Stakeholder Value Creation: a Collective Action Approach

Stakeholder Value Creation: A Collective Action Approach

MASTER THESIS

Submitted in Partial Fulfillment of the Requirements for the Degree of

MASTER OF SCIENCE

in Strategic Management

Prof. Dr. Kerstin NEUMANN

Department of Strategic Management, Marketing and Tourism

The University of Innsbruck School of Management

Submitted by

Susann KRUSCHEL

Innsbruck, June 2019

Table of Content

List of Figures ...... III

List of Tables ...... IV

List of Abbreviations ...... V

1. Introduction ...... 1

2. Sustainability, Stakeholders and Collaboration ...... 4

2.1. Sustainability ...... 4

2.2. Stakeholder Theory ...... 5

2.3. Stakeholder Value Creation ...... 8

2.3.1. How Stakeholder Relationships Create Value ...... 8

2.3.2. Stakeholder Value Definition ...... 11

2.4. Collaboration ...... 13

3. Collective Action Theory ...... 15

3.1. Core Concepts of Collective Action Established by Ostrom ...... 16

3.1.1. Collective Action Problems of Appropriation and Provision ...... 16

3.1.2. Institutions as Problem Solutions ...... 19

3.1.3. Eight Design Principles for Successful Collective Action ...... 21

3.2. Comparing the Different Settings ...... 26

3.2.1. Actors ...... 26

3.2.2. Underlying Structure ...... 27

3.2.3. Source of Conflict/Problem ...... 28

3.2.4. Rule-Creation and Decision-Making ...... 28

3.2.5. Soft Mechanisms – Trust, Reciprocity and Reputation ...... 29

3.2.6. Summary ...... 31

4. Synthesis ...... 33

4.1. Summary ...... 33

Table of Content

4.2. Synthesis of Collaboration and the Eight Design Principles ...... 34

4.3. Adopting the Eight Design Principles to the Organizational Level ...... 35

4.3.1. Boundary Rules ...... 35

4.3.2. Allocation Rules According to Local Conditions ...... 37

4.3.3. Participation in Making and Modifying Rules ...... 38

4.3.4. Monitoring ...... 39

4.3.5. Graduated Sanctions ...... 41

4.3.6. Conflict Solving Arenas ...... 43

4.3.7. Right to Organize by Local or National Government ...... 44

4.3.8. Nested Enterprises ...... 45

4.4. Eight Design Principles for Successful Stakeholder Value Creation ...... 46

5. Conclusion ...... 47

5.1. Contribution & Further Research ...... 49

5.2. Managerial Implications ...... 52

References ...... 54

List of Figures

Figure 1: Eight Design Principles (Source: Adapted from Ostrom, 1990, p. 90) ...... 21 Figure 2: Comparison of Institutional and Organizational Setting (Source: Author) ...... 32 Figure 3: Collaboration Black Box (Source: Adapted from Thomson and Perry, 2006, pp. 24) ...... 34 Figure 4: Eight Design Principles for Successful Stakeholder Value Creation (Source: Author) ...... 46

III

List of Tables

Table 1: Key Features of the Four Relational Models (Source: Bridoux and Stoelhorst, 2016, p. 233) ...... 9

List of Abbreviations

CPR Common-pool resource

IPCC Intergovernmental Panel on Climate Change

UN United Nations

WCED World Commission on Environment and Development

1. Introduction

One of the most frequently cited definitions for sustainability is provided by the WCED (1987) and states that it is the “development that meets the needs of the present without compromising the ability of future generations to meet their own needs." A closer look reveals that so far, the current population’s and its predecessors’ actions are not guided by the premise of sustainability. The IPCC (2018) released a special report on climate change painting a dramatic picture about how humanity is responsible for a temperature increase of 1 ºC and heading towards 1,5 ºC with potentially catastrophic consequences like extreme weather conditions and rising sea levels. So, when Nobel Peace Prize nominee and environmental activist Greta Thunberg (2019) addressed economists at the World Economic Forum in Davos in 2019 with the statement that “our house is on fire” to raise urgency on the matter of climate change and the need for sustainable actions, she has a valid point.

The United Nations (UN) draw attention to additional pressing global issues concerning rising inequality, unemployment, disparities of opportunity, wealth and power and the depletion of natural resource, to name a few (United Nations Global Compact, 2015). In order to tackle these issues along the triple bottom line of economic growth, social needs and environmental protection all 193 member states of the UN signed “The Agenda 2030 For Sustainable Development”. By developing the 17 Sustainable Development Goals within the subjects of people, prosperity, planet, peace and partnership, the UN Global Compact offers global goals and guidance for the private and public sector to collaborate on tackling the challenges of the 21st century by the year 2030. Additionally, opportunities for sustainable and responsible management and business models are provided. To fulfill these goals a collective effort from states, public institutions, privately held organizations, society and science on a global as well as on a local scale is needed. Goal number 17 builds on the necessity for multiple stakeholder partnerships to mobilize and share resources to reach the common goals and create value beyond financial measures.

The private sector is vital in order to succeed in this endeavor through their positive contributions of innovation and investment power to support sustainable development on the one hand (econsense, 2016). On the other hand, their business activities like production processes or supply chain activities often have a negative impact on the environment and society through, e.g., resource extraction, waste production, pollution and poor working conditions (Carr and Alter Chen, 2001; WCED, 1987). Their hunt for profit, shareholder value

1. Introduction maximization and individualistic behavior causes a great extent of today’s world’s economic, social and environmental disparities (Lozano, 2007).

Going back to the definition from the beginning the essential question is what and how do corporations need to change to meet the needs of today without comprising future generation to meet theirs? One important step for organizations towards sustainability and reaching at least some of the UN’s 17 Sustainable Development Goals is the collaboration with and integration of different stakeholders and their interests into the value creation process (Hart and Milstein, 2003). To engage in stakeholder value creation requires corporations to question what they consider value and for whom they create it. Solely focusing on financial measures in order to meet shareholder interests is insufficient at this point (Freeman, 1984). Organizations will have to broaden their horizons to multiple interests and their alignment towards common goals and multiple concepts of the meaning of value (Freeman, 2010).

On the institutional level, the theory of collective action aims to find answers of how collaborative behavior among multiple actors can be fostered and maintained in order to reach a common objective. Extensive theoretical and empirical research has been conducted on how communities or groups of actors are able to self-organize the sustainable use and maintenance of a common-pool resource (CPR) in order to ensure its long-term survival. Ostrom (1990) challenged the tragedy of the commons concept of Hardin (1968) which states that the protection of CPRs requires an external force or authority by arguing that resources can be successfully managed bottom-up by different actors if certain principles are being adhered to.

Little research has been conducted on how these findings on collective action can be transferred from the institutional level to the organizational level. The eight design principles created by Ostrom (1990) that are crucial for successfully maintaining collaboration in a common-pool resource setting are potentially beneficial for other group settings, e.g., on the organizational level which require a collaborative attitude to reach common goals (Wilson, Ostrom and Cox, 2013). Further research is still necessary to understand the relationship between the design principles and the performance of groups, e.g., firms and their stakeholders, to connect collective action theory to economic theory.

To contribute to closing this research gap this master thesis proposes the following research question:

How can the theory of collective action be adopted towards the organizational context to support stakeholder value creation?

1. Introduction

In order to answer this research question a thorough literature review is conducted on the topics of stakeholder value creation, collaboration and collective action. Since collective action theory and stakeholder theory operate on different levels, the institutional and the organizational, both settings will be compared to look for similarities and potential boundary conditions. The aim is to generate knowledge from Ostrom’s (1990) eight design principles for the process of stakeholder value creation in order to foster collaboration and ensure ongoing contributions of multiple stakeholder and the organization to a common objective. These design principles will then be adapted towards stakeholder value creation.

This conceptual master thesis is structured into the following chapters: After the introduction provided in this chapter, chapter 2 gives an overview on the current state of literature in the areas of stakeholder theory, stakeholder value creation and concludes with the process of collaboration, which is an essential cornerstone for both stakeholder value creation and collective action.

Chapter 3 outlines collective action theory with a special regard to Ostrom’s research and the eight design principles. It also juxtaposes the institutional and organizational setting to investigate the common ground for the application of the principles.

The following chapter 4 contains the synthesis of the previous chapters from which the adapted design principles will be derived. This chapter provides an overview of which and how the eight design principles can be usefully applied on stakeholder value creation to foster collaboration on the organizational level and consequently support sustainability.

The last chapter of this master thesis concludes with a summary of the findings, contributions and provides directions for further research. As a last step, possible managerial implications are indicated.

2. Sustainability, Stakeholders and Collaboration

Within this chapter the topics of sustainability, stakeholder theory and stakeholder value creation will be introduced. Followed by the concept of collaboration, which is essential for successful stakeholder management in organizations (Savage et al., 2010) and in collective action theory (Ostrom, 1990). To begin with the context of corporate sustainability is briefly introduced since stakeholder value creation is one important step towards a more sustainable way of doing business.

2.1. Sustainability

Taking multiple stakeholders and their interests into consideration during decision-making processes is a crucial step for an organization towards sustainability (Hart and Milstein, 2003). Sustainability on the organizational level is labeled as corporate sustainability. If a company implements corporate sustainability, it requires it to broaden its horizon beyond financial measures and to include environmental and social concerns (i.e. triple bottom line) into their strategy, decision-making and operations (Berger, Cunningham and Drumwright, 2007). To meet the needs of multiple stakeholders in this fast-changing world with high uncertainty has become essential for the long-term survival of organizations (Garvare and Johansson, 2010).

Due to the rising pressure on the environment and increasing social inequalities worldwide sustainability should be applied as the guiding principle in businesses. In order to promote sustainability corporations could start by aiming at incorporating stakeholders and promoting collaboration (Gibson, 2012).

On the institutional level, communities or small groups strive for the sustainability of common- pool resources through collective action (Ostrom, 1990). Within this master thesis further investigations within collective action theory will be conducted to extract central learnings from the collaborative mechanisms for stakeholder value creation.

2. Sustainability, Stakeholders and Collaboration

2.2. Stakeholder Theory

The beginnings of stakeholder theory lie in taking a stand against the omnipresent view that shareholder primacy is the guiding light for corporations and that management should be conducted solely in the interest of shareholders (Freeman, 1994). Shareholder primacy claims that the purpose of the corporation is to maximize value for shareholders and that only they have a right to residual income therefore limiting other stakeholders’ access to value from their investment (Hoskisson et al., 2018; Klein et al., 2012).

