Corporate Env Responsibleness Strategies

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THE JOURNAL Sharma et al. / ENVIRONMENTAL OF APPLIED BEHAVIORAL RESPONSIVENESS SCIENCEMarch 1999

Corporate Environmental Responsiveness Strategies The Importance of Issue Interpretation and Organizational Context

Sanjay Sharma St. Mary’s University

Amy L. Pablo Harrie Vredenburg University of Calgary

This article analyzes the environmental responsiveness strategies of seven companies in the Canadian oil industry over a 15-year period, during which environmental issues gained increasing public and regulatory attention. These within-industry corporate case comparisons serve as the basis for developing an understanding of corporate environmental responsiveness that centers on the relationships between issue interpretations and strategic responses as well as the role of antecedent organizational context elements.

Future productivity advances will come from environmental response. Managers are realizing that this is an area with tremendous potential for generating cost reductions and efficiency improvements. The industry has been extremely sloppy in the area of wastes, spill, and leaks, because no one focused on wastes and the problem of their disposal. Only when the environment became important did firms start to monitor these seriously. A Sanjay Sharma is an assistant professor of strategy at St. Mary’s University, Halifax, Canada. Amy L. Pablo is an associate professor of management, and Harrie Vredenburg is professor of marketing at the University of Calgary, Canada. THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE, Vol. 35 No. 1, March 1999 87-108 © 1999 NTL Institute

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focus on these aspects of our operations, rather than only on increases in production and sales, has opened up a whole new area of profit improvement and process innovation. —Vice president of operations at a senior Canadian oil company I care as much as any other person about environmental degradation. I do have ideas about how I can reduce some of the environmental impacts of this operation. However, these involve investments for which I cannot guarantee results. If these investments affect output and profits, I am out of a job. Unless I have some discretionary funds to play around with, I can’t do anything on my own. The instructions from the top are clear, invest only as much as is necessary to get a clean chit from regulators. —Manager of refining at a major Canadian oil company

Corporate concern with the preservation of the natural environment is a topic that has attracted increasing attention among both scholars and managers over the past quarter of a century (Sethi, 1995). However, as reflected in the preceding quotations, there are widely divergent organizational and managerial perspectives driving corporate strategies in this regard, even among firms that use similar technologies, face comparable competitive environments, operate under commensurate levels of public scrutiny, and are subject to a common regulatory regime. To date, academic literature has made little progress toward providing a theoretical foundation for understanding the source and nature of the differences observed in organizations’ approaches to managing the business–natural environment interface. Although extant research describes and categorizes firms’ orientations toward dealing with the natural environment (e.g., Hunt & Auster, 1990; Post & Altman, 1992; Westley & Vredenburg, 1996), it does not provide insights into the individual, organizational, or situational particulars that may be associated with the development of an organization’s strategy for managing its relationship with the natural environment. Furthermore, although the study of corporate environmental responsiveness is certainly informed by the corporate social responsibility literature, it varies in significant ways from the more general study of corporate response to social issues. Specifically, although most social issues have a circumscribed impact on an organization’s ways of operating, the natural environment is a social issue that has widespread and farreaching consequences for the entire range of a business firm’s operations, affecting the organization through its entire systems cycle (Shrivastava, 1992). Effective management of the business–natural environment interface requires a fundamental shift in ways of thinking about doing business (Shrivastava, 1995; Westley & Vredenburg, 1996). This includes consideration of the renewability and sustainability of inputs and products, recognition of the need for cyclical systems of production, assessments of the ecological impact of technologies used and scale of operations, and a general reevaluation of the desirability of development through growth. These essential changes in frames of reference within business organizations require changes that are more widespread and far reaching than the changes that need to be made for dealing with most social issues. Understanding the requisite conditions for environmental responsiveness is not only an important and legitimate area of inquiry but is also a complex and encompassing

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endeavor that can fruitfully draw upon multiple research paradigms (e.g., corporate social responsiveness, strategic issues management) to enhance development of more explanatory frameworks of corporate environmental responsiveness. The present research was carried out for the purpose of building such a framework and was specifically designed to gain insight into the dimensions that distinguish various approaches to managing the business–natural environment interface and into factors related to the approach that is taken. Findings from within-industry comparative case studies are presented and used to derive a theoretical framework for understanding corporate strategies of environmental responsiveness and to suggest a set of empirically testable propositions flowing from that foundation.

METHOD Research setting. Much of the research on corporate environmental responsiveness has looked across a wide variety of industries and types of businesses (Hunt & Auster, 1990; Post & Altman, 1992; Westley & Vredenburg, 1996). Even when research has focused on a single industry (e.g., Logsdon, 1985; Throop, Starik, & Rands, 1993), the focus of the research has been limited to attempts to develop generic typologies of corporate environmental responsiveness. Because a central goal of this research was to identify the factors associated with an organization’s responses to environmental issues and the mechanisms through which these factors operate, an industry was sought in which environmental issues were a major domain element for all organizations. The oil and gas industry extracts natural resources from the environment at a rate faster than that at which they can be replaced and thus, by definition, is a nonsustainable industry. As such, in a world of increasing environmental awareness and public demands for institutional control or self-control, this is an industry under considerable social pressure and one in which the ability of organizations to align themselves with their natural environments will determine the quality and extent of their continued existence. Furthermore, the study was confined to a single industry to control for as many external influences as possible and to help define limits for generalizing the findings (Eisenhardt, 1989). Due to the geographical concentration of the Canadian oil and gas industry in one province, individual firms are subject to a lower diversity and range of external influences and variations than a more widely dispersed subset of the industry would be. Also, the geographical concentration of most oil and gas company offices in a single city allowed for repeated face-to-face interviews and follow-up discussions with industry executives, industry experts, and regulators. Company selection. Companies were selected based on theoretically important criteria including size, the range of activities in which they were involved, and the number of firms to be studied. The appendix presents company profiles and provides characteristics of the sample according to size and activities. At the request of informants, the company names are disguised to assure confidentiality.

