The Price of Pollution

“I was interested in how activist groups were making the environment important for them as a company—not just as something they should think about because it affects all of our well-being, but because it’s something that could affect their bottom line,” he says. King, with his colleague Ion Bogdan Vasi, an assistant professor at Columbia University, set out to study both how activism impacts that bottom line and how it alters the way companies perceive financial risk related to the environment. The line from boycott to balance sheet, they found, is not as direct as they might have expected.

Two Kinds of Activism

Not all activism, King points out, comes from outside the company; sometimes employees or investors try to change a corporation’s policies from within. The activism that often garners the most media attention—through rallies, protests, and petitions—is called secondary activism because it is done by secondary stakeholders, people who are not directly involved in the company but feel the effects of its policies as a customer, neighbor, or concerned citizen. Activism by people directly involved in the firm— its employees, investors, and other main stakeholders—is primary activism. Both kinds, King hypothesized, could hurt firms financially.

King and Vasi wanted to find out not only whether these two types of activism can impact a corporation’s financials, but also whether they can change how a corporation thinks about its bottom line. To do that, they looked at what is called perceived environmental risk, or how much environmental risk a firm’s analysts believe it to have. (In this case, environmental risk represents the possibility that an environmental catastrophe or a company’s environment-related policies lead to a financial loss.)

“We were really interested in risk because that’s the language that corporate America uses,” King says. “You don’t make any type of decision in the corporate world unless you can explain the effect it’s going to have on the amount of risk a company faces.”

Earlier studies had shown that boycotts and protests lead some companies to adopt more environmentally friendly practices, while other companies appear to adopt green initiatives without fundamentally changing their policies. But previous work had not examined which changes in attitudes or perception might give rise to a change in policy. Because risk is such an important consideration in the corporate world, King and Vasi thought perceived risk might be a big part of what was making companies switch from polluters to planet-lovers.

To test their ideas, King and Vasi looked at how both kinds of activism affected the 700 largest corporations in the United States from 2004 to 2008. They gathered data about activism that originated within each company—such as shareholder resolutions—and without, as measured by media mentions of protests and other demonstrations. (Any protest that did not make the news, they figured, was probably not big enough to have much of an impact on the company.) They also collected data on each firm’s risk assessments and overall financial performance. In analyzing their data, the researchers controlled for factors like a company’s size, its research activities, and its record of pollution so they could isolate the effect of environmental activism on perceived environmental risk and financial performance.

Activism and Perceived Environmental Risk

Primary activism, it turned out, had a stronger effect on a firm’s perceived environmental risk than secondary activism, in part because it is driven by insiders, who analysts might assume have more detailed knowledge about internal policies and practices. For example, the potential costs of environmental litigation can be enormous. Although they rarely come up in a typical tallying of a company’s liabilities, investors may catch wind of potential problems before outsiders hear of them.

“Activism raises issues about practices these firms engage in that regular analysts or investors wouldn’t be aware of. People in the financial world don’t have time to do deep investigations of every company, or go to every plant and measure emissions,” King says. “By submitting a resolution to bring that information to the front of the agenda, shareholder activists are saying, ‘This is something that we should be concerned about, both as a planet and as a financial community.’”

Neither kind of activism, however, directly affected financial performance; firms did not lose money simply because of a protest. What King and Vasi did find, though, is that companies with higher perceived environmental risk fared worse financially. In this way, activism—especially activism by shareholders—had a more roundabout effect. It bumped up perceived risk, which in turn hurt the company’s bottom line. “Shareholder activists are indirectly leading to worse financial performance for firms because they lead analysts to see these companies as more risky,” King says.

King says this study along with his and others’ earlier work clearly shows how different types of activism influence corporations. “We know that boycotts and protests are an effective means of activism,” he says, “but it may be that their effectiveness in generating an immediate response from CEOs makes them less effective in increasing the long-term risk of the company.” Shareholder activism, on the other hand, often goes unnoticed by the general public, and slowly works its way through institutional channels rather than immediately grabbing the attention of—and eventually demanding action from—the company’s leadership. This gives it time to attract the notice of risk analysts, King says, who alter their assessments of the firm.

It is also possible these different types of activism influence firms’ environmental practices in the long term, King points out. Most companies feel pressured to go green, but the approaches can be vastly different. Some revamp their policies while others “greenwash,” or paint themselves greener than they actually are. “I would speculate that the institutional avenue for change may be fairly effective for creating lasting implementation of environmentally friendly policies,” King says, “whereas boycotts are effective at creating immediate change but they may also lead to greenwashing.”

Related reading on Kellogg Insight

Why Boycotts Succeed—and Fail: Corporate vulnerability and damaged reputations

Sustainability Is a Team Effort: Corporate sustainability works best when employees are stakeholders