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4 Organizational Change and the Greening of Business News stories indicate that some major corporations have undertaken serious efforts to reduce their carbon footprints. However, there has been very little systematic research into why they have done this while other corporations in the same industries apparently have not. The chapter begins with two leading scholars of organizational change presenting some general principles that might offer explanations. They are followed by an industry expert who discusses the results of an annual survey of business execu- tives conducted by Johnson Controls, Inc., which reports on their attitudes about energy efficiency and the reasons they give for deciding whether or not to make investments in this arena. The following discussion, including contributions from people who have worked closely with business execu- tives on climate change issues, covers other possible explanations for these business decisions. These contributions together offer a rich set of plausible hypotheses about what affects “greening” decisions of businesses. One discussant considers recent legislation aimed at changing business behavior and concludes by noting the need for social scientific study of business deci- sion making to provide a basis for more effective legislation. INTRODUCTORY COMMENTS Andrew Hoffman University of Michigan Andrew Hoffman opened the session by emphasizing the importance of business organizations for supporting policy and for implementing so- 61

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62 FACILITATING CLIMATE CHANGE RESPONSES lutions. Although policy debates have been dominated by discussions of the setting of a price for carbon, he said, a price for carbon alone will not achieve desired goals. Prices must be accompanied by institutional, social, and cultural change. For example, although business and the market re- sponded well to the 2008 oil price spike, if the government had created the price spike, the response would not have been the same. In Ireland, a tax on plastic bags led to a 95 percent drop in their use. This happened not only because of the tax, but also through an associated change in norms, in which people who used plastic bags were considered loutish. Understanding how such a norm gets established is critical for understanding how markets will change to address climate change. He introduced the session by saying that the first two presentations would cover social science knowledge at the individual and organizational levels. These would be followed by a presentation on what happens in cor- porations and then a discussant comment. WHY DON’T WE ACT FASTER IN AN ENVIRONMENTALLY RESPONSIBLE MANNER? AN APPLICATION TO CLIMATE CHANGE Max Bazerman Harvard University Citing his book, Predictable Surprises (Bazerman and Watkins, 2004), Max Bazerman reported that most people could identify problems in their organizations that were known to be worsening but that the organization would not address. Climate change is a great example of this phenomenon. People are very slow on the uptake. Why don’t they act? There are cogni- tive, political, and organizational aspects, but his presentation focused mainly on cognitive biases, which are difficult to fix (Fischhoff, 1982). Several cognitive biases explain predictable surprises: 1. Positive illusions (it is not as bad as you think, there will be a tech- nological fix, etc.). 2. Egocentrism: Who should fix it, those who created the problem or those who will suffer? People take more credit than they deserve when things are going well. 3. Overly discounting the future—people take benefits now and let others pay later. 4. Do not fix it if you cannot tell it is broken—but by the time you can tell it is broken, it is too late to act. 5. Bounded awareness—concentrating on some information keeps

