In Case You Missed It: Filling the Governance Gap

Did you miss the 2014 Business and Society Leadership Summit, held in Evanston last weekend? If so, we’ve got you covered. Read on for insights from Kellogg School faculty—Daniel Diermeier, David Austin-Smith, and Brayden King—on the rise and consequences of private governance.

“We're living in an age where business has arguably become the main driver of social, economic and political change in the world. That means businesses are being held accountable for the consequences of this change.” So argued Daniel Diermeier, a professor of managerial economics and decision sciences and the faculty director for the Kellogg Public–Private Initiative, in his introductory remarks. For better or for worse, Diermeier continued, “the process that we all so love—elections and legislatures and courts and all of that—that’s all out.” In its place are cajoles and threats and negotiations, tools more traditionally suited to international relations than to governance.

In Diermeier’s words, “If Walmart says we’re only going to buy fish from sustainable fisheries, it has almost the same effect as if the US government says so.” But when corporations have so much power, what happens if Walmart decides not to cooperate? And what protections remain when the public gaze shifts elsewhere?

David Austin-Smith, a professor of managerial economics and decision sciences, offered up the environmental organization Rainforest Action Network (RAN) as an example of corporate activism at its most effective. Initially, RAN pushed for regulatory changes. But then, to great effect, the organization switched to targeting businesses. In the early 2000s, RAN organized boycotts and other public demonstrations against Citigroup in a (successful) effort to convince the company to stop financing environmentally destructive products. “Not only was Citigroup persuaded to do what RAN wanted,” said Austen-Smith, “but the other banks saw what happened … and Bank of America, JP Morgan, Chase, Goldman Sachs and others automatically self-regulated.”

But like Diermeier, Austen-Smith also raised questions about the limits of private regulation. For instance, two competing agreements have emerged from last year’s factory collapse in Bengaledesh. In May, many garment retailers and producers voluntarily agreed to accept legal liability for workers’ safety all the way down the supply chain. But other companies, including those from North America, are not accepting legal liability for such incidents, committing instead to more-aggressive monitoring. Is this enough?

Corporations and activists needn’t always be at odds with one another. Sometimes, firms can ally with activists, putting pressure on competitors that don’t conform to best practices, pointed out Brayden King, an associate professor of management and strategy. “Our research has shown that if a company has been actively advocated against by an NGO in the past, it is much more likely to collaborate in joining company-sponsored boycotts in the future—becoming activist-like themselves,” King explained.

Editor’s note: Brayden King talks in great length (along with Klaus Weber) about corporate activism in this month’s issue of Insight—check it out. Or head here for more conference content.