Impact of Green Building and Environmental Issues
Organizations respond or react the way they do to environmental issues. On one hand, organizations have control over their corporate strategies. Firms can utilize their resources and capabilities to gain a competitive advantage (Barney, 1991; Peteraf, 1993; Wernerfelt, 1984). On the other hand, firms’ flexibility of action is also limited by external forces. Institutional theory addresses how external institutions create the homogeneity of organizations within an organizational field. Organizations adopt templates for organizing, which can increase their legitimacy in the eyes of the authorities in their field (Scott, 2001). Legitimacy yields access to resources such as raw material, capital, and technology. I argue that the differences in resources and capabilities between firms, as well as their awareness, knowledge, and perceptions of institutional forces all play a role in the extent to which firms integrate environmental issues into their planning process and strategy.
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This piece of work investigates the question of how organizations respond to environmental issues from the perspectives of examining both firms’ internal capabilities as well as the external pressures they face. This chapter presents background on the green building industry, then the problem statement, justification, and research objectives for this study on corporate environmentalism in relation to firms’ external pressures and internal capabilities. Specifically, this study examines members of the banking sector in order to determine the factors affecting corporate environmentalism.
Overview of Green Building
The concepts of sustainability and environmental responsibility are gaining tremendous momentum throughout the design and construction industries. .“Green.” or “sustainable.” buildings are emerging as an important market not only in the United States, but also around the world. Green building is an outcome of a design philosophy which focuses on increasing the efficiency of resource use — energy, water, and materials — while reducing building impacts on human health and the environment during the building’s lifecycle, through better siting, design, construction, operation, maintenance, and removal. Sustainable buildings are more efficient in using key resources like energy, water, materials, and land than buildings that are simply built to meet regulations (Kibert, 2007). They also create healthier environments with more natural light and clean air, and they contribute to improving occupants.’ health and productivity (Kibert, 2007).
The benefit of a green building is that it promotes sustainability (Kibert, 2007). Sustainability means that a green building not only reduces the impact on the environment, but it also improves the condition of its occupants as well as reduces costs in the long term. These benefits achieve the triple bottom line, a concept that captures an expanded spectrum of values and criteria for measuring organizational and societal success, including economic, environmental, and social factors (Elkington, 1994). The triple bottom line can be succinctly described as accounting for people, the planet, and profit. Green building practices are set to achieve these goals.
The demand for green buildings in the market place is growing (Anonymous, 2008; Koltko, 2008; Sullivan, 2008) and rapidly becoming the most significant trend in the building industry. The membership growth of various green building programs demonstrates that green building is gaining popularity and creditability. Public and private sector entities, including the cities of Santa Monica, San Diego, San Francisco, San Jose, Long Beach, Los Angeles, Seattle, and Portland have publicly supported and adopted green building policies and clean energy standards. San Mateo County, the University of California, the Department of the Navy, the federal General Services Administration, and the states of Oregon, New York and Maryland have also done so (Kats et al., 2003). The federal government has also outlined a comprehensive Research and Development plan for improving the energy performance of buildings National Science and Technology Council, Committee on Technology (NSTC, 2008). Corporate entities, including Steelcase, Herman Miller, Johnson Controls, Interface, IBM, PNC Financial Services, Southern California Gas Company, Toyota, and Ford Motor Company have all constructed green buildings (Kats et al., 2003).
Companies often perceive the importance of the natural environment and the opportunities from corporate environmentalism1 differently. Even those companies that see a similar degree of opportunity can differ in the extent to which they integrate environmental issues into their strategic planning process and formulate organization strategy. Two different logics can be used to provide an explanation for firms’ behavior: a resource-based view of the firm and a perspective based on institutional theory. A resource-based view of strategy asserts that every firm possesses unique resources that influence their strategic choices and ultimately their competitive advantage (Barney, 1991; Peteraf, 1993; Wenerfelt, 1984). The RBV focuses on how the value, rarity, imperfect mobility, and non-substitutive nature of resources within a firm yield to competitive advantage (Barney, 1991). These resources and capabilities may be financial, human, intangible, physical, organizational, or technological (Amit and Schoemaker, 1993; Barney, 1991; Farjoun, 1994).
RBV is based on two assumptions. First, companies within an industry or sector may be heterogeneous with respect to the resources they possess. Second, resources may not be perfectly mobile across companies, and that heterogeneity can be perpetual (Amit and Schoemaker, 1993; Barney, 1991; Dierickx and Cool, 1989; Peteraf, 1993). These two assumptions show that every firm possesses unique resources that are not easily transferable to others.