In his seminal work, Freeman (1984, p. 46) offers a broad definition of stakeholders. He states that “a stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization's objectives.” In contrast, Post, Preston and Sauter-Sachs (2002b) incorporate the value creation aspect by stating that stakeholders contribute either voluntarily or involuntarily to the process and thus either bear risk or benefit from a company’s activities. Stakeholders of an organization can thus, e.g., be employees, customers, suppliers, communities and also shareholders (Freeman, 2010).

Donaldson and Preston (1995) identify three different perspectives of stakeholder theory in literature, which are: Instrumental stakeholder theory, normative stakeholder theory and descriptive/empirical stakeholder theory.

The instrumental approach draws attention to in how far stakeholder management has an effect on achieving corporate goals, e.g., financial targets (Berman et al., 1999). In this case, stakeholder management is seen as a means to an end. In contrast, the normative stakeholder theory follows the moral obligation and purpose a firm has towards its stakeholders and how this may positively affect financial goals, but as a side benefit (Argandoña, 1998). Descriptive/empirical stakeholder theory is the practical approach offering empirical insights into how organizations are managed and how stakeholders are identified (Agle, Mitchell and Sonnenfeld, 1999).

While this distinction is without a doubt important to understand, the different perspectives and motives behind stakeholder management, Hörisch, Freeman and Schaltegger (2014) suggest an integrative view, which this master thesis will apply. This approach represents the fact that normative and instrumental stakeholder theory are highly interconnected with each other. It also refutes the idea that business and ethical issues can be treated separately. Every business decision will have an influence on society. The assumption that both issues can be treated

2. Sustainability, Stakeholders and Collaboration individually is known as the separation fallacy (Freeman et al., 2010). If an organization aims to create actual value for stakeholders, the core business has to be linked also to social as well as environmental issues (Hörisch, Freeman and Schaltegger, 2014).

By incorporating social and environmental issues a corporation moves away from shareholder primacy to a broader spectrum of stakeholders. Stakeholder theory states that a firm’s responsibility is not limited to equity holders but to all stakeholders since an organization’s value creation is not only supported by investments of shareholders. Other stakeholders like the beforementioned also contribute resources and capabilities to the value creation process (Coff, 1999).

In the stakeholder-based view of a firm, organizations are often defined as various interdependent relationships among stakeholders (Donaldson and Preston, 1995). When an organization conducts business, it acts within these various relationships of different groups which all have a stake in the business activities. These relationships need to be managed by executives in a way that as much value is created for all stakeholders. In order to do so shareholder primacy is given up and replaced by the purpose of satisfying the interests and needs of multiple stakeholders (Freeman, 2010). It requires organizations and its executives to constantly balance and incorporate these various relationships and goals and take them into account during decision-making processes and strategy formulation. Investing in relationships that ensure long-term success and establishing a collective underlying strategy is a vital part of stakeholder management (Freeman et al., 2010; Freeman and McVea, 2001).

Identifying and meeting stakeholder interests and managing multiple relationships are two of the big and complex challenges in stakeholder management. Often the chosen solution to this issue is to find trade-offs among stakeholder interests and often in favor of the interests of shareholders. Consequently, a group of stakeholders whose interests are not being met may stop contributing to the value creation process. Therefore, it is advisable to put an effort on finding joint interests, which indeed is more difficult than finding trade-offs, but will ultimately lead to greater value (Freeman, 2010).

It becomes obvious that stakeholder management is not an easy endeavor for organizations. In order to master this challenge a collective effort is needed from all parties. To foster collaboration between different stakeholders with different interests a set of shared core values is necessary. These shared core values provide the relationships with the necessary stability in order to survive in the long-run (Freeman and McVea, 2001).

2. Sustainability, Stakeholders and Collaboration

As Freeman (2010) states, it is now interesting to look at stakeholder theory from a value creation point of view instead as a concept that only works by trading off stakeholder interests. In the next subchapter the topic of stakeholder value creation will be further examined to find out how organizations can jointly create value with and for multiple stakeholders.

2. Sustainability, Stakeholders and Collaboration

2.3. Stakeholder Value Creation

The ultimate objective of an organization is to create value (Grant, 2002; Mills and Weinstein, 2000; Rappaport, 1986). For an organization following the stakeholder-based view this objective results into creating as much value as possible for as many stakeholders as possible (Freeman, 2010). Also, the role of stakeholders within the value creation process becomes more and more important and requires the coordination of their multiple values (Ramírez, 1999). To understand how value is created and what stakeholders consider as value are crucial factors in investigating the stakeholder value creation process.

2.3.1. How Stakeholder Relationships Create Value

The total value of an organization is created by not only the organization itself but also by its stakeholders (Garcia-Castro and Aguilera, 2015). The critical aspect here is that value is created relational and interdependent through the relationships among stakeholders, and between stakeholders and organization (Bridoux and Stoelhorst, 2016; Post, Preston and Sachs, 2002a). Stakeholders create value by contributing resources and capabilities that are firm-specific, casually ambiguous and socially complex (Coff, 1999). In order for an organization to access these resources and capabilities it needs to build relationships and interconnections with and among stakeholders (Rowley, 1997). Understanding what fosters these relationships may allow drawing insights on why certain firms are more successful in engaging in stakeholder value creation than others.

The contributions stakeholders make towards joint value creation depend on the way each of the stakeholders formulates their relationship with others involved in the value creation process. Bridoux and Stoelhorst (2016) identified three relational models that foster, in this particular research case, social welfare: Communal sharing, authority ranking and equality matching. The relational model of communal sharing implies that an individual merges his or her identity with the community. Through this the personal identity recedes into the background and the community identity becomes dominant. All participants or relational partners are perceived as equal community members and decisions are made by consensus. Authority ranking follows a hierarchical concept with power asymmetries. Appropriate behavior and decisions are related to the rank in the hierarchy. An important aspect here is the perception of the superior as legitimate. In equality matching the central element is reciprocity. Partners see themselves as equal and the relationship is characterized through balanced and proportionate interactions. In terms of decision-making everyone has an equal voice. In contrast to the beforementioned three 8

2. Sustainability, Stakeholders and Collaboration models stands the relational model of market pricing. Here, the self-interest of the individual and the rational calculation of cost vs. benefits are central aspects. Decisions are made individually and are mediated only by the market. This focus on personal rewards hinders contributions to joint value creation (Olson, 1965).

The following Table 1 summarizes all four relational models. Bridoux and Stoelhorst (2016) argue that the levels of appropriate behavior vary across all four models leading to either more or less contributions to value creation. The motivation to contribute is highest in the relational model of communal sharing, where also the highest level of collaborative behavior can be observed. Similarities to collective action settings can also be found within the relational model of equality matching. Reciprocity is also an essential underlying mechanism in order solve collective action problems (Ostrom, 1998).

Table 1: Key Features of the Four Relational Models (Source: Bridoux and Stoelhorst, 2016, p. 233)

For ongoing contributions stakeholders must perceive the organization to having adopted the same relational model in order to recognize the relationship as harmonious. A relationship is perceived as harmonious when similar motivations and expectations can be assumed from partners (Connelley and Folger, 2004; Giessner and van Quaquebeke, 2010). When the relationship is regarded as inharmonious and the organization’s behavior as inappropriate the following reactions can be expected: Stakeholders may adopt the relational model of market pricing and follow a self-interested approach instead of collaborating, inappropriate behavior may be seen as a honest mistake and is therefore forgiven, the misbehavior is settled through

2. Sustainability, Stakeholders and Collaboration sanctioning or the relationship is ended and further contributions are withheld (Bridoux and Stoelhorst, 2016; Giessner and van Quaquebeke, 2010; Ostrom, Gardner and Walker, 1994).

Mitchell et al. (2015, p. 858) consider the process of value creation as a “sequential risk-sharing process of stakeholder organization”. They established four risk-sharing premises of the stakeholder value creation process: Activity, alignment, interaction and reciprocity. Activities are exchanges or transactions among stakeholders or between stakeholders and organization that either create or destroy value. In order to create the most value for all stakeholders and minimize the involved risk it is paramount to align stakeholder interests instead of trading them off against each other. The pressure that arises from the different interests of stakeholders is best reacted on through a common purpose. This common purpose is shaped by innovation and guided by moral norms. This interaction of purpose, innovation and moral norms creates value. The last premise is the premise of reciprocity. Reciprocity is vital to sustain ongoing contributions. It entails that when one stakeholder contributes to value creation, value is created for the other stakeholders as well by making the “value pie” bigger for everyone. Reciprocity also contains the ethical obligation of everyone within the relationship set to return value to one another in the long run, thus ensuring fairness of contributions.

The four premises illustrate the importance of relationships. These relationships do not just occur but are built over time and require a foundation of trust (Post, Preston and Sachs, 2002a). Schneider and Sachs (2017) investigated stakeholder value creation in issue-based stakeholder networks. They also value trust and collaboration as vital aspects of stakeholder relationships. The level of trust in a relationship can provide indications about the amount of resources and capabilities contributed in a multi-stakeholder setting. The higher the level of trust, the more are stakeholders willing to contribute. The more is being contributed, the more value can be created. Positive effects also emerge from trust and collaboration in terms of reduced transaction and agency costs (Foss and Foss, 2005; Jones, 1995; Mayer, Davis and Schoorman, 1995).

Furthermore, regular interaction and communication play a vital role in the stakeholder value creation process. It can foster a more inclusive stakeholder identity with a focus on finding integrative solutions. Through highlighting common grounds in terms of values, norms, and goals stakeholder value creation is promoted (Gaertner and Dovidio, 2014; Hewstone, Rubin and Willis, 2002).

2. Sustainability, Stakeholders and Collaboration

2.3.2. Stakeholder Value Definition

An important question underlying the stakeholder value creation process is how stakeholders define value for themselves beyond economic figures. Value creation for shareholders can be captured in financial measures. Value for stakeholders on the other hand can take other forms and may look differently from stakeholder group to stakeholder group (Tapaninaho and Kujala, 2019). Value is created through interaction and lies within the relationships of multiple stakeholders. Therefore, value cannot be summarized in a single metric (Dean, Ottensmeyer and Ramírez, 1997). Garriga (2014) supports this opinion by stating that value is multifaceted, subjective and might differ among stakeholder groups.

For many stakeholders, financial value is also from importance. But it is crucial to acknowledge that value is defined individually, and stakeholders will look for the highest value returns in relation to their contribution. For an organization this can mean that stakeholders will stop contributing to the value creation process in order to invest somewhere else where greater value, in whatever form, can be assumed (Harrison and Wicks, 2013). To prevent this from happening, a firm should aim to achieve satisfactory results for all stakeholders involved in the value creation process. If this goal is being attained and stakeholder interests are being met, a firm can create more value over time (Campbell and Andrew, 1997; Freeman, 1984).

