Valuing Stakeholder Governance: Property Rights, Community Mobilization, and Firm Value

• Date: 01 December 2017
• Author: Kate Odziemkowska,Sinziana Dorobantu
• DOI: http://doi.org/10.1002/smj.2675
• Published date: 01 December 2017

Strategic Management Journal

Strat. Mgmt. J.,38: 2682–2703 (2017)

Published online EarlyView 31 July 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2675

Received 9 March 2016;Final revisionreceived 10 May 2017

Valuing Stakeholder Governance: Property Rights,

Community Mobilization, and Firm Value

Sinziana Dorobantu1*and Kate Odziemkowska2

1Department of Management and Organizations, Stern School of Business, New

York University, New York, New York

2Management Department, The Wharton School, University of Pennsylvania,

Philadelphia, Pennsylvania

Research summary: While researchhas shown that good stakeholder relations increase the value

of a rm, less is known about how specic types of stakeholder governance affect rm value. We

examine the value of one such governance mechanism—community benets agreements (CBAs)

signed by rms and local communities— intended to minimize social conict that disrupts access

to valuable resources. We argue that shareholders evaluate more positively CBAs with local

communities with strongproperty rights and histories of institutional action and extra-institutional

mobilization because these communities are more likelyto cause costly disruptions and delays for

a rm. We evaluate these arguments by analyzing the cumulative abnormal returns associated

with the unexpected announcement of 148 CBAs signed between mining companies and local

indigenous communities in Canada.

Managerial summary: With rms across many industries facing escalating costs associated with

social conict, new tools are emergingto help rms mitigate these risks by seeking the support of

the local communities in which they operate.Community benets agreements (CBAs) are contracts

in which a community provides consent for a new investment in return for tangible benets, such

as local hiring and revenue sharing. We argue that although CBAs arecostly for the rm, they are

particularly valuable when communities can cause costly disruptions and delays for a rm. Our

study of investor reactions to the announcement of 148 CBAs signed between mining companies

and local indigenous communities in Canada shows that investors value more CBAs signed with

communities with strong property rights and histories of protest. Copyright © 2017 John Wiley

& Sons, Ltd.

Large-scale projects can profoundly transform local

communities, economies, and environments, and

they often lead to social conict between compa-

nies and local communities. In a recent example,

American Indians of the Standing Rock Sioux tribe,

Keywords: stakeholder governance;property rights; social

movements; local communities; corporate social responsi-

bility

*Correspondence to: Sinziana Dorobantu, Department of Man-

agement and Organizations, Stern School of Business, New York

University, 40 West 4th Street, Suite 707, New York, NY 10012.

E-mail: sdoroban@stern.nyu.edu

[Correction made on 9/28/2017, after rst online publication:

The Dakota Access oil pipeline was originally notes as being

1,183 Km. It is actually 1,900 Km. We apologize for the error.]

Copyright © 2017 John Wiley & Sons, Ltd.

whose reservation borders the charted path of the

$3.7 billion, 1,900 Km Dakota Access oil pipeline,

have been protesting against the construction of

the pipeline, claiming that it traverses ancestral

lands and that oil spills would be ruinous to their

well-being. In August 2016, they asked a federal

court in Washington, DC, to issue an injunction

that would halt the pipeline’s construction (Healy,

2016). Although the court denied the request, the

U.S. government ordered a pause in the construc-

tion, raising concerns over the pipeline’s future

(Healy & Schwartz, 2016). As this example illus-

trates, social conict is associated with signicant

disruptions and delays that increase operational

Valuing Stakeholder Governance 2683

costs (Franks et al., 2014), lower the market val-

uation of planned or existing operations (Henisz,

Dorobantu, & Nartey, 2014), and potentially delay

entry into new markets (Ingram, Yue, & Rao, 2010).

