Ó Springer 2006
Journal of Business Ethics (2006) 67:139–154 DOI 10.1007/s10551-006-9019-3
Corporate Political Strategy: An Examination of the Relation between Political Expenditures, Environmental Performance, and Environmental Disclosure
ABSTRACT. Two fundamental business ethics issues that repeatedly surface in the academic literature relate to business’s role in the development of public policy [Suarez, S. L.: 2000, Does Business Learn? (The University of Michigan Press, Ann Arbor, MI); Roberts, R. W. and D. D. Bobek: 2004, Accounting, Organizations and Society 29(5–6), 565–590] and its role in responsibly managing the natural environment [Newton, L.: 2005, Business Ethics and the Natural Environment (Blackwell Publishing, Oxford)]. When studied together, researchers often examine if, and how, corporations influence environmental policy decisions. Drawing from literatures on corporate political activity, corporate social and environmental performance, and corporate environmental disclosure, we develop and empirically examine two research questions concerning the relations between corporate political expenditures, environmental performance, and environmental disclosure. The questions are: (1) Do corporations that are poorer environmental performers spend more on political activities than their better-performing counterparts? (2) Is there an association between corporations’ spending on political activities and the extent of their financial report environmental disclosures? We investigated these questions through analyses of data we gathered on a sample consisting of 119 U.S. environmentally sensitive firms for the 2001–2002 election cycle. After controlling for firm size and specific industry effects, our tests reveal a significant, inverse relationship between firm environmental performance and political spending. This is consistent with the notion that U.S. firms with relatively poorer environmental performance records engage more intensely in corporate political activities as part of their overall strategic management of their relationship with the state. In addition, a significant and positive association between the amount of political spending and the extent of environmental
Charles H. Cho Dennis M. Patten Robin W. Roberts
disclosure suggests that environmental disclosure and political spending are both proactive, complementary tactics to strategically manage public policy pressure. If corporations’ strategies are intentionally designed to unreasonably limit their environmental responsibilities or to misrepresent firm environmental performance, then we argue that these activities reflect a significant lapse in ethical conduct. KEY WORDS: business ethics, corporate political strategy, environmental disclosure, environmental performance, political expenditures
Introduction Prior work in accounting argues that environmental disclosure is a strategic tactic used by corporations to help manage exposure to public policy pressure (Patten, 1992, 2002; Walden and Schwartz, 1997). In support of this claim Patten (2002), for example, presents evidence that differences in the extent of financial report environmental disclosure are negatively related to environmental performance. He documents that companies with higher levels of toxic emissions (size-adjusted) tend to make more extensive mitigating environmental disclosures. However, environmental disclosure is only one of a number of potential approaches that corporations can use to manage their exposure to political risks. In this paper, we explore an alternative strategic political tactic, corporate political activities, and attempt to determine first, whether consistent with environmental disclosure findings, companies that
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are poorer environmental performers spend more on these political activities than their better-performing counterparts. In addition, we also attempt to identify whether corporate election campaign spending is related to the concurrent use of financial report environmental disclosure. Hillman and Hitt (1999) argue that corporations employ separate, but overlapping, strategies for participating in the public policy process. If political spending and financial report environmental disclosure are both proactive tactics but are targeted at differing audiences, we would expect their use to be more complementary than substitutional (as found in Patten and Trompeter, 2003). This paper extends business ethics research regarding the role of corporations in the development of public policy and accounting research on corporate environmental disclosure in three ways. First, we situate firms’ environmental performance and disclosure within the broader context of overall corporate political activity. Previous accounting work documenting an inverse relation between firm environmental performance and the level of environmental disclosure hints indirectly that strategic and political considerations may at least partially motivate environmental disclosure policy. If this is true, we expect related corporate political activities to likewise reflect a negative relation to firm-specific environmental performance. We extend existing research by examining this relation. Second, research in corporate political activity finds that firms in environmentally sensitive industries tend to be politically active with respect to federal campaign contributions, presumably in order to decrease the likelihood of having unfavorable government policies enacted (Hoberg, 1990; Mahon and Kelley, 1998). No studies to date have examined the extent to which this alternative political approach for dealing with public policy pressures may be related to the use of financial report environmental disclosure. Third, we relate our findings to broader business ethics issues regarding the appropriateness of corporations’ involvement in the development public policy. Prior studies have raised ethical concerns over the extent of corporations’ involvement in politics because their degree of influence relative to other segments in society has grown dramatically over the years (Roth, 2002). In large part, corporations have used their influence to narrowly benefit
their shareholders, not to benefit broader society (Roberts and Bobek, 2004). Thus, in pursuing their own political agendas, corporations often support public policy decisions that harm other segments of society such as the provision of public goods (Roth, 2002) and the natural environment (Clawson et al., 1998).
