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Business & Society

Measuring 50(1) 71­–115

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DOI: 10.1177/0007650310394427
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Development,
Reliability, and
Validity

Judith L. Walls1, Phillip H. Phan2,

and Pascual Berrone3

Abstract
Inconsistent results in prior work that link environmental strategy to com-
petitive advantage may be due to the empirical difficulties of marrying the
theoretical connection between a firm’s resource base and its environmental
strategy. The authors contribute to the field by developing a measure that
is congruent with the natural resource–based view, a dominant paradigm in
this line of work. This article content analyses company reports and second-
ary data to develop a measure of environmental strategy grounded in the
natural resource–based view. They identify six environmental capabilities
that form components of a reliable, multidimensional construct of proactive
environmental strategy. They also identify a measure of reactive compliance
strategy. They verify reliability of their new measure through exploratory
and confirmatory factor analyses, establish convergent and discriminant
validity via a multitrait, multimethod matrix and demonstrate superior

1
Concordia University, Montreal, Quebec, Canada
2
The Johns Hopkins University, Baltimore, MD
3
University of Navarra, Madrid, Spain

Corresponding Author:
Judith L. Walls, Assistant Professor, John Molson School of Business, Concordia University,
1455 de Maisonneuve Blvd. W., Montreal, Quebec, Canada H3G 1M8
Email: [email protected]
72 Business & Society 50(1)

predictive validity of their measure compared to two others commonly

used in the literature. In the conclusion, they discuss implications for research
and practice.

Keywords
environmental strategy, competitive advantage, environmental capabilities,
measurement, reliability, validity

Introduction
Consideration of the natural environment has become a critical element in a
firm’s long-term strategy. Changes in the regulatory and institutional envi-
ronment as well as more fundamental changes in managerial and consumer
perception has driven many companies to shift from a reactive to proactive
approach to address environmental issues (Hoffman, 1999). Accordingly,
firms are building unique environmental capabilities that drive competitive
advantage in the manner put forth by the natural resource–based view, or NRBV
(Hart, 1995).
As research in this area has proliferated, a variety of measures of environ-
mental strategy has emerged. As a result, theoretical and empirical approaches
to studying environmental strategy are wide-ranging and generate inconsis-
tent results. For instance, studies tend to blur the lines between environmental
management and environmental performance (Claver-Cortés, Molina-Azorín,
Tarí-Guilló, & López-Gamero, 2005). As a result, studies often proxy envi-
ronmental strategy with environmental performance measures. Or, in the
case of propriety measures, the operationalizations have not been validated.
As a consequence, it has been difficult for researchers to compare results,
replicate studies, and refine theory in the field.
The purpose of this article is to create a measure of environmental strategy
that is consistent with theory. We focus on the construct, its definition, opera-
tionalization, and measurement in a manner that is congruent with the NRBV.
We develop a new measure of environmental strategy using content analysis,
and assess its reliability and validity against two commonly used measures.
Specifically, we identify six environmental capabilities that form a multidimen-
sional construct of a firm’s “proactive” environmental strategy. In addition,
we capture the dimensions of “reactive” compliance strategy via the content
analysis. We establish construct reliability, convergent and discriminant valid-
ities, and show that our measure has stronger predictive power than the other
commonly used measures. We contribute to the environmental management
Walls et al. 73

literature by closing the gap between the extant empirical approaches and
theoretical underpinnings of the NRBV.

Environmental Strategy
A corporate environmental strategy is a set of initiatives that mitigate a
firm’s impact on the natural environment. Firms achieve such a strategy by
implementing products, processes, and policies that reduce energy consump-
tion and waste, use ecologically sustainable resources, and employ environ-
mental management systems (Bansal & Roth, 2000). To understand how
environmental strategy creates value for a firm, researchers have increas-
ingly turned to the natural resource–based view (NRBV) as a dominant theo-
retical paradigm (Hart, 1995; Sharma & Aragón-Correa, 2005). This view is
an extension of the resource-based view of the firm, which emphasizes that
internal resources and capabilities, when valuable, rare, inimitable, and with-
out equivalent substitutes, can lead to sustainable competitive advantage
(Barney, 1991).
Sustainable competitive advantage is achieved when resources and capa-
bilities are path dependent, causally ambiguous, and socially complex (Barney,
1991). In the case of environmental strategy, related capabilities can take the
form of continuous improvements that lower costs, integration of stakehold-
ers to preempt competition, and developing a shared vision that secures a
firm’s future position (Hart, 1995). A firm may build environmental capabili-
ties sequentially due to the path dependence of capability development in
general (Wernerfelt, 1984), or indeed concurrently because of the social
embeddedness of environmental issues specifically (Hart, 1995).
A firm’s approach to environmental strategy may lie along a continuum of
“reactive” to “proactive” (Aragón-Correa, 1998; Hart, 1995; Henriques &
Sadorsky, 1999; Hunt & Auster, 1990; Klassen & Whybark, 1999; Russo &
Fouts, 1997; Sharma & Vredenburg, 1998; Shrivastava, 1995). Reactive
environmental strategies address environmental issues when they arise as a
result of the firm’s activities. Such strategies are designed to comply with
environmental regulation, and usually implement so-called “end-of-pipe”
solutions that are corrective and emphasize the minimization of risk, liabili-
ties, and costs (Roome, 1992).
In contrast, proactive environmental strategies emphasize prevention and
are a unique combination of resources through which firms develop environ-
mental capabilities. There is little systematic research on how firms acquire
environmental capabilities but Marcus (2005) suggests that they can be
developed from internal, external, or systemwide sources of the firm. Thus,
74 Business & Society 50(1)

in addition to traditional resource–based perspectives in which firms generate

capabilities as an incremental result of growth and expansion through under-
lying skills and knowledge, environmental capabilities may also come from
interfirm ties and networks (external), and public policies, values, and beliefs
(systemwide; Marcus, 2005). Researchers suggest that to bestow a competi-
tive advantage, proactive environmental strategies must (a) be future-oriented
and go beyond regulatory compliance (Aragón-Correa, 1998); (b) implement
pollution prevention technologies via product and process (re)design or adap-
tation (Christmann, 2000; Marcus & Geffen, 1998); and, (c) be reflected in
corporate and managerial values and integrated into management systems
and business strategy (Hart, 1995; Russo & Fouts, 1997).
Whether environmental strategy indeed leads to competitive advantage is
a topic that has been thoroughly studied. Evidence from several meta-analyses
suggests a positive, though small, relationship between environmental and
financial performance (Margolis, Elfenbein, & Walsh, 2007; Orlitzky, Schmidt,
& Rynes, 2003). Yet studies that link environmental strategy to competitive
advantage are often plagued with methodological problems such as omitted
variables and endogeneity (Siegel, 2009). Thus the environmental strategy—
competitive advantage relationship remains under much debate.
Moreover, empirical studies have often blurred the lines between environ-
mental management and environmental performance (Claver-Cortés et al.,
2005). Empirical work in this area relies on the NRBV to make an implicit
assumption that environmental performance is a proxy for environmental
strategy. Nevertheless, this approach conflates cause and effect and has led to
a lack of consensus on the relationship between environmental strategy, envi-
ronmental performance, and financial performance (Claver-Cortés et al.,
2005). As a result, it has been difficult for researchers to compare studies,
replicate results, and refine theoretical models in this field.
We propose that a better measure of environmental strategy is needed to
address these concerns. This article is a first step toward developing a mea-
sure of environmental strategy rooted in the theoretical underpinnings of the
NRBV. A considerable body of work supports the notion that under some
circumstances it pays to be green (Gladwin, 1993; King & Lenox, 2002;
Orsata, 2006; Russo & Fouts, 1997). In particular, environmental strategy
tends to pay when firms acquire green competencies (e.g., Marcus &
Anderson, 2006; McEvily & Marcus, 2005). We show that our measure of
environmental strategy, aligned with theoretical underpinnings of this body
of work, has strong reliability and validity and better predictive validity than
the extant measures.
Walls et al. 75

Method
We studied large U.S. firms during 2003 in industries with high level of
effluent in their production processes since environmental issues for these
firms are salient (Hart & Ahuja, 1996). Our sample consisted of 184 firms in
the S&P 500 index, covering 22 industries from primary and manufacturing
industries with SIC codes below 5,000.
Our study was conducted in three phases. First, it was our goal to establish
a new, reliable measure of environmental strategy that was consistent with
theory, specifically the NRBV. Second, we wanted to compare our new mea-
sure to other measures commonly used by researchers to assess the reliability
and validity of our measure. Last, we aimed to establish whether our new
measure predicted outcomes related to competitive advantage to determine
whether our measure had stronger predictive power than other measures. We
describe our data collection and analytical procedure for each phase below.

