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Phil Sharp:
My name is Phil Sharp, and I’m delighted to be president of Resources for
the Future (RFF). I welcome you today to our eighth annual Hans
Landsberg Memorial Lecture, a lecture series that honors the pioneering
work that Hans Landsberg did in energy and mineral economics and his
many years of service to Resources for the Future—and some of the key
issues that this nation has faced. We’re very pleased again this year to
have with us his daughter, Ann, and her husband, Tim Baehr. Welcome
back.
Let me just say one word briefly about today’s topic on which many
words will be said by people who are very significant in this field, in
particular our very distinguished speaker. The impact of regulation on
innovation and competition in this country is, of course, an issue that has
intensified in the last couple of years and even the last couple of weeks in
this country. There’s no doubt about the importance of trying to
understand the relationship of the various forces involved between
government, corporations, business, and community at large; indeed, as
the new Congress has just met, the new Republican leadership in the
House of Representatives has made it clear that one of their strong focuses
is going to be on examination of the regulatory systems in our government
today. This week the president of the United States, in a letter to the editor
of the Wall Street Journal, made it very clear that this has become a
prominent issue on his agenda for his administration and issued the
Executive Order calling for government-wide review of regulations.
This issue has been important for many years, and we at RFF have been
deeply involved—our scholars have—in a variety of facets. Our scholars,
including Hans Landsberg, have been pioneers in the development of
analytical tools by which to measure and judge various regulatory
systems. They have been pioneers in creating designs that hopefully are
more cost-effective ways for us to approach the issues that society has
decided to regulate. They have been deeply involved in how to evaluate
policies that we’ve had in place as well as determine their value to our
society and whether or not they are meeting the goals that were
established.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 In the last couple of years, our folks have been deeply involved especially
on climate issues, but on others as well around these issues. We saw our
folks being asked to consult on these kinds of questions with the Regional
Greenhouse Gas Initiative of the New England states and the California
government as it decides how to create a carbon market to regulate carbon
dioxide. And certainly our folks have been engaged at the White House
and on Capitol Hill over the last several years on a host of these issues,
especially surrounding competitiveness and how to design effective
policy. We certainly intend for that to be a continuing focus for a good
deal of our research as well.
Today we’re delighted to have—in addition to our highly talented
speakers—a number of folks in our audience that I’d like to recognize. I
want to be very clear that we consider everybody here a distinguished
guest at RFF, but I do want to recognize a couple of people in that process.
We’re very delighted to have with us the former director of the U.S.
Environmental Protection Agency (EPA), Bill Reilly, who is currently cochair of the Oil Spill Commission, which has just produced a very
significant report.
We’re delighted to have with us Frank Loy. Frank Loy is a former
assistant secretary of state who was very much involved in climate
negotiations among others on behalf of the United States, and he’s been
chairman and vice chairman of our Board of Directors.
We’re very pleased to have with us former Congressman Sherry Boehlert.
Sherry was chairman of the House Science Committee. We also have with
us the former governor of Alaska, Tony Knowles. Tony is also president
of the recently founded National Energy Policy Institute that has worked
very closely with our scholars on a major report on trying to assess various
policy choices in the field of energy.
Our program today is being cosponsored by the Sustainable Prosperity
Organization, which is a new policy research network in Canada, and
we’re very delighted to have with us its founder and chair, Stewart Elgie,
to make a couple remarks. He is a law professor at the University of
Ottawa.
Stewart Elgie:
Thanks, Phil. As Phil said, I’m the chair of Sustainable Prosperity, which
is a horrible name. No one can pronounce it. But it’s a green economy
think tank in Canada, and we’re very pleased to be cohosting this event
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 with RFF. And not just because it got me out of Ottawa, where it was –25º
yesterday, although I’d be lying if I said that wasn’t a factor.
This is my first visit to RFF, and I have to say, I’m blown away. I’ve
heard people call this a mecca for environmental economics and policy,
and I now know why they say that. We don’t have anything like this in
Canada, although we’re trying to change that, as I’ll explain in a minute.
Let me disclose quickly a national secret for Canada, which is that a major
part of our national identity is obsessing over ways that we’re better than
the United States. It’s a long list, of course, starting with hockey and beer.
But I have to confess to some envy over the wealth of good think tanks
that you have here, and RFF for me is at the top of that list. So it’s a real
privilege to be here today.
I can’t think of any more important or timely topic to be discussing than
the Porter Hypothesis. From its origins 20 years ago, it’s had a truly
profound impact on the way in which we think about the relationship
between regulation, environment, and economy around the world. I can
say a lot about that impact. For example, “Porter Hypothesis” has 452,000
hits on a Google Scholar search. You can drop that tip at a dinner party
some night. But I’d like to say a little bit about its impact on me and my
life—so, the Oprah approach, the speaker introduction.
I’m a recovering environmental lawyer. I spent 15 years of my original
career founding and then running Canada’s major public-interest
environmental law firm, taking the bad guys to court. And at some point, I
came to realize that most of them weren’t actually bad guys. I’ve never
met a CEO who woke up one morning thinking, how do I mess up the
planet today? They woke up thinking, how do I make a profit? It turned
out that largely because we operate an economic system, it doesn’t count
environmental costs. It encourages them, and all of us, to behave in
unsustainable ways. That breakthrough insight as a lawyer led me to
change careers, go back to Yale about eight years ago, and do a doctorate
environmental law and economics with Dan Esty, shifting from the most
hated profession to the most dismal profession.
One of the first articles I read there, in Nat Keohane’s course, was an
article by Michael Porter, and the last paragraph said this: countries need
an entirely new way of thinking about the relationship between
environment and competitiveness. No lasting success can come from
policies that promise environmentalism will triumph over industry or vice
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 versa. Success must involve innovative-based solutions that promote both
environmentalism and industrial competitiveness.
It was one of those moments where someone wrote exactly what you were
thinking, but 10 years earlier, showing you that your ideas weren’t really
that original. But they were ideas that were ahead of their time. Porter’s
words and the spirit behind them inspired me when I came back to Canada
to create Sustainable Prosperity. The simplest way to describe Sustainable
Prosperity is that it’s the closest thing we have to RFF in Canada, although
we have a long way to go before we can really compare ourselves. It’s
both a green economy think tank and a network of economy scholars from
across Canada, with a few from outside Canada as well, focusing on
market-based approaches for both a stronger and a greener economy. It
also links in business and policy leaders so good ideas can form policy
development. So in some ways, Michael, you played a role in the creation
of Sustainable Prosperity, unwittingly perhaps.
Six months ago, we did round one of this event in Montreal. We hosted an
event that brought together more than 70 scholars from four continents
who had done research on the Porter Hypothesis and spent the whole day
exploring its various branches, trying to pull together what we’d learned
over 20 years of research. If you’re interested, you can go to
http://www.sustainableprosperity.ca, click on events, and you can see the
PowerPoint presentations from a variety of people breaking out the
different branches of the Porter Hypothesis.
And just a little plug, by the way, tomorrow night four of the world’s top
economists will be debating the future of economic growth. Two have
written books saying that economic growth has to end if we’re going to
live sustainably. Two have said we can transform the nature of economic
growth by dematerializing economic growth, sort of the Porter
Hypothesis. They’re live webcasts, so if you want to go to the website,
you can also whittle your evening away tomorrow.
Back to the Porter Hypothesis conference: in addition to these
presentations, Mark Cohen and I and two other authors pulled together a
state-of-knowledge synthesis, trying to tie together all the research on the
Porter Hypothesis over 20 years in 20 pages or less. That’s available out
front if you haven’t picked it up. Again, it may be worth having a look at.
And Mark managed to somehow convince the Review of Environmental
Economics and Policy to do a special issue on the Porter Hypothesis at 20,
which will run this year, presumably, and Michael will be contributing a
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 piece to that. So it really has spurred a lot of good thinking on an issue that
needs it.
One of the real benefits for me of this has been getting to know Mark
Cohen. Mark and I share a passion for bridging the world of research and
policy in business, and translating good ideas into real change. So it’s my
pleasure to turn it over to Mark now. Mark is not only the vice president
for research at Resources for the Future, but also a professor at Vanderbilt
University. He has the daunting task of explaining the Porter Hypothesis
before Michael Porter speaks.
Mark Cohen:
That is quite a task. Thank you. It’s a pleasure to be here and to once again
work with Sustainable Prosperity on this very timely and important topic.
My thanks particularly to Michael Porter for coming, and to Dan Esty and
Chad Holliday, who we’ll introduce later to be on a panel.
While some of this audience is intimately familiar with the Porter
Hypothesis, we’re not all on the same page. To some of you, it might be a
new concept. To get us on the same page, Professor Porter asked me to
briefly introduce the Porter Hypothesis and give you some background. As
Stewart said, outside there is a paper that this introduction is based on, and
you’ll have access to that paper. I’ll go through it very quickly because
you didn’t come to hear me—you came to hear Professor Porter.
The best way to introduce the Porter Hypothesis is to start with what we
all learned in Economics 101 about environmental regulation: that it’s
costly. It costs us hundreds of billions of dollars to comply. It takes up a
big percentage of GNP. It costs us jobs. You know the story.
Well, that was the story, and that’s the story I think a lot of us grew up on.
