ECPR Standing Group on Regulatory Governance Third Biennial Conference

17-19 June 2010 University College Dublin

Regulation in the Age of Crises

The Receptive Capacity of Firms and the Regulation of Ecological Modernization

GARY LYNCH-WOOD and DAVID WILLIAMSON School of Law, University of Manchester

Ecological modernization theory, which emphasizes market-driven innovation as the basis for environmental improvement, raises fundamental questions for regulators. Protagonists argue government control through the imposition of prescriptive rules is ineffective, and there is a need to encourage greater stakeholder engagement, using reflexive instruments of governance, to facilitate decision making that supports market-type innovations. In practice this necessitates a transfer of decision-making from the state to the market. Yet the argument seems to sidestep the issue of whether firms vary in their ability to respond to governance forms of regulation, and if they do, whether this affects the precepts underpinning ecological modernization theory. Further investigation proceeds to show ecological modernization is the outcome of formal and informal legal pressure on constituencies of firms with different receptive capacities to those pressures. This requires that we reject blanket style governance prescriptions and in turn accept the need for tailored regulatory solutions. In advocating this pluralistic worldview the analysis identifies a clear and distinct role for the state, as it does for civil society, in the pursuance of ecological modernization. On this basis ecological modernization theory, to be a credible theory, has yet to fully capture the regulatory dynamic that drives ecological modernization.

INTRODUCTION

In response to the perception that the capitalist system embodies an antagonistic relationship between environmental protection and economic development there has emerged the countervailing view that the market’s intrinsic urge to modernize, if properly directed, can find efficient and effective solutions to the environmental problems confronting society. Under the auspices of ‘ecological modernization theory’ this has proven an attractive proposition, especially for neoliberal market economies. It suggests material and energy streams can be decoupled from, and hence not jeopardize, economic growth. To facilitate this regulation has to direct the market since technical and social adjustments will not spontaneously emerge in an unfettered setting. The responsibility accorded to regulation is thus great, requiring as it does that policymakers redirect industrial and societal structures to greener pathways of production and consumption. Alongside and as a consequence of this responsibility is the requirement for a change in the state-economy relationship, since the state now needs to assume a different role in the determination of environmental innovation in the economy. The need for a change in the state-economy relationship can be traced back to before the 1990s and continues in a debate on the appropriateness of different regulatory frameworks for ecological modernization. This has ranged across disciplines and has tended to focus on the extent to which ecological modernization language has embedded itself in policy and how this is modifying regulatory strategies and styles (e.g. Buttel 2000, Hajer 1995, Weale 1992, Jänicke 2008, Flynn & Baylis 1996, Neale 1997, Christoff 1996, Berger et al. 2001, Gouldson & Murphy 1998, Murphy & Gouldson 2000, Sonnenfeld & Mol 2002, Ashford 2002, Mol 2000, Mol & Spaargaren 2000). Part of the debate focuses on the need for a retreat from government engineered command-and-control regulations, because they are too inflexible and blunt, and an associated desire to develop strategies that are compatible with the pursuit of contemporary goals1. When this happens the change will be significant, for it represents a movement away from an era where it is assumed there is hostility between environmental and economic goals. The contemporary need, for compatibility between environmental protection and economic wellbeing, is therefore a break with the past. As part of this realignment the state has to reinvent its role by supporting and steering appropriate market mechanisms. The state then experiences a metamorphosis, having to reconfigure itself to move from direct ‘government’ to indirect ‘governance’. At this point the emphasis is on leveraging, not forcing, the firm’s decision-making capacity towards the achievement of ecological modernization. The assumption underpinning ecological modernization can therefore be said to be best achieved when innovative capacity (of the firm) is functionally attuned (i.e. economically orientated) to solving complex environment-development problems. Whether this metamorphosis should involve direct regulation is less clear. Although regulatory standards may stimulate eco-innovation (e.g. limits on CO2 emissions induces innovative engine design) the overall view appears to stress an incompatibility. This anticipates a key question for the present analysis: is this just an article of faith (Ashford

2002) or does it indeed portray a fundamental irreconcilability2. To investigate this further the analysis draws upon our previously articulated argument that firms vary in their ability to respond to different forms of regulation (Williamson et al 2008, Lynch-Wood and Williamson 2010). Having then shown blanket-style governance is inappropriate the analysis continues by drawing on current work to demonstrate regulatory effect is the outcome of two sources of regulatory pressure (Williamson and Lynch-wood 2011, Williamson et al. 2011). The two sources of regulation, formal and civil, affect firms differently, and this provides the basis for the argument that the goal of ecological modernization has to be supported by a plurality of regulatory approaches.

If we are committed to ecological modernization we must therefore channel government and governance forms of regulation to where they will be most effective. This means we should not apply governance type mechanisms to where firms routinely and purposely deviate, and likewise, we should not rely on direct government type mechanisms for firms with a propensity to go beyond compliance, as both needlessly hamper the process of ecological modernization. The analysis of these issues and arguments commences with a review of how regulation has changed and why this is related to ecological modernization. Following this we consider how firms’ compliance orientations vary and how these orientations influence the effectiveness of regulatory approaches. To develop this further the analysis then considers how these differences to regulation are influenced by formal and informal rules. This is the backdrop for the development of a model of regulation based on receptive capacity. By seeking to align regulation to organizational receptivity we outline the idea that groups of firms possess sufficient commonality that they constitute distinct systems - recognizing this has important implications for how strategies can be formulated to secure and encourage behavior that exceeds compliance. Finally, we consider the implications for ecological modernization.

THE REGULATORY LANDSCAPE

To better understand the changing nature of regulation and the relationship of this to ecological modernization the analysis begins by looking at conventional approaches to regulation and how these have been reassessed in light of the quest for sustainable development. This highlights a complex regulatory landscape, where criticism and reassessment have shifted perceptions on what constitutes suitable regulatory arrangements for the achievement of ‘deeper’ societal goals. CONVENTIONAL APPROACHES Direct regulation, which uses regulatory agencies to enforce prescriptive standards, flourished in the 1970s. It can be described as a period when industrialized states reacted to public concerns by introducing legal measures to control harmful activities (Weale 1992, Gunningham & Grabosky 1998). The reliance on the state, with a focus on controlling pollution, inevitably became a legalistic undertaking with a focus on crime and

punishment. It also had a lasting legacy, with policymakers going on to create specialized agencies to monitor and enforce compliance. Typically the effort led to the licensing of heavily polluting firms, with an emphasis on single-media and end-of-pipe solutions. A high priority was ascribed to certain sectors and issues (e.g. large petro-chemical complexes); with most firms subsequently being overlooked by being below legally prescribed thresholds. This emphasis continues into the present period, with much policy being anchored around permits and enforceable standards. They have become more sophisticated over this period, with ‘integrated pollution control’ perceived to be state-of-the-art environmental regulation (Murphy & Gouldson 2000). To be sure, the evolution of direct regulation represents a development over earlier more primitive end-of-pipe approaches. In the case of the modern system of integrated pollution prevention and control (IPPC) it includes anticipatory and precautionary requirements. It also includes flexible process-type standards, such as ‘best available techniques not entailing excessive costs’. At face value this suggests legally enforceable regulations can, if correctly construed, be flexible and non-prescriptive (i.e. they target but do not specify performance output, product process, product composition, product use etc.)3. Even with these developments there has been criticism, sometimes overstated, that direct regulation is incompatible with modern policy needs4. This revolves around the view that direct regulation is bureaucratic and stifles innovation and competitiveness, with top-down approaches preventing rather than curing problems. Collectively it suggests, notwithstanding their more recent incarnations, that direct regulation fails to induce the far-reaching transformations that sustainable development demands5. Sustainable development requires more than a patching-up of specific problems, with the scale and complexity of environmental degradation mandating a restructuring of regulatory effort. This necessitates decentralized governance, since only alternative approaches embedded in individual constituencies are considered capable of addressing the problem. EMERGING APPROACHES It is generally agreed that sustainable development requires the integration of economic and environmental policies, and since this is not self-guaranteeing, that state intervention is required (WCED 1987, UN 2002). To this end the Brundtland Commission (WCED 1987) suggested policy should intervene in the market to ensure externality costs are internalized by those creating the problem. This is evident in European policy, especially the Fifth and Sixth Environmental Action Programs, which tried to improve the functioning of the market through the provision of better information, education and research, and the associated use of voluntary approaches. At the international level the World Summit on Sustainable Development (UN 2002) also supported the case for a fuller range of instruments, as did the OECD in 1991 when it highlighted the importance of improving the policy framework through a more effective regulatory system using subsidies and tax reforms, and so forth (OECD 199 1).

