International Journal of Economy, Management and Social Sciences, 2(8) August 2013, Pages: 550-557

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

Firms Environmental Performance:

Voluntary Actions and Managerial Attitudes
Amir Hossein Montazer-hojat *1, Khalid Abdul Rahim 2
1
2

Department of Economics, Faculty of Economics and Social Sciences, Shahid Chamran University, SCU, Ahvaz, Iran.
Institute of Agricultural and Food Policy Studies, UPM, 43400 Serdang, Selangor, Malaysia.

AR TIC LE INF O

AB STR AC T

Keywords:

This study considers Malaysian palm oil mills Environmental Performance from two aspects:
voluntary actions and firms internal factors effects. Having a good understanding of the factors
affecting the environmental performance of firm helps policy-makers develop more effective
environmental policies. In fact, analyzing the factors helps the firm evaluate and improve the
results of their voluntary actions. Environmental performance, in this study, is specified as a
function of voluntary actions, managerial attitudes, and some control variables. Our findings show
that voluntary actions have the highest contribution to a firms environmental performance among
others. Managerial attitudes toward improving environmental performance also have a significant
effect on the firms environmental performance. However, age and size seem to have negative
effects. Our results reveal that public owned firms are more polluting than their privately owned
counterparts.

Firm environmental performance

Voluntary actions
Managerial attitudes
Palm oil mills

2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Industrialization is one of the major goals in any developing country where negative externality problems arise due to ignorance and
undervaluation of the environment. Nowadays, assessment of firms environmental performance (FEP) constitutes a fundamental part of
global environmental protection, necessitating developing countries to protect the environment. Government pressures such as marketbased instruments (MBI) and command-and-control approaches (CAC) have had an essential role in protecting environmental media
against further deterioration in many countries. However, using these approaches to control firms pollution does not and should not
prevent considering other methods. Recent studies have revealed that complying with the regulations alone is not sufficient to ensure
prevention of environmental degradation, and that the public and private costs of this method of environmental protection are considerable
[1].
FEP, such as level of pollution emission or abatement, could be affected by actions done voluntarily. Motives for these actions are from
society. Doonan et al. (2005) recognized community and non-governmental organizations (NGOs) as sources of social pressures. The key
question is whether or not the outcome of social pressures could lead to improvement in FEP. This question could be of interest to
regulatory authorities, who make policy for countries since these actions could assist regulatory mechanisms [2]. Likewise, this question
helps companies expending on voluntary actions to improve their environmental performance. In Malaysia, society pressure has notified
firms that consumers consider their business operations in connection with the environment. Such awareness could lead to a motivation in
developing voluntary actions by firms [3]. During the last two decades, the society pressures, through jurisdictions, have had a significant
increase in Malaysia. The number of society complaints against environmental pollution has risen during two decades. It has grown from
811 in 1991 to 4931 in 2008 i.e. a growth equal to 508 per cent during two decades and 25 per cent of growth per annum. Table 1 presents
the number of complaints from air and water pollution. In 2008, there were 3551 and 504 cases for air and water pollutions respectively.
This may be attributed to the growing awareness of society about the dangers of environmental pollution.
Table 1. Pollution-related Complaints received by DOE
Number
Total
Air pollution
Water pollution

1991
811
593
78

2000
2284
1690
228

2005
4628
3513
452

2008
4931
3641
504

Source: Department of environment (DOE), Annual Report, 2008

Firms differ from each other in terms of their managerial attitudes, and such differences affect their environmental performance. Many
empirical studies have examined the factors affecting the efficiency of managerial attitudes, profitability, level of production and etc [4,5].
* Corresponding author.
Email address: a.mhojat@gmail.com

