Why competition can be bad, environmental reporting standardisation and a question of definitions
Compelled to cheat
Restrictions on competition are bad, right? Monopolies lead to restricted choice, and excessive regulation inhibits innovation. But does that make competition good? Yes, the logic goes. Competitive economies promise higher quality goods at lower prices. What emerges is greater consumer surplus and social welfare. This paper offers a slightly different take. It maintains that competition can encourage company responses that are socially costly or even unlawful.
The theory rests on one main premise: competition drives companies to engage in a non-stop game of one-upmanship on their rivals. The fiercer the competition, the fiercer they fight. The goal? To keep costs low and standards high. Theoretically, the law provides parameters in which to play the game. Keep to the rules, however, and companies can find themselves at a “juncture with few options to seek advantage or even survive”.
And it’s not just profit-hungry owners and shareholders pushing their companies over the ethical edge. Product-hungry buyers can too. The paper examines the impact on ethical conduct of consumer demand for illicit products and services. By way of empirical evidence, the researchers look at vehicle emission testing. In the US, most state authorities outsource such testing to private firms. These firms then compete to win car owners’ business.
The idea is that they are thus pushed to provide the best quality service. Unfortunately, “best quality” for the government (ie identifying polluting vehicles) and for car owners (ie declaring their cars’ emissions to be within limits) are diametrically opposed.
Figures show that pass rates are higher in areas where more firms are competing. How applicable the emissions case is to other business areas is not clear, but the underlying theory about the ill effects of excessive competition is fascinating.
“Driven to Cheat: competition and the unethical firm”, by Victor Manuel Bennett et al, University of Southern California, April 2011.
Green reporting, global exposure
In its second recent working paper on non-financial reporting (see also May’s Ethical Corporation), Harvard Business School considers why environmental reporting remains such a mixed bag. With more companies disclosing their impacts on the planet and its resources, a growing standardisation in reporting criteria should emerge. It hasn’t.
Data points remain consistently inconsistent and incomparably non-comparable. This paper asks why. It finds its answer in institutional factors related to firms’ “global embeddedness”.
The more integrated a company is in the globalisation process, the more pressure it will be under to conform to transparency demands from governments and civil society. The opposite is also true – hence the phenomenon of companies reporting more (in terms of facts and figures), yet simultaneously less (in terms of materiality). In other words, fewer globalised corporations tend to disclose “relatively benign” environmental impacts to create an impression of transparency, “while masking their true environmental performance”: ie greenwashing.
To back up their hypothesis, HBS researchers examine the reports from 4,646 public companies from 46 countries over a three-year period. The results are illuminating, if not entirely surprising.
Environmental disclosure is likely to shoot up when companies are domiciled in countries that are engaged in intergovernmental environmental organisations; are home to a more globalised citizenry; and provide greater civil liberties and political rights.
Interestingly, the one factor that seems the most obvious – namely, the stringency of environmental governance in a company’s home country – is shown to have no bearing on disclosure rates. The findings will please institutional theorists. The global environmentalism movement can take heart too. Thanks to their efforts, more companies are reporting, albeit it still in “myth and ceremony” for many.
“The Globalisation of Corporate Environmental Disclosure: accountability or greenwashing?” by Christopher Maquis and Michael Toffel, Harvard Business School, Working Paper, May 2011.
CSR: big ‘C’ versus little ‘c’
A terminological debate is raging over the phrase corporate social responsibility. Increasingly, we’re seeing the “social” element dropped (to encompass environmental and governance issues as well). “Responsibility’ (with its notion of concomitant rights) is also losing favour to “sustainability” (a more forward-looking, business-driven term).
What has remained undisputed until now is the notion of “corporate”. While applying to the private sector at large, the word corporate has tended to be interpreted as “corporation” (as in, large, publicly traded, multinational company). Looking through the lens of humanitarian help, this paper brings the last leg of the CSR stool into question.
For most large listed companies, the question of whether to contribute to relief efforts or not is weighed against the need to meet their fiduciary obligation to their shareholders. Even if they get the nod, economic resources can only do so much.
Post-crisis recovery depends on rebuilding social capital over the long term. Which is where the small “c” factor comes in: ie small, locally owned businesses. Embedded in their communities, their decisions occur within “a context of community connections and reciprocal obligations”. This isn’t just a semantic argument. Understanding the pivotal role of local businesses should inform future disaster planning as well.
“Post Disaster: corporate social responsibility after disaster”, by Susan Kuo and Benjamin Means, Washington University Law Review, Vo. 89, April 2011.
Campus news
Harvard Business School has opened applications for its three-day Executive Education programme on corporate social responsibility. “CSR: strategies to create business and social value” runs from 18-22 October.
Dow Chemicals is looking for candidates for its third annual Innovation Student Challenge. The competition invites students from selected universities to propose solutions to meet global sustainability challenges.