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Firm size was taken into account to accommodate the possibility that firm size influences environmental responsiveness strategy. The implicit assumption driving use of this criterion was that firms with greater resources may have greater organizational slack to adopt voluntary strategies of environmental responsiveness. Firms’ range of activities also was used as a selection criterion to ensure that the entire spectrum of activities in the oil and gas industry was covered. The assumption behind this theoretical criterion was that firms forced to respond to a wider range of external stakeholders, due to involvement in a wide range of activities, may undertake a broader spectrum of environmental actions and strategies. Finally, the number of firms studied (seven) was determined when further data collection did not lead to the emergence of any new significant themes and variables. Data collection. The research questions emphasized the need to ask what factors affect managerial interpretations of environmental issues and how these interpretations affect strategies of corporate environmental responsiveness. Such questions lend themselves to theory-building techniques of research inquiry where generation of theory is more important than the testing of theoretical frameworks (Yin, 1989). A multicase study was required to explore interfirm differences in response to the environment. A single in-depth case study would not have provided the differential response characteristics in which we were interested. This method facilitated the extraction of variables of theoretical importance while controlling for common industry and contextual variables through the study of individual firms within the same industry. Open-ended unstructured interviews with respondents in key positions within firms were used to gather data on these members’ interpretations of events and issues, ensuring richness of detail through clarification of questions, elaboration of responses, collection of anecdotes, and identification of sources of corroboratory evidence (Parkhe, 1993). The interviews started out as very broad and unstructured, asking, “Does the natural environment have any importance in context of your company’s operations?” and gradually became more structured and specific as verification of the themes that emerged from these interviews was sought in subsequent interviews. Each interview was analyzed through comparative analysis with others, and emergent themes were used as guides for imparting greater structure to subsequent interviews. Unstructured interviews were conducted with a total of 7 senior executives (CEO or president) and 12 middle managers in the seven companies studied. In smaller companies, several functions (including operations and environmental assessment) often were combined into one position, and on average, 2 managers (1 senior executive and 1 middle-level manager) were interviewed. In the larger companies, an average of 4 managers were interviewed. Leads to other key informants and data sources were identified at each interview. Interviews were taped and subsequently transcribed. The length of the interviews ranged from 45 to 120 minutes and totaled 36 hours. Archival data in the form of corporate public documents (such as annual reports, environmental assessment reports, company newsletters, company policy declarations, and newspaper reports on the environmental actions and strategies of the companies) for the period 1985 to 1995 also were analyzed. These data were used primarily

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to verify what managers had said during the interviews. In addition, interviews with officials from the Alberta Energy and Resources Conservation Board (the regulatory enforcement body), with officers of the Canadian Association of Petroleum Producers (the industry association), and with representatives of Alberta Greens and of Greenpeace (two environmental interest groups that scrutinize oil and gas industry practices) also were conducted. This was done to verify and triangulate themes emerging from the interviews with industry executives. Data analysis. Data were content analyzed after each interview to detect emergent themes, which were compared with similar themes identified in earlier interviews through constant comparison (Yin, 1989). Follow-up interviews were conducted with some managers to verify themes emerging from subsequent interviews. An interview summary form (M. B. Miles & Huberman, 1984) was prepared after each interview to highlight emergent themes and other issues of interest that would be followed up at subsequent interviews. Each interview was coded in accordance with these emerging themes, and sentences relating to each different theme were entered in separate computer text files set up for each emergent theme. The number of references and intensity of support for each theme were identified within each file before deciding which themes to retain and which to drop as less theoretically significant. Connections between significant themes were investigated in the data. The sifting process continued in tandem with data collection. Interview data were supplemented with a content analysis of archival data. Finally, a literature search was conducted in tandem with data collection to reinforce emerging theoretical concepts and ground them in extant literature.

CASE STUDY FINDINGS To facilitate comparison of the environmental strategies of individual firms, the reconstruction of organizational responses to the environmental issue in the Canadian oil industry was divided into four phases based on increasing intensity of environmental concern in the institutional environment. These phases roughly correspond to Post’s (1978) four stages for the evolution of an external public policy issue: gestation, politicization, legislation, and litigation. As issues go through these phases, the zone of discretion (Ackerman, 1975) and the ability to influence the shape of the issue decreases for businesses. During the gestation phase (1980-1985), both regulatory intensity and public concern over environmental preservation were at low levels. However, environmental groups across Canada were agitating to raise societal awareness about the environmental damage caused by the oil industry. During the politicization phase (1986-1987), the environment became increasingly important in public policy debates and political consciousness, and government agencies undertook reviews and recommended that environmental regulations be rationalized and escalated. However, public interest in environmental preservation remained low. During the legislative phase (1988-1992), the intensity of public concern grew dramatically due to well-publicized

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environmental accidents (e.g., the Exxon Valdez oil spill) and increasingly urgent warnings of environmental destruction. Environmental regulations were rationalized, and companies were required to undertake exhaustive environmental assessments and obtain approvals for new developments through a public consultation process. During the litigation phase (1993 onward), managers were made personally liable for environmental accidents and infringement of regulations, whereas environmental regulations were made more stringent, and the level of public concern remained high. Phase 1 (1980-1985). During this period, five of the seven companies (Royal, National, U.S. Oil, Farmers, and Northern) did not take actions beyond those minimally required to meet specific environmental regulations. According to the production manager of Royal, “The environment seemed to have little to do with our business.” As a result, no initiatives were taken in the form of environmental policy statements, environmental assessments or audits, or incorporation of environmental considerations into corporate planning or control systems. The operating managers of these companies indicated that they did not feel the need to factor environmental preservation into their operating decisions because their companies did not require them to do so and few external pressures existed. The production manager of Royal explained, “Personally we were beginning to become aware that our company’s operations were polluting nature, but it did not somehow seem as serious as it does now.” Environmental regulations were mainly dealt with by staff legal or public relations functions, and information available to operating managers about environmental issues was mainly in the form of interpretation of regulations to enable compliance. Expansion, new development, and diversification required environmental approval from provincial authorities—however this was mainly in the form of a license obtained by the legal department. The managers saw their companies’ roles as maximizing shareholders’ wealth while meeting regulations and acting as good corporate citizens through corporate philanthropy. The actions taken by the remaining two companies (Buffalo and Sioux), however, revealed very different strategies for dealing with environmental issues during this period. Each of these two companies chose to adopt leadership stances in different areas of environmental action and institutionalized these positions in corporate mission statements. Sioux declared itself “The Alternative Energy Company” in 1980, whereas Buffalo stated its mission in 1981 was to “Build goodwill among all its neighbors through environmental leadership.” Because it was unlikely that, at this stage, environmental considerations were affecting the petroleum purchase decisions of the general public, these messages were not likely to be targeted to consumers. Rather, the publicly stated environmental positions of both companies appear to reflect the values and beliefs of the senior management in these companies. In addition to taking a clear position on how the company was going to deal with the business–natural environment interface, both Sioux and Buffalo took consistent and supportive operational and administrative actions. Sioux Oil established a staff-level environmental assessment department and an alternative energy research center in 1980. They also bought two ethanol refineries and started selling ethanol-blended gasoline in 1980. Furthermore, starting in 1981, Sioux pioneered engine oil recycling