In 1991 an article by Michael Porter in Scientific American— that’s on
your seats—titled “America’s Green Strategy,” questioned this
conventional wisdom. Now what did the Porter Hypothesis say?
First it said that strict but flexible environmental regulation leads to
innovation. Now people have analyzed this, and we now call that the weak
version of the Porter Hypothesis, partly because it’s not that difficult to
buy into. Innovation, new technologies, new ways of doing business:
that’s what you expect to happen.
Of course, the point of regulation is to improve environmental
performance. So there’s no surprise over the next link—that is, if you have
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 more innovation, you expect better environmental performance. That’s not
controversial. The controversial part is at what cost.
The surprising and controversial part of the Porter Hypothesis goes further
and states that innovation then often may lead to improved business
performance and, in fact, national competitiveness. That’s what’s often
called the strong version of the Porter Hypothesis.
The initial reaction to the Porter Hypothesis was swift and largely
negative, mostly by the economics profession—not surprising. The
traditional economic response was that if there’s such low-hanging fruit,
why don’t firms know about it? Why is $20 on the ground, and they’re not
picking it up? And I think the second reaction was, where’s the empirical
evidence? Like good economists, they said, “Show us the money. Where’s
the evidence?”
I should note very quickly that like most famous theories—and it has
become famous—the Porter Hypothesis is often misquoted. Often you’ll
hear this: all regulation leads to innovation. No, it doesn’t say that. It says
that well-designed regulation does. So there’s a distinction between any
kind of regulation and well-designed regulation. That’s very important.
And the second thing the Porter Hypothesis does not say is that innovation
always offsets the cost of regulation. It says that it often does, and may
well. And that’s the empirical question.
Over the past 20 years, the impact, as Stewart alluded to, has been
profound. There have literally been hundreds of studies testing,
explaining, and trying to understand from a theoretical standpoint why this
could be. On a personal note, the Porter Hypothesis had a strong influence
on my own research in the early and mid-nineties. I did a lot of empirical
work looking at those issues. And as a business school professor at
Vanderbilt—I started teaching courses on environmental management in
1993—the first thing that you would do was read the Porter piece.
Not surprisingly, the Porter Hypothesis has strong links to research at
RFF, where our researchers have published dozens of studies on topics
such as the impact of environmental regulation on productivity,
innovation, and competitiveness, and we continue to work in that area.
In terms of management education, thousands of MBA students have been
taught the Porter Hypothesis and the potential value of the sustainable
enterprise. It’s had a rather important impact in the business school
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 community. And of course, it’s had a very big impact in the public policy
arena. I’m going to say a few things about that very briefly. Dan Esty, who
I will introduce later, will most likely spend a little time talking about that.
Its most profound effect is probably on the business practice itself. We
have a very great representative of the business community, Chad
Holliday, who will also be up to say a few remarks later on how this
relates to business.
Why would properly crafted regulation lead to a positive outcome? There
are many ideas behind this, but let me just touch upon three of them very
quickly.
One is that firm managers might not act in the best interest of
shareholders. They may have short-term focus, may be risk adverse, may
be shirking, et cetera. Regulation might force top managers to do things
that are in shareholders’ interest but might not be in their own interest.
It also might reduce uncertainty of investments in environmental
protection. It’s very important for business to have certain regulations as
opposed to uncertainty.
Regulation also will raise corporate awareness and provide external
pressure on a topic that might otherwise be lost in the shuffle. There are so
many things that businesses have to deal with on a day-to-day basis. But I
don’t want to go into all of this right now. I just want to give you a flavor
of how we got here.
So what is the empirical evidence? Not surprisingly, there is plenty of
evidence for the weak version that regulation spurs innovation. Oftentimes
it’s measured by patents, but others have looked at it in a different way. So
the evidence is pretty strong that, yes, regulation spurs innovation.
In terms of the strong version, if we look at regulation and business
performance and productivity, the evidence is mixed but growing. The
earlier studies—many of which were looking at 1970s and early 1980s
data—found a negative relationship between productivity and regulation.
More recent data and studies that are looking across a longer timeframe
longitudinally are finding evidence of a positive relationship. So there’s
very interesting movement in terms of the academic research and the
literature in this area.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 The previous slide spoke about the business-level performance, but as I
said, the strong version also has this nation-level performance. What about
the impact of regulation on a nation’s competitiveness? Here, there’s some
evidence. It’s not fully resolved. Let me tell you, as somebody who’s been
in this area trying to do research, it’s extremely difficult. The best thing I
think we can say right now is there’s no evidence that countries with strict
environmental regulations lose competitiveness. And there’s some
evidence suggesting the relationship may be, in fact, positive. There’s a lot
more to it than that, but I just wanted to give you a very quick flavor.
I want to end with policy implications. One is very clear: regarding
environmental policies, performance and market-based policies are
preferred. That’s something near and dear to the heart of RFF. Second,
there are direct implications for industrial patent policy. If you want to
spur innovation, that’s obviously one thing you want to look at. And the
third big category is a reminder of the importance of organizational and
governance conditions, such as transparency and makeup of the board of
directors. The bottom line is aligning shareholders’ interests with the
board of directors can often be important if we believe that that’s part of
the issue.
It’s my great pleasure to introduce Michael Porter. He’s the Bishop
William Lawrence University Professor of Harvard Business School and
founder of the Harvard’s Institute for Strategy and Competitiveness.
Professor Porter is the father of the field of modern corporate strategy.
Porter’s Five Forces and other theories of strategy are rooted in his
training as an economist. Like RFF researchers though, who are mostly
economists, Professor Porter is grounded in both economic theory and
reality—in his case, the reality of the modern business organization.
Every business school student in the world since the 1980s knows who
Michael Porter is and has read his work. I can attest to that—my daughter
has as well. It’s not an exaggeration to say that he is the world’s most
influential thinker on management and competitiveness.
With that, I introduce you to Michael Porter.
Michael Porter:
Well, Mark, that was just a tiny bit embarrassing, but I thank you, and I
feel very, very welcome here at RFF. I feel very much at home, and I’m
extremely grateful for the opportunity to be here today to deliver this
distinguished lecture. And I want to thank RFF, Phil, Mark, and others, for
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 their tremendous interest in this work, and the tremendous work that this
organization is doing.
As you’ll see later, I think this is the kind of think tank and NGO we need.
There are others that I wouldn’t say that about in this field, that I don’t
think are helping, but I think this organization is making a phenomenal
impact.
I want to recognize Dan Esty and Bill Reilly. I wouldn’t be here or even
have known about this topic if it weren’t for getting to know Dan and Bill
quite some years ago. It was the collaboration with them that led to this
work and this paper. Also, a little known fact is that the research assistant
on the article in which I introduce the Porter Hypothesis was Ben Esty,
Dan’s brother. He is now a full professor at Harvard Business School and
was my student at the time. So there’s a tremendous sense of family and
kinship in this work with these two here sitting in the front row and others
at EPA in those days who were really looking for new and innovative
ways of thinking about regulation and how to do regulation.
I want to recognize and thank Stewart Elgie, first of all for being one of
the coauthors of this marvelous survey paper. You’re never happy with
everything in a survey paper, but this is a great survey paper, and I think
it’s extraordinarily useful in pulling together a very large string of
literature that I’m very proud has come out of my one-page article. And by
the way, I had to write another, longer article to deal with all the incoming
missiles that were being fired. But ultimately, I think Stewart, Mark, and
their colleagues have done a great job, and I commend this to you: that for
all of us who are interested in this topic of environmental regulation, the
article has just a wealth of insight about this question. It’s more than a
review article. It’s a value-added review article that adds a lot of new
ideas, at least for me as I think about this.
Finally, Chad Holliday is somebody I know well and I’ve worked with in
the past. What an honor, Chad, for you to be here. I’m really appreciative
of that.
As was said by Mark, I think this topic is—the reason we’re here probably
mostly is because the original article was written in 1991, so this is the 20year anniversary. But I think the timing is not just about the twentieth
anniversary. I think this whole question of American competitiveness and
the role of regulation in American competitiveness has really risen again
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 to the top—or very near the top—of the radar screen in the debate in this
country.
At the same time there’s a tremendous angst and even tension between
business and government—the private sector and the public sector—and
how those two parties can either work collaboratively or competitively in
addressing some of the most important challenges facing America and our
society.
So I think this question of the Porter Hypothesis is in a sense an issue that
won’t quit, and it’s also a metaphor, as we’ll see later, for a lot of other
issues and how we are tackling those issues from a governmental and
policy point of view.
What I’d like to do very briefly in this session—and hopefully not take too
much time—is cover four topics. One you might be interested in—because
I think it will be somewhat educational for today’s issues—is how this
hypothesis emerged. Why would I be crazy enough to put out this idea?
I’m a card-carrying economist. I have a PhD from Harvard in economics.
How could I possibly have put out this idea? Where did it come from? I
think the answer is it came from a number of threads and bodies of
thinking and research that were quite different from the mainstream work
that was going on in economics that had led people to conclude the
opposite of the hypothesis. Going through that will be helpful because it
lays some important groundwork that we can build upon.
