Towards the Natural Environment Agency Theory (NEAT)

Adopting a ‘positive theory of agency’ approach, we draw on insights from economic, finance, and accounting theory to develop and study the agency relation between the firm and the society in the context of the natural environment. We call it the natural environment agency theory (NEAT). Viewing the firm as a nexus of contracts, we argue based on public property rights to clean air, water, and land, that a business (agent) has an implicit environmental contract with the society (principal) under which it agrees that it will not pollute or degrade these publicly owned natural environmental resources (commons) in the process of production and sale of its goods and services. In turn, society implicitly provides business what is conventionally called the ‘license to operate'. If, however, in the process of its profit pursuit, the business violates this contract and imposes upon the society negative environmental externalities like air, water, or land pollution, depletion and resulting degradation which as per NEAT, we term as the natural environmental agency costs (NEAC), then the society has the right (and obligation) to demand remedial action i.e. demand businesses to internalise its NEACs and reverse environmental degradation. Adopting the agency relationship approach and drawing on associated conceptual insights including conflict of interest/goals, information asymmetry, and the mechanisms to reduce these, including monitoring, bonding, and incentives, we propose and test predictions of NEAT. We find support for these predictions. Our findings not only open novel future directions for research but also inform policy and practice