There are increasing and diverse interests in how strategy and corporate governance drives environmental management and these create pressures on companies. These pressures affect the corporate governance of firms because shareholders desire for the firm to be seen as environmentally friendly, pressure and influence managerial behaviour to environmental issues.

Environmental management focuses on the appropriate policies and governance mechanisms that companies put in place to mitigate the impact of their activities on the environment. Poor environmental management implementation may lead to social discontent and protests by local communities. Environmental liabilities take away a lot of value from companies if not managed properly. The impact of mitigating such liability becomes visible in the share value.

Management consultants, for example, those at Gabriel Domale Consulting, help managers to implement their corporate governance over environmental management. This enables these companies to carry on their activities in full compliance with environmental requirements (policies and regulations) while also achieving competitive returns on investment. The possible downside of environment management can thus be mitigated by governance mechanisms.

In this article, I will be addressing two fundamental questions:

1. Strategy as a driver in environmental management.
2. Role of corporate governance in environmental management.

Effective corporate governance and strategy are imperatives in driving value-based environmental management. Governance mechanisms that companies put in place help to mitigate the impact of their activities on the environment.

Strategy As A Driver In Environmental Management

Environmental strategies may arise as a response to social pressures to gain legitimacy from environmental stakeholders. In fostering good environmental management, the organization must identify and demonstrate ‘good citizenship’ behavioural imperatives with the host communities that the firm operates.

Environmental management activities include pollution reduction and control; reduction of toxic emissions, control of waste, and biodiversity. Environmental management activities will cost the firm although the costs can be transferred to the public through a better reputation and image which attracts customers and employees.

Markets create incentives for environmental control activities. Internal and external factors may influence environmental control activities and the behaviour of managers in charge of these activities. By investing in good environmental policies, the firm reduces compliance and liability costs, improves the bottom-line and market share, while enhancing both the tangible and intangible assets.

Different environment regulations and market reactivity across different regions may lead to different pay off to environmental initiatives. It is important to evaluate the effectiveness of environmental management from the perspectives of firm profitability, and societal/governmental regulations.

Firms involved in environmental management could be split into two major blocks: (i) green compliant firms – focusing on full compliance with relevant regulations and policies and (ii) environmentally pro-active firms – seeking to achieve abnormal returns through green investments.

Based on a resource-based perspective of corporate environmental performance, it can be argued that the level of industry´s growth moderates the expected probability of returns. However, in low growth industries, the adoption of new policies (related to environmental conditions) would be difficult, as they require a loosening of organizational structures and norms.

The expected payoff of any environmental investment risk tends to be higher in high-growth industries as they generate the type of innovative culture that facilitates pollution prevention as the structure allows for slack resources to be invested in environmental improvements.

It pays to be environmentally responsive, as reducing emissions increases efficiency and saves money, giving firms a cost advantage. However, pollution abatement is a cost burden on firms and it can be detrimental to competitiveness.

Gabriel Domale Consulting develops frameworks that enable managers to implement their company’s pollution prevention strategy to cut pollution well below the levels required by law, reducing the firm’s compliance and liability costs. Consistency in implementation is required as there tends to be a long lag between pollution reduction and impact on return on equity (ROE).

This may be due to ROE reflecting operating efficiency and capital structure with confounding effects on return on sales (ROS) and return on assets (ROA). The other factor is that the environmental profile of a company affects its liability exposure, reputation, and market share.

The general observation is that efforts by companies to prevent pollution and reduce emissions usually drop to the ‘bottom line’ within one to two years of initiation. And that those firms with the highest emission levels stand the most to gain.

Your company’s environmental strategy can be achieved either through reduction or control mechanisms. I encourage companies to adopt a win‐win view of the relationship between business and the environment. The consensus is that talk is cheap but environmental efforts are not.

Role Of Corporate Governance In Environmental Management

In environmental management, firms attempt environmental sensing in deciding on good corporate governance or environmental policies or even adapting to the actions of other actors within the environment. Such isomorphic tendencies shaped the behaviour of firms and firms with good environmental management gain legitimacy and reputation from the external environment.

Due to the lack of high-level visibility of environmental management activities, many shareholders tend not to be aware of the liabilities that firms face on environmental issues. Where environmental management initiatives are not expected to generate enough returns (financial / reputation) or the impacts of the initiatives are not visible in share price, the board may tend not to support such investments.

If environmental protection is linked to financial performance, the board and managers will promote more of these investments with the logic that reducing environmental liability creates more value for customers. Managers can be made to focus on the ‘invisible liability’ if their incentives include stock options.

Initiatives, such as environmental remediation and pollution control, are not as intuitive and may be seen as diminishing cashflow, though those initiatives are more related to diminishing a liability that turns into visible value in the share price. Intriguingly, activities central to the firm´s business are more visible, quantifiable and easy to value.

Thus, it appears counterintuitive to sacrifice cash (visible) to diminish a liability (invisible). External stakeholders can become an important influence in determining what a firm will do, simply by making the environmental issues - and the implications for shareholders - more visible.