Secondly, I’d like to reflect a little bit on what’s changed since the original
article was written. I can be very brief there because I think both Mark and
Stewart have done a good job of capturing a little bit of the empirical
evidence and what’s happened since.
I’d like to summarize some of the implications that this body of work has
today for the way we’re thinking about regulation in general and for the
way we’re thinking about environmental regulation. I’d like to use, in
addition to some general principles, a case study.
Dan Esty and I have written an op-ed that hopefully will appear shortly
about climate change and how we think about regulation in the area of
climate change. We’ve had sort of checkered history in America over the
last few years. And the question is, if we applied the thinking in this
work—thinking, by the way, that Dan and I have written about over the
subsequent years—how would we approach the regulation around the
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 issue of climate change? I think it’s a very telling and a very immediate
example of how perhaps we could have done this better if we could have
broader consensus about this basic approach.
Then if we have time—and I’ll calibrate the time as we get there— I’d
also like to suggest that this Porter Hypothesis, this basic idea that
addressing a societal issue in the right way with the right regulatory
environment, can actually enhance competitiveness of the company—and
can be applied to many more societal issues. Since I wrote this little paper,
I’ve worked on a whole variety of other topics, like health, healthcare,
safety, and economically distressed communities. What comes to the
forward time and time again is some of the same underlying principles.
Out of that conviction and that body of work has come another article that
you hopefully will pick up called “Creating Shared Value,” which is in the
current issue of the Harvard Business Review. I think copies are available
to pick up if anybody’s interested. It talks a little bit about how the same
philosophy embedded in the Porter Hypothesis applies to all manner of the
corporation’s impacts or touch points with society. I’d like to give you
some of the highlights of that thought, and then, of course, we’ll have time
for hopefully some discussion.
So where did the Porter Hypothesis emerge from? First and foremost, it
emerged from an empirical observation. After an arduous five-year
process, I had written a book called The Competitive Advantage of
Nations. In that book I had looked at 10 major industrial countries from
many continents, and I’d really been trying to get at the question of why
some countries are competitive in certain fields. Why is America so
dominant in software? Why are the Japanese so phenomenally strong in
consumer electronics? Why are the Germans so good in machinery and
automobiles? What explains the origins of competitiveness?
To really understand competitiveness, we couldn’t look at the nation as a
whole. We had to look at the specific fields within the nation in which the
nation had emerged and become an innovator and a leader.
In the course of writing that book, I had looked at hundreds of different
industries across many, many different countries, and I kept noticing
something. I kept noticing that there were often very strict standards and
regulations in a particular country in a particular field, yet that country
was competitive in that field. I kept noticing that over and over again.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Out of that came this notion that we could see not a conflict between strict
environmental regulation and competitiveness, but we could see a
complimentary—that these things could actually reinforce each other. But
what became clear from looking at all this country experience was that
there was a critical piece to make that connection work, and that was
designing the regulation, the regulatory process, and the regulatory
standards themselves in the right way. The right way meant stimulating an
ambition rather than simply imposing cost that the firm could do nothing
but bear. That empirical observation led to the Porter Hypothesis. Actually
this article was solicited by the editor of Scientific American, who had
read the book and noticed this observation that had been made a number
of times in the book. The editor said, “Gee, would you write a little article
on it?” So this turned into a one-page article. And little did I know that
here we would be today.
But I’m extremely proud of this work. I’m also extremely proud of the
literature that’s grown out of that article because, as I hope you picked up
from Mark’s summary, this is a literature that’s focused on the facts. It’s
focused on empirical evidence, and the nuance and richness of the
understanding of the issues and the theory has simply grown, and grown,
and grown over time. If more of the research in economics was like this,
we’d be a lot better off because it’s targeted at real issues. It’s dealing with
very practical on-the-ground problems of great importance for our society.
So I’m very proud of the literature that grew out of this work.
Now why might I have taken those empirical observations seriously? Why
might I believe that every firm wasn’t optimizing its environmental
performance already, which was what the theory said? Why might I
believe that innovation and the use of resources, like minimizing
environmental impacts, might actually enhance competitiveness? Why
might I think that the regulatory environment could be a profound driver
of innovation? Well, all these things were coming at me from a body of
work that I had been doing over a number of years, and so let’s just talk
about some of the key points.
When economists think about firms—at least historically—they think of a
firm as a very simple thing. A firm is a production function. It takes labor
and capital and converts it into output. The conception of a firm is as an
optimizing vehicle with full information. The firm knows pretty much
everything out there. The firm as a production function optimizes the
output at every moment in time and maximizes profit.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 But as we were studying firms and trying to understand competitive
advantage, we came to understand that firms are anything but simple.
Firms are incredibly complex, and this concept of the value chain was one
of the core frameworks that I introduced in the strategy work that I’d been
doing in the 1980s largely. The value chain just is a representation that the
firm is a complex set of activities, that firms are involved in doing
business in hundreds of different activities and processes: procurement,
operations, marketing, customer service, information technology (IT),
technology development—hundreds and hundreds of activities. These
activities and the choices that the company makes ultimately result in the
competitive advantage of the firm. All competitive advantage in a firm
grows out of the ability to perform some of these activities in a unique and
distinctive way.
All of a sudden, the idea that every firm would know everything about all
the choices that it could possibly make in that value chain and had thought
of all the opportunities to improve environmental performance simply
became unrealistic. Every firm makes mistakes every day. Economists
have a hard time dealing with this. They think of the firm as optimizing—
and maybe it does in some sense of optimizing with limited information—
but firms have too many things to do. There are too many issues to worry
about. There are many complex choices to be made. There are hundreds of
investment projects, hundreds of different places where you could put
capital. It is very hard to measure the return on many of those things.
In a world where firms are like this, it became very plausible that by
riveting the attention of the firm on important issues like energy use and
emissions, regulation would potentially have a profound impact on where
the firm put its energy in terms of innovation and where it put its capital in
terms of investment.
So part of the story here in the Porter Hypothesis is a much more complex
view of what firms are really like. If we want to be successful in
regulation, we have to embody and embrace this view of what firms are
actually like, the complexity and the multitude of choices, the lack of
information, and the limited bandwidth that firms have. That has profound
effects on how regulators need to do their job, which we’ll talk about later.
In addition to developing a conception of the firm that was quite different
than the traditional neoclassical view of the firm in economics, we also
were in a period where we were starting to develop a very different
conception of competitiveness. The traditional conception of
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 competitiveness that I encountered when I came into the field was that
competitiveness is about cost minimization. People would say you’re
competitive if you have low wages. You’re competitive if your currency is
low. You’re competitive if your costs are low.
What became clear is that actually that’s not necessarily true; moreover,
it’s a very bad way of thinking about competitiveness from the point of
view of social progress. We don’t want low wages. We want to create an
environment where we can support high wages. Therefore, as we came to
understand the countries that are prosperous, we realized the countries that
are competitive are the countries that are productive, can utilize resources
productively, and can drive productivity growth over time.
This conception of competitiveness put a very different light on the
question of environmental regulation because if you have a very shortterm narrow cost perspective about competitiveness, then you’re much
more likely to think that environmental regulation is an unambiguous
negative. But if you have a productivity growth perspective of
competitiveness and realize that the environment involves the use of many
resources, then all of a sudden the idea isn’t so crazy that if regulation
somehow stimulated innovation, that could improve competitiveness. This
was the sensibility with which I was thinking during this period, and I
have continued to work in this area since.
The third piece here was, what’s the role of location in competitiveness
and productivity growth? What we came to understand is that location
matters a lot. Where the company is based and the environment
surrounding the company can have a profound effect on how competitive
and productive it could be.
In particular, as I’ve highlighted here, the work we did on competitiveness
was really suggesting the profound impact of what we call demand
conditions: the signals that the company is getting from the customer,
from the marketplace, about the standards, quality, or the features that the
company needs to meet.
Let me tell you one funny story. You all probably know this, but the
Japanese are the world’s leader in global positioning systems (GPS). All
the leading innovators and the dominant players in that area are Japanese.
Now you might say, “Why aren’t the Americans the innovators in GPS?”
because, of course, we were the ones that put up these satellites and had all
the IT that would seem to make us the natural player.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 The answer is demand conditions. In Japan, addresses are not consecutive.
So if you go on a street, it’s not house number one, house number three,
house number four. Addresses are kind of random. If you don’t know
exactly where the house is, you can’t find it in any simple process. So the
Japanese have this incredible need for GPS, just like they had an
incredible need for fax machines because the typewriters and telexes of
the day didn’t work with Japanese characters. In that case, they had to
have a way of transmitting handwritten documents because most
documents in Japan were handwritten. Those are cases where the demand
conditions—the nature of the local needs—have a profound effect on
innovation.
In America, we thought of the fax machine and the GPS as curiosities,
toys for people who had everything. In Japan, the fax machine was a
business necessity. In Japan, the GPS was critical. That was even before
you added the legendary traffic jams in Tokyo. In Japan when you tune
onto your GPS, it’ll tell you exactly where the traffic jams are. They’re
way ahead of us. They already embodied that technology into the GPS
system. Why? Because there was an incredible demand. There was an
incredible need.
What we came to understand is that environmental regulation is one of
those demand conditions. By setting environmental standards in the right
way, by setting them relatively high, you really stimulate innovation or
can stimulate innovation. We see that over and over and over again in
industry after industry.