Firms Environmental Performance: Voluntary Actions and Managerial Attitudes

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(8) Au gust 2013

Nonetheless, few studies, have analyzed the influence of managerial attitudes on environmental performance in a statistical sense [6].
Therefore, this study concentrates on the effects of managerial attitudes to fill the existing gap in literature. In other words, using previous
studies, we performed a regression analysis to examine the effects of managerial attitudes on FEP.
This study is organized as follows: the next section begins with the theoretical framework followed by the methodology, and finally, the
results are discussed and policy implications and recommendations for future studies are presented.
Rationally, a firm which is under pressure of society selects its emission amount such that its profit is maximized. In other words, the firm
will improve its engagement in voluntary actions if the benefit it makes from the increased engagement outweighs its associated costs (see
Figure. 1). Likewise, for firms not already engaged in voluntary actions, the engagement will be plausible only if the net profit obtained
from engagement is positive [7].

Society
Pressure
Firm

Making decision

Yes
Net benefit 0

No

Firm improves its level of voluntary actions

or engages in voluntary actions

Firm refuse to improve its level of voluntary

actions or engage in voluntary actions
Figure 1. Decision Making Process by a Firm to Engage to Voluntary Actions

Engagement in voluntary actions such as ISO14001 and Environmental Management System (EMS) causes a firms products to be viewed
environment friendly to the public and increases the firms sales, leading to its increased benefit [8]. In order for firms to engage in
abatement activities to treat their pollution even beyond the mandatory standard, the above benefit must outweigh the costs associated with
engagement in such abatement activities.
According to Khanna and Damon (1999), the level of pollution discharged by the i th firm (EPi) is expressed by a vector of observed
exogenous factors, X1i (such as government pressure, firms size, age and ownership type), and its level of engagement in voluntary actions,
VAi. Thus, the FEP could be expressed as follows:
(1)
EP i X 1i i VA i 1i
where EPi is environmental performance for the ith firm; i is a random error term i is a parameter vector; and is a parameter.
;

That a firm raises or lowers its engagement in voluntary actions is dependent upon the net benefits it obtains by doing either; that is, the net
benefits from an increased engagement, VA* [7]. The ith firms net benefit from improvement in voluntary actions is VA* X where

i
i
2i 2
2i
X , is a vector of exogenous variables for the firm and 2is a vector of parameters. In general, VA* is not observed but firms engagement
2i
i
level in voluntary actions is observable. It means, when VA is increased VA* must have risen. According to Khanna and Damon (1999),
i
i
assuming that has a normal distribution, the relationship between VAi and VA* is a relation that can be expressed using the model given
2i
i

below:
VA i F ( X 2 i 2 ) i
(2)
where F is the cumulative distribution of the standard normal variable 2 i . Variables which affect the level of voluntary actions are

included in vector X 2i . These variables are assumed to influence X 1i , and as a result, FEP. The error terms 1 i and 2i may contain factors
such as managerial attitudes [7] that could influence both a firms level of voluntary actions and its environmental performance [7]. The
presence of these factors is likely to result in a correlation between the errors which causes OLS estimator to be biased. To avoid this
problem, Khanna and Damon (1999) used two-stage least square technique. However, in this study, we suggest a variable to measure the
managers attitudes for controlling omitted variable biase.

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sci ences, 2(8) Au gust 2013

On the other hand, the government enforcement variables are important drivers of environmental performance [9]. It is entirely plausible
that the managers attitude variable picks up the effect of inspections/enforcement since such a manager is also much more likely to be
compliant with environmental regulations. To avoid the correlation between error terms of equations (1) and (2), and to control the
government regulation effects on environmental performance, managerial attitudes is included in the model. Managerial attitudes as an
explanatory variable could remove the relation between errors and improvement on goodness-of-fit.
Despite the abundance of studies on environmental performance in the economic literature, few studies have ever estimated the effect of
managerial attitudes on environmental performance. It follows that a logical development in the economic literature could be realized
through analyzing the effects of managerial attitudes on environmental performance. Table 2 shows some previous studies wherein the
effects of internal factors were examined. Based on the literature, the influence of managerial attitudes on FEP has not yet been appreciated
well. In fact, while numerous studies have extensively focused on the relationship between FEP and firm characteristics, the environmental
effect of managerial attitudes has remained an open question.
Table 2. Summary of previous studies
Author