These external influences can be treated as governance instruments. The logic of investing in environmental management should also align with shareholders' interests, either through higher profits or avoidance of dire financial consequences of non-compliance with environmental regulations.

Local consulting firms in Africa should leverage their expertise in governance and environmental management strategy to provide advisory to companies and public institutions to strengthen their strategy, governance processes and management practices.

One of such local management consulting firms is Gabriel Domale Consulting which provides advisory in finance, strategy, corporate governance, transformation, cost reduction and leadership training to help companies and public institutions to transform their operations.

In Concluding

A robust national environmental policy will send a strong signal that external corporate governance elements will 'lead' or 'steer' behaviour by 'aligning' incentives. This is done by ensuring that the attainment of financial goals is dependent on the achievement of environmental goals. 

The national environmental strategies can be treated within a continuum between 'command and control' and ‘market-based approaches such as emissions trading. Yet there needs to be a clear political commitment for an environmental agenda and pollution free environment to be achieved.

Many advisors on the right have argued that it pays to be environmentally green because reducing emissions increases efficiency and saves money, giving firms a cost advantage. While those on the left with divergent views posit that pollution abatement is a cost burden on firms and is detrimental to competitiveness. I encourage companies to adopt a win‐win view of the relationship between business and the environment.

The other factor is that the environmental profile of a company affects its liability exposure, reputation, and market share. The general observation is that efforts by companies to prevent pollution and reduce flaring usually drops to the ‘bottom line’ within one to two years of initiation. Your company’s flare reduction strategy can be achieved either through a reduction or control mechanism.

There tends to be a long lag between flare reduction and impact on return on equity (ROE). This may be due to ROE reflecting operating efficiency and capital structure with confounding effects on return on sales (ROS) and return on assets (ROA). I suggest that your company’s pollution prevention strategy should offer to cut flaring well below the levels required by law, reducing the firm’s compliance and liability costs.

Increasing environmental control activities have the highest positive effect on financial performance, yet managers tend to be unaware of this effect. Managers need to innovate and find new strategies to obtain rent or higher returns.

Dr Leesi Gborogbosi / info@gabrieldomale.com / leesi.gborogbosi@gmail.com / +2347034604152

CEO, Gabriel Domale Consulting – Dr Leesi Gborogbosi

Dr Leesi Gborogbosi is the CEO of Gabriel Domale Consulting, a management consulting firm based in Nigeria, that helps companies in Africa to grow, provides insights to leaders and transforms institutions.

He has about three decades of leadership experience in the oil and gas industry (Shell Nigeria). He is an expert in finance, strategy, corporate governance, transformation, cost management, leadership development and due diligence.

Dr Leesi Gborogbosi was Project Finance Manager of Upstream Oil & Gas Projects (7 projects - Headline size: $8 bln) - Southern Swamp Associated Gas System, Forcados Yokri Integrated Project, Otumara, Adibawa, Agbada and Assa North/Ohaji South Projects.

He provided advisory services: strategic planning, budget management, funding strategy, risk management, governance, due diligence, and investment plan, covering the full life cycle of the seven major upstream oil/gas projects, power facilities, and export pipelines.

He collaboratively works with business leaders and their organizations to identify growth opportunities and create value through operational excellence in strategy implementation and capital efficiency by delivering projects within costs, building strategy and planning frameworks and crafting innovative funding solutions.

Dr Leesi Gborogbosi supports finance leaders in making crucial decisions and optimising performance through financial excellence in finance systems and accounting operations, budgeting, finance transformation, cost reduction, governance, risk, and compliance.

He has doctoral degrees in strategy and business studies and MSc (Research Methodology in Management) from IE Business School, Madrid and an MBA (Finance and Banking) from the University of Port Harcourt, Nigeria; and BSc (Accountancy) from the University of Nigeria, Nsukka. He had his secondary education at Federal Government College, Jos, Nigeria.

His doctoral dissertation focuses on strategy implementation, collaboration, the role of middle managers, and the dynamics of social movements (host communities).

Dr Leesi Gborogbosi leverages his professional experience as a Certified Management Consultant (CMC); Fellow, Institute of Chartered Accountants of Nigeria; and The Institute of Management Consultants. He is a member of the Chartered Institute of Procurement & Supply, London; Nigerian Institute of Management (Chartered); and Strategic Management Society, Chicago, United States.

He was nominated by the Strategic Management Society, Chicago for "Best International Conference Paper Prize Awards" in 2017 and 2015. He was appointed the Chair for the Session on “Leading change implementation processes” at the Strategic Management Society conference in Denver, United States in 2015.

Dr Leesi was a member of the Strategic Management Society “Special Committee on Diversity and Inclusion”, Chicago, USA, with the responsibility of providing the Strategic Management Society Board of Directors with a good audit of where the Strategic Management Society stands concerning inclusiveness in its activities.