The Invisible Handout A Stakeholder Model of Organizational

The Invisible Hand-out: A Stakeholder Model of Organizational Free Riding Jae Hwan Lee Ronald K. Mitchell May 4, 2010

INTRODUCTION 1. Dependent Construct : Organizational Free Riding 1. UN Global Compact 2. Predominantly Individual-level and State-level 3. Scant Research on Free Riding by Organizations 4. Manifestation of “Invisible Hand-out”

INTRODUCTION 2. Independent Constructs - Stakeholder Orientation (Greenley & Foxall, 1997) - Stakeholder Sensemaking (Basu & Palazzo, 2008) Capacity - Stakeholder Influence Capacity (Barnett, 2007) - Stakeholder Urgency (Mitchell, Agle, & Wood, 1997) 3. Commonality Among ICs : Corporations vis-à-vis Stakeholders

INTRODUCTION 4. Organizations-Stakeholders - Organizations embedded in environment (stakeholders) - Attention to stakeholders is a scarce resource 5. Scarcity Logic - Organizations organize efforts in the face of stakeholder-attention scarcity - In collective action, some organizations may free ride on other organizations due to ICs

Scarcity Logic 1. Stakeholder Orientation 1. Incentives (Hill & Jones, 1992) 2. Stakeholder Sensemkaing Capacity 1. Risk/Uncertainty (Dickson & Giglierano, 1986) 3. Stakeholder Influence Capacity 1. RBV (Kogut & Zander, 1992) 2. Risk/Uncertainty (Godfrey, 2005) 4. Stakeholder Urgency 1. Asset Specificity (Williamson, 1985)

Stakeholder Orientation Stakeholder Sensemaking Capacity Stakeholder Influence Capacity P 1 (-) P 2 (-) P 3 -1 (-) P 3 -2 (+) P 4 (-) Stakeholder Urgency Organizational Free Riding

Free Riding: Antecedents 1. Glaucon (circa. B. C. 380) Argued against obedience to the law on the grounds that if only one can escape sanctions of violations, the law will not be maintained. 2. Hume (1740) Two neighbors may agree to drain a meadow…But ‘tis very difficult, …that a thousand persons shou’d agree in any such action…each seeks a pretext to free himself of the trouble and expense, and wou’d lay the whole burden on others 3. Pareto (1935) If all individuals less one continue refraining from doing A, the whole community loss is very slight, whereas the one individual doing A makes a personal gain far greater than the loss that he incurs as a member of the community

Free Riding: Antecedents 4. Samuelson (1954) Public goods can be consumed by all societal members if they are available and denied to none because of their intrinsic indivisibility 5. Olson (1965) Unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests. 6. Rawls (1971) Where the public is large and includes many individuals, there is a temptation for each person to try to avoid doing this share. This is because whatever one man does, his action will not significantly affect the amount produced. He regards the collective action of others as already given one way or the other.

Free Riding: Antecedents 7. Hardin’s (1971; 1982) Game Theory The collective good will not exist unless at least two people work to produce it. In this situation, the more of them who produce it, the less the cost of production to each, and the individual’s preferences are compared with the preferences of the rest of the group 8. Related Concepts - Public Goods (Marwell & Amex, 1979, 1980) - Collective Action (Oliver, Marwell & Teixeira, 1985) - Prisoner’s Dilemma (Flood, 1952; Luce & Raffia, 1957) - Tragedy of Commons (Hardin, 1968) - Social Trap (Platt, 1973) - Social Dilemma (Orbell & Dawes, 1981)

Free Riding: Definitions 1. Merriam-Webster Dictionary A benefit obtained at another’s expense or without the usual cost or effort 2. Types of Definitions Definitional Focus Collective Activities Stigler (1974), Brubaker (1975), Schneider & Pommerenhne (1981), Marwell & Ames (1981), Kim & Walker (1984), Lee (1988), Cullity (1995) , Shane (2001) Group Membership Albanese & van Fleet (1985), Cooper, Dyck, Frohlich (1992), Jones (1995), Kidwell, Nygaard, & Sikoset (2007), Matzat (2010) Collective Activities & Pettit (1986), Iannaconne (1991), Price, Cosmides, Tooby (2002) Group Membership Conscious Decision Schnake (1991), Wagner (1995), Shapiro, Furst, Spreitzer, von Gilnow (2002), Taggar & Neubert (2008)