Firms characteristics

Year
Size

[10]

2009

[11]

2009

[12]

2008

[13]

2007

Age

Ownership

Managerial
attitudes

[14]

2007

[15]

2006

[16]

2006

[17]

2006

[18]

2005

[19]

2005

[20]

2003

[21]

2004

[22]

2003

[23]

2003

[24]

2001

[25]

2001

[26]

2001

[27]

2000

[28]

1999

[29]

1999

[30]

1997

[31]

1996

[32]

1995

[33]

1996

[34]

1995

[35]

1994

[36]

1992

Total

times

10

10

The assessment of the relationship between voluntary actions and FEP is done by means of the first hypothesis.
Hypothesis 1: Environmental performance is improved when firms are further involved in voluntary actions.
Analysis of the effects of managerial attitudes on FEP is done based on the second hypothesis.
Hypothesis 2: Environmental performance is improved when managerial attitudes are improved.

Firms Environmental Performance: Voluntary Actions and Managerial Attitudes

553

Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(8) Au gust 2013

According to our hypotheses, formulation of environmental performance for the firms performing voluntary actions and managerial attitude
are examined through an equation revealing the level of their effects. Thus, the FEP could be expressed as a function of voluntary actions
and managerial attitudes as:
(3)
EP i f ( VA i , MA )
where EPi is environmental performance for the ith firm; VAi is voluntary actions by the ith firm and MAi is managerial attitudes for the i th
firm.
As shown in Table 2, some of the previous studies have considered firms attributes as determinants of FEP. To control their effects and to
improve goodness-of-fit, three control variables, namely size, age, and type of ownership are included in equation 1 as:
EP

f ( VA i , MA , S i , A i , OT

(4)

where, Si is size; Ai is age and OTi is ownership type for the ith firm. Equation 2 could be specified as an empirical model as:
EPi 0 1VA i 2 MA i 3 S i 4 Ai 5 OT i e i

(5)

All variables are used in natural logarithm form.

2.