The legacy of these developments is seen in environmental policy taking cognizance of and accommodating a broader range of regulatory tools and non-state actors, to the extent that it has become more open to the view that the regulatory function can reside in the tripartite domains of state, industry (self-regulation) and civil society (Gunningham & Grabosky 1998, Gunningham & Sinclair 2002, Hutter & Jones 2007, Ayres & Braithwaite 1992). Although direct regulation using licenses and enforceable standards continues to dominate, the new regulatory landscape thus requires that we accommodate a broader view of the role of the state (Rhodes 2003). In practice this is associated with the increasing use of reflexive and market-based regulatory instruments, and an accompanying leveraging of civil society engagement pressure, to enhance industry self-regulation and civil society oversight. While governance is less overt in its approach due to its emphasis on participatory decision-making it is nevertheless a significant surrogate regulatory pressure, to the extent that it constitutes and can be called civil regulation. Sometimes inaccurately referred to as the social license (which is really the product of civil regulation) this sphere of regulation is the outcome of non-state actors exerting a pressure on a societal entity (Vogel 2005, Gunningham et al. 2004, Lynch-Wood & Williamson 2007). By directly and indirectly involving civil society in the decision-making process - which can in turn be supported by the state through the facilitation of communication, education and information – there is the expectation that stakeholders and market participants will thus gain in knowledge and influence, and that this will change extant market practices. This description of governance is very different, at least in terms of its theoretical claims, to that of reflexive law (Teubner 1983). In many ways reflexive law takes the concept of governance onto a higher dimension since it argues that self-regulation is the only form of regulation that can operate in complex pluralistic societies. Although the theoretical underpinnings of reflexive law, which draws upon the social theory work of Luhmann and Habermas, are central to the argument being presented in this analysis, we stand back from the view that there is by necessity a requirement to install self-regulatory mechanisms that empower actors to manage/regulate on the state’s behalf. There is however broad agreement that reflexivity, which involves reflection on behavior based on assessment of information that is both internal and external to itself, can be a powerful regulator of behavior. If reflexive instruments encourage organizations to learn from and modify their behavior based on experience and received information it follows reflexive policy must enhance the self-referential capacities of social systems and institutions outside of the legal system so that firms embedded in or shaped by those entities are stimulated to regulate themselves. Correctly framed reflexive policies would therefore promote self-regulating social systems, such that there is less reliance on direct interventions using detailed rules, to the extent that success would broadly equate to a scenario where the lighter the regulatory touch the greater the regulatory outcome. An appropriate example would be the European Eco-Management and Auditing Scheme (EMAS). Although voluntary it requires firms to

have procedures for maintaining compliance, including the production of a register of significant environmental impacts, the carrying out of periodic audits, and the disclosure of environmental performance data. Other examples include economic instruments (e.g. taxes and charges), social reporting mechanisms, disclosure instruments, and industry self-regulation (Hess 1999, Fiorino 1999, 2006, Stewart 2001, Gunningham & Sinclair 2002). REGULATORY APPROACHES FOR ECOLOGICAL MODERNIZATION Ecological modernization and sustainable development emerged independently but share the belief that economic growth must be decoupled from increasing resource use and environmental degradation. Ecological modernization is however less ambitious than sustainable development since it does not directly address issues such as poverty alleviation within and between generations (Langhelle 2000). This has proven to be an advantage, for although admirable, the scope of the sustainable development is also its Achilles Heel since it fails to provide meaningful guidance on policy construction (Esty 2001, Spaargaren & Mol 1992). Ecological modernization overcomes this by only seeking to make production and consumption more sustainable. Moreover, it says technical and social changes can be integrated into the market system so that the market system itself then addresses the problem (Spaargaren 2000). The way out of the ecological crises is therefore further modernization, even though previous versions of modernization caused the crises (Mol 1995). The uniting of market and ecological goals is said to necessitate micro (e.g. industrial ecology) and macro (e.g. state, institutional, policy) adjustments. Micro adjustment dominated early ecological modernization discourse and emphasized the encouragement of technological advancement in industrial production to facilitate cleaner processes (Huber 1982, 1985). It was soon realized this had to be accompanied by macro changes as otherwise they were an imposition without credibility. In practice this meant the micro adjustment had to come out of and be part of the process of technological and economic development (Mol & Spaargaren 2000; Weale 1992; Hajer 1995). Known as prevention by policy realignment, it sought to build on the inherent urge within market economies to modernize. To be successful it requires that the invisible hand of the market is ‘steered’ so that innovation is stimulated in the right direction. This in turn requires an appropriate stimulus to the market, and a corresponding decentralization of government interventions, to the point that industry and environmental groups are the key participants in the decision-making process. When this happens discursive practice can be said to have changed such that it legitimizes positions that seek to protect the environment (Mol & Sonnenfeld 2000; Buttel 2000; Blowers 1997; Jänicke 2008). Regulation, of course, has an important role to play in creating this propensity for eco-innovation in firms. Indeed, the link between ecological modernization and forms of regulation is well established (Ashford 2002, Töpfer 1989, Weale 1992, Mol 1995, 1996, Gouldson & Murphy 1998, Murphy & Gouldson 2000, Jänicke 2008, Gunningham & Sinclair 2002, Flynn & Baylis 1996). However, the form of the relationship is ambiguous to the extent that there is a lack of theoretical detail on why different types of regulation

support ecological modernization. Thus Ashford (2002) says it is remains unclear whether innovations in regulation complement or substitute command-and-control regulation. Looking at this more closely, direct regulation can be an important stimulus for eco-innovation. Regulation may incentivize innovation, to the extent it directs the forward development of technology to environmentally responsible ends. A phased substance or product ban, as a direct regulatory intervention, can therefore induce significant product or process modernization. Much of the literature supports this view, especially when regulation is flexible (e.g. Hemmelskamp et al. 2000; Porter & van der Linde 1995a, 1995b; Ashford 2002; Gouldson & Murphy 1998; Murphy & Gouldson 2000). If direct regulation fails to stimulate required technological change then the problem may therefore not be the approach itself. Rather, it may be how the regulation is constructed and applied, which may be an artifact of the institutional context within which it is formulated (Ashford 2002). In spite of the evidence most decision-makers still believe direct regulation hinders rather than promotes necessary innovation. It manifests itself through an emphasis on governance and non-legal arrangements, to the extent that this interpretation has itself symbolized the practice of ecological modernization6. This process draws upon other regulatory domains (e.g. civil society, self-regulation) and supports these by advocating regulatory decentralization and consensus forming arrangements. For example, Mol (1995, 47) says policy should provide “the conditions and stimulates for social ‘self-regulation’ through economic mechanisms and/or the public sphere of citizen groups, environmental NGOs and consumer organizations”. Others talk about the liberation of the innovative energies of business (Neal 1996), while the Fifth Environmental Action Program, often seen as a policy blueprint for ecological modernization, emphasized and facilitated dialogue among partners to create a spirit of shared responsibility. Failure to implement clean technology was, by default, a result of the inadequacies of the pre-existing command-and-control approach (Neal 1996). The argument that the state has to become more decentralized, flexible and consensual implies a parallel process of political modernization, since the institutional transformations relate to the role of the state itself7. Only then, according to the argument, can we fully facilitate new-generation instruments to encourage win-win outcomes. These are likely to include, as a minimum, the use of economic incentives, performance standards, information strategies, and liability rules (Gunningham and Sinclair 2002, Neal 1996). The sum of these changes represents a seismic shift of approach and has far-reaching implications. Getting it wrong is therefore perilous. Because of this the analysis now considers the extent to which firms are affected by formal and informal regulatory pressure. The answer, it will be shown, affects how ecological modernization should be regulated.

A DYNAMIC MODEL OF REGULATION

In considering how regulation affects firms the analysis initially focuses on differences. Specifically, we see how factors affecting the way firms respond to regulation differ as firm size varies (Williamson et al 2008, Lynch-Wood and Williamson 2010). This finding provides the basis for the assessment of how firms are likely to respond to different forms of regulation. Together they demonstrate a dynamic regulatory constituency, at least for developed market economies, and one that materially affects the process of ecological modernization. WHY ORGANIZATIONAL DIFFERENCES MATTER Levels of greening, which range from noncompliance to leading-edge, are the outcome of organizational differences. These differences are identified by looking at how small and large firms respond to green pressure, under the premise that variances in response to the same pressure signal a material difference. The framework for doing so is largely taken from Bansal and Roth (2000) and investigates how differences in response across a range of driver areas are mediated to produce different compliance motivations and orientations8. Drivers Drivers of environmental behavior include legislation, stakeholders, economic opportunity, and ethical motive. Compliance with environmental legislation is often cited as the main driver of small firm behavior, particularly when environmental improvements cannot be justified on economic grounds (Worthington & Patton 2003, 2005, Baylis et al. 1998). This suggest smaller firms tend to be instrumental and pragmatic, which is why positive environmental attitudes rarely get converted into ‘beyond compliance’ behavior (Worthington & Patton 2005). Although compliance is essential for large firms, to sustain legitimacy, it is not, of itself, the primary driver of compliance or beyond compliance behavior (Gunningham et al. 2004). For example, the most likely participants of the US Environmental Protection Agency’s voluntary 33/50 program, which encouraged firms to voluntarily develop less toxic substances, were large firms. Importantly, they participated for public recognition and not compliance reasons (Arora & Cason 1996). The need for legitimacy suggests stakeholders influence organizational behavior. Environmental stakeholders include non-governmental organizations (NGOs), neighbors, communities, suppliers, customers and investors, with the magnitude of their impact varying across different types of firms. To cite an example, research indicates external stakeholders have little interest in, and insufficient power to influence, the environmental practices of small firms (Rowe & Enticott 1998, Williamson & Lynch-Wood 2001, Lynch-Wood & Williamson 2007; Lynch-Wood et al. 2009). Consequently the environment becomes a relatively low priority for smaller firms (Revell & Blackburn 2004) and they have little incentive to further develop their environmental reputations (Graafland & Smid 2004). Conversely, since larger firms are more visible and seek to protect brand identity it comes as no surprise their stakeholders have the wherewithal to be more active and powerful (Weber & Wasieleski 2003; Lynch-Wood & Williamson 2007).

