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18
Factors in Firms and Industries Affecting
the Outcomes of Voluntary Measures
Aseem Prakash*
Voluntary programs pertain to policies that firms adopt even though they
are not required to do so by law. In the past two decades, such programs
have gained prominence in many Organization for Economic Co-opera-
tion and Development (OECD) member countries (Gibson, 1999; Haufler, 2001~.
In the United States, the Environmental Protection Agency (EPA) has sponsored
more than 40 voluntary programs. In the European Union (EU), more than 300
such agreements can be identified, and in Japan 30,000 local-level programs
(especially agreements negotiated between a firm and a municipality) have been
reported (Borkey et al., 1998~.
Voluntary measures have been designed, monitored, and enforced by gov-
ernment agencies (the EPA's 33/50 and Project XL programs), nongovernment
groups (World Wildlife Fund's Forest Stewardship Council program), industry
associations (American Chemistry Council's Responsible Care program), and
individual firms (corporate environmental reporting).
They vary in their scope, targeting firms at the global level (ISO 14000),
regional level (the EU's Environmental Management and Audit System [EMAS]
standards), national level (Britain's BS 7750 standards), or subnational level
(Ontario's industry-specific pollution prevention projects). Within these levels
of aggregation, they could be specific to a firm (the compact between the Inter-
national Federation of Building and Wood Workers and IKEA), or an industry
(the mining charter of the International Council for Metals and the Environ-
*The author would like to express gratitude to Tom Dietz, Paul Stern, Dan Kane, and the two
anonymous reviewers for comments on the previous draft.
303
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FACTORS IN FIRMS AND INDUSTRIES
meet), or cut across industries (the Coalition for Environmentally Responsible
Economics initiative).
Voluntary measures could be market promoting (such as technical standards
that reduce transaction and production costs) or market restricting (such as ratings
by the Motion Picture Association of America regarding appropriateness of films
for children). Two key issues in studying them as a category of policy instruments
include under what conditions they arise (who demands and supplies them) and
how effective they are in improving firms' environmental performance.
EMERGENCE OF VOLUNTARY CODES
Demand for Voluntary Measures
The popularity of voluntary measures can be traced to the changing prefer-
ences and strategies of a variety of actors on how to deal with negative environ-
mental externalities. Voluntary measures enable regulators facing declining bud-
gets to implement their mandates at lower costs (see Randall, this volume,
Chapter 19~. Unlike command-and-control policies that these measures are sup-
posed to replace or supplement, regulators conceivably can achieve their policy
objectives without the accompanying acrimony.) Citizens also enjoy an in-
creased supply of environmental amenities without increased taxes. Voluntary
measures seem to be in consonance with the political climate that calls for "rein-
venting government" (Osborne and Gaebler, 1992) and encourages self-regula-
tion by the regulatees. The same political climate often leads many to view
governments as suffering from competency deficits, thereby making them lag-
gards in understanding complexities of modern technologies, let alone in regu-
lating them.
Firms demand voluntary measures because, compared to command-and-con-
trol regulations, they get greater operational flexibility in designing and imple-
menting their policies (National Academy of Public Administration, 1995; Ma-
jumdar and Marcus, 2001~.2 Voluntary measures that encourage firms to adopt
stringent pollution standards also may increase profits inasmuch as pollution
represents resource waste (Hart, 1995; Porter and van der Linde, 1995; for a
critique, see Walley and Whitehead, 1994~. For example, in the Green Lights
program (now merged into the Energy Star program), the EPA provides techni-
cal information about efficient lighting practices to participating firms. Many
firms have experienced substantial reductions in energy bills, often equivalent to
a 50-percent return on investment (Borkey et al., 1998~.