Phase I: Measuring Environmental Strategy

Data came from corporate environment (or social responsibility) reports,
environmental pages from corporate web sites, and annual reports. Annual
reports are useful to study organizational strategy because they are public,
readily available, and provide comparable sets of data (e.g., Abbott &
Monsen, 1979; Arndt & Bigelow, 2000; Bowman, 1984). Similarly, environ-
mental reports provide comparable data on firm’s environmental activities
(Morhardt, 2001), particularly with the emergence of standardized reporting
systems such as the Global Reporting Initiative in 2000. We targeted reports
for the year 2003. Since not all firms report annually on their environmental
activities, if a report for 2003 was missing, we chose the report produced
closest to that year. When an environmental report was not available or data
was thin, we sourced additional information from environmental web pages
and/or annual reports. In our sample, 83 firms produced environmental
reports, 60 had environmental web sites and 106 stated environmental infor-
mation in their annual reports.
To analyze the data, we used content analysis (Holsti, 1969; Miles &
Huberman, 1994) in two stages, following the process of Arndt and Bigelow
(2000). The initial stage consisted of developing a coding scheme to code
text, pictures, and captions from all reports. The process was iterative, going
back and forth between words/phrases in each report and topics that emerged
(Glaser & Strauss, 1967; Miles & Huberman, 1994).
76 Business & Society 50(1)

The second stage interpreted the content in reports through the lens of the
NRBV. We wanted to identify specific resources and capabilities that organi-
zations had developed to address environmental issues. Guided by a holistic
literature review of the NRBV and through another iterative process, we identi-
fied which topics were relevant and collated them into environmental capabil-
ity categories. To avoid the possibility of capturing environmental performance
instead of environmental strategy, we also coded statements about outcomes of
environmental strategy such as new products, designs, or technologies firms
developed, emissions and other key environmental indicators, and environ-
mental awards won. We explicitly excluded these from our analysis.
Since our goal was to develop a measure of environmental strategy, we
developed a set of scales for each category that could be summed up (Abbott
& Monsen, 1979). Topics were either coded as binary or converted to a sliding
scale if the code referred to amounts (years, numbers, etc.) or level of inten-
sity. The result was that categories were represented by scales and therefore
captured the intensity and scope of a firm’s environmental capability as well
as its presence. The final coding scheme consisted of 21 topics that fell into six
major categories of “proactive” environmental strategy (Table 1) and one cat-
egory of a “reactive” compliance strategy that contained two topics (Table 2).
We tested for reliability and validity to verify the congruence of the constructs
with theoretical underpinnings of the NRBV (Hoskisson, Hitt, Johnson, &
Moesel, 1993; Schwab, 1980; Venkatraman & Grant, 1986). Reliability of
the content analysis and environmental strategy construct was measured in
several ways. First, we assessed interrater agreement by asking a second
researcher to code a random selection of reports. This procedure yielded a
Cronbach’s alpha of 91.3%. Second, we established content validity by
matching topics with theory through our iterative coding process (Nunnally
& Bernstein, 1984). Third, we assessed construct validity by splitting our
sample to conduct exploratory factor analysis on the first data set and confir-
matory factor analysis on the second data set (Bollen, 1989). We used a factor-
extraction method with quartimin oblique rotation to establish that the six
capability categories were dimensions of an environmental strategy construct
(Bartholomew, Steele, Moustaki, & Galbraith, 2002; Fabrigar, Wegener,
MacCallum, & Strahan, 1999).1

Phase II: Evaluating the New

Environmental Strategy Measure
To evaluate our new environmental strategy measure, we compared it to data
collected on two other measures often used as proxies for environmental
Walls et al. 77

Table 1. Coding Scheme and Sample Phrases—Environmental Strategy

Measurement
Category Topic Sample phrases scale

Environmental History of “our commitment to Scale from 0-4

strategy implementing sustainability has a long 0 = no history
1. Historical environmental history” 1 = 1-10 years
orientation program “as early as 1928, our 2 = 11-20 years
  electric subsidiary . . . 3 = 21-30 years
  installed electrostatic 4 > 30 years
  precipitators to reduce
  particulate emissions”
“adopted its Environmental
Policy in February 1975”
2. Network Supplier policies “suppliers must be Scale from 0-4
Embeddedness committed to reducing Aggregation of
(a) Supply the environmental scales from
chain impact of their designs, four topics
  manufacturing processes, (binary)
and waste emissions . . .  
legal compliance to laws
on chemicals, waste . . .
endeavor to reduce or
eliminate waste of all
types”
“suppliers have committed
to . . . sustainable forest
management standard
. . . certification process
requires independent . . .
audit”
  Buyer policies “products must be (binary)
  designed, engineered,  
  installed and supported  
to achieve customers’
production needs and
their EHS objectives”
“recycled more than 8
million tires through
dealership collection
programs”
“ISO certification to meet
customer requirements”

(continued)
78 Business & Society 50(1)

Table 1. (continued)

Measurement
Category Topic Sample phrases scale
  Life cycle analysis “implemented a (binary)
or product comprehensive product
stewardship stewardship program
  to manage EHS issues  
concerning the chemical
content of products,
direct materials and
packing materials”
“product life cycle
principles are being
applied to acquired
products and during the
development of new
products . . .and during
the design phase”
  Industrial “facility recovers starch (binary)
symbiosis released during cutting
activities operations, which is
  then sold to outside  
companies for further
processing and use in
products”
“unavoidable potato
residuals generated
during processing are
sold as animal feed”
2. Network Government “cooperate with federal, Scale from 0-7
embeddedness relationships state and local Aggregation of
(b) Other government agencies binary scales
stakeholders in . . . developing a cost from seven
  effective, performance- topics
based environment, (binary)
safety and health policy”
“working with members of
Congress . . . to urge the
U.S. . . .not to abandon the
rule prohibiting roads from
being built in currently
protected forests”

(continued)
Walls et al. 79

Table 1. (continued)
Measurement
Category Topic Sample phrases scale
  NGO “pipe was donated to (binary)
  relationships three different wildlife  
refuges in California for
use in watershed habitat
maintenance”
“spent nearly US$300,000
to fund the installation
of hack boxes and
hack tower material to
reintroduce peregrine
falcons to the Big River
habitats”
  Business/industry “participate in the Global (binary)
  associations Roundtable on Climate  
  Change”  
“member of the Business
for Social Responsibility
(BSR)”
“participate in conferences,
industry-working
groups on specific
projects such as cleaner
transportation”
  Community “a statewide initiative to (binary)
programs teach young people
  about renewable energy  
technologies”
“community and
environmental
commitment through
employee volunteerism
programs, corporate
donation campaigns,
and environmental
education and curriculum
development programs”
  Employee “instituted programs to (binary)
programs reduce air emissions

(continued)
80 Business & Society 50(1)

Table 1. (continued)
Measurement
Category Topic Sample phrases scale
from employees’ vehicles
  traveling to and from  
  work”  
“more than 600 . . .
environmental activities
are being undertaken . . .
by our employees”
“actively support
employee volunteerism
. . . donate US$10 for
every qualifying hour of
volunteer work”
  Socially “proudly listed in the Dow (binary)
  responsible Jones Sustainability Index,  
  shareholders Calvert Social Index and  
the Domini 400 Social
Index”
“met with 15 SRI firms,”
“increased shareholder
value through EHS
commitment”
“CSR analyst meetings”
  Volunteer “entered into voluntary (binary)
programs cleanup agreements . .
  . with the Department  
of Environmental
Conservation”
“joined U.S. EPA Climate
Leaders Partnership
to work towards a
voluntary commitment
to reduce greenhouse
gases”
3. Endowments ISO certification “half of our locations are Scale from 0-5
  ISO14001 certified” Aggregation of
“all our facilities worldwide scales from
are expected to comply three topics
with our corporate

(continued)
Walls et al. 81

Table 1. (continued)
Measurement
Category Topic Sample phrases scale
  Environmental 0 = No ISO
  Protection Program, 1 = some sites
  which is aligned with ISO have ISO
14001” 2 = all sites have
ISO
(binary)
  Environmental “we are using Six Sigma to
  management reduce the amount of  
system wood waste from ‘cut
direct’ saws by 50%”
“environmental
management system
being developed at
facility by facility basis”
  Environmental “investing US$1.5 billion 0 = US$0-
  R&D over the next several US$399mil
  years in environmental 1 = US$400-
systems that will US$1.6bn
significantly reduce 2 = > US$1.6bn
emissions of SO2 and
NOx at our power
plants”
“US$82million in
environmental spending”
“invested more than US$4
million on research
in the pursuit of a
‘zero-discharge’ water-
recycling technology”
4. Managerial Long-term “we also set key milestones Scale from 0-3
vision commitment to be met by 2010” Aggregation of
  to environment “new voluntary program to scales from
  reduce carbon intensity two topics
by 2012” 0 = no visionary
“life cycle management statement
reviews of all existing 1 = statement is
products must be made
completed by 2010” 2 = vision is > 5
years

(continued)
82 Business & Society 50(1)

