Secondary Stakeholder Actions and the Selection of Firm Targets Charles E. Eesley, MIT Sloan School of Management [email_address] Michael J. Lenox, Fuqua School of Business, Duke University [email_address] Academy of Management Conference Aug. 2006, Atlanta, GA

Research Question What determines the targeting behavior of secondary stakeholder groups? Firms - incentive to self-regulate to minimize disruptions (Hart, 1995; Jones, 1995; Porter and van der Linde, 1995; Russo and Fouts, 1997). Growing in number and power (Bhagat, Bizjak, & Coles, 1998)

What determines the targeting behavior of secondary stakeholder groups?

Firms - incentive to self-regulate to minimize disruptions (Hart, 1995; Jones, 1995; Porter and van der Linde, 1995; Russo and Fouts, 1997).

Growing in number and power (Bhagat, Bizjak, & Coles, 1998)

Introduction Primary/Internal stakeholders – customers, employees Secondary stakeholders - Activists, advocacy groups, religious organizations and other non-governmental organizations (Clarkson, 1995) Lack formal contractual bond / direct legal authority

Primary/Internal stakeholders – customers, employees

Secondary stakeholders - Activists, advocacy groups, religious organizations and other non-governmental organizations (Clarkson, 1995)

Lack formal contractual bond / direct legal authority

Stakeholder Theory Extend Rowley & Moldoveanu’s (1993) interest-based and identity-based model of stakeholder mobilization. Stakeholder attributes condition identity vs. interest-driven agenda Allows ex ante identification of stakeholder grouping Provide large-scale empirical test of types of firms likely to be targeted by types of stakeholder groups using a wide range of actions. target firms that increase the likelihood of bringing power and resources regardless of prospects for change Identity-based target firms that sec. stakeholders are most likely to be able to change so as to advance their agenda Interest-based

Extend Rowley & Moldoveanu’s (1993) interest-based and identity-based model of stakeholder mobilization.

Stakeholder attributes condition identity vs. interest-driven agenda

Allows ex ante identification of stakeholder grouping

Provide large-scale empirical test of types of firms likely to be targeted by types of stakeholder groups using a wide range of actions.

Conclusion - sneak peak Firms that are more consumer-oriented, financially sound, and heavier polluters are more likely to be targets Powerful stakeholder groups pursue an identity-based agenda – target large, visible firms Weaker stakeholder groups tend to pursue an interest-based agenda – target mid-sized, dirty firms relative to their industry

Firms that are more consumer-oriented, financially sound, and heavier polluters are more likely to be targets

Powerful stakeholder groups pursue an identity-based agenda – target large, visible firms

Weaker stakeholder groups tend to pursue an interest-based agenda – target mid-sized, dirty firms relative to their industry

Hypotheses Powerful, legitimate stakeholders (Interest-based) target: H1a : Worse performing firms on the dimension of concern H1b : Smaller firms H1c : Financially-sound firms Weak, less legitimate stakeholders (Identity-based) target: H2a : Larger firms H2b : More visible firms

Powerful, legitimate stakeholders (Interest-based) target:

H1a : Worse performing firms on the dimension of concern

H1b : Smaller firms

H1c : Financially-sound firms

Weak, less legitimate stakeholders (Identity-based) target:

H2a : Larger firms

H2b : More visible firms

Context All U.S. firms (public) in sectors where at least one firm was the target of an action concerning the natural environment - 1988 to 2003. 219 firms targeted by ~300 stakeholder groups. 32,764 observations of 3227 firms (Compustat Annual Dataset). 333 proxy votes, 144 civil suits, 78 protests, 59 collaborations, 38 boycotts, and 9 letter-writing campaigns.

All U.S. firms (public) in sectors where at least one firm was the target of an action concerning the natural environment - 1988 to 2003.

219 firms targeted by ~300 stakeholder groups.

32,764 observations of 3227 firms

(Compustat Annual Dataset).

333 proxy votes, 144 civil suits,

78 protests, 59 collaborations,

38 boycotts,

and 9 letter-writing campaigns.

Industrial Sectors Most Targeted

Stakeholder Attributes Power: powerful – assets greater than the median of all stakeholder groups weak - assets less than the median Legitimacy: Existing public opinion surveys Stakeholder Legitimacy : holding institutions (less legitimate) religiously affiliated groups (less legitimate) activist individuals (more legitimate) non-environmental NGOs (more legitimate) environmental NGOs (more legitimate)

Power:

powerful – assets greater than the median of all stakeholder groups

weak - assets less than the median

Legitimacy:

Existing public opinion surveys

Stakeholder Legitimacy :

holding institutions (less legitimate)

religiously affiliated groups (less legitimate)

activist individuals (more legitimate)

non-environmental NGOs (more legitimate)

environmental NGOs (more legitimate)

Methods Dependent Variables - Stakeholder Actions # against a firm in a given year # by powerful groups # by weak groups # by more legitimate groups # by less legitimate groups Independent Var. Firm Relative Emissions, Firm Assets, Firm Cashflow Firm Advertising Intensity = log advertising expenditures / firm assets

Dependent Variables - Stakeholder Actions

# against a firm in a given year

# by powerful groups

# by weak groups

# by more legitimate groups

# by less legitimate groups

Independent Var.

