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Session 9 – Integrative Case 05/31/10 Copyright 2009 D.Diermeier SEEK-441 Strategic Management in Non-Market Environments Daniel Diermeier IBM Professor of Regulation and Competitive Practice & Director of Ford Center for Global Citizenship Kellogg School of Management (MEDS)

Drexel’s dilemma Variable scope of the issue. Where are the pressure points? Junk bonds may be used for: Hostile takeovers Restructuring; LBOs Mergers and friendly acquisitions S&L holdings Keeping the issue narrow cuts losses in the event that legislation passes, but. . . . . . keeping all these together complexifies the issue which can increase uncertainty. It can also bring other interests into alignment with Drexel’s interests; e.g., some investment banks, some businesses, communities, some financial institutions. Financing high-growth companies Do we want to take a bullet and survive or try to stop all the bills? moratorium on hostile takeovers H.R. 2476 restrictions on holdings by financial instit. 05/31/10 Copyright 2009 D.Diermeier

Drexel’s first pass
Little coalition building
hadn't analyzed interests affected by the broad scope of the issue
Little institutionalism
little political "infrastructure marketing"
little institutional know-how
Economically sophisticated but politically unsophisticated messages
"Junk bonds are essential to competitiveness and economic strength."
“ the risk-adjusted yield is higher on junk bonds”
a duel of economic facts adds uncertainty but will not carry the day
Result: Failed to slow the legislative momentum.
05/31/10 Copyright 2009 D.Diermeier

05/31/10 Copyright 2009 D.Diermeier Legislator Status Quo Dimension 1 Dimension 2 high low low high Does Drexel have a change? The Power of Uncertainty high Bill Outcome 1 = Outcome ? Outcome 2 Outcome 3

Drexel’s second pass - refined strategy
Objective:
kill the bills (all of them!)
Does Drexel have a chance? Yes, because
Drexel can serve as a catalyst for con-coalition
It is always much easier to block a bill than to pass it.
Legislators are risk-averse; the more uncertainty about consequences the better
Drexel will not win on “numbers”, “coverage”, etc. but may make legislators hesitant to vote for a bill with very uncertain consequences.
Drexel needs to focus on “counter-active” lobbying and creating uncertainty. To do this credible testimony by allies is key!
but Drexel must be very aggressive given the issue location in the life-cycle and its lack of political infrastructure.
stop the bills as early in the process as possible (committee stage!)
focus on pivotal legislators -- use politically-relevant information

Coalition Formation and Rent Chain
Should Drexel accept Aylward’s offer?
Yes.
What should the group be called?
Yuppies for profit?
Junk bond junkies?
Alliance for Capital Access (ACA)
How to use the rent chain?
Rely on its clients (especially companies with very good public image e.g., Kinder Care Learning Centers, Calvin Klein, Wickes, Southmark)
Educate them about the threat
Encourage them to take political action by telling them who to contact and what to do. Reduce their costs of organization by using the Alliance for Capital Access financed by Drexel.
Use at committee hearings and in lobbying efforts (credibility!)
Should Drexel engage in public advocacy campaign?
Low key is preferable, but some targeted ads may help (Drexel spent about $ 4 mill. on this).

Lobbying
Lobby who?
All key institutional actors (committee chairs, party leaders, President) because all are not well-informed about junk bonds
Senators and representatives from states not well served by established securities industry e.g., Virginia increased employment by 64,000 by firms using junk bonds, New Mexico does not have a single investment grade company
What message should Drexel convey?
Drexel will be put out of business or badly hurt by this legislation?
NO!
Junk bonds are essential for economic growth, jobs and competitiveness
Few states have investment grade companies (Senate)
Number of companies per district that used junk bonds to expand. (32 companies in Bliley’s (R-VA) district; 64,000 jobs)
Restrictions on junk bonds are unfair to states and localities who depend upon jobs provided by firms who use junk bonds
Restrictions will only help complacent managers without helping stockholders or employees.

Lobbying (con’t)
Lobby how?
Need access so consider contributions to D’Amato (R-NY) and Wirth (D-CO). Contribute to natural allies. D’Amato because Drexel is his constituent. Wirth because of connection to high tech startups in western states.
Hire lobbyists. Robert Strauss (Chair of Democrat Party) and John Evans (Republican former SEC official).