Table 1. (continued)
Measurement
Category Topic Sample phrases scale
  Global level of “three regional (binary)
  vision sustainability reports  
were published in . . .
Australia . . . Canada . . .
Latin America”
“revised our sustainable
forestry policies and
practices to . . . promote
sustainable forestry on a
global level”
5. Top Senior “the vice president of Scale from 0-4
management environmental the department . . . Aggregation of
team skills executive reports to our group scales from
  president . . . who two topics
  reports directly to (binary)
Chairman and CEO”
“officers . . .Vice President-
Environment, Health &
Safety and Audit”
“we welcomed . . . as Vice
President and Chief
Sustainability Officer
[reports directly to the
board]”
  Reporting “senior managers are part 0 = no reporting
structure level of the environmental structure
  management reporting 1 = local/facility
  structure” level
  “independent 2 = senior
assessments by external management
organizations” 3 = board/
“corporate responsibility external
committee at board auditors
level”
“local facilities are
responsible for
implementation”

(continued)
Walls et al. 83

Table 1. (continued)
Measurement
Category Topic Sample phrases scale
6. Human Environmental “all facilities provide staffing Scale from 0-2
resources training and training initiatives to Aggregation of
  programs manage environmental scales from
  protection” two topics
  “more than 65% of (binary)
our workforce has  
participated in a Lean
event”
“trained more than
50 . . . scientists on
designing environmental
sustainability into our
new products”
“added an EHS module to
our global . . . training”
  GRI or CERES “supports the Global (binary)
  reporting Reporting Initiative (GRI)  
  systems as a comprehensive
format for reporting
data on economic,
environmental and social
performance”
“in developing this report,
we relied heavily on the
guidelines issued by the
[GRI]”

strategy and that capture both proactive and reactive strategies (Entine, 2003;
Toffel & Marshall, 2004). The first data source was Kinder, Lydenberg, and
Domini (KLD). KLD’s data has been used extensively in academia for
research on corporate social responsibility and environmental sustainability
(Graves & Waddock, 1994; Johnson & Greening, 1999; McWilliams &
Siegel, 2000; Neubaum & Zahra, 2006; Waddock & Graves, 1997). Research
has shown that the KLD environmental strengths and concerns measures are
theoretically and empirically distinct, and represent two different constructs
in terms of proactive and reactive environmental approaches firms takes
(Chatterji, Levine, & Toffel, 2009; Mattingly & Berman, 2006; Strike, Gao,
& Bansal, 2006). We used KLD’s environmental strengths and environmental
84 Business & Society 50(1)

Table 2. Coding Scheme and Sample Phrases—Environmental Compliance

Measurement
Category Topic Sample phrases scale
Environmental Violations “12 noncompliance orders Scale from 0-6
  Compliance for seven facilities” Aggregation of
“21 violations in 331 scales from two
inspection” topics
“123 noncompliance events 0 = no violations
and accidental releases in 1 = at least 1
2003” violation
  Remediation “[we] companies 0 = no remediation
  costs and/ paid US$151,250 in costs or fines
  or fines environmental fines or 1 < US$100mil
penalties” 2 = US$100mil-
“environmental fines US$399mil
totaled US$16,200 for 3 = US$400mil-
violations at five locations US$899mil
worldwide” 4 = US$900mil-
“we have determined that US$1.6bn
the recorded liability for 5 = > US$1.6bn
environmental matters
. . . is approximately
US$337.4 million”
“[we are investigating]
several current and
former manufacturing
facilities, in both the
United States and
abroad, to investigate and
remediate environmental
contamination resulting
from past operations up
to possibly US$578.8 mil”

concerns categories (appendix).2 Each category was binary to indicate whether

the firm performed the activity. We aggregated the category scores for a total
respective score of KLD strengths as a measure of “proactive” environmental
strategy and KLD concerns as a measure of “reactive” environmental strat-
egy, attributing equal weights to the categories. The maximum possible score
was 6 for KLD strengths and 7 for KLD concerns. In our sample, 32.1% of
firms had at least one KLD strength and 40.8% had at least one KLD con-
cern. The most frequent KLD strength was for KLD’s “pollution prevention”
Walls et al. 85

category (12.5% of our sample) and the most frequent KLD concern was for
“hazardous waste” (26.6%).
TRI data was a second oft-used measure of environmental strategy (King
& Lenox, 2002; Klassen & Whybark, 1999; Russo & Harrison, 2005). TRI
data consisted of toxic emissions via air, water, land, or underground injection
that must be reported to the Environmental Protection Agency (EPA). To
account for risks associated to human health, we weighted chemicals using
the Human Toxicity Potential Factor (HTP) developed by Hertwich, Mateles,
Pease, and McKone (2001), which measures toxicity in terms of benzene
equivalence (for carcinogens) or toluene equivalence (for noncarcinogens).
Each measure was aggregated across chemicals at facility level and then to
parent company. We next calculated the predicted value of pollution by esti-
mating total waste generation levels using production ratios in the prior year
reported by TRI and compared these against actual levels (King & Lenox,
2000, 2002). If actual waste was lower than predicted, this pollution preven-
tion measure would yield positive results. We aggregated the carcinogenic
and noncarcinogenic measures (Berrone & Gomez-Mejia, 2009) to capture
“proactive” environmental strategy. “Reactive” environmental strategy mea-
sure was calculated in the form of end-of-pipe pollution control. This measure
was calculated as a ratio of the sum of chemicals recycled, treated on-site, and
transferred to other locations for further treatment divided by the total waste
generated by the firm (King & Lenox, 2001, 2002, 2004; Sarkis & Cordeiro,
2001). TRI data was available for about three quarters of our sample.
While both the KLD and TRI measures clearly say something about a
firm’s environmental activities, neither is rooted explicitly in theory. Yet, they
are often used as proxies for environmental strategy. Therefore, we compared
the KLD and TRI measures against our new environmental strategy measure,
developed with theoretical alignment in mind, to test convergent and discrimi-
nant validity. To do so, we used a multitrait, multimethod matrix (Campbell &
Fiske, 1959). This procedure allowed us to check that correlations converged
between different methods of capturing the same trait, for instance proactive
environmental strategy, and that these could be discriminated from traits
intended to differ, in our case reactive environmental strategy. In addition, the
matrix assessed internal reliability scores for each measure.

Phase III: Environmental Strategy

and Competitive Advantage
The third phase of our analysis was to assess the relationship between our
environmental strategy measure and a competitive advantage outcome for
86 Business & Society 50(1)

firms. Our goal was to establish the predictive validity of our new measure
and compare the predictive power of our measure to other measures often
used in the literature.
We considered competitive advantage in terms of two firm-level outcomes:
environmental and financial. We used two different outcomes because we
wanted to delineate between environmental strategy, in the form of manage-
ment practices, certification, initiatives, and technologies, and environ-
mental performance in the form of the impact of a firm’s activities on the
natural environment (Claver-Cortés et al., 2005). Past research has largely
considered the relationship of environmental performance (not strategy) with
financial performance (e.g., Hart & Ahuja, 1996; King & Lenox, 2002; Russo
& Fouts, 1997). Yet the relationship between environmental and finan-
cial performance may be explained by environmental strategy (Claver-Cortés
et al., 2005). For instance, there is evidence that firms with developed
environmental capabilities in manufacturing or supplier networks have
stronger environmental performance (Klassen & Whybark, 1999; Marcus &
Geffen, 1998).
To avoid common method bias, data on environmental performance was
collected from a source unrelated to our measures. We collected data from
RiskMetrics’ Innovest Strategic Value. This database establishes ratings on
firm’s environmental activities based on company data, in-depth sector anal-
ysis, and interviews.3 We used Innovest’s environmental score with a 5-year
lag (i.e., data from 2008) to capture future environmental performance of a
firm based on its environmental strategy in 2003.
Financial performance was measured as Tobin’s Q using Compustat data
(King & Lenox, 2002). Tobin’s Q captures a firm’s market value based on
expectations of future cash flow, such as those gained from environmental
initiatives. Therefore, we assessed Tobin’s Q in 2003 and did not use lags in
the financial performance analysis.
Predictive validity on both outcomes of competitive advantage was
assessed using regression analysis, as a form of criterion-related validity of
a new measure (Kerlinger & Lee, 2000). To avoid omitted variable bias, we
included a number of controls that are known to affect financial performance
and typically used in environmental management research (McWilliams &
Siegel, 2000; King & Lenox, 2002). These controls were collected using
Compustat data and included firm size as a log of assets, sales growth as
change of sales over the last 3 years, R&D intensity as R&D expenditure
over sales, capital intensity as capital expense over sales, and leverage as
total debt over total assets. We added an industry control in the form of pol-
lution intensity that ranked 2-digit SIC industries by total amount of toxic
Walls et al. 87

emissions, from most (highest score) to least (lowest score) polluting sector
(Berrone & Gomez-Mejia, 2009).

Results
We present our results in four sections. First, we provide a detailed overview
of our findings of the content analysis, and the six environmental capabilities
that emerged. We link these capabilities to the literature the NRBV and
describe how we operationalized them. Next, we review the reliability of our
environmental strategy construct based on these six capabilities. Third, we
demonstrate the results of the multitrait, multimethod matrix analysis that
compares our measures with those of KLD and TRI. Finally, we show the
results of the predictive validity of the construct.

