We live in a society that scrutinizes the environmental activities of the corporate world. How can companies address society’s concerns and improve levels of environmental performance, while maintaining market share and financial returns? The answer could lie in their corporate governance structure.
Recent years have seen company stakeholders demand better environmental performance, particularly by businesses in polluting industries. Whether it is consumer pressure for green products, media pressure for a green approach or government pressure to stick to green regulations, leaders must take action. The degree to which they respond – or not – appears to hinge on the corporate governance mechanisms that are in place.
When it comes to environmental measures, stakeholders’ and management’s preferences are likely to diverge. Stakeholders show a greater willingness to ‘go green’ than management, because not only do they not have to implement environmental strategies, they are also less likely to be concerned about the effect of such strategies on financial margins.
For management, however, devising an environmental strategy requires a lot of effort, redesigning the company’s internal processes and developing green practices to minimize pollution levels. The possible impact of a new environmental strategy on the bottom line will also cause concern if executives are under pressure to improve margins.
This divergence of interest can be resolved to some extent, however, by corporate governance mechanisms that increase management’s willingness to satisfy stakeholders’ environmental demands. Several important instruments can impact on management’s environmental behaviour, thus helping to determine a company’s environmental performance levels. These include:
Corporate governance and environmental management can go hand in hand, with evidence suggesting that ‘well-governed’ firms also seem to be good environmental performers.
When considering what corporate governance mechanisms to put in place, leaders need to be aware of the effect of such mechanisms on their organization’s strategy, in this case its environmental strategy.
Understand the links between your management teams and your company’s various – and often vocal - stakeholder groups. Using commonly employed corporate governance mechanisms such as those outlined above can affect environmental performance because they increase management’s sensitivity towards stakeholders’ environmental concerns.
In short, those companies that have a greater exposure to the market for corporate control, and to the legal and regulatory system, higher equity-based compensation, and more pro-stakeholder directors on their boards, show a better level of environmental performance.
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