So again, if one has a narrow view of the firm as maximizing profits every
moment in time and a narrow view that competitiveness is about lowering
short-term costs, that person would think the Porter Hypothesis was
complete lunacy. But if one has this perspective described above on the
firm and competitiveness, all of a sudden one’s mind is opened to a
broader approach.
One corollary of the concept of competitiveness and the role of location is
the notion of clusters—that competitiveness doesn’t arise in isolated firms.
Competitiveness arises in critical masses of firms in a particular location
that feed off each other. This slide is a pictorial of the life sciences cluster
in Massachusetts, which is probably the strongest life sciences
concentration of firms and institutions in the world.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 There are a lot of synergies where you have all these companies in the
same location and you get a lot of efficiencies, opportunities for dynamism
and innovation, and new business formation. We have increasing data on
that. We see clusters in every industry all over the world. Here’s a
representation of the wind power cluster in Spain. Spain is doing really
well in international competition in the area of wind power. Part of that
has to do with some demand conditions, some ways of regulating and
supporting that industry.
But the point is that in the modern conception of competitiveness, progress
is collaborative. In the old top-down view of competitiveness and
government policy, government drives competitiveness. Government sets
the rules. Firms are passive actors. In a world of innovation and
productivity, in a world where firms have many different choices about
how to create unique strategies and how to develop unique products and
processes, all of a sudden any economic progress is collaborative.
We know from studying many, many countries and successes in
competitiveness and economic development that successful progress is
going to require us to not see the various actors or stakeholders in society
as competing with each other, but finding areas where they can be aligned
to actually drive more rapid progress.
Again, all of these ideas start to give us a broader basis on which to think
that the role of environmental regulation can be very different than it was
historically believed to be.
What’s happened since? I would say that there’s been extraordinary
uptake in business about the potential of environmental improvement to
lower costs, improve processes, and ultimately drive, in many cases,
competitiveness. Many companies have embraced this more rapidly than I
could have expected. I think the original impetus for this uptake was really
corporate social responsibility (CSR).
Initially companies felt, “We need to do this to be good citizens.” But I
think increasingly as every year goes by, the uptake in business is much
more around the notion that this actually is good for the company: “This is
good for business. This will make us more competitive. This will improve
our efficiency. This will improve our resource utilization. And this will
improve our products and their acceptance by the customer.” So I think
the biggest success has been probably in the business community.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 There certainly has been some uptake of these ideas in the regulatory
world outside the United States quite broadly. In the United States, I think
it’s been a bit of a mixed bag. In some areas, we see this thinking about
regulation really deployed and in other areas not. So I would call this a
mixed picture.
In the NGO community, again, there’s a mixed picture. I think now more
and more of the leading NGOs are starting to want to work collaboratively
with business and understand that working around this notion of win–win
is the best way to actually make progress rather than using the old-style
NGO model of embarrass, litigate, and shame the private sector. I think
there’s progress there, but again, it’s not complete yet.
Probably in many ways, the most important thing that’s happened is the
shift in societal values. I think values in society have moved dramatically
pro-environment, particularly among the younger people. I think that has
fueled the greater focus and shifting thinking about the environment in the
business community, in particular, because I think they perceived that the
reward for the societal values attached to that kind of activity have been
enhanced.
I think this is one of the great opportunities we have right now, that we
have a younger cohort in our society that believes deeply in the
environment. They believe deeply in dealing with some of the most
important problems we’re facing in society: the problems of poverty,
economic opportunity, and nutrition. I certainly know my daughters who
are college-age just think very differently about this set of issues, and I’m
sure your children and grandchildren do as well.
I think that’s a tremendous asset we have because if that’s true, they’re
going to be the employees of the companies in the future, and they’re
going to be the consumers who are buying products and valuing different
products in terms of their attributes. They’re also hopefully going to be
enlightened NGO and government leaders, and we hopefully can
capitalize on that new energy and caring about some of these issues.
That said, I want to be absolutely clear: there are still a lot of people—and
I will say that there are still a lot of people in this town—who believe that
the relationship between environmental improvement and the corporation
is inherently adversarial. And there are lots of political obstacles still to
fully embracing the thinking underlying the Porter Hypothesis—all kinds
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 of political obstacles that have to do with ideological positions that have
been difficult to shed.
I think there has been a curious flip of the Republican Party. I’m a
Massachusetts Republican. I just want to be honest about that. In
Massachusetts, Republicans are a very rare species. We are quite liberal
on all social issues and quite conservative on economic issues. The
Republican Party once was the champion of pro-innovation through
market-oriented regulatory approaches. Now we have this curious flip
where the Republican Party or at least some parts of the party have
become in many ways an obstacle.
So I think we have some real challenges. We can’t move on from this
issue yet. We’re still in the middle of it. In the environmental arena in
particular, it’s a very important question to be talking about today. That’s
why I think this session is so timely, and that’s why I’m so pleased that all
of you are here.
What are the implications of the Porter Hypothesis for policy? Let me just
expand a little bit on some of the points that Mark made. Basically the
one-liner is “look for the win–win solution.” This says that there could be
and can be often a win–win solution where we can improve environmental
performance at the same time as we are making the company more
productive, making it more innovative, improving the value of its
products, and making it more competitive. We need to do everything we
can to widen the circumstances where that can happen. That’s the oneliner—that therefore regulators need to see businesses as not an adversary.
They need to see businesses as entities that hopefully they can understand
well enough to engage and interact with in a way that allows these win–
win opportunities.
How would we translate that more specifically into regulatory choices? As
has already been said, the Porter Hypothesis suggests that you set
performance standards for environmental improvement, not specify how
to achieve those standards. If you specify how to achieve those standards,
you guarantee that there’ll be no innovation, and you cut off your nose to
spite your face. And we still do that time and time and time again.
A corollary to this is that we don’t subsidize particular technological
solutions. We want to encourage investment, have investment tax credits,
or have research and development tax credits that are neutral across
technology—that might be a good thing. But we don’t want to try to have
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 somebody decide which technology is going to be the best way to innovate
to deal with this environmental problem and make things better. That’s a
real mistake. We’re working at cross-purposes to our fundamental goals
when we do things like that.
Number two, we want to utilize phase-in periods when we are
incorporating or promulgating environmental standards. We want phase-in
periods that are aligned with the time constant in the industries that we’re
regulating and the new product cycles. Because if we try to force things at
a pace that’s not aligned with the investment cycle in the industry, we will
force firms to either reject or try to roll back the regulation, or we will
actually drive up costs. But if we can get the regulatory timeline aligned
with the business timeline, we’ll have a much higher opportunity to get
that innovation solution than will the compliance or end-of-pipe type
solution.
Number three, we need to ensure as much as we possibly can a predictable
evolution of standards over time. Ideally we’d like to know what those
standards are going to look like over the next 20 years because many of
these require long-term investments in technology and new operating
methods, processes, and product designs. We want companies to have
some predictability about where things are going because if they have that
predictability, they’re more likely to get it right. They’re more likely to
make that investment in trying to drive that innovation rather than either
trying to reject the whole idea and take us to court or do some short-term
and ultimately costly thing.
Where appropriate, of course, we need to set prices on some of the
underlying resources—whether it’s water or another resource that we’re
concerned about—that reflect the true cost. Getting that true cost is often a
complicated analytical question, but we at least need to start moving those
resource prices toward the real cost rather than unwittingly subsidizing
environmental inefficiency, which we do in many areas.
We know that the right kind of regulation is regulation where there’s
national and international harmonization of standards, where the United
States isn’t doing it in a different way than everybody else. Ideally there’s
a syncing-up of the states, and there’s a syncing-up of countries. Because
the more we sync up the various jurisdictions, the greater the incentive to
do the innovation, and the greater the disincentive to just do the short-term
thing that drives up the cost. This is a very important issue in the area of
climate change. We would ideally like to have a climate change regime
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 that’s relatively consistent around the world because that gives everybody
incentive to innovate and ultimately improve their competitiveness.
We also want to simplify the actual processes of regulation as much as we
possibly can, rather than complicate it and make it time consuming. We
want to make those processes more transparent if we possibly can. Ideally
we would prefer to have very open reporting of how well the company is
doing or what the company is actually achieving in terms of performance.
We’d like a lot of transparency on performance standards and auditing of
people who seem to be, for whatever reason, worth auditing, rather than
forcing everybody through the same cumbersome, repetitive process over
and over and over again, which is what we tend to do here.
There’s no conflict between high standards and very efficient
implementation of those standards. That’s the ideal world. We’re not
talking about reducing the standards. We’re talking about how to actually
enforce and achieve compliance with those standards, and there are a lot
of different ways of doing that. For various legal and other reasons in
America, we have made it truly an arduous process. And I think it works
against our interests in the process.
We also know Porter-Hypothesis thinking would suggest that there are at
least a few other steps that we should also take. Regulation is not the
whole strategy. We have to get the regulation right, but we also have to,
number one, focus on measurement. The more we can measure and
require measurement of performance by everybody in a consistent way,
the more every company has to put out its performance on water, on
energy, on emissions, on this, on that.