The consideration of external institutional factors has usually been absent from the RBV literature. Institutional pressure (such as media attention and regulation from green building programs) is also an important concept to consider given the strategic changes that firms are undergoing in order to remain competitive. This concept draws upon institutional theory, which posits how organizations become more aligned with the institutional environment over time and come to resemble each other in structure and practice (Starik and Marcus, 2000).
Institutional arguments posit that a firm’s choice of strategy is constrained by institutional forces (Scott, 2001). In order to survive, companies must conform to the rules and cultural belief systems prevalent in the environment (DiMaggio and Powell, 1983; Meyer and Rowan, 1977). Institutional theory also offers explanations for why firms adopt certain strategies (DiMaggio and Powell, 1983; Pfeffer and Salancik, 1978). Although many theorists consider that a firm’s resources and capabilities influence its strategy, institutional theory focuses on the direct impact of institutional rules, pressures, and sanctions on organizational strategy.
In the context of organizations and their relationships with the natural environment, many researchers have noted the importance of firms’ resources in influencing their environmental strategies for their competitive advantage (Aragon-Correa and Sharma, 2003; Bansal, 2005; Hart, 1995). In addition, several research studies have been performed using the natural environment as a context for researching management issues and extending institutional theory (Bansal and Gao, 2006; Greening and Gray, 1994;Hoffman, 1999; Jennings and Zandbergen, 1995; Lounsbury, 2001). However, only limited research on organizations and the natural environment has integrated a resources-based view and institutional arguments to identify the factors relevant to explaining a firm’s decision to adopt environmental initiatives and certification. This concept draws upon institutional theory, which posits how organizations become more aligned with the institutional environment over time and come to resemble each other in structure and practice (Starik and Marcus, 2000).
This research aims to increase the understanding of why firms view the opportunities of corporate environmentalism differently, and why firms that view a similar degree of opportunity differ in the extent to which they integrate environmental issues into their strategic planning process. Three key contributions are expected as a result of conducting this research: (1) a better understanding of how the institutionalization of environmental practices and standards were originated by the green building movement; (2) a more comprehensive examination of RBV and institutional perspectives in the context of business and the natural environment; and (3) empirical results that provide pragmatic answers to key questions surrounding the executives.’ perceptions of certified wood products schemes.
Theoretical Research Objectives
- Empirically test a theoretical model using RBV and institutional theory to explain corporate environmentalism.
- Empirically test the relationship between firms’ resources and capabilities and their corporate environmentalism.
- Empirically test the relationship between perceived institutional pressures from green building programs and firms’ corporate environmentalism.
- Empirically investigate the nature of the relationship between the resources and capabilities of firms and their perceived institutional pressures from green building programs and their effects on corporate environmentalism.
The structure of the study will be as follows:
The second chapter will review the literature about the given topic. The third chapter will described the methodology used in the study. In the fourth chapter, the data will be analyzed and discussed in detail. Finally, the fifth chapter will be a conclusion and recommendations for further research.
Chapter 2: Literature Review
This chapter presents a literature review of the theories on corporate environmentalism that resources and institutional pressures affect corporate environmentalism. First, it reviews the literature on organizations and the natural environment, followed by a review of corporate environmentalism. Next, the chapter reviews the institutional theory and resource-based view of firms.
Organizations and the Natural Environment
The primary goal of this research is to understand how the resources and capabilities within a firm as well as institutional pressures influence its corporate environmentalism. The three-fold arguments presented in this research are: 1) organizational resources and capabilities influence a firm’s corporate environmentalism; 2) institutional pressures influence a firm’s corporate environmentalism; 3) the relationship between resource-based and institutional factors affects a firm’s corporate environmentalism.
The terms “environmental.” or “natural environment.” are understood by many scholars through their connection to the economic concept of externality (Berchicci and King, 2007). In traditional economic theory, government, not business, is responsible for correcting problems of externality, but government regulation has the potential to hurt firms by increasing costs and constraining the choices available to managers. The purpose of business, however, is to maximize internal returns. Therefore, much research has been done to answer the question, “does it pay to be green?” to try to understand why some firms go beyond regulatory compliance in their environmental efforts. Many scholars have investigated the effects of environmental actions on a firms’ competitive advantage (Christmann, 2000; Nehrt, 1998; Shrivastava, 1995b) as well as on their financial performance (Ambec and Lanoie, 2008; Clemens, 2006; King and Lenox, 2000; Klaasen and McLauglin, 1996; Klassen and Whybark, 1999; Orsato, 2006; Russo and Fouts, 1997).