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6 ORGANIZATIONAL CHANGE AND THE GREENING OF BUSINESS people from seeing other things that are clearly there. The busier they are, the more they fail to see things that are plainly there. Organizational barriers to action include (1) structural barriers (e.g., the problem of “silos”); (2) dysfunctional leadership incentives (e.g., no reward for incurring costs now for benefits to future leaders; thinking it’s not my job to fix future problems now); and (3) failures of federal agencies to do their jobs, some of which can be traced to a failure to create signifi- cant campaign finance reform, which has led to money working against wise policies. Political barriers to action include the dysfunctional role that special interest groups play in preventing adoption of wise legislation. In the discussion, a participant asked if there is danger of not having the big event that gets people to attend to climate change. Bazerman said that good advice needs to be available when a disaster comes, because that’s when people will pay attention. He added that there may indeed be some big events. Another participant asked why some businesses see it as in their interest to plan for a low-carbon future, and others do not. Bazerman agreed that there are differences and that leaders do matter. A participant pointed out that a lot of political action was taken on the environment in the 196­­­­­­­0s and 1970s without a big crisis, suggesting that the rightward political shift in the nation has some responsibility. Another participant said that business leaders sometimes have “Aha!” moments. The example cited was Lord Brown at British Petroleum, who was said to have come to believe that climate change is happening when he was told that it is the reason he is losing his beachfront. ORGANIZATIONS, INSTITUTIONS, AND IDEAS Royston Greenwood1 University of Alberta Royston Greenwood said that harnessing the power of organizations is needed to deal with climate change, but that they are very hard to change. He offered three main points. First, organizations are socially embedded in an institutional context, which consists of the taken-for-granted ideas and values, often embedded in formal rules and policies that shape the way that people think and act. Because they are taken for granted, these ideas and values 1 Presentation is available at [url] http://www7.nationalacademies.org/hdgc/Organization al%20and%20Institutional%20Barriers%20Royston%20Greenwood%20Univ%20of%20 Alberta.pdf [accessed September 2010].

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64 FACILITATING CLIMATE CHANGE RESPONSES are regarded as normal and rarely explicitly considered. As an example, he reported that chief executive officers (CEOs) in the United States have more impact on the corporate bottom line than those in Germany or Ja- pan, and he gave two explanations for this difference. One is a culture of individualism—leaders in the United States are expected to act as strong individuals and to make a difference. The other is an underlying insti- tutional infrastructure that enables individualism, including distributed shareholders, boards of directors controlled by the CEO, and compensation arrangements focused on individuals. Greenwood described the institutional context as having three com- ponents or pillars: (1) regulative, (2) normative, and (3) cognitive. Most attention in the climate change debate is being given to the first, the regulative. But such an approach underestimates the importance of nor- mative and cognitive frames of reference (or “logics”). An example is the work of Rachel Carson (196­­­­­­­2), who undermined the use of the synthetic pesticide DDT by changing how people think about its consequences and by undermining its normative acceptance. After huge resistance, she even- tually changed national policy, but regulatory change followed change in cognitive and the normative context. In fact, focusing on the regulatory context can produce unintended dys- functions, such as (1) working to rule (a condition in which any specified rule becomes the maximum behavior), (2) rules being treated as nuisances with compliance becoming only ceremonial, and (3) government regula- tions becoming adversarial. In short, regulation has inherent limitations. As an example of differences in normative contexts, Greenwood as- serted that the “logics of action,” that is, the underlying normative and cognitive ways that people think about how senior corporate managers should behave, have gone from a stewardship logic (in which the interests of multiple stakeholders are considered as relevant) to a shareholder service logic (in which only the interests of shareholders are considered). This lat- ter logic is then underpinned by organizational structures and governance arrangements. An example is the linking of shareholder interests directly with those of the CEO through, for example, stock options. The corporate infrastructure gives the message that greed is good, and behavior changes accordingly. Changing this behavior implies a need to revert to the steward- ship logic. In sum, the institutional context creates practices that are resis- tant to change. The normative and cognitive pillars are the most difficult to change, but they often receive less attention than the regulative. Second, organizations are linked to the institutional context through organizational communities, such as industries, professions, occupations, and communities based on geographical proximity. These communities are important because they influence how corporations behave, especially when issues are unclear. The greater the ambiguity of an issue, the more