The more those measurements are consistent and comparable, the more
energy we’re going to get, and the more innovation we’re going to
stimulate because companies are going to be comparing themselves;
they’re going to be talking to the companies that are doing better. Their
competitive juices are going to be flowing. So mandatory measurement
becomes critical. Again, we do some of that, but we can do a lot more.
Collaborative activity can often be a very effective way of stimulating
more rapid progress on innovation. You have an industry or an industry
cluster do some collaborative activity around particular environmental
problems and technologies.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Also important are research and fusion of learning. There are all kinds of
examples in the papers that are summarized in the survey paper where
simply training people in how to deal with certain environmental problems
in corporations can have a tremendous impact on speeding up the fusion of
new technology and the rate of learning.
Again, don’t assume that companies know everything. Don’t assume that
they get everything right. That’s a bad assumption. Supporting research as
part of the regulatory strategy, supporting training, and getting industry
groups together to train each other all become really fundamental core
strategies if what we’re really trying to achieve is an innovation solution
and not a cost-increasing solution.
In terms of corporate practice, we have to move beyond thinking of
environmental issues as CSR. Corporate social responsibility is about
philanthropy. It’s about image. It’s about giving. It’s about volunteering.
It’s about being a good guy or a good lady: “Look at how we’re being
good.”
Those are great sentiments, and I don’t want to be negative about them,
but if we want to really be effective in the corporation at this, we have to
start treating it as a real business issue. We have to start looking at it not as
CSR, but as a way of actually enhancing our productivity and our
competitiveness.
The companies that are making the most progress on environmental
performance are the ones that have made that mentality shift: “This is not
about being a good guy. This is not about dealing with the critics and the
NGOs. This is really about a core business activity.”
Environmental issues are becoming increasingly a strategic differentiator.
More and more companies are finding that their ability to excel in this area
is allowing them to get a competitive advantage against their competitors.
It’s not just an operational matter; it’s a way of distinguishing the
organization from its competitors.
Let me take the last few minutes and try to widen this discussion a little
bit. I think the fundamental idea of the Porter Hypothesis is that if we
think about innovation and we think of the world in terms of dynamism
and change, we can have environmental improvement while enhancing
competitiveness.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 But what I’ve come to believe is that the same kind of mindset and the
same kind of outcomes are possible in a variety of other areas of societal
concern. This little schematic diagram just gives a few examples.
Environmental impact as of 1991 was more about pollution than it is
today. Today I think we’re seeing environmental impact as more also
about energy use, water use, and a broader set of issues that are more
extensively related to the use of natural resources. The Porter-Hypothesis
thinking applies equally to all these broader definitions of environmental
performance.
It also applies to other corporate issues as well, like health, for example.
I’ve been working extensively in the area of healthcare for the last six or
seven years. Employers used to think of healthcare benefit costs as a cost
to be minimized, and many companies tried very hard to even get out of
the healthcare business altogether.
But sometime over the last five or six years, most of the leading
companies have had an epiphany, and you’re going to smile when you
hear what that epiphany is. What they’ve learned by doing the math is that
the health benefit costs are not the big cost. The big cost is the cost of poor
health, absenteeism, people being at work but not really being productive,
and the inability to retain staff. The current estimates are that the cost of
poor health is about three or four times the cost of the health benefits.
So all of a sudden, it doesn’t seem so smart to minimize the cost of the
health benefits. What you want to do is spend the right amount on health
benefits in the right way to maximize the health of your employee
population—to control their diabetes, help with weight control, and
implement health and wellness programs.
There’s been a tremendous revolution in many corporations about the
whole attitude toward health, healthcare, and health benefits. That’s an
example of how it’s not just the environment; if you look at the issue from
a deeper perspective, you all of a sudden see that it’s not a conflict
between health benefits and competitiveness. You can actually align those
to create an advantage. You can align those to help you improve your
competitiveness; health benefits are not inevitably a drag.
That same thinking can apply to areas like safety, skill building in the
employer base, and a whole variety of other areas. That’s what this new
article, “Creating Shared Value,” is all about.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 The basic idea in this article is that we can in many areas, by the way we
go about addressing them in the corporation, actually enhance our
competitiveness as a company while addressing some of the most
important societal issues. The environment is exhibit A. We can have
shared value. We can benefit the corporation. We can benefit the societal
issue.
The traditional view of the role of business in society has been what’s
good for business is enough to be good for society: if it’s good for General
Motors, it’s good for the country. I think what we’re starting to understand
is that we need to turn that inside out: what’s good for the community and
for citizens is good for business. Businesses now are starting to learn that
issues like nutrition and health and environmental performance are
actually some of the core tools to drive business performance and
competitiveness, and to differentiate the company from its rivals.
This is an opportunity to take the next step beyond CSR thinking. CSR
thinking says, “Look, let’s run our business, but then on the side, we’ll
have a corporate responsibility program to prove that we really care about
the community, to comply, and to avoid doing harm.” This new
philosophy says, “No, we have to go from CSR to CSV, creating shared
value. We have to think about how to compete in a way that also creates
value for society. And by the way, if we can identify and tackle some of
these very important and pressing societal needs, that gives us a profound
opportunity to actually improve our competitiveness.” It’s this kind of
reversal of the thinking about the connection between the company and its
society that I think we are starting to see the beginnings of.
In the process, what we’re seeing also is a very interesting blurring
between the boundaries of for-profit and nonprofit. In the old world, you
were either a for-profit or you worked on social issues, because those
twain never met. Dealing with social issues was about social issues, and
that was different than running a business. Now what we’re seeing is
organization after organization creating profitable business models to
actually address very profound social issues, whether it’s nutrition,
poverty, microfinance, or many others.
I think we’re at the beginning of what I believe will be a decades-long
process of rethinking and reconceiving how the role of the corporation fits
within broader societal needs. I think that will be very good not only for
the environmental movement, but for many other issues as well.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Time does not allow me to go into the details of creating shared value, but
what are some of the key highlights? What we understand is that many
products that companies sell don’t just meet economic needs or traditional
consumer needs, but they also meet social needs. Food companies that had
been used to getting people to consume too much and get fat are learning
that they can differentiate themselves by helping people consume what
they should consume and be healthy. This mindset could have happened
decades ago, but I think we are now at a moment where this kind of
different sort of thinking is emerging. There are many other examples of
that.
We are now starting to understand that productivity in the value chain is
maybe not what we originally thought in the use of energy, in the role of
logistics in the corporation, in the use of all kinds of natural resources, and
in thinking about employee productivity and location, where we locate
stuff. We’re seeing a profound revolution in our understanding about
what’s really productive: is it really productive to ship a part from one
continent to another in order to assemble it in a different location if we
actually do the real math?
We’re discovering that with the heightened awareness of environmental
issues, the use of resources, emissions, and so forth, we are in the process
of realigning value chains and redefining the supply chain in the global
economy. I think that will be a very positive set of developments as well.
We’re also understanding more and more that the surrounding community
around the company can have a profound effect on that company’s
productivity. Therefore, the company has a role in developing the cluster
in the communities in which it’s operating rather than seeing that as
somebody else’s job.
Nestlé is an excellent example of a company that’s moving this direction,
and there are some examples here that you can look at if you’re interested.
This is just a case of espresso, one of the most wonderful strategy cases
that I know of over the last decade or so, where Nestlé built a whole new
coffee business in this giant corporation with a very different strategy than
before.
One of the keys to espresso success has been this notion of creating shared
value: a whole new way of working with farmers, a whole new way of
sourcing coffee beans, a whole new way that not only improves the supply
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 chain and improves the quality of the beans that it gets, which is critical to
its strategy, but also has dramatic effects on environmental performance in
the coffee-growing regions that creates shared value.
All profit is not equal. Profit that accompanies shared value is a higher
role for the corporation, and that’s the role that corporations today must
strive for.
Increasingly we’re going to see that the best strategies have a social
dimension. They’re not just narrow economic strategies. They’re going to
involve and embody these broader needs and issues that we’ve been
talking about.
Again, thank you all for the chance to talk about this. Those of you here
who are in the business of regulation, I think that we have learned a lot
about how to approach this question, and we’ve learned the tremendous
power that can be achieved if we can find a way to create these
opportunities for shared value, these opportunities for innovation. So
hopefully as we approach issues like climate change and others, we can
embody these principles. I look forward to the discussion following this to
flesh out some of these ideas. Thank you very much for being here.
Mark Cohen:
Thank you so much, and we’re going to have questions in just a few
minutes. But first I want to introduce our panel, and we’ll have a few
remarks by Dan Esty. Full bios are in front of you. Dan is Hillhouse
Professor of Environmental Law and Policy at Yale. He’s written
extensively on environmental policy and corporate strategy,
competitiveness, trade, et cetera, and most importantly was at EPA—I
think he’ll talk a little bit about that—so he also has the government
experience. I should say most importantly, he is a member of our Board of
Directors at RFF.
Chad Holliday is currently chairman of the Board of Bank of America. We
probably all know him best as former CEO and chairman of the Board of
DuPont, and he has numerous, numerous other affiliations: World
Business Council, Business Roundtable. He’s been very much a business
leader in the area of environment and sustainability, and transformed it in
many, many ways.