Increasing empirical evidence has challenged the traditional perspectives that voluntary environmental practices that are not mandated by regulations involve investments requiring careful cost-benefit analysis (Wally and Whitehead, 1994). For example, Klassen and McLaughlin (1996) found a positive relationship between firms.’ environmental awards and their effects, the Toxic Releases Inventories (TRI) database has been used as a proxy for environmental performance in several research studies (King and Lenox, 2000; Klassen and Whybark, 1999; Russo and Harrison, 2005). An adoption of ISO 14001 is another proxy that has been used to explain environmental performance (Christmann and Taylor, 2001; Gonzalez- Benito and Gonzalez-Benito, 2005; Jiang and Bansal, 2003). Corbett and DeCroix (2001) have shown that the parties in a supply chain can profit by reducing material consumption. The degree to which organizational actions exceed environmental regulations is used to assess their environmental performance (Aragõn-Correa, 1998; Aragõn-Correa and Sharma, 2003; Buysse and Verbeke, 2003; Hart, 1995; McKay, 2001; Sharma, 2000).
The role of regulation in shaping firms’ environmental performance is another area that receives a lot of research attention (King and Lenox, 2000; McKay, 2001; Nehrt, 1998; Rugman and Verbeke, 1998a, 1998b). One fundamental research interest addresses voluntary initiatives versus mandatory regulations and their relative efficacy. Another parallel stream of research shifts the focus from regulators to a wider group of stakeholders. The arguments are that different stakeholders lead to different types of organizational and environmental strategies, and that some are more effective than others in shaping environmental performance (Buysse and Verbeke, 2003; Christmann, 2004; Fineman, 1996, 1997; Fineman and Clarke, 1996; Henriques and Sadorsky, 1999; Sharma and Henriques, 2005). In addition, several researchers have focused beyond environmental performance to the area of sustainable development. In addition to the environment, researchers investigating sustainable development and its manifestations also include its effects on social and economic dimensions (Bansal, 2005; Russo, 2003; Sharma and Henriques, 2005; Shrivastava, 1995c; Starik and Rands, 1995). Although much attention has been paid to organizational and environmental outcomes, less attention has been paid to the process by which managers perceive and interpret the relationship between the natural environment and its effects on their organizations. It is critical to understand the process by which managers interpret the relationship between the natural environment and their organizations, as well as what factors influence their environmental strategies and actions, which ultimately lead to their firm’s performance and competitive advantage. One way that a business can address environmental issues is through corporate environmentalism, which is the recognition and integration of environmental concerns into a firm’s decision making process (Banerjee, 2001).
Hoffman (1997) has analyzed the institutional history of corporate environmentalism. He studies the chemical and petroleum industries from 1960 to 1993 using institutional theory as a framework to understand how these industries have been altered by increasing pressures for environmental management. Hoffman identified four phases of corporate environmentalism in the chemical and petroleum industries. The first phase is industrial environmentalism (1960- 1970), which focuses on the internal resolution of environmental problems as an addition to firms’ operations. The second phase is regulatory environmentalism (1970-1982), which focuses on regulatory compliance with strict environmental laws imposed externally. The third phase is environmentalism as social responsibility (1982-1988), which focuses on pollution prevention and waste reduction driven externally by industry associations as well as by voluntary initiatives. Finally, the fourth phase is strategic environmentalism (1988-1993), which focuses on top management and board level integration of proactive environmental strategies.
In addition to the work of Hoffman (1997), Banerjee (2001) has proposed a working definition of corporate environmentalism:
.“Corporate environmentalism is the organization-wide recognition of the legitimacy and importance of the biophysical environment in the formulation of organization strategy, and the integration of environmental issues into the strategic planning process. (p.181)”
Based on this working definition and on the background literature, Banerjee (2001) has identified two themes in corporate environmentalism, consisting of a corporate environmental orientation and an environmental strategy focus.
Corporate environmental orientation
Corporate environmental orientation refers to the notion that firms need to recognize their impact on the environment and try to mitigate such impact (Banerjee, 2001). Corporate environmental orientation is akin to corporate social responsibility, specifically toward the natural environment (Banerjee, 2001). Banerjee, 2001 offered two sub-themes associated with corporate environmentalism orientation: the first focuses on a firm’s internal aspects of values, behavior, and commitment; and the second focuses on managers’ perceptions of the need to respond to external stakeholders.
