Beyond too big to fail company maintenance of

Beyond too big to fail: company maintenance of license to operate Arno Kourula (Amsterdam Business School, Uv. A, a. e. kourula@uva. nl) Ville-Pekka Sorsa* (Hanken School of Economics, ville-pekka. sorsa@hanken. fi) Jukka Rintamäki (Aalto University School of Business, jukka. rintamaki@aalto. fi) Sub-theme 11: The politicized multinational company: contested transnational spaces and the role of actors and institutions

The Iron Law of Responsibility • "[I]n the long run, those who do not use power in a manner which society considers responsible will tend to lose it" (Keith Davis 1960) • The iron law seems a bit rusty (to say the least). But why?

The purpose of our paper • To provide a clearer conceptualisation of firms’ license to operate (in relation to similar concepts) • To explore conditions and mechanisms that allow companies to maintain their license even after major transgressions • Background observation: “too big to fail” is inaccurate and doesn’t explain but few cases – but most firms seem to be too something to fail

License to operate (1) • Legal and social mandate for companies to operate – Legal personhood and decision-making authority – Social mandate: “the idea that industrial facilities must comply with tacit expectations of regulators, local communities, and the public in order to continue operations” (Howard-Grenville et al. , 2008, 77) • Key difference to similar concepts: power to close down activities or/and the entire firm – ”Frictional” vs. ”existential” questions

License to operate (2) Reputation Legitimacy Stigma License to operate Signal of quality and behavior Label evoking collective Perceptions of perception of appropriateness organization’s discredit Permission to undertake business activity Basis Social Legal Nature Gradual Binary Definition Background Signaling theory Neo-institutional Labelling theory Legal and social contract (and institutional) theory Adapted from Devers et al. (2009)

Classifying operating licenses Individual firm level Entity-based assessment Activitybased assessment Industry-level License to operate License to exist Is this firm allowed to engage in an activity? Is this type of firm allowed? License to act License to conduct Is this activity allowed for a firm? Is this type of activity allowed?

Gaining and losing a license • Positive vs. negative licenses – Positive licenses explicitly defined a priori: corporate charters until 19 th century, general business licenses, licensing in PPPs, franchises etc. – Negative (a posteriori) definitions about precarious and constantly re-negotiated boundaries of necessity • Direct vs. indirect loss – Ceasing a firm requires some form of direct legal action/backing – Indirect loss usually occurs for economic reasons (bankruptcy) – Social action (e. g. boycotts, demonstrations) very rarely leads to loss of operating licenses

The research setting • Focus on maintenance after ’indefensible actions’ for methodological reasons (i. e. , active maintenance likely to occur) • Two further working assumptions guiding the search for cases and literature: – The smaller the discrepancy between firm actions and societal expectations, the more likely is the maintenance of license to operate. – The smaller the discrepancy between firm actions and industry norms, the more likely is the maintenance of license to operate.

Our propositions (so far) Condition Mechanism Term Example Historical transgressions Forgetting work Too old to fail United Fruit Company (Chiquita), Standard Fruit Company Past responsible actions Reputation(? ) Too good to fail Google, Tata Group Past irresponsible actions Reputation(? ) Too typical to fail Rio Tinto, Volkswagen History of the industry or technology Too customary to fail Philip Morris, Exxon High level of transparency Too transparent to fail Highly regulated industries (pharma? ) Lack of transparency Too opaque to fail De Beers Network centrality Network position Too embedded to fail Monsanto, Volkswagen Network periphery Network position Too invisible to fail Multiple examples Lack of legal framework or jurisdiction Enforcement Too virtual to fail Pornography or gambling firms Government ties Ties to powerful actors Too connected to fail AIG Path dependency

Discussion • Being on the ‘knife edge’ as described by the Iron Law applies in quite rare conditions (i. e. , in the middle of U-shaped curves and trade-offs) • Of course, much more systematic research needed to discover and define the exact points in which friction turns so strong that it closes down companies or some activities in different cases and environments • Our research provides clues on where to start looking for such points