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in North America and built a recycling plant and a used oil collection network. The identification, development, and exploitation of alternative fuel technologies were coordinated through task forces of research, staff, and line managers, and a separate project matrix was set up for each product and technology. Sioux’s managers assessed that their corporate success depended on identification and exploitation of alternative energy sources that would differentiate them in the marketplace. At the same time, because Sioux was not an upstream company, they did not recognize a need for a detailed environmental audit of operations. Thus, the managers who saw their company as an environmental leader “in the marketplace” seemed insulated from environmental issues in other aspects of their jobs. Buffalo Oil created a staff-level environmental assessment department in 1981 that undertook a detailed audit of the impact of its operations on the natural environment. Furthermore, a board-level committee on environmental strategy and a task force comprising managers from line and staff units at all levels were established at this time. The result of these efforts was an action plan approved by the board in 1984 for reducing the environmental impact of the company’s operations. These actions created a tremendous level of awareness of the impact of the company’s operations on the natural environment and also made available to managers a large amount of data. This also was a clear communication by top management that environmental preservation was important to the company’s image and that consistent employee behavior would be evaluated favorably. Consequent recommendations by the exploration department for the closure of marginal wells in ecologically sensitive areas and the practical development of horizontal drilling techniques that were less environmentally disruptive were carried out by 1985. Decisions were made to adopt state-of-the-art technology exceeding environmental regulations for all new developments. Although these measures added approximately 5% to project costs, Buffalo’s CEO justified this decision as follows: I could not see then, as now, any hope of reversing environmental degradation. The regulations are bound to increasingly become more stringent, and public pressures for greater environmental stewardship by the industry are bound to increase. At that future time we would be better placed as compared to our competitors who would have to undertake these investments overnight at several times the cost we incurred.

Despite the seeming lack of expectation at this time for action on this issue from regulators or other stakeholders, the managers of Buffalo and Sioux interpreted attention to environmental issues to be of strategic importance. They recognized a level of interdependency with stakeholder groups in their areas of operation and perceived that building good relationships with these groups would be central to their ability to operate effectively in the future. Management at all levels viewed environmental leadership as a valuable intangible asset and as the route to continued corporate success. Thus, during this phase, clear differences can be seen between the relative apathy toward the natural environmental by the subset of five companies and the emergence of an organizational stance on the business–natural environment interface by the other two.

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Phase 2 (1986-1987). Although the level of public concern for environmental preservation remained low at this time, fresh environmental regulations at the federal and provincial levels were passed in 1986. Detailed environmental assessments for all new projects, expansions, developments, and diversifications were required, and a public consultation process wherein projects and developments would require public/citizen consent was instituted. During this period, anti-industry environmental groups were not active in Alberta, and approvals were not actively opposed due to a public attitude that favored economic growth over environmental preservation. Nonetheless, managers at Royal, National, U.S. Oil, Farmers, and Northern began to see environmental issues as potential hurdles and irritants to the smooth running of business. Extra effort was required in conducting environmental assessments and public relations exercises to get approvals in public hearings. However, this was seen primarily as a function of corporate staff departments. Line managers were not really affected by environmental issues unless their approvals were held up. The exploration manager of U.S. Oil said, “The need for conducting environmental assessments and obtaining a string of approvals for new developments led to delays and pushed up our capital costs and thus affected the viability of new finds.” Due to the increasing burden placed on corporate staff to meet greater regulatory environmental requirements, Royal, National, and U.S. Oil transferred the environmental assessment function from their legal departments to larger departments dealing with health and safety issues. These departments initiated environmental assessments for all new projects and embarked on public relations activities to manage the approval process. Northern’s and Farmers’ legal departments continued to manage the business–natural environment interface by interpreting environmental regulations for operating managers. They also appointed outside consultants for required environmental assessments. Buffalo reaped the benefits of its environmental leadership position with a wide variety of stakeholder groups in getting its developments and projects approved. The company also patented nearly a dozen improvements in its drilling, extraction, and refining processes that led to lower material and energy consumption and lower amounts of waste. Research on high oxygenated fuels was initiated in Buffalo’s research center. Furthermore, in its office operations, recycling operations and energy conservation won the company a civic award. In 1987, Buffalo performed another detailed environmental audit to quantify environmental performance indicators that were incorporated into employee performance evaluation systems. Provided with constantly updated information on the environmental impact of operations, Buffalo’s employees became increasingly concerned about the environmental impact of their decisions. According to the refinery manager of Buffalo, “Information availability made a consideration of environmental impact of any investment or process change automatic.” Concurrently, initial successes in cost reductions through process modifications and through waste reduction, recycling, and reuse, and the growing reputation of Buffalo in the area of environmental leadership, gave operating managers increased confidence in their ability to incorporate environmental preservation into their business decisions.