Long-Term Measures
Continuing relations
1983-84 PAC contributions $20,550
1985-86 " " $177,800
D’Amato $56,750 (PAC + individual contributions)
Wirth $23,900 (PAC + individual contributions)
Washington presence (building a continuing political infrastructure)
Washington office--Mary Jo Jacobi (former aide to Reagan)
Questionable measures; e.g., “speaker’s fees”

Drexel: outcomes and conclusions
No legislation emerged from committee, neither in the House nor Senate.
Original strategy unlikely to succeed:
information not politically useful
did not provide a politically-relevant reason to oppose the bills
Revised strategy was consistent with:
better understanding of interests, institutions and politically relevant information
backed by substantial resources--this was the most important issue on Drexel’s agenda
The case illustrates the openness of the U.S. system; Drexel was able to change the outcome at a very late date; as we will see in future sessions such a strategy would probably not have worked in other political systems (such as Germany or Japan).

Drexel – Junk Bond Update
Drexel’s junk bonds fueled successful new ventures such as MCI and Turner Broadcasting
In 1989, the market for junk bonds was estimated at $28 billion
In 1990, Drexel went bankrupt after pleading guilty to six felony counts
Drexel assessed $650 million in fines
Milken spent two years in jail, paid a record $1.1 billion fines, and was banned for life from securities industry
By 1991, the default rate for junk bonds reached 10 percent and only $4 billion was issued
In 1996, the industry has rebounded with $73.6 billion issued and $142 billion issued in 1999
Today, there are 60 players ranging from prominent Wall Street investment houses to major U.S. and foreign banks
Many mutual fund and pension funds hold “high yield” debt are part of their portfolio
In 2001, Levi Strauss raised $1.05 billion in “high yield debt”
No new pushes for regulation

Perceptions about lobbying
Power over actions: persuasion/threats, coercion, cutting deals in smoke-filled rooms -- seldom
Influence over beliefs: strategic provision of politically-relevant information to and from political and public officeholders -- the principal form of lobbying
Politically-relevant information pertains to the interests of officeholders; e.g., constituents and policy interests; rent chain; emphasize jobs--not profits
Strategic in the sense of providing your side of the issue and counteracting the other side’s messages
Strategic in the sense of targeting (whom to lobby) and timing (when to lobby them)

Levels of Lobbying 05/31/10 Copyright 2009 D.Diermeier Business CEO Member/Officeholder Government “ Restrictions on junk bond financing will cost jobs.” Interact with the member and her staff at multiple levels Staff Managers technical information political information committee personal --administrative assistant --legislative director --legislative assistant --legislative correspondent Linton senator messages

Lobbying – Key Steps
Step 1. Identify the information that stakeholders possess that is decision-relevant for legislators.
Step 2. Determine how to transmit that information to legislators credibly .
Step 3. Get access to pivotal legislators and proposers.

Types of lobbying 05/31/10 Copyright 2009 D.Diermeier contact--But why should I act? Quality Type of information Remark Irresponsible false Not only morally but also strategically objectionable Superfluous true but known Politicians are busy and do not like their time wasted. Good true and unknown A necessary but not sufficient condition for a successful lobbying Excellent true, unknown, and important to the politician’s goals Sufficient for a contact, plus good prospects for influence; a vote or, better yet, an ally

What Makes Information Credible?
1. Record of being truthful and accurate--reputation
2. Relationships of trust
3. Data and analysis
4. Corroboration of position and analysis by others with different interests

Principles of lobbying
Know the institutional arena--where decisions are made
Know its officeholders' interests and incentives; risk averse and don’t like uncertainty; e.g., about whether constituents will benefit or be hurt and complain or take action;
Respect the officeholder and her staff--most are smart, all are savvy
Don't just talk - Listen to officeholder and her staff
for their interests and concerns
strategic advice--about process, about likely votes
Explore and exploit coalition building opportunities;
e.g.Calgene include sunflower growers (chapter 8)
Microsoft included [email_address] and Icast.com as part of coalition to lobby FCC to open up AOL’s instant messenger service.
Establish (access), maintain, and use continuing relations
use allies that have access: e.g. TribalVoice and the FCC.

The Interest Group-Matrix
Identifies strategy templates
Tool is best used in conjunction with Distributive Politics Spreadsheet
Depending on an issue’s location in the matrix different approaches are appropriate

Interest Group Matrix 05/31/10 Copyright 2009 D.Diermeier Opponents of Policy/Law Proponents of Policy/Law Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics environmental protection trade liberalization tax breaks

Probability of Passing Bill 05/31/10 Copyright 2009 D.Diermeier Entr. Politics Interest Group Politics Client Politics Opponents of Policy/Law Proponents of Policy/Law Organized Not Organized Organized Not Organized ?