Thus visibility can be said to generally increase as firm size and profile increases. This tends to make large firms more vulnerable to attention from interested parties and associated generation of augmented institutional pressure (Lynch-Wood & Williamson 2007). The perceived economic benefit from being green also appears to increase as firms become larger. This can be seen across a number of areas, with owner-managers of small firms for example believing their firms to be lean, to the extent that green economic opportunities, based on efficiency gains, must be negligible. Further, this is reinforced by and produces the view that they have negligible environmental impacts (Williamson et al. 2006). As a consequence the economic rationality of smaller firms perceives environmental benefits in terms of small-scale cost reductions and efficiency gains (Baylis et al. 1998). This in turn means smaller firms are unlikely to capitalize on green opportunities if it entails significant capital outlay as they will be reluctant to incur debt and will demand a quick payback (Petersen & Rajan 1994; Michaelas et al. 1999). In association with this they have the view they have insufficient slack resource to exploit opportunities anyway, meaning environmental improvement and exploitation is at best a marginal activity and why it makes sense to not participate in environmental improvement programs (Petts et al. 1999; Hitchens et al. 2005). Likewise and by way of contrast, larger firms do have the capacity and a willingness to make large-scale investments, to reduce costs, and to exploit emerging market opportunities to gain competitive advantage (Porter & van der Linde 1995a, Russo & Fouts 1997, Judge & Douglas 1998). Ethical motivations, which include social legitimacy expectations and management values (Di Maggio & Powel 1991, Wood 1991, Greening & Gray 1994, Marshall et al. 2005), also appear to affect small and large firms differently. In short, large firms are more affected because they are more visible to the pressures that induce ethical behavior. Together with their greater capacity to exploit green market opportunities it thus becomes strategically sensible to adopt beyond compliance practices. By way of contrast, smaller firms are more likely to be influenced by the ethics of their owner-managers, which in turn are influenced by market values that diminish the worth of the natural environment. It manifests itself through decision-making frames exhibiting certain types of behavior over others (Lewicki et al. 1999), which helps explain why positive environmental values of owner-managers rarely translate into actions for improved environmental performance (Smith & Kemp 1998; Hitchens et al. 2004). Overall, it suggests market values take priority over ethical considerations in the decision-making frames of owner-managers (Williamson et al. 2006). Mediating Context Factors influencing the interpretation of, and action resulting from, driver pressure include ‘issue salience’, ‘field cohesion’, ‘individual concern’, and to a lesser extent the ‘resource endowment’ of the firm. Issue salience is the level of importance a particular ecological issue has for firm constituents, and is determined by certainty, transparency and emotivity. Certainty relates to the measurability of environmental issues, with toxic waste disposal

having a high degree of certainty on account of people being aware of unsafe disposal. In contrast global warming has a low level of certainty because the impact of the firm is less obvious. Transparency concerns how environmental issues are attributed to firms’ activities. Noise pollution is thus more transparent than air pollution since it is easier to link it to specific sources. Emotivity relates to the emotional responses induced by environment issues, with a major oil spillage inevitably eliciting a more reaction than waste going to landfill. In general, each of these mediating factors becomes more intense as firm size increases. Thus a single major pollution incident is more measurable than many smaller impacts, which means it has greater certainty and transparency, which induces greater emotivity. Field cohesion refers to the intensity and density of formal and informal network ties between constituents in an organizational field. An organizational field is a recognized area of institutional life (e.g. key suppliers, product customers, regulatory agencies), and although field cohesion varies across firms of all sizes there are significant differences between small and large firms. Large firms are associated with powerful elites, institutional decision-making, supply chain control, financial power and dominant products (Pettigrew 1992). Since they are more likely to interact with powerful stakeholders (e.g. environmental regulators and NGOs) their field cohesion strengthens the drivers of green behavior. Smaller firms have in contrast been associated with the lower middle class, a lack of financial power, and local markets (Owens 2002). Consequently, they tend not to interact with major stakeholders and their field cohesion is generally less intense with regard to the mediation of green drivers. Individual concern is the degree to which organizational members value the environment coupled with the degree of discretion they have to act. With respect to discretion, this is likely to increase as firm size decreases since the key influence in smaller firms is owner-managers. That individual discretion decreases as firm size increases is due to the growing power of other stakeholders, particularly shareholders. Nonetheless, while owner-managers of smaller firms may have more discretion than employees of large firms this is unlikely to be associated with increasing concern for the environment since the decision-making frames of SME owner-mangers tend to prioritize revenue-based activities over environmental activities (Williamson et al. 2006). The market reinforces this by providing greater rewards for competitiveness and price than it does for environmental behavior (Spence et al. 2000). For large firms it is managers who make and implement decisions. In doing so, they are accountable to a wider range of stakeholders; some of whom will have environmental expectations (e.g. NGOs). Managers who share these values can therefore use these stakeholder expectations to justify their own preferences for how the firm should behave and develop. Similarly, managers who do not have environmental values may find they have to follow the values of wider stakeholders9. From this we hypothesize the mediating factor of individual concern is generally more important in large firms than it is in small firms. What is more, since the literature suggests that individual concerns are enduring, we would expect these differences to be long-lasting.

The resource endowments of firms also influence how they respond to opportunities and threats (Barney 1991, Peteraf 1993). Resources refer to assets, knowledge, capabilities and processes, and Russo and Fouts (1997) demonstrate that firms which tend towards compliance will differ in their resources than those that tend towards prevention. It concurs with evidence that scarce resources underpin a lack of environmental activity in smaller firms (Hutchinson & Chaston 1994), and that smaller firms do not possess the human and financial capital to enable them to make sustained environmental improvements (Gerstenfeld & Roberts 2000, Hitchens et al. 2004). Nooteboom’s (1994) study of innovation is similarly relevant, showing that differences in resources result in small firms having comparative advantage in the earlier stages of innovation, because it is less expensive, and large firms having advantage in subsequent stages by being able to scale-up the innovative process. Motivations Firms are motivated, to differing degrees, by ‘competitiveness’, ‘legitimation’ and ‘ecological responsibility’. These influence how firms perceive and react to, and yet is also a consequence of, the drivers and mediating contexts outlined above10. Although firms can possess all three motivations, it is argued smaller firms are more likely to be motivated by competitiveness and legitimation, and large firms by competitiveness, legitimation and ecological responsibility. This is the outcome of the variation in intensity of these motivations across firms. In general, the evidence suggests the intensity of motivations is different for firms of different size within and across sectors. Large firms motivated by competitiveness tend to perceive ecological responsiveness as a means of improving long-term profitability (Bansal & Roth 2000). Examples of competitive responses include energy and waste management savings, material input reductions to produce more with less and the development of eco-products. By comparison, small firms that are motivated by competitiveness tend to be less environmentally active (Petts et al. 1999, Worthington & Patton 2003, 2005), perceiving ecological responsiveness in terms of basic compliance (Williamson et al. 2006, Worthington & Patton 2003, 2005). Accordingly, Scherer and Ross (1990) show that unlike large firms which seek to leverage resources to develop longer-term green product/market positions, smaller firms tend to focus on process intensification-type measures to reduce costs. This is broadly similar for legitimacy, as is evident in how firms respond to societal pressures by publishing environmental and social reports. The reporting mechanism enables firms to identify with legitimacy-enhancing symbols, values and institutions (Dowling & Pfeffer 1975), and in general large firms are more likely to report than small firms because their need for legitimacy is greater (Lynch-Wood & Williamson 2007; Lynch-Wood et al. 2009). This is because legitimacy can affect the reputation of a firm, which is more important for large firms as this more readily affects their stock market valuation. Moreover, since large firms have a proportionally greater need to protect their reputation they are more likely to attempt to legitimize themselves by going beyond

compliance. For small firms legitimacy is more specific in that they are sufficiently concerned to avoid fines but have less exposure to the wider societal pressure that induces a strategic concern for the enhancement of reputational capital more generally. Ecological responsibility, such as the provision of less profitable green product lines and donations to environmental interest groups, are carried out with a sense of responsibility rather than self-interest. The preceding analysis would suggest large firms are proportionally more likely to go beyond compliance than smaller firms because there are greater institutional and social pressures requiring such behavior. Although it is in their self-interest to do so they do not expect a direct payback. Conversely, smaller firms are less likely to act altruistically, but when they do so it will be more likely this is not out of self-interest. In outlining the factors that influence the environmental orientation of firms it has become clear visibility and resources differences affect worldviews and practices, even if these differences are not always size mediated. What is more, when these differences are equated to the proxy of firm size it becomes possible, as outlined below, to more realistically examine how firms respond to different forms of regulation. Firm Differences and Receptive Capacity The analysis indicates large firms are more aware of environmental issues as a consequence of having more resources, systems, expertise, and pressure exerted on them, than small firms. This would suggest large firms should in general be more compliant than small firms, and have a greater propensity to go beyond compliance. In aggregate it is thus argued the risk of noncompliance increases as firm size decreases and the capacity for self-regulation increases as firm size increases. Yet some large firms do break the law and some small firms go beyond compliance. Consequently the risk of non-compliance, as well as beyond compliance behavior, has to accommodate compliance orientation, while recognizing compliance orientation is associated with firm size. This also enables us to consider how firms respond to different forms of regulation, as we now have the necessary parameters to assess the ‘receptive capacity’ of firms to regulation. Consideration of the interplay of compliance orientation and the ability of the firm to respond to different forms of regulation, as a consequence of their receptivity profile, produces the eight receptive capacity typologies shown in Figure 1. The view that a firm has a specific receptive capacity to regulation supports the claim regulation functions better when targeted correctly, as this accommodates the cultures and understandings of regulatees (Baldwin & Black 2008). The model therefore accommodates a full range of compliance types, be they intentionally or recklessly noncompliant, technically or substantially non-compliant, compliant within the spirit of the law, or beyond compliant. Furthermore, being analogous to real world groupings, the

eight typologies are unevenly populated (e.g. most small firms are vulnerable satisfiers; very few large firms are benevolent giants).

