Governance

1
Governance

• Economics and political economy perspectives

2
Economics Perspectives

• Positive
• Why did private environmental governance emerge
  when it did?
• In which issue arenas did it arise and not arise
  and why?
• Why did the participants participatemotivation?
• How are firms and NGOs matched?
• Why was the governance arrangement designed the
  way it was?
• What incentive and governance problems did it
  address?
• How did the GA respond to change and
  unanticipated events?
• What was the distribution of costs and benefits
  from the GA?
• Can we predict where GAs will arise in the future
  and how they will be designed?
• Why are GAs observed more in some
  cultures/countries than in others?

3
Economics Perspectives

• Normative
• What (market failure) problem is to be solved?
• Which interests are affected?
• Why have not those affected already solved the
  problem?
• Transaction costs
• What design will best solve the problem?
• How well does the design deal with the standard
  incentive and information problems?
• Performance evaluation
• Efficiency
• Evaluation What went right and what went wrong?
• What is missingpolitical economy
• The problem may extend beyond economics
• Interests may engage in politics.
• Politicians may interevene
• Distributive consequences may be more important
  than efficiency.

4
Public Politics and Public Regulation
people
interest groups
government
Public politics
X
Public politics
Regulation (mandatory)
firms and markets
5
Public and Private Politics and Environmental
Governance
people
Support participation
Representation
activists interests
Private politics
government
regulation (voluntary)
PVAs Negotiated Agreements
campaign
firms and markets
6
Public and Private Politics and Self-Regulation
people
Support participation
Representation
activists interests
government
Potential for private politics
Potential for public politics
firms and markets
Self-regulation
7
Why the ascendancy of private governance?

• Public regulation is very costly
• Demonstrated government failuresSuperfund,
  command and control
• Regulations that generated new sources of
  oppositionwetlands, ESA, takings
• Regulation beyond the law
• Environmental justice
• Changing political climate
• Opposition to new regulation strengthenedthose
  bearing the cost learned that they can win test
  casesClintons failed BTU tax and health care
  initiatives
• Influence of informationmedia, Internet, TRI
• Ascendancy of NGOs
• Because of government inaction?
• A substitute for government

8
Governance Arrangements as Private Institutions

• Participation (voluntary) and representation
• What activities are governed?
• Legislationdealing with new issues
• Regulationimplementation of legislation
• Information generation
• Enforcement
• Voluntary
• Informational--public disclosure
• Adjudication of disputes
• Performance evaluation
• Achievement of purpose
• Of the governance institution
• Is it an equilibrium institution? That is, one
  that will survive?

9
ExampleFair Labor Association

• Participation (bargaining)
• ParticipantsApparel and footwear firms and NGOs
• Non-participantsunions and their allies
• Representation (on board)
• Participants plus licensors
• Legislation e.g., revisions of code
• Supermajority of board
• Regulation
• Promulgation of rules
• Information generation
• Self-reportingto FLA
• Independent inspections
• Enforcement
• Board directivescomply with rules
• Public disclosurerelease of inspection reports
  by majority rule
• Judiciaryhear and resolve complaints and disputes

10
Participation

• Why do firms participate?
• Citizens reward them?
• In the marketplace
• By holding their shares
• Sufficiently to align private interests with
  citizens interests?
• Coercion/threats?
• Public and private politics
• Regulators
• Legislators
• Internal motivation
• What can a firm gain from a GA?
• Collective action to reduce free-riding
• Information
• Certification
• Reputation
• CoverResponsible Care?

11
What limits governance arrangements?

• Free-riding by potential participants
• An inability to commit
• Opportunism by politicians
• Opportunism by citizens and NGOs
• Litigation
• Asbestos litigation, Vioxx lawsuits
• Limits participation in ISO 1400 and other
  collective arrangements
• Criticism by non-participants
• Shirking due to weak enforcement
• What are the limits of private governance?
• Could it ever be comprehensive? Seems unlikely.
• Processbroad participation/democracy may not be
  the answer
• SF (citizen initiatives/process) vs. Chicago
  (decisive leadership)

12
Commitment Problems

• A firm entering into a private governance
  arrangement cannot count on opponents withdrawing
  
• FLA did not deter the unions from forming the WRC
• Non-participants cannot commit not to exploit an
  opportunity such as a disaster
• Politicians
• Activists
• Regulators may not be able to commit even if they
  want to, since politicians cannot commit not to
  intervene
• Participants and non-participants cannot commit
  not to turn to the courts
• Can you trust the other side?
• Dow Chemical and NRDCreportedly positive
• But, no other firm worked with NRDCwhy?
• Would timber companies participate in FSC?

