1. 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

2. 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)

3. 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

4. Stakeholder Theory

Extend Rowley & Moldoveanus (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 changeIdentity-based target firms that sec. stakeholders are most likely to be able to change so as to advance their agendaInterest-based 5. 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

6. 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

7. 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.

8. Industrial Sectors Most Targeted 9. 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)

10. 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

11. Methods, cont.

Model 1: Probit specification:

Prob (action taken against firm = 1) = F(bx)

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

12. FIGURE 1 Marginal impact of firm size on stakeholder actions by stakeholder type 13. 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).

14. EstimatingStakeholder Actionsby stakeholder and action type Standard errors are in parentheses.+ p< 0.10,* p< 0.05, **p< 0.01, ***p< 0.001 0.5790.503Pseudo R20.143+ (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 EmissionsRE 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 15. 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

16. Additional slides to answer questions 17. 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?

18. Context

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

19. 20 Most Active Stakeholder Groups 20. Firm size and Stakeholder Type 21. Passive Stakeholders 22. Aggressive Stakeholders