Content Analysis
Even though there is a trend toward standardized global environmental
reporting, reports in our sample varied in many respects. They differed in
length, type of information reported, and style; some reports emphasized
pictures, others graphs and tables. Data on environmental resources and
capabilities were found in various sections or aspects of reports—sometimes
in formal descriptive text, other times in diagrams or stories. In spite of these
differences, reports were fairly consistent in what they reported. In our
sample, 83.2% contained information on proactive environmental strategy in
the form of capabilities, and 34.2% contained information of reactive envi-
ronmental strategy in the form of compliance issues.
In terms of proactive environmental strategy, the content analysis revealed
six categories of environmental capabilities. These included historical orien-
tation (52.2% of firms), network embeddedness including supply chain net-
works (53.8%), and stakeholder engagement (64.7%), endowments (69.0%),
managerial vision (75.0%), top management team skills (51.1%), and human
resource systems (42.4%). Each capability is rooted in theoretical paradigm
of the natural resource–based view and identified through the iterative coding
process we described earlier. We describe the capabilities and how they were
operationalized.
Historical orientation. A company’s path through time and space and the
unique historical conditions of its establishment dictates how it acquires and
exploits resources and therefore how well it performs in the future (Arthur,
1989; Barney, 1991). History can bestow firms with competitive advantage:
preferential locations, founding conditions, scientific breakthroughs, and values
88 Business & Society 50(1)

and beliefs that dominate the period all contribute to the development of firm
specific capabilities.
Environmental capabilities are no different. For example, the develop-
ment of environmental capabilities often begins as a reflection of the institu-
tional environment at a point in history with a reactive approach of pollution
control that later builds up toward a proactive goal of sustainable develop-
ment (Hart, 1995; Hoffman, 1999). By forming a reactive approach, firms
build a foundational capability to address ongoing environmental issues.
Having a “foot-in-the-door” in dealing with the natural environment makes it
easier to gain support for future environmental projects, especially if past
experiences were successful (Cordano & Frieze, 2000). In addition, actively
seeking opportunities to improve environmental performance becomes a part
of the corporate culture and identity (Sharma, 2000). Firms with a strong his-
tory in environmental strategy are more likely to consider the environmental
impact of new strategies, products, and processes. They are also more likely
to spread environmental values throughout their supply chain in their rela-
tionships with buyers, suppliers, consumers, and peers. Therefore, the longer
a firm’s history of having an environmental strategy, the more likely it is to
have built environmental capabilities. In our content analysis, “historical ori-
entation” was coded as a scale based on the years since a firm implemented
an environmental program.
Network embeddedness. A network is a set of linkages among organizations
characterized by specified relationships based on (a) resource transfers such
as money, information, power, commitment, or personnel or (b) interpenetra-
tion of organizational boundaries through shared interest groups (Laumann,
Galaskiewicz, & Marsden, 1978). Networks are strategically important because
they allow firms to respond to their interdependence with the general external
environment (Pfeffer & Salancik, 1978; Uzzi, 1999) by having access to the
right resources, identifying opportunities, matching expectations, and gaining
control over information (Burt, 1997; Lenz, 1980). The ability of organiza-
tions to generate resources is partly determined by their networks (Lenz,
1980). Because networks evolve over time, they are path dependent and
become a capability of the firm (Freeman & Barley, 1990; Lenz, 1980). Net-
works are furthermore socially complex and difficult to imitate.
Access to networks is particularly critical for corporate environmental
strategy because environmental issues are extremely complex and thus
require firms to have interdisciplinary skills and coordinate their environ-
mental response with others (Roome, 1992). Moreover, networks and exter-
nal ties are a source of environmental capability acquisition in the form of
Walls et al. 89

information sharing, trust, and joint problem solving (McEvily & Marcus, 2005).
In terms of environmental strategy, networks fall into two groups: firms
along the product supply chain acting as suppliers and buyers, and other
stakeholders such as governments, employees, NGOs, or “any group or indi-
vidual who can affect or is affected by the attainment of the organization’s
objectives” (Freeman, 1984, p. 46). The “supply chain network” has a direct
impact on a firm’s production process and therefore also on its environmental
performance through engaging with outsiders and sharing information along
the product supply chain (Cerin & Karlson, 2002; Marcus & Geffen, 1998).
The “other stakeholder network,” on the other hand, influences environmental
strategy through social pressure and can determine the type of environmental
strategy a firm pursues (Delmas & Toffel, 2008). In response to stakeholder
influence, firms can develop specific environmental strategies such as eco-
design and ecosystem stewardship (Sharma & Henriques, 2005). By address-
ing stakeholder concerns, companies develop trust and credibility and build a
good corporate reputation, an intangible resource (Sharma & Vredenburg,
1998; Russo & Fouts, 1997). Networking thus represents a socially complex
environmental skill that forms a competitive advantage for environmental
strategy (Delmas & Toffel, 2004; Hart, 1995; Henriques & Sadorksy, 1999).
Our content analysis suggests that “supply chain network” can be measured
as a reflection of companies’ engagement with suppliers, buyers, conduct
product stewardship efforts, or engage in material exchange (industrial
symbiosis) with other companies. In turn, the “other stakeholder network”
is a reflection of a firm’s association with governments, NGOs, industry
associations, communities, employees, socially responsible investors, and
voluntary programs.
Endowments. Firms can build competitive advantage through the accumu-
lation of assets over time. Such endowments become an asset stock for the
firm when the resource flows form a consistent pattern of appropriate choices
on expenditure to build resources and skills (Dierickx & Cool, 1989). This
path-dependent process is usually causally ambiguous and can allow firms to
achieve strategic goals more quickly than competitors. Asset stocks are also
interconnected with other stocks and subject to continual reinvestment to
forestall erosion (Dierickx & Cool, 1989). Endowments can appear in the
form of physical assets or structures in the form of organizational slack.
Organizational slack is the cushion of actual or potentially accessible
resources that allows organizations to respond to pressure, initiate strategic
change, champion causes, and facilitate innovative or creative behavior
(Bourgeois, 1981; Singh, 1986). Slack allows firms to retain earnings for
90 Business & Society 50(1)

reinvestment, particularly useful if the firm wants to invest in long-term proj-

ects such as environmental strategy.
An effective environmental strategy requires continual and considerable
reinvestment (Darnall & Edwards, 2006). Firms that possess long-term
endowments can more easily build environmental capabilities because it
allows them to invest in technological leadership and exploit opportunities
(Aragón-Correa, 1998). In particular, the greater the degree of discretionary
slack—that which is within the latitude of managerial action—the more
likely it is that managers can address environmental issues (Sharma, 2000).
Slack allows flexibility and firms with slack respond in a timelier manner to
changes in environmental technologies (Aragón-Correa, Matías-Reche, &
Senise-Barrio, 2004). Thus, endowments and related slack allow firms to
build proactive environmental strategies. “Endowments,” in our analysis, is a
combination of the amount of money a firm invests in environmental research
and development (scale) and supporting structures such as an environmental
management system or an ISO-14001 certified environmental process that
would create the necessary slack to maximize the endowment.
Managerial vision. “Visioning” is the process of projecting a desired future
organizational state that, when effectively communicated, empowers follow-
ers to enact the vision (see Westley & Mintzberg, 1989). Visionary leadership
may result from an individual’s capacity for imagination, inspiration, insight,
foresight, or sagacity and can be directed to focus on products, processes, the
market, the organization, or ideals (Westley & Mintzberg, 1989). Visionary
leadership benefits company performance, attitudes of followers, creates
cohesion among the top management team, and has a positive influence on
corporate citizenship (see Groves, 2006). Visionary leadership furthermore
positively influences values of social corporate responsibility toward share-
holders, stakeholders, and the community at large (Waldman et al., 2006).
Managerial vision is also important for building internal interdependencies
and interrelationship within organizations (Dierickx & Cool, 1989). Vision is
particularly important when uncertainty is high and actions are difficult to
contract, and managers with strong visions will tend to attract employees
with similar beliefs (Van den Steen, 2005).
Visionary leadership is a unique capability because it is not clear if such
leaders can be trained. In addition, a complex or internally interdependent
organization is difficult for competitors to copy because it cannot be system-
atically managed or influenced (Barney, 1991; Child, 1972). Environmental
strategies require visionary leadership because the success of environmental
strategies depends on long-term commitment and investment (Hart, 1995).
Walls et al. 91