For this master thesis the definition of value by Harrison and Wicks (2013) is used. They define value as everything of potential worth to a stakeholder. Due to its broadness, this definition includes economic as well as any other form of value. It therefore allows value creation beyond financial measure to meet the variety of stakeholder interests and compensate them for their contribution in a suitable manner. The two authors describe suitable compensation as utility. Utility stands for a stakeholder’s received value that meets their preferences. Derived from these two aspects and Freeman’s (1984) idea of stakeholder theory, firm performance can be defined as “the total value created by the firm through its activities, which is the sum of the utility created for each of a firm's legitimate stakeholders” (Harrison and Wicks, 2013). Legitimate stakeholders can be, e.g., customers, employees, communities or suppliers (Phillips, 2003).

A first step for organizations towards stakeholder value creation is to recognize that value is embedded in the relationships with stakeholders and not only in conventional assets (Post, Preston and Sachs, 2002a). Moreover, do stakeholders not only have multiple interests but also define value and utility subjectively. In contrast to shareholders, value might not necessarily be of financial form. Another important aspect is to look for synergies among stakeholder utilities

2. Sustainability, Stakeholders and Collaboration and jointness of interests instead of weighing- and trading off interests against, e.g., shareholder interests. By conducting innovative actions that meet mutual utilities and fostering collaborative relationships value can be created for and with a variety of stakeholders.

2. Sustainability, Stakeholders and Collaboration

2.4. Collaboration

One ingredient that is vital in stakeholder value creation as well as in collective action is the collaboration process among the individual actors in order to pave the way to reach a common objective (Ostrom, 1990; Savage et al., 2010; Thomson and Perry, 2006). Collaboration efforts can be observed on the institutional and organizational level and the processes on both levels show similarities. As organizations become more and more interdependent due to the complexity of today’s world, the need for interaction among actors to reach satisfactory long- term agreements becomes increasingly important.

Collaboration is defined as “a process through which parties who see different aspects of a problem can constructively explore their differences and search for solutions that go beyond their own limited vision of what is possible” (Gray, 1989, p. 5). This definition implies that Synergetic outcomes can be achieved through collaboration. These outcomes are essential in the process of stakeholder value creation (Tantalo and Priem, 2016). To observe and understand the process behind collaboration efforts is rather difficult. Therefore, Wood and Gray (1991) introduced the term of the “black box”, in which these processes and practices are hidden.

Successful collaboration is reached through constant renegotiation and finding equilibria in different processes. Thomson and Perry (2006) identified five dimensions of processes taking place inside the “black box” of organizational collaboration: Governance, administration, autonomy, mutuality and norms of trust and reciprocity.

During the governance process joint decisions concerning rules are made in order to govern behavior and relationships. This is also a vital step in solving collective action problems. Ostrom (1990) states that the development of working rules is essential to define certain boundary conditions of decision-making, behavior and appropriation. The second process is the administration process, which describes how collaboration is implemented. This includes roles and responsibilities, monitoring and coordination. Due to the lack of hierarchies and standardization as well as the interdependent relational setting instead of a contractual one this process is more complex in the collaboration context (Huxham and Vangen, 2005; O'Toole, Laurence J., Jr., 1996). Another aspect also essential in collective action theory and stakeholder theory is the quandary between self-interest and collective-interest or autonomy dimension according to Thomson and Perry (2006). In order for actors to continue their contribution and share information in the collaboration process they need to be able to also reach individual goals (Huxham, 1996). Stakeholders will only keep to their contributions if they receive value suiting

2. Sustainability, Stakeholders and Collaboration their utility (Harrison and Wicks, 2013). This directly connects to mutuality. Without mutual benefits essential information sharing will not be conducted. Thus, it is important to achieve win-win solutions to problems so, e.g., stakeholder will not withdraw their efforts (Wood and Gray, 1991). The last process, that requires careful calibration of the equilibrium is norms of trust and reciprocity. Reciprocity entails that actors will contribute as long as others do the same also known as tit-for-tat reciprocity (Ostrom, 1990, 1998). Mutual trust is fundamental in collaboration among stakeholders as well as in collective action settings in order to build and maintain relationships (Huxham and Vangen, 2005). If trust among actors is high, the payoffs from collaboration will be as well (Ostrom, 2000).

Collaboration is a fragile system that can easily disintegrate and requires a lot of resources in form of time and energy to build and maintain (Thomson and Perry, 2006). It is important that actors establish credible commitment towards the common objective. Collective action theory states that face-to-face communication, mutual monitoring and sanctioning are vital conditions for credible commitment (Mattessich and Monsey, 1998; Ostrom, 1998).

Collaboration is the central activity in order to move from independent behavior in a collective action setting to interdependent (Ostrom, 1990) and to switch from shareholder primacy to stakeholder value creation (Perrini and Tencati, 2006). The beforementioned dimensions illustrate what happens in the background of collaboration and give insights on essential processes that need careful adjustment to foster collaborative behavior among multiple actors.

3. Collective Action Theory

Moving away from the organizational context of stakeholders, collective action theory is rooted in the institutional level and influenced by researchers of various disciplines like anthropology, politics or sociology among others. The aim of collective action theory is to shed light on under which conditions small groups or communities relying on the same common-pool resource are able to govern the sustainable use of said resource without the intervention of external authorities (Agrawal, 2001).

The dilemma in this scenario is owed to the properties of the CPR. The facts that exclusion of actors is impossible or cost intensive and consumption is highly competitive and subtracting often leads to overconsumption and ultimately depletion of the CPR (Poteete and Ostrom, 2004). A CPR can be, e.g., fishing grounds, forests or irrigation systems. Early research concerning the commons suggested that this dilemma or collective action problem can only rarely be solved or that privatization of the resource or governmental interventions are necessary in order to sustain the CPR (Hardin, 1968; Olson, 1965).

A central problem within collective action theory is the so-called free-rider problem. In order to achieve collective action and the responsible use of a CPR the individuals should jointly contribute towards a common objective (Olson, 1965; Ostrom, 1990). Individuals who engage in opportunistic, self-interested behavior not only do not contribute to the process of sustaining the resource but decrease the attainable benefits for others. Also, the costs resulting from this behavior are distributed among all individuals, producing so-called externalities (Bandiera, Barankay and Rasul, 2005; Hardin, 1968). Without a collective effort of the local community or individuals relying on the CPR the long-term availability of the resource is endangered.

There is a wide body of literature in collective action theory that points towards the successful self-organization of shared resources and thus taking a stand against Hardin’s (1968) famous work The Tragedy of the Commons (Burger and Gochfeld, 1998; Feeny et al., 1990; Ostrom et al., 1999). His main argument is that actors are unable to sustain a CPR and instead cause its depletion through opportunistic behavior if no external authority intervenes. What Hardin (1968) did not take into consideration are underlying agreed on institutional arrangements that allow individuals to move beyond self-interested behavior and towards effective self- governance of a common-pool resource over time. He therefore extended his work with the article The Tragedy of the Unmanaged Commons (Hardin, 1994) by highlighting that it is the

3. Collective Action Theory ungoverned common that is at the mercy of the involved actors behavior and thus at risk of destruction.

To engage in collective action is a costly endeavor for everyone involved. It not only requires overcoming information asymmetry through close communication and information exchange to create a basis for collaboration, but also to establish a distribution and incentive system to govern the CPR and ensure ongoing contributions (Poteete and Ostrom, 2004).

Within this master thesis the focus will be laid on the research conducted by Ostrom. By applying the eight design principles in the organizational context, more specifically stakeholder value creation, the resulting principles will contribute to closing the research gap identified by Wilson, Ostrom and Cox (2013).

3.1. Core Concepts of Collective Action Established by Ostrom

In her seminal work Governing the Commons Ostrom (1990) examines several articles of field studies to answer the central question of “how can a group of principals [community of citizens] who are in an interdependent situation organize and govern themselves to obtain continuing joint benefits when all face temptations to free-ride, shirk, or otherwise act opportunistically” (Ostrom, 1990, p. 29). To answer this question, she uncovers what successful self-organizing groups do differently from those who fail. The key to success lies in the underlying institutional arrangements these local communities established and/or adapted.

To gain a better understanding why institutions are of such importance, a deeper look will be taken into the central problems of appropriation and provision which individuals face in CPR- settings and how institutions contribute to the solutions. Also, a review of the eight design principles will be conducted to prepare for the connection to stakeholder value creation and the organizational level. Along the way, terminologies of collective action used by Ostrom to illustrate CPR problems will be briefly introduced.

3.1.1. Collective Action Problems of Appropriation and Provision

The terms appropriation as well as provision play a central role in Ostrom’s study of collective action and common-pool resources. Appropriation is a CPR-setting where multiple individuals draw resource units (e.g., tons of fish) from the same resource system (fishing ground). These individuals are called appropriators. This CPR is the origin of each appropriator’s economic

3. Collective Action Theory activity. Every individual activity will influence the other individuals and therefore are interdependent as long as they draw from the same CPR.

Ostrom, Gardner and Walker (1994, p. 4) define CPRs as resource system where the limitation of appropriators is difficult and the appropriation by each user subtracts from the resource. A CPR is therefore nonexcludable and rivalrous in consumption (Klein et al., 2019). Due to these characteristics a CPR is prone to overconsumption and exploitation by its users if they are unable to establish suitable measures. The owners of a CPR can be local, regional or national governments, communities, companies or private individuals (Ostrom, 2003).

The main problem here is to organize how, when and in what quantity resource units are supposed to be allocated from a resource system. This is necessary in order to reduce uncertainty and conflict among appropriators and to avoid rent dissipation, meaning that marginal costs exceed marginal returns (Libecap, 1994). This process is mainly characterized through trial and error learning experiences (Ostrom, 1990).

If appropriators act independently in interdependent settings the benefits will be smaller compared to following an organized and coordinated strategy together. Such an independent behavior may ultimately lead to lower returns or, in a worst-case scenario, to the destruction of the resource (Olson, 1965, p. 7). If there is no accepted allocation method in place which is followed by most appropriators, they may refuse to contribute to provision activities. Provision activities include the construction and maintenance of a resource system to ensure the long- term preservation of a CPR. Provision problems occur on the supply or demand side or a mixture of both. The supply side deals with the construction and maintenance of the resource system to sustain it over time. The demand side determines the withdrawal rates of resource units.

