Self‐Regulation and the Market for Activism

• Published date: 01 September 2016
• DOI: http://doi.org/10.1111/jems.12162
• Date: 01 September 2016
• Author: David P. Baron

Self-Regulation and the Market for Activism

DAVID P. BARON

Graduate School of Business

Stanford University Stanford

CA 94305

dbaron@stanford.edu

This paper presents a theory of the market for activism where citizens fund activists, campaigning

activists pressure firms to change their practices, and firms self-regulate to forestall or mitigate

campaigns. Activists have leverage because firms must self-regulate before they are targeted, and

their self-regulation must deter the activists conditional on being targeted. Activists anticipate

gaining more from campaigns against soft (more vulnerable) firms than hard (less vulnerable)

firms, so it is more costly for soft firms to forestall the activists, and some risk a campaign but

self-regulate to mitigate the probability that the campaign succeeds. Campaigns thus can occur

in equilibrium. The threat from activism is the probability that a firm is targeted, and the stronger

the threat the fewer campaigns there are because more firms self-regulate to forestall a campaign.

Radical activists target harder firms than do moderate activists, and the more radical the activists

the more costly it is to forestall them. Some firms are too hard to be threatened by activism and

maximize their profits. Firms that are too hard to target directly may be vulnerable to campaigns

threatening their supply and distribution chains. Activists and their donors have an incentive to

maximize the scope of activism; that is, the breadth of the threat from activism.

1. Introduction

The market for social pressure or activism centers on activists and campaigning NGOs

seeking to change the behavior of firms through private politics. The direct application

of social pressure to firms has evolved in four stages. The environmental movement was

ignited by Rachel Carson’s Silent Spring, and much of the early focus was on building

awareness of environmental issues. Social activists focused on government and were an

important force in the wave of social regulation enacted during the 1970s. When the wave

of government regulation began to wane, many activists and campaigning NGOs shifted

their focus from public politics to private politics and targeted firms directly rather than

working through government. Michael Brune, then executive director of the Rainforest

Action Network (RAN) and currently the executive director of the Sierra Club, stated,

“We felt we could create more democracy in the marketplace than in the government”

(Baron and Yurday, 2004). The vehicle for this private politics was a corporate campaign

targeting firms whose practices the activist wanted changed.1

Some firms, however, weretoo costly to target or were not substantially threatened

by a corporate campaign. To pressure these firms, activists innovated by targeting their

supply and distribution chains to disrupt the markets in which they operated. These

value chain campaigns often were effective, and more importantly they exposed a large,

new set of firms to the threat of private politics. The fourth phase was in response to

this broadened threat from activism as more firms began to self-regulate to lessen social

pressureand avoid targeting. In implementing their self-regulation some firms partnered

1. The concept of private politics was introduced and formalized by Baron (2001, 2003).

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 3, Autumn 2016, 584–607

The Market for Activism 585

with NGOs, shifting the focus of the NGOs from confrontation to cooperation. This paper

focuses on the third and fourth phases of the development of the market for activism,

including both the demand side where activists challenge firms with corporate and

value chain campaigns and the supply side where citizens fund activists and determine

the scope of activism. In the presence of this market, firms have the opportunity to

self-regulate or to risk a campaign.

Self-regulation in private politics is important for at least three reasons. First, it

represents an alternative, albeit imperfect, to government regulation. Second, it pro-

vides an explanation for the widespread adoption of corporate social responsibility by

firms, a term that encompasses self-regulation. Third, it provides an explanation for the

movement by many activists from confrontation to cooperation; that is, working with

firms to implement their self-regulation.

The theory presented is for a de nouveau market for activism in which firms and

NGOs are not yet distinguished by reputations and includes a continuum of firms with

varying vulnerability to a campaign, a continuum of donors that fund activists, and an

endogenous number of activists that are either moderate or radical. The activists monitor

firms and can conduct a campaign against a firm if its practices are unacceptable, where

the probability of campaign success is a function of the firm’s vulnerability and its

practices. Anticipating the monitoring by activists, the firms can either self-regulate to

forestall a campaign or risk a campaign and, if targeted, self-regulate to reduce the

probability that the campaign succeeds. To forestall a campaign, the firm must self-

regulate to the point at which, if targeted, the activist accepts the self-regulation and

does not campaign. Firms, however, must self-regulate before they know whether they

will be targeted. Since the activists cannot commit not to campaign against a firm, the

forestalling self-regulation takes into account the incentives of the activist to campaign.

A campaign against a softer (higher vulnerability) firm is more attractive to an activist

and hence more costly to forestall, and some softer firms choose to risk a campaign

but may self-regulate to mitigate the probability that the campaign succeeds if they are

targeted. If engaged by an activist, a campaign results, and if not engaged, no campaign

results. Campaigns thus can occur on the equilibrium path in the market for activism.

Some firms are too hard for activism and maximize their profits. The reach of private

politics thus has limits.

The most noticeable effects of activism are the outcomes of campaigns conducted

against firms, but the greater effect may be from the threat of activism. That is, many

more firms are threatened by activists than can be targeted, and many of these firms

self-regulate to forestall a campaign even though they know that the probability they

will actually be targeted is not high. The equilibrium in the market for activism has two

properties that result because the number of potential targets is greater than the number

of activists. The first is leverage which results because firms that prefer to forestall a

campaign must self-regulate before they are targeted, and their self-regulation must

deter the activist once targeted. The second is a degree of safety in numbers resulting

because not all threatened firms can be targeted by a campaign.

Radical activists induce broader forestalling self-regulation than do moderate ac-

tivists, and radical activists may threaten harder (low vulnerability) firms than moderate

activists threaten. The scope of activism, that is, the set of firms threatened, is greater

the more radical are the activists. Some firms, however, are too hard for a corporate

campaign.

Several empirical studies of targeting conclude that activists choose soft targets,

and the theory presented here indicates that soft firms risk being targeted because due to