I want to turn it over to Dan for a few comments, then Chad, and then Phil
will entertain questions with us.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Dan Esty:
Mark, thank you very much. Phil, thank you, and really thanks to all of
you for taking time out of busy days and schedules to be here and to
reflect on 20 years of thinking about this Porter Hypothesis.
I’m especially grateful to Mike Porter for coming today but even more for
his intellectual leadership. Many in this room have thought about and
some have written about this topic. I have built an entire career on it. I
have worked at the business–environment interface for 20 years, thinking
about how businesses need to bring environment and sustainability into
strategy, and thinking about how policy needs to engage the business
community.
I want to reflect on my tracking of the Porter Hypothesis over 20 years and
start where Mike Porter started, by saying I think we’re at an auspicious
moment. There has been I think a very unhelpful debate over regulation in
this country in the last couple of years, and we need to get it back on track.
Frankly, I can’t think of a better institution to lead that process than RFF,
so I am grateful to RFF for teeing up the conversation we’re having today.
I hope very much that it goes beyond today and that we actually can see a
push to get some of the conversation today into the discussions across this
town.
I want to share some thoughts on where I see progress having been made
over 20 years and then raise some questions, or invite some inquiry about
where progress has not been made and why.
First of all, I think there has been a substantial degree of consensus over
the need to move regulation beyond the old model of command and
control. And I think there are a number of aspects to that, including a
focus more on performance and output results as opposed to technology
mandates or so-called best-available technology or requirements.
I think there is also recognition that there is real value in a regulatory
structure that seeks to induce innovation and not just force compliance.
And I think there is a growing recognition around some of the principles
of smart regulation that Mike highlighted: the need to have a market
payoff for those who bring innovations to bear that help solve problems;
the need for predictable frameworks that help people understand that there
will be that potential for a market payoff; the value of data and metrics and
measurement and information as a way to figure out who’s doing well
and, perhaps with some analysis, why; and the value of disseminating best
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 practices—being able to figure out who’s leading, what they’re doing, and
then share that information.
I guess the greatest success, which Mike hinted at but I want to really hone
in on, is the enormous change in attitudes in the business community. I
think for many, many years, but beginning to deteriorate 20 years ago in
part because of this Porter Hypothesis, there was a sense in the business
world that environment as a topic was a burden. It was about regulations
to follow, costs to bear, risks to manage, and the old model in business
was to send it off to the general council’s office, and the less heard about it
the better.
I think we’ve seen a dramatic transformation in how business deals with
the environment today. Almost all companies, and certainly all of the
leading ones, see the environment and sustainability more broadly as an
area of opportunity, first because there is an opportunity to differentiate
yourself from the competition by managing those risks, costs, and
regulations better. But then even more dramatically, there is an upside
opportunity, a chance to drive growth, to be innovative, to build your
brand, and to add intangible value to your business by taking these issues
on in a constructive, strategic way, and really playing offense on this
agenda and not defense.
And so from Chad Holliday’s DuPont to Junior’s Drycleaners in Cheshire,
Connecticut, there are companies big and small across every sector that
now are positioning themselves as solutions providers. And they do this
not to be good citizens. This is not a corporate social responsibility
agenda. They do it because there’s an economic promise of marketplace
success. I think that is the greatest positive element of what the Porter
Hypothesis has helped us rethink and refocus on.
I am concerned, and it raises a puzzle for conversation today, over why the
policy process in Washington seems not to have gotten some of these
fundamental principles clear. Frankly, I think there is a real question about
whether some of the fundamentals of good policy analysis have gotten lost
in recent years: the idea that you want to focus on a full picture of costs
and benefits of regulation—not just short-term cost to the regulated
community, but the cost of inaction or what the economists here might
think of as opportunity costs. Again, that’s an important reframing that I
hope we can begin to push.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Second of all, there are longer-term and perhaps less tangible elements of
this cost and benefit calculation that need to be thought about—for
example, whether we’re structuring regulation to induce innovation that
will produce competitive opportunities and a vibrant business community
going forward.
I think we really have lost the recognition that environmental progress is
fundamentally a function of technology development and broader
innovation, and we should do much more to center our policy processes,
our regulatory strategies, and our debates about how to move forward on
how to induce that innovation.
A lot of what the business community has picked up, I’ve written about
and called the green-to-gold agenda. Businesses are recognizing there is a
payoff to thinking about the environment. But I want to argue today that
there’s also a gold-to-green agenda, which is to say if we’re going to make
progress on the environment, it helps a great deal to harness the
commitment to economic growth, prosperity, and competitiveness. We’ve
done too little to think about how to ensure that our environmental
regulatory strategy is in alignment with those broader economic goals and
with business success. I think that’s the flip of the Porter Hypothesis that
has gotten too little attention. I would critically argue that the important
effort for RFF and others is to figure out how we make that part of the
conversation here.
I would like to just stress one other point, and then I’ll let Chad talk, and
hopefully we can begin a dialogue back and forth. I don’t think the big
challenges of the day—energy strategy, climate change, building
competitiveness—can be addressed in a bitter partisan battle. I just don’t
see how we make progress when people are broken down in one party
against the other.
I hearken back to the Clean Air Act of 1990, which a number of people in
this room can remember. It is a great trivia question as to what the final
Senate vote was on the Clean Air act of 1990. And Phil Sharp, who was
there, did not know the answer this morning, so I won’t test any of the rest
of you. My students at Yale all assume it was 51-49. The really smart ones
think it was 60-40, knowing you had to get 60 votes to get closure in the
Senate. The actual answer was 89-11.
Why I raise that is because it suggests that we really built a consensus up
the middle that drew Democrats and Republicans together on getting the
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 job done. And frankly, I think that’s what is essential to make progress on
issues like climate change. You can’t do it with one party because I
promise you that the year after that bill went through, there were not a
few, not dozens, but a hundred fixes that had to be made to the
legislation—because little things go wrong in big, complicated pieces of
legislation. But we had a broad base of the Congress committed to getting
this job done right and working to fix it up.
We don’t see that, for example, on healthcare, and it’s going to be a mess.
And I think we need to ensure that when we’re looking at transformation
like we need to on the energy foundation of our society, on how we
address climate change, how we build a competitive economy for the 21st
century, we find ways to pull together.
It is with appreciation for what the Porter Hypothesis has done in the
business world to build an appreciation of the green-to-gold agenda and a
recognition that the next challenge is the gold-to-green agenda that I’m
glad to have a chance to be with you here today, and to talk about how to
start that process.
I do have a sequel coming out to Green to Gold, and there’s been a debate
about whether it should be called Green to Platinum, or Gold to Green.
But it’s actually going to be Green to Gold Business Playbook. It’s the
“how” after the “why” of green-to-gold.
Chad Holliday:
Thanks, Dan. And Michael, it’s just really helpful to hear what you say.
Let me try to add just a few things from a business perspective so we can
get to the questions.
About 20 years ago, not long after you were writing that one-page article,
Bill Reilly came to DuPont and led a board-level committee that
challenged us not just do the right thing for the environment, but asked,
how do we make a business case for that? I think one of the things is
having a board-level committee and someone of Bill’s stature to lead us.
It made a tremendous difference, and we ended up with a company
mission of sustainable growth, which we defined as increasing shareholder
value and societal value while we reduced our environmental footprint.
That stuck through the company over that period of time, and every action
has sort of built on that. I won’t take you through the specific
accomplishments, but they’ve also been good for our shareholders.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 As I looked back preparing for today at the businesses in DuPont and the
changes they’ve made, and looked at our suppliers, which are critical, and
our customers who are critical, there are three things that I saw that really
made it click, and when they were all in place, it really worked.
First, there had to be a vision of where you were going. It had to be a
vision not the next quarter, not the next year, but generally five to seven
years out. It had to be a vision that the senior leadership of the
organization bought into, and the people who are there today had to see
their picture in that vision. You know the group picture you take? When
you get it back, the first thing you look at is to see where you are. If you’re
not there, you don’t look that hard. So what some people miss is they
don’t show where you fit into that. So the first thing is a vision that people
can relate to—not too high-powered but one that makes sense.
If you stop with vision, you probably won’t go very far, so you have to
give people some tools. You have to give them some money to invest.
You have to say what the rules are, the regulations for that investment.
You have to put some processes in place—probably the processes you use
in your company won’t work like they should in the future. And you have
to give training to people. Michael mentioned that a couple of times. If
you don’t give people the training of how to apply themselves, it won’t
work.
In our experience, if you stop there, you make a little progress but not
much. The third piece, as we look back at the business being successful, is
you have to get some early wins. People can’t wait five to seven years for
success, so you get early wins. The biggest thing you do with those wins is
you communicate them effectively throughout the entire organization
because people believe real examples inside their own company. And
you’re also giving people permission to do stuff by saying, “This is a good
example, it’s what happened, and they didn’t break the rules, but they’re
right on the edge, and we’re going to celebrate them.”
What we found is that if you put those three things in place, whether
you’re in DuPont or any other company, those kind of make sense with
what you’re doing.
Michael, as you were talking today, I really related. I did read your article
before I came. I grew up in manufacturing plants; my first 12 years were
on plants, and I’m an industrial engineer, and I just love plants. So I love
going into a plant and talking to a plant manager who’s rather successful.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 It really hit me again as I read your article that the most successful plant
managers work in concert with their local community. You can’t tell them
from corporate how to do that because in every community, the tools to
work with are very different.