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Sioux continued to expand its marketing of alternative energy sources—methanol, ethanol-blended gasoline, recycled engine oils, and compressed natural gas. Photovoltaics research was initiated, and Sioux (like Buffalo) began a program of energy conservation and waste reduction in its refining and office operations. Sioux’s employees recognized that actions leading to the identification and implementation of environmentally friendly product technologies that could increase market share would be rewarded. The market development manager explained, “The real stars were the employees who identified ideas for products with a lower environmental impact.” Phase 3 (1988-1992). Several oil spills around the world (including the Exxon Valdez), publicity over the reported discovery of a hole in the Earth’s ozone layer, and record summer temperatures in Europe and North America (interpreted as signaling global warming) were among the factors leading to a galvanization of public concern for environmental protection. The Canadian government undertook an Energy Options initiative to establish a sustainable energy plan for the 21st century, generating great awareness for environmental preservation. The 1992 United Nations Conference on Environment and Development, the 1987 Report of the World Commission on Environment and Development, the Montreal Protocol on ozone depletion, and other international events focused attention on issues such as biodiversity, climate change, ozone depletion, renewable resources, and habitat protection. National Oil released a written environmental policy statement and participated in a joint industry effort to establish environmental action guidelines. It also set up systems for recycling and reduction of paper use in its offices. National, Royal, and U.S. Oil conducted detailed corporate environmental assessments and audits. Although these firms paid greater attention to public relations efforts directed toward obtaining approvals for new developments, increased media and environmental group pressure led to many failures in this process. In accordance with regulations, Royal began to clean abandoned wells and retail gas stations and conduct research on soil contamination restoration to avoid large liabilities at abandoned sites. While National and U.S. Oil embarked on similar clean-ups, the smaller of the historically environmentally inactive companies—Farmers and Northern—pleaded inability to act due to lack of resources. Operating managers of these companies experienced a high degree of conflict between their growing personal awareness of environmental degradation and the lack of concrete actions by their companies in this direction. They explained that they had no incentives on the job to do anything other than meet their economic and output targets while meeting environmental regulatory requirements. Even if they were to engage in voluntary environmental actions, they were uncertain both about the effect of such actions on their companies’ environmental impact and also on economic performance measures. The companies’ failure to provide information on the relationship between organizational activities and environmental outcomes was central to this felt lack of control. Managers at National described a sense of frustration during this period because the company had just begun to formulate an environmental action plan when it changed ownership. The new owners, concerned about reversing a decade of

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losses and inefficiencies, could not see the economic justification for nonrequired environmental actions. The managers of these five companies were unanimous in their opinion that the motivation for reducing the risk of environmental accidents was to avoid financial disruption and loss. According to the vice president (environmental assessment) of National, “The main issue here is minimization of risk and liability. . . . We can’t afford environmental accidents or spills.” The refinery manager of U.S. Oil remarked, “By minimizing the risk of liabilities, we reduce the possibility of financial disruption and adverse publicity. . . . This leads to a healthy bottom line.” The experiences of Buffalo and Sioux were markedly different. In 1988, Buffalo carved out a portion of budgeted funds to use for experimentation with changes in inputs, processes, waste treatment, and material specifications at operating managers’ discretion. This was done to allow operating managers at all levels to find ways of reducing the impact on the natural environment of the company’s operations. Since quantified environmental performance indicators already had been included in employee performance systems, this action served to match authority with responsibility in this area. Business unit heads were provided with their own environmental assessment officers to enable immediate analysis of the environmental impact of planned actions and modifications. The pace of innovations in drilling, production, and refining processes; waste reduction and reuse systems; and energy efficiency accelerated, resulting in a stream of innovations and patents during this time period. Buffalo claimed the lowest oil production and refining costs, lowest energy consumption per unit of output, and the lowest percentage of waste generation in the industry during this time while its sales grew at an average of 8% per annum—even in the context of a 2% per annum decline in industry sales. Buffalo’s refinery manager said, “During this period, we achieved a level of comfort with strategies for dealing with environmental impact due to the continued availability of information and fast feedback on the environmental impact of operations.” The stream of cost reductions and corporate goodwill resulting from past environmental preservation actions further reinforced this sense of effectiveness. That exemplary environmental performance was a central corporate value consistently communicated through supportive evaluation and reward systems. Sioux’s sales also grew at an average of 8% per year during this time period. In addition to general increased environmental awareness, car emission control regulations passed in British Columbia led car owners to buy petroleum products with a lower impact on the environment, such as the low carbon emission ethanol blends that Sioux produced. Spurred on by this favorable response in the marketplace, Sioux continued to focus on a green marketing strategy while investing to replace outdated and inefficient refinery equipment. Phase 4 (1993 onward). In 1993, federal and provincial regulations were rationalized and consolidated, and managers were made personally criminally liable for environmental accidents and damage caused by their companies’ operations. Companies and their managers began to be prosecuted for punitive damages for environmental lapses.

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The stricter regulatory measures enacted during this period created panic among the smaller companies, which did not have independent environmental assessment functions. Farmers and Northern reported having hired environmental consultants in 1993 to ensure that their “paper trails” and procedures were in accordance with regulations. The CEO of Farmers said, “I won’t make any bones about this. . . . We hire consultants to make sure that the paperwork is in order to show that emergency response procedures are in place. No one wants to be held criminally liable for negligence.” The chief operating officer of Northern observed, “The titles alone of the environmental regulations run into 14 pages. . . . All we can do is cope.” The larger companies, National, Royal, and U.S. Oil, conducted emergency environmental audits in 1993 to assess risk of environmental accidents and possible liability exposure. Identified risks were plugged during 1994, and emergency response procedures were instituted to minimize any damage from environmental accidents. Royal released a public environmental report in 1994 based on this environmental audit. While Royal and U.S. Oil included an environmental impact statement in their annual reports from 1989 onwards, National has still made no reference to the natural environment in its reports. Neither the smaller nor the larger of the five companies made changes in their planning, budgeting, or control systems and policies to incorporate environmental preservation concerns. The managers of these five companies explained that their views about the environmental issue changed significantly during this phase. Beyond being seen as an obstacle to be dealt with in the normal course of business, this issue began to be imbued with a sense of urgency reflecting the potential for personal loss due to corporate outcomes seen as beyond managers’ control. According to the chief operating officer of Northern, “We were looking at prison terms and personal penalties for corporate actions.” This issue was now seen as a major risk factor with little or no upside potential and possible downside consequences of significant magnitude. The environmental assessment manager of Royal said, “Overemphasis on environmental preservation is going to make the Canadian oil and gas industry uncompetitive internationally.” Again, Buffalo and Sioux experienced this phase differently from the other five. Sioux expanded its sales of less environmentally damaging fuels. Even though Buffalo as an extractor of natural resources is engaged in a nonsustainable business, it was recognized by regulators and environmental groups as constantly looking for ways to “tread more lightly on nature.” Thus, although these two companies made no significant changes in their operations under the new regulatory regime, actions taken during previous phases in the development of this issue positioned them well for the current phase. Sioux, being a downstream company, has lower risk interfaces with the natural environment, with the dangers being localized around refinery sites and in the transportation of petroleum products. Thus, managers’ perceptions were that the risks associated with environmental issues were relatively low, whereas the level of pride in being a market leader in environmental products was high. Buffalo’s managers expressed a high degree of control and ownership over the company’s environmental actions. They felt that with 15 years of experience in addressing the environmental issue through active management of the business–natural environment interface and