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6 ORGANIZATIONAL CHANGE AND THE GREENING OF BUSINESS an organization is influenced by its links to communities. Organizations look to their peers for guidance on how to understand and respond to issues. Change in the climate change debate may therefore depend on find- ing exemplars in an industry who can shape the “community” response either by example or by influencing the community through its formal associations. Looking at business communities may be informative when looking for ways to achieve change. Third, Greenwood noted the potential importance of accounting firms as part of the institutional infrastructure. They link shareholders to corporations through the audit. An interesting way by which the cli- mate change debate might gain traction would therefore be through the audit. For example, if regulators required that the carbon footprints of businesses be audited, such an audit would change the incentive systems in the businesses. There is evidence that the accounting profession in several countries is aware of this potential role and is developing appropriate train- ing programs. The important point is that change in corporate behavior cannot be a function of formal government policy only, but should be reflected throughout the regulatory framework. In the discussion, one participant pointed out that to get good envi- ronmental auditing, auditors need to be independent. Another participant noted the existence of huge corporate “spin machines” selling various mes- sages with evocative language, such as “clean coal.” Hoffman commented that the topic of organizational behavior is not popular in business schools, but it is very popular among business executives. Business school students think that they just need to come up with the right idea. Executives realize that the more important tasks are convincing people that it is the right thing and then getting them to do it. BUSINESS ACTIONS ON ENERGY EFFICIENCY Clay Nesler2 Johnson Controls, Inc. Clay Nesler spoke about the Johnson Controls Energy Efficiency In- dicator (EEI) survey, which includes responses from more than 1,400 ex- ecutives responsible for managing, reviewing or monitoring energy use in their organizations.3 Buildings are about 40 percent of the nation’s carbon 2 Presentationis available at http://www7.nationalacademies.org/hdgc/Survey%20Results% 20on%20Barriers%20to%20Change%20in%20Business%20Clay%20Nesler%20John%20 Controls%20Inc.pdf [accessed September 2010]. 3 Information on the survey is available at http://www.johnsoncontrols.com/publish/us/en/ news.html?newsitem=http%3A%2F%2Fjohnsoncontrols.mediaroom.com%2Findex.php%3 Fs%3D112%26­­­­­­­amp%3Bcat%3D94 [accessed August 2010].

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66 FACILITATING CLIMATE CHANGE RESPONSES footprint and efficiency pays for itself, yet investment does not flow there. So the survey asked the executives about their attitudes, priorities, concerns, investment plans, and the decision criteria they used. A total of 70 percent of respondents said that efficiency has never been more important, even in April 2009 when other economic issues were highly salient. This level of response was fairly consistent across commercial, industrial, and institutional buildings, although the high- est level of attention was in the last category. When asked about new construction, 34-38 percent of executives said that it will be built to a green building standard (e.g., Leadership in Energy and Environmental Design), and about 17 percent said buildings would be retrofitted to a standard. On average, 6­­­­­­­0 percent said they add green elements to their design and retrofit projects but without seeking certification. The average organization expected to save about 6­­­­­­­ percent from investments in energy efficiency. Nesler noted that when Johnson Controls does energy performance analyses for retrofitting buildings, it usually estimates 15-25 percent sav- ings. In their project to retrofit the Empire State Building, Johnson Controls expects to save 38 percent of energy, with a 3-year incremental payback. Nesler also noted a long-term trend to invest less in the commercial sector. Managers of institutional buildings were planning to invest more, but the commercial sector lags for many well-known reasons. Respondents were expecting to see new legislation, and thought incentives in such legis- lation will be highly influential in their purchase decisions. And 57 percent of respondents said that climate change is a significant influence on their organization’s energy efficiency decisions; 12 percent of the companies— mainly large ones—have public carbon reduction goals. According to the respondents, the main barriers to investing in energy efficiency were lack of capital (40 percent), long payback (especially among industrial sector respondents, who expect a 2-year payback on average) (30 percent), and dedicated attention from ownership. The average “hurdle rate”—the level of expected payback or rate of return that an investment must pass to be approved—is 2.7 years, or a 35 percent rate of return. The hurdle rate was 2.9 years in the commercial sector and 4.3 years in the institutional sector, even though state laws allow investments with up to a 15-20-year payback. In short, although these investments are low risk with great and measurable rates of return, they are still not being made. Nesler concluded by saying that there is increasing interest in energy- efficient investment among businesses, but investment has slowed. He ex- pressed the hope that policy certainty, new incentives, and new financing solutions would lead to a surge in private-sector investments.