A corporate mission that embeds social goals allows firms to develop envi-
ronmental capabilities (Marcus & Andersson, 2006). Vision prioritizes the
environment on the corporate agenda; managers champion and direct functional,
department and production processes toward environmental goals (Andersson
& Bateman, 2000). Our analysis indicates that managerial vision of environ-
mental strategy can be measured in terms of the time dimension of the envi-
ronmental vision (short- or long-term goals have been set) and the depth of
the vision across the organization (global or not).
Top management skills. Managerial skills may be generic (transferable),
industry specific, and firm specific (such as know-how) used to make opera-
tional and strategic decisions that build competitive advantage (Castanias &
Helfat, 1991). Superior management skills are a source of economic rent
(Penrose, 1959) and difficult for competitors to imitate as they are firm-
specific (Barney, 1991). The competitive advantage of top managers comes
not just from within the firm but also through the managers’ connections
within the business environment. Evidence suggests, for example, that the
ability to network along the supply chain and stakeholders through reciprocal
relationships based on trust confers competitive advantage (Tsang, 1998).
A successful environmental strategy is likely to require managerial com-
petencies in combination with other firm-specific capabilities (Russo &
Fouts, 1997). Implementing environmental strategic initiatives requires tight
internal integration and coordination as well as stable external partnerships
(Dechant & Altman, 1994), which require a talented top management team.
The role of managers in environmental strategy is one of central coordina-
tion, integration, and connections with others to source for talent, ideas, and
technologies (Marcus & Geffen, 1998). To do so, environmental managers
must have some tenure with the firm and relevant functional experience in
environmental issues (Aragón-Correa et al., 2004). In our content analysis
“top management team” environmental skills are assessed by whether the
environmental manager is on the executive team and by the reporting level of
the environmental manager (a scale of local or facility level) to senior man-
agement team or the board.
Human resources. Human resources are firm-specific capabilities that can
also bestow competitive advantage (Barney, 1991). Particularly, human
resources can be a unique capability if a firm’s HR practices differ from most
of its peers were developed through trial-and-error (path-dependent), consist
of continual investment, and are highly integrated with other firm resources
(socially complex), and cannot be substituted by planning systems (non-
substitutable; Lee, Phan, & Chan, 2005).
92 Business & Society 50(1)

Human resources are an important capability for the development of envi-

ronmental strategies because dealing with environmental issues requires
expert knowledge and specific incentives (Wehrmeyer, 1996). Such experi-
ence may not necessarily rest within the firm but can be brought in by hiring
professionals or experts. Indeed, the more firms search for talent and ideas
externally, the more likely they will be able to build environmental capabili-
ties if they can harmonize the external learning within the firm (Marcus &
Geffen, 1998). In addition, firms that evaluate managers on environmental
performance criteria are more likely to develop environmental capabilities
(Sharma, 2000). In our analysis, two processes that firms have in place rele-
vant to “human resources” skills for environmental strategy are formal envi-
ronmental training programs and formal environmental performance
reporting systems.
Content was also analyzed for reactive environmental strategy. These
were captured in the form of noncompliance with environmental regulation.
Two topics were captured for this category that we labeled environmental
compliance: an indication of violation of environmental regulation, that may
or may not have involved a penalty in the form of a fine, and costs in terms
of fines or remediation costs the company reported.

Construct Reliability
We assessed the reliability of our environmental strategy construct, based on
six environmental capabilities using factor analysis. Table 3 indicates that all
capabilities are positively correlated with one another. It appears that firms
develop environmental capabilities in parallel as suggested by Hart (1995).
The reliability analysis was done using both exploratory and confirmatory
factor analysis. We split the data into two random samples, one containing
122 observations and a smaller one with 62 observations, to cross-validate
our model (Bollen, 1989). The larger sample was used in an exploratory fac-
tor analysis using a factor extraction method, in case reliabilities were low
(Fabrigar et al., 1999). We used oblique quartimin rotation, allowing factors
to correlate (Fabrigar et al., 1999), based on the evidence that firms build
environmental capabilities in parallel.
Results are given in Table 4 and show that all environmental capabili-
ties loaded onto a single factor with loadings ranging from 0.52 to 0.81,
above the 0.40 cutoff point typically used in strategic management litera-
ture (e.g., Finkelstein, 1992). Loadings on additional factors were below
the 0.40 cutoff point. The eigenvalue of the first factor was 3.42 (Chi-
square = 355.78), and a scree plot and Akaike Information Criterion
Walls et al. 93

Table 3. Descriptive Statistics—Proactive and Reactive Environmental Measures

M SD Skew. Kurt.  

Environmental 9.03 7.19 0.38 1.88 1 2a 2b 3 4 5

Strategy
1 Historical 0.89 1.07 1.16 3.65  
orientation
2a Supply chain   1.00 1.15 0.91 2.80 0.45  
network
2b Stakeholder   2.55 2.52 0.46 1.71 0.49 0.62  
network
3 Endowments   1.33 1.19 0.58 2.50 0.41 0.51 0.62  
4 Managerial vision   1.22 0.92 0.19 2.13 0.44 0.42 0.54 0.55  
5 TMT skills   1.45 1.60 0.46 1.53 0.49 0.46 0.62 0.53 0.43  
6 HR skills   0.59 0.76 0.84 2.21 0.42 0.55 0.63 0.44 0.47 0.54
  Environmental   0.65 1.04 1.68 6.19  
compliance
  KLD strengths   0.42 0.70 1.63 5.14 1 2 3 4 5  
1 Environmental   0.05 0.23 3.93 16.46  
products
2 Pollution   0.13 0.33 2.27 6.14 0.17  
prevention
3 Recycling   0.05 0.22 4.18 18.50 0.34 −0.01  
4 Alternative fuel   0.07 0.26 3.35 12.23 −0.64 −0.10 −0.63  
5 Environmental   0.09 0.29 2.82 8.93 0.09 0.41 0.12 0.15  
communication
6 Other strengths   0.03 0.18 5.26 28.70 −0.64 0.10 −0.63 0.38 0.23  
  KLD concerns   0.90 1.29 1.19 3.17 1 2 3 4 5 6
1 Hazardous   0.27 0.44 1.06 2.12  
waster
2 Regulatory   0.20 0.40 1.53 3.35 0.62  
problems
3 Ozone depletion   0.01 0.10 9.43 90.01 0.58 0.22  
4 Emissions   0.19 0.39 1.58 3.49 0.65 0.63 0.56  
5 Agricultural   0.02 0.15 6.56 44.02 0.33 0.58 0.69 0.36  
chemicals
6 Climate change   0.17 0.38 1.77 4.14 0.16 0.33 −0.47 0.37 −0.49  
7 Other concerns   0.05 0.22 4.18 18.50 0.18 0.07 −0.56 −0.10 −0.60 0.42
  Pollution 12.68 30.74 −0.55 2.03  
prevention
  Pollution control   0.77 0.28 −1.33 3.72  

Note: n = 184 except for Pollution Prevention (n = 133) and Pollution Control (n = 135).
Tetrachoric correlations were used for KLD measures

(AIC) statistic confirmed that a one-factor model was the best fit. We
assessed raw residuals and found no problems with correlated residuals or
skewed dispersion.
94 Business & Society 50(1)

Table 4. Exploratory Factor Analysis

Variables Factor 1 Factor 2 Factor 3

    1.  Historical orientation 0.693 −0.039 0.125
2a.  Supply chain network 0.759 −0.022 −0.160
2b.  Stakeholder network 0.810 0.033 −0.020
    3.  Endowments 0.581 0.305 −0.041
    4.  Managerial vision 0.520 0.235 −0.003
    5. TMT skills 0.655 0.014 0.207
    6.  Human resources 0.723 −0.152 −0.012
Eigenvalues 3.42 0.68 0.10

Note: factor extraction (principal factor) method was used with oblique quartimin rotation.
n = 122, Chi-square = 355.78, degrees of freedom = 21, Cronbach’s alpha = 0.86.

Table 5. Confirmatory Factor Analysis

Variables Factor 1
    1.  Historical orientation 0.505
2a.  Supply chain network 0.646
2b.  Stakeholder network 0.857
    3.  Endowments 0.761
    4.  Managerial vision 0.738
    5. TMT skills 0.806
    6.  Human resources 0.804
Eigenvalue 3.83

Note: factor extraction (principal factor) method was used, constrained to one factor. n = 62,
Chi-square = 220.71, degrees of freedom = 21, Cronbach’s alpha = .964.

The single-factor construct had a high reliability score with a Cronbach’s

alpha of 0.86 and a reliability coefficient Rho of 0.84, well above the 0.70
cutoff point that is considered acceptable for early stage construct validation
(Nunnally & Bernstein, 1994).
We then used the smaller sample to run a confirmatory factor analysis. We
used a factor extraction method but restricted the analysis to one factor. The
results were closely aligned with those of the exploratory factor analysis
(Table 5), indicating that our measure appeared appropriate.4
Results of the factor analyses suggest that all environmental capabilities
were a component of the environmental strategy measure we developed
Walls et al. 95

Table 6. Multitrait Multimethod Matrix of Environmental Measures

A1 B1 A2 B2 A3 B3
Environmental strategy A1 (0.86)  
Environmental compliance B1 −0.06a ()  

KLD strengths A2 0.51b 0.04 (0.24)  

KLD concerns B2 0.17 0.11b 0.31a (0.65)  

Pollution prevention A3 −0.02b 0.03 0.10b −0.03 (0.63)  

Pollution control B3 0.03 0.13b 0.13 −0.18b 0.38a ()

Note: Cronbach’s alpha not available for “Compliance” and “Pollution Control.” n = 127,
correlations greater than 0.16 are significant at a 5% level. Internal reliabilities of the measures
are shown within parentheses
a. Discriminant validity between correlations of different constructs using the same
measurement instruments.
b. Convergent validity of correlations of the same constructs using different measurement
instruments.

through our content analysis. Thus our environmental strategy measure was
a formative (aggregated) construct (Edwards, 2001) that consisted of six
environmental capabilities.5