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the concomitant accumulation of goodwill, their risks from unexpected environmental accidents and resultant personal liabilities were low. Rather, they viewed attention to the environmental issue as a source of potential product, process, and image improvements to create competitive advantage. Furthermore, the managers of these companies expressed positive feelings about being associated with a caring company, with this “positive glow” (Dutton, 1993) engendering mental processes of creativity and efficiency in problem solving and providing a sense of control through task persistence and motivation. The following quotes are an expression of these feelings: Buffalo’s market development manager: I may not find such a rewarding work environment in another company. Buffalo’s environmental assessment manager: We can’t always justify our environmental actions based on numbers and paybacks. . . . We have an environmental conscience too. . . . We want our employees to feel good about their jobs. When we leave our offices, we go home to our spouses, children, parents, and friends, we want to be able to hold our heads up and say that we try to do something more than pay lip service. Sioux’s regional marketing manager: Many oil marketers accuse us of environmental opportunism. . . . I don’t think it bothers any one. . . . We are sincere in trying to do what we can. When I joined the company, it was just a job. . . . Now I am dedicated to the mission [of being “The Alternative Energy Company”].

A review of our case study findings allowed us to identify the very different approaches taken by these organizations in response to the environmental issue. To specify the distinguishing features of corporate environmental strategies, we examined the case study data in the context of extant literature relevant to the emerging themes.

A FRAMEWORK FOR UNDERSTANDING CORPORATE ENVIRONMENTAL RESPONSIVENESS Corporate Environmental Strategies

Although each of the seven companies exhibited a distinct pattern of environmental responsiveness actions, a clear dichotomy in environmental responsiveness emerges between subsets of the seven organizations studied: a group of five that includes Royal, National, U.S. Oil, Farmers, and Northern, on one hand, and a group of two that includes Buffalo and Sioux, on the other. The analysis suggests that the primary dimensions of responsiveness on which these organizations split is in the degree of discretion reflected in the actions taken and in the extent to which firms attempted to take control in their dealings with the environmental issue. Degree of discretion relates to whether an organization’s response is mandated by economic and legal requirements incumbent on the firm or whether the response is dependent on managers as moral actors who make decisions that direct corporate strategies and actions relative to the issue of concern (Ackerman, 1975; Dutton, 1993;

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Wood, 1991). The greater the degree of discretion, the more voluntary the response can be said to be. Organizations also vary in the extent to which they attempt to exert control over how social issues affect the firm (Post, 1978; Sethi, 1979). Passive responses include avoidance by denying ownership of the issue (Dutton & Dukerich, 1991) or minimal response to regulatory and stakeholder demands through adjustment only of those firm structures, systems, and processes directly affected by increased emphasis on particular elements of the operating domain. More active responses include taking preemptive actions to define and act on issues before appropriate responses are prescribed externally. Reactive strategies: risk and liability reduction. The group of five essentially abdicated decisions about how the organization would handle the environmental issue to coercive institutional forces (DiMaggio & Powell, 1983), forces that gained momentum over time. Actions were not taken until mandated and until the potential domains of action had become highly circumscribed—that is, there was little discretion or control evidenced by these firms in the evolution of their environmental strategies. Rather, these firms exhibited reactive strategies directed toward compliance with environmental regulations and accepted industry practice. Environmental lapses in the form of spills and leaks result in a variety of negative outcomes: damage to corporate reputation, financial loss, and personal liability for managers for situations over which they have little control. The larger three in the group of five (Royal, National, and U.S. Oil) conducted environmental audits to assess areas of risk and the extent of potential liability resulting from ongoing operations. The smaller companies (Farmers and Northern) reported hiring consultants to establish an adequate paper trail to show that regulations were being met. Both sets of firms focused on damage control through the development of procedures to prevent spills, leaks, and accidents and emergency response procedures to handle such events if and when they did occur. These reactive strategies of environmental responsiveness were viewed by both groups of firms as being in conflict with economic objectives but as a necessary cost of liability reduction against uninsurable contingencies. Proactive strategies: creation of competitive advantage. The group of two, Buffalo and Sioux, was much more enterprising in its orientation, with the member firms using both discretion and control to enact their own interpretations of the evolving environmental issue. This proactive strategy was reflected in the early and innovative actions taken by these organizations not only to manage organizational identity, image, and reputation with key stakeholders but also to gain the prospector’s early-mover advantage (R. E. Miles, Snow, Meyer, & Coleman, 1978) by acting to shape industry standards and regulations in an increasingly important strategic domain. These two companies differed substantially in size and in the range of their operating activities, yet managers in both companies viewed environmental strategies as sources of potential gain resulting from enhanced corporate image and goodwill, product differentiation, cost reduction due to lower waste production and energy use, and enhanced productivity and innovation due to the reengineering of various aspects of

