Working with Stakeholder Groups: A TCE Perspective

1. Working with Stakeholder Groups: A TCE Perspective Andrew King Tuck School of Business at Dartmouth University of Minnesota – April 30, 2010

2. Observed Behavior • “Recently, a number of environmental nonprofits have teamed with corporations to launch a wide range of … environmental projects. These alliances focus on developing clean manufacturing and pollution prevention processes and technologies...” • “In every case, they found that corporations effective alliances had adopted practices that exceeded regulatory requirements, that such practices were part of their overall business strategies and that the companies perceived and valued these practices…” Does this mean its easy? Does it always work this way? University of Minnesota – April 30, 2010

3. Stakeholder Theory • Freeman (1984) • attempts to ascertain which groups are stakeholders in a corporation and thus deserve management attention. • Donaldson and Preston (1995) • Really three theories: descriptive, instrumental, normative. Normative is the core & fundamental. • Michael Jenson (2002) • Its all hooey. Managers should maximize one thing: P • Philips, Freeman, and Wicks (2003) • “The tools and concepts employed under the rubric of agency theory could be usefully applied within a stakeholder framework..” University of Minnesota – April 30, 2010

4. What are Transaction Costs? University of Minnesota – April 30, 2010

5. What might TCE say about cooperation between corporations and environmental groups? University of Minnesota – April 30, 2010

6. The Coase Theorem:When TC small, mutually beneficial exchange leads to max welfare. MC of Abatement $ $ MB of Abatement Emissions Optimal University of Minnesota – April 30, 2010

7. But what if TC are significant? University of Minnesota – April 30, 2010

8. Holdup Problem • Parties that could benefit from exchange, fear that an exchange agreement will increase the bargaining power of the other party. • Polluter is afraid of buying pollution abatement equipment for fear stakeholder will cut off payments. • Stakeholder is afraid of buying pollution abatement equipment for fear stakeholder will require payments to use it. • One commonly suggested solution – form a firm. • What if it is hard to form a firm? University of Minnesota – April 30, 2010

9. GreenFreeze Story • GreenPeace and Dortmund Institute develop new technology for hydrocarbon refrigerators. • GreenPeace transfers the technology to a financially strapped East German firm. • The refrigerator becomes very popular. FORON bought by investors. • Major suppliers also produce a hydrocarbon fridge. • FORON goes out of business. University of Minnesota – April 30, 2010

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12. My Intuition University of Minnesota – April 30, 2010

13. Hypothesis 1 • When a firm has a second-best production option that uses fewer environmental resources, and the cost to make this the first-best option is less than the environmental benefit that will be gained, corporate-stakeholder exchanges will involve stakeholder investment in an asset that makes the environmentally preferred option the first-best production option. University of Minnesota – April 30, 2010

14. Implications for Empirical Results • All technologies transferred by stakeholder group to firms should be win-win. This is not caused by a lack of information or myopia among firm managers, it is caused by TCE. • Only those technologies that can provide win-win will actually be transferred. University of Minnesota – April 30, 2010

15. Wasteful Effort Problem University of Minnesota – April 30, 2010

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19. Example of Problem: The PALCO story • Sleepy “family” company cuts redwood trees at a slow rate. • Company purchased by Charles Hurwitz (Maxxam) in LBO. • Modernizes plant B to allow a higher cut rate. Triples cut rate. Announces he will cut in areas that had previously been untouched (Headwaters Forest). • Government pays $380M (45% of original price) for approximately 3% of PALCO property. University of Minnesota – April 30, 2010

20. My Intuition CF will transfer up to $ 35 M to IP for use rights to land. University of Minnesota – April 30, 2010

21. Hypothesis 2 • When a firm’s second-best production option uses more environmental resources, corporate-stakeholder exchanges will transfer this second-best option to stakeholder groups. University of Minnesota – April 30, 2010

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24. Hypothesis 3 • Corporate-stakeholder exchanges will tend to include stakeholder groups with a valuable reputation for fair dealing, and corporations for which their environmental reputation is an important asset. University of Minnesota – April 30, 2010

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26. Hypothesis 4 • Corporate-stakeholder exchanges will tend to establish a long-term relationship that includes a sequence of joint projects. University of Minnesota – April 30, 2010

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29. Hypothesis 5 • Stakeholder groups will separate organizationally and financially their corporate engagement and auditing activities. University of Minnesota – April 30, 2010

30. Conclusion University of Minnesota – April 30, 2010

31. Backup University of Minnesota – April 30, 2010

32. Comparison of cut schedules University of Minnesota – April 30, 2010

33. My Intuition ED will transfer up to $ 35 M worth of hybrid technology to get FedEx to switch to hybrid trucks. University of Minnesota – April 30, 2010