Corporate environmental performance: Revisiting the role of organizational slack

Highlights

• Absorbed slack has a negative impact on Environmental Performance (EP).

• Industry discretion, regulatory pressures, and EP aspirations bolster the positive impact of unabsorbed slackon EP.

• Industry discretion and EP aspirations weaken the negative relationship between absorbed slack and EP.

• Regulatory pressures accentuate the negative relationship between absorbed slack and EP.

Abstract

To date, there has been little agreement on the role of organizational slack in firms' Environmental Performance (EP). Drawing on the Behavioral Theory of the Firm (BTOF), we advance this line of inquiry by conceptualizing the distinct effects that absorbed slack and unabsorbed slack have on EP as well as how industry discretion, firm-specific regulatory pressures, and EP-aspiration levels moderate these effects. We test our hypotheses with a unique panel of 753 US public firms for the period 1991–2008. As hypothesized, our findings indicate that unabsorbed slack has a positive effect on EP, while absorbed slack has a negative one. Industry discretion, firm-specific regulatory pressures, and EP aspiration levels moderate these relationships in distinct ways. We discuss the implications of our research on managerial and policy decision-making.

Introduction

Institutional and competitive pressures force firms to manage and improve their environmental performance (EP), defined as “the outcome of a firm's strategic activities that manage its impact…on the natural environment” (Walls, Berrone, & Phan, 2012: 891). For instance, the US Sarbanes-Oxley Act requires firms to disclose potential environmental risks, whilst three of the ten UN Global Compact principles apply to the environment. Despite these pressures, firms vary substantially in their EP and to date, there is no general agreement about what explains this variation (Aguilera, Rupp, Williams, & Ganapathi, 2007; Darnall, Henriques, & Sadorsky, 2010; Dowell & Muthulingam, 2017; Hart, 1995; Hart & Ahuja, 1996; Henriques & Sadorsky, 1996; Kassinis & Vafeas, 2006; Sharma, 2000; Zyglidopoulos, Williamson, & Symeou, 2016).

An influential strand of the literature attributes this variation in firms' EP to organizational slack, a core concept of the behavioral theory of the firm (BTOF) (Cyert & March, 1963). This research views organizational slack, which we will simply refer to as “slack,” as excess unabsorbed financial resources that facilitate discretionary EP investments (Amato & Amato, 2007; Brammer & Pavelin, 2008; Chen, Zeng, Lin, & Ma, 2017; Chiu & Sharfman, 2011; Harrison & Coombs, 2012; Julian & Ofori-Dankwa, 2013; Orlitzky & Benjamin, 2001; Post, Rahman, & Rubow, 2011; Shahzad, Mousa, & Sharfman, 2016; Sharfman, Shaft, & Tihanyi, 2004; Waddock & Graves, 1997). Unabsorbed slack also may enable managers to reduce uncertainty and risk in the process of environmental management, and to regard environmental management as an opportunity (Liang & Liu, 2017; Sharma, 2000); to facilitate creative search of and experimentation with new environmental innovations (Bansal, 2005; Bowen, 2000; Bowen, 2002); to make managers less resistant to stakeholders' environmental demands (Arora & Dharwadkar, 2011; Berrone, Fosfuri, Gelabert, & Gómez-Mejía, 2013); and to enable firms to conduct environmental practices in multinational contexts (Aguilera-Caracuel, Guerrero-Villegas, Vidal-Salazar, & Delgado-Márquez, 2015). However, scholars found inconsistent results of the unabsorbed slack – EP relationship.

Heeding Bowen's (2002) call for more holistic, dynamic, and nuanced research on different forms of slack and EP, we hope to clarify the linkages between slack and EP by addressing three major concerns. First, extant research has not adequately incorporated some of the most important developments of slack research that unveil contrasting roles of different kinds of slack (Cheng & Kesner, 1997). Recent research suggests that slack absorption, i.e. the degree to which slack resources are tied up (or not) to specific firm operations, determines how slack influences firm behavior and outcomes (Tan & Peng, 2003; Voss, Sirdeshmukh, & Voss, 2008). Although some prior studies on slack and EP acknowledge absorbed slack, they neither conceptualize (e.g. Chen et al., 2017; Li et al., 2017) nor empirically examine (e.g. Bowen, 2002) potential differences in how absorbed and unabsorbed slack influence EP.

