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Report n°2: An integrated approach to economic and social contestability in business

Forms and dynamics of contestability management in a recycling branch

Table 1 below outlines the various different forms of contestability that operate in such a context and situates the players responsible for each. These are the different forms of protest the historic recycling operator has to monitor. Based on that analysis we will examine the ways in which the economic characteristics of the recycler's activity expose it to one or other form of contestation and how the different forms hinge together. We advance four key proposals (P1, P2, P3 and P4) in this respect. They can be summarised as follows.

  • [P1] - "Low economic contestability induces high contestability on environmental issues

For the historic operator examined, a dynamic relationship emerges in which the exposure to competition by new entrants at the same level in the branch ("degree of internal or external economic contestability") tends to be inversely related to the exposure to external social contestation ("degree of social contestation on external environmental or safety grounds").

Indeed, the choice of assets and particular economic forms organizing the transactions that improve the recycling operator's competitiveness on the input and output markets (i) reduce the threat from new entry on either of these markets (ii) reduce the competition exerted by other established operators at the same level in the branch and (iii) confer a strong economic position to the historical operator in his relations with his suppliers. At the same time, these choices (i) increase the firm's exposure to external social contestation and (ii) increase the factors that are favourable to the emergence of social protest. Typically, in the stylised case taken as a reference, that configuration results from the operator's exclusive acquisition of and efforts to preserve an ideal geographical siting with regard to the access it affords: to a sufficiently dense reserve of materials for recycling that is all the more advantageous for being located in an urban context or high-density industrial zone, and a diversified set of transportation infrastructures to enable supplying the customers at least possible cost. This is viable only by combining specific local assets - dedicated shredding equipment, for instance - and building up intangible assets like a reputation and constraining suppliers to learn through practice and repetition how the recycler evaluates the scrap and prices it. This combination enables the recycler to maintain a strong grasp on the market that a newcomer would be unable to match. Because of this configuration, however, the recycler is vulnerable to two forms of mistrust that can lead to social protest.

On the one hand there is the threat of contestation through defection by the firm's suppliers and on the other the threat of external social contestation either by local players (challenging vigilance and Nimby syndrome) or by more general actors -NGOs, central public authorities, etc.- (generalizing social contestation). This latter kind of threat may also however affect a newcomer attempting to develop similar activities in the same region as the historic operator(11). In this latter case, the new business projects may arouse Nimby type reactions.

Contestation from the firm's suppliers through defection, aroused by the recycler acquiring a dominant position on the market, may suffice to trigger external social contestation of his activities when, in a context of local protest or vigilance this results in an increase in the environmental or health risks to the local population or community, even if the extent of such a threat remains uncertain and debatable. In this way, a link could be established between the quality of economic relations within the branch and the operators' exposure to external social contestation on environmental grounds. It is manifestly in the historic operator's interest to take note of this link.

(11) This would again reduce the incentive to enter the market to compete with the historic operator.

  • [P2] - "The historic operator rationally manages by anticipating the threat of environmental protest; however the strategy he develops to guard against such threats may contribute to a reduction of his economic contestability"

For a historic recycling operator, engaging in a proactive strategy to reduce his exposure to a social contestation on environmental and safety grounds would be economically advantageous from two aspects.

Firstly, reducing the threat would avoid the challenge to the firm's activities from which it cannot disengage itself without huge losses, given the time horizon of its economic engagement.

Secondly, by preparing for the eventuality of social protest the recycler can paradoxically hope to improve his competitive position (extent of exposure to contestability by competitors). This is possible because some actions to reduce his exposure to potential external social protest also have the effect of reducing the possibilities of entry available either to operators already in the branch (integration upstream or downstream) or to new operators who might be tempted to enter that market. When such possibilities exist, an active strategy to prevent potential risks to the community and forestall the dynamics of social protest is economically rational for the historical operator without need of delicate arbitrage, for it directly serves to make the firm more profitable. Herein resides an original basis for voluntary initiatives in terms of environmental responsibility.

