Towards the Natural Environment Agency Theory (NEAT)

Abstract

Drawing on insights from theories in management, economics, finance, and accounting, we
develop the natural environment agency theory (NEAT) to study the agency relation between
business and society in the context of natural environment. Based on public property rights to
clean air, water, and land, we argue that a business (agent) has an implicit contract with society
(principal). Under this contract, it agrees not to impose on society natural environmental agency
costs (NEACs) of pollution, depletion, and degradation while producing and selling
goods/services in return for its license to operate. Building on agency and stakeholder related
concepts, we propose and test the effectiveness of NEAC-reducing mechanisms, including
monitoring, bonding, and incentives. We find support for NEAT predictions. Our findings open
novel directions for future research and inform policy and practice.

Keywords: agency theory, stakeholders, natural environment, corporate social responsibility, environmental disclosures, environmental performance, structural equation modelling

JEL Classification: G3, G39, M4, M41, Q5