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operations. Buffalo was proactive in the protection and preservation of natural habitats and heritage sites and in the reduction of process wastes and energy use in operations. Sioux campaigned for reduction in air pollution through cleaner fuels and fuel-burning technologies. Both gave considerable emphasis to managing relationships with a wide array of strategically important stakeholders, and both used a longer time horizon for evaluating economic success. Managerial Interpretations and Corporate Environmental Responsiveness

These opposing environmental responsiveness strategies appear to be associated with basic differences in the ways managers interpreted the strategic nature of the environmental issue. These differences are revealed in the interview data in terms of managers’ characterizations of what the environmental issue meant for them and their companies. Managers from companies exhibiting reactive environmental strategies clearly expected a loss to accrue from issues having to do with the natural environment either in terms of some investment required to manage the issue (e.g., pollution control equipment, environmental audits) or in terms of costs incurred due to undesirable outcomes (e.g., cleanup of spills). Uncertainty and ambiguity relative to cause-and-effect relations between organizational actions and environmental impact contributed to a sense of the issue as highly uncontrollable, and the heightened concern the issue evoked for the organizations’ overall well-being defined this as a negative situation. On the other hand, managers from companies exhibiting proactive environmental strategies attended to information about the gains that could be made from a variety of initiatives and looked for ways to build these into their strategic and operational decision-making processes. Furthermore, greater certainty about these organizations’ willingness and ability to meet this challenge sent signals that this was an issue over which some degree of technological and administrative direction could be exercised, contributing to a greater sense of control. Finally, the belief that activities taken to manage this issue were supportive of accomplishing a central corporate goal gave this issue a positive tone. Thus, most fundamentally, the evidence emerging from this study suggests that the reactive and proactive strategies of environmental responsiveness are a reflection of managerial interpretations of environmental issues as threats or opportunities. That is, managers’ characterization of the environmental issue in terms of the three attribute dimensions of negative-positive, loss-gain, and uncontrollable-controllable points to the fact that the threat-opportunity categorization is salient for cognitions and actions relevant to this issue (Dutton & Jackson, 1987; Jackson & Dutton, 1988). Proposition 1: Managerial interpretations of environmental issues as threats are associated with reactive strategies of corporate environmental responsiveness; conversely, managerial interpretations of environmental issues as opportunities are associated with proactive strategies of corporate environmental responsiveness.

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However, as noted by Dutton and Jackson (1987), “The meaning of a strategic issue is not inherent in the environmental events or developments. Instead, the organization’s internal environment (ideology or structure) has a major effect on the meanings that evolve” (p. 77). That is, organizations play an important role in shaping perceptions of issues, influencing how managers construct their own versions of reality (Weick, 1979), and driving strategy making and consequent organizational actions. The Importance of Organizational Context

A number of organizational factors appear to have been central to the interpretation of the environmental issue as a threat or an opportunity, with the resulting impact on environmental responsiveness strategies. Differences were observed in the firms’ strategic positioning relative to the emerging issue, in particular in terms of timing of response and legitimation of the issue as part of the firm’s identity. Furthermore, differences were seen in three elements of organization design between the proactive and reactive firms: information flow, managerial discretion, and control systems. Timing of response. As issues progress from limited attention by special interest groups, to widespread public interest, to regulatory prescriptions, the zone of discretion available to a company for dealing with an issue successively decreases (Ackerman, 1975). However, early adoption of an issue presents a number of uncertainties for a company and its managers: The urgency and durability of the issue are unclear, acceptable standards of behavior are constantly changing and are difficult to determine, and means of dealing with these issues are unknown and may require the development of new technologies, expertise, knowledge, and thinking frameworks (Ackerman, 1975). Thus, although early action presents opportunities for strategic flexibility, it also carries with it the potential costs of uncertain developments relative to an issue. In this study, the five companies exhibiting reactive environmental responsiveness strategies believed that early calls for environmental preservation reflected a nondurable and nonurgent issue, adopting a wait-and-see attitude and following regulations as they changed. By 1993, these companies were in a very difficult situation, being faced with clear external demands but having developed neither adequate organizational routines nor the learning capabilities required to deal with the environmental issue in an effective way. The two proactive companies, on the other hand, undertook long-term investments early on, based on a belief in the urgency and durability of environmental preservation as an issue. This early action enabled these companies not only to shape the dimensions of the environmental issue and how they would deal with it without external pressure but also provided managers with time to gain familiarity with the issue and to generate knowledge and learning capabilities for dealing with the business–natural environment interface over the long term. For both organizations, the resulting sense of autonomy and control over an important emerging issue was a source of pride that spurred creative action among managers.

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Proposition 2: Managerial interpretations of environmental issues as opportunities are likely to be associated with an early corporate response in the issue life cycle.

Issue legitimation. According to Noël (1989), top management enacts the strategic core of an organization by emphasizing activities that are crucial to the survival and growth of the firm. By setting personal examples and devoting more time and attention to certain issues, they indicate the strategic importance of these issues to corporate strategy and infuse an issue with value beyond the technical requirements of the task at hand. Thus, the issue’s purpose is enriched such that corporate identity is altered in some way (Ackerman, 1975; Selznick, 1957), and this influences how members interpret and respond to the issue (Dutton & Dukerich, 1991). Buffalo’s mission of goodwill generation among neighbors through environmental preservation and Sioux’s mission as an alternative energy company provided labels that drew attention to the environmental issue as a legitimate focus of organizationwide action. This labeling through mission statements was central to corporate identity, providing guiding reference points within which employees frame decisions and actions. The managers of the five reactive companies, lacking any such guiding reference point on environmental actions, continued (and still continue) to treat environmental issues as regulatory issues to be dealt with by the legal and compliance departments and as a risk and liability reduction problem. Although Royal and National issued environmental policy statements in 1989, these statements are not considered by managers as an integral part of the corporate mission. U.S. Oil, Farmers, and Northern still have not formulated environmental policy statements. Proposition 3: Managerial interpretations of environmental issues as opportunities are likely to be associated with legitimation of the issue as part of the corporate identity.

