Two things can dramatically decrease the level of pollution likely to be created by a firm, says new research. No, it’s not complicated machinery for carbon sequestration, or more government regulation. It’s much simpler: family ownership and financial rewards.

Luis Gomez-Mejia
Gomez-Mejia

New research suggests that firms where a single family owns at least five percent of the voting stock, pollution levels are much lower. Also, firms pollute less when the CEO is given long-term financial incentives for pollution control.

To come to these results, researchers analyzed toxic emission reports from the Environmental Protection Agency, examining the structure and actions of hundreds of companies.

When it comes to family ownership, researchers hypothesize that when a family’s image and reputation are at stake, there is a greater drive to be ecologically sound. Institutional investors can tend to have a more short-term view of the business, while family owners are more concerned with its overall quality and longevity, says Luis Gomez-Mejia, the Benton Cocanougher Chair in Business and Mays management professor, who has co-authored two studies on the topic of corporate pollution reduction.

Other research on family-owned firms and “socio-emotional wealth” dovetails with Gomez-Mejia’s: leaders of family-owned companies are more likely to derive a sense of identity from the firm, desire to be seen as generous and pro-social within a community, and strive to maintain group integrity within a community.

These factors create a non-economic incentive for environmental efficacy, particularly if the family and the business are concentrated in one location as the family usually cannot escape being the face of the business.

When firms are not family owned, Gomez-Mejia says corporate pollution reduction is still a matter of incentives; however this time, the incentive is financial rather than socio-emotional. “To the extent that the CEO is rewarded for investing in pollution control and also pollution prevention, the more likely it is that the firm will engage in those efforts,” he says.

Furthermore, the structure of the incentives matter: stock and option incentives are more effective than cash in pollution reduction. This is due to the long-term nature of both meaningful environmental policies and the interest-bearing securities. That is, continued pollution control leads to continued corporate wellbeing, which leads to continued growth of securities held by the CEO.

Gomez-Mejia admits there is one limitation to the research: the EPA only requires emission reports for American companies and many of the corporations involved in the study are multinational. “A remaining question is to what extent…the CEOs may have an incentive to move or shift the pollution elsewhere,” he says. He is planning a follow-up study to investigate this question, but notes that data collection is difficult, as pollution reporting in many developing countries is not accurate.

“Socio-economic wealth and corporate responses to institutional pressures: Do family-controlled firms pollute less?” is a collaboration between Pascual Berrone, Cristina Cruz, Gomez-Mejia, and Martin Larraza-Kintana, published in Administrative Science Quarterly in 2010.

“Environmental performance and executive compensation: an integrated agency-institutional perspective,” is a collaboration between Pascual Berrone and Gomez-Mejia, published in the Academy of Management Journal in 2009.