Slides

04/09/23 Copyright 2009 D.Diermeier 1

Session 9 – Integrative Case

SEEK-441 Strategic Management in Non-Market Environments

Daniel Diermeier

IBM Professor of Regulation and Competitive Practice & Director of Ford Center for Global CitizenshipKellogg School of Management (MEDS)

Drexel’s dilemmaVariable scope of the issue. Where are the pressure points?

Junk bonds may be used for:

Hostile takeoversRestructuring; LBOsMergers and friendly acquisitions

S&L holdings

Keeping the issue narrow cuts losses in the event that legislation passes, but. . .

. . . keeping all these together complexifies the issue which can increase uncertainty. It can also bring other interests into alignment with Drexel’s interests; e.g., some investment banks, some businesses, communities, some financial institutions.

Financing high-growth companies

Do we want to take a bullet and survive or try to stop all the bills?

moratorium on hostile takeovers

H.R. 2476

restrictions on holdings by financial instit.

04/09/23 2Copyright 2009 D.Diermeier


Drexel’s first pass

Little coalition building hadn't analyzed interests affected by the broad scope of the issue

Little institutionalism little political "infrastructure marketing" little institutional know-how

Economically sophisticated but politically unsophisticated messages

"Junk bonds are essential to competitiveness and economic strength."

“the risk-adjusted yield is higher on junk bonds” a duel of economic facts adds uncertainty but will not carry the

day

Result: Failed to slow the legislative momentum.


President

House

SQ

Senate

Does Drexel have a chance? – Status Quo Bias

Senate Filibuster Pivot

Region of policy change

Region disappears!Status Quo prevails!


Legislator

Status Quo

Dimension 1

Dimension 2

highlow

low

high

Does Drexel have a change? The Power of Uncertainty

high

Bill

Outcome 1

= Outcome ?

Outcome 2

Outcome 3


Drexel’s second pass - refined strategy

Objective: kill the bills (all of them!)

Does Drexel have a chance? Yes, because Drexel can serve as a catalyst for con-coalition It is always much easier to block a bill than to pass it. Legislators are risk-averse; the more uncertainty about

consequences the better Drexel will not win on “numbers”, “coverage”, etc. but may make

legislators hesitant to vote for a bill with very uncertain consequences. Drexel needs to focus on “counter-active” lobbying and creating

uncertainty. To do this credible testimony by allies is key! but Drexel must be very aggressive given the issue location in the

life-cycle and its lack of political infrastructure. stop the bills as early in the process as possible (committee

stage!) focus on pivotal legislators -- use politically-relevant

information


Coalition Formation and Rent Chain

Should Drexel accept Aylward’s offer? Yes. What should the group be called?

Yuppies for profit? Junk bond junkies? Alliance for Capital Access (ACA)

How to use the rent chain? Rely on its clients (especially companies with very good public

image e.g., Kinder Care Learning Centers, Calvin Klein, Wickes, Southmark)

Educate them about the threat Encourage them to take political action by telling them who to

contact and what to do. Reduce their costs of organization by using the Alliance for Capital Access financed by Drexel.

Use at committee hearings and in lobbying efforts (credibility!) Should Drexel engage in public advocacy campaign?

Low key is preferable, but some targeted ads may help (Drexel spent about $ 4 mill. on this).


Lobbying

Lobby who? All key institutional actors (committee chairs, party leaders, President)

because all are not well-informed about junk bonds Senators and representatives from states not well served by established

securities industry e.g., Virginia increased employment by 64,000 by firms using junk bonds, New Mexico does not have a single investment grade company

What message should Drexel convey? Drexel will be put out of business or badly hurt by this legislation?

NO! Junk bonds are essential for economic growth, jobs and competitiveness

Few states have investment grade companies (Senate) Number of companies per district that used junk bonds to expand.

(32 companies in Bliley’s (R-VA) district; 64,000 jobs) Restrictions on junk bonds are unfair to states and localities who

depend upon jobs provided by firms who use junk bonds Restrictions will only help complacent managers without helping

stockholders or employees.


Lobbying (con’t)

Lobby how? Need access so consider contributions to D’Amato (R-NY) and

Wirth (D-CO). Contribute to natural allies. D’Amato because Drexel is his constituent. Wirth because of connection to high tech startups in western states.

Hire lobbyists. Robert Strauss (Chair of Democrat Party) and John Evans (Republican former SEC official).