Voluntary measures may have marketing payoffs as well if they enable
firms to compete on environmental quality (Arora and Cason, 1996; Charter and
Polonsky, 1999) especially important for firms that seek to sell "green prod-
ucts" (see Th0gersen, this volume, Chapter 5~. Strategically, firms could attempt
to preempt and/or shape environmental regulations if they themselves craft vol-
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ASEEM PRAKASH
305
untary policies (Nehrt,1998~. If higher standards incorporated in voluntary mea-
sures lead to stringent regulations, technologically advanced firms could raise
the cost of entry for their rivals (Salop and Scheffman, 1983; Barrett, 1991~.
Furthermore, if firms may require their suppliers to adhere to voluntary pro-
grams (for example, Ford requiring its suppliers to become ISO 14001 certified),
joining a voluntary program may become a business necessity (see Rejeski and
Salzman, this volume, Chapter 2, on this subject).3
In demanding voluntary measures, firms are driven by other critical mo-
tives as well. Most importantly, firms often adopt them to seek legitimacy from
external stakeholders. Reputational benefits of being a good corporate citizen
serve their long-term profit and nonprofit objectives (Hoffman, 1997~. Of course,
it is difficult to quantify reputational benefits. Consequently, top management' s
commitment as reflected in their values, beliefs, and attitudes is important
because many voluntary measures cannot be justified on traditional economic
criteria that require estimating rates of return and comparing them with a compa-
ny's cost of capital (Prakash, 2000a; Nakamura et al., 2001~.
The need for legitimacy varies across industries. Arguably, firms in pollu-
tion-intensive industries or industries with bad reputations of complying with
environmental laws are more likely to demand voluntary measures (see Nash's
discussion on Responsible Care, this volume, Chapter 14~. In some cases, volun-
tary policies may be adopted simply because top managers consider them the
"right things to do." Thus, economic explanations are often underspecified in
explaining firms' responses to voluntary programs.
Voluntary measures also have their critics. Many environmental groups are
suspicious of voluntary codes, viewing them to be outside public scrutiny. U.S.-
based groups are accustomed to a policy environment shaped by the 1946 Ad-
ministrative Procedures Act (APA), which provides for public involvement in
the regulatory process. These groups fear that the processes of establishing vol-
untary codes are not adequately inclusive and transparent; this is a major concern
if such measures replace or dilute traditional policy instruments whose develop-
ment followed APA procedural guidelines. Voluntary measures also may lack
teeth: To monitor compliance, they often involve self-audits by regulatees, not
external audits by credible third or fourth parties.4 Furthermore, by making laws
and policy processes less adversarial, voluntary policies may lessen the recourse
to the judicial setting, the arena of choice of environmental groups who view it
as relatively "liberal" and certainly not "captured" by the industry (Vogel, 1995~.
Supply of Voluntary Programs
Voluntary measures can be supplied designed, established, and promot-
ed by governments (see Mazurek, this volume, Chapter 13), industry groups,
nongovernment groups, or individual firms. An important factor influencing
firms' incentives to adopt voluntary measures is whether their reputational bene-
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FACTORS IN FIRMS AND INDUSTRIES
fits manifest as public, impure public, or private goods.5 Based on the twin
attributes of consumption, excludability and rivalry, products can be classified in
four stylized categories: private goods (rival, excludable), public goods (nonri-
val, nonexcludable), common-pool resources (rival, nonexcludable), and impure
public goods (nonrival, excludable) (Ostrom and Ostrom, 1977; National Re-
seach Council, 2002~. Rivalry implies that it is difficult for two or more consum-
ers to simultaneously consume (or enjoy the benefits of) a given quantity of a
product. In contrast, multiple users can use nonrivalrous products such as roads,
movie theatres, and public parks at the same time. Excludability implies that
Consumer A, who has paid for the product, can prevent other consumers (who
have not paid for it) from enjoying a product's benefits. If excludability were not
possible, Consumer A would not be able to prevent "free riding" by others. As a
result, the consumer would have few incentives to pay for the product in the first
place. Thus, for the market mechanism to function, it is necessary that goods be
excludable (Olson, 1965; Hardin, 1968~.