Information flow. Early in the evolution of the environmental issue, there were considerable uncertainties and ambiguities regarding the final dimensions of this issue in terms of the relationship between organizational actions and environmental outcomes, standards of enforcement, and public expectations. The managers of all companies in this study indicated that during this stage, even if they knew the right questions to ask regarding the business–natural environment interface, the information and knowledge necessary to answer these questions was hard to come by. Without this information, the financial and technical implications of a decision were difficult to assess. The proactive companies undertook detailed environmental audits and made this information available to all employees. Although the staff environmental assessment department was responsible for initial generation of information on the business–natural environment interface, subsequent knowledge generation also involved line managers at all levels, sparking an even faster pace of learning. Thereafter, line managers became recognized as primary sources of knowledge for dealing with environmental issues and for formulation of environmental strategies, while information support from the staff departments and from research activities was continued. The reactive companies, on the other hand, set about environmental assessment and audit actions to a limited extent only when environmental issues were perceived as

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regulatory in nature (in 1988) and in earnest after regulatory escalation (in 1993) when environmental issues became sources of major risk and liabilities. At all times, environmental issues were primarily dealt with by staff legal, public relations, and environmental assessment departments. These companies’ line managers were not involved in building an understanding of the business–natural environment interface and how to manage it; rather, their focus was on how to avoid accidents and minimize difficulties with the approval process. For these managers, environmental issues presented risks and liabilities and regulatory hurdles that would have to be overcome through assistance by the staff functions. Because line managers tend to emphasize economic and operational targets, while staff managers tend to emphasize issue interpretation and analysis, it is important to strike a balance of influence between line and staff units in formulating external affairs strategies (R. H. Miles, 1987). The reactive companies did not achieve this balance, as they kept environmental issues within the domain of staff units and thus failed to gather information on how these issues could be operationally addressed and on the economics of doing so. The proactive companies, on the other hand, achieved this balance through the use of such integrative devices as board-level committees, task forces, and rotation of staff officers from environmental assessment departments to the business units. This balancing of responsibilities for information support sparked processes of learning and knowledge generation on alternative strategies for reducing the environmental impact of the companies’ operations. For managers of the proactive companies, this alleviated the informational ambiguity that is an important determinant of threat perceptions of strategic issues (Jackson & Dutton, 1988). Proposition 4: Managerial interpretations of environmental issues as opportunities are likely to be accompanied by a balance of influence between line and staff functions in building information on the business–natural environment interface.

Managerial discretion. The creation of an organizational context that facilitates experimentation and provides discretion to managers (Hambrick & Finkelstein, 1987; Wood, 1991) is essential to the development of new frames of reference, as becomes necessary during the evolution of new strategic issues (Shrivastava & Mitroff, 1982). The proactive companies provided this context by altering patterns of authority, responsibility, and control to allow operating managers discretion in the use of budgeted funds to experiment with changes in material specifications, process modifications, waste-handling systems, operating policies, and new product development. Not only was environmental impact ameliorated, but cost benefits and patentable innovations were realized as well. The reactive companies did not provide any such discretion to their managers in dealing with the environmental impact of their operations. Consequently, the only major innovation that could be documented among these five companies is contaminated soil restoration technologies emerging from Royal’s research laboratory. This is consistent with Govindarajan’s (1986, 1988) findings that linked budgetary flexibility to improved managerial performance in high-uncertainty situations. The discretion provided to managers of the proactive companies apparently increased their

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sense of control in dealing with the environmental issue, alleviating the perception of issue uncontrollability associated with threat interpretations. Proposition 5: Managerial interpretations of environmental issues as opportunities are likely to be accompanied by discretion to take actions at the business–natural environment interface.

Control systems. During the second phase in the evolution of the environmental issue, Buffalo altered its employee performance evaluation systems to include specific and quantifiable environmental performance indicators. Under this system, equal weighting was given to environmental and economic performance indicators, consistent with the corporate mission of environmental leadership. Sioux, in addition to using economic performance criteria, incorporated measures of performance reflecting activity directed toward market-oriented environmental responsiveness. Although some of the reactive companies also included environmental performance indicators in their evaluation systems, the managers of these companies stressed that these indicators were quite subjective in nature and were given very little importance. Economic performance targets were the preeminent measures of employee performance, and managers were left uncertain about exactly what was expected from them in terms of environmental behaviors or outcomes. The incorporation of quantified environmental performance indicators in control systems removes the subjectivity and uncertainty associated with taking actions on issues whose dimensions are not clear. This explicit valuing of environmental performance eases the pressure on economic performance criteria, reducing the potential threat of loss for managers who are uncertain about the impact of environmental actions on the organization’s economic performance. Proposition 6: Managerial interpretations of environmental issues as opportunities are likely to be accompanied by a balance between the use of quantifiable environmental performance criteria and economic performance criteria in control systems.

Summary. Organizational influences on environmental issue interpretation are intertwined. One factor alone is not sufficient to create a particular issue interpretation, culminating in a specific environmental responsiveness strategy. Changed employee performance evaluation systems motivate managers to act, whereas information support and the availability of managerial discretion makes actions and decisions possible on emerging and uncertain issues. A line-staff balance is necessary to maintain the right amount of focus on both economic and environmental performance. Early response provides a nonthreatening time frame during which managers achieve comfort and familiarity with the business–natural environment interface, while issue legitimation provides the overall guiding frame of reference within which managers make decisions and take actions. Finally, outcomes of organizational strategies provide feedback to reinforce managerial interpretations.