  • [P3] - "Low economic contestability provides with a strong leverage effect"

For the recycling operator, there is a relationship between the management of its economic contestability (internal and external) and the exposure to social contestation. When there is little economic threat from competitors, the operator has the resources to encourage his economic partners to adopt behaviour that minimises the risk of social protest. A configuration of this nature can thus be established when four conditions are satisfied: (i) it is not economically viable for the historic operator to relocate (due to the expense of re-locating and the sunk costs), (ii) no operator on the input or output market is capable of encroaching upon the historic operator's activities upstream or downstream(12), (iii) the legitimacy of the upstream or downstream is also under threat (13) and (iv) the nature of the economic contracts or relations of authority binding the various parties in the branch is such that the historical operator can incite the upstream or downstream operators to follow patterns of behaviour that fosters the supply of high quality materials.

Thus, the same economic mechanisms aimed at overcoming market failures brought about by the uncertain quality of the goods exchanged (materials collected for recycling) can serve as a lever to encourage operators in a particular branch to take into account and reduce the potential social risks that it may create when there is a direct inverse link between the quality of goods supplied to the branch and the likelihood of local or more widespread environmental risks setting off a protest movement. Preventing contestation through defection by suppliers would therefore also reduce the probability of creating or increasing the risks to the community and eventually triggering social contestation. In other words, particular organisational modes in commercial relations can usefully serve to encourage a supplier upstream to adopt a behaviour that reduces the social contestability of the whole branch.

(12) More generally, the historic operator uses specific tangible or intangible assets that no economic agent, upstream or downstream, would be in a position to acquire or use as effectively.

(13) The legitimacy in question here can be challenged in several possible cases, depending on the the target. It may be the legitimacy of an economic activity - this is typically so for an incineration operator, where the harmlessness of the smoke he produces is contested (dioxin). A local authority may also be contested over the legitimacy of contracts it has signed with a private service provider.

  • [P4] - "Integrated management of the relations between different types of contestability requires a strategic management of the information transmitted during commercial transactions to agents who may exhibit mistrust for the recycling operator and choose the option of contestation through defection"

To avoid setting off a dynamic chain of events resulting in a combination of both economic and social contestation, the historic operator must exercise preventive and corrective management of any defection and opposition due to mistrust on the part of one of the firm's economic partners. Such mistrust might arise out of the modes of organisation of the transactions required for the activity, or might emerge when partners (inside or outside) consider their means insufficient to encourage the historic operator to choose an economic behaviour that preserves the mutual interest (in the case of suppliers-recycler or service providers-customer relations) or the interests of the community (in the case of relations between local residents and the recycler).

In this context, strategic management of information transfer to scrap metal collectors and external players in the branch proves necessary to control both the economic and the social threats. Far from making absolute transparency on the characteristics of the goods produced, the processes used or the pricing system applied an ideal to achieve, a delicate balance is usually vital between the demand for transparency and the maintenance of a selective opacity with respect to certain variables. Ignoring the need for this kind of arbitrage on what information to reveal would result in simultaneously weakening the quality of economic relations as well as the firm's achievements in terms of the environment and safety, thereby increasing the likelihood of arousing social protest. In the case of a recycling branch, careful arbitration between transparency and opacity is aimed partly at reducing the risk of contestation (defection) by suppliers (wastes hidden in the materials to be recycled) and partly at taking into account the strategic use that external players already opposed to the activity might make of confidential scientific information.

In this first hypothesis, the recycler will seek to dispel sources of mistrust, which even if unfounded stem from a difference in expertise ostensibly prejudicial to the suppliers. In the second hypothesis, the historic operator will have to anticipate the negative impact of public revelation of unscientifically based conjecture on possible risks to the community, in a social context marked by a popular culture that wrongly, with respect to doctrine, mistakes the precautionary principle for a rule of abstention before unproven hazards (Godard et al., 2002; Godard, 2003).

To substantiate the above propositions, the argument that follows will proceed in three stages. The first deals with the front end (input market) of the branch, the second with the back end (output market). The third takes into account the factors of uprising social contestation as perceived by a historic recycling operator in the context as described.