Background and hypothesis development Suarez (1998) argues that the dominant position business holds in American politics (see Eismeier and Pollock, 1988; Smith, 2000) serves as a motivator for corporations to develop and implement political strategies that complement their overall business agenda (Suarez, 1998). Corporations tend to become politically active when they realize that their business interests may be affected by public policy deliberations (Suarez, 2000). Hillman and Hitt (1999) integrated the diffused literature on this topic into a comprehensive model of corporate political strategy formulation. Appendix A presents the Hillman and Hitt (1999) model as summarized by Roberts et al. (2003). Hillman and Hitt (1999) argue that corporations participate in the political process because they, like other interest groups, seek specific forms of policy or policy outcomes. According to Hillman and Hitt’s conceptual model, firms can use three different strategic approaches in their attempt to influence the policy process. First, an ‘‘information strategy’’ focuses on directly providing policy-makers with information on corporate views and desires. Second, a ‘‘financial incentive strategy’’ involves attempting to influence political outcomes by providing direct financial support to the decision-makers. Finally, corporations may choose to indirectly influence policy deliberations by gaining the support of members of the public who, in turn, are then expected to convey their desires to the policy makers. Hillman and Hitt (1999) label this approach as the ‘‘constituency-building strategy.’’ Hillman and Hitt (1999) further note that corporations may concurrently employ a variety of tactics within each strategy as a means of participating in the public policy process. Researchers question both the ethicality of corporations’ involvement in policy making (Clawson et al., 1998) and the efficacy of the
Corporate Political Strategy: An Examination resulting governmental regulations (Argandona, 2004). This study is specifically concerned with the relationship between corporate political activities and federal-level public policy with respect to environmental matters. Environmental regulations can substantially influence corporate operations, with the greatest impact on firms whose activities are considered to be environmentally sensitive.1 Given the strategic importance of environmental regulation, particularly in conjunction with the concurrent pressure applied by environmental lobbying groups, it is not surprising that firms from environmentally sensitive industries undertake visible, proactive political actions (Hoberg, 1990). These firms want to be viewed as good stewards of the natural resources they control (Cordano et al., 2004). A growing body of accounting research (e.g., Blacconiere and Patten, 1994; Patten, 1992, 2002; Patten and Trompeter, 2003; Walden and Schwartz, 1997) argues that financial report environmental disclosure is one of the methods corporations use to address exposures to public policy pressure. In support of this claim, several recent studies provide evidence that this disclosure appears to be used by companies as a response to negative environmental performance. To illustrate, Deegan and Rankin (1996) investigate the annual report environmental disclosures for 20 Australian companies prosecuted for environmental violations and find higher levels of positive, as opposed to negative, disclosure for all of the sample firms. Similarly, Patten (2000) documents that increases in disclosure of Superfund-related environmental exposures for a sample of U.S. companies were correlated with concurrent increases in the provision of other, offsetting environmental information. Perhaps most directly, however, Patten (2002) finds that, controlling for firm size and industry membership, companies with worse environmental performance as measured by size-adjusted releases of toxic chemicals tend to include higher levels of positive environmental disclosure in their 10-K reports. In each of these studies, the authors argue that corporations are using disclosure to offset the potentially increased public policy pressures arising from their poorer environmental performance. If through this disclosure strategy firms intentionally attempt to mislead policy makers and
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other stakeholders, we should consider these activities to be unethical (Neu et al., 1998). Beyond just being a reactive device, however, environmental disclosure may also be used as a proactive policy tool. Parker (1986, p. 76), for example, asserts that disclosure ‘‘might be used to anticipate or avoid social pressure.’’ Cormier et al. (2004) propose a model of environmental reporting, in which disclosures are made according to managers’ attitudes and perceptions towards various stakeholder groups. More directly, Patten and Trompeter (2003, p. 86) argue that ‘‘firms may believe that by projecting an image of environmental concern and awareness they can reduce the likelihood of having negative government actions initiated or passed.’’ The proactive use of financial report environmental disclosure, because it appears to be aimed at addressing general public perceptions as opposed to being a direct provision of information to policy-makers, can thus be argued as a constituency-building political strategy tactic. As noted above, Hillman and Hitt (1999) argue that corporations might simultaneously pursue tactics under more than one strategy in their attempts to influence policy. This study investigates another potentially effective proactive device for corporate participation in the public policy arena – providing direct financial support to legislators’ election campaigns (a financial incentive strategy tactic). The 1974 amendments to the Federal Election Campaign Act allow companies to support candidates for legislative offices by forming political action committees (PACs) that can legally provide candidates with campaign contributions. Both Mack (1997) and Hillman and Hitt (1999) argue that corporate PAC contributions are used by firms to attempt to influence policy outcomes. However, these campaign contributions must be disclosed to the U.S. Federal Election Commission (FEC), and information on corporate political spending is made publicly available through a variety of sources including, for example, the Center for Responsive Politics (CRP). A number of prior studies have investigated the use of PAC contributions within specific industries including defense (Fleisher, 1993), financial services (Kroszner and Stratmann, 1998; Romano, 1997), and public accounting (Roberts et al., 2003), among others. Studies have also investigated corporate PAC contributions related to Congressional consideration