Figure 1: Receptive Capacity Profiles

Before considering which forms of regulation these groups of firms respond to, and the implications of this for the practice and theory of ecological modernization, it is necessary to consider why forms of regulation matter. WHY FORMS OF REGULATION CO-EXIST As indicated, regulation can include formal and informal rules. These are the manifestation of two sources of regulatory pressure, which affect firms differently as a consequence of receptivity differences to those forms of regulation (Williamson and Lynch-Wood 2011; Williamson et al. 2011). The basis for this view, as will be shortly outlined, arises out of social theory explanations of social order in complex societies. It has been shown that in the right circumstances civil society can formulate and enforce rules in relation to the practices of firms (Bendell 2000, Cramer 2002, Murphy and Bendell 1997, Vogel 2005). Because of this it is an important form of regulation even though it is not enshrined in law (Gunningham et al. 2004). By utilizing this regulatory force, as a form of governance, the state is thus required to steer rather than row, in the belief that guiding firms to self-reflection is more productive than compulsion to meet minimum requirements. It also requires, being decentralized and non-hierarchical, that both public and private actors participate in

the formulation and implementation of corporate policy. This works, as Dragneva-Lewers et al (2011) show, by civil regulation incorporating four constituencies of actors and three pressure routes for channeling actor pressure. Actor constituencies comprise civil society organizations, the media, consumers and stakeholders, while pressure routes comprise the formal legal system, consumer and labor market behavior, and civil actions. The three driver mechanisms exert pressure on firms by singularly or jointly threatening to engage in legal action to draw attention from state authorities to increase enforcement and monitoring (including legal suits on individual firms in order to influence all firms), by seeking to affect consumer and labor behavior such that purchasing and labor decisions are changed, and by direct protest actions like ‘naming and shaming’. A prerequisite for civil society pressure is individuals and groups are free to form entities to affect change. These include trade unions and employers’ organizations, non-governmental organizations, professional associations, charities, grass-roots organizations, and organizations that involve citizens in local and municipal life as typified by churches and religious communities. For ecological modernization to occur through civil regulation it therefore has to actualize the values and purposes of this range of stakeholder constituencies to the extent that they are mobilized as independent voluntary efforts for the purpose of influencing corporate behavior. The advantage of this, and why it can be effective, is that it enables actors to collectively express a view over the use of resources they may/not possess. Importantly, this is likely to increase in significance when the limitations of blanket style formal regulation are fully appreciated and there is recognition that civil society pressure will increase as societies become more informed and pluralistic. Whether this represents a paradigmatic change for regulation is both contentious and important. The view that legal frameworks change over time has a long tradition (e.g. Weber [1922] 1978, Nonet and Selznick 1978). At the societal level it is described as a movement from repressive to autonomous and then responsive law (and by others as the movement from formal, substantive to reflexive law). In the context of a failure of command and control regulation and the pluralization of society the change manifests itself in the need for law to more flexible and for social pressure to be perceived as a source of knowledge for self-correction (Nonet and Selznick 1978). This suggests that law should allow, and indeed facilitate, some form of non-centralized governance as a legitimate form of regulatory control. To investigate this we now consider how social order is possible in complex societies, using ideas developed by Luhmann and Habermas. Regulation and Social Order Luhmann (1985, 1986, 1995) argues social systems are autopoietic11. Autopoietic systems are normatively closed and cognitively open, which explains why social sub-systems operate autonomously using their own logic. Luhmann thus extends the ideas

of the biologists Maturana and Varela (1980) by arguing that a system reproduces its own identity without being dependent on the environment that the system operates within. At the biological level the thesis asserts that systems are not the reproduction of component parts, be it a living cell or lung, but rather the system of interactions that produce the component parts, where the component parts then maintain the interactions that constitute the system. On this basis an autopoietic system requires external sources, such as energy, to sustain its operation, but is autonomous because the system operates independently of those required external sources.

For Luhmann a social system similarly exists and reproduces itself independently of its surroundings. Although the social system cannot exist without the host system of which it is a part (i.e. society), it is nevertheless self-sustaining since communication enables a social system to decide self-referentially what is relevant and has meaning for the system. Consequently, in functionally differentiated societies the economic system is a sub-system and has its own functional code that makes it sensitive to external signals while concurrently remaining independent of other systems. The code of the economic system is money, and because the system is autopoietic it is sensitive to societal expectations of how economic system should behave, since it is in its self-interest of the economic system to do so (i.e. it interprets social expectations in terms of its effect on the ability of the economic system to make money). This means the economic system can only be altered by processes prescribed by the system (e.g. technological improvement has to be functionally related to money) yet is open to information about its environment from other subsystems (e.g. technological improvement is affected by changing societal relations concerning the making of money). The notion that the process of ecological modernization, as a component of the economic system, produces its own purpose and yet learns to adapt this in relation to the external environment is challenging because it means it cannot be fully steered (Teubner 1993). If true it requires we accept ecological modernization can only be made receptive to external pressure by developing new and more sensitive ways for the economy to absorb information from the stakeholder environment, so that this can, in turn, be translated into and made compatible with the functional code of money. In general, the mechanisms for absorbing information from the stakeholder environment are initiated by the state through the communication of formal rules and by civil society communicating normative expectations. Communication thus enables subsystems to attune their operations in relation to other parts of the system. Being a social system the communication is moreover reflexive since there is a need to select from different offerings – with the reflexivity of the subsystem being affected by the reflexivity of other subsystems (i.e. a stabilized system is a shared reflexive communication system). Since this reflexivity involves individual consciousness the consciousness has to be ‘structurally coupled’ to the communication system so that the message – rather than the actor – is communicated. This is in comparison to the subsystems themselves, as subsystems are not

structurally coupled. Rather, they are a structured part of the system. Thus coupling is different at the individual and system level. Systems are operationally coupled and therefore update in relation to one another if this is functional for the system that contains them. Interpenetration then describes the situation where structural coupling is operationally coupled so that the same communication is relevant to two or more subsystems (Leydesdorff 2001). Reflexive selections therefore provide meaning to the system. Since these reflexive selections maintain the system by differentiating the system from the wider social environment (otherwise the system can exist) it is clear that what is acceptable to the system has to be determined by the system. This does not mean the system is isolated or self-sufficient even though it cannot be controlled externally. On the contrary, as an autonomous entity it has to select certain areas from its environment to fulfill its specific function, as do all systems, be they economic or legal. Thus ecological modernization is a form of communication for the economic system, to solve a problem for the economic system, and in so doing, to solve a problem for the social system as a whole. It is equally important to remember that, being an autopoietic system, the economic system does not determine the process of ecological modernization. This is because any autopoietic system is realized through its structure, since the structure selects from available states (e.g. protecting the environment, not protecting the environment) to sustain the structure, with successful selection being successful because it is suitable for the economic system. In effect, to sustain its functionality the process of ecological modernization, as a communication, has to have legitimacy for the system - otherwise the communication will be counterproductive and the system will start to fail12. In this way autopoiesis accommodates the social system ‘double contingency of human action’ requirement. All social systems require this on account of the need to be able to depend on another person’s behavior: person ‘A’ expects person ‘B’ to behave in a certain way, which requires that person ‘A’ respects the expectation that person ‘B’ has of person ‘A’ (i.e. expectation of expectations). Law in this context has to coordinate these agreed expectations if the social system is to exist13. Luhmann refers to these expectations as ‘congruently generalized normative behavioral expectations’, and proceeds to argue that law and regulation provides the premises of social action since social action is impossible without such security. Law and regulation as security can of course be coercive and facilitative (i.e. constraining and enabling), which means law and regulation acts as a structure of society because it constrains and facilitates (Luhmann [1972] 1985). In a complex and changing society law and regulation is moreover contingent since these agreed expectations change over time. In effect law, as a decision-making process, is a learning process. Disturbances to the system from the surrounding environment (i.e. other systems constituting the social system) can then occur directly when there is a catastrophe (e.g. the banking system collapses) and indirectly through

socially mediated interdependencies (e.g. the economy is forced to comply with legal requirements even when the economy would achieve better results itself). In this scenario communication, as the systems mechanism for reconciling these disturbances, is of paramount importance. As might be expected, the self-organizing paradigm of Luhmann has been criticized. Habermas [1987] (2005) says it provides insightful descriptions but is deficient because it distinguishes language and system. For Habermas ‘communicative action’ integrates language and system. The claims of communicative action rest and build upon a distinction between cognitive-instrumental rationality (i.e. actions that seek the successful realization of privately defined goals) and communicative rationality (i.e. mutual understanding through speech). Hence, only through language, under conditions of rational argumentation, can actors coordinate their actions towards mutual understanding14. This, in turn, requires that rational argumentation, through language, has legitimacy (i.e. validity claims of speech15). In everyday situations communicative action is not criticized (i.e. it has legitimacy) because the claims it makes happen in an undisputed ‘lifeworld’. This basic sphere of sociality is the result of the lifeworld organizing itself according to validity claims of speech acts. Validity claims of speech acts are an objectivating (i.e. converting into an object) attitude to events, a normative attitude to people, and an expressive attitude to an individual’s subjectivity (Deflem 1996). They structurally manifest themselves as culture, society and personality, which leads to the differentiation of the lifeworld into distinct structural domains and related specialized social institutions. To sustain this configuration society has to transmit relevant mutual understandings through language with respect to cultural values, legitimate norms, and socialization processes. These in turn requires that society manipulates and controls the host environment (e.g. economic system, political system, legal system) to ensure these transmissions are successful (Deflem 2006). By so doing Habermas juxtaposes systems theory alongside a lifeworld as the lifeworld cannot function without supporting systems. That society comprises a lifeworld and system(s) is important because over time systems have become ‘uncoupled’ from the lifeworld to the point they now function independently of the lifeworld. This means they no longer facilitate communicative action to aid understanding. Rather, they become steered by media, money and power. As a consequence, if the economic system behaves strategically, as a self-serving system, at the expense of the commonly accepted lifeworld, then the process of ecological modernization may become uncoupled from the lifeworld. The effect of this is that the process of ecological modernization can then suffer from a lack of mutual understanding and a crisis of legitimation can occur. To restore the conditions of legitimacy it is necessary to create a more ‘ideal speech situation’ (which Habermas subsequently refers to as ‘presuppositions of argumentation’) so that there is a common understanding.