When appropriators follow individual and unorganized strategies the level of uncertainty and the risk of free-riding among individuals is high. Therefore, the motivation to invest in costly provision activities that would benefit all appropriators is low. It becomes clear that the provision problem cannot be solved as long as there is no solution to the appropriation problem in place (Ostrom, 1990).

The problems of appropriation and provision extend over time when individuals discount future benefits and value immediate benefits higher. This depends on factors like time-horizons, physical and economic security and shared norms. Shared norms of behavior are a crucial factor in collective action situations. They impact the likeliness of appropriators to engage in

3. Collective Action Theory opportunistic behavior. Opportunistic behavior makes it difficult to develop long-term and stable commitments. Shared norms can help to reduce this risk but not eliminate it entirely (Ostrom, 1990).

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3.1.2. Institutions as Problem Solutions

In order to solve these problems, individuals must organize themselves and move from independent behavior to following congruent strategies and a collective action approach by creating new institutional arrangements. Institutions are shared concepts organized by working rules, norms and strategies that are applied in reoccurring situations to determine eligible decision-makers in some arena, allowed and constrained actions, used aggregation rules, followed procedures, provided or restricted information, payoffs assigned to individuals depending on their actions (Crawford and Ostrom, 1995; Ostrom, 1986).

Working rules are those rules applied, monitored and enforced by individuals when making a choice. In CPR-settings, these rules may differ substantially from official regulations. Ostrom (1990) divides rules into three levels:

1. Operational rules support appropriators in a practical way in making day-to-day decisions and on how to conduct their work. 2. Collective-choice rules have an indirect effect on operational choice by appropriators and their officials or external authorities making policies about how the CPR should be managed. 3. Constitutional-choice rules determine who is authorized to create new collective-choice rules and what set of rules are to be applied during the process.

Successful and stable institutional arrangements can be created when problems of supplying own institutions, commitment to rules and mutual monitoring are solved and thus pave the way to solutions for appropriation and provision problems. One important pillar of institutions are so called norms (Scott, 1995). Ostrom (2000) argues that social norms create long-lasting cooperative behavior whereas externally implemented rules are likely to disappear quickly. Crawford and Ostrom (1995) define social norms as the common understandings about “obligatory, permitted or forbidden” actions. If these norms are being more and more adhered to over time, expensive and invasive monitoring becomes less necessary in order to maintain rule conformance because mutual monitoring sets in. Settings where external rules are in place prevent social norms from forming and evolving (Ostrom, 2000).

These rules and norms are not only vital in order to establish institutions but also as a next step to foster collaborative behavior among all actors. Essential aspects of collaboration are trust and reciprocity (Thomson and Perry, 2006), which are also a critical success factor for collective action (Poteete and Ostrom, 2004). Another important cornerstone for achieving

3. Collective Action Theory collective action is the reputation of trustworthiness of actors. All three factors trust, reciprocity and reputation can help overcome short-term opportunistic behavior and successfully manage a CPR. The ability to make mutual commitments in order to build trust requires direct communication between everyone involved. These mutual commitments also serve as a reassurance that others will reciprocate and that an adequate behavior can be expected (Ostrom, 1998; Poteete and Ostrom, 2004). Direct communication also enables acquiring information on the reputation of others concerning trustworthiness, which plays an essential role in the willingness to collaborate (Mohtashemi and Mui, 2003).

These soft mechanisms are very effective in order to decrease free-riding and other opportunistic behavior, increase collaboration and therefore leading towards collective action. However, it is important to take the cost side into consideration. Communication and interaction are often only pursued if the costs for engaging in them are close to zero or in proportion to their benefits (Bandiera, Barankay and Rasul, 2005; Ostrom, 1998).

By closely studying field settings in which appropriators were able to establish, implement and monitor own rules to control a CPR, institutions as well as the resource system itself were preserved over a long period of time, Ostrom gains insights into how these self-organized groups were able to solve the before mentioned problems. As a result, she established eight design principles that are crucial for the long-term survival of self-organized groups in a CPR- setting and their established institutions.

3. Collective Action Theory

3.1.3. Eight Design Principles for Successful Collective Action

Within this subchapter the eight design principles created by Ostrom (1990) will be introduced. The following Figure 1 provides a brief overview over the principles and their main argument.

Individuals or households who have rights to withdraw 1. Clearly Defined Boundaries resource units from the CPR must be clearly defined, as must the boundaries of the CPR itself.

Appropriation rules restricting time, place, technology, 2. Congruence Between and/or quantity of resource units are related to local Appropriation and Provision Rules conditions and to provision rules requiring labor, material and Local Conditions and/or money.

Most individuals affected by the operational rules can 3. Collective-Choice Arrangements participate in modifying the operational rules.

Monitors, who actively audit CPR conditions and 4. Monitoring appropriator behavior, are accountable to the appropriators or are appropriators.

Appropriators who violate operational rules are likely to be assessed graduated sanctions (depending on the seriousness 5. Graduated Sanctions and context of offense) by other appropriators, by officials accountable to these appropriators, or by both.

Appropriators and their officials have rapid access to low- 6. Conflict Resolution Mechanism cost local arenas to resolve conflicts among appropriators or between appropriators and officials.

7. Minimal Recognition of Rights to The rights of appropriators to devise their own institutions Organize are not challenged by external governmental authorities.

8. Nested Enterprises Appropriation, provision, monitoring, enforcement, conflict for CPRs that are Part of Larger resolution, and governance activities are organized in Systems multiple layers of nested enterprises.

Figure 1: Eight Design Principles (Source: Adapted from Ostrom, 1990, p. 90)

1. Clearly Defined Boundaries Individuals or households who have rights to withdraw resource units from the CPR must be clearly defined, as must the boundaries of the CPR itself.

This first step is crucial in order to limit free-riding by outsiders who have not contributed to produce benefits. By specifically defining who is authorized to withdraw resource units and by defining the boundaries of the CPR, uncertainty about who is involved and the dimension of the resource system can be reduced and a foundation for trust reciprocity can be build (Ostrom,

3. Collective Action Theory

1990, pp. 91). If these boundaries are defined by external authorities, there is a high risk that long-term users of the CPR will not accept them as legitimate or might not even know about them (Ostrom, 2005).

By examining fishery systems in the south Pacific, Ruddle (1996) also showed that defining the physical or biological boundaries are from importance, but should remain flexible when the CPR requires it through, e.g., changing conditions. Additionally, he stresses that the definition of social boundaries like rules of behavior and access conditions for all involved stakeholders are just as important. This directly leads to the second design principle.

2. Congruence Between Appropriation and Provision Rules and Local Conditions Appropriation rules restricting time, place, technology, and/or quantity of resource units are related to local conditions and to provision rules requiring labor, material and/or money.

In order to preserve a CPR, it is important to adjust appropriation and provision rules to specific local conditions since they may vary substantially. One-fit-all solutions are rarely if never appropriate to preserve a variance of resource systems. The ones who are most familiar with local conditions and requirements are usually the appropriators themselves and therefore best suited to contribute to rule formulations (Ostrom, 1990, p. 92). This design principle is essential when it comes to providing a fair system which determines the proportional allocation of benefit in relation to required input (Trawick, 2001). Perceived fairness of the rules is a crucial attribute of long-lasting CPR-systems (Chakraborty, 2004).

3. Collective-Choice Arrangements & 4. Monitoring Most individuals affected by the operational rules can participate in modifying the operational rules.

Monitors, who actively audit CPR conditions and appropriator behavior, are accountable to the appropriators or are appropriators.

The third design principle of collective-choice arrangements entails that the majority of individuals is authorized to participate in creating and modifying operational rules. This allows for rules that are suitable to local conditions, are considered to be fair and are adaptable when environmental or societal changes occur. Governmental inventions on the other hand lead to frequent rule violation and less contributions due to lower acceptance. To create a set of rules that works for everyone involved requires time and effort and the development process contains

3. Collective Action Theory a trial and effort learning curve (Bandiera, Barankay and Rasul, 2005; Ostrom, 2005, pp. 263– 265).

Sarker and Itoh (2001, p. 96) support this design principle by studying a Japanese irrigation system and finding that the irrigators “collectively participate in modifying their daily operational rules”. In cases where this design principle is absent the management of a CPR is often destined to fail (Cox, Arnold and Villamayor-Tomas, 2015).

By applying these three principles alone it is already possible to design an institution with a good first set of rules, if the costs of rule changing are kept relatively low. But there is no guarantee that appropriators will follow these self-established rules. Here, the problem of commitment steps in and is often thought to be fixed through external authorities (Hardin, 1968). But Ostrom (2000) states that external rules and monitoring may drive out cooperative behavior entirely. The field studies showed that this is not necessary and often even insufficient. The selection of own monitors whose duty it is to monitor the resource itself and the behaviors of individuals can foster the willingness to cooperate. The cases with long-term surviving institutions and CPRs demonstrate that internal investments into monitoring and sanctioning help providing stable commitment and cooperative behavior (Ostrom, 1990, pp.93). Gautam and Shivakoti (2006) deliver an example of forestry in Nepal that illustrates the effects of choosing own and accountable monitors well. It was stated that most users find the chosen monitoring system effective and helpful in order to govern the CPR.

5. Graduated Sanctions Appropriators who violate operational rules are likely to be assessed graduated sanctions (depending on the seriousness and context of offense) by other appropriators, by officials accountable to these appropriators, or by both.

Contrary to the former assumption that appropriators will not monitor and sanction themselves due to high personal costs and the creation of a public good available to all (2nd-order dilemma), in strong institutions the appropriators do in fact conduct the tasks of monitoring and sanctioning. As soon as appropriators have made a contingent self-commitment, they are motivated to monitor others to make sure that rules are mostly being followed. If appropriators can install customized rules, that facilitate monitoring, the costs can be reduced.

In case monitors discover infractions of rules, the imposed sanctions depend on the severity and frequency of rule breaking and are therefore called graduated. Finding a rule breaker also allows the monitor to gain status and prestige. The rule-breaker on the other side decreases or even

3. Collective Action Theory loses these private benefits and reputation of trustworthiness due to the breaking of commitment (Ostrom, 1990, pp. 94). Baldassarri and Grossman (2011) support the effectiveness of sanctioning when facing collective action problems. Sanctioning can discipline violators and therefore ensure a higher level of contributions.

6. Conflict Resolution Mechanism

Appropriators and their officials have rapid access to low-cost local arenas to resolve conflicts among appropriators or between appropriators and officials.