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of tax legislation (Freed and Swenson, 1995; Roberts and Bobek, 2004). In general, these studies document that corporations appear to use PAC contributions as a means of participating in the political process, but that the extent of spending varies in systematic ways. There is considerable evidence that firms from environmentally sensitive industries also have been active with respect to election campaign spending. Eismeier and Pollock (1988) note, for example, that by 1984 PACs from the energy and natural resources industry already outnumbered those from other industries, and throughout the mid-1980s consistently ranked among the highest contributors to political causes. More recent evidence suggests this level of political involvement persists. For example, the energy and natural resources industry donated more than $20 million in PAC contributions during the 2002 election cycle (Center for Responsive Politics, 2004) and was ranked fourth for PAC hard dollar contributions made by industry groupings (FECInfo, 2004). The evidence presented above suggests that firms from environmentally sensitive industries may be using PAC contributions as a financial incentive tactic for influencing public policy deliberations. As noted previously, financial report environmental disclosure is also argued to be used as a method for participating in this process. If both of these activities are indeed driven by corporate concern with potential public policy actions, we would expect that, similar to the relation between environmental performance and environmental disclosure, worse environmental performers would make larger campaign contributions than their better-performing counterparts. In essence, these firms would appear to be attempting to improve their perceived environmental performance and ethicality by encouraging less stringent performance standards. Although these actions may improve the financial performance of the corporations, it harms both the public and the natural environment. Accordingly our first hypothesis is stated as: H1: The extent of corporate political spending by firms in
environmentally sensitive industries will be negatively related to firm environmental performance. Beyond just examining the relation between environmental performance and corporate political
spending, however, we also attempt to determine whether the extent of this spending is associated with the concurrent use of environmental disclosure as alternative proactive devices for addressing political exposure. To date, there has been very limited disclosure-related research into the potential relation between alternative methods corporations use for addressing their political exposure and the extent of firm disclosure. An exception is Patten and Trompeter (2003), which examines whether prior levels of financial report environmental disclosure mitigate the use of earnings management as a tool for addressing exposures to political pressure. Patten and Trompeter (2003) study this issue relative to chemical firm reactions following the 1984 Union Carbide chemical leak at its plant in Bhopal, India, and find that companies with higher levels of pre-event environmental disclosure exhibited significantly lower levels of earnings management following the accident. The authors thus conclude that disclosure and earnings management appear to be alternative, or substitute tools for participating in the political arena. Patten and Trompeter’s (2003) results suggest that corporate political spending might also be expected to be used as an alternative to environmental disclosure as a means for addressing political exposure. However, as noted by Patten and Trompeter (2003) disclosure (in their case) was a proactive tool whereas the earnings management was a reactive device. Drawing from Hillman and Hitt (1999), we argue that, as proactive public policy participation tools, financial report environmental disclosure and corporate political activities represent separate strategies driven by related strategic goals. If true, a complementary, rather than a substitute relation between firm-specific levels of environmental disclosure and political spending would be expected. Given the ambiguity with respect to expectations, we state our hypothesis regarding the relation between political spending and financial report environmental disclosure in null form: H2: There will be no relation between the extent of cor-
porate political spending by firms in environmentally sensitive industries and the extent of financial report environmental disclosure.
Corporate Political Strategy: An Examination Research method and analysis
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Descriptive statistics
Sample selection To be included in this study, sample firms had to meet the following criteria: 1. They had to be listed in the 2002 KLD Research & Analytics, Inc.’s ratings of corporate social performance (used to assess environmental performance and discussed below). 2. They had to have a primary standard industry classification (SIC) code of 13xx (oil exploration), 26xx (paper), 28xx (chemical and allied products), 283x (pharmaceuticals), 29xx (petroleum refining), or 33xx (metals). 3. They had to have a 2001 fiscal year 10-K report available on the Security and Exchange Commission’s EDGAR database. A total of 119 firms met all three criteria and thus constitute the final sample. The largest concentration of these companies, 57 firms, was from the 28xx (chemical and allied products) industry, although 29 of these were 283x (pharmaceutical) companies. The sample firms ranged in size (based on 2002 revenue levels) from $3.5 million to $178,909 million, with a mean (median) of $8,754.1 million ($2,639 million). Summary data on the sample firms are provided in Table I. In addition, a list of the sample firms is presented in Appendix B.
Corporate political spending We use the CRP database on political spending to identify firm-specific campaign contributions made to Senators and members of the House of Representatives for the 2001–2002 election cycle. Firmspecific amounts of corporate political spending for our sample firms ranged from 0 to $736,200 with a mean of $70,190.
