price society pays for limiting the liability of equity holders. From the standpoint of economic efficiency, no simple bankruptcy priority rule works as well as unlimited liability by the firm’s owners.’
investment decision, they have a strong interest in trying to keep the various stakeholder groups onside. The managers need to manage the stakeholders in order to make an investment successful.
What can be said about the distribution of value or of risk? The com- bination of purchased inputs and the value added by the enterprise creates the value realised in the final market. In theory that value is distributed in a way which reflects the opportunity costs of the rele- vant inputs as determined in competitive markets. The opportunity cost of any input is the lowest price which a marginal supplier would be prepared to accept for delivery of the input in a competitive market in which there are many rival suppliers. The distribution usually reflects markets which are less than perfectly competitive, the price being made rather than taken.
There is a choice between two strategies. The first is keep an arms length relationship with all suppliers, to enter only short-term con- tracts and to minimise the immediate costs of any inputs. The second strategy is to enter a closer, more long-term relationship which seeks to minimise the cost over a longer time horizon. The managers of the enterprise, wishing to keep the various stakeholder groups happy, might tend to the second strategy. In order to keep the groups supply- ing inputs happy it is helpful to provide a share of total value in excess of that suggested by the level of opportunity cost. There are a number of reasons for doing this:
The lack of a competitive context – there are seldom a large number of possible suppliers. The suppliers have asymmetric information in that insiders, those who already supply, have experienced a learning process which gives them an advantage over outsiders in quality, design or cost level. This creates significant switching costs.
The need for a longer time horizon. In the process of negotiation it may be important to create a long-term relationship, not a series of transitory, arms-length relationships. Such a relationship is not a zero-sum one, rather one in which both partners can benefit from the cooperation. There may be an exchange of information concern- ing strategy, specifically of technical and organisational knowledge about specific investment projects. Input suppliers can provide knowledge which improves the net cash stream of the investment.
The existence in a typical enterprise of ‘organisational slack’. In the words of Buckley (1996: 3), ‘Slack consist in payment to members of the coalition in excess of what is required to maintain the organiza- tion.’ It also consists in resources which are not fully utilised. Such a The Investment Process and Decision Making: the Organisational Perspective 115
strategy has positive implications for the enterprise. It is possible to allow in good times the development of organisational slack in the knowledge that in bad times this slack can be taken up. Pressure can be applied to suppliers to reduce costs when there is a particular need to do so.
The point in the life cycle reached. Profit levels vary during the life cycle of the enterprise’s business units. They tend to be at their lowest at the beginning and the end of the life cycle. The risk toler- ance of the enterprise varies according to its financial position.
When profits are at a satisfactory ‘above normal’ level, particularly if there is a free cash flow, it is possible to be proactive rather than reactive in controlling risk. The scope for behaviour which keeps the stakeholder groups happy varies with the pressure on the profit level of the enterprise. When profit is low, there is a tendency to react slowly to stakeholder groups, doing the minimum to keep them happy. On the other hand, during adolescence and maturity, when profit levels are satisfactory, there is more inclination to keep such groups happy. At this stage in the life cycle, there may be more lati- tude in negotiating with contractual partners and giving them more of the value created by the relevant investment.
The importance of the different stakeholder groups varies according to where in the life cycle of the relevant product(s) the enterprise is.
In its early life, the sources of finance are important. During the period of rapid expansion the relationship with suppliers and with workers is critical. Individual investments should be analysed with this in mind.
For all stakeholders the degree of the commitment required determines the degree of interest and the nature and level of risk. Each of the stake- holder groups, with an investment in the relationship at risk, wishes to mould that relationship to meet its own interests as effectively as possi- ble. The risk increases with the degree of asymmetric investment, being greatest for those who have made the largest investment. Stakeholders are the possessors of knowledge not possessed by any other group. The greater is the degree of asymmetric information the greater is the bar- gaining strength of those who are in possession of that information.
The ideal combination for a stakeholder group is large information and small investment. The smaller the number of partners within the groups dealing with the relevant enterprise and the greater the depen- dence of the enterprise on that group the smaller is the degree of risk for that group but the greater the risk for the enterprise.
All the groups work together to create economic value. Political value is also created, which can be turned into economic value.
Political value comes from the advantage to be won by instituting a change in government policy or regulation in your own favour, or from the gaining of social legitimacy by managing important social issues in such a way as to win support for the enterprise and to enhance its reputation. Some of the stakeholders are more involved in this second network than the first. However, they will negotiate in a way which influences the distribution of economic value.