I go into one plant and I say, “Where’s your XYZ crane, because I know
you’ve got to move this vessel twice a year.” He says, “Well, we don’t
have one. The aluminum plant down the road has that crane, and we do
this for them.” And I say, “Does corporate know you’re doing that?” “No.
They would not understand. So basically we’re scheduling our plant with
the aluminum plant. Yes, we are. Don’t tell corporate, because they’ll
have a fit, and you know, the marketing guys.” So I think that’s very, very
successful.
We also see that we have to have a precision welder. They have to be
available. They’re not available by contract, so we share it with different
companies in the community. And that’s something I found we did a lot
more in Asia, where we just didn’t have the resources to draw from.
The second example that came to mind is that I work with an engineering
company, CH2M HILL. They’re one of your clients I know, they’ve been
a leader around the environment, and they’re considered to be the best
water engineering company in the world. I asked them, “How come you’re
the best water engineering company?” “Aah, we’re the best engineers.
We’re widening the Panama Canal.” I keep probing them because this is
fundamental engineering; anybody can learn it. “Well, why are you
better?” And really they say, “Well, they only call us in when they’ve got
a real problem. And we know the secret to a real problem is a community
system to solve it.”
So you have to work with the city on their water needs, with the plant on
their water needs, and get a comprehensive way of doing that. And that’s
why they have a contract with seven states to answer, how do you deal
with the Colorado River? They think about not just the industry around
that, but they think of everything else going on.
So I just could not agree more that a lot of the value you’re talking
about—you know, we never did use the term “corporate social
responsibility” in DuPont. We just didn’t. It was fine, but that’s not what
we were about. But the value you’re talking about can be done. There are
examples of it being done, but how do you unleash that?
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 The last thing is that Bill was key at Rio 1992. Dan, you were helping him
with Rio 1992. Rio is coming again in 2012. And I’m very pleased to be
working with a group formed by the International Chamber of Commerce,
the World Business Council for Sustainable Development, a new and
global compact that petitioned the United Nations to be the business
representatives, to bring a voice of business on how we can work together.
We had a chance to present to 192 delegates of the United Nations that
case just two weeks ago, and we got a lot of receptivity. We’re hopefully
going to go to Rio 20 years after you guys got started and maybe talk
about how business can be part of the answer. Thanks very much.
Phil Sharp:
Now we have an opportunity for about 20 minutes for engagement with
the audience with this very stimulating speech and commentary by our
two other guests. Please, if you have a question, we have two microphones
we’re going to carry around, and if you would quickly identify yourself
and ask your question, we would appreciate it so we can get multiple
people in.
Question:
My name is David Clark. I’m with Inside Washington Publishers, and in
my reporting on environmental and energy issues, one of the things we
constantly hear is that there’s this train wreck coming with EPA
regulations, especially the air regulations but also the 316(B) water
regulations. Is this the result of poorly designed regulations, or what do
you attribute that to given what we’ve heard today?
Dan Esty:
Everyone’s looking at me, but I’m going to look at Phil. I think there are
constraints within the current regulatory structure, and I think there is an
important opportunity to have a dialogue about how to do regulation
differently and better. But I do think that there’s also been a lot of
criticism leveled at the EPA that’s unfair. They are doing the best they can
within a constrained regulatory structure, and there are enormously high
expectations across our society for improved air, for improved water. I
think this is an agency that’s struggling with limited resources and
constrained regulations to try and deliver the best it can on that agenda.
So I think it would be great if instead of having a bloodbath, as you
describe it, or a train wreck, there was more of a conversation about how
we could sharpen the regulatory portfolio and really move these things
forward in a way that engages the business community. I think that’s the
lesson we’ve heard today: one really would like to see a regulatory
structure that helps to foster creativity, that brings to bear the thinking of
the business community about the best way forward from the biggest
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 companies to the back-of-the-garage entrepreneurs. That’s how we have
historically made progress, and it would be great if we could again focus
on that as the path forward.
Phil Sharp:
I would just quickly add that you do need to take into account the order in
which these things arise on the agenda. They’re not necessarily chosen to
arise on the agenda by virtue of the leadership of EPA. Off and on, they
are because a court suit has been filed that has said you have to by X date
come to some kind of resolution or conclusion on that. And indeed,
sometimes parties in both camps, environmental and business, find
themselves having fought something in the courts and won, only to find it
to come back and bite them in the rear end two years later when suddenly
they have to confront a new and different regulatory environment. We see
that on a couple of these clean air issues, they’re among this package of
things that you’re addressing here.
Question:
Reid Detchon with the Energy Future Coalition. I’d like to follow up on
that line of reasoning because what I find persuasive about the Porter
Hypothesis is that the consumer’s going to put some demand pressure on a
producer to make change. And environmental change can be a
differentiator, a positive selling point in the marketplace. But the area
we’re just talking about has to do with the regulation of power plants, and
power plants don’t have any direct relationship with customers. Their
incentive is to extend their life and instead of matching up their investment
cycle, to prolong it.
I wonder if you could imagine a way, as we head toward this train wreck,
where a succession of important clean air rules are going to be applied at
power plants. How would you think of applying the Porter Hypothesis to
that environment?
Michael Porter:
Unfortunately, I’m not an expert on power plants. The fundamental idea
here is that if an entity can be given a platform and a set of rules and an
expectation about the set of rules in the future, there will be both an
incentive and a necessity—but also the time and the scope—for
innovation.
Dan and I have written a piece about climate change, and hopefully this
piece will be seeing the light of day shortly. The basic argument we make
about climate change is that the efforts in the United States over the last
two years really violated a lot of the key principles of the Porter
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Hypothesis. It really wasn’t about stimulating innovation or stimulating it
in the best possible way.
What mistakes did we make? We created this very complicated cap-andtrade system that was kind of hard to understand, and there wasn’t a really
clear link between that system and motivation for companies to invest in
innovation. There wasn’t a predictability about what the value of
innovation would be because you couldn’t tell what these credits were
worth. There was a lot of uncertainty about how the value of innovation
would play out over time.
Then we decided that we were going to start subsidizing individual
technologies rather than actually creating a motivation for anybody with a
good idea, with any technological solution, to ultimately be able to be
successful.
Dan and I have suggested that the simplest, cleanest approach to climate
change policy is what we call an emissions charge, a carbon tax. You
know, I think the name itself—when we’re stuck on what we call
something and when the word tax is ruled as invalid from the start—I
think we put in the article, let’s call this a depletion charge for depleting
future generations’ energy resources.
Let’s call it whatever we need to call it, but the point is that we need to
create an incentive for innovation. We need to start small and phase it in
over a long period of time, so that companies have an opportunity and
power plants have an opportunity to understand this is the way the world
is going to be. This charge is going to go up over time. All of a sudden
there’s a great business case for investing in new technology. There’s a
level playing field so that the people who are the most effective at building
out this technology over time will succeed.
So again, I think that we have allowed ourselves to get into a situation
where we’re fighting over interest groups trying to minimize the shortterm impact that these issues will have on their business, rather than
finding a way of formulating the regulatory question to really mobilize
innovation. Dan, you pick up from there.
Dan Esty:
Well, I hope we don’t draw the wrong conclusions from the debate over
the last couple of years, one of which could be that market mechanisms
aren’t a good way to go. Frankly, that is not at all the conclusion that
should be drawn. I do think we ended up with a cap-and-trade package
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 that had some problems and therefore sank. I think the truth is that capand-trade is a strategy that locks in an environmental target and leaves
open the question of at what price those allowances are going to trade;
therefore it leaves open the question of the economic burden. And as the
economy soured over 2008–2009, that became a tough nut to sell—that is,
to say that we’re going to have an economic burden at a difficult moment
for the economy.
The alternative, which is an emissions charge, or an energy resources
depletion charge, would in fact not lock in the environmental target as the
cap-and-trade would but locks in the economic price, which could start
very low and escalate slowly over time. I think that’s more attractive.
Second of all, I think there was the problem of giving away so many of the
allowances—not as the 1990 Clean Air Act gave some number for a few
years of transition to help people adjust, but to give away 80 percent of the
allowances out to the 2030s began to make it look like a special-interest
capture of a regulatory program, and that helped sour it.
Third of all, the very nature or idea of a carbon market, which seemed
very cool and cutting edge three years ago, in the wake of the collapse of
the year 2008 started to look like another opaque market—too complex for
everyday people, and one where the average citizen would not win and
probably some Wall Street folks would.
So I think all of that burdened this idea of how we should regulate and has
left us, Reid, with a not very attractive Clean Air Act command-andcontrol strategy. I guess I’m hopeful that we don’t pursue Clean Air Act
models to the ultimate end here because I don’t think it is a good structure
for addressing big-picture problems like the energy future of our society. I
guess I’m hopeful—but in Washington one can be quickly discouraged
about this—that there could be another pass at the right market approach,
the right market mechanism, some kind of a charge, with the logic being
not only that it’s the right way to regulate, but that at a moment where we
need revenue—because we’re not going to be able to get where we need to
go cutting spending alone—there might be a way to use a pairing of a
slowly escalating charge not hitting until out years in a big way as an
answer to two problems at once: how do we get the right energy strategy
in place that’s really thoughtful, addresses not only climate change, but
our dependence on foreign oil, and begin to address some of the budget
deficit concerns?