Methodology

The selection of sample is based on careful consideration of several factors: environmental performance, standard level set by Department
of Environment (DOE), and type of pollutants which vary from one industry to another. For this reason, and also noting their level of water
pollution, palm oil mills are selected as the industry of interest in this study. Primary data were collected from 45 palm oil mills in Selangor
and Johor states in Malaysia in 2008. These two states were selected due to their high number of water pollution sources and polluted rivers
in comparison with other states. According to DOE reports (2008) the most polluted rivers are located in these states.
The employees in charge of environmental affairs of each mill were called in order to fill in the questionnaires. However, 8.1 per cent of the
firms did not show any interest to participate. Later, the hardcopy of questionnaires were mailed, emailed and faxed to the individuals in
charge. Twenty-two days later, those who had not replied were contacted and requested to fill in the forms on time. After thirty days, they
were contacted again. The response rate was only 10 percent for the following six months, and we concluded that using mail and/or e-mail
unsatisfactorily led to low response rate from palm oil mills. Hence, to improve the response rates, the non-respondent mills were contacted
by telephone and asked about their reasons. The most commonly mentioned reason for not replying to the mails was the very timeconsuming nature of the task. Therefore, the initial eight completed questionnaires were discarded, and with a change in the strategy, we
used self-distribution method (visiting the mills) to fill in the questionnaires. Also, to improve the response rates, Malay translation of the
questionnaires was used instead. In each visit, after each question had been read, the addressee was asked to reply to it. This new approach
resulted in an increase in response rates by 51 per cent. Also, using this method, we prevented pattern answering which might be straight
down the page or diagonally across the questions [37].
Using the theoretical framework and instruments used in previous studies [38, 39, 40] a questionnaire was adopted including questions for
measuring voluntary actions, namely firms characteristics and managerial attitudes. Then the DOEs experts were consulted about each
question. Their comments led to some amendments in the questionnaires including changes in the existing questions and also addition of
some new ones, thus the contingent validity was fulfilled. Supplementary reviews were done by some interested researchers in Economics
and Management Faculty of University Putra Malaysia (UPM). In order to ensure clarity and increase the reliability of the questions, they
were examined by five mill managers who were selected randomly (pilot study). Some suggestions were made by them, and the
corresponding revisions were performed.
The questionnaire included four sections. Section I collected respondents demographic information. In section II the mills were also asked
about their characteristics. Hence, the questionnaire included some questions about the number of employees, and age. The information on
type of ownership was obtained from Malaysian Palm Oil Board (MPOB) data base. Based on previous work by Nakamura (2001), firm
size was measured using the number of full-time employees; mill age, or 2008 minus year of establishment. Furthermore, a binary dummy
variable was employed to stand for the type of ownership of mills. Its value equalled1 if the firm had a public ownership and 0 otherwise.
In section III managerial attitudes were considered as aforementioned; questions 1 to 12 were related to mangers attitudes. Due to the
expansion of management attitudes and intensity of this study, a Likert agreement scale was used to examine perceptions and attitudes of
management for each mill. The Likert-type scale considers respondents with various characteristics, for each of which they are asked
whether, and how strongly, they agree or disagree, using one of a number of positions on a five-point scale. The total score of section III of
the questionnaire represented each firms attitude regarding the environmental issues. An index to be used in the model was created by
averaging the scores corresponding to these 12 years.
12

index

/ 12

i 1

where, a i is the aggregate score of questions 1 to 12 for each firm.

Section IV of the questionnaire included 11 questions. Each question represented an action taken by a mill voluntarily to improve its
environmental performance. In the Likert-type scale were put scores from 1 to 5 for the questions, measuring voluntary actions taken by the

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sci ences, 2(8) Au gust 2013

mills. The sum of the voluntary actions of a firm was obtained through these questions. Then an average was computed for the voluntary
actions. Finally, the summation of those averages represented a score for each mill as follows:
11

index

a i / 11

i 1

where,

a i are scores of questions 1 to 11 from section IV of the questionnaire. To analyze the impacts of the determinants and to explore

their connection with environmental performance, it is necessary to choose an indicator which measures FEP. Among the indicators used in
previous studies are the levels of pollution, emission, or level of abatement [41, 42, 43]; environmental investments [44]; self-assessed
compliance performance [45] and environmental management system [45]. In view of the fact that their system of treatment and type of
pollutants they generate are the same, the level of water pollution load after treatment palm oil mills achieve was chosen as the most proper
indicator. Hence, we measured the mills environmental performance as the biochemical oxygen demand (BOD) load (in tonne) in effluent.
Also, in the economic literature on environment protection, the pollution load treated is the final target of FEP [46].

3.

Data description

We used Mean, Median and Mode as indicators to describe firm size in the sample. In the meantime, we considered the European
Commission (EC) definition for various firm sizes. Accordingly, firms with 250 or more, 50 to 249, and 10 to 49 employees were regarded
as large, medium, and small respectively. Based on the EC definition, there is no large sized firm in the sample. Standard deviation for full
sample revealed that the firms were not too much different in the category. Based on the completed questionnaires, the employment levels
were not widely dispersed in the sample (Mean = 95.1, SD = 25.9), with a median of 90 individuals per firm. The firms in the sample were,
on average, 28 years old. The percentage of firms with the age of 28 years or above was 19 while the percentage of private firms in the
sample was 88. In view of the proportion of medium-sized firms, this is an expected observation.
Completed questionnaires revealed that the average level of voluntary actions of palm oil mills was 2.26. Moreover 33 per cent of the mills
were found to be above this level. They also revealed that the average level of manager attitude to protect the environment was 2.97. In the
sample 46 per cent of mill managers had attitudes above the average. As regards the reliability test, the Cronbachs alpha (), which is
widely employed in empirical studies, was used to determine whether questions are interrelated in such a way that they could be combined
into an index [11]. According to the results, was 0.73 for 12 questions dealing with managerial attitudes and was 0.77 for those relating to
voluntary actions.