Even when appropriators established rules themselves, the possibility to find a way to interpret them in their favor exists and can lead to free-riding. In order to prevent this over time a conflict resolution mechanism must be present. Here, appropriators have the chance to discuss and resolve conflicts and further define what an infraction constitutes (Ostrom, 1990, pp.100). Without these mechanisms a successful management of a CPR becomes more difficult and may end in severe conflicts (Cox, Arnold and Villamayor-Tomas, 2015).

7. Minimal Recognition of Rights to Organize The rights of appropriators to devise their own institutions are not challenged by external governmental authorities.

Rules installed by appropriators mostly do not undergo an official recognition process by authorities or governments and are therefore informal. It is important though that officials grant these rules at least minimal recognition and legitimacy to ensure that the self-governed CPR can be sustained. If this is not the case, appropriators who do not agree with a certain rule can turn to external officials to get this rule overturned (Ostrom, 1990, p. 101). Governments trying to impose own rules on a CPR community and therefore question established institutions of the community often leads to failure, especially when they do not suit the local conditions (Scott, 1998).

8. Nested Enterprises Appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities are organized in multiple layers of nested enterprises.

As soon as a CPR becomes more complex, they are organized on several nested levels, e.g., local, regional, and national. Therefore, the established institutional arrangements should become more complex, redundant and nested in many different layers. This is best implemented

3. Collective Action Theory by allocating authority to support the adaption of governance at multiple levels and hence providing wide-ranging institutional infrastructures (Dietz, Ostrom and Stern, 2003).

The problems faced on each level may differ considerably from another. It is therefore essential to establish rules for appropriation and provision, monitoring, sanctioning conflict resolution mechanisms and governance activities not only at one level, but on each level to reach a complete system and ensure a long-term survival of the CPR (Ostrom, 1990, pp. 101). This polycentric approach proofed far more successful than one-level and centralized control and decision-making that were presumed to increase efficiency by limiting redundancies (Dietz, Ostrom and Stern, 2003).

With these eight design principles, Ostrom offers a guidance for individuals facing collective action problems to self-organize in order to preserve a CPR for mutual and long-lasting benefits. The principles analyze the conditions under which trust and reciprocity are established and maintained in order to solve collective action problems (Cox, Arnold and Villamayor-Tomas, 2015). Ostrom (2005) also stresses that these principles do not provide a “one-size-fits-all” planning solution and instead need careful adjustment between rules, environment and community. If a group of actors is able to transfer them successfully, new institutional arrangements can be created that ensure relatively stable conditions for each appropriator, provisioner and the resource system itself. She also urged other researchers to put the design principle to a test in practice (Abernathy and Sally, 2000; Crook and Jones, 1999; Weinstein, 2000).

While there is evidence in the literature that support the design principles, critical voices are also heard. Multiple authors argue that Ostrom’s (1990) list is incomplete in terms of social variables (Singleton and Taylor, 1992), more specific properties of CPR system (Agrawal, 2002) and external socioeconomic factors like, e.g., market integration (Tucker, Randolph and Castellanos, 2007). However, for the purpose of this master thesis the original eight design principles by Ostrom (1990) will be applied and not extended versions since it would exceed the scope of the thesis.

3. Collective Action Theory

3.2. Comparing the Different Settings

Most of the research in this field has been conducted on the institutional level. In order to draw conclusions for organizations and stakeholder value creation it is essential to contrast both settings, the institutional setting of collective action and the organizational setting of stakeholder value creation. By doing so the groundwork is laid to investigate which of Ostrom’s (1990) eight design principles for successful and long-term collective action are applicable in the organizational setting and foster collaboration among stakeholder.

One could argue that these two theories cannot benefit from one another due to the different levels of analysis and that gained knowledge from an institutional research setting is not transferable to an organizational context. Even though it might be necessary to establish boundary conditions, it is evident that organizations must also solve collective action problems among different parties to successfully create joint value. Klein et al (2019) argue that the alignment of various interests and goals, securing of ongoing participation and the coordination of actions of stakeholders of an organization are collective action problems and that those are analogous to the problems found on the institutional level.

Within the next subsections both levels will be contrasted along five attributes that are of central interest in collaboration, collective action as well as in stakeholder value creation: Actors, underlying structure, sources of conflict/problem, rule-creation and decision-making and soft mechanisms.

3.2.1. Actors

On the institutional level of collective action Ostrom (1990) identified two types of central actors within communities or groups in a CPR-setting: Appropriators and provisioners. Appropriators include all actors of a community that draw resource units from a common-pool resource. Provisioners are the ones contributing to the construction and maintenance of the resource. The desirable condition in order to solve collective action problems is that actors take on both roles to foster trust and collaboration through reciprocity.

On the organizational level the actors involved in the process of stakeholder value creation are the organization itself in center surrounded by its multiple stakeholders. Stakeholders like, e.g., employees, suppliers or customers contribute resources and capabilities to the value creation process of an organization (Klein et al., 2019).

3. Collective Action Theory

While the organization with its value creation processes forms the economic basis for the actors on the organizational level (Grant, 2002; Mills and Weinstein, 2000; Rappaport, 1986), in an institutional collective action setting the CPR is the central element of economic activity (Ostrom, 1990). The main difference that requires mentioning at this point is the passiveness of the CPR with its non-excludability and substractability qualities (Poteete and Ostrom, 2004). The CPR can be acted upon by all surrounding actors due to its passiveness. The value creation process on the contrary is managed centrally by the organization in which it takes place. Thus, power and the access to relevant information are unequally distributed among the organization and its stakeholders (Venkataraman, 2002). In more recent research, decentralized stakeholder networks where the focal organization might not be at the core are being discussed. Socio- economic issue are in the center instead which can enable more inclusive decisions in an increasingly complex environment (Frooman, 2010; Roloff, 2008).

In both settings the plurality of actors and their interests play an essential role. Furthermore, the same challenge is faced – to maintain ongoing contributions to the common goal. In order to ensure ongoing contributions in either the perpetuation of a CPR or towards value creation in an organization, actors no matter if stakeholder, organization, appropriator or provisioner, are required to collaborate with each other and to build trusting relationships.

3.2.2. Underlying Structure

The underlying structures of successful collective action efforts are institutional arrangements. These arrangements are shared concepts that consist, e.g., of rules and social norms that serve as a guidance for actors in terms of appropriate behavior, creating order and reducing uncertainty (Crawford and Ostrom, 1995; North, 1991). The ability of a community to establish such institutional arrangements is vital for the effective self-governance of a CPR (Lubell et al., 2002).

Organizations also contain underlying structures to reach goal achievement and provide guidance during the conduct of business activities. These formal and informal rules and procedures are known as governance structures (Klein et al., 2019) and are the equivalent to the institutional arrangements in the collective action setting. Governance structures are in place to regulate conflicts and control the handling of all resource related matters (Blair and Stout, 1999; Williamson, 1985). By organizing the beforementioned issues, governance structures are an important cornerstone within the “black box” of the collaboration process (Wood and Gray, 1991).

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Moe (1990, pp. 217–218) summarized this by stating that economic organizations and institutions are “structures that emerge and take the specific forms they do because they solve collective action problems.”.

3.2.3. Source of Conflict/Problem

When multiple actors draw resource units from the same unmanaged CPR the risk of exploitation and destruction of the resource is high. Additionally, the risk of free-riders, actors who appropriate but do not invest into provision, obtaining benefits without conducting investments into the sustainability of the CPR is high and is therefore reducing the benefits for everyone. The underlying problem here is the lack of reciprocity, which hinders the formation of trusting relationships. The collective action problem, in a nutshell, states that all actors would be better off if they cooperated instead of acting in a self-interested fashion, but rational individuals more often than not tend to rather engage in free-riding (Olson, 1965).

In the organizational setting the same collective action problem can be observed. The set-up is similar. Multiple actors, or in this case stakeholders, with different interests and the organization could generate greater value if they collaborated instead of pursuing individual self-interested goals. Klein et al. (2019) argue that in order to fulfill the purpose of an organization, which is to collectively deploy assets, resources and capabilities of stakeholders, the aforementioned organization needs to coordinate stakeholder interests to create joint value because value cannot be realized independently.

In order to solve this collective action problem on the institutional as well as on the organizational levels, actors in a CPR-setting or stakeholders and the organization must come together in a collaborative manner to establish institutional or governance arrangements to ensure that contributions into the shared goal are ongoing and free-riding is kept at a minimum level.

3.2.4. Rule-Creation and Decision-Making

The aspect of who is authorized to make decisions about rules and whose interests are being considered is important on both levels. Successful collective action efforts require the establishment of rules and norms in order to form institutional or governance arrangements. Ostrom’s (1990) third design principle of collective choice arrangement discusses the issue of decision-making. The importance here lies in the authorization of most actors to take part in the

3. Collective Action Theory process of rule-creation and modification and therefore in setting the foundation for fair and suitable decision-making.

On the organizational level the same applies to setting up governance arrangements. Decisions on rules that govern behavior are preferably made jointly (Thomson and Perry, 2006). A central component of stakeholder theory and stakeholder value creation is the consideration of stakeholders and their interest during the decision-making processes (Hörisch, Freeman and Schaltegger, 2014). Hall, Millo and Barman (2015) state that interests should not only be considered during decision-making but that it is important to include stakeholders in the process. Joint decision-making requires the direct communication of interests, expectations, beliefs etc. Through this collaborative approach to decision-making joint value can be created (Raiffa, 2007).

To make decisions and establish rules collaboratively has advantages in contrast to imposed ones. Communities that self-govern a CPR benefit from imposing their own rules and institutions. The advantages here lie in greater acceptance of results and rules and therefore the willingness to follow the rules. Also, the commitment towards a decision are greater. By directly including most actors into the processes, the most suitable and appropriate decisions can be made. External authorities lack specific knowledge and flexibility to impose the right rules and decisions and thus the risk of actors ignoring them increases and opportunistic behavior becomes more likely (Ostrom, 1990).

To involve stakeholders into the decision-making processes can also have positive effects for an organization in terms of efficiency gains and as a consequence lead to competitive advantage (Turnbull, 1994, 1997). Furthermore, it is assumed that it helps decreasing conflicts (Rothman and Friedman, 2001). It becomes apparent that collaborative decision-making and rule-creation play a significant role on both levels and entail similar advantages for collective action and stakeholder value creation.