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Chad Holliday:
Maybe I’ll just add a few quick points to that. What business will say is,
“Give me certainty, and I can deal with it.” I think that’s a competitive
advantage to this country because I still think we’re the most creative,
innovative country in the world. So the more we can get that certainty,
we’ll move.
Second, I was with a group of 130 CEOs of chemical companies globally
yesterday, and we had one of these responses—you know, where you vote.
And it said, “How many of you think you’ve got to somehow price this
stuff”—it didn’t say how—“to be successful?” and it was 82 percent. So I
think there is a belief in it. And as an industry we’ve already looked at it,
and we’re going to have to do something to put a price on it some way or
another, or it won’t work.
The other phenomenon that’s really surprised many of us since this last
summer, after Copenhagen wasn’t a big success and there wasn’t an
energy bill here, is we’ve seen more and more companies say, “They’re
not going to make the rules; we’d better get on with it.” So we’re seeing
more companies step up to the party.
Dan Esty:
Our proposal by the way is a $5-per-ton charge escalating $5 per ton per
year for 20 years: predictability, slow escalation that allows people to
regear their capital investment over a timeframe that’s logical, and we pair
that with a proposal that the international negotiations shift focus not on
targets—at least not on emissions targets—but on a common price target
of $100 a ton in 2050.
It turns out to be much easier to get the Chinas, Indias, and developing
countries of the world to focus on that common price target because every
government in the world needs revenue, and it doesn’t seem to feel like a
growth cap the way the emissions targets do.
Question:
I’m Roy Gamse. I was director of economic analysis at EPA in the dark
ages. I’m amused that after politicians have disingenuously managed to
label as a tax what isn’t a tax, the solution seems to be to make their
dreams come true and actually use a tax instead. But my question is, there
seems to be a major disconnect between politicians on Capitol Hill who
purport to represent business interest and what I’m hearing here about
business interest. It’s obvious from a lot; this isn’t a secret. You read the
ads in the Washington Post from hundreds of CEOs. It’s plain as can be.
What can we do to close that disconnect so that the politicians can
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 represent what business really wants and have a chance of closing the gap
between the parties?
Chad Holliday:
We put together a very interesting group two years ago—three years—
called U.S. Climate Action Partnership (CAP), a group of twelve
businesses and four NGOs. We locked ourselves in a room for a year and
said, “Could we come up with something we could all buy into?” There
were some very long nights, but we came up with a plan. It did have a capand-trade aspect to it. We didn’t communicate it very well, so it got way
off track.
So I think that’s an example. These were companies across various
different industries. And we came out with it. So I think it can be done,
and shame on us: somehow we did not sell that effectively, but I think the
underlying premises for how it can be done are out there. We’ve just got
to find a way to communicate it better.
Phil Sharp:
I think Chad underestimates the impact that they had. While they did not
get it over the finish line in the U.S. Senate, the fact is I think it’s very
doubtful the House could ever have advanced this legislation with the
speed that it did without U.S. CAP being engaged.
I say that because what you’re advocating is a huge investment, as Chad
articulated, in the time and the energy of leadership of various companies
on this kind of proposition. And the question they’re naturally going to ask
is, “Is it worth it?” And I think the evidence is very clear: yes it is, even
though the final result wasn’t achieved at this go-around.
Tony Knowles here has a question.
Question:
Yes, thank you. Tony Knowles with the National Energy Policy Institute.
Thanks to the continued public service of Bill Reilly, and Bob Graham,
and other members of the Oil Spill Commission, it has probed into the
complete disconnect between regulations and the government and
corporate response to those regulations.
I was wondering if you could comment on the tragic human and
environmental consequences. I was wondering if you could comment on
the concept of a corporate shared value in the relationship between the
regulated and the regulators, and how we can avoid this kind of situation
in the future.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 Michael Porter:
Well again, I’m not nearly as well informed on this particular case as
many of you. I actually was a board member of one of the predecessor
companies of Transocean, so I do know a fair amount about the offshore
drilling industry.
The notion of shared value is built around specific areas of societal
concern, or specific societal needs. So in this case, it would be the safe
development of offshore energy resources. And the question is, how do we
get the safest use of offshore energy resources at the minimum added cost
of business? And how can we innovate in how we develop those
resources? How can we advance the technology in ways that improve
safety, but without keeping more and more cost, by doing things better and
using better technology and using better methods and using better
processes?
Shared-value thinking says the companies that can figure out how to
develop their offshore drilling and development activities the best and the
fastest will benefit by hopefully having a limited number of accidents.
Look at the disastrous effect these accidents have on a company. Sharedvalue thinking says that safety is not only good for society, it’s actually
good for the company as well. So the shared-value philosophy would be
that.
The question then is how to create a dialogue and a regulatory structure
and process that would really hasten that thinking rather than have this be
a kind of contest to see companies trying to minimize the requirements
and government trying to maximize the requirements, and having a tug-ofwar. How can we create the right kind of process?
I think probably step one would be to, as we talked a number of times
today, start really collecting data and tracking performance and measuring
intensively the environmental impact and the environmental record. Now
some of that is probably going on in the industry. But ultimately we ought
to be focused on the output, the outcome, which is good safety
performance—not on specifying certain specific steps that companies have
to go through.
So that’s how the philosophy would apply. We should get Bill or others
here to talk about how you would actually redesign the regulatory process
in that case.
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 But the other day, I was on an airplane, and I was thinking about airplanes.
We can make dramatic improvements on these areas of environmental
performance and safety performance. They don’t require in many cases
extra spending, but they require new ways of thinking about how you do it
and how do you do it well.
So the whole philosophy here in shared value is that from a company’s
point of view, let’s look at it that way rather than see any social issue like
safety as a threat to the success of the corporation. Let’s, as Dan said, see
it as an opportunity. But maybe others would want to comment on how in
this specific case we could redefine or restructure the regulatory
environment. I don’t know enough about it.
Phil Sharp:
Actually, I was going to recognize Bill Reilly. He’s already spoken to this,
and the commission has made a recommendation on it patterned after what
was done after the nuclear accident in this country. Bill, do you want to
take just a couple of minutes? We’re at the end of our session here, but
this is well worth hearing from Bill.
Bill Reilly:
Your point about performance and performance standards is directly
relevant to this situation. The tendency is that our government apparatus—
and certainly at the Bureau of Ocean Energy Management, Regulation and
Enforcement, the successor to the marine resources regulator—is to
prescribe in ever more detail how things should be done: how negative
pressure tests should be conducted, where centralizers fit in, all that sort of
thing.
The great fear I have looking at that situation is that will be effective for
three to five years. But if you see the dynamic development of that
industry, and the dynamism it took to go 5,000 feet down—now they’re
going 10,000 feet down; three rigs are being made for that—one worries
that will be out of date.
What if instead of those kinds of prescriptive regulations, you had two
things? You had performance standards. One of the company CEOs was
just telling me the other day, “We learned from a catastrophe in the 1980s
to always have three barriers in an under-balanced well.” That is one
thing. The other is to put more initiative back onto the company that’s
being regulated. Ask them, in the way that is done in the North Sea, “You
look at the particularities of this situation. You look at the formation. What
is the pressure? How difficult will this be as a drilling proposition? Are
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The Porter Hypothesis After 20 Years: How Can Environmental Regulation Enhance Innovation and Competitiveness? Eighth Annual Hans Landsberg Memorial Lecture January 19, 2011 there salt domes, and things of that sort that complicate it all? What do
you propose to do about each of those risks that you identify?”
And then the regulator looks at that, doesn’t necessarily even approve it,
but simply accepts it unless it’s wholly unacceptable, and it’s no longer a
mentality of checking the box. The tragedy, part of it, in the Gulf is people
checking the boxes didn’t understand the technologies, which they freely
admitted. It got way ahead of them, and they didn’t understand it because
they were not informed, trained, prepared, and resourced over the years to
be the match of the people they were regulating.
Your emphasis on performance is exactly right I think, what’s called the
safety case, the way this is done in the North Sea. I’ve had people say—
smart people who have a history with regulation—that’s not American.
It’s un-American not to have black-letter law, and I think there’s some
truth to that, frankly.
So it might be a difficult transition to make, and some people in the
Interior Department were like, “Well, okay, we’ll do that, but we’ll also
have stricter regulations.” Well, you have to have a platform, a foundation,
but I think there is insight for that industry and for that regulator in your
formulation.
Phil Sharp:
Well, ladies and gentlemen, we’ve run the clock here. I can’t help but
seize the moment since Bill Reilly spoke to just indicate that just up on the
websites, both ours and for the Oil Spill Commission, are some papers that
our scholars were commissioned by the Oil Spill Commission to do, one
of them on just this very topic. And those—as all of our work is always
ultimately made available to the public—are now available to all of you.
But most importantly, I think you’ll surely agree with me what an
extraordinary, stimulating conversation we’ve had with one of the
profound leaders on the thought in this, with Professor Michael Porter and
Dan Esty and Chad Holliday.
Thank you so much.
[End of Audio]
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