Construct Validity: The Multitrait Multimethod Matrix

We tested the validity of our environmental strategy construct using a multi-
trait, multimethod matrix analysis (Table 6). This analysis provides informa-
tion on internal reliabilities of the measures (in parentheses), discriminant
validity between correlations of different constructs using the same measure-
ment instruments (superscript “a”), convergent validity of correlations of the
same constructs using different measurement instruments (superscript “b”),
and discriminant validity between correlations of different constructs using
different measures (Campbell & Fiske, 1959).
Internal reliability scores were calculated through Cronbach’s alpha, and
were not available for the environmental compliance measure constructed in
our content analysis or TRI’s pollution control measure as these were single-
item constructs. Internal reliabilities were strong for our environmental strat-
egy measure (0.86), KLD concerns (0.65) and TRI pollution prevention
(0.63). The KLD strengths reliability score was only 0.24. Since this measure
is based on an unsystematic categorization of firm’s environmental initiatives
96 Business & Society 50(1)

without sound theoretical grounding, however, there was no a priori expecta-

tion for strong internal reliability.
Discriminant validity of different constructs using the same method (hetero-
trait mono-method) was marked with superscript “a”, and should have been
close to zero. These correlations were between the “proactive” and “reactive”
environmental strategy constructs in our content analysis, KLD, and TRI.
Our environmental strategy construct had a very low correlation with envi-
ronmental compliance (–0.06), suggesting strong discriminant validity. In
contrast, convergent validity was less strong for KLD (0.31) and TRI (0.38)
where proactive and reactive constructs correlated moderately.
Convergent validity of similar constructs measured in different ways
(homo-trait hetero-method) was marked with superscript “b”. These correla-
tions should have been significantly different from zero. Among the proac-
tive constructs, convergent validity was strong between our measure of
environmental strategy and KLD strengths (0.51). In contrast, the TRI pollu-
tion prevention measure did not correlate significantly with the environmen-
tal strategy nor KLD strengths.
Among the reactive constructs, convergent validity did not take place—
none of the correlations were statistically significant. Qualitatively, the envi-
ronmental compliance measure from our content analysis was weakly
positively correlated with both KLD concerns and TRI pollution control.
However, the correlation among the latter two reactive measures was signifi-
cant but negative. This relationship suggests that firms that have implemented
fewer pollution control techniques have higher KLD concerns. Thus, while
both of these variables are considered “reactive” environmental approaches
in our analysis, there appears to be a difference between them. Future research
may need to reconsider “reactive” approaches along a continuum that distin-
guishes between minimal compliance to environmental regulation (in the
form of pollution control) versus failure to comply (in the form of KLD con-
cerns). Our environmental compliance measure appears to capture both these
types of reactive approaches. Furthermore, the KLD concerns measure may
be artificially inflated because a firm with one environmental problem could
be captured in several of the KLD concerns categories. For example, a firm
that has “substantial emissions” may also have “regulatory problems” for
which it would score a double hit in the KLD concerns measure. Such infla-
tion could partly explain why the convergence between our environmental
compliance measure and KLD concerns, although positively correlated, is
not statistically significant.
A final discriminant validity check assessed correlations of different con-
structs measured in different ways (hetero-trait hetero-method). In this analysis,
Walls et al. 97

superscript “b” diagonal values should have been higher than adjacent values
in normal font. We found discriminant validity in the case of our content
analysis measures and KLD measures. Evidence was inconsistent for the TRI
measures. The pollution control measure could be discriminated from our
content analysis measures, but the pollution prevention measure could not be.
The TRI measures could also not be sufficiently discriminated from either of
the KLD measures. This circumstance would suggest that TRI pollution pre-
vention (a proactive construct) does not discriminate enough from reactive
constructs. Again, future researchers may wish to consider different levels of
proactive approaches firms take when dealing with environmental issues.

Predictive Validity
The final stage of our analysis was to test for predictive validity. The purpose
was to examine how our measure of environmental strategy, developed from
content analysis and aligned with the theory of the NRBV, improved the
predictability of competitive advantage outcomes. Specifically, we studied
the association of all proactive and reactive environmental measures with
two types of outcomes: environmental performance and financial perfor-
mance. The regression models were run in stages. We first ran a base model
that included only controls. Subsequently we ran models for each proactive
and reactive environmental measure to separately assess the association with
the performance outcome and predictive power. Table 7 shows descriptive
statistics of the variables used in the regressions.
We first ran these models on the environmental performance outcome
(t + 5), to assess the association of a firm’s proactive and reactive environ-
mental approaches on actual environmental performance 5 years down the
line (Table 8). The basic model including controls indicates that leverage is
negatively associated with environmental performance. Firm size is posi-
tively associated with environmental performance, as is capital intensity
(weakly so). Models 1 and 2 show that our environmental strategy and envi-
ronmental compliance measures predicted environmental performance.
Environmental strategy is positively associated with environmental perfor-
mance and environmental compliance is negatively associated. The KLD
strengths measure was also positively associated with environmental perfor-
mance (Model 3). In contrast, no association was found for KLD concerns or
either of TRI measures. The KLD strengths measures explained an additional
5.6% of variance (adjusted R2) compared to the base model. Our environmen-
tal compliance measure explained an additional 3.3% of variance. Our envi-
ronmental strategy measure almost tripled explanatory power for environmental
98
Table 7. Descriptive Statistics—Dependent and Independent Variables

M SD Skew. Kurt. 1 2 3 4 5 6 7 8 9 10 11 12 13
  1 Environmental 5.20 1.51 −0.09 2.43  
performance
  2 Tobin’s Q 1.75 1.22 1.47 5.19 0.19  
  3 Environmental 9.03 7.19 0.38 1.88 0.65 0.15  
strategy
  4 Environmental 0.65 1.04 1.68 6.19 −0.26 −0.18 −0.07  
compliance
  5 KLD strengths 0.42 0.70 1.63 5.14 0.49 −0.09 0.56 0.07  
  6 KLD concerns 0.90 1.29 1.19 3.18 0.11 −0.26 0.20 0.27 0.40  
  7 Pollution 12.68 30.74 −0.55 2.03 0.05 0.02 0.09 0.08 0.00 0.19  
prevention
  8 Pollution 0.77 0.28 −1.33 3.72 0.13 0.23 0.20 0.07 0.19 0.02 0.16  
control
  9 Sales growth 14.63 15.73 1.53 6.60 0.04 0.01 −0.18 0.00 0.07 0.11 −0.08 0.00  
10 Leverage 0.25 0.15 0.13 2.48 −0.17 −0.38 −0.02 −0.03 −0.01 0.01 0.04 −0.27 −0.12  
11 Firm size 9.16 1.11 0.36 3.25 0.35 0.00 0.48 0.08 0.36 0.53 0.29 0.09 −0.05 0.00  
12 Capital intensity 0.06 0.05 1.77 6.37 0.28 0.32 0.14 −0.19 0.05 −0.05 0.15 0.14 0.20 −0.14 0.09  
13 R&D intensity 0.09 0.12 3.20 16.80 0.26 0.54 0.16 −0.20 −0.01 −0.16 −0.08 0.21 0.07 −0.42 0.09 0.53  
14 Pollution 17.90 6.48 −0.13 1.64 0.15 0.12 0.19 0.12 0.25 0.31 0.32 0.07 −0.21 0.13 0.20 0.13 0.00
intensity
Note: n = 84.

Table 8. Predictive Validity—Environmental Performance (Innovest Ratings) (t + 5)
Controls Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Sales growth 0.003 (0.010) 0.009 (0.008) 0.004 (0.009) 0.003 (0.009) 0.005 (0.010) 0.000 (0.012) 0.003 (0.011)
Leverage −2.796*** (1.009) −2.873*** (0.842) −2.856*** (0.989) −2.809*** (0.975) −2.832*** (1.002) −2.500* (1.319) −2.030 (1.295)
Firm size 0.412*** (0.116) −0.030 (0.115) 0.433*** (0.114) 0.262** (0.123) 0.532*** (0.137) 0.365** (0.140) 0.320** (0.131)
Capital 6.902* (3.744) 6.050* (3.128) 5.802 (3.698) 7.159* (3.620) 6.197 (3.745) 7.900* (4.664) 6.429 (4.353)
  intensity
R&D intensity 0.503 (1.559) 0.362 (1.301) −0.176 (1.553) 0.623 (1.507) 0.242 (1.557) −0.070 (3.099) 2.250 (2.607)
Pollution 0.017 (0.023) 0.008 (0.019) 0.026 (0.023) 0.005 (0.022) 0.028 (0.024) 0.022 (0.027) 0.016 (0.025)
  intensity
Environmental 0.131*** (0.018)  
  strategy
Envioronmental −0.292** (0.120)  
  compliance
KLD strengths 0.576*** (0.189)  
KLD concerns −0.225 (0.139)  
Pollution −0.000 (0.006)  
  prevention
  (TRI)
Pollution 0.556 (0.672)
  control (TRI)
Constant 1.486 (1.060) 4.476*** (0.976) 1.454 (1.039) 2.781** (1.109) 0.406 (1.248) 1.772 (1.276) 1.642 (1.361)
R2 .184 .436 .222 .244 .201 .169 .193
R2 adjusted .143 .402 .176 .199 .154 .101 .130

Note: n = 126 except for Model 5 (n = 94) and Model 6 (n = 97). Standard error is shown within parentheses.
*p < .10. **p < .05. ***p < .01.