Environmental strategy focus
Environmental strategy focus reflects the degree to which environmental issues are integrated into strategic planning processes (Banerjee, 2001). Banerjee argued that the level of strategy focus can vary and offered two levels of environmental strategy focus. The first level is the corporate strategy focus. Banerjee argued that higher levels of strategic focus can result in what Shrivastava (1995b) calls “ecologically sustainable least-cost strategy” and “ecologically sustainable niche strategy” to achieve a competitive advantage. The second level is the business/functional strategy focus. Environmental strategies at the functional level are limited in scope and aimed at emissions reduction and waste management (Banerjee, 2001).
Corporate environmentalism is involved is related to concerns about perceptions of legitimacy that are external to an organization, as well as the strategic planning process internal to an organization. An organization conforms to its institutional environments in order to reduce uncertainty and increase its legitimacy. Organizations adopt templates for organizing, which can increase their legitimacy in the eyes of the authorities in their field (Scott, 2001). Legitimacy yields access to resources such as raw material, capital, and technology. Institutional theory emphasizes how organizations gain legitimacy through isomorphism, which creates homogeneity within the organizational field. Next, I examine the elements of institutional theory that are relevant to the discussion of corporate environmentalism.
Institutional theory addresses how external institutions create the homogeneity of organizations within an organizational field. DiMaggio and Powell (1983) define an organizational field as “organizations that, in the aggregate, constitute a recognized area of institutional life: key suppliers, resources and product customers, regulatory agencies, and other organizations that provide similar services or products.” (p.148). Organizations gain legitimacy and reduce uncertainty through isomorphism, which consists of three mechanisms: coercive, normative, and cognitive mechanisms (Scott, 1995). Each mechanism differs in the degree to which it is visible and ranges from the directly coercive to that which is taken for granted (Zucker, 1983).
Three Pillars of Institutional Theory
Regulative mechanisms (i.e., coercive mechanisms) are based on legal sanctions to which organizations comply out of expediency – to garner rewards or to avoid coercion (Scott, 1995; Scott and Davis, 2007). Their behavior is viewed as legitimate to the extent that it conforms to rules and laws (Scott and Davis, 2007). A normative mechanism is morally grounded, to which organizations will adhere based on social obligation, appropriateness, and common values (Scott, 1995; Scott and Davis, 2007). Organizations’ structures and behaviors are legitimate to the extent that they are consistent with widely shared norms defining appropriate behavior (Scott and Davis, 2007). The cultural-cognitive mechanism refers to the collective constructions of social reality via language, meaning systems, and other rules of classification embodied in public activity (Thompson and Fine, 1999). This mechanism refers not only to individual psychological constructs, but also to common symbolic systems and shared meanings. The cultural-cognitive mechanism emphasizes the taken-for-granted assumptions and unconscious beliefs (Scott and Davis, 2007) to which an organization will attend out of habit, convention, or obligatory action (Zucker, 1983). These three mechanisms form a composite of institutional pressures that create the collective reality for an organization – explanations of what is and what is not, what can be acted upon and what cannot (Hoffman, 2003). In short, organizations facing the same institutional pressures will have a similar structure.
Institutional theory emphasizes the isomorphic effects of institutional processes (Scott and Davis, 2007), by which organizational fields and populations become more aligned in their structural and procedural features (DiMaggio and Powell, 1983; Scott, 2001; Scott and Davis, 2007). Institutionalization is a process that creates a social reality between actors through externalization, objectivation, and internalization (Berger and Luckmann, 1966). According to Berger and Luckman, institutions are shared realities that have become taken-for-granted. Neoinstitutionalists consider the cognitive classifications, rules, and scripts that have become taken-for- granted to be the rules that determine how actors attribute meaning to their actions (DiMaggio and Powell, 1991). Organizations conform to taken-for-granted norms concerning the appropriate way to organize in order to receive support and legitimacy. Meyer and Rowan (1977) have argued that institutions are likely to take the form of “rationalized myth”. The myths built into institutional elements create the necessity, the opportunity, and the impulse to organize rationally (Meyer and Rowan, 1977).