Voluntary codes can be viewed as a category of impure public goods of two
kinds: toll and club (Prakash, 2000b; for an extended discussion on impure pub-
lic goods, see Comes and Sandier, 1996~. Toll goods such as movie theaters can
be unitized; that is, consumers can reveal their preferences by paying for every
additional unit. They are provisioned by levying a user toll (such as a movie
ticket). In contrast to toll goods, the discrete consumption units of club goods
cannot be priced (because it is difficult to estimate their marginal costs), and
membership fees (that are based on average costs) finance their collective provi-
sion. Many voluntary measures can be conceptualized as club goods whose
reputational benefits are nonrival and potentially excludable, and it is difficult to
price their discrete units.
From a firm's perspectives, voluntary policies create excludable benefits (re-
duce resource waste, shape regulations and so on) as well as nonexcludable bene-
fits (improve environmental quality), but impose private costs on them. Reputa-
tional benefits, often the key motivation to subscribe to a voluntary measure, are
often nonexcludable, spilling over to other firms. Therefore, making reputational
benefits excludable becomes a key issue in the institutional design. This can be
accomplished by establishing boundary features (such as participation logo or cer-
tificate) that enable stakeholders to differentiate adopting firms from nonadopters,
thereby transforming reputational benefits into excludable club goods.
However, akin to Olson's (1965) "privileged groups," leading firms unilat-
erally may supply voluntary clubs that create reputational benefits for the whole
industry. This is because the gains accruing to them are significant enough that
they are willing to tolerate free riding by others. For example, the Responsible
Care program has been designed, adopted, and promoted predominantly by large
chemical firms because they perceive themselves to be receiving most of the
goodwill benefits that the program generates for the chemical industry (Nash,
this volume, Chapter 14; Prakash, 2000b).
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307
As examined by Mazurek (this volume, Chapter 13), some voluntary mea-
sures (such as Project XL) that are supplied by government agencies grant regu-
latory flexibility to firms that join them. In return, firms often agree to adhere to
more stringent regulatory standards than those required by the statute. Thus,
firms reap excludable benefits (regulatory flexibility, better relationships with
stakeholders), but bear higher excludable costs. The problem arises as some stake-
holder groups, being skeptical of such business-government relationships, oppose
these policies. This reduces goodwill benefits accruing to firms, thereby making
these voluntary clubs less attractive to them. Consider the tepid response of U.S.
firms (as compared to European and Asian firms) to ISO 14000 standards. As of
March 2001, 6,261 Japanese, 2,400 German, 2,010 British, 1,441 Spanish, 1,420
U.S., 1,370 Swedish, and 881 Taiwanese facilities were ISO 14000 certified (ISO
World, 2001~. If controlled for the size of the economy, the low levels of American
acceptance become even starker. This voluntary code is sponsored by a nongov-
ernment organization, the International Organization of Standardization, which
seeks to promote uniform environmental standards across countries. To get the
ISO 14001 seal (the membership card to this club), firms are required to have a
third-party certification (at a sizable cost) of their environmental management sys-
tems. One would expect that the requirement of third-party audits would make ISO
14001 legitimate to stakeholder groups. Firms, of course, want these audits to be
protected by attorney-client privileges, lest these audits uncover incriminating in-
formation. Many environmental groups oppose granting attorney-client privilege
to these audits because firms may abuse this privilege. The EPA, therefore has, not
granted this privilege, and as a result, U.S. firms have been lukewarm toward ISO
14000 standards (Kollman and Prakash, 2001~.
DO VOLUNTARY CODES MATTER?
As with any policy instrument, voluntary codes should be examined in terms
of their efficacy. This can be done at two levels: first, their adoption rates, given
that firms are not obliged by law to join them, and second, how they influence
firms' environmental performance.6 The first dimension was discussed earlier in
terms of demand and supply aspects and how these affect adoption rates. In
operationalizing the second dimension, it is important to assess codes' impact in
relation to alternatives that is, to compare environmental performance cross-
sectionally (adopters versus nonadopters) and longitudinally (within adopters,
proadoption versus postadoption).