Environmental performance Although a number of external corporate social performance evaluations have been published over the past 30 years, most have been limited to a
n (sample size) Number of firms in industries Oil/gas extraction (13xx) Paper (26xx) Chemical and allied products (28xx) Pharmaceuticals (283x) Petroleum refining (29xx) Primary metal industries (33xx) Firm size (2002 venues) Mean Median Standard deviation Corporate political spending Mean Standard deviation KLD environmental concern ratings Mean Standard deviation Environmental disclosure content analysis score (max=8) Mean Standard deviation
119 25 15 28 29 9 13 $8754.1 million 2639.0 million 20,202.3 million $70,190.0 134,190.6 0.82 1.242
2.09 1.756
relatively small number of companies, or have focused on only smaller subsets of performance. In addition, Stanwick and Stanwick (1998, p. 201) have called for an examination of ‘‘other variables which could be used as proxy for environmental performance.’’ However, since 1994 the independent ratings company KLD Research & Analytics, Inc.2 (KLD) has maintained a database that appears to overcome these problems. KLD independently rates hundreds of companies traded on U.S. stock exchanges in terms of their social performance across a range of dimensions related to stakeholder concerns. The company draws upon a variety of sources to capture relevant social performance data (Waddock and Graves, 1997; Hillman and Keim, 2001). Because the KLD database provides a quantifiable and enhanced corporate social performance measure and preserves its independent rating system (see Hillman and Keim, 2001), the KLD data has been used in a growing body of largely managementbased U.S research on corporate social performance issues (e.g., Graves and Waddock, 1994; Griffin and Mahon, 1997; Greening and Turban, 2000; Ruf
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et al., 2001; Waddock and Graves, 1997). Given the apparent strengths of the KLD ratings, we use this database to identify environmental performance for our sample firms. KLD separately assigns strengths and concerns across eight social performance categories or ‘‘screens.’’ These include community, corporate governance, diversity, employee relations, environment, human rights, product and other (KLD, 2003). This study focuses exclusively on the environmental performance screen data. KLD analyzes corporate environmental performance strengths and concerns based on an extensive assessment of each company’s environmental management, planning and impact assessment, utilization of resources, compliance with applicable laws and regulations, and emissions. High strength ratings are given to firms that (1) engage in exceptional environmental planning; (2) take initiatives regarding environmentfriendly use of natural resources; and/or (3) have established procedures to minimize the environmental impact of their operations. High concern ratings are given to companies that (1) reveal poor compliance records with environmental laws and regulations; (2) emit hazardous or toxic substances in large quantities; (3) fall behind their industry competitors in implementing preventive measures to reduce environmental impact; and/or (4) generate a significant portion of their revenues from products or services that negatively affect the environment. KLD assigns a score of zero or one for each of the strength and concern areas included in its environment screen (see Appendix C for a list of the different strengths and concerns of the environment screen). Because our focus is on the degree to which environmental performance impacts exposures to the political process, we use the environmental concern ratings as our measure of performance.3 More specifically, KLD scores from 2002 were used for our comparisons with the 2001–2002 political spending. Sample scores ranged from 0 (i.e., no environmental concern) to 5 (i.e., high environmental concern) with a mean score of 0.82.
Environmental disclosure Consistent with Patten and Trompeter (2003), we use an eight-item content analysis scheme to identify
the extent of sample firm environmental disclosure. Content analysis (see, e.g., Wiseman, 1982) involves reviewing the financial report for the presence or absence of statements related to environmental issues. The specific areas examined for in this study (drawn from Patten and Trompeter, 2003) are identified in Appendix D. Similar to Patten and Trompeter (2003), we identify disclosure in the 10-K reports for the year prior to the year of corporate political spending (i.e., 2001), as this is the information that would have been publicly available during the political spending cycle. Actual content analysis scores ranged from 0 to 6. The mean disclosure score for the sample was 2.09.
Analysis We use multiple regression analysis to test the first hypothesis. However, because political campaign spending, our dependent variable, cannot be negative, we use Tobit analysis to estimate our regression model (see, e.g., McDonald and Moffitt, 1980). Our primary concern is to identify whether, consistent with results for financial report environmental disclosure, poorer environmental performance is associated with higher levels of corporate political spending. To test this relation we use each firm’s total political spending (PolSpend) during the 2001– 2002 election cycle as the dependent variable and the firm’s 2002 KLD environmental concern rating (designated as EnvPerf) as an explanatory variable. Because higher KLD concern scores indicate worse environmental performance, a positive relation between the performance measure and the extent of corporate political spending is expected. Patten (2002) notes that both firm size and industry classification are factors associated with the extent of financial report environmental disclosure, and as such, had to be controlled for in his analysis of the relation between disclosure and performance. It seems likely these factors might also be expected to influence corporate political spending. As argued by Watts and Zimmerman (1986) large firms are generally assumed to be more visible to policy makers and thus have an incentive to participate more extensively in the political process. Further, small firms, knowing that their larger counterparts must make efforts to address public policy pressures, may
Corporate Political Strategy: An Examination ‘‘free ride’’ on the spending of the bigger companies. Finally, although there are legal restrictions on the extent of political contributions any single company can make, larger firms can be assumed to have greater discretionary resources for these activities than smaller companies. All of these factors suggest that corporate political spending by larger firms will be higher than comparable spending by smaller companies. Separate industry effects might also be anticipated. While the industry groups included in this study are assumed to face higher environmental scrutiny than other industry classifications, other types of legislative pressure may vary within our sample industry selections. Of particular concern in this analysis is the inclusion of pharmaceutical companies. In addition to the extensive environmental concerns these companies face, pharmaceutical firms must deal with higher levels of political review related to product development and authorization. Accordingly, it seems plausible that these firms could be expected to make political contributions that are driven by factors other than environmental scrutiny. We control for potential political spending impacts by including Size (company revenues for 2002) and Pharm (one/zero indicator variable where one identifies companies whose primary SIC code is 283x) independent variables.4 Each of these control variables is expected to be positively related to the extent of corporate political spending. Overall, our regression model is stated as: PolSpendi ¼ a1 þ B1 EnvPerf i þ B2 Sizei þ B3 Pharmi where PolSpendi = the election cycle 2001–2002 political spending by firm i; EnvPerfi = the 2002 KLD environmental concern score for firm i; Sizei = the 2002 revenues for firm i, and Pharmi = one if the firm has a primary SIC code of 283x, and zero otherwise. Our second hypothesis is tested by computing correlation statistics, both parametric (Pearson product–moment correlation) and non-parametric (Spearman’s rho), for the relation between corporate political spending and financial report environmental disclosure content scores.
