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Corporate Environmental Responsibility: A Legal Origins Perspective

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Abstract

In this study, we examine the determinants of corporate environmental responsibility (CER), as well as the relationship between legal systems and CER as measured by a unique set of global environmental cost data. Results of our analyses show that firms’ legal origins affect CER, which requires a long-term management perspective. Specifically, our results indicate that civil law firms exhibit significantly higher levels of CER than common law firms. In addition, results of an auxiliary test suggest that manager shareholding has a significant, nonlinear relationship with CER. The association between a firm’s legal origin and its CER performance remains robust after controlling for the effects of managerial ownership and issues related to endogeneity. Our findings imply that although the majority of corporate law studies in the past few decades provide support for the common law system emphasizing the maximization of shareholder value and investor protection, the civil law system stressing the maximization of stakeholder wealth and the importance of CER may become more influential in the coming decades as CER becomes central to firms’ operations.

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Notes

  1. A real-world example of CER is summarized in General Electric’s (GE) Sustainability Commitments Report. GE’s CER programs include dredging the Hudson River and removing sediment, engaging in water-related Kaizen-Blitz activities to reduce water consumption, optimizing energy use, reducing greenhouse gas emissions, and reducing air pollution excesses and reportable spills. GE’s CER activities also include programs that educate employees, local communities, and NGO members about the environment, health, and safety.

  2. Although several studies seek to determine the factors that affect CER activities, they investigate topics that are too narrow and specific to support an overall conclusion. For example, Eckberg and Blocker (1996) argue that conservative religious beliefs are negatively related to environmental concern. Using survey data from 17 interviews with professional sports teams and league executives, Babiak and Trendafilova (2011) suggest that strategic motives and institutional pressures are the main drivers of the adoption of green management practices. In contrast to this study, our study identifies more fundamental determinants of CER activities using global environmental costs data.

  3. A pyramidal ownership structure embodies a top-down chain of control in which firm owners are located at the top of the pyramid. In a multiple-share class structure, investors are classified into groups according to their voting practices. These structures allow managers to reinforce their control through shareholdings with superior voting rights (DeAngelo and DeAngelo 1985).

  4. Although some “dedicated” investors (e.g., large investors) often discourage myopic management decisions (Bushee 1998), minority shareholders and outside investors are typically more interested in short-term profits than the long-term performance or sustainability of the companies in which they invest. This short-term focus often induces management to make myopic decisions that discourage long-term investments (Porter 1992, Solomon and Solomon 1999, Talbot 2013). In turn, the lack of critical information for making long-term management decisions can harm firm value (Bainbridge 2006). Relative to civil law countries, the rights of outside investors and minority shareholders are better protected, and shareholders’ decisions are often given greater emphasis, than in common law countries (La Porta et al. 1998, 2008).

  5. La Porta et al. (1998) claim that when investor rights are well-protected, small investors may purchase corporate shares at sufficiently high prices to induce corporations to issue new shares and open the stocks to the public. High demand for corporate shares by shareholders can accelerate the decentralization of firms’ ownership.

  6. Sharfman and Fernando (2008) and El Ghoul et al. (2011) argue that firms can reduce the risks and costs of capital through long-run environmental management. Hart and Ahuja (1996) and Makni et al. (2009) further show that CER investment is necessary to improve a firm’s long-term performance and value, and establish a basis for sustainable growth.

  7. Modigliani and Miller (1958) and Hart (1995) further argue that the shares typically give (minority) shareholders the right to change directors and managers that impinge on investors’ rights and force higher dividend payments that reduce investment in long-run projects.

  8. Firms that engage in CER activities achieve the long-term goal of reputation building, which can positively affect both consumer purchases and investments in the company (Mohr et al. 2001). CER can also reduce the risks that firms face. Boutin-Dufresne and Savaria (2004) and Lee and Faff (2009) argue that low CSR/CER firms exhibit significantly higher idiosyncratic risk than do high CSR/CER firms. In addition, Albuquerque et al. (2013) find that low CSR/CER firms are subject to higher systematic risk than their high CSR/CER counterparts. Finally, CER activities can lower regulatory risk and reduce the cost of capital (Heinkel et al. 2001; El Ghoul et al. 2011).