Meyer and Rowan (1977) have emphasized organizations’ needs to gain legitimacy from an institutional environment. The understanding of collectively constructed social realities provides a framework for the creation and elaboration of formal organizations (Scott and Meyer, 1983; Scott and Meyer, 1994). Legitimacy enables a firm to compete more effectively, for it enables better access to resources, attracts better employees, and improves the exchange conditions with partners (Aldrich and Fiol, 1994; DiMaggio and Powell, 1983; Oliver, 1991; Pfeffer and Salancik, 1978; Turban and Greening, 1997). Legitimacy can also lead to economic benefits without technical gain. As a consequence, organizational routines can become decoupled from technical processes, for routines may be initiated and maintained because they have a legitimating function (Boons and Strannegard, 2000). For example, Westphal and Zajac (1994) found that a substantial number of firms are likely to adopt but not actually implement long-term incentive compensation. Zajac and Westphal (2004) have advanced neo-institutional theory by suggesting how policies can become institutionalized, despite growing evidence of their non-implementation, by virtue of the socio-historical estimation process that drives market reactions. Policy adoptions internal to a firm may become more symbolic and less substantive (Edelman et al., 1991; Pfeffer, 1981). With this view, Zajac and Westphal’s perspective integrates Meyer and Rowan’s (1977) decoupling thesis with Zucker’s (1983) thesis of institutionalization.
Resource-Based View of Strategy
A resource-based view of strategy (RBV) emphasizes that every firm possesses a unique bundle of resources and capabilities that influence its strategic choices and ultimately its competitive advantage (Barney, 1991; Peteraf, 1993; Wenerfelt, 1984). These resources may be financial, human, intangible, physical, organizational, or technological (Amit and Schoemaker, 1993; Barney, 1991; Farjoun, 1994). An RBV is based on two assumptions: first, companies within an industry or sector may be heterogeneous with respect to the resources they possess; second, the resources may not be perfectly mobile across companies, and that heterogeneity can be perpetual (Amit and Schoemaker, 1993; Barney, 1991; Dierickx and Cool, 1989; Peteraf, 1993). These two assumptions show that every firm possesses unique resources that are not easily transferable to others.
The RBV emphasizes how the value, rarity, imperfect mobility, and non-substitutive nature of resources within a firm can lead to a competitive advantage (Barney, 1991). In discussing the imperfect mobility of resources, Peteraf (1993) has suggested the idea of causal ambiguity as representing the non-definable nature of resources a firm possesses and has established the concepts of ex ante and ex post limits to competition within a RBV strategy. Prior to investing (ex ante) in resources, managers make varying estimations of the resources’ future value. As a result of these varying estimations, firms make differing investments in resources. After investing (ex post), factor immobility and barriers to competition from substitute products or services prevent those firms that made inferior decisions from adjusting. Thus, some firms gain a sustainable competitive advantage (Barney, 1991; Peteraf, 1993). Wernerfelt (1984) has established the concept of combining resources together, as if in a bundle, to create a unique whole.
A number of researchers have empirically applied RBV to the analysis of environmental strategies and profitability (Aragõn-Correa, 1998; Christmann, 2000; Hart, 1995; Marcus and Geffen, 1998; Maxwell, Rothenberg, Briscoe, and Marcus, 1997; Rugman and Verbeke, 1998; Russo and Fouts, 1997; Sharma and Vredenburg, 1998). Fineman and Clarke (1996) have found that firms.’ superior resources allow them to adapt to regulations, garnering advantages over their competitors more quickly and efficiently. Judge and Douglas (1998) have demonstrated that firms that successfully integrated the natural environment into their strategic processes achieved competitive advantages, both financially and environmentally. Clemens and Douglas (2006) have argued that environmental resources may include many components in a bundle, for example, additional accounting systems (Sinding, 2000), more extensive monitoring of waste streams (Sharfman, Ellington, and Meo, 1997), training, additional information requirements, and indirect costs involved in adopting any new system requiring organizational changes (Huybers and Bennett, 2003). In their analysis, Clemens and Douglas (2006) found that coercion is positively related to voluntary green initiatives, but the relationship is contextual and depends on the level of superior resources of firms that focused on environmental strategies.
Organizational slack allows firms to make investments in resources and capabilities that may not have an immediate pay-off (Bansal, 2005; Levinthal and March, 1981). It can help a firm develop the resources and capabilities necessary to improve the speed and degree to which it can adapt to its external environment (Bansal, 2005; Cheng and Kesner, 1997). Bourgeois (1981) has defined organizational slack as “that cushion of actual or potential resources which allows an organization to adapt successfully to internal pressures for adjustment or to external pressures for change. (p.84)”.
Bansal (2005) has investigated the relationship between organizational slack and sustainable development. She found that organizational slack permits firms the latitude to seek creative new solutions to corporate sustainable development in many circumstances. For instance, many respondents in her study noted that large firms, firms with extra financial resources, or large environmental health and safety (EHS) departments were more likely to implement new practices. In addition, the financial benefits that accrue from sustainable development can often be long term and diffuse, for example, through improved corporate reputation or social capital. Thus, I investigate the relationship between organizational slack and its effect on the relationship between institutional pressures and corporate environmentalism.
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