Faculty member in the Department of Managerial Economics & Decision Sciences until 2014
In 1987 Rainforest Action Network (RAN) initiated a nationwide boycott against Burger King. At the core of their demands was the accusation that the contracts with Central American countries for exports of cheap hamburger beef resulted in “rainforests being denuded to provide pasture for cattle” (RAN 2007). The result: a 12 percent drop in Burger King’s sales and the cancellation of $35 million worth of contracts with the tropical countries. This example reflects a trend: activist organizations ceasing to direct their demands to governments and, according to David Baron and Daniel Diermeier, “increasingly turning to private politics to advance their agenda.”
In a 2007 published paper, Baron (Stanford University) and Diermeier (the Kellogg School’s Department of Managerial Economics and Decision Sciences) approach this subject by focusing on the realm of private politics. This area encompasses political and regulatory competition outside the realm of public institutions such as governments, agencies, or courts. In private politics, activists target companies directly in order to influence the company’s business practices and their tools range from boycotts over shareholder activism to inflicting reputational damage. These tactics raise new questions for companies: How do activist organizations choose their targets? Are their actions credible? What strategies do they use to achieve their goal? Can firms avoid being a target, and if so, how? Baron and Diermeier analyze these questions using a formal model of a campaign as they “examine strategies for lessening the chance of being a target and for addressing an activist challenge once it has occurred.”
Baron and Diermeier demonstrate that the target selection is far more complicated than we think it is. One would imagine that the process is pretty simple: a company is harming a public interest and a campaign is set in motion against them. However, it is not so straightforward. Before initiating a campaign, activists must decide whether to confront a particular firm or a whole industry. For example, when addressing the problem of the cutting of old-growth timber, RAN decided to deal only with Boise Cascade (a paper manufacturer).
The Domino Effect
Targeting one specific firm is advantageous in many ways, but most importantly it may create a domino effect within the industry. If the activist successfully alters the practices of one target, other firms may voluntarily modify their actions by “proactively anticipating the activist’s demands” and avoiding being subject to a campaign. For instance, Baron and Diermeier cite the case of Citigroup conceding to RAN’s demands (see Murray, 2005). Confronted with the peril of becoming the next two targets, Bank of America and JP Morgan Chase decided to change their practices proactively. As a consequence of this targeting strategy, industry-wide changes result from confronting a single firm while counting on proactive actions by others. This dynamic may act as a substitute to governmental regulation.
In some cases, activist organizations aim at the customers of their targets to force them to concede. Here again, the case of RAN against Boise Cascade is relevant. The timber company did not sell its products directly to the consumer but to companies such as Kinko’s, Home Depot, and Lowe’s. Baron and Diermeier argue that “these companies have a brand and a public face” that the supplier does not have. Taking this into consideration, RAN confronted each of these companies and succeeded. Kinko’s, Home Depot, and Lowe’s concluded that they agreed with the activist organization’s environmental policies and stopped selling products made from old-growth timber. This is a case of what Baron and Diermeier call an indirect or market campaign directed against “an element of the firm’s value chain.”
Recalcitrant or Strategic?
However, do all targets react in the same manner when facing an activist campaign against them? And does every activist organization follow the same modus operandi? Herein lies one of the most important contributions of the study. Baron and Diermeier put forward a model in which the nature of the target can be of two types: recalcitrant or strategic. The first type is unwilling to adhere to the demands while the second type is responsive and concedes if the gains of forfeiting are larger than the benefits of resisting. JP Morgan Chase can be categorized within the first category as it resisted for a year before accepting RAN’s demands. Meanwhile, McDonald’s would be an example of a responsive target as it has changed its practices in relation to animal welfare.
Correspondingly, the degree of aggressiveness of the activist organization campaigns varies according to the nature of the target and the issue at stake. If a firm proves to be responsive, it may be become a preferred target as the probability of success is larger. An activist organization will think twice before confronting a recalcitrant firm, as the likelihood of being defeated and having their reputation damaged is significant.
The following diagram summarizes of Baron’s and Diermier’s arguments:
By presenting this typology of activists and of targets, Baron and Diermeier bring to bear an important factor in today’s world: reputation. It is easy to see that a firm with a record of conceding to every demand will be subject to more aggressive campaigning than one that is known for giving a fight. Accordingly, an activist organization known for not enforcing its threat will never pose a real challenge to any target. Reputation and credibility are directly related. Building a name for being tough might be a successful strategy for avoiding becoming a target in the first place.
Avoiding the Bulls Eye
How can a firm avoid being a target? Here, Baron and Diermeier outline possible nonmarket strategies for firms carrying their functions in an environment characterized by the presence of activists. Among these, they single out following a proactive strategy as it will reduce the odds and harshness of a campaign. The aim is to make the necessary adjustments so as to be less attractive in the eyes of the activist organizations. This happened in the context of RAN’s campaign against Citigroup, Bank of America, and JP Morgan Chase. Moreover, “the firms will compete to avoid a campaign, resulting in a race to the top. Therefore, the firms in the industry have an incentive to act collectively to avoid being caught in a race to the top.”
Overall, Baron and Diermeier manage to initiate a set of innovative questions in a new field of study with complex strategic interactions. Furthermore, the formal model exposes an intricate process in which ex ante and ex post considerations directly affect the result of the game. The selection of the issue, the firm, and the degree of aggressiveness of the campaign pursued by the activist, combined with the possible responses of the target, prove that “strategic interactions play an important role in all aspects of the campaign.”
Murray, Alan (2005). “Scandals Leave Big Banks Vulnerable,” Wall Street Journal, April 13, 2005.
RAN, Rainforest Action Network (2007), “Who We Are: Our History,” www.ran.org/who_we_are/our_mission_history/ (accessed September 4, 2007).
Agustín Casas, is a doctoral student in the Department of Economics at the Weinberg College of Arts and Sciences, Northwestern University
Baron, David P. and Daniel Diermeier (2007). “Strategic Activism and Nonmarket Strategy,” Journal of Economics and Management Strategy, 16(3): 599-634.
Four tips for turning this trait into a “networking superpower.”
A definitive new study dispels the myth of the Silicon Valley wunderkind.
Here’s how to make your manager look good and become indispensable in the process.
For starters, get out of the office and find your end users.
Coworkers can make us crazy. Here’s how to handle tough situations.
Plus: Four questions to consider before becoming a social-impact entrepreneur.
Finding and nurturing high performers isn’t easy, but it pays off.
A Broadway songwriter and a marketing professor discuss the connection between our favorite tunes and how they make us feel.