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Results Table II presents the results of the Tobit analysis. As indicated in the table, both the Size and Pharm control variables are positively and significantly related to corporate political spending. These results suggest that during the 2001–2002 election cycle larger firms had higher political spending than smaller firms, and companies in the pharmaceutical industry contributed more than firms from other environmentally sensitive industries. More importantly, however, the EnvPerf variable is, as expected, positively related to the amount of corporate political spending. This variable is significant at the p = 0.003 level, one-tailed. These results thus provide evidence that, consistent with prior results for the relation between environmental performance and financial report environmental disclosure, an inverse relationship exists between firm environmental performance and levels of political spending, after controlling for firm size and other contribution motivations.5 Our second test examines whether the extent of prior 10-K report environmental disclosure is associated with the level of political spending by firms from environmentally sensitive industries. Table III presents correlation coefficients for the relation between financial report environmental disclosure content scores and the level of corporate political spending. As noted in the table, the variables are positively correlated and both parametric and nonparametric tests indicate that the relation is statistically significant. The Pearson r measure (parametric) is significant at the p = 0.001 level while the Spearman’s rho statistic (non-parametric) shows significance at p < 0.001. Both of these significance levels are based on two-tailed tests. Thus, results indicate that rather than being substitutes, financial report environmental disclosure and corporate political spending appear to be complementary tools used by firms from environmentally sensitive industries for addressing their exposure to public policy pressure. Additional test for rationality of corporate political spending In order to provide insight into the potential motivations behind firms’ decisions to use financial
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TABLE II a
Results of Tobit model regression analysis testing the relation between corporate political spending and environmental performance Number of observations Pseudo-chi-square statistic Pseudo-R2 Parameter estimates Variable Predicted sign Intercept None EnvPerf (+) Size (+) Pharm (+)
119 38.250 0.389 Parameter estimate )100355.08 42279.00 4.42 100023.20
t-statistic )3.827 2.856 5.427 2.586
Statistical significance* 0.001 0.003 0.000 0.005
a
The Tobit model is:PolSpendi ¼ a1 þ B1 EnvPerfi þ B2 Sizei þ B3 Pharmi where PolSpendi = the election cycle 2001–2002 political spending by firm i; EnvPerfi = the 2002 KLD environmental concern score for firm i; Sizei = the 2002 revenues for firm i, and Pharmi = one if the firm has a primary SIC code of 283x, and zero otherwise. * Significance levels are based on a one-tailed test for the EnvPerf, Size, and Pharm variables.
TABLE III Correlation between corporate political spending and financial report environmental disclosure content scores Correlation coefficient
Statistical significance*
0.311 0.445
0.001 0.000
Parametric (Pearson r) Non-parametric (Spearman’s rho) *
Significance levels are based on a two-tailed test.
incentive strategies (i.e., making PAC contributions), we conduct further empirical tests. Similar to the methods used by Roberts et al. (2003), we examine PAC contributions made by our sample firms to individual federal legislators during the 2001–2002 election cycle and focus our investigation on their rationality. Based on the corporate political strategy literature description of corporations as political market participants (e.g., Grier et al., 1990; Grier and Munger, 1991; Hillman and Hitt, 1999), we posit that firms in environmentally sensitive industries strategically allocate political expenditures to a particular, targeted group of influential senators and members of the House of Representatives (hereafter, the ‘‘House’’). One common measure to identify such legislators is membership on pertinent
committees (see Grier et al., 1990; Grier and Munger, 1991 for extended discussions). The 2002 National Environmental Scorecard published by the League of Conservation Voters6 notes ten congressional committees broadly related to the environment. From that list, we identified four specifically dealing with environmental policymaking and label them ‘‘environmental committees.’’ These are the Senate Energy and Natural Resources Committee, the Senate Environment and Public Works Committee, the House Energy and Commerce Committee and the House Resources Committee. We first test whether our sample firms made significantly higher political contributions during 2001–2002 to members of the environmental committees7 than to other senators and representa-
Corporate Political Strategy: An Examination tives. Evans (1991)argues that committee leadership usually allows for a relatively higher influence and authority over other committee members. Therefore, to further test the rationality of political expenditures incurred by our sample firms, we next compare the PAC contributions received by environmental committee chairmen and vice-chairmen to PAC contributions received by other committee members. Table IV presents the results of our additional analyses. As highlighted in the table, the average total of PAC contributions from our sample firms to environmental committee members was $20,644. In contrast, other senators and representatives, on average, received only $13,063. The two means are significantly different (p = 0.001, one-tailed). As further noted in Table IV, the average total of PAC
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contributions to environmental committee leadership was $42,600 while other environmental committee members received $19,698, on average. This difference is statistically significant at p = 0.033, one-tailed. The findings summarized in Table IV provide evidence that firms operating in environmentally sensitive industries make strategic and rational allocations of their political expenditures. That is, they appear to target their PAC contributions to congressmen presumably influential in the debate over environmental legislation and policy.