Opponent Strategy 05/31/10 Copyright 2009 D.Diermeier Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics Opponents of Policy/Law Proponents of Policy/Law environmental protection trade liberalization tax breaks

Proponent Strategy 05/31/10 Copyright 2009 D.Diermeier Organized Not Organized Organized Not Organized Interest group politics Entrepreneurial politics ? Client politics Opponents of Policy/Law Proponents of Policy/Law environmental protection trade liberalization tax breaks

Client Politics - Overview
Proponents are organized - opponents are not
Since opponents are not organized, proponents should win if their supporters are organized, politically motivated and willing to take action
But:
1. Counteractive strategies are available
e.g. information supplied by an opposing group may push the issue towards interest group politics
2. General public distaste for client politics
this may allow opposing interests to portray proponents as “special interests”

Client Politics – Proponents
Proponent tactics usually include:
Using a low profile strategy to avoid media or public attention
Providing the key decision makers with information (credible) that points out the public benefits of a policy measure – decision makers may use this information to later justify their vote
Considering the merits of a piggy-back or legislative vehicle strategy such as omnibus bills, riders on appropriations, comprehensive reform measures (e.g. Luxury Tax)
Hurrying the matter to a resolution before media attention or opposition groups can organize
Anticipating opposition tactics
(see next slide)

Client Politics - Opponents
Opponent tactics usually include:
Using a high profile strategy to expose proponents as political clients (a.k.a. “pigs feeding at the public trough”)
The Problem: incentives for collective action against proponents are low by definition and high-profile strategies are costly, so...
Leverage existing social, economic or political infrastructure to minimize organization costs and time
Search for a well-placed politician (e.g. Party Leader/Committee Chair) or political entrepreneur (i.e. Nader) to represent the otherwise inactive and dispersed cost-bearers
Create media interest in issue or the proponents tactics for special interest legislation

Entrepreneurial Politics
Entrepreneurial politics is the opposite of client politics and is one of the most difficult strategies
A political entrepreneur can be someone within the political system (e.g. Senator Kennedy of education) or outside of politics (e.g. Ralph Nader on consumer rights)
Additionally, you have to discern whether information exists that can credibly alter perceptions about costs and benefits so that the nature of politics can shift to interest group politics
If so, an effective strategy may be possible but has to be carefully implemented
If not, more modest and realistic objectives must be adopted to minimize losses (e.g. market entry)

Interest Group Politics - Overview
Interest group politics is typically highly visible (e.g. oil industry vs. environmentalists)
There may be disagreement within interest groups about the appropriate scope or resolution of the issue (e.g. obesity)
Business interests tend to have relatively high resources and low costs of organizing, and thus may help to represent unorganized interests (e.g. manufacturer organizing suppliers)
Key problem for businesses is translating money into votes!

Interest Group Politics
Some common tactics by Interest Group Proponents and Opponents:
Coalition-building with other Interest Groups is critical
Pharmaceutical companies and patients
Pick an objective in order to build the strongest coalition
Disney
Using your rent chain
Luxury Tax
Adopting arguments that emphasize the interests of otherwise unrepresented interests / constituents
Drug-Reimports – Drug safety
Seeking diverse groups to coordinate / corroborate messages
internet gambling
Scrubbers (see Baron book)

Interest Group Politics
Proponent Strategies
Changing the status quo is generally more difficult and requires persuasive arguments or evidence
Identify the broadest coalition by strategically defining coalition
Identify strengths and weaknesses of coalition
Opponent Strategies
Focusing on doubt and risk of new law or policy
Use delay tactics to postpone decision (e.g. “Big Five” tactic against SEC chairman’s reform to separate audit and consulting functions)
Identify strengths and weaknesses of coalition

Interests - Key Take-Aways
Constituency analysis helps predicting which interests will be active and their expected impact.
If more than one interest is active on a given issue, the distributive politics spreadsheet helps to estimate a group’s likely impact as well as coalitional alignments.
As the Disney case demonstrates, coalitions are highly issue-specific. Which aspect of an issue is emphasized, will determine coalitional alignments.
The interest group matrix helps to identify broad strategy options for different interest group configurations.

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by Jack78 on May 31, 2010

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