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6 ORGANIZATIONAL CHANGE AND THE GREENING OF BUSINESS PANEL DISCUSSION Andre de Fontaine of the Pew Center on Global Climate Change, who is trying to get companies to join a business leadership council on climate change, spoke about what he has observed in corporations. He reported that senior leadership is key to a company’s involvement. Some companies have engaged recently in outreach to their entire workforce. For example, Alcoa has an online carbon calculator for employees to track their progress toward company goals, allowing them to compete if they so want. These goals are useful, especially if linked to action plans. United Technologies collects data on the carbon footprint of its facilities and uses the data in management. Toyota monitors and evaluates on the basis of British thermal unit, or BTU, used per vehicle produced. Companies are considering the cooperative benefits of efficiency, such as enhanced corporate reputation and better employee morale and attention to production processes. Some companies have set investment expense goals on an annual basis. Melissa Lavinson of Pacific Gas and Electric (PG&E) identified a few drivers of corporate activity: the regulatory environment, the competitive environment, and the geographic environment. She said that customer and employee influences also matter. PG&E has evolved over 20 years, begin- ning with a chief executive officer (CEO) who created an environmental ethic and culture. The CEOs who followed were less aggressive on this matter, but the ethic was sustained through the people and procedures that had been put in place. The current CEO has brought in scientists to engage with the senior management team to discuss climate issues. He decided that the industry had a responsibility to develop solutions. He wanted to create a “line of sight” for employees, that is, a way for them to see how they could be part of the solution in their everyday jobs. The company also addressed the need to make the business case even for people who did not believe in climate change. The company developed a vision and value statement and links decisions with it, as well as new standard routines to make the new orientation last. Nesler spoke more about the Johnson Controls project to renovate the Empire State Building The building today has hundreds of tiny offices, and the company that owns it wanted to attract larger and more up-scale ten- ants. The management company offered the building to the Clinton Climate Initiative (CCI), which said it needed an icon. The building owner wanted to prove that it makes good business sense to retrofit existing buildings and to create a replicable model for all large commercial buildings, so the Empire State Building was selected. All of the work will be in the public domain. The team that designed the retrofit program, which included Amory Lovins and the Rocky Mountain Institute, decided to remanufacture all 6­­­­­­­,500 of the windows, adding mylar film “tuned” to the side of the building each

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6 FACILITATING CLIMATE CHANGE RESPONSES window is on and filling the inner space with inert gas so that the windows will be super-insulated. The retrofit is expected to save 38 percent of energy, with a 3-year incremental payback. Johnson Controls, which is doing the retrofit, is guaranteeing the energy savings for 15 years. The owner says it would be irresponsible not to invest in this program. In sum, Nesler said that the real estate industry is starting to talk about its obligation to reduce emissions and the opportunity to save both energy and money. Hoffman asked the panelists three questions. The first was about strate- gies for change. He remarked that although giving the CEO an epiphany is one strategy, there had to be more. What are the main obstacles? In his research, he found that accounting departments tended to be the most resistant to green investments. Several commenters noted the importance of procedures and incentive structures within a company. Lavinson agreed about accountants, noting that managers come and go, but accountants stay and weather changes of CEOs, so they need to be convinced or to have their incentives realigned. Nesler said that leadership is critical to get the process started, but not enough to keep it going. For example, some companies institute a corporate sustainability report, which looks good for a couple of years but then runs out of gas. He said that the goals have to be embedded in the culture of the organization. For example, Caterpillar created a “lean manufacturing” program, which meant that the environ- mental program put an emphasis on reducing waste. This put energy on the scorecard. The company developed measures of the carbon footprint of every project. De Fontaine added that when Walmart started rating its suppliers on their carbon footprints, that created a lot of change. Hoffman then asked what happens when one company diverges from the rest of its industry. Lavinson said that in the electricity industry, a caucus of CEOs challenged the leadership of EEI, with some threatening to leave the institute. EEI’s national position on climate change went against the interests of some of the members, eventually leading to changes in EEI. The industry has an aging infrastructure, so it needs to make investments for a 30-year time frame. Executives are concerned that if the investments are bad, there will be trouble from their customers. Coal-heavy electric utilities are begin- ning to accept the view that change is needed. Nesler said that his company has invited its suppliers to disclose their greenhouse gas emissions publicly. There were very diverse responses, in- cluding a few suppliers who refused to respond at all. The company helped its suppliers learn how to do it. He said that Johnson Controls has seen that the things it does for environment are also good for its business and that other companies that track their emissions and manage their energy for a few years also learn that there are benefits both for the business and the environment. De Fontaine noted, however, that some companies, for