Discussion and conclusions U.S. corporations that operate in environmentally sensitive industries are keenly interested in strategi-
TABLE IV Comparisons of means for PAC contribution dollars made by firms operating in environmentally sensitive industry between environmental committee members and non-members (Panel A); environmental committee leadership and other members (Panel B), during 2001–2002 Panel A – Environmental committee members versus non-members; n = 575 Environmental Environmental committee committee members non-members Mean PAC 20,644 (27,286) 13,063 (19,850) contributions received from firms operating in environmentally sensitive industries during 2001–2002 Panel B – Environmental committee leadership versus other members; n=121 Environmental Environmental committee committee leadership other members Mean PAC 42,600 (49,893) 19,698 (25,854) contributions received from firms operating in environmentally sensitive industries during 2001–2002
t-Statistic
Statistical significance*
)3.428
0.001
t-Statistic
Statistical significance*
)1.856
0.033
Standard deviations are reported in parentheses below the means. The t-statistic is for the t-test on the difference in mean scores. * Significance levels are based on a one-tailed test.
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cally managing their exposure to political risk. Prior work in accounting investigating the relation between environmental performance and environmental disclosure (e.g., Patten, 2002) finds that firms with worse pollution records make more extensive mitigating environmental disclosures than firms with better-pollution performance. Thus, disclosure is argued to be a strategic tactic used by these poorer performing firms to help manage political risk. In environmentally sensitive industries, firms’ environmental disclosures often frame their environmental performance as one of compliance with existing federal regulations. Federal regulations, then, represent societal expectations for firm environmental performance. Thus, firms can manage environmental performance and environmental disclosure risk by attempting to influence the types and extent of federal environmental regulation. Prior research argues that the levels of firms’ federal campaign contribution and lobbying expenditures provide evidence that corporations are proactively managing their political risks. In this paper, we investigated the use of political expenditures by firms in environmentally sensitive industries as an additional strategic tactic that is employed to manage environmental regulatory risk. We examined relationships between political expenditures, environmental performance, and environmental disclosure for a sample of 119 U.S. firms from environmentally sensitive industries for the 2001– 2002 election cycle. Our analysis found a significant negative relationship between firm political spending and environmental performance. Thus, similar to prior results from studies of environmental disclosure, our findings support the notion that poorer environmental performers undertake additional political tactics to manage their relatively greater political exposure. We also found a significant positive association between the extent of political spending and the extent of environmental disclosures made by our sample firms. This finding supports the conjecture that environmental disclosure and political spending are complementary strategic tactics that firms use to manage environmental public policy pressure.
We argue that these empirical findings also point to an ethical issue for managers of environmentally sensitive firms. The evidence from this study and prior studies show a pattern in which firms with poorer environmental performance records try to gloss over their performance by making extensive and opaque disclosures and/or become more actively engaged in corporate political activity as a way to influence the passage of favorable environmental legislation. If these business strategies are intentionally designed to attempt to unreasonably limit a firm’s environmental responsibilities or to misrepresent their environmental performance, then we argue that these activities reflect a significant lapse in ethical conduct. Ethical problems related to disclosure could be improved, in part, by requiring that external auditors attest to the accuracy of firms’ disclosures. As many other researchers have pointed out, corporate political influence is a systemic issue that is not easily addressed. Government regulations such as the Lobbying Disclosure Act of 1995 at least provide some degree of transparency. The findings of our study are limited to only one election period. In general, we assume that the level of political pressure with respect to environmental matters was relatively low during this election cycle. For example, a review of the Wall Street Journal Index indicated that no major environmental policies or changes were being debated in either period. The extent to which the findings reported for this study would hold in periods of higher public pressure relative to environmental matters cannot be determined. Future research may extend our initial work on several fronts. Although we found empirical associations that are consistent with our conjectures, case-level analysis would be beneficial in the further development of corporate political activity work dealing with environmental issues. Lastly, future archival studies may refine our tests by isolating the timing and specific recipients of firm’s political expenditures to better understand the rationale and test the effectiveness of firm strategies.
Corporate Political Strategy: An Examination Acknowledgments The authors would like to thank two anonymous reviewers and the participants of the 2004 Inter-Disciplinary Corporate Social Responsibility Research Conference held in Nottingham, United Kingdom.