Free Riding: Definitions 3. Select Definitions - Marwell & Walker (1984: 3) Free riding refers to the absence of contribution towards the provision of a public good by an individual, even though he or she will not be excluded from benefiting from that good - Albanese & van Fleet (1985: 244) The “free rider” refers to a member of a group who obtains benefits from group membership but does not bear a proportional share of the costs of providing the benefits - Iannaconne (1991: 1184) The (free rider) problem arises whenever the members of a group receive benefits in proportion to their collective, rather than individual, efforts - Schnake (1991: 42) Free riding refers to conscious attempt to benefit from group membership without bearing a proportional share of the costs

Free Riding: Our Definition I define organizational free riding to be: The tendency for an organization to benefit from group membership without bearing a proportionate share of the costs

Consequences of Definition 1. 2. 3. Limited to organizations only (Individuals and states will not be considered) Organizations in group membership (Group’s common cause or purpose) Existence of external pressures upon organizations (Presence of coercion or incentives)

Stakeholder Orientation: Antecedents 1. Stakeholder (Freeman, 1984) 1. any group or individual who can affect or is affected by the achievement of the firm’s objectives 2. broad vs narrow stakeholder 2. Stakeholder Orientation … 1. Reflects how much the firm attends to and addresses the interests of stakeholders (Greenley & Foxall) 2. Important because it is a key element of org culture 3. Important due to its relationship with org performance 4. Distinct from stakeholder culture (Jones, Felps, & Bigley, 2007)

Stakeholder Orientation: Definitions 1. Dooley & Lerner (1994: 704) The level of importance for Freeman’s generic stakeholder classifications of stockholder, community, customer, employee, government, and management as it relates to the importance of strategic choices and the goals of the firm 2. Greenely & Foxall (1997: 263) The relative attention that companies give to each of their stakeholder groups 3. Logsdon & Yuthas (1997: 1216) Describe how top managers view their relationships with individuals and groups in society 4. Luk, Yau, Tse, Sin, & Chow (2005: 163) A company’s stakeholder orientation represents how much the company attends to the interests of all of its relevant stakeholders and thus attempts to address such interest

Stakeholder Orientation: Our Definition We define stakeholder orientation to be: The extent to which an organization attends to and addresses interests of its stakeholders

Logic: Incentives Stakeholder-Agency theory (Hill & Jones, 1992) - Stakeholders (Principals) and Managers (Agents) - Governance structures minimize utility loss derived from diverging interests between management and stakeholders - groups of companies are like stakeholders - stakeholder orientation (aligned interest) can minimize stakeholder utility loss because of “relational governance”

Proposition 1 The level of free riding is negatively associated with stakeholder orientation

Stakeholder Sensemaking Capacity: Antecedents 1. Stakeholder (Freeman, 1984) Any group or individual who can affect or is affected by the achievement of the firm’s objectives 2. Sensemaking (Weick, 1995) 1. A thinking process that uses retrospective accounts to explain surprises (Louis, 1980) 2. A process by which individuals develop cognitive maps of their environment (Ring & Rands, 1992) 3. The reciprocal interaction of information seeking, meaning ascription, and action (Thomas, Clark, & Gioia, 1993) 4. A tripartite view of its essential processes: (1) cognitive, (2) linguistic, and (3) conative. (Basu & Palazzo, 2008)

Stakeholder Sensemaking Capacity: Our Definition We define stakeholder sensemaking capacity to be: the ability of an organization to develop cognitive maps of its stakeholders

Logic: Risk & Uncertainty 1. 2. 3. Two different types of risk – sinking-the-boat-risk and missing-the-boat-risk – may manifest themselves (Dickson & Giglierano, 1986) Awareness of both kinds of risk will impact on the nature of the environmental analysis (Dickson & Giglierano, 1986) In the stakeholder perspective, firms are embedded in the environment, and their ability to make sense of the environment, namely, stakeholders, may affect the level of commitment to collective action