4.

Results and discussion

The empirical model was estimated using ordinary least squares. The results are given in Table 3. It can be seen that the R2 value for the
model is fairly high. According to R2, 46 per cent of the variations in environmental performance are explained by its determinants. The
effects of voluntary actions and managerial attitudes on BOD load are strong and their coefficients are negative and significant at the level
of 1per cent. However, size, age and ownership type are not of strong influence on the dependent variable.
Table 3. Estimation results
Variable

Coefficient

Probability

20.916***

0.000

LVA

-4.378***

0.000

LMA

-1.996***

0.003

LS

0.438**

0.057

LA

0.437**

0.012

OT

0.349*

0.094

R-squared = 0.465

F-statistics (p-value) = 6.79 (0.000)

***, **, * denote statistically significant at 1per cent, 5per cent and
10per cent respectively

Table 4 shows the results of multicollinearity test. Multicollinearity problem exists if Tolerance is below 0.1 and VIF is above 1. In our
case, no multicollinearity was identified between explanatory variables.
The error terms were also checked for Classical Normal Assumptions including heteroskedasticity and non-normality. As indicated in
Table 5, the null hypothesis for no heteroskedasticity could not be rejected at a level of 5%. Breusch-Pagan-Godfrey test was performed to
check for heteroskedasticity problem. To check whether residuals are normally distributed, we used Jarque-Bera test. The results confirmed
the existence of normal distribution for residuals.

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Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 2(8) Au gust 2013

Table 4. Multicollinearity check results

Variables
LVA

Multicolinearity Statistics
Tolerance
VIF
.532
1.881

LMA

.668

1.496

LS

.780

1.282

LA

.588

1.700

OT

.715

1.399

Constant

Table 5. Diagnostic test results

Test

Statistics

p-value

Heteroskedasticity

0.41**

0.834

Normality

2.06**

0.356

**significant at level of 5%

Hypothesis 1 predicted that the more a firm is involved in voluntary actions the better would be its environmental performance. In view of
the obtained results, this hypothesis could be supported. The voluntary actions to protect environment were found to be significant and
negatively related to pollution load in effluent. If the rate of voluntary actions of a firm increases by 1 per cent, the BOD load discharged
decreases by 4 per cent, meaning that the FEP improves by 4 per cent. The results revealed that the voluntary actions are very effective and
firms employing these actions have a better environmental performance. It could be concluded that the society pressures are effective for
crude palm oil firms. This finding is supported by some previous studies such as [47, 22]. Therefore, voluntary actions should be regarded
as important and innovative instruments by the policy makers. The descriptive statistics disclosed that involvement of palm oil mills in
voluntary actions is not that extensive. Nevertheless, this moderate involvement has proved to have a considerable effect on the
environmental performance of the mills. Hence, it may be argued that further society and NGOs awareness of environmental damages
caused by the mills leads to further pressures on mills so that they have to reduce further their pollution voluntarily.
Hypothesis 2 stated that when managers have better attitudes to protect the environment, the pollution discharged by their firms decreases
and their environmental performance improves. The finding suggests that 1 per cent increase in managerial attitude could improve the
environmental performance by 1.9 per cent supporting hypothesis 2. In other words, environmental performance is flexible with respect to
management attitudes. Managers awareness of environmental issues is a factor that when accompanied with high degree of motivation
gives companies the ability to enhance their environmental performance [48, 49]. Our findings support the Theory of Reasoned Action
which suggests that a person's behavioral intention depends on their attitude. Therefore, if a manager intends to reduce pollution then s/he
will do it to improve the FEP. Also, our results supported Cordano and Frieze's (2000) study which showed that managerial attitudes
towards pollution reduction have a positive relationship with abatement activities.
The coefficient of size is positive suggesting that the larger the firms are the greater is the discharged pollution. It may be related to the fact
that, in our sample, the size of firms varied in medium category. As shown by descriptive statistics, all firms in the sample fell into medium
category and there was no large sized firm. Hence, it is not anticipated that coefficient of size to be negative. This was also shown by
Matthew et al. (2005) and Elsayed (2006) who found the pollution intensity to be a negative function for only large sized firms. On the
contrary, small and medium sized firms have restricted access to the resources. They tend to pay much lesser to reduce their pollution level
[50].
Age was found to be of negative effect on environmental performance, suggesting that pollution discharged by a firm increases with age;
however, the corresponding estimated coefficient showed that the effect was not appreciable. This result was confirmed by [16,51].
The estimated coefficient for ownership type was significant and positively associated with pollution load discharged by firm. This
suggests that publicly owned firms are more polluting in comparison with those privately owned. The finding is supported by [33].