Long-Term Measures

Continuing relations 1983-84 PAC contributions $20,550 1985-86 " " $177,800 D’Amato $56,750 (PAC + individual contributions) Wirth $23,900 (PAC + individual contributions)

Washington presence (building a continuing political infrastructure)

Washington office--Mary Jo Jacobi (former aide to Reagan)

Questionable measures; e.g., “speaker’s fees”


Drexel: outcomes and conclusions

No legislation emerged from committee, neither in the House nor Senate.

Original strategy unlikely to succeed: information not politically useful did not provide a politically-relevant reason to oppose the bills

Revised strategy was consistent with: better understanding of interests, institutions and politically

relevant information backed by substantial resources--this was the most important

issue on Drexel’s agenda The case illustrates the openness of the U.S. system; Drexel

was able to change the outcome at a very late date; as we will see in future sessions such a strategy would probably not have worked in other political systems (such as Germany or Japan).


Drexel – Junk Bond Update

Drexel’s junk bonds fueled successful new ventures such as MCI and Turner Broadcasting

In 1989, the market for junk bonds was estimated at $28 billion In 1990, Drexel went bankrupt after pleading guilty to six felony

counts Drexel assessed $650 million in fines Milken spent two years in jail, paid a record $1.1 billion fines, and was

banned for life from securities industry By 1991, the default rate for junk bonds reached 10 percent and only

$4 billion was issued In 1996, the industry has rebounded with $73.6 billion issued and

$142 billion issued in 1999 Today, there are 60 players ranging from prominent Wall Street

investment houses to major U.S. and foreign banks Many mutual fund and pension funds hold “high yield” debt are part

of their portfolio In 2001, Levi Strauss raised $1.05 billion in “high yield debt” No new pushes for regulation


Perceptions about lobbying

Power over actions: persuasion/threats, coercion, cutting deals in smoke-filled rooms -- seldom

Influence over beliefs: strategic provision of politically-relevant information to and from political and public officeholders -- the principal form of lobbying

Politically-relevant information pertains to the interests of officeholders; e.g., constituents and policy interests; rent chain; emphasize jobs--not profits

Strategic in the sense of providing your side of the issue and counteracting the other side’s messages

Strategic in the sense of targeting (whom to lobby) and timing (when to lobby them)


Levels of Lobbying

Business

CEO

Member/Officeholder

Government

“Restrictions on junk bond financing will cost jobs.”

Interact withthe member and her staff atmultiple levels

Staff

Managers

technical information

political informationcommitteepersonal--administrative assistant--legislative director--legislative assistant--legislative correspondent

Linton senatormessages


Lobbying – Key Steps

Step 1. Identify the information that stakeholders possess that is decision-relevant for legislators.

Step 2. Determine how to transmit that information to legislators credibly.

Step 3. Get access to pivotal legislators and proposers.


contact--But why should I act?

Types of lobbying

QualityType of

information Remark

Irresponsible false Not only morally but alsostrategically objectionable

Superfluous true but known Politicians are busy and do not liketheir time wasted.

Good true and unknown A necessary but not sufficientcondition for a successful lobbying

Excellent true, unknown, andimportant to thepolitician’s goals

Sufficient for a contact, plus goodprospects for influence; a vote or,better yet, an ally


What Makes Information Credible?

1. Record of being truthful and accurate--reputation

2. Relationships of trust

3. Data and analysis

4. Corroboration of position and analysis by others with different interests


Principles of lobbying

Know the institutional arena--where decisions are made Know its officeholders' interests and incentives; risk averse and

don’t like uncertainty; e.g., about whether constituents will benefit or be hurt and complain or take action;

Respect the officeholder and her staff--most are smart, all are savvy

Don't just talk - Listen to officeholder and her staff for their interests and concerns strategic advice--about process, about likely votes

Explore and exploit coalition building opportunities; e.g.Calgene include sunflower growers (chapter 8) Microsoft included Excite@Home and Icast.com as part of coalition

to lobby FCC to open up AOL’s instant messenger service.

Establish (access), maintain, and use continuing relations use allies that have access: e.g. TribalVoice and the FCC.


The Interest Group-Matrix

Identifies strategy templates

Tool is best used in conjunction with Distributive Politics Spreadsheet

Depending on an issue’s location in the matrix different approaches are appropriate


Interest Group Matrix

Opponents of Policy/Law

Proponents of Policy/Law

Organized Not Organized

Org

aniz

edN

ot O

rgan

ized

Interest grouppolitics

Entrepreneurialpolitics

?Client politics

environmental protection

trade liberalization

tax breaks


Probability of Passing Bill

Entr. Politics

Interest Group Politics

Client Politics



Organized Not Organized

Organized

Not Organized ?