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CONCLUSION Our study makes explicit the key dimensions differentiating organizational strategies for dealing with environmental issues and, in the process, highlights the need to go beyond mere description and categorization to development of a theoretical framework to explain the occurrence of these strategies. By isolating key variables related to managerial interpretations of the environmental issue and by revealing the organizational features accompanying their operation, our framework suggests where researchers should focus in trying to explain various environmental responsiveness approaches. In this study, we identify fundamental aspects of issue interpretation that are central to managerial cognitions and actions directed toward dealing with a domain dimension that until the very recent past has been considered an “externality” to the organization (Shrivastava, 1995). Identification of managers’ focus on the negative-positive, loss-gain, and uncontrollable-controllable dimensions of dealing with the environmental issue suggests mechanisms by which interpretations central to cognitions and actions relevant to this issue develop. Specifically, managers’ categorization of the environmental issue as a threat or an opportunity results in environmental responsiveness strategies consistent with those interpretations. Furthermore, the study adds to our understanding of organizations as interpretative systems by shedding light on a number of questions raised by Dutton and Jackson (1987) in their initial work on strategic issue diagnosis. The research reported here suggests that issue classifications endure over time and are strongly influenced by various aspects of the decision maker’s context. In this work, examination of the context within which these interpretations develop reveals a number of organizational factors accompanying the threat-opportunity labeling. Foundational among these were the firm’s strategic positioning on the issue reflecting both the timing of its response to the issue as it evolves (assessments of urgency) and the extent to which the issue is made central to the firm’s identity (assessments of criticality). Supporting contextual features were organization design decisions consistent with this strategic direction. Specifically, these reflected moves facilitating the flow of pertinent information throughout the organization, decentralizing decision making to place authority and responsibility at the most appropriate level, and fine-tuning control systems to ensure that targets and mechanisms were focusing attention and efforts in the intended direction. The recognition of these important elements highlights the relevance of theoretical paradigms focusing on adaptation through strategic issues management (e.g., Daft & Weick, 1984; Dutton & Dukerich, 1991) and structural reorientation (e.g., Miller & Friesen, 1980; Tushman & Romanelli, 1985). Thus, this research productively builds on existing theories of management and organizations to suggest elements of organization–natural environment alignment and begins to answer Shrivastava’s (1995) call for research considering the implications of ecocentrism for management theory. It should be noted that this study was limited to the Canadian oil industry, and thus, findings might be context specific to some extent. However, there are few reasons to

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suggest that the same industry in other national settings would adopt a widely different range of environmental responsiveness strategies. Although the specifics of different industry situations may change, the factors influencing issue interpretations and strategies are organizational and thus widely applicable. It is likely that the factors influencing corporate environmental responsiveness strategies discussed in this article are not exhaustive. Further studies in different industry contexts and in different regulatory regimes are bound to add to the understanding developed here. However, this framework provides a useful guide for further research as well as for practitioners seeking to make organizational changes and adaptations to more proactive environmental responsiveness strategies. Organizations that create a context within which their employees are influenced to embrace environmental issues as opportunities stand to reap significant benefits from a number of sources—lower costs of input materials, higher process efficiencies, lower energy use, waste reuse and recycling, differentiated products, and higher levels of corporate reputation and goodwill. Although it is too early to draw firm conclusions on the overall economic performance outcomes of proactive strategies of environmental responsiveness, it certainly can be argued that proactive strategies do not detract from competitiveness. This study focuses attention on a critical area of corporate responsibility with systemwide implications. The introduction of such ecocentric perspectives on organizations should allow us to begin to include preservation of the natural environment in definitions of organizational effectiveness.

APPENDIX Company Profiles (company names have been disguised) a

b

Royal Petroleum, classified as a major, is one of the largest integrated oil companies in Canada with annual sales revenues of around Can$10 billion and more than 10,000 employees. It is the subsidiary of a U.S. multinational company, one of the largest oil companies in the world. Royal started operations in the late 19th century, initially by procuring and marketing oil, and soon integrated backward into transportation and upstream activities. Even though Royal undertakes some environmental actions that may not be required by regulations, the primary motivation is to reduce risk. U.S. Oil, classified as a senior in the industry, is an upstream company with annual sales revenues of around Can$4 billion and more than 3,000 employees. It was founded during the early 20th century and is the subsidiary of an integrated U.S. multinational. This company has had a series of major oil spills and pipeline leaks over the past decade. As a result, it has undertaken an exhaustive environmental risk and liability assessment. Similar to Royal, this company’s motivation is to avoid huge public liability payments as well as adverse media publicity. National Petroleum was set up in the 1970s as a government-owned company. Until its privatization in 1990, it had accumulated huge losses due to high levels of inefficiency. During this phase, it undertook a leadership stance on establishing environmental assessment guidelines for the oil industry. Since privatization, the top management views any environmental actions not

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required by regulations as wasteful. This has caused frustration among managers from the previous regime who retain values of environmental protection. National is a major and has integrated operations with annual sales revenues of around Can$6 billion and more than 7,000 employees. Buffalo Oil, classified as a senior, has integrated operations with annual sales revenues of around Can$1 billion and 1,500 employees. It was set up during the 1950s as an oil exploration company and soon integrated forward into transportation, refining, and marketing operations. In 1981, Buffalo adopted a mission statement of “generating goodwill among its neighbors.” During the early 1980s, it became an industry leader in undertaking environmental audits, emissions reduction, waste recovery, and so on, long before the rest of the industry considered environmental protection an important issue. Sioux Oil, classified as an intermediate, is a downstream company with annual sales revenues of around Can$500 million and more than 1,000 employees. It was set up during the 1950s and has been an innovative marketer. In the late 1970s, it invested substantially in research facilities in tune with the new mission statement of becoming an alternative energy company. In 1980, Sioux became the first marketer of ethanol-blended gas in Canada. In 1981, it set up the first commercial North American plant to recycle used engine oil. It also established a network to collect used engine oil from gas stations and private garages. Sioux has invested in research into renewable energy sources. Farmers, classified as an intermediate, is an upstream company with annual sales revenues of around Can$300 million and more than 700 employees. Farmers began oil exploration during the early 1980s. Northern Resources, classified as a junior, is an upstream company with annual sales revenues of around Can$100 million and 400 employees. It began operations in the 1980s. Its founder and current president expresses belief in unhindered free enterprise and minimum government regulation. He emphasizes good corporate citizenship that involves contributions to charities and the arts. a. Company classifications within the industry are based on size in terms of a mix of sales and assets. b. Integrated companies are involved in the full range of industry activities, including exploration, production, refining, and marketing. Upstream companies engage exclusively in exploration and production, whereas downstream companies engage exclusively in refining and marketing activities.

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