Firm Relative Emissions, Firm Assets, Firm Cashflow

Firm Advertising Intensity = log advertising expenditures / firm assets

Methods, cont. Model 1: Probit specification: Prob (action taken against firm = 1) = F(b’x) Model predict: firm has an action taken against it Model 2-14: Poisson Predict: # of actions, # of actions by powerful/weak, more legitimate/less legitimate, aggressive/passive groups Include year and sector dummy variables and firm random effects. Factor analysis, k-means cluster analysis

Model 1: Probit specification:

Prob (action taken against firm = 1) = F(b’x)

Model predict: firm has an action taken against it

Model 2-14: Poisson

Predict: # of actions, # of actions by powerful/weak, more legitimate/less legitimate, aggressive/passive groups

Include year and sector dummy variables and firm random effects.

Factor analysis, k-means cluster analysis

FIGURE 1 Marginal impact of firm size on stakeholder actions by stakeholder type

Results Hypotheses 1a, 1c, and 2b supported: Firms that are more visible, financially sound, and heavier polluters are targeted. Different stakeholder types target different firms w/ different actions. Opposite relationship than hypothesized. Powerful, legitimate stakeholders - large, financially sound firms with high absolute levels of pollution (Identity-driven). Weaker, less legitimate stakeholders - smaller firms, substantial cash flow, poor environmental performers (Interest-driven).

Hypotheses 1a, 1c, and 2b supported: Firms that are more visible, financially sound, and heavier polluters are targeted.

Different stakeholder types target different firms w/ different actions. Opposite relationship than hypothesized.

Powerful, legitimate stakeholders - large, financially sound firms with high absolute levels of pollution (Identity-driven).

Weaker, less legitimate stakeholders - smaller firms, substantial cash flow, poor environmental performers (Interest-driven).

Estimating Stakeholder Actions by stakeholder and action type Standard errors are in parentheses. + p < 0.10, * p < 0.05, ** p < 0.01, *** p < 0.001 0.579 0.503 Pseudo R2 0.143+ (0.087) 0.047 (0.060) 2.238*** (0.224) 1.198*** (0.245) Firm Absolute Emissions -13.479+ (6.977) -13.325* (6.947) -14.872*** (4.456) -10.637* (4.723) Firm R&D Intensity 2.946* (1.216) 0.435 (1.607) 5.387*** (1.300) 2.941 (2.359) Firm Advertising Intensity 0.314** (0.114) 0.185* (0.079) 0.799*** (0.125) 0.566*** (0.128) Firm Cashflow -0.101** (0.039) 0.079*** (0.017) Firm Assets 2 0.273*** (0.758) -0.398 (0.256) 0.112 (0.128) 0.281* (0.133) Firm Assets 1.414* (0.691) 0.235 (0.847) 1.130*** (0.274) 0.179 (0.338) Firm Relative Emissions RE Poisson RE Poisson Poisson Poisson Specification Actions by Cluster 1 (Passive) Actions by Cluster 1 (Aggressive) Actions by Weak Groups Actions by Powerful Groups Dependent Variable

Results and Conclusion Large environmental advocacy groups - broader agenda (drawing media attention and making examples out of industry leaders) Smaller groups may have narrower goals Step toward determining conditions when secondary stakeholders may induce firms to self-regulate

Large environmental advocacy groups - broader agenda (drawing media attention and making examples out of industry leaders)

Smaller groups may have narrower goals

Step toward determining conditions when secondary stakeholders may induce firms to self-regulate

Additional slides to answer questions

Discussion and Future Work Further work: Ordering of stakeholder actions taken Targeting certain firms in an industry first More precise measures for legitimacy than the current public opinion surveys?

Further work:

Ordering of stakeholder actions taken

Targeting certain firms in an industry first

More precise measures for legitimacy than the current public opinion surveys?

Context Figure 1. Breakdown of industry affiliation of the 331 firms in our sample

Figure 1. Breakdown of industry affiliation of the 331 firms in our sample

20 Most Active Stakeholder Groups

Firm size and Stakeholder Type

Passive Stakeholders

Aggressive Stakeholders