To provide a concrete example, take the case of the EPA's 33/50 program.
Under Section 313 of the 1986 Emergency Planning and Community-Right-to-
Know-Act (EPCRA), firms with manufacturing facilities in the United States are
required to submit annual reports on their releases and transfers of specified
chemicals. Because EPCRA also required the EPA to make these data available
to the public, the EPA developed a computerized database known as the Toxics
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FACTORS IN FIRMS AND INDUSTRIES
Release Inventory (TRI). To encourage firms to reduce the releases of 17 specif-
ic TRI chemicals,7 in February 1991, the EPA proposed a voluntary program
called 33/50. Under 33/50, firms voluntarily committed to reducing the releases/
transfers of these 17 chemicals by 33 percent by 1992 and by 50 percent by
1995, with 1988 as the baseline. The EPA contacted nearly 10,000 facilities, of
which 1,300 (13 percent) agreed to participate in this program. Thus, the adop-
tion rates were not high. However, the program did affect environmental perfor-
mance: 33/50 chemical releases/transfers reduced by 15.4 percent during 1988-
90, but by 46.9 percent during 1990-95 (1991 is the baseline because the program
was launched in 1991~. Furthermore, the releases/transfers of 33/50 chemicals
dropped by 46.9 percent during 1990-95 as opposed to a reduction of 25.3 per-
cent for TRI chemicals outside the purview of the program. Again, joining this
voluntary program seemed to have a positive input on environmental perfor-
mance (EPA, 1999~.
CONCLUSION
Voluntary measures are an exciting development in the environmental poli-
cy landscape. They are demanded and supplied by a whole gamut of actors.
Their acceptance among firms and stakeholders depends on how they cohere
with extant institutions, and more importantly, how managers perceive the costs
of adopting them in relation to their excludable reputational benefits. Thus, an
important factor in influencing their adoption rates is whether their institutional
design transforms reputational benefits from a public good to a club good. Fu-
ture research must carefully examine their efficacy on various dimensions in
relation to competing policy instruments.
NOTES
1 For reference, 70 percent of the EPA's decisions that reflect the command-and-control mode
are challenged in courts (Reilly, 1999).
2 Voluntary programs also create positive externalities such as generating awareness and dis-
seminating information about best environmental practices. Such externalities may not sufficiently
persuade firms to invest resources in adopting them. However, from a policy perspective, the pres-
ence of such externalities can serve as a powerful incentive for the regulators to promote them.
3 The corollary then is that sponsors of voluntary programs should focus on recruiting the "big
fish" that have extensive forward and backward linkages. Taking advantage of market power en-
joyed by such actors, their market power exercised through the value chain networks (that are in-
creasingly becoming the defining features of cross-border economic flows) can create significant
environmental multipliers. Also see Furger (this volume, Chapter 17).
4 Gereffi et al. (2001) identify four kinds of audits signifying increasing levels of credibility
with external stakeholders: first-party or internal audits, second-party audits done by managers from
the industry association, third-party audits by external auditors paid for by the firm, and fourth-party
audits by external auditors not paid for by the firm.
5 As pointed out earlier, monetary incentives reduced costs or increased sales/profits also
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ASEEM PRAKASH
309
may serve as motivators. However, many believe that because firms have exhausted opportunities for
reducing costs, voluntary measures need to be justified in terms of nonquantifiable benefits.
6 Though not discussed here, the costs of rulemaking, monitoring, enforcing, and sanctioning
(the so-called transaction costs) and the dynamic impacts on innovation and productivity also are
important in comparing the efficacy of various instrument types.
7 The rationales for targeting these chemicals were that: (1) they have significant adverse
impacts on health and the environment; (2) they were used in large quantities by facilities; (3) their
releases relative to their total usage were high; and (4) their usage as well as releases could be
reduced by employing pollution-prevention technologies and practices.
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Representative terms from entire chapter:
reputational benefits
