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Research published in the Strategic Management Journal shows that two unexpected factors prompt companies to improve their environmental reporting. The first is shareholder activism at a competitor firm, and the second is the threat of new government regulation – even if that regulation only affects other industries. The study was conducted by Erin Reid and Michael Toffel of Harvard Business School. Their goal was to determine which forces drive firms to undertake climate change activities. To conduct their study, the researchers used Carbon Disclosure Project data on S&P 500 companies. The data included CEOs’ identification of the risks and opportunities associated with climate change as well as official reporting on greenhouse gas emissions. SHAREHOLDERS (YOURS OR OTHERS’) DRIVE VOLUNTARY DISCLOSURE The authors found one of the most powerful influences on corporate strategy and reporting was shareholder resolutions at other organizations. For example, Greenpeace, a shareholder in Royal Dutch/Shell, launched a protest campaign against the company for its decision to sink the decommissioned Brent Spar oil storage platform. Not only did the shareholder resolution they filed address the Brent Spar situation – it also protested the industry practice of sinking decommissioned oil platforms into deep-sea ridges. The research showed that being directly targeted by a shareholder resolution more than doubled the chance a company would voluntarily disclose their emissions. And every shareholder resolution launched in the same industry further increases the chance a firm will report. REGIONAL REGULATORY CHANGES PROMPT CSR STRATEGY Companies also strengthened their CSR strategy and publicly disclosed more environmental information when the state in which they were headquartered began considering more stringent environmental regulations. The regulations didn’t have to be formalized – or even apply to a given company’s industry – to make firms feel pressured enough to change their practices. THE TAKEAWAY Companies should view activist shareholders not as outliers but as representatives of broader stakeholder interests. They should also view activist shareholders as early indicators of future political changes. Companies should address activist concerns sincerely and effectively before those activists wield influence with regulators and bring about cumbersome regulatory changes. Similarly, companies should keep an eye out for pending changes in legislation and regulation. Even if they currently target other industries, the changes might be indicative of regulations soon to affect your industry. IMPLICATIONS FOR RESEARCHERS Future research could more directly examine the attributions stakeholders ascribe to firms engaged in different CSR activities. Research could also evaluate how different forms and measures of CSR activities can affect firm value. Finally, examination of the managerial motives behind CSR activities is needed to determine whether managers employee CSR activities to gain insurance protection. Source: Paul C. Godfrey, Craig B. Merrill, and Jared M. Hansen. (2009). The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. Strategic Management Journal, 30: 425-445. Summary: Denny Kuruvilla and The Network Team