Voluntary Standards Offer Reputation Insurance

This study examines the chemical industry’s Responsible Care Program and evaluates whether it improved member firms’ environmental performance relative to their peers. The authors find firms that adopt Responsible Care do not make environmental improvements faster than other firms-possibly because non-compliance is not punished. Yet, managers may still benefit by adopting such programs because they provide information on best practices, help promote a positive image and act as reputation insurance against negative events.

Background

The Responsible Care Program was implemented by the Chemical Manufacturing Association (CMA) in 1990 in response to declining public confidence in the industry (which fell from 30 percent to 14 percent approval from 1980-1990). The program outlines broad environmental and safety standards for managing facilities and interacting with the community, suppliers and customers. Though CMA members must adopt the standard and submit progress reports, companies choose how to achieve goals and non-compliance is not punished.

Findings

• Firms are more often members of CMA and take part in Responsible Care when they have: a) Better known brands or corporate names; and b) Higher levels of pollution compared to the rest of their industry sector.

• Firms participating in Responsible Care do not improve their environmental performance more than non-members in the industry. Firms that participate in Responsible Care improve their environmental performance no faster than they normally did. This suggests voluntary standards may be most effective when non-compliance penalties exist.

Implications for Managers

• Adopting voluntary standards like Responsible Care can provide a form of insurance on reputation. Firms faced with environmental damage charges can show stakeholders they followed accepted practices. Yet, firms should be careful since their reputation may be damaged if stakeholders find out they are not complying with the standard.

• Firms may reap additional benefits if they lobby their industry association to punish firms that do not comply with the industry standard. If the industry standard is seen as having “teeth”, it will not only improve profits for certified firms but also improve environmental performance of the industry.

Implications for Researchers

This article extends theoretical and empirical analysis of self-organized regulation to trade association-sponsored standards. We suggest research can explore why Responsible Care did not lead to improvements across firms since best practices would be shared? As well, did the program lead to improvements in specific firms, and if so what characterizes these firms?

Methods

This study looked at 3606 facilities belonging to 1500 firms in the chemical industry from 1987-1996. There were 160 CMA member firms that participated in Responsible Care. The sample consisted of 22,476 observations at the facility level and 12,829 observations at the firm level. Firm environmental performance was measured using data from EPA’s Toxic Release Inventory.