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University of Minnesota – April 30, 2010 Working with Stakeholder Groups: A TCE Perspective Andrew...
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Transcript of University of Minnesota – April 30, 2010 Working with Stakeholder Groups: A TCE Perspective Andrew...
University of Minnesota – April 30, 2010
Working with Stakeholder Groups: A TCE Perspective
Andrew King
Tuck School of Business at Dartmouth
University of Minnesota – April 30, 2010
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
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..”
University of Minnesota – April 30, 2010
What might TCE say about cooperation between corporations
and environmental groups?
University of Minnesota – April 30, 2010
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
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
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
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
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
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
My Intuition
Trees Threaten
Houses
Joint 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.
University of Minnesota – April 30, 2010
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
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
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
Hypothesis 5
Stakeholder groups will separate organizationally and financially their corporate engagement and auditing activities.
University of Minnesota – April 30, 2010
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.