Notes 1
Similar to Patten (2002), we classify firms from environmentally sensitive industries as companies with the following primary standard industry classification (SIC) codes provided by the U.S. Department of Labor – Occupational Safety and Health Administration: 26xx (paper and allied products), 28xx (chemical and allied products), 29xx (petroleum refining and related industries), or 33xx (primary metal industries). For this study, we added 13xx (oil and gas extraction) firms because they would also be under high environmental scrutiny. 2 The professional services firm of KLD Research & Analytics, Inc. (KLD) is located at 129 Mt. Auburn St., Cambridge, MA 02138, USA. KLD’s social research is distributed in SOCRATES – The Corporate Social Ratings MonitorSM. SOCRATES is a proprietary database program that provides access to KLD’s ratings and other data pertaining to the social records of over 3,000 publicly traded U.S. companies. 3 All tests were repeated using the net (strength score minus concern score) environmental rating from KLD as the measure of environmental performance. All results remain qualitatively similar to those presented in the paper.
4
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Regression models were also estimated using dummy variables for all separate industries. Results, not presented here, remain qualitatively similar to those presented in the paper. 5 We also compared the mean political spending for firms receiving an environmental concern citation from KLD to the spending for firms with no concern items noted. Results of t-tests, not presented here, indicate the companies with concern items spent significantly more, on average, than those with no concerns noted. 6 The League of Conservation Voters is an environmental group that publishes annual reports compiling U.S. congressmen’s voting records on environmental legislation during a specific period and their respective party affiliation. These reports also disclose some information on House and Senate committees broadly related to the environment. 7 In total, there were 553 members of the U.S. Congress (465 House representatives and 88 senators) during 2001–2002 who were identified as recipients of PAC contributions from firms operating in environmentally sensitive industries. Among those recipients, 121 were members of the four environmental committees (91 House representatives and 30 senators) and 5 were either committee chairmen or vice-chairmen, constituting leadership. Lastly, a House representative or a senator could belong to both House environmental committees or to both Senate environmental committees. Membership was thus dichotomously determined based on membership on either committee of each chamber. Eight congressmen (five House representatives and three senators) fell into that category.
Evidence of decision choice
Variables affecting decision
Decision choices
Election issue using transactional approach
Less pluralistic society
More related product diversification
Corporate government relations office
Specialized political knowledge Relationships with key policy makers
More pluralistic society
More unrelated product diversification
No corporate government relations office
No specialized political knowledge No relationships with key policy makers
Representative trade association or interest group visible in public policy-making process
Less pluralistic society (regardless of approach)
Greater degree of dependence on government policy
Less financial and intangible resources (regardless of approach)
Decision two: Level of participation Collective (cooperation of two or more individual firms)
Lesser degree of dependence on government policy
Decision one: Approach to political strategy Transactional (short- Relational (long-term: term; spans multiple issue-specific issues) focus)
Position papers/ technical reports
Sponsor research projects Expert witness
Lobby Dominant firms visible individually in public policy-making process
More pluralistic society (regardless of approach)
More financial and intangible resources (regardless of approach)
Individual (solitary efforts by individual or firm)
Decision three: Strategies and tactics to Informational (provide information about preferences and cost/benefit of alternative policies) Transactional approach and in public opinion formation stage (regardless of level of participation) Greater firm credibility and uses relational approach (regardless of level of participation)
Hiring people with political experience/ running for office
Paid travel
Honoraria
Contributions
Transactional approach and in public policy formulation stage (regardless of level of participation)
be used Financial Incentive (align policymaker and firm interests)
Political education programs
Press conferences
Advocacy advertising Public relations
Grassroots efforts
Transactional approach and in public policy formulation stage (regardless of level of participation) Greater firm credibility and uses relational approach (regardless of level of participation) Large employment/membership base
Constituency Building (affect policy indirectly through appeals)
Appendix A Summary of the Hillman and Hitt (1999) model of corporate political strategy formulation (Roberts et al., 2003)
Appendix
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Appendix B List of sample firms 3M Company Abbott Laboratories Air Products & Chemicals, Inc. AK Steel Holding Corporation Albemarle Corporation Alcoa, Inc. Allegheny Technologies Incorporated Allergan, Inc. Amerada Hess Corporation Amgen, Inc. Anadarko Petroleum Corporation Andrew Corporation Apache Corporation Avery Dennison Corporation Avon Products, Inc. Barr Laboratories, Inc. Bausch & Lomb Incorporated Bemis Company, Inc. BJ Services Company Bowater Incorporated Bristol-Myers Squibb Company Burlington Resources, Inc. Cabot Corporation Calgon Carbon Corporation Caraustar Industries, Inc. Celgene Corporation Cephalon, Inc. ChevronTexaco Corporation Chiron Corporation Church & Dwight Co., Inc. Clorox Company Colgate-Palmolive Company ConocoPhillips Corning Incorporated Devon Energy Corporation Diagnostic Products Corporation Dial Corporation (The) Diamond Offshore Drilling, Inc. Dow Chemical Company DuPont Company