For law to support legitimacy for a common understanding it must thus help resolve a social coordination problem, which in developed market economies manifests itself as a process of pluralization that produces fragmented identities and an expansion of ‘self-orientated’ freedoms and rights. The solution, according to Habermas, is to confine agreement to general norms which regulate areas of free choice. This requires law to have a dual character since they must provide a stable environment (e.g. legal rights) so that individuals can form their own identities and strategically pursue their own interests; and at the same time enabling this law to come out of a discursive process so that it is rationally acceptable because it is reached on the back of an understanding on the basis of validity claims (Habermas 1996)16. Within this schema law performs the central activity of normatively institutionalizing the independent functioning of the steering media of money and power. This is important as law allows society to benefit from the uncoupling of economic, legal and political systems from the lifeworld (i.e. the uncoupling makes a common understanding a more efficient process) by again recoupling the systems through the media of money itself (in the case of the economic system) - by making money a legal norm. That money manifests itself as a legal norm to recouple the economic system to the lifeworld is apparent in the legalization of monetary transactions using contract and property law (Deflem 1996). In so doing law, by institutionalizing a practical discourse to recouple the economic system to the lifeworld based on legal norms, becomes a primary medium of social integration in modern societies. Habermas goes on to show that modern law is a system of norms that are both coercive and positive, with individuals deciding which approach they want to follow: “They can either consider legal norms merely as commands …. and take a strategic approach to the calculable consequences of possible rule violations; or they can take a performative attitude in which they view norms as valid precepts and comply ‘out of respect for the law’. A legal norm has validity whenever the state guarantees two things at once: on the one hand, the state ensures average compliance, compelled by sanctions if necessary; on the other hand, it guarantees the institutional preconditions for the legitimate genesis of the norm itself, so that it is always at least possible to comply out of respect for the law” (Habermas 1996. pp135-136). On this basis we can see why formal (i.e. state) and informal (i.e. civil society) regulation exists – they accommodate and facilitate strategic and performative actions. Habermas uses the term ‘communicative power’ to describe how agreement is discursively achieved: “informal public opinion-formation generates ‘influence’; influence is transformed into ‘communicative power’ through the channels of political elections; and communicative power is again transformed into “administrative power” through legislation” (Habermas 1996). The same process describes the parallel workings of civil society, with informal dialogue on norms, rights and expectations being transferred into civil regulatory pressure using civil

society organizations, consumers, media and stakeholders. Thus Habermas and Luhmann provide very different explanations of social order even though they both accommodate regulatory pluralism. For Luhmann social order is established by the diversity of communicative systems creating a complex and dynamic stability (i.e. social order is possible by forming social systems). The basis of social order is therefore constantly changing since these functionally differentiated systems collide and influence each other, seeking as they do dominance over each other whilst simultaneously being interdependent by providing the preconditions for each other. Habermas criticizes this as being “neo-conservative” on the grounds that such a view marginalizes the role of the individuals. Indeed, Habermas argues that social order is established by societal members when they generally perceive society as legitimate – to the extent that a shared worldview penetrates all spheres of life. The question that these different interpretations raise for the present analysis, and the one that will now be investigated, is how different forms of regulation sustains ecological modernization. Forms of Regulation and Ecological Modernization Although Luhmann and Habermas provide very different social theories they both consider communication to be essential for social order. In the case of Luhmann social systems are systems of communication. The communication within a system reduces complexity since the communication only selects a limited amount of information that is available to the system, with the selection mechanism (of information) being ‘meaning’ to the system. The distinctiveness of systems is thus maintained by communicating what is meaningful to the system – which is why the social system self-referentially produces its own elements from an overly complex environment. Luhmann argues that social systems require a communication media, a communication code, and symbolic generalization. For the economic system the communication media is money and the communication code is payment and non-payment. As with all systems, the third required element is symbolic generalization, which for the economic system is the transaction itself. From this it can be seen that the economic system becomes simultaneously more autonomous and independent, as well as interdependent, because subsystems rely on other subsystems to carry out particular functions (e.g. education to cultivate social communication, politics to acquire power, science to carry out research). The working of the economic system and the process of ecological modernization can now be more fully appreciated. Briefly, the communication media of the economic system is money, the communication code is payment and non-payment, and the accompanying symbolic generalization is the mutual agreement on what constitutes an economic transaction. Communication within this requires an information selection, which focuses on the financial performance of the firm rather than

environmental protection. Similarly, form selection, in terms of how to communicate, focuses on the payment of dividends and growth rather than on criteria such as environmental performance of suppliers, and the understanding selection, on what should be understood, focuses on the success of the firm as an economic entity rather than the firm as a social institution. At the micro level the temporal feature (i.e. structure of expectation before and after an episode) is thus likely to focus on the delivery of agreed targets by the firm, with the environmental feature (i.e. other roles in the interaction) incorporating the often conflicting interests of employees, suppliers, customers and so forth, and the factual feature (i.e. themes in the interaction) revolving around the needs of the firm for the firm to be successful. Being autopoietic, each layer is constrained by the previous system selection, which since the system is dynamic, simultaneously requires reflective negotiation and agreement for the selection to take place. In so doing the system maintains its own distinctiveness. Thus, the communication of ecological modernization primarily seeks to produce successful investments, with protocols steering participants to this conclusion. At the same time the process accommodates second order themes, such as environmental welfare. This is because stakeholders can interact by protesting to express their views and if necessary forming alliances, to constrain the process through legal, media and consumer actions. Similarly, this second order theme is constrained to restrict roles so that the economic system survives this to operate efficiently. Thus the roles of the management team are given primacy over other roles (e.g. local community). But again this interaction, because the process is dynamic, takes account of other roles to ensure that the system sustains itself. By so doing the interaction accommodates other interests, which constrains without limiting the primary purpose of the economic system. The connection between the economic system, (and the process of ecological modernization) and the legal system is through interpenetration or structural coupling. Interpenetration, as developed by Parsons and Shils [1951] (2001), occurs when one system provides another system with structural support. In this situation the economy has to accommodate law in its operation without however law determining economic operations. Thus law supports the functioning of the economic system by providing rules for its operation, with the economic system complying or not complying on the basis of economic criteria (i.e. it makes economic sense to comply or not comply). As indicated, the process is self-controlling since subsystems select from different operation offerings on the basis of a consciousness that is structurally coupled to the communication (i.e. the need for efficient economic system), with subsystems then, since they are operationally coupled, updating in relation to one another if this is functional for the system that contains them. Thus the rules that are appropriate for the functioning of the economic system have to be appropriate rules for the functioning of the legal system, and vice versa. In this way interpenetration is

where structural coupling is operationally coupled so that the same communication (i.e. the process of ecological modernization) is relevant to the functioning of both the economic and legal systems. This suggests regulation supports the functioning of the economic system and the process of ecological modernization because it is in the systems self-interest to do so. Yet, as Luhmann stresses, autopoiesis is not deterministic. This is because structural coupling has no overarching causality as it only makes selective connections between the system and the environment (Luhmann 1992). Constituting a simultaneous relationship between the system and the environment, structural coupling produces internally selected irritations (perturbations), as there are always differences between the system and the environment. The effect of these differences is that the system self-learns from its environment. Consequently structural coupling of the economic system with civil society enables the economic system to learn and evolve, just as the structural coupling of law with civil society enables the system of law to learn and evolve – even though they are operationally closed systems. Law cannot therefore replace civil regulation, even though law learns from and evolves by being perturbed by civil regulation, since law, like civil regulation, is autopoietic. Thus new forms of civil enforcement are difficult to fit into law, with ‘private’ efforts to enforce public law being relegated to supplying information to force public authorities to intervene, and with enforceable law then in turn serving as a negotiating tool to gain non-enforceable concessions (Luhmann [1989] 1986, 75). The view that civil regulation is itself autopoietic implies that civil regulation has to be necessary accompaniment to law (otherwise it could not exist). It is necessary because the functional differentiation of society means only subsystems and their coding can be actualized (Luhmann [1986] 1986, 109). The ecological modernization problem now becomes clear, in that the danger of stakeholder disenchantment (i.e. that the economic system starts to disintegrate) is connected to the inability of a system to accept redundancy (i.e. that the economic system is not functioning properly). It materializes itself as stakeholder disturbances being channeled into the economic system communication media of money and the communication code of payment (money) and non-payment (no-money), which has the capacity to restrict the economic system itself. Yet at the same time the resonance capacity of the overall societal system is increased since the sub-systems that comprise the overall societal system accommodate this resonance if it is in the interests of the overall system to do so. Consequently, attempts to restrict resonance by subsystems is inevitable, as is the frustration and angst of those who are part of resonance creation, which in turn requires accommodation of the resonance as part of a continuous process mutual adjustment. This does not mean that regulation, either through collectively binding decisions or social pressure to behave in certain ways, cannot influence the economic system.

