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Volume 15, Number 1
January 2009

Managing regulation

John Maxwell’s research shows that companies need to put more effort into their non-market strategies

In the 1980s, Dupont was the largest producer of chlorofluorocarbons (CFBs) in the world. When it was suggested that CFBs were creating a hole in the ozone layer, Dupont demurred, all the while working on alternatives. In 1988 the company dramatically changed course, announcing it would voluntarily cease all CFB production. Dupont’s action helped pave the way for the Montreal Protocol, which banned the substance, and ensured the company a competitive advantage in the post-CFB world.

Dupont is a classic case of how a proactive firm can profit from the public regulatory environment, says Ivey Professor John Maxwell, Academic Director of the Lawrence National Centre for Policy and Management. In his research he looks at “non-market” strategies - ways in which firms interact with governments, regulators, and NGOs.

Although firms can sometimes benefit from regulatory action, it’s more often seen as an extra cost. In one stream of his research, Maxwell looks at the conditions under which firms agree to voluntarily regulate themselves. The goal of self-regulation is to pre-empt action by government, allowing firms greater flexibility and efficiency. He found that the decision to self-regulate depends on the political environment and the pressure on politicians to regulate. “If there is a lot of pressure, as there is now in the financial industry, self-regulation is probably futile and not worth incurring the cost,” he says.

In one of his studies, he looked at the U.S. chemical industry, which pre-empted regulatory threats by voluntarily agreeing with the EPA to reduce toxic emissions. Maxwell found that the reductions varied from state to state, depending on the political pressure to regulate. In states with more people involved in environmental groups, the companies reduced more. “They perceived a greater threat of regulation, so they engaged in greater self-regulation,” he says.

In another stream of his research, Maxwell looks at non-market strategies to influence regulatory decisions. Politicians, when deciding whether to impose restrictions, weigh regulatory goals against their impact on the economy. They often look to the public for feedback, and respond differently when a proposed regulation results in a sharp outcry or little response.

One obvious way to influence legislators is to lobby them directly. Maxwell has explored another strategy for firms - helping groups whose opposition or support is aligned with theirs. For example, a firm might provide financial resources or expert assistance. A company like Toyota might help environmental groups pushing for higher fuel efficiency by giving them a platform to voice their concerns. “The goal of my research is to underline the importance for firms to think about these non-market issues, and develop strategies in the same way as they do when competing in the marketplace,” he says.

Another research interest for Maxwell is greenwashing, a term generally understood as making environmental claims that don’t stand up to scrutiny. For example, when Ford announced with great fanfare the launch of its Escape Hybrid SUV, the company was roundly criticized for the poor fuel economy on all its other vehicles.

Most firms have a mixed record when it comes to its environmental or social policies. When these firms do good things, managers are often reluctant to publicize them because of the fear of being criticized as hypocritical. In a recent paper, Maxwell focused on the issue of disclosure: when does a firm emphasize the good things it does, when does it disclose its entire record, and when does it say nothing?

The answer, says Maxwell, depends on the public perception of the company. “If a firm already has a good reputation, then it might not want to promote the good things if there are some bad things it doesn’t want people to know about,” he says. “Of course, if the news is universally good, then go ahead.”

Wal-Mart is a company that in recent years has received much criticism for its labour practices, and is now finding it difficult to site new stores. To counter its poor perception, the firm is beginning to tout itself as an environmental leader. This is a smart move for Wal-Mart, says Maxwell. “When a company is poorly regarded by the public, then it’s a good strategy to promote the good things it is doing, despite the criticism it may encounter.”

Maxwell is looking forward to his new job as Academic Director for Ivey’s Lawrence Centre. He believes the Centre can play an important role in helping firms become more sophisticated about issues of public policy. “It’s important that business thinks more deeply about the impact of public policy and regulation from a strategic perspective.”