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6 ORGANIZATIONAL CHANGE AND THE GREENING OF BUSINESS example in the agricultural sector, get pressure when they get ahead of their customers. Finally, Hoffman asked how companies’ responses might change if suddenly there were a cap-and-trade system, or a carbon tax, or a re- newable portfolio standard. Lavinson replied that a renewable portfolio standard would tell her company how to reduce carbon, whereas cap and trade would let the company decide from a broader portfolio of options. A carbon tax would act like cap and trade in this respect. Nesler said that Johnson Controls already factors in the future cost of carbon in its decision making. The company thinks more is needed than cap and trade or a car- bon tax. There also need to be stronger building codes, appliance standards, incentives for retrofits, and renewable portfolio standards to get immediate emissions reductions. He said that the efficiency market is inelastic—there would be little impact on the demand for energy efficiency for any carbon price under $40 per ton. For that reason, a set of complementary policies is also needed. In the subsequent discussion, Charles Wilson asked about ways to ac- celerate the diffusion of innovation into business communities. Will stories do it? Are formalized mechanisms using peer groups necessary? Nesler said that Walmart has a Personal Sustainability Program that gets groups of employees to work together on activities that promote general well-being (not only about the environment). The idea is that taking action person- ally will help it spread. Following that idea, Johnson Controls, which has a “vision week” every year, devoted it to sustainability 2 years ago. The company identified 30 things to do at home, at work, and on the road, to improve sustainability and asked employees to do one thing in each cat- egory. The company challenged them by setting different businesses and regions against each other. The company had 100,000 people involved, and they continued after Vision Week ended. An online version of this personal sustainability challenge is available in the public domain at http://www. mygreenprint.org. Lavinson said that to get people to improve energy efficiency, codes and standards are by far the most effective. With some utility companies, it is hard to make significant inroads because of their business model. If a util- ity has a business model that is agnostic about saving energy versus selling it, it becomes an ally in addressing climate change. They have all the data they need. De Fontaine suggested that the most effective strategy is to make behavioral change automatic—to set lights to go off automatically, prevent thermostats from being set too high, and so forth. Susanne Moser, noting that dialogue between social scientists and busi- ness leaders happens even less often than between social scientists and policy makers, asked the panelists what they would ask from social science. Nesler replied that business makes up the social science as it goes along.