Clearly regulation can influence behavior, but what it cannot do, is predict the consequences of the regulatory intervention. Thus civil regulation creates a resonance that can induce change, both good and bad, in the economic system. The question of whether this can be steered, in the sense that a regulatory pressure on a system induces the system to reflect on its own operations in a way that corresponds with the intention of the steering, is less clear. At one level steering is possible because it only requires that we choose a distinction (e.g. improve environmental performance rather than not improving environmental performance) as the basis for the reduction of the difference that this represents (e.g. an improvement in environmental performance). But as this, just as with external triggers, can only be done by the system changing its own structures using its own operations, external steering can only action itself through self-steering (Luhmann 1997). In summary, the work of Luhmann stresses the inevitability of autopoietic sub-systems. As shown in Figure 2, which is an extended schema of the regulatory stages outlined by Paterson and Teubner (1998, p.458), these can operate at different levels in society. Moreover, they operate because they constitute a dynamic stability at a particular point in time. The further implication of autopoiesis is the code of the economic system necessitates the process of ecological modernization supports the functioning of the economic system. Thus ecological modernization regulation, be it formal state regulation or civil society pressure, is effective to the extent to which it is aligned to the code. This is further complicated by the observation that there are systems of firms and these have different receptive capacities to different forms of regulation. Although Habermas disagrees with Luhmann he nevertheless recognizes that society is highly pluralistic, with functional differentiation increasing as societies develop. This pluralism requires the transmission of relevant mutual understandings, otherwise there is a danger the economic system will become uncoupled from the lifeworld. Communicative action coordinates actions towards this mutual understanding by facilitating agreement on general norms. The process of ecological modernization therefore has the potential to support or hinder this agreement. Furthermore, the use of formal and informal regulation can be both coercive and positive, allowing firms to take a strategic approach to rule violation and a performative approach out of respect for the law. Given differences in receptive capacity to regulation across firms the provision of formal and informal regulation is therefore necessary since it accommodates and facilitates system-wide mutual understandings.

Figure 2: A Dynamic System of Regulation

RESPONSE PROFILES With the conceptual building blocks in place the analysis now proceeds to consider how ecological modernization can be regulated. On the basis of the profiles shown in Figure 1 the analysis considers left-hand and right-hand profiles separately.

Left-Hand Profiles These are inhabited by smaller firms generally lacking visibility and spare resources. Typically, though not inevitably, they will be less inclined to respond to those sorts of self-governance arrangements that are often seen as conducive to ecological modernization. There may, however, be scope for direct measures that induce environmental innovations. That said, the behaviors of these firms are diverse and need further elucidation. Delinquents are not only very difficult to control, but they are also unlikely to respond to governance-based measures and non-legal arrangements that are often seen as conducive to ecological modernization. They are typically very small and possibly of a transitory or ‘phoenix’ nature, reconstituting themselves should circumstances demand it (e.g. to continue trading when previous misdemeanors render this difficult). Another distinguishing feature is that they deliberately or recklessly pollute, making them indifferent to some sanctions like small fines or warnings and resistant to any social

stigma associated with willful pollution. They typically engage in low-level activities such as fly-typing and are often overrepresented in industries like construction and demolition waste (Webb & Marshall 2004). It is equally the case that they may engage in wider criminal activities (e.g. tax evasion) or even be part of organized criminal networks. Delinquents are troublesome from an environmental perspective, not because their individual impacts are necessarily large but because they are difficult to managed because they function underneath the environmental regulator’s normal focus. Owing to their disposition, effective regulatory approaches may include intelligence-led policing so that these firms can be effectively targeted, and rehabilitation to facilitate moral reinstatement. Sanctions must be strong; particularly as their typical behavior is to avoid compliance due to their invulnerability to societal pressure for change (i.e. environmental concerns will be a low priority). Given these characteristics, it is highly improbable that delinquents will be ecological modernizers, so they are unlikely to respond to measures – especially governance-based arrangements – that are seen as supportive of its objectives. A delinquent firm, after all, has neither the resources nor proclivity to reflect seriously on or address its environmental actions unless forced to. And its networks and stakeholders are unlikely to be passionate environmental citizens (in fact it may operate in sinful or criminal markets and be associated with criminal networks). What this suggests is that environmental self-governance is hardly an option. Rather than transferring responsibility from the state to the firm it is more important to increase the role of the state and the likelihood of sanctions. For delinquents, it may be important not to focus efforts on promoting the virtues of self-regulated ecological modernization. Quite the reverse, the first step is to focus efforts on ensuring compliance with simple rules and standards. Relatively basic environmental improvements are likely to require a strong regulator presence. This is not to say that more innovative environmental improvements cannot be made, but if they are they will need driving. More innovative environmental improvements (e.g. the use of green technologies, processes or materials) will only take place if they are mandated and enforced (whether by a regulator or, which is less likely given their markets, through an active supply chain). The use of certain greener materials, say, in construction could be mandated, although an important joint strategy would be to obstruct the supply of cheap rogue or prohibited materials. There may be a role then for more precautionary and efficiency-based command-and-control-based measures, but they must be relatively simple and unquestionably enforced.

Vulnerable satisfiers, the largest group, are firms that are naturally yet also vulnerably compliant due to the constraints imposed by having scarce resources together with limited stakeholder pressures for environmental improvements and a laissez-faire outlook (Williamson et al. 2006; Lynch-Wood & Williamson 2007; Williamson & Lynch-Wood 2001). Vulnerable satisfiers lean towards basic levels of compliance, allocating sufficient but minimal resources for legitimacy and peace of mind. They therefore operate with the risk of noncompliance, although breaches would probably lack intention or recklessness. Importantly though, vulnerable satisfiers are in an aggregate sense vulnerably compliant. A vulnerably compliant firm is not necessarily vulnerable across its entire business. For example, regulations that target specifically a firm’s products or production, such as

changes to specifications or hazardous contents, are likely to be internalized more so than general environmental rules that are not product- or production-specific. This could be put down to the fact that the supply-chain can act as a powerful surrogate regulator for product compliance; that is, product compliance equals market legitimacy. What is nevertheless important is that these firms have a naturally compliant orientation which means they will seek compliance if they know something has to be complied with and understand what is required. This, given their limited resources, may require external guidance and support. It is important for us to understand this orientation since the opportunity to facilitate compliance using multiple agencies is attractive both financially and practically, especially when we consider that the regulator is constrained in what it can do owing to its own resource limitation. A regulatory strategy that focuses on achieving compliance for this system of firms can therefore incorporate handholding and guidance with the backup of a strong incentive to participate (e.g. latent threat of large civil or criminal sanctions and increased inspections for suspected noncompliance). But, critically, the rationale for adopting this approach also provides the basis for a rejection of more reflexive strategies focusing on self-regulation through the use of management systems and disclosure tools and so on, due to the absence of the necessary preconditions. Although these firms may be sympathetic to environmental issues, they are unlikely to respond to governance approaches because they lack the necessary incentives, resources and skills. That said, these firms will be more responsive to government-induced innovative regulatory measures (e.g. performance product standards) that intervene more directly in established patterns of production and consumption. There is a strong role for the state, but not the same role that would be used for delinquents. The primary role is to support the proper implementation of direct measures. This is not to say that these firms are incapable of improving their environmental capabilities, it is just that any environmental improvements are more likely to occur through a tightening of these relatively simple direct measures and underpinning this with proper support, or making these innovation-based changes a necessary feature of their supply chain. Again, there may be a role for more efficiency-based command-and-control measures, but they must be relatively simple and supported. For this large group of firms, self-governance and self-regulated environmental innovation is unlikely.

A much smaller group of small firms are minor strategic players which have a greater capacity and incentive for responding to the sorts of self-governance and self-regulatory approaches that may be more supportive of ecological modernization. Their distinguishing feature is that, unlike vulnerable satisfiers, they seek to identify with market opportunities for good environmental behavior to exploit emerging markets or to safeguard their strategic position by reducing risk through the protection of their legitimacy. We should recognize, though, that they do not necessarily self-manage due to partnerships, consensus or constructive dialogue; they often do it because of perceived or actual pressure or market obligation. They seek to improve and demonstrate their environmental responsibility because it is in their interests since they are more likely to function in environmentally active supply chains and networks. A minor strategic player may for example work towards environmental management system (e.g. ISO 14001 or EMAS) accreditation if

this is required by an influential customer or if it is close to the regulator. They may report on and possibly improve their environmental performance if this is seen as a stakeholder requirement. While these measures are not altruistic, accreditation or reporting demonstrates positive environmental behavior and a penchant towards environmental improvements, and as such allows the regulator to adopt a different compliance approach. Their characteristics make them more receptive to reflexive strategies and self-governance measures that are more conducive to ecological modernization. Clearly, their resources, networks and markets mean these firms are more able to take responsibility for decision-making and to self-govern. Ironically, while these firms are more likely to be in close proximity with state regulators, the state could possibly take a more distant role. Like vulnerable satisfiers, environmental regulations that focus specifically on their products or their production will almost inevitably be internalized as this is a feature of market legitimacy. Command-based innovative and precautionary approaches, or direct measures that allow for more innovative or cost-effective technologies to be used, could be useful mechanisms for these firms as they may well be used for market purposes or to demonstrate good environmental behavior. This is consistent with the much of the strategic choice literature, where appropriate corporate strategies can be derived from an analysis of the external environment. From this perspective, Porter and van der Linde (1995a, 1995b) argue that strict environmental regulation can provide competitive advantage for firms and nation states because it enables them differentiate their product or service offerings. In contrast to the previous categories, the environmental behavior of altruistic citizens is motivated by ethical and environmental concerns. Indeed, ethical or ecological responsibility, rather than business success as measured through profits, is likely to be a primary motive. Given this ethical orientation and the concomitant desire to go beyond compliance it seems appropriate that the regulator should adopt an arm’s length approach based on observed behavior and that it actually reward such behavior through positive actions (e.g. positive publicity by bestowing labels of excellence, relaxation of formal compliance requirements, reduced statutory payments). As such, altruistic citizens are clearly receptive to reflexive approaches. Moreover, they may actually be part of the philosophy of greening the market. Right-Hand Profiles These profiles are populated by a far smaller number of larger firms that generally have greater resources and levels of visibility. Again, large firms are not a homogenous group but may have different orientations.