  9. The foundational and descriptive research in the law and finance literature (e.g., La Porta et al., 1998) describes and analyzes the legal systems in which firms operate. Specifically, this research explores the legal protection of investor rights, the quality of law enforcement, and the relationship between ownership concentration and investor protection. Although we explore the significant differences of business environments, management philosophies, corporate governance structures, and investor protections in common law and civil law countries and use these to interpret the possible link between firms’ legal origins and their CER investments, some sub-dimensions of each legal system are not distinctly differentiated between civil and common law countries (see “Discussion”). Thus, we only focus on the clearly distinct and different attributes of legal systems for motivating the Hypothesis 1.

  10. Our untabulated results show a significantly negative relationship between our ratios of direct environmental costs to total assets and the environmental management scores from ASSET4 (Thomson Reuters). Our results indicate that environmental management scores are likely to be higher when firms have a lower ratio of environmental costs to total assets. Thus, the evidence suggests that our environmental cost data can be used as a proxy for CER level.

  11. The input/output model developed by Leontief (1970) uses information on the amount of resources required to produce a unit of output and where this output is sold. Trucost compiles a standard model by integrating the use and emissions of over 700 environmental resources.

  12. An online appendix with detailed descriptions for each component of direct environmental costs is available online at the Trucost web site (www.trucost.com).

  13. Our legal origin relationship with DEC/TA remains intact when we use robust standard errors clustered at the firm level.

  14. Although the Scandinavian civil law dummy and DEC/TA have an insignificant relationship in model 5 of Table 8 (with a t-value of -1.00), they have a statistically significant and negative relationship in all other main and robustness tests.

  15. The legal origin (i.e., common law, civil law, French civil law, German civil law, and Scandinavian civil law) dummies are exogenously determined. Thus, we do not need to use the two-step GMM estimation in Tables 6, 7, 8, and 9. However, Table 10 uses a two-step GMM because manager ownership might be endogenously determined.

  16. MAN_OWN and MAN_OWN_SQ are used as instrumental variables for the third and fourth lagged periods in the two-step GMM.

  17. We also find the same results when using year- and firm-fixed effects with robust standard errors clustered at the firm level. In addition, we find that the results are qualitatively identical in all tests after mitigating possible endogeneity problems in our untabulated GMM results.

  18. Table 11 supports the interpretation that managers of civil law firms have a greater tendency to make long-term investment decisions (i.e., CER investments) in order to enhance firm value and foster sustainable growth.

  19. The American oil company, Chevron, was fined $9.5 billion for its pollution of the Lago Agrio oilfield in the Amazon region.

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Acknowledgments

We are grateful for the helpful comments and suggestions from Iljonng Kim, Jiyoung Kim, Jeongsim Kim, Taeha Kim, Heonjae Song, Heejin Yang, Dongwoo Yoo, and all seminar participants of the CFE-CSR forum. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2014S1A5B8060964).

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Authors and Affiliations

  1. School of Economics and Management, Southwest Jiaotong University, No. 111, Section 1, North Erhuan Road, Chengdu, Sichuan, 610031, P.R. China

    Hakkon Kim

  2. College of Business, Korea Advanced Institute of Science and Technology, 85, Hoegi-ro, Dongdaemun-gu, Seoul, Republic of Korea

    Kwangwoo Park

  3. College of Economics, Sungkyunkwan University, 25-2, Sungkyunkwan-ro, Jongno-gu, Seoul, 110-745, Republic of Korea

    Doojin Ryu

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  1. Hakkon Kim
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Appendix

Appendix

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Table 12 Legal origins and countries
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Kim, H., Park, K. & Ryu, D. Corporate Environmental Responsibility: A Legal Origins Perspective. J Bus Ethics 140, 381–402 (2017). https://doi.org/10.1007/s10551-015-2641-1

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