3.2.5. Soft Mechanisms – Trust, Reciprocity and Reputation

Trust, reciprocity and reputation are the soft mechanisms as well as the foundation for successful collective action efforts and building and maintain strong relationships between different actors (Ostrom, 1990). Also, norms of trust and reciprocity is one dimension of processes which take place within the “black box” of collaboration and a premise of stakeholder value creation (Mitchell et al., 2015; Thomson and Perry, 2006).

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On the organizational level these three attributes are also of importance and have been discussed numerously in literature. Trust is vital in bolstering cooperative behavior not only within organizations (Gulati and Westphal, 1999) but also between different stakeholder groups (Jensen, 2003; Uzzi, 1997). Just like in a collective action setting trust should be established among stakeholders to foster commitment towards a common goal (Ganesan, 1994).

To trust another person or party means to have positive expectations about their behavior and goodwill (Rousseau et al., 1998). The willingness to trust someone is strongly based on their reputation in terms of trustworthiness (Swift, 2001). Jones (1995, p. 421) states that “a reputation for trustworthiness is really a reputation for not being opportunistic”. The presence of opportunistic behavior is a risk factor on both levels and poses a threat to successfully establishing collaborations.

While in collective action settings trust needs to be created among actors, on the organizational level trust needs to emerge among stakeholders and between stakeholders and the organization. To build a trusting relationship between stakeholders and the corporation it is vital that the corporation shows trustworthy behavior, e.g., by avoiding opportunism to build up their reputation (Hosmer, 1995; Swift, 2001).

A fundamental part of establishing trusting relationships and reputation is a matter of reciprocity. This is also true for both levels. Stakeholders and organization need to reciprocate by contributing to the value creation process in order to build trust and a reputation of trustworthiness. Reciprocity roots in mutual loyalty and cannot be imposed through external interventions (Fassin, 2012). The same is true for communities relying on a common-pool resource. Trusting relationships and contributions to maintain the resource over time are essential. Free-riding and other opportunistic behavior is prevented or at least limited through reciprocity (Ostrom, 1990).

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3.2.6. Summary

The following Figure 2 provides an overview over the discussed attributes. By contrasting five attributes at the institutional and organizational level considerable similarities were emphasized. The fact that multiple actors with personal interests are able to achieve higher benefits if they collaborated among each either is equally present in the CPR as well as in the stakeholder setting. The underlying structures reveal commonalities as well. Institutional arrangements and governance arrangements consists of rules and norms that govern the actions and behavior of the actors. The source of conflict is in both cases opportunistic and self- interested behavior by the actors or on the organizational level stakeholders. Everyone would be better off if they collaborated instead of free-riding on the contributions by still obtaining the benefits. Rule-creation and decision-making are conducted in a participatory and collaborative way on both levels and the soft mechanisms of trust, reciprocity and reputation are vital for fostering collaboration and solving the collective action problem in a CPR-setting as well as in a stakeholder setting.

One difference of both settings is the central element of the common-pool resource on the one hand and the organization on the other. While the common-pool resource remains passive, the organization holds power and controls the access to relevant information.

3. Collective Action Theory

Institutional Setting Organizational Setting

Collective Action Stakeholder Value Creation

Appropriators Organization Actors Provisioners Stakeholders

Underlying Structure Institutional Arrangements Governance Arrangements

Collective Action Problem Source of Collective Action Problem Opportunism/Withdrawal of Conflict/Problem Free-Riding/Opportunism Contributions

Rule-Creation and Participatory and Participatory and

Decision-Making Collaborative Collaborative

Trust, Reciprocity and Trust, Reciprocity and Soft Mechanisms Reputation Reputation

Figure 2: Comparison of Institutional and Organizational Setting (Source: Author)

To conclude, it can be assumed that the eight design principles by Ostrom (1990) can be transferred to the organizational setting. By applying insights grounded in collective action theory to stakeholder value creation additional knowledge can be gathered and contributed to literature.

4. Synthesis

In this chapter the discussed findings on stakeholder theory, stakeholder value creation, collaboration and collective action will be synthesized. After a brief summary of the previous findings each design principle will be adopted towards stakeholder value creation.

4.1. Summary

When organization decide to implement corporate sustainability the matters of stakeholder integration and collaborative approaches are inevitable (Gibson, 2012). An important step on the way towards corporate sustainability is to give up shareholder primacy and include multiple stakeholders and their interest into decision-making process and the overall corporate strategy (Freeman, 1984).

Stakeholder value creation is gaining more and more attention within the stakeholder approach. Central element of stakeholder value creation are the relationships among stakeholders and between stakeholders and the organization. Within these relationships joint value is created (Post, Preston and Sachs, 2002a). As long as partners show appropriate instead of self-interested and opportunistic behavior and the level of trust is high relationships are perceived as harmonious and contributions to value creation are made (Bridoux and Stoelhorst, 2016). Next to trust reciprocity is also an indicator of ongoing contributions. Both beforementioned attributes as well as common values, norms and goals are vital in order to foster collaborative relationships among actors and promote stakeholder value creation (Schneider and Sachs, 2017).

Collaboration is an important driver of stakeholder value creation (Thomson and Perry, 2006) as well as collective action theory (Ostrom, 1990). In both cases the process of giving up independent and self-interested behavior for interdependent relationships is necessary to achieve the common objective of joint value creation or in the case of collective action of successful self-governance of a common-pool resource.

4. Synthesis

4.2. Synthesis of Collaboration and the Eight Design Principles

Collaboration requires a careful calibration of different processes that take place within the “black box” (Thomson and Perry, 2006). The five processes shown in Figure 3 show similarities with Ostrom (1990) eight design principles. The design principle three (collective-choice arrangements) resembles the process of governance, where joint decisions in terms of rules are made. The process of administration organizes the implementation of collaboration. This process can be associated with design principle four (monitoring), five (sanctioning) and six (conflict resolution) which are essential for implementing and maintaining collaboration in a collective action setting. Design principle two (congruence of appropriation and provision rules) contributes to balancing self-interest vs. collective interest by establishing a fair set of rules for appropriation and provision. If these rules are being adhered to win-win solutions can be achieved for everyone involved. The design principles of collective action investigate under which conditions norms of trust and reciprocity are created and maintained to limit opportunistic behavior (Cox, Arnold and Villamayor-Tomas, 2015).

Governance Administration (implementation of collaboration - rules, (joint decisions about rules to govern responsibilities, monitoring & behavior & relationships) coordination) Mutuality (win-win solutions) Norms of Trust and Autonomy Reciprocity (balance of self-interest vs. collective- (fundamental ingredients for long-lasting interest) relationships)

Figure 3: Collaboration Black Box (Source: Adapted from Thomson and Perry, 2006, pp. 24)

This comparison emphasizes the importance of collaboration in the process of establishing a self-governing and self-managing community, that is able to sustain a common-pool resource successfully. Adopting the principles towards stakeholder value creation will not only gain valuable insights from collective action theory but also from the underlying concept of collaboration.

4. Synthesis

4.3. Adopting the Eight Design Principles to the Organizational Level

Wilson, Ostrom and Cox (2013) argue that the design principles are not only applicable in CPR- settings, from which they were derived, but in every setting where groups must work together in order to achieve a shared goal. Within this subchapter each of the eight design principles by Ostrom (1990) will be adopted towards stakeholder value creation. Every adoption process results in the adequate reformulation of the principles.

The principles contain valuable insights in terms of collaboration among different actors, the creation of lasting relationships and solutions to collective action problems. Stakeholders and firms on the organizational level face similar challenges when engaging in joint value creation and can potentially benefit from the insights Ostrom (1990) gained during her research on communities in a CPR-setting.

Since this master thesis sets the focus on value creation the matter of appropriation will not be closely considered on the organizational level.

4.3.1. Boundary Rules

Individuals or households who have rights to withdraw resource units from the CPR must be clearly defined, as must the boundaries of the CPR itself (Ostrom, 1990).

The first design principle by Ostrom (1990) stresses the importance of defining boundaries in terms of the CPR and identifying all actors with appropriation rights. This step is vital in order to provide clarification, reduce uncertainty and establish a common group identity (Wilson, Ostrom and Cox, 2013).

This design principle entails valuable insights for organizations, that engage in stakeholder value creation. Just like in a collective action setting those stakeholders who contribute to the value creation process by supplying resources and capabilities need to be identified. By providing certainty for all actors about who is involved the foundation for a common identity is laid. When stakeholders identify with each other and are able to establish a common identity issues occurring within groups in a multi-stakeholder setting are more likely to be settled through integrative solutions (Schneider and Sachs, 2017).

By defining who is part of the collective or the stakeholder network it is also determined who is authorized to take part in certain decision-making processes. Klein et al. (2019) call these

4. Synthesis stakeholders enfranchised stakeholders. They receive the right to participate in decision- making through contributing resources and capabilities that are crucial for value creation.

Aside the identification of actors with appropriation rights, the principle also states to define the physical boundaries of the common-pool resource. Transferred to stakeholder value creation it is useful to define the boundaries of value and identify how value is defined by each stakeholder group. Moving away from shareholder value primacy and acknowledging that value is created within the relationships with various stakeholders is essential. Furthermore, the subjective concept of value and how it is created is unique to each stakeholder relationship of an organization (Garriga, 2014).

The first of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Stakeholders who contribute to an organization’s value creation by supplying resources and capabilities must be clearly identified as well as the subjective concept of value within each stakeholder relationship.

4. Synthesis

4.3.2. Allocation Rules According to Local Conditions

Appropriation rules restricting time, place, technology, and/or quantity of resource units are related to local conditions and to provision rules requiring labor, material and/or money (Ostrom, 1990).

The second design principle rather focusses on establishing rules that govern the fair and sustainable distribution of resource units among appropriators and rules that ensure contribution to provision activities. Both, appropriation and provision rules, should conform to the local surrounding.

Since this master thesis concentrates on the value creation process and not the distribution of value this principle will be applied in a more general manner. The underlying notion of this principle is to create a sense of fairness by balancing costs and benefits (Wilson, Ostrom and Cox, 2013). This is essential for collective efforts to thrive but also important in a stakeholder setting. If individuals perceive rules as unfair and encouraging inequality, they are more likely not to commit to them or show opportunistic behavior ultimately damaging the collective effort or withhold contributions to the process of joint value creation.

Besides rules being perceived as fair they should also suit the local environment. For stakeholder value creation this means that the rules should be appropriate for the local economic conditions and consider organizational characteristics. Just like every resource setting and its environment is unique so are organizations, their stakeholder relationships and their economic environment.

The second of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Creation of rules that foster a fair cost-benefit equilibrium for stakeholders and are suitable to the economic environment and organizational conditions.