13
Research Issues

• Self-regulation
• Can we design self-enforcing mechanisms
• Using market forcesGilead Sciences
• Does a design work with both moral motivation and
  self-interest?
• How does a GA respond to events
• Does it limit or encourage opportunism
• Exploiting a toxic leak
• Seeking a public substitute from a friendly state
  government (e.g., California)
• What explains the scope of a GA
• Broader means greater heterogeneity of interests
• Does this imply that by design there will be
  weak governance and enforcement e.g.,
  Responsible Care?
• Narrower means less heterogeneity
• Means lots of one-on-one arrangements
• Stronger governance and enforcement?

14
Research Directions

• Much of the economic theory and empirical work on
  GAs is based on reduced form models of conduct
  e.g., firms enter GAs to forestall or deter
  government regulation.
• Foundations Conduct
  Performance
• Performance
• Focus on the evaluation of performance
• Evaluate the full effects
• Few firms report costs, let alone the full costs
  
• Self-evaluation is often not compelling or
  credible.
• Can an outside observer effectively evaluate
  absolute performance?
• What did the participants gain and lose
  (distributive consequences)?
• What lessons can be learned from what went right
  and wrong?

15
Principal Research Focus
people
Support participation
Representation
activists interests
government
Potential for private politics
Potential for public politics
firms and markets
Self-regulation
16
Foundational Research Focus
people
Support participation
Representation
activists interests
government
Potential for private politics
Potential for public politics
firms and markets
Self-regulation
17
Foundations

• Should predict/assess whether there is a threat
  and how likely it is and how likely it can be
  averted.
• Begin with citizens preferences and likely
  actionsexplain social pressure
• Develop our understandings from first principles
• Motivationself-interest and moral
• Will consumers reward private actors for their
  actions? How and how much?
• Will investors reward firms for their private
  governance?
• Will citizen-consumers harm firms that do not
  participate in private governance?
• NGOs as agents of (some) citizens
• Preferences, funding, strategies, accountability
• Whom do they target?
• Take seriously the possibility of moral
  motivation
• Micro view of institutions of public (government)
  and private (public sentiment and social
  pressure) regulation
• Limits of collective action
• Free-riding and coordination problems
• Shirking

18
Comparative Research

• How do EGAs differ from other governance
  arrangements?
• What can a GA do beyond what an individual firm
  can do?
• End coercion
• Restrain regulators
• Discourage legislators
• How does one take the large step from the
  positive to the normative
• What is the significance of scientific
  uncertainty for the formation and performance of
  GAs?
• Are the costs of a GA hidden from consumers and
  shareholders?

19
Innovative Market-Based Governance

• Gilead Sciences
• BPs internal CO2 trading (now discontinued)
• Fair trade
• Certification programs
• RAN and Citigroupcontrolling opportunism

20
Example Private Politics and an EGA

• Four year campaign by the Rainforest Action
  Network (RAN) against Citigroup regarding project
  finance
• Citigroup weakened by a series of scandals
• In June 2003 Citigroup and 3 other banks
  announced the Equator Principles for project
  financeto protect ecosystems
• RAN (and other NGOs) praised the EP but stated
  that the loopholes were big enough to drive a
  bulldozer through
• After 8 months of negotiations with RAN,
  Citigroup adopted a new policy going considerably
  beyond the Equator Principles e.g., identified
  High Caution Zones covered general corporate
  loans no minimum project size investments in
  sustainable development supporting FSC certified
  forest products in emerging markets no illegal
  logging
• RAN sought and Citigroup refused public
  enforcement
• A signed contract
• Board approval of the agreement
• Citigroup and RAN developed (evolving) monitoring
  mechanisms
• Citigroup quarterly shows confidential lending
  data to RAN
• Plus a no surprises agreement
• Enforcement limited to resuming the campaign

21
Hunches

• The economics approach may underestimate the
  effect of social pressure e.g., coercion by
  NGOs.
• The economics approach may underestimate the
  prospect for voluntary action in the absence of
  coercion.
• Reputation is more important than most people
  think.
• How important is it and why is it important?
• Can a collective reputation be developed?
• Does a collective reputation provide cover?
• How susceptible is it to criticism and threats?
• We need to understand public sentiment better.

22
Framework

• Motivation and opportunity
• Where incentives come from
• Unilateral action and bargaining
• Institutional design
• Management
• Performance evaluation

23
Conceptual frameworks

• Externalities and public goods/common pools
• Public and private politics
• Public and private regulation
• Endogenous institutions
• Objectives
• Efficiency
• Justice

24
What cant private governance do well?

• Compel participation
• Compel performanceavoid shirking
• Monitoring and compliancewhy is this true?
• Independent inspection and monitoring (FLA)
• Self-auditingcredibility?
• Transparency and disclosure
• Measuring performance and demonstrating success

What is the point here?