Despite having significant resources, ogres, as the name suggests, are firms that are intentionally or recklessly noncompliant. While they may attempt to cultivate an image of responsibility, they are unlikely to properly self-regulate and are likely to need the state to be closely involved if they are to improve their environmental performance. Well-documented examples of ogres, in other areas of activity, include acts of purposeful fraud by firms such as Enron and WorldCom. From an environmental perspective, we could use

the willful environmental risk-taking as exemplified by Union Carbide in Bhopal, India. The Exxon Corporation also provides a good example of major recidivism, with the firm’s “ill-equipped, overloaded, poorly maintained, badly captained container ship”, the Exxon Valdez, despoiling the coast of Alaska in March 1989 (Glasbeek 1989 p. 135). It is important to point out that ogres may (and often do) engage in reckless activities in developing nations, even in situations where they demonstrate compliance or good practice in their home state. The mines and smelter operated by the Southern Peru Copper Corporation, which is owned by Grupo Mexico, caused severe environmental degradation through riverine disposal (i.e. dumping mine waste into rivers) in contravention of Peruvian law (Earthworks and Oxfam America 2004). Such behavior cannot be justified since the firm should have the resources and technical knowledge to manage its impacts regardless of where it operates. Due to their intentional and reckless behavior, and given their resource base, ogres should be heavily penalized, both financially and publicly and, where appropriate, criminally. This provides a simple illustration of the behavioral characteristics of those firms we class as ogres. The important point about these firms from an ecological modernization perspective, though, is that they do have the resources to respond to more reflexive measures and to self-regulate. The reason that they do not is likely to result from their lower levels of visibility, particularly if they operate in states where there may be a less active civil society or a poor environmental infrastructure. In the short term, this may require a greater role for the state in order to put the necessary preconditions in place. There may be a role for more precautionary and efficiency-based command-and-control-based measures, and innovation-driven command-based standards, but their implementation may need a degree of supervision either through a strong state or an active supply-chain. Ogres are not, we would suggest, natural ecological modernizers. Being large, firms we classify as safe satisfiers have the capacity and resources to develop sophisticated environmental strategies, but generally do not do so. Although they have the resources to self-govern and self-regulate, and to adopt those governance strategies that are seen as supportive of ecological modernization, they tend to not be engaged with deeper ecological issues. A possible reason for this could be a lack of exposure to the types of civil or supply-chain pressures that can often encourage beyond compliance behavior. This lack of pressure may derive from the products and services they are involved with (e.g. finance), their position within the supply chain (e.g. not supplying to consumers or major customer), the structure of the company (e.g. conglomerate with many unrelated business units), or the fact that they can offset criticism by satisfying minimum compliance requirements. Yet because they do have capacity to go beyond compliance, and the resources to develop sophisticated responses, the regulator’s task is to provide the necessary incentives for this to occur. This may involve increasing their visibility (e.g. through performance disclosure strategies and local and national pollution release inventories) so that there is greater levels of civil society pressure. This can be augmented by raising the profile of the environment to the firm itself (e.g. introduce mandatory self-auditing) and by then reinforcing this through the latent threat of large civil or criminal sanctions and increased inspections. A strategy of positive criticism may also be appropriate – although they comply, they can do better by going beyond compliance.

Again, safe satisfiers do have the resources to respond to more reflexive measures and to self-regulate, but in the short to medium term this may require a greater role for the state in order to put the proper preconditions in place. Of course, being safe satisfiers these firms will respond to direct measures that promote technical innovation (e.g. innovation-oriented product standards). Having a considerable resource-base, these firms will and are able to make significant technological and product changes if they are required to, and because these firms are large and economically powerful this may create the conditions for change through their product supply chains.

Large firms can also be major strategic players. Although similar to safe satisfiers in terms of resource availability they are different on account of their desire to exploit green market opportunities and/or to protect their market position against the risk of adverse publicity. This arises from the fact that they are more likely to be visible to – or possibly would like to be visible to – a wider range of influential stakeholders and potential customers. Either of these situations requires them to protect or enhance their legitimacy, typically through a willingness to incorporate sophisticated environmental strategies and demonstrate environmental leadership. Poor environmental performance might have damaging effect on their competitiveness. As such, major strategic players are receptive to reflexive and self-governance mechanisms that demonstrate good practice, and are likely to allocate considerable resource in doing this. Since they will readily adopt, say, environmental management systems and participate in voluntary disclosure strategies to demonstrate compliance, it seems inappropriate and wasteful to allocate scarce regulatory resources to this task. A more appropriate regulatory strategy is to acknowledge and incentivize such behavior by using these types of activities to demonstrate compliance in other areas, and simultaneously to reinforce the behavior through positive feedback in the form of awards and positive publicity. In order to reinforce the trust that is inherent in this approach, and to reinforce the appropriateness of the approach, the strategy must be supported using the latent threat of large civil or criminal sanctions. Publicity strategies would be highly effective too since poor publicity would be particularly damaging to these firms. Their networks, market positions, and resources, mean they are likely to respond to self-regulatory and self-governance measures that are conducive to ecological modernization. Like safe satisfiers, these firms have a considerable resource-base and are thus able to make significant technological and product changes if they are required to through innovation-oriented command-based measures. The difference, however, is that these firms may anticipate and look for opportunities due to these technological and product changes. Along Porter’s line of argument, they may see such changes as a market opportunity. Another important feature of these firms is that if they have to make technological product changes, which are induced to direct product standards, then this may create the conditions for change through their supply chains (but these changes are only likely to relate to product changes rather than wider behavioral changes).

The final system of firms is benevolent giants, which contains a very small number of firms whose business model is driven by ethics. A good example is Grameen Bank, an organization that has reversed conventional banking practice and which adopts the

premise that credit is a human right and not a privilege - and in doing so has facilitated the lifting of poverty for many people. That there are very few benevolent giants suggests they find it difficult to compete in many markets due to cost disparities and the ability of competitors to mimic their approach. Where they do operate the regulator should reward such behavior through the use of reflexive mechanisms. This is likely to include the acceptance of compliance conformance using self-reporting mechanisms and, where appropriate, a reduction of the business burden more generally. This is a brief overview of firms’ compliance orientations. If we can link these to regulatory strategies we can make regulation more responsive in many ways. Although space limits a fuller exploration of these orientations, the intention has been to show that it is possible to target regulatory approaches so they deliver better regulatory outcomes. This has important implications for how we regulate for the pursuit of ecological modernization objectives.

FINAL REMARKS

Our aim here has been to improve our understanding of regulation, particularly the contexts in which different forms and domains of regulation will be effective or ineffective. In our quest to do this we have illustrated how regulatory approaches, tools, and mechanisms can only really be successful if aligned properly to firms’ receptive capacities. Receptive capacity, as we have shown, is a composite measure of firms’ compliance capabilities and orientations. The argument we have presented is, we feel, important, and is clearly of relevance to the regulatory context for ecological modernization. (After all, the theory of receptive capacity says that simply because certain forms of regulatory arrangements are considered favorable to ecological modernization, does not mean they will necessarily induce ecological modernization in all contexts). But before we offer some concluding comments about the implications for ecological modernization, we should say a few words about the general implications of our work on receptive capacity. Again, the effectiveness of regulation is likely to be determined by their application and, in particular, by firms’ receptive capacities. If we recognize this, and adjust regulatory approaches accordingly, we are making a significant leap towards making regulation ‘really responsive’ and properly accommodating the cultures understandings of regulated organizations (Baldwin & Black 2008). By observing regulation through the lens of receptive capacity, we may be able to better align regulatory tools and compliance approaches. Ultimately this means we have to individualize the application of regulation based on observed behavior. Even so, the analysis has demonstrated groups of firms have sufficient commonality that they will respond to broadly similar things in generally similar ways. Certain firms will respond to some approaches (e.g. those based on the direct regulatory model), but not others (e.g. certain forms of governance arrangements). Several groups of firms may respond to a particular set of regulatory measures, such direct regulations, but the approaches we use to get them to respond may differ across groups:

one group (e.g. vulnerable satisfiers) may require assistance to underpin its natural compliance disposition; another (e.g. delinquents) may need close monitoring to reposition its noncompliance orientation; while a final group (e.g. minor strategic players) may need no assistance whatsoever due to its proactive compliance approach. So in addition to enabling a better alignment of regulatory tools and compliance approaches, a receptive capacity approach enables a less profligate use of scarce regulatory resources. Looking at firms’ orientations, what is the point of promoting the strategic and environmental health benefits of environmental management systems to, say, ‘delinquent’ firms? Or, dare it be said, why waste valuable inspection resources on large ‘major strategic players’ when they have the resources and the tendency for beyond compliance activities? Finally, why target, say, ‘vulnerable satisfiers’ with the promotion of environmental management systems or messages of ‘green is efficient’ when they already regard themselves as lean and their approach to environmental issues is anchored on law and compliance. The inference from this, which to some extent is endorsed by Baldwin and Black’s (2008) claim that we need to properly accommodate the cultures understandings of regulated organizations, is that individualization is not unrealistic, especially as much law and regulation is already individualized. Fuller (1969) himself said the great bulk of modern laws relate to specific forms of activity. Ours, however, is an extension of this point, suggesting that any measure, plus any activity that supports the successful implementation of that measure (e.g. support, enforcement, information, promotion), must relate to regulatees’ receptive capacities. Thus, any consideration of regulatory measures should not ‘simply’ be a consideration of the tool and measures themselves, but the entire regulatory package; or, as it were, the entire ‘approach’. Regulatory individualization, then, may require us, in relation to each response profile, to consider the following three questions:

• What types of instruments are we asking firms to respond to? • How do we help/get them to respond? • And what do we do if they do not respond?

