A Dynamic Model of Corporate Campaigns

This chapter introduces a finite-horizon (three-period) model of corporate campaigns in which an activist targets a single firm. The activist cares solely about the social benefits generated by the private regulation the firm is capable of undertaking. A firm can undertake costly effort in each period to improve its reputation in the subsequent period. The activist could undertake costly effort to impair the firm's reputation. As compared to a setting in which the firm faced no activist, the firm chooses a higher level of private regulation in the first period and, in expectation, a higher level of private regulation in the second period as well. The authors interpret this increase as self-insurance against reputational harm. The activist has a strategic effect on the firm in the second period: if the campaign impairs the firm's reputation, the firm will undertake more private regulation than it would have had its reputation remained the same or even improved.

Target Selection by Activists and the Structure of Competition

This chapter extends the model to include two potential targets for campaigns. Activists targeting firms in different industries are shown to be likely to focus on the firm with the weaker reputation or greater sensitivity to reputation. The latter finding rationalizes the practice of secondary targeting in which an activist targets a consumer-facing company that cares a lot about its reputation rather than the companies in its supply chain creating the harm. In the case of two potential targes in the same industry, the competitive interdependence between the two firms affects the targeting decision. When it is weak—e.g., when firms sell differentiated products—the activist tends to target the firm whose characteristics predispose it to engage in more private regulation than its rival (e.g., the more patient firm, the market leader). When competitive interdependence is strong—as in commodities industries—the activist targets the firm predisposed toward less private regulation.

Do Activist Campaigns Benefit Society?

Using the three-period model from Chapter 2, this chapter explores whether the presence of activists enhances or harms social welfare. Campaigns have both static and dynamic effects which have fairly different but complementary effects on social welfare. The canonical case in which an activist campaign increases welfare involves a firm that cares intensely about protecting itself against reputation loss, an activist that is not excessively passionate, and a campaign aimed at addressing a high-stakes negative externality. A sufficiently high marginal benefit from private regulation is necessary for an activist to be socially beneficial, while campaigns resulting in private regulation that is essentially redistributive necessarily reduce social welfare.

Campaign Tactics

This chapter models the interaction between a firm and activist using an infinite-horizon dynamic stochastic game. The firm enhances its reputation through private regulation, but the firm has an incentive to coast on its reputation by private regulation as its reputation grows. The activist can harm the firm’s reputation through criticism, which impairs the firm’s reputation on the margin, and confrontation, which can trigger a crisis that can severely damage the firm’s reputation. Criticism and confrontational activity are shown to be imperfect substitutes. The more patient the activist, or the more passionate about externality reduction, the more likely the activist is to rely on confrontation. The more patient the firm, the more likely that it will be targeted by an activist that relies on confrontation. The chapter also explores whether the activist might reward the firm with praise.

Conclusions: What Have We Learned?

This chapter summarizes each preceding chapter and then offers lessons for scholars and practitioners. Scholars should note the value of dynamic modeling in understanding interactions between activists and firms in the realm of private politics. Activists and firms can use the insights of the model to approach corporate campaigns more strategically. For example, for activists, the framework suggests that efforts aimed at hurting the reputations of firms can do more than serve an ideological aim at making companies look bad, or as a device to threaten harm. Activists can play the role of private regulators when effective public regulation is missing. For leaders of firms, the analysis highlights that corporate social responsibility and other initiatives can serve to enhance a firm’s reputation, but they can also be viewed as a form of risk management in the face of activist pressures that can potentially harm reputation.

An Introduction to Corporate Campaigns

In recent years, many activists have concluded that public processes, such as new legislation, regulatory enforcement, or lawsuits, respond too slowly and can be blocked too easily by special interests. In response they have turned to private politics instead. Private politics refers to actions by private interests, such as activists and nongovernmental organizations (NGOs), that target private agents, typically firms. This chapter describes two key elements of private politics: corporate campaigns and private regulation. It discusses the logic of corporate campaigns, how firms endeavor to respond to them, and empirical evidence on the consequences of campaigns. It then turns to private regulation, and its close counterpart, corporate social responsibility. The chapter raises a puzzle about corporate social responsibility that the models in later chapters will help resolve. The chapter concludes by providing an overview of the remainder of the book.