Working with Stakeholder Groups: A TCE Perspective

University of Minnesota – April 30, 2010

Working with Stakeholder Groups: A TCE Perspective

Andrew KingTuck School of Business at Dartmouth


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?


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: Philips, Freeman, and Wicks (2003)

“The tools and concepts employed under the rubric of agency theory could be usefully applied within a stakeholder framework..”

What are Transaction Costs?



What might TCE say about cooperation between corporations

and environmental groups?


The Coase Theorem:When TC small, mutually beneficial

exchange leads to max welfare.

MC of Abatement

MB of Abatement

$ $

Emissions Optimal


But what if TC are significant?


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?


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.


My Intuition


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.


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.


Wasteful Effort Problem


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.


My IntuitionTrees Threaten

HousesJoint Project

IP $50 $40, but an investment of 5 makes this 43 (net 48)

= 26+25 = 51

Conservation Fund

$35 $0 =35-(26+26)= 35

Total $ 85 $48 to 80 85

CF will transfer up to $ 35 M to IP for use rights to land.


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.


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.


Hypothesis 4 Corporate-stakeholder exchanges will tend to

establish a long-term relationship that includes a sequence of joint projects.


Hypothesis 5 Stakeholder groups will separate organizationally

and financially their corporate engagement and auditing activities.

Conclusion


Backup



Comparison of cut schedules

Cut Rate

Time till depletion* of old growth.

PL: 45 mmbf/year 21.2 years or 2007

MX: 135 mmbf/year 10.1 years or 1996

* Assumes constant cut rate, which is not likely the optimal path.


My IntuitionIC Truck Hybrid Truck Hybrid Joint

ProjectFedEx $100 $110-30 = 80 $110–5 =105

Environmental Defense

$ 0 $35 $35 -24 = 10

Total $ 100 $ 105 $ 105

ED will transfer up to $ 35 M worth of hybrid technology to get FedEx to switch to hybrid trucks.

Working with Stakeholder Groups: A TCE Perspective

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