For each profile, the answers to these questions may be very different (e.g. consider the differences between the ‘delinquent’ and the ‘altruistic citizen’). Of course, regulatory individualization still means that we have instruments specifying certain minimum requirements (e.g. relating to waste) to apply across all firms, and that we require specific risk-based measures (e.g. permitting) to apply to certain firms. But even though measures may apply across all firms, or risk-based measures across certain types of firms, if we consider the three questions just asked then the model of receptive capacity still enables us to see what we may need to do to get them to properly respond. As well as individualization, the theory of receptive capacity also helps us to appreciate that because of firms’ orientations, substantive law approaches must underpin more reflexive and governance-based arrangements. Appropriately aligned regulatory pluralism,

therefore, is essential, which brings us on to some final remarks about ecological modernization. The idea of regulatory receptivity has implications for regulatory approaches across many different fields, and clearly goes to the heart of ecological modernization. Analyzing regulation from the perspective of receptive capacity helps us to understand, even if here we are unable to address in full, some of the issues that have been outlined in this paper. An issue of some vagueness in the literature is whether ecological modernization requires the use of forms of regulation that are more direct or of the command and control style. The idea of receptive capacity would suggest that it has to include direct measures if we are to make any serious inroads into, and improvements to, organizational behavior. The reason for this, as we have seen, is that certain groups of firms – which, by the way, comprise the majority of firms – will only respond to more direct measures. These firms are not affected by stakeholder-induced civil regulatory pressures. They are not self-regulators and are not part of active environmental networks. They are not, and are not ‘forced’ to be, and do not necessarily want to be, ‘environmentally cooperative’. As a result, we may be unable to rely on governance tools to induce creative eco-innovation. For these firms, the process of technological and process advancements may have to be forced (if the technologies exist), possibly by the regulator or through the supply chain. It is therefore important for policymakers to give greater consideration to what Ashford (2002) calls the technology-focused regulatory approach. It is for policymakers to consider how innovation-based and precautionary methods can be integrated into direct approaches; possibly approaches that go to the heart of processes or standards or which drive change through flexible performance standards. This is certainly not to say that there is no room for more decentralized governance arrangements, cooperative strategies, and movements that are stakeholder-based. However, such approaches have to be carefully positioned ‘on top of’, or build on, direct measures. This is because we cannot rely on these arrangements too much as only certain types of firms will be able to respond in the proper way. For these firms, their resources, levels of visibility, stakeholder interactions, and engagement with environmental issues mean they may be more conducive to these creative self-regulatory responses. So, if we neglect direct approaches and place too much faith in the virtues of governance-based arrangements, then this could be highly counterproductive. An approach based on receptive capacity shows that regulatory pluralism is vital. We need a range of measures – both direct and indirect – which push and pull the processes of eco-innovation. Most regulatory approaches have some value, but the important point is that if we are to maximize their value they need to be administered both cautiously and with receptivity in mind. Receptivity helps us to see where those strategies that may be more conducive to the process of ecological modernization might work. But we have to accept that we need also to address situations where they will not work using alternative methods which, while not necessarily underpinning ecological modernization, are necessary for achieving important environmental objectives like basic levels of environmental wellbeing: measures and approaches that as a minimum ensure that firms will get the

basics right and that they do what they have to correctly. The literature is awash with talk of shifting patterns of regulation, observations about whether governance-based approaches and arrangements are needed, and talks of ‘rejections of’ and ‘shifts from’ command-and-control. There are some dangers here. What exactly is the extent of these shifts or rejections? Are these shifts at the ‘expense’ of direct measures? Are these rejections ‘total’ rejections of direct measures? We would have to argue, based on receptivity, that too bold a shift would probably be counterproductive given that most firms are of a ‘compliance only’ disposition, and it follows from this that a shift toward governance-based arrangements cannot possibly be at the expense of direct measures. And a rejection of command and control? We would simply have to consider the receptive capacity of the vast majority of firms and suggest that any rejection would have to be undertaken very cautiously indeed because the consequences could be huge. Any shift or rejection has to take account of the context. Of course, if we are to make genuine progress then we have to constantly think of new ways of doing things and we have to rely on range of tools. But, it is important that we think of new ways of doing things that build on both ‘government’ and ‘governance’ arrangements. The current emphasis on governance arrangements is, we feel, unsound and undermines the theory and practice of ecological modernization. Through our analysis, however, we are now able to properly examine different arrangements by considering, and trying to understand, where they are needed, how they will work, and what we can do to maximize their effectiveness. At the same time we are aware the preceding analysis is work-in-progress, with many areas requiring further elaboration and theoretical justification.

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1 The acid rain problem of the 1980s is an example of regulation failure, with the direct regulation on ‘dilute and disperse’ ignoring transboundary impacts (Neale 1997, Hajer 1995). 2 Ashford (2002 p 1417) says “These articles of faith have been endorsed by government, industry, and mainstream environmentalists alike. Each was dissatisfied with the gridlock in environmental policy, and the opportunity to try a different approach was appealing – although different actors were more attracted to some initiatives than to others.” 3 The potential offered by newer forms of direct regulation have however to be applied to the majority of smaller firms. For example, the Environment Agency of England and Wales applies most of its regulatory resource to controlling the impacts of firms with Part A1 permits, four-fifths of which are large firms (Environment Agency 2007). On a similar basis, of the 3500 licensed IPPC sites only around 700 belong to small and medium sized enterprises (SMEs). For Part B processes, which are less environmentally damaging, and which are typically located in SMEs, there are a further 19,000 licensed activities – a fragment of the total number of firms that have an environmental impact3. To compensate for this lack of activity the UK has formulated general rules for industries and sectors, even though enforcement of these rules normally lies outside of the radar of the regulator. 4 Ashford (2002) posits that command-and-control regulation is the ‘whipping boy’ of economists and government critics, often based on a misconception of what the regulation requires. Critics thus tend to over-generalize command-and-control problems, highlighting specific weaknesses (e.g. excessive uniformity) without considering the benefits (e.g. the use of non-uniform standards). 5 This view relates to the argument that the complexities of sustainable development require a negotiating, contractual state, and so a major challenge to the ecological state’s authority would be to develop instruments of guidance or steering ‘rather than’ traditional command-and-control strategies with detailed substantive prescriptions (Lundqvist 2001). 6 This has led Ashford (2002) to make a distinction between ‘ecological modernization’, based on non-legal arrangements, and ‘technology-focused regulation’, which mandates ecological modernization.

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7 Mol and Sonnenfeld (2000) portray five necessary transformations. In addition to the nation state there is a need for a change in the role of science and technology, an increase in the importance of the market dynamic and of economic agents, a furtherance of the position, role and ideology of social movements, so that there is a change in discursive practices and emerging new ideologies. 8 The Bansal and Roth (2000) analysis assessed large firm behaviour differences. Thus it served a very different purpose than the present analysis and no claim to comparability can be assumed or implied. Rather, the Bansal and Roth method is simply a vehicle for making sure relevant areas are considered. 9 This, of course, is not to suggest that profit maximization is not a key influence in large firms. It simply means it can be offset by through other stakeholder expectations. Thus smaller firms are also driven by profit maximization, but are less likely to have stakeholders that can offset such behavior. 10 An extensive management literature argues that organizational culture strongly influences the ‘world view’ of firms and that this affects how strategy is formulated and acted upon (see Mintzberg & Waters 1985; Johnson 1988). 11 The term autopoiesis is loosely concerned with self-organizing systems and life (Mingers 1989): A direct translation of the word would be ‘self-(re-)productive’ (Görke and School 2006). 12 It is important to note that the determination of activities by the structure of an autopoietic system does not deny free will. This is because communication enables descriptions of the system, which leads to self-observation. Self-reflexive self-description then enables us to move beyond predetermination (Mingers 1989). 13 Law is here used in preference to the term ‘regulation’ since it is a more inclusive term. In most areas regulation is preferred because it has a more specific meaning in relation to the point being made. 14 Rational argumentation is necessary since the validity of a moral norm cannot be justified through individual reflection alone. It has to be justified intersubjectively through a process of argumentation between individuals so that a mutual understanding of the validity of the claim can be agreed (Habermas 1984). 15 Validity claims are of three types: speech-acts as an objective claim to truth; normative claims to rightness; and evaluative claims to authenticity and sincerity (Habermas 1984) 16

In demonstrating the dual character of law Habermas highlights how linguistic structures and social systems are connected (i.e. they are not two separate systems). Yet the proposition that language, as the medium of communication, enables the integration of individual and inter-individual actions does not, in itself, explain why language can carry these integrating functions (Leydesdorff 2003). Luhmann avoids this by saying language, as a medium of communication, is very different than the system that employs language. For Habermas ‘linguistically generated intersubjectivity’ links language and system, since a persons ego is determined through socializing interactions (i.e. communicatively with other individuals). The problem with this is that it presupposes self-consciousness in order for other people’s speech to be recognized (Frie 1997). Habermas responds to this, albeit inadequately, by saying ‘common’ language is ‘given’ and has a structure that allows us to communicate and regulate our communications internally at the individual and social system levels (Leydesdorff 2003). This meta-integration is said to be an idealization (assumption) that cannot be denied.