99
100 Business & Society 50(1)

performance increasing adjusted R2 from 14.3% to 40.2%, an additional

25.9% of variance explained. These results suggest that an environmental
strategy measure developed in close alignment with the natural resource–
based theoretical perspective has a much stronger predictive ability for future
environmental performance, a form of competitive advantage, than other
measures often used by researchers.
We next ran the environmental measures on the financial performance
outcome, to assess the association of proactive and reactive environmental
approaches on the (future) market value of the firm (Table 9). The base
model indicates that, as in the environmental performance regression, lever-
age has a significant negative association with financial performance. In
addition, R&D intensity was positively associated with financial perfor-
mance, as was pollution intensity (weakly so). Models 2 and 4 show that two
types of reactive environmental measures were negatively associated with
financial performance (environmental compliance and KLD concerns). None
of the other measures were significantly associated with financial perfor-
mance. Environmental compliance explained an additional 1.7% of variance
(adjusted R2) over the base model, and KLD concerns explained an addi-
tional 4.1% of variance. These modest predictive powers are not unexpected
since many factors affect firm performance. What is surprising is that none
of the proactive environmental measures appear to affect firm performance,
a finding that contradicts results found in several meta-analyses (Margolis et al.,
2007; Orlitzky et al., 2003). This lack of relationship may be because we
included several controls such as R&D intensity, which appear to mediate
the relationship between firm’s social strategies and financial performance
(McWilliams & Siegel, 2000). Our results suggest that firms are not rewarded
by the market for implementing more proactive types of environmental strat-
egies. However, when firms fail to meet basic environmental regulatory
requirements, the market appears to punish them perhaps viewing such a
strategy as excessively risky.

Discussion
This article represents a first step toward developing a measure of environ-
mental strategy that is coherent with the natural resource–based view of the
firm. In the past, scholars have used a variety of measures that blurred the
lines between environmental strategy and environmental performance to pre-
dict competitive advantage, with inconsistent results. This article addresses
these concerns by using a content analysis approach to develop a measure of
environmental strategy rooted in theory, a major contribution of our work.

Table 9. Predictive Validity—Financial Performance (Tobin’s Q)
Controls Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Sales growth 0.008 (0.006) 0.009 (0.006) 0.009 (0.006) 0.008 (0.006) 0.011* (0.006) 0.008 (0.007) 0.001 (0.006)
Leverage −1.796** (0.788) −1.838** (0.787) −1.862** (0.779) −1.805** (0.791) −2.008*** (0.766) −0.833 (0.865) −2.021** (0.844)
Firm size −0.117 (0.088) −0.181* (0.102) −0.105 (0.087) −0.100 (0.093) 0.021 (0.097) −0.067 (0.089) −0.040 (0.083)
Capital −2.104 (2.681) −2.256 (2.678) −2.918 (2.675) −2.152 (2.691) −3.087 (2.615) −0.493 (2.760) 1.036 (2.558)
  intensity
R&D intensity 6.057*** (1.100) 6.038*** (1.098) 5.650*** (1.103) 6.030*** (1.105) 5.593*** (1.076) 8.241*** (1.816) 5.032*** (1.531)
Pollution 0.031* (0.017) 0.031* (0.016) 0.038** (0.017) 0.033* (0.017) 0.046*** (0.017) 0.017 (0.016) 0.023 (0.015)
  intensity
Environmental 0.019 (0.015)  
  strategy
Environmental −0.179** (0.087)  
  compliance
KLD strengths −0.077 (0.145)  
KLD concerns −0.306*** (0.102)  
Pollution 0.003 (0.004)  
  prevention
  (TRI)
Pollution 0.128 (0.389)
  control (TRI)
Constant 2.332*** (0.793) 2.759*** (0.865) 2.315*** (0.783) 2.193** (0.838) 1.086 (0.873) 1.551* (0.811) 1.613* (0.853)
R2 .391 .399 .412 .393 .435 .346 .323
R2 adjusted .360 .363 .377 .356 .401 .291 .267

Note: Standard error is shown within parentheses.

*p < .10. **p < .05. *** p < .01.

101
102 Business & Society 50(1)

We find that our environmental strategy measure, which captures firm’s

proactive environmental initiatives, has strong reliability and validity. Our
content analysis shows that firms develop up to six specific environmental
capabilities. Taken together, these capabilities form a firm’s proactive environ-
mental strategy that converges with another measure of proactive envi-
ronmental strategy (by KLD) and can be distinguished from various
measures of reactive environmental strategy in the form of noncompliance
or minimal compliance. Moreover, the predictive validity of our measure is
strong. Our environmental strategy measure explains an additional 25.9%
of variance over a base model, and double the variance of the KLD strengths
measure, to predict future environmental performance. Our reactive envi-
ronmental compliance measure shows weak convergence with other reac-
tive measures. Nevertheless, environmental compliance predicts both future
environmental performance and future financial performance, with modest
additional variance explained at 3.3% and 1.7% over base models, respec-
tively. Our conclusion is that our new measure of environmental strategy,
rooted in theory, is better able to capture firms’ environmental capability
development and environmental noncompliance than other measures often
used as proxies.
While the main purpose of this article is to evaluate our newly developed
measures, we also simultaneously assessed reactive and proactive environ-
mental strategy measures using KLD and TRI data. Some results from these
external measures are worth noting. For instance, internal reliability is low
for KLD strengths. Convergent validity is statistically insignificant for KLD
concerns and the TRI pollution prevention and pollution control measures.
There could be several reasons. First, part of the problem may lie in the nature
of the TRI data, which is captured at facility level and then aggregated to
company level, which means that environmental effects may be averaged
out. Second, the TRI pollution prevention measure may be an insufficient
method to capture underlying environmental capability development. Third,
there may be a need to distinguish between noncompliance and minimal
compliance as discussed earlier. Reactive environmental strategies may need
further refinement and be coded along a continuum (Newman & Hanna,
1996). In addition to these issues, both KLD’s and TRI’s proactive and reac-
tive measures correlate significantly and therefore do not discriminate suffi-
ciently between proactive and reactive environmental strategies. It is possible
that firms use a combination of reactive and proactive approaches (Aragón-
Correa, 1998) and continue to pollute, for instance, when in the process of
being more proactive. Nevertheless, the lack of discriminant validity is
Walls et al. 103

reflected in the lack of predictive power: TRI measures are not associated
with either performance outcome, nor is KLD concerns associated with envi-
ronmental performance. These troublesome results highlight the importance
of developing (and using) measures that are aligned with theoretical perspec-
tives of the NRBV.
One implication of our findings is that a firm’s environmental strategy
can be identified by underlying environmental capabilities. In particular,
six capabilities (in which network embeddedness is split into two types)
appear valuable to firms. In aggregation, these form a firm’s environmen-
tal strategy. The combinations of capabilities are unique between firms
although some patterns appear. For instance, among firms with only one
capability, managerial vision is the most common. Firms with two capabilities
most often combined vision with environmental endowments. Engagement
with organizational stakeholders is the most common addition for firms
with three capabilities. Firms next develop top management team skills and
then relationships supply chain stakeholders. Firms with six capabilities
tend to have long historical orientations toward environmental strategy.
The least common capability is human resources; perhaps this capability
requires the most intense integration of environmental strategy with the
company’s operations. These patterns seem to suggest that some capabili-
ties, such as involving top levels of management, cooperating with external
organizations, and setting up human resources systems, are more difficult to
develop or require more commitment and integration. This suggestion reso-
nates with other work that shows firms often begin by building “easier”
environmental capabilities and later integrate more complex ones (Marcus
& Anderson, 2006). Implications for future research are that not all capa-
bilities are equal, and it may be interesting to investigate the combination of
capabilities and their impact on competitive advantage. For practice, these
patterns suggest that firms can create a more valuable environmental strat-
egy when they combine several types of environmental capabilities and
integrate these with management systems. Certainly, firms that combine
more capabilities appear to benefit from a competitive advantage in terms
of environmental performance.
Our findings on reactive environmental strategies also have implications.
Our compliance strategy measure is negatively associated with both environ-
mental performance and financial performance. This negative association
suggests that firms with reactive environmental strategies suffer with respect
to both competitive advantage outcomes. Firms with these kinds of strategies
appear to be lagging behind their peers and may face double costs: first, they
104 Business & Society 50(1)