Proposition 2 The level of free riding is negatively associated with stakeholder sensemaking capacity

Stakeholder Influence Capacity: Antecedents 1. Stakeholder (Freeman, 1984) Any group or individual who can affect or is affected by the achievement of the firm’s objectives 2. Stakeholder Influence (Rowley, 1997; Frooman, 1999) 1. Stakeholders influencing corporations 3. Stakeholder Influence Capacity (Barnett, 2007) 1. Corporations influencing stakeholders 2. Ability of a firm to identify, act upon, and profit from opportunities to improve stakeholder relationships through corporate social responsibility

Stakeholder Influence Capacity: Our Definition We define stakeholder influence capacity to be: Ability of an organization to identify, act upon, and profit from opportunities to improve stakeholder relationships

Logic: RBV 1. SIC is “soul of a business” (Chappell, 1993) wherein observers ascribe character to the firm (Sen & Bhattacharya, 2001) that helps them to answer the question “Given how this firm has behaved in the past, can I trust it in the future? ” (Barnett, 2007) 2. SIC is a type of intangible asset because it represents an organization’s know-how and Information (Kogut and Zander, 1992) with regards to its ability to influence stakeholders 3. At a given point in time, firms have various degrees of SIC because of the path-dependent nature of stakeholder relations (Barnett, 2007). 4. The knowledge of SIC will grow experientially through the employment of combinative capabilities (Kogut & Zander, 1992).

Proposition 3 -1 The level of free riding is negatively associated with stakeholder influence capacity

Logic: Uncertainty 1. 2. Good behaviors can generate positive moral capital among communities and stakeholders, and this accumulated moral capital can provide an organization with insurance-like protection (Godfrey, 2005) Path-dependent and accumulated SIC can generate positive moral capital among communities and stakeholders, and this accumulated moral capital can provide organizations with insurance-like protection

Proposition 3 -2 The level of free riding is positively associated with stakeholder influence capacity

Stakeholder Urgency: Antecedents 1. Stakeholder (Freeman, 1984) Any group or individual who can affect or is affected by the achievement of the firm’s objectives 2. Stakeholder urgency (Mitchell, Agle, & Wood, 1997) 1. The degree to which stakeholder claims call for immediate attention based on the ideas of time sensitivity 2. Time sensitivity: the degree to which managerial delay is unacceptable to the stakeholder) 3. Criticality: the importance of the claim to the stakeholder

Stakeholder Urgency: Our Definition We define stakeholder urgency to be: The degree to which stakeholder claims call for immediate attention

Logic: Asset Specificity 1. 2. 3. 4. Criticality is embedded in the stakeholder urgency concept because the stakeholder’s possession of firmspecific assets, or those assets tied to a firm that cannot be used in a different way without loss of value (Hill & Jones, 1992; Williamson, 1985). This makes it very costly for the stakeholder to exit the relationship (Mitchell et al. , 1997). In a case where the stakeholder possesses assets not so specific to the firm, it is not so costly for the stakeholder to exist the relationship. In such a loosely-coupled relationship, the stakeholder is less likely to put pressures on the firm to resolve the externality problem.

Proposition 4 The level of free riding is negatively associated with stakeholder urgency

DISCUSSION 1. Stakeholder Punishment of Free-riders 1. Difficult Task • • Not readily observable Easily forgotten 2. But, still Important Task 2. Evolutionary Biology (Cosmides, 2004) 1. Punishing free-riders and those refusing to punish them is morality criterion (Mitchell, 2004) 2. Discouraging free riders is survival of the fittest to reproduce necessary behaviors (Cosmides, 2004) 3. Broader, societal implication

DISCUSSION 1. Plans that fail to detect and punish free-riders are morally questionable (Mitchell, 2004) 2. Industry self-regulatory institutions 1. Foundational work • • • Common pool resources (Ostrom, 1990) Institutions (North, 1981) Industry self-regulatory institutions constrain individual firms’ action that may harm others and the industry as a whole 2. Planning, preventive measures (Barnett & King, 2008) 1. Spillover effects 2. protection of intangible commons 3. Apply the logic of scarcity