4. Synthesis

4.3.3. Participation in Making and Modifying Rules

Most individuals affected by the operational rules can participate in modifying the operational rules (Ostrom, 1990).

Successful collective action that results in the sustainable use of a common-pool resource involves that members are able to develop and carry out some of their own rules. Not only does this participative approach foster greater commitment but also ensures that the installed rules are suitable (Ostrom, 2000).

In order to raise the efficacy of stakeholder groups in stakeholder value creation processes it is also important to authorize them to make some of their own rules. This is also important in the process of collaboration. Stakeholders should be invited to participate in making joint decisions about the rules that are supposed to govern behavior and the relationships between organization and stakeholders and among stakeholders (Thomson and Perry, 2006).

Stakeholders or individuals in general are more likely to commit to rules and goals they established themselves or at least participated in the creation process (Husted and Jesus Salazar, 2006; Wilson, Ostrom and Cox, 2013). Even though it might decrease the chances of rule breaking, it is still no guarantee that everyone will follow them over time. Nevertheless, it is advisable to integrate the different stakeholders, their different interests and value utilities in the decision-making process of establishing rules for the governance structure of the company.

Not only being part of the rule-creation process can have a positive effect on individuals to follow them but also that the jointly established rules and decisions are more likely to be adequate. This allows for the organization and stakeholders to contribute their know-how and interests to find suitable agreements.

The third of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Contributing stakeholders must be authorized to make some own rules and consent to decisions in establishing governance arrangements.

4. Synthesis

4.3.4. Monitoring

Monitors, who actively audit CPR conditions and appropriator behavior, are accountable to the appropriators or are appropriators (Ostrom, 1990).

The problem of free-riding and shirking is a common collective action problem and can be found on the institutional as well as on the organizational level. Monitoring proofs to be an effective measure to limit opportunistic behavior and can ensure that all stakeholders keep contributing and committing to an ongoing joint value creation (Blair and Stout, 1999, 2001).

On the organizational level, monitoring is usually conducted by the board of directors. Blair and Stout (2001) state that the board of directors serves as the legal and neutral entity, which holds the power to allocate the created economic value and take the role of a mediator among the team to solve conflicts over the allocation. In publicly traded companies the board is elected by the shareholders. However, a board’s responsibility is not exclusively towards shareholders (Clark, 1985). This means the duty of the board of directors is to manage all stakeholders and act on their behalf (Hoskisson et al., 2018). The issue with boards of directors as the monitoring entity is that their actions are often biased and that they often make decision in favor of shareholders (Thompson, 2016) or are simply unable to make suitable decision for stakeholders due to a lack of information (Hansmann and Kraakman, 2001).

An opportunity to make monitoring more inclusive for stakeholders and their interests as well as ensure that all parties adhere to the established rules and commitments, is to integrate more stakeholders into governance. A possible way to do so is through the representation of stakeholders in the governing boards of directors. Stakeholders who contribute to the value creation process regularly and show long-term commitment could receive voting rights and could be voted for to become part of the board and ensure the representation of stakeholders and their interests (Banerjee, 2014; Fassin, 2012).

If an organization is not publicly traded and therefore not required to appoint a board of directors to fulfill governance and monitoring duties it is still essential to collectively select a monitor among stakeholders, in the organization or an external third party to perform the task.

4. Synthesis

The fourth of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Organizational monitoring, including stakeholders and their interest, audits behavior and rule conformity to ensure ongoing contributions towards joint value creation processes.

4. Synthesis

4.3.5. Graduated Sanctions

Appropriators who violate operational rules are likely to be assessed graduated sanctions (depending on the seriousness and context of offense) by other appropriators, by officials accountable to these appropriators, or by both (Ostrom, 1990).

The fifth of Ostrom’s (1990) design principles highlights the importance of applying graduated sanctions when rules are violated by a community member in order to limit free-riding and other opportunistic behavior.

Graduated sanctions can also be useful in stakeholder value creation in order to regulate divergent behavior of stakeholders or the organization which could harm the relationship and therefore the joint value creation process. As long as stakeholders perceive that all partners including the organization adopt the same relational model the relationships are harmonious. Is this no longer the case and the behavior is seen as inappropriate, the risk of stakeholders turning towards self-interested behavior and stop contributions increases (Bridoux and Stoelhorst, 2016). It is more likely to stick to a common goal and direct personal efforts towards it if there is a threat of being personally sanctioned in the case of disregard (Ellemers, Gilder and Haslam, 2004). Sanctioning is therefore an important cornerstone in stakeholder value creation to maintain commitment and reciprocity.

Sanctioning should be graduated meaning proportional to the severity of the transgression. Smaller rule violations or inadequate behavior do not require severe punishment. Reminders with indications of possible future sanctions may already suffice. Repeated violations or misbehavior should be penalized with more serious forms of sanctions and reputational consequences. This way stakeholders or the organization must not fear to endanger the whole relationship setup, for example by committing an unintentional infraction.

To apply sanctions gradually allows for more flexibility when being confronted with rule violations or inadequate behavior. Factors like motive, severity and frequency can be taken into account and thus offer a more equitable sanctioning system.

In an organizational setting sanctions are often part of the contractual agreements. Graduated sanctions in terms of the relational connection among stakeholders and the organization should be agreed on collectively and recorded in the governance agreements.

4. Synthesis

The fifth of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Stakeholders and/or organizations that violate rules or show inadequate behavior are rebuked by graduated sanctions. These sanctions should be agreed on collectively and imposed by a designated official.

4. Synthesis

4.3.6. Conflict Solving Arenas

Appropriators and their officials have rapid access to low-cost local arenas to resolve conflicts among appropriators or between appropriators and officials (Ostrom, 1990).

In order for rules and institutional arrangements to stand the test of time actors must have easy access to conflict resolution mechanisms. In case of a conflict among any parties, e.g., due to different interpretations of a rule, these mechanisms are vital to achieve quick and fair settlements so the collective effort of sustaining a CPR is not endangered and collaboration does not come to an end.

Such conflicts can also occur on the organizational level during stakeholder value creation processes and can be challenging to resolve. Different perceptions of value, varying interpretations of rules as well as various interests can be the source of disagreement. To prevent such conflicts from taking a toll on the relationships among stakeholders and between stakeholders and the organization, and therefore posing a threat on the joint value creation processes, the possibility to quickly and fairly resolve these conflicts must be available.

When conflicts are resolved in a constructive manner, relationships are strengthened, trust is fostered, and commitment is increased. All three are vital in terms of collaboration. The outcome of such a conflict resolution should be satisfactory for everyone involved and preserve the joint value creation process (Mele, 2011).

On the institutional level these resolution mechanisms can range from informal to rather sophisticated court-like mechanisms (Ostrom, 1990). On the organizational level conflicts may also be solved in an informal setting when interaction among the parties is possible or in a way that has been priorly agreed on and defined within the governance arrangements (Hemmati et al., 2012).

The sixth of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Stakeholders and organizations establish a fair and accessible conflict resolution mechanism to solve conflicts, that could otherwise endanger the relationships which are vital for stakeholder value creation.

4. Synthesis

4.3.7. Right to Organize by Local or National Government

The rights of appropriators to devise their own institutions are not challenged by external governmental authorities (Ostrom, 1990).

It is as important for CPR-regimes to create own institutions that are not impeded by external authorities, as it is for governance arrangements and policies established by stakeholders and organizations to receive recognition by external authorities.

Not only should these governance arrangements and policies receive recognition, but also should organizations and their stakeholders be able to establish their own arrangements and rules that suit their conditions and environment, which goes hand in hand with design principle three (Wilson, Ostrom and Cox, 2013).

However, organizations and stakeholders are embedded in a statutory framework of different laws that regulate certain areas of business activities. The self-established arrangements and rules must not violate the higher laws and regulations. In terms of social and environmental matters research has shown that voluntary and self-imposed governance is more effective than coercion through the political and social environment (Husted and Jesus Salazar, 2006).

The seventh of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Governance arrangements established by stakeholders and organizations should receive minimal recognition by external authorities as long as they do not violate higher laws and regulations.

4. Synthesis

4.3.8. Nested Enterprises

Appropriation, provision, monitoring, enforcement, conflict resolution, and governance activities are organized in multiple layers of nested enterprises (Ostrom, 1990).

The last design principle suggests that more complex and larger CPR-regimes follow a polycentric approach by nesting the established institutional arrangements within different layers. This is especially relevant when CPRs are part of a larger system.

Polycentricity requires different layers of interaction with graduated mechanisms of communication, coordination and communication (Klein et al., 2019). Polycentric systems consist of multiple actors and various centers of decision-making that require interdependency (Kivleniece and Quelin, 2012). This also applies to organizations and their internal governance structure (Klein et al., 2019).

To nest governance structures within multiple layers is especially beneficial and vital in larger organizations with potential subsidiaries to allow appropriate coordination among all parties and finding the optimal scale for each activity (McGinnis, 1999). By distributing authority, governance structures can be adapted across the multiple levels and ensure that rules and other agreed on activities, like monitoring and sanctioning will be conducted throughout the entire system (Dietz, Ostrom and Stern, 2003).

Williamson (1985) argues that polycentric governance comes with a price. The costs for the intensive coordination efforts across all actors and layers are high. By taking a look at Ostrom’s (1990, p. 180) research and her comparison of CPRs with different success rates it becomes clear that the benefits of polycentric governance outweigh the costs when the other design principles are also observable (Klein et al., 2019).

The eighth of Ostrom’s (1990) design principles contains valuable information and can be adopted to stakeholder value creation on the organizational level as follows:

Larger organizations and their stakeholders nest governance arrangements and rules across multiple levels and subsidiaries.

4. Synthesis

4.4. Eight Design Principles for Successful Stakeholder Value Creation

The following Figure 4 summarizes the results from the careful adoption of Ostrom’s (1990) eight design principles towards stakeholder value creation on the organizational level. Just like the principles derived from common-pool resource settings, these principles for stakeholder value creation provide a guidance for organizations and stakeholders when engaging in joint value creation processes. They are however not meant to provide an implementation instruction or planning solution. Instead, these principles require the careful calibration of rules, economic environment, organizations and stakeholders.

Stakeholders who contribute to an organization’s value 1. Clear Definition of Stakeholders creation by supplying resources and capabilities must be and Their Subjective Concept of clearly identified as well as the subjective concept of value Value within each stakeholder relationship.

2. Cost-Benefit Equilibrium Suitable Creation of rules that foster a fair cost-benefit equilibrium to Economic Environment and for stakeholders and are suitable to the economic Organizational Conditions environment and organizational conditions.