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0 FACILITATING CLIMATE CHANGE RESPONSES He noted that it would not design a new product without an engineer, yet it launched a worldwide employee program without consulting a behav- ioral scientist. He went on to cite several programs in businesses, at the state level, and in nongovernmental organizations—all invented in similar ways. He noted that companies go to the American Council for an Energy- Efficient Economy to share ideas. The group has stakeholders and a budget, and he believed it could be a great experimental ground and would be very open to social science involvement. Hoffman remarked that there are no incentives for social scientists to work with business. Social scientists have to translate their knowledge and make it accessible to business, but the incentives are aligned against that. Bazerman suggested that people with good ideas might be able to contact Nesler or Lavinson with a one-page précis. But he went on to note that for social scientists to publish, they need to run experiments. As a social scientist, he would want to suggest that a business try an idea on half its employees to produce a high-quality study. It would be possible to mix a high-quality experiment with a good demonstration project. WHAT YOU DON’T KNOW ABOUT HOW PROPOSED FEDERAL CLIMATE CHANGE LEGISLATION WOULD HARNESS CORPORATE AND INDIVIDUAL BEHAVIOR John Dernbach4 Widener University Law School John Dernbach began by saying that law is all about behavior. How- ever, those who draft legislation guess about how people and organizations will respond to what they are doing. For example, he drafted the Pennsylva- nia mandatory recycling law in 1984. It requires curbside recycling because practitioners all said to make it easy to comply. He said that the movement to behavioral economics can be seen in pro- posed federal legislation. In his view, the federal climate legislation creates a norm in addition to the regulations. He sees utility companies as a major obstacle because of state laws that encourage the consumption of energy. Companies that lead on climate change have multiple influences—what is good business, what is good for environment, what Walmart is doing, and so forth. These companies will have a competitive advantage, which will help reinforce the norm when the advantage is seen. Regarding federal climate legislation, Dernbach said that all the major bills have cap and trade as a centerpiece. This will raise the price of carbon, which will motivate individuals to efficiency and conservation, although 4 Presentation is available at http://www7.nationalacademies.org/hdgc/Comment_Public_ Acceptance_of_Energy_Technologies.pdfPg. 4-8 [accessed September 2010].

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1 ORGANIZATIONAL CHANGE AND THE GREENING OF BUSINESS measures to reduce the price impact on consumers would reduce this ef- fect. He emphasized that market imperfections will limit the effectiveness of the price signal because (a) consumers consistently undervalue efficiency and conservation savings, (b) there is a significant principal agent problem (e.g., in rental housing), and (c) the price signal is not sufficient to trigger the investment needed to get an 80 percent reduction in emissions. Also, as has been made clear in many presentations at the workshop, prices alone are insufficient to motivate individuals. Dernbach went on to note that these bills have a number of other provi- sions to deal with the market imperfections. One of the key behavioral pro- visions is a State Energy and Environment Development Account in H.R. 2454 that would fund energy efficiency programs, such as building codes, building energy performance labeling programs, and low-income commu- nity energy efficiency programs. The bill would also create a new Clean En- ergy Deployment Administration in the U.S. Department of Energy (DOE) that would publish goals for the deployment of such technologies as a zero net energy building stock and make financial products available to enable owners to make energy efficiency investments with reasonable payback pe- riods. It would allow DOE to offer bonuses to retailers or distributors for sales of best-in-class appliances; bounties for replacement of old, inefficient products; and reward manufacturers for producing new, super-efficient products. It would also support communication and rebate programs for water-efficient products. Both H.R. 2454 and S.B. 1733 would also address transportation planning, including encouragement of public and nonmo- torized travel, zoning changes, and travel demand management programs. Both bills would call on the U.S. Environmental Protection Agency (EPA) to study and then develop a product carbon disclosure program and report back on the results. They would also provide credits for reforestation and other activities to offset carbon emissions. Dernbach concluded that to make these proposals effective will require social science. What is missing in the legislation is an effort to fully engage the public. There is a need to use what is known about motivating human behavior to engage people nationwide. Environmental law has traditionally treated polluters as “other,” and this legislation follows that model. What is needed now is to engage everyone. In a brief concluding discussion, Baruch Fischhoff noted that the Food and Drug Administration and the National Cancer Institute both know they need behavioral science and have some staff on hand to make changes. EPA’s Science Advisory Board, however, chose not to protect its behavioral science and wants to restore its 1970 worker profile. EPA does not, in his opinion, even know who to hire to get the behavioral expertise it needs. The organization is not structured to do this. Dernbach replied that ide- ally the legislation would call for engagement and agency officials would follow that lead.

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