Eastman Chemical Company Noble Corporation Ecolab, Inc. Noble Energy, Inc. Engelhard Corporation Nucor Corporation Ensco International Incorporated Occidental Petroleum Corporation EOG Resources, Inc. OM Group, Inc. Exxon Mobil Corporation Packaging Corporation Forest Laboratories, Inc. Patterson-UTI Energy, Inc. Forest Oil Corporation Pfizer, Inc. Fuller (H.B.) Company Phelps Dodge Corporation Georgia-Pacific Corporation Pioneer Natural Resources Company Gilead Sciences, Inc. Pogo Producing Company Halliburton Company PPG Industries, Inc. Harsco Corporation Praxair, Inc. Helmerich & Payne, Inc. Precision Castparts Corporation Hercules Incorporated Premcor, Inc. Human Genome Science, Inc. Pride International, Inc. ICOS Corporation Procter & Gamble Company IMC Global, Inc. Rock-Tenn Company IMCO Recycling Inc. Rohm and Haas Company International Flavors & Fragrances, Inc. Rowan Companies, Inc. International Paper Company RPM International, Inc. Invitrogen Corporation Schering-Plough Corporation IVAX Corporation Schlumberger N.V. Johnson & Johnson Sealed Air Corporation Kerr-McGee Corporation Sigma-Aldrich Corporation Kimberly-Clark Corporation Smith International, Inc. King Pharmaceuticals, Inc. Smurfit-Stone Container Corporation Lilly (Eli) and Company Sonoco Products Company Lyondell Chemical Company Sunoco, Inc. Marathon Oil Corporation Temple-Inland, Inc. MeadWestvaco Corporation Transocean, Inc. Medicis Pharmaceutical United States Steel Corporation MedImmune, Inc. Unocal Corporation Merck & Co., Inc. Valero Energy Corporation Millennium Pharmaceuticals, Inc. Vertex Pharmaceuticals, Inc. Minerals Technologies, Inc. Wellman, Inc. Monsanto Company Worthington Industries, Inc. Murphy Oil Corporation Wyeth Nature’s Sunshine Products, Inc. XTO Energy, Inc. Newfield Exploration Company
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Appendix C Environment screens for KLD ratings on corporate social performance Environment Strengths Beneficial products and services
Pollution prevention Recycling Alternative fuels
Communications
Property, plant, and equipment Other strength Concerns Hazardous waste
Regulatory problems
Ozone depleting chemicals Substantial emissions
Agricultural chemicals Climate change
Other concern *
The company derives substantial revenues from innovative remediation products, environmental services, or products that promote the efficient use of energy, or it has developed innovative products with environmental benefits. (The term ‘‘environmental service’’ does not include services with questionable environmental effects, such as landfills, incinerators, waste-to-energy plants, and deep injection wells.) Through 1994, ‘‘substantial revenues’’ was specified as more than 4% of total revenues The company has notably strong pollution prevention programs including emissions reductions and toxic-use reduction programs The company either is a substantial user of recycled materials as raw materials in its manufacturing processes, or a major factor in the recycling industry The company derives substantial revenues from alternative fuels. The term ‘‘alternative fuels’’ includes natural gas, wind power, and solar energy. The company has demonstrated an exceptional commitment to energy efficiency programs or the promotion of energy efficiency The company is a signatory to the CERES Principles, publishes a notably substantive environmental report, or has notably effective internal communications systems in place for environmental best practices. KLD began assigning strengths for this issue in 1996 The company maintains its property, plant, and equipment with above average environmental performance for its industry. KLD has not assigned strengths for this issue since 1995 The company demonstrates a strong environmental attribute not addressed by KLD’ ratings categories The company’s liabilities for hazardous waste sites exceed $50 million, or the company has recently paid substantial fines or civil penalties for waste management violations. Before 1996 the threshold for liabilities was $30 million The company has recently paid substantial fines or civil penalties for violations of air, water, or other environmental regulations, or it has a pattern of regulatory controversies under the Clean Air Act, Clean Water Act or other major environmental regulations The company is among the top manufacturers of ozone depleting chemicals such as HCFCs, methyl chloroform, methylene chloride, or bromines The company’s legal emissions of toxic chemicals (as defined by and reported to the EPA) from individual plants into the air and water are among the highest of the companies followed by KLD The company is a substantial producer of agricultural chemicals, i.e., pesticides or chemical fertilizers The company derives substantial revenues from the sale of coal or oil and its derivative fuel products, or the company derives substantial revenues indirectly from the combustion of coal or oil and its derivative fuel products. Such companies include electric utilities, transportation companies with fleets of vehicles, auto and truck manufacturers, and other transportation equipment companies. KLD began assigning concerns for this issue in 1999 The company has environmental problem not specifically covered in KLD’s categories, usually an environmental accident
From KLD Research & Analytics, Inc. (2003).
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Appendix D Environmental disclosure content analysis items 1. 2. 3. 4. 5. 6. 7. 8. *
Statements or discussion of the company’s environmental policy or concern for the environment Discussion of the company’s pollution control facilities or processes Discussion of specific (non-hazardous waste-related) environmental regulations or requirements Statement or discussion of the company being in compliance with environmental regulations Disclosure of current or past years’ capital expenditures for pollution control or abatement Disclosure of projected future capital expenditures for pollution control or abatement Disclosure of current or past years’ operating costs for pollution control or abatement Disclosure of projected future operating costs for pollution control or abatement
From Patten and Trompeter (2003).
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[email protected];
[email protected] Dennis M. Patten Department of Accounting, Illinois State University, Normal, IL 61761, U.S.A. E-mail:
[email protected] 