Opponent Strategy

Organized Not OrganizedO

rgan

ized

Not

Org

aniz

ed



?Client politics





tax breaks


Proponent Strategy


rgan

ized

Not

Org

aniz

ed



?Client politics





tax breaks


Client Politics - Overview

Proponents are organized - opponents are not Since opponents are not organized, proponents should win if

their supporters are organized, politically motivated and willing to take action

But:

1. Counteractive strategies are available e.g. information supplied by an opposing group may push

the issue towards interest group politics

2. General public distaste for client politics this may allow opposing interests to portray proponents as

“special interests”


Client Politics – Proponents

Proponent tactics usually include: Using a low profile strategy to avoid media or public

attention Providing the key decision makers with information

(credible) that points out the public benefits of a policy measure – decision makers may use this information to later justify their vote

Considering the merits of a piggy-back or legislative vehicle strategy such as omnibus bills, riders on appropriations, comprehensive reform measures (e.g. Luxury Tax)

Hurrying the matter to a resolution before media attention or opposition groups can organize

Anticipating opposition tactics (see next slide)


Client Politics - Opponents

Opponent tactics usually include:

Using a high profile strategy to expose proponents as political clients (a.k.a. “pigs feeding at the public trough”)

The Problem: incentives for collective action against proponents are low by definition and high-profile strategies are costly, so...

Leverage existing social, economic or political infrastructure to minimize organization costs and time

Search for a well-placed politician (e.g. Party Leader/Committee Chair) or political entrepreneur (i.e. Nader) to represent the otherwise inactive and dispersed cost-bearers

Create media interest in issue or the proponents tactics for special interest legislation






rgan

ized

Not

Org

aniz

ed



?Client politics



tax breaks


Entrepreneurial Politics

Entrepreneurial politics is the opposite of client politics and is one of the most difficult strategies

A political entrepreneur can be someone within the political system (e.g. Senator Kennedy of education) or outside of politics (e.g. Ralph Nader on consumer rights)

Additionally, you have to discern whether information exists that can credibly alter perceptions about costs and benefits so that the nature of politics can shift to interest group politics If so, an effective strategy may be possible but

has to be carefully implemented If not, more modest and realistic objectives must

be adopted to minimize losses (e.g. market entry)






rgan

ized

Not

Org

aniz

ed



?Client politics



tax breaks


Interest Group Politics - Overview

Interest group politics is typically highly visible (e.g. oil industry vs. environmentalists)

There may be disagreement within interest groups about the appropriate scope or resolution of the issue (e.g. obesity)

Business interests tend to have relatively high resources and low costs of organizing, and thus may help to represent unorganized interests (e.g. manufacturer organizing suppliers)

Key problem for businesses is translating money into votes!



Some common tactics by Interest Group Proponents and Opponents:

Coalition-building with other Interest Groups is critical Pharmaceutical companies and patients

Pick an objective in order to build the strongest coalition Disney

Using your rent chain Luxury Tax

Adopting arguments that emphasize the interests of otherwise unrepresented interests / constituents

Drug-Reimports – Drug safety

Seeking diverse groups to coordinate / corroborate messages

internet gambling Scrubbers (see Baron book)



Proponent Strategies Changing the status quo

is generally more difficult and requires persuasive arguments or evidence

Identify the broadest coalition by strategically defining coalition

Identify strengths and weaknesses of coalition

Opponent Strategies Focusing on doubt and risk

of new law or policy Use delay tactics to

postpone decision (e.g. “Big Five” tactic against SEC chairman’s reform to separate audit and consulting functions)

Identify strengths and weaknesses of coalition


Interests - Key Take-Aways

Constituency analysis helps predicting which interests will be active and their expected impact.

If more than one interest is active on a given issue, the distributive politics spreadsheet helps to estimate a group’s likely impact as well as coalitional alignments.

As the Disney case demonstrates, coalitions are highly issue-specific. Which aspect of an issue is emphasized, will determine coalitional alignments.

The interest group matrix helps to identify broad strategy options for different interest group configurations.

Slides

Economy & Finance

better drexel

junk bonds restrictions

junk bonds senators

wirth d

diermeier legislator

high low low high

junk bond junkies

pac contributions