Tuesday, April 28, 2015

Hands off my Partner! France shows how a Third Party Can Complicate an Alliance

There is excitement in the business press around the dealings that the state of France has with car maker Renault, and the impact this could be having on the alliance of Renault and Nissan. The story starts with complicated maneuvers by the Economy Minister (this is France, after all), which are interesting enough to mention, but I will soon get to the alliance issue.

The start of the excitement is that the French government made a change in the stock voting rights late last year that benefits long-term investors, because they get double voting rights, so double the power, if they have held the shares for two years or more. But there is more to the law; it can also be used to favor French or other European shareholders over others, and specifically it lets the French state get double voting rights on its shares. That is a big power grab in a nation that has large state shareholding of many companies. The French government has assured managers and other owners that their intentions are purely beneficial and they do not intend to discriminate against others. The very existence of the law, and past French Economy Minister behavior against firms, place that assurance very much in doubt.

But enough legal issues, over to alliances. The Renault – Nissan alliance is famous as one of few very successful cross-border alliances of large firms. It started more or less as a rescue of Nissan, which was in bigger trouble than Renault when it was initiated, though neither firm was healthy. As a result, both firms own a portion of each other, but Renault has voting shares over Nissan but not the other way around. And what started as a rescue led to very significant success and growth. Now Nissan has double the car sales of Renault.

The Renault CEO Carlos Ghosn has made big personal investments in making the alliance work, and has drawn much credit from its success. He reacted quickly against the new law through seeking to make a special Renault exemption from it (this is legal), as well as speaking publicly against the law. No doubt he is doing this because Nissan enjoys their relation with Renault but do not trust the French state.  Indeed, he has been supported by his board of directors, as well as from the Nissan board of directors. He has until recently looked like he would be able to get a majority of Renault stockholders to vote for the exception, as he is required to do.

And now I need to bring the French state maneuvers back into the story. The Economy Minister Emmanuel Macron has arranged to buy a substantial share of Renault stock and to have options to sell them after the shareholder meeting. Translation: he is using taxpayer money to buy the votes necessary to stop Ghosn at the shareholder meeting. This is nearly certain to work, making France an even more important shareholder in Renault as intended.

What about the alliance, then? Well, it is going to be interesting. As long as France does not intervene much, it is likely that it will go on as before because Renault and Nissan are still useful for each other. But if there are problems things could change dramatically because Nissan actually needs Renault much less now than it used before. The main problem would be that Renault owns so much of Nissan that getting away from Renault would be hard. It is easy to see ways that this change in power will cause problems, and much harder to see any benefits to the alliance -- or to France.

Stacy Meichtry,  Jason Chow and Sam Schechner. 2015. France Outflanks, Outrages Renault’s Ghosn. Wall Street Journal, April 27 2015.
Greve, Henrich R., Timothy J. Rowley, and Andrew Shipilov. 2013. Network Advantage: How to Unlock Value from your Alliances and Partnerships. Jossey-Bass. 

Sunday, April 12, 2015

Loyal Cheaters: When Organizations Promote Wrongdoing

Every now and then we hear news about employees who are engaged in wrongdoing of various kind, usually harmful to customers and employees. The most spectacular have been financial fraud, as when traders lose money while performing trades that break the internal rules of their banks. UBS trader Adoboli was convicted for unauthorized trading that led to a 2 billion dollar loss; Barings Bank trader Leeson was convicted for unauthorized trades that lost 1.4 billion dollar. Barings Bank went bankrupt; UBS bank stock owners (and surely, customers as well) suffered financially from the losses.

We often think of such wrongdoing as being the result of bad employees acting against their company, but is that really the right story? It is certainly a poor fit with these trader cases, because both of them started trading out of control after losing money, not while making a profit. You could see them as trying to avoid getting fired, but surely that does not fully explain risking lengthy prison terms.  In fact, an odd but plausible true explanation is that their wrongdoing was an attempt to save the firm from losses.

Research supporting this explanation has been done by Donald Palmer and Christopher Yenkey, and will soon be published in Social Forces. They looked at another context with some famous wrongdoing: the cycling race Tour de France. There, the beginning of blood monitoring in the 2010 race makes it easy to investigate which cyclists likely engaged in blood doping or drugging, even if they did not get blood values suspicious enough to fail tests. Of course is well known that Lance Armstrong engaged in doping for many years and was stripped of 7 wins; not everyone knows that Alberto Contador was declared winner in 2010, but lost the victory after a drug investigation. The key point in Tour de France is that players may cheat to benefit themselves and their team, and it is actually possible to test what makes them most likely to cheat.

So what determined cheating? The role in the team is most important, because specialists such as team leaders and sprinters had the most suspicious blood values, while their supporting cyclists had the second-most suspicious values. Members of teams that let each cyclist compete individually were least likely to cheat. People don't cheat for themselves as often as they cheat for their organization.

So we have an interesting result that should give pause to anyone who sees wrongdoing in organizations as a result of individuals looking out for themselves. It could be exactly wrong: they are trying to help their employer. This means that the right response against wrongdoing is not more organizational control of what people do, but less pressure to win. 

Palmer, D., C.B. Yenkey. 2015. Drugs, Sweat, and Gears: An Organizational Analysis of Performance-Enhancing Drug Use in the 2010 Tour de France. Social Forces.

Alberto Contador (center) celebrating his Tour de France victory. 
To the left is Andy Schleck, who has now been declared the winner.