Contributing stakeholders must be authorized to make 3. Collective-Choice Arrangements some own rules and consent to decisions in establishing governance arrangements.

Organizational monitoring, including stakeholders and their interest, audits behavior and rule conformity to ensure 4. Monitoring ongoing contributions towards joint value creation processes.

Stakeholders and/or organizations that violate rules or show inadequate behavior are rebuked by graduated 5. Graduated Sanctions sanctions. These sanctions should be agreed on collectively and imposed by a designated official.

Stakeholders and organizations establish a fair and accessible conflict resolution mechanism to solve conflicts, 6. Conflict Resolution Mechanism that could otherwise endanger the relationships which are vital for stakeholder value creation.

Governance arrangements established by stakeholders and 7. Minimal Recognition of Rights to organizations should receive minimal recognition by Organize external authorities as long as they do not violate higher laws and regulations.

8. Governance Arrangements and Larger organizations and their stakeholders nest Rules are Nested Across Multiple governance arrangements and rules across multiple levels Levels and Possible Subsidiaries and subsidiaries.

Figure 4: Eight Design Principles for Successful Stakeholder Value Creation (Source: Author)

5. Conclusion

So far, little research has been conducted on how findings from collective action theory on collaboration as well as sustainable and bottom-up CPR management can be transferred from the institutional level to the organizational level. The aim of this master thesis has been to draw conclusions from collective action theory, more precisely from Ostrom’s (1990) eight design principles for successful collective action, and to investigate in how far these can be adopted to support successful stakeholder value creation. To conduct research on different levels of analysis is complex. Thus, this master thesis represents an attempt to build a bridge between the institutional and the organizational level in the context of collective action and stakeholder value creation.

The literature review on stakeholder theory, stakeholder value creation, collaboration and collective action revealed, that in order to solve collective action problems, either on the institutional or organizational level, collaborative efforts are required. Only when multiple actors in a CPR-setting or stakeholders and organizations in a joint value creation process move from independent and self-interested behavior towards interdependent relationships built on trust, opportunistic behavior can be limited, and joint benefits can be increased.

The comparison of both settings was conducted in order to evaluate if Ostrom’s (1990) design principles are transferable from the institutional level to the organizational level. By juxtaposing central elements of both collective action and stakeholder value creation strong similarities were revealed. This result suggests that enough common ground between both settings exists in order to enrich stakeholder value creation through insights extracted from collective action theory on common-pool resources.

The results of the beforementioned comparison allowed the adaption of Ostrom’s (1990) eight design principles towards stakeholder value creation. Therefore, the research question can be answered as follows: The theory of collective action can be adopted towards the organizational context through the adaptation of Ostrom’s (1990) eight design principles to stakeholder value creation. The adapted principles entail valuable insights from successful collaboration within CPR-settings that can support stakeholder value creation in organizational settings.

Collaboration is a vital ingredient in order to tackle the 17 Sustainable Development Goals established by the UN (United Nations Global Compact, 2015). The issues humanity face today on a local and global scale require the private and public sector to work together. Goal number

5. Conclusion

17 “Global Partnership for Sustainable Development” highlights this aspect by stating that multiple stakeholder partnerships are needed to mobilize and share resources in order to reach common goals and create value beyond financial measures. Engaging in stakeholder value creation is one promising way towards a more sustainable development along the triple bottom line in businesses. When organizations take on the responsibility and commit to tackling the stated goals more sustainable business models will be created.

The result of this master thesis suggests businesses to be guided more by the eight design principles and move away from shareholder primacy and financial value maximization towards creating value by building strong and trustful relationships with multiple stakeholders. That way, sustainable business models can evolve and as much value as possible can be created for multiple stakeholders.

A shift into this direction may lead towards a development that allows the next generations to pursue their future and meet their own needs on a planet where it is still possible to live on.

5. Conclusion

5.1. Contribution & Further Research

This master thesis and its results contribute to the literature of various fields ranging from sustainability, stakeholder theory and stakeholder value creation to collective action theory, institutional theory and behavioral theory over to organizational theory and areas of strategic management and governance.

The primary contribution of this master thesis is the adaption of the eight design principles by Ostrom (1990) towards stakeholder value creation, and therefore supporting the closure of the research gap identified by Wilson, Ostrom and Cox (2013). The established eight design principles for successful stakeholder value creation form the bridge between the institutional and organizational level and show how collective action theory can enrich economic theory.

Another theoretical contribution is the comparison of the institutional setting with the organizational setting along the central characteristics of both settings and collaboration. These characteristics are: Actors, underlying structure, source of conflict/problem, rule-creation and decision-making and soft mechanisms. By juxtaposing both settings relevant similarities were identified, that allow the transfer of conclusions from collective action theory, and thus adapting the design principles towards stakeholder value creation.

Valuable insights for sustainability were also gained. By contributing the adapted design principles organizations and stakeholders can draw on this guideline, derived from the knowledge on how common-pool resources can be self-governed and managed sustainably, to foster stakeholder value creation. Stakeholder value creation strongly relates to corporate sustainability and can support sustainable development along the triple bottom line (Freeman, 2010; Gibson, 2012; Tapaninaho and Kujala, 2019).

Since the foundation of this synthesis was created exclusively based on literature, these contributions are all theoretical in nature and predominantly serve to fill the theoretical literature gap. Ostrom derived her design principles from investigating field studies and had therefore access to examples from practice. This master thesis entirely relies on theory and the knowledge Ostrom gained by studying CPR-regimes. Empirical research, case studies or other organizational examples could have provided a more detailed insight into how stakeholder value creation is being applied in practice and what processes successful implementations have in common.

5. Conclusion

Therefore, an implication for further research could be to put the established design principles to the test in practice. A possible way to do so would be to follow Ostrom’s approach by investigating case studies. Here, it would be useful to look for evidence that could support the adapted design principles or establish new ones and compare the two. This way it would be possible to derive principles that are more closely related to practice by still being enriched with knowledge from collective action theory.

Just like Ostrom’s (1990) design principles the adapted principles established in this thesis neither provide an implementation guide nor a panacea to stakeholder value creation. Mostly, actors engage in trial and error processes along the eight principles to find the right way of self- management. Thus implementation can look very differently between regimes (Wilson, Ostrom and Cox, 2013). It can be assumed that this will also be the case in a stakeholder value creation setting. Ingram and Hong (2014) developed eight questions to guide the implementation of the collective action design principles. In order to facilitate the implementation process of joint value creation according to the design principles, it would be useful to adopt those questions towards the eight design principles for successful stakeholder value creation.

Even though Ostrom (1990) researched different kinds of CPR-regimes from, e.g., irrigation systems and fishing grounds to meadows and forests she did not differentiate the principles. When conducting more empirical research on the topic of stakeholder value creation, it would be interesting to investigate in how far the type of organization, e.g., NGO, large privately held corporation or family business, may has an influence on the way how joint value creation is conducted and if the principles may need to be adjusted accordingly.

Another interesting aspect in this context is the value distribution process, which this master thesis did not focus on. Ostrom (1990) provides some insights on the appropriation matter. The issue of how stakeholders, who contribute resources and capabilities to value creation, can be compensated residually is as interesting as it is difficult to solve. Further research in this direction may be valuable in order to establish a cost-benefit equilibrium, that is perceived as fair among all actors and not solely based on financial measures.

The most vital aspects in both stakeholder value creation and collective action are the collaboration and the relationships among all actors involved (Bridoux and Stoelhorst, 2016; Ostrom, 1990; Post, Preston and Sachs, 2002a). The mechanisms that make collaboration and relationships successful and long-lasting are hard to observe or to determine. As a consequence, research on how to best enable stakeholders and organizations to create and maintain long-

5. Conclusion lasting and relationships in order to ensure ongoing contributions towards a common objective and foster sustainable business models would be valuable in the area of strategic management.

5. Conclusion

5.2. Managerial Implications

Even though this master thesis was entirely derived from theory, it still contains valuable managerial implications. Since companies play an essential role in finding solutions for global and local issues that cause, e.g., resource depletion and inequality, they can have an impact on a more sustainable future.

The most important takeaway from this master thesis for managers, who conduct the change towards a more sustainable way of doing business and move away from shareholder primacy towards including all stakeholders, is that value, in whatever form, is created within the multiple relationships with multiple stakeholders. For these relationships to prosper and ensure ongoing contributions to joint value creation, collaborative effort from everyone involved is needed. Here, it is vital that managers recognize these relationships and are able to build and sustain them through trustworthy and interdependent behavior that limits opportunistic and self- interested endeavors.

Since value is a subjective concept that varies among stakeholders, and between stakeholders and organizations it is vital for managers to identify what these individual concepts of value entail. These varying forms of value should then find their way into reporting systems and be translated into measurable performance indicators. Because what gets measured also gets managed.

A look at the adapted design principles for successful stakeholder value creation provides an overview and guidance of important areas that need close attention by managers. The principles describe the conditions under which trust and reciprocity, fundamental for long-lasting relationships and collaboration, are established and maintained. Even though the principles appear to be intuitively they are not being adopted spontaneously by groups (Wilson, Ostrom and Cox, 2013). Therefore, organizations and their stakeholders should establish a plan on how to educate and train their management in this area. Managers need skills and knowledge of how to best manage not only business activities but also manage a variety of relationships and ensure their maintenance.

The costs for engaging in stakeholder value creation and for implementing measures that are guided by the principles are an essential factor for organizations and managers and should not exceed the reachable benefits. Trust and collaboration can reduce transaction and agency costs (Foss and Foss, 2005; Jones, 1995; Mayer, Davis and Schoorman, 1995). In order to keep

5. Conclusion coordination costs, e.g., monitoring costs relatively low, it is advisable to focus on establishing a suitable and fair set of rules and norms for governance arrangements. The better the rules are in terms of perceived fairness and suitability and the higher the trust among actors is the higher the possibility of keeping coordination and monitoring costs low.

Since the collaboration with and integration of different stakeholders and their interest is an essential step for businesses in the private sector in order to tackle and meet the UN’s 17 Sustainable Development Goals this master thesis provides a useful insight into important factors that can foster stakeholder value creation and therefore a more sustainable business model with less negative environmental and social impacts.

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Affidavit

I hereby declare that this Master’s thesis has been written only by the undersigned and without any assistance from third parties. I confirm that no sources have been used in the preparation of this thesis other than those indicated in the thesis itself.

This Master’s thesis has heretofore not been submitted or published elsewhere, neither in its present form, nor in a similar version.

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