5.

Conclusion and Policy Implications

The outcomes of our study revealed that the present level of firms involvement in voluntary environmental actions can influence their
environmental performance considerably and reduce acceptably their load of pollution in their effluents. Previous studies showed that the
major reasons for firms to take these actions are the pressures through complaints lodged by the society and pressures from nongovernmental organizations (NGOs) protecting the environment. It has also been shown by previous studies that the higher the level of
peoples literacy in a district the more is the level of firms involvement in these actions (Pargal & Wheeler, 1996). It is thus recommended
that peoples level of knowledge on aftermaths of the pollution made by firms is increased by public training through media. This would
help to put pressure on firms so that they accept to regularly inform the public of their environmental actions. Such public trainings should

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sci ences, 2(8) Au gust 2013

also stipulate the preservation of ones right for suing firms for their polluting actions. Likewise, the authorities should have jurisdiction
and should deal with environmental cases duly. Also, policy makers should encourage formation of NGOs, and by making firms closer to
NGOs, use their potential in training the personnel of firms. Training the employees enhances their level of knowledge and could produce
pressure internal to the firms to improve the environmental performance. In these countries, NGOs are also one of the agents putting
pressure on firms through media and sometimes even prosecution. Encouragement by government of the formation of NGOs appears to be
a proper orientation in Malaysia too.
In some developed countries, such as the US, the environment agency offers annual voluntary action packages enabling firms to optionally
improve their environmental performance. The varieties of educational, technical and financial aids offered to firms in the course of these
programs motivate firms to join them. In Malaysia, such programs could be offered and executed by DOE. Of course, evaluation of the
effects of such programs entails post-implementation research works.
The results of this study also revealed that the managerial attitude of the firms has a strong influence on their environmental performance. It
is thus recommended that the managers knowledge of the environmental impacts of the firms actions be improved through holding short
training courses such as workshops. This results in improvement in FEP.
Variables such as age, type of ownership and size were found to be of negative effect on FEP. The ages of firms within the surveyed states
average 28 years which is a high figure. In light of the governmental policies for development of palm oil industry in Malaysia, it is
suggested that the government facilitate the conditions for emergence of new firms in the industry.
Regarding the effect of ownership, it was found that government-linked firms generate more pollution. Consequently, it is proposed that
these firms must improve their environmental management and technology. Moreover, the privatization could be considered.
Since all the firms studied in this research fell into the category of medium-sized, the results were not as we expected. Previous studies
show that the large firms outperform the smaller ones environmentally. It is hence recommended that formation of firms of larger sizes be
encouraged by the government and that efforts be made in merging smaller firms into larger ones.

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