have fines associated with violations or remediation costs; second, they are
behind the curve in terms of investing in environmental capabilities. Not
only do these firms have worse environmental performance, they also have
lower financial performance. Thus, while a definitive positive association
between proactive environmental strategy and financial performance was
not present in our work, it appears that investors place lower value on reac-
tive compliance strategies.
The results of the financial performance regressions warrant additional
comment. We find that reactive environmental strategy is negatively associ-
ated with financial performance but do not find a positive association for
proactive environmental strategy. This latter finding does not conform to
results from many other studies (Margolis et al., 2007; Orlitzky et al., 2003).
We speculate that one reason is that some studies suffer from omitted vari-
able bias. Certainly, moderating, mediating, and other confounding factors
affect outcomes in studies that link corporate social performance to financial
performance (McWilliams & Siegel, 2000; Orlitzky, 2008). Our work included
a number of control variables in our regression to account for such effects. A
second explanation could be that many factors affect financial performance.
Environmental strategy, rather than explain a large amount of variance in
financial performance, may play a more critical role in general corporate
strategy for outcomes such as market share, productivity, human capital,
product differentiation, cost reduction, and more (Ambec & Lanoie, 2008;
Siegel, 2009). As the mechanisms of these relationships are still poorly
understood, a contribution of our work is in identifying the underlying capa-
bilities of environmental strategy that could pave the path for understanding
these theoretical mechanisms. Future research that seeks on whether it pays
to be green may need to consider alternative types of competitive advantage
outcomes, rather than focus on financial performance.
This study, like any other, has its limitations. For instance, our study is not
a panel data and we can therefore say little about how companies develop
capabilities over time, an area that remains open for future research. Rather
than assess changes over time, our purpose was foremost to develop a new
measure of environmental strategy. The measure we developed is better able
to capture capability development than proxy measures such as KLD and
TRI, since it is aligned with theoretical perspectives. In addition, it is more
refined since it aggregates several capability scales, rather than simply being
a combination of arbitrary categories or a reflection of pollution output. Yet,
it is simple enough to be replicated. As a result, future researchers who wish
to understand the process of environmental capability development can use
our measure.
Walls et al. 105

Another limitation of our work is that we say little about “how” firms
develop or implement environmental capabilities. Our work focuses on find-
ing commonalities in terms of what types of capabilities firms develop.
However, two firms may implement the same capability in very different
ways. The implementation and integration of a supply chain network capabil-
ity, for instance, may determine how much value it creates. Our work simply
identifies that the firm has the capability and how to measure it. This finding,
in itself, is a contribution to the field since NRBV stresses that competitive
advantage may erode over time. Building on our work, future research may
observe new capabilities developed for environmental strategy, or discover
unique combinations and integration of capabilities.
Our work has implications for future research. While we conducted our
content analysis at firm level, our work hints at cross-level theorizing. For
instance, human resources, visionary leadership, and top management skills
are important capabilities. We believe that more work can be done at a micro-
and meso-level organizational behavior to tease out individual and group
level effects in the development of environmental capabilities. In addition,
the network-embedded nature of environmental capabilities suggests that
extraorganizational factors are important. Future work on environmental
strategy needs to investigate issues such as interfirm relationships and part-
nerships across supply chains, industries, and stakeholders. Such work may
need to draw on stakeholder views and network analysis, as well as agency
theory and resource-dependence perspectives. Finally, capability develop-
ment also appears related to regulation and policy in the form of voluntary
initiatives and external auditing. Research can explore the development of
such capabilities in the context of public policy.
This work also has implications for practice. We have identified six key
capabilities that firms develop to implement an environmental strategy.
While the combination and integration of these capabilities may differ
between firms, managers may find these results useful. Our work can guide
managerial planning on where to invest and what to develop in terms of envi-
ronmental strategy. We also show that some capabilities may be more easily
attained than others, so our work provides managers a handhold on where to
start. These types of practical steps may prove useful to firms who have not
yet developed a proactive environmental strategy. More advanced firms may
benefit from understanding that integration of more difficult capabilities such
as expertise at the top level of the firm, or implementing human resource
systems, improves environmental performance further.
Environmental capabilities create value for firms. Our work is a first step
to identifying where that value is created and how to measure it.
106 Business & Society 50(1)

Appendix
KLD Measures
KLD Environmental Strengths Categories
1. Beneficial Products and Services. The company derives substantial
revenues from innovative remediation products, environmental ser-
vices, or products that promote the efficient use of energy, or it has
developed innovative products with environmental benefits.
2. Pollution Prevention. The company has notably strong pollution
prevention programs including emissions reductions and toxic-use
reduction programs.
3. Recycling. 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.
4. Alternative Fuels. 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 pro-
motion of energy efficiency.
5. Communications. The company is a signatory to the CERES Prin-
ciples, publishes a notably substantive environmental report, or
has notably effective internal communications systems in place for
environmental best practices.
6. Other Strengths. The company demonstrates a strong environmental
attribute not addressed by KLD’s ratings categories.

KLD Environmental Concerns categories

1. Hazardous Waste. The company’s liabilities for hazardous waste

sites exceed US$50 million, or the company has recently paid sub-
stantial fines or civil penalties for waste management violations.
2. Regulatory Problems. The company has recently paid substantial
fines or civil penalties for violations of air, water, or other environ-
mental regulations, or it has a pattern of regulatory controversies
under the Clean Air Act, Clean Water Act, or other major environ-
mental regulations.
3. Ozone Depleting Chemicals. The company is among the top manu-
facturers of ozone depleting chemicals such as HCFCs, methyl chloro-
form, methylene chloride, or bromines.
Walls et al. 107

4. Substantial Emissions. 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.
5. Agricultural Chemicals. The company is a substantial producer of
agricultural chemicals, i.e., pesticides or chemical fertilizers.
6. Climate Change. The company derives substantial revenues from
the sale of coal or oil and its derivative fuel products, or the com-
pany 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.
7. Other Concerns. The company has environmental problem not specifi-
cally covered in KLD’s categories, usually an environmental accident.

Acknowledgments
The authors would like to thank Andy Hoffman, Jim Walsh, the editors, anonymous
reviewers, and participants at the Special Issue workshop for insightful comments. We
are especially grateful to Steve Walls and Katy DeCelles for technical assistance.

Declaration of Conflicting Interests

The author(s) declared that they had no conflicts of interest with respect to their
authorship or the publication of this article.

Funding
The author(s) disclosed that they received the following support for their research
and/or authorship of this article: We would also like to acknowledge the support of the
Alcoa Foundation Conservation and Sustainability Fellowship Program and
the Frederick A. and Barbara M. Erb Institute for Global Sustainable Enterprise at
the University of Michigan. We are indebted as well to the Spanish Minister of Science
and Innovation (ECO 2009-08799, ECO2009-08446 and ECO2010-09370-E) and the
Generalitat de Catalunya (2009 SGR 919) for providing financial support.

Notes
1. We used oblique rotation rather than orthogonal (Varimax) to relax the assump-
tion that latent variables be uncorrelated. This is a reasonable expectation in
the case of environmental capabilities, which are often developed sequentially
within firms.
108 Business & Society 50(1)

2. KLD also provides data on a number of other social responsibility measures. We

used only the measures related to environmental initiatives of firms: “environ-
mental strengths” and “environmental concerns.”
3. In addition to environmental rating, Innovest’s data also rates other components.
We only used the environmental rating, which is based on board and executive
oversight, risk management systems, disclosure/verification, process (“eco-”)
efficiencies, health and safety, new product development, and climate risk.
4. We used a factor extraction method as it was appropriate for our data, but this
method does not provide goodness-of-fit measures. Post hoc robustness tests
show our results are consistent with a maximum likelihood confirmatory factor
analysis run in EQS. This gave a Comparative Fit Index (CFI) of 0.988 and a Root
Mean Square Error of Approximation (RMSEA) of 0.051 confirming that the one
factor model is a good fit (Fabrigar et al., 1999).
5. Since environmental strategy is a multidimensional construct, broader than each
of the capabilities, we reported an overall reliability coefficient rather than any of
the subscales, which would expected to be lower than the overall construct (e.g.,
Hanisch, Hulin & Roznowski, 1998; Ones & Viswesvaran, 1996).

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Bios
Judith L. Walls is an assistant professor at the John Molson School of Business,
Concordia University. Her research investigates the role of corporate governance in
corporate social responsibility and how firms develop capabilities to manage their
environmental outcomes, both within the firm and along its supply chain. She com-
pleted her PhD at Rensselaer’s Lally School of Management and Technology, and a
postdoctoral fellowship at the University of Michigan’s Erb Institute for Sustainable
Enterprise.

Phillip H. Phan (PhD, University of Washington) is professor and executive vice

dean at the Johns Hopkins University Carey Business School. His research includes
corporate governance and technology entrepreneurship and he has published more
than 80 research articles.
Walls et al. 115

Pascual Berrone (PhD, Universidad Carlos III) is an assistant professor of strategic

management at IESE Business School. His research interests focus on various aspects
of the interface between corporate governance and corporate social responsibility,
with particular emphasis on the impact of incentives schemes and ownership struc-
tures over environmental performance of firms. His research also examines sustain-
able innovation and how external factors affect the environmental-related innovation
propensity of firms. In addition, his research investigates the extent to which sym-
bolic and substantive environmental strategies are effective in achieving both social
acceptance and economic performance. His work has been published in international
journals like Academy of Management Journal, Administrative Science Quarterly,
Human Resource Management, Journal of Business Ethics, International Journal of
Human Resource Management, Journal of Business Research, Corporate Governance:
An international review among others.