In a number of industries (including mining, oil

and gas, renewable energy, agriculture, forestry,real

estate, and infrastructure), rms are increasingly

relying on legally enforceable contracts known as

community benets agreements (CBAs)1to govern

their relationships with local communities. These

agreements enable rms and local communities to

converge on a mutually acceptable distribution of

value, ensuring that local communities receivecom-

pensation for the resources they provide and for

the social and environmental disruptions associ-

ated with these projects. Existing CBAs cover large

real estate developments, such as Pacic Park (for-

merly known as Atlantic Yards) in Brooklyn, New

York, and have become an established feature of

onshore wind developments in the United Kingdom

(Cowell, Bristow, & Munday, 2011). In the min-

ing sector in Canada— the empirical context of our

study— there are over 350 publicly disclosed CBAs

with indigenous communities (Natural Resources

Canada, 2014).

In all these industries, access to specic

resources— a well-located site or a land area rich

in natural resources— requires the consent of

the local community; without it, the rm’s local

operations may be disrupted or delayed, leading

to costly adjustments. Because local communities

are sovereign entities, the exchange relationship

through which communities grant a rm access to

site-specic resources cannot be internalized within

the hierarchical structure of the rm, as predicted

by transaction costs economics (Williamson, 1985).

Firms cannot merge with or acquire local commu-

nities. Similarly, access to specic resources may

not be ensured through relational contracts (Baker,

Gibbons, & Murphy, 2002; Gibbons & Henderson,

2012; Macaulay, 1963) where communities have

strong incentives to extract more value from a

project once it is underway. As a result, contractual

agreements become a mechanism for governing

the relationship between a rm and the local com-

munity whose cooperation is critical for the rm’s

1We use the term community benets agreements (Cain, 2014;

Parks & Warren, 2009; Salkin & Lavine, 2008) to also include

agreements referred to as community development agreements

(O’Faircheallaigh, 2015b) and impact and benet agreements

(Sosa & Keenan, 2001).

access to valuable resources, and consequently, for

its nancial performance.2

In this article, we examine whether rms can cre-

ate value through CBAs. By legally binding both

parties to pre-agreed terms, CBAs reduce the likeli-

hood of conict with the local community,lowering

the probability of disruptions and delays associated

with such conicts, and therefore, increasing the

ability of managers to stay on schedule and within

budget. But such agreements are costly to negoti-

ate and implement: They commit the rm to shar-

ing part of the value created with the community;

they require specialized negotiators and managerial

time; and they can delay regulatory approvals and

operations schedules. Thus, given that CBAs entail

not only benets, but also signicant costs, investors

may not always perceive them as adding value to

the rm. Instead, they may view CBAs as diverting

resources from shareholder value maximization to

short-term conict avoidance (Friedman, 1962), or

as symbolic acts of impression management (Els-

bach, Sutton, & Principe, 1998) with limited impli-

cations for value creation.

We argue that CBAs add value to a rm when

they are signed with communities who can obstruct

a rm’s access to valuable resources through their

strong property rights or their ability to mobilize

against the rm using social movement tactics (such

as protests or blockades) or institutional tactics

(such as legal action or interference in the regulatory

process). Such communities are more likely to enter

into conict with the rm, leading to disruptions

and delays that negatively impact its value. As

CBAs are a means of lowering the probability of

such disruptions, they are likely to be perceived by

investors as valueenhancing, but only when they are

signed with communities that pose a considerable

risk of disrupting rm operations.

We assess the nancial value of CBAs by

analyzing market reactions to the unexpected

announcement of 148 agreements between local

indigenous communities and 95 rms in the Cana-

dian mining industry. CBAs are negotiated in strict

condentiality, and the most pertinent information

disclosed during their announcement is the signing

2We do not mean to suggest here that contractual agreements

and relational governance are mutually exclusive, but only that

a contractual agreement is necessary when the rm is highly

dependent on the consent of the local community. In fact, much

of the argument we develop below rests on the idea that the

negotiation of a CBA lays the foundation for a relational contract

that is likely to complement the formal contractual agreement.

Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2682–2703 (2017)

DOI: 10.1002/smj