Second, several empirical studies use financial performance (FP) (e.g. ROA or ROE) as a proxy for slack (e.g. Brammer & Pavelin, 2006; Julian & Ofori-Dankwa, 2013; Leyva-de la Hiz, Ferrón-Vilchez, & Aragón-Correa, 2018; Waddock & Graves, 1997) even though the relationship between slack and FP itself is not very clear (Nohria & Gulati, 1996) and the research does not distinguish between unabsorbed and absorbed types of slack (Arora & Dharwadkar, 2011). Third, the research into the role of slack as an EP antecedent omits the potential effect of contingency factors. All these concerns are mirrored in the relevant empirical evidence, which remains inconclusive (e.g. Amato & Amato, 2007; Darnall et al., 2010; Dowell & Muthulingam, 2017).

We respond to these gaps by drawing on the BTOF and research on slack (Lecuona & Reitzig, 2014; Love & Nohria, 2005; Sharfman, Wolf, Chase, & Tansik, 1988; Singh, 1986; Tan & Peng, 2003; Voss et al., 2008) to incorporate a more nuanced understanding of unabsorbed and absorbed slack in investigating their distinct roles as antecedents of EP. In our baseline arguments, we posit that unabsorbed slack, being uncommitted and relatively easy to redeploy (Huang & Chen, 2010; Sharfman et al., 1988; Suzuki, 2018; Tan & Peng, 2003), allows managers to search for new environmental technologies or to initiate environmental projects, and therefore enhances EP. In contrast, we posit that absorbed slack, which by being enmeshed in organizational operations is difficult to identify, recover and redeploy, will diminish EP. We further deploy the BTOF to advance novel inquiries, by exploring how industry discretion, firm-specific regulatory pressures, and firm (EP) aspirations uniquely interact with unabsorbed and absorbed slack and moderate their relationships with EP in distinct ways. These hypothesized moderating effects are associated with managers' use of slack resources to expand their searches for solutions to organizational problems, to boost their efforts to achieve particular goals, and to reach aspired levels of goal performance, respectively.

We test our hypotheses drawing on a unique panel of 753 US public firms for the period 1991–2008. Our baseline findings suggest that unabsorbed slack enhances EP, while absorbed slack diminishes EP. Most of our hypotheses are supported and suggest that industry discretion, firm-specific regulatory pressures, and aspiration levels moderate these relationships in distinct ways. Our results are robust to different modeling and variable specifications.

Our contribution is twofold. First, we contribute to the broader literature investigating the antecedents of EP (Darnall et al., 2010; Dowell & Muthulingam, 2017; Hart, 1995; Hart & Ahuja, 1996; Henriques & Sadorsky, 1996; Paeleman & Vanacker, 2015; Sharma, 2000; Vanacker, Collewaert, & Paeleman, 2013) by showing that EP is a function of the interplay of internal resources and external pressures and goals. Second, we contribute to the more specific literature investigating the role of slack as an EP antecedent (Aguilera-Caracuel et al., 2015; Bowen, 2002; Chen et al., 2017; Leyva-de la Hiz et al., 2018; Sharma, 2000) by conceptualizing, measuring, and testing the effect of both absorbed and unabsorbed slack. We offer a fine-grained investigation into the moderating conditions under which the influence of unabsorbed and absorbed slack resources as antecedents of EP is enhanced or constrained. Contrary to extant research we do not detach slack from other key aspects of the BTOF, avoiding a partial application of the theory (Bowen, 2007). Our systematic view enables us to identify pertinent contingency factors from a potentially infinite number of spurious ones.