). He found that the late CCX had a larger effect in reducing carbon emissions than did the still thriving CDP. Andrea Prado (Stern School of Business) considered how managers choose which voluntary program to join. She found evidence that they were influenced by a practical desire to reach important customers, and a cynicism regarding whether those customers could really distinguish the meaning between different standards. Jiao Luo (Columbia Business School) demonstrated that firms consider the degree of consensus or polarization in the media with respect to carbon markets. The more polarized media opinion, the less likely that firms will participate in carbon markets.

Research on stakeholders and stakeholder groups continues to be an area of growing importance. Tom Lyon (U. Michigan), Yao Lu, Xinzheng Shi and Nan Wang (all of Tsinghua University) reported evidence that Chinese investors tend to expect that voluntary environmental excellence is linked to poor financial performance. N. Craig Smith and Luk Van Wassenhove (both of INSEAD Social Innovation Centre), and Leena Lankoski (U. Helsinki and INSEAD Social Innovation Centre) applied prospect theory to produce a new theory of how stakeholders would respond differently to potential gains and losses.
Although many papers considered the effect of regulators or pressure from other institutions and regulators, a large number considered the motivation and efficacy of voluntary action. Olga Hawn, Aaron Chatterji, and Will Mitchell (all Fuqua School of Business) evaluated the conditional financial effect of listing on the Dow Jones Sustainability Index. Their work could suggest which firms will be motivated to engage in voluntary environmental protection. Sinziana Dorobantu, Witold Henisz, and Lite Nartey (all The Wharton School) investigated examples in extractive industries and concluded that investments to reduce conflict with stakeholders enhances the financial valuation of a firm. In a powerful demonstration of the value of voluntary action, they showed that investments in improved stakeholder relations could dramatically multiply firm value. Brian Richter (Richard Ivey School of Business) evaluated whether investments in lobbying and voluntary action were substitutes or complements. His evidence clarified when and where firms might choose one or the other option. Elizabeth Connors (Northeastern U.) and Lucia S. Gao (U. Massachusetts – Boston) provided evidence that environmental performance is positively associated with both leverage and voluntary environmental disclosure, and that leverage is negatively associated with disclosure.

The conference also included research which dug into the critical issue of how firms respond to internal and external pressure to improve environmental performance. Cary Coglianese and Jonathan Borck (U. Pennsylvania Law) reported on research attempting to identify the characteristics of facilities that are more likely to exceed regulated environmental performance and/or participate in voluntary programs. Nilanjana Dutt (Fuqua School of Business) and Andrew King (Tuck School of Business) reported research on when operators tend to learn from chemical spills. Pete Tashman (George Washington U.) shared his research which attempts to understand when firms choose to invest in climate change adaptation. Anil Doshi (Harvard Business School), Glen Dowell (Johnson School of Management), and Michael Toffel (Harvard Business School) investigated how firms responded to mandatory disclosure requirements.

The last paper served as a fitting close to the conference. It showed (as did the totality of this year’s presentations) that research on sustainability must consider the full life cycle of institutional change. How do new institutional regulations come about? How do firms shape regulation? How do firms respond to institutional rules? When will they avoid, comply, or exceed new rules? And most important of all, how can we create a world which maintains an efficient economy while sustaining our natural resources?

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