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

I

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

II

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

III

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

List of Tables

IV

List of Tables

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

233) ............................................................................................................................................. 9

List of Abbreviations

V

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

1

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

2

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

3

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

4


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.


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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


6

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).


7

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.


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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


9

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


10

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).


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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


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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.


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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


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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

15


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


16

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


17

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


18

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).


19

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


20

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.


21

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.

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,

Individuals or households who have rights to withdrawresource units from the CPR must be clearly defined, asmust the boundaries of the CPR itself.

1. Clearly Defined Boundaries

Appropriation rules restricting time, place, technology,and/or quantity of resource units are related to localconditions and to provision rules requiring labor, materialand/or money.

2. Congruence Between Appropriation and Provision Rules

and Local Conditions

Most individuals affected by the operational rules canparticipate in modifying the operational rules.

3. Collective-Choice Arrangements

Monitors, who actively audit CPR conditions andappropriator behavior, are accountable to the appropriatorsor are appropriators.

4. Monitoring

Appropriators who violate operational rules are likely to beassessed graduated sanctions (depending on the seriousnessand context of offense) by other appropriators, by officialsaccountable to these appropriators, or by both.

5. Graduated Sanctions

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

6. Conflict Resolution Mechanism

The rights of appropriators to devise their own institutionsare not challenged by external governmental authorities.

7. Minimal Recognition of Rights to Organize

Appropriation, provision, monitoring, enforcement, conflictresolution, and governance activities are organized inmultiple layers of nested enterprises.

8. Nested Enterprises

for CPRs that are Part of Larger Systems


22

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


23

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.


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


24

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.


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).


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


25

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.


26

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).


27

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).


28

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


29

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).


30

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.


32

Institutional Setting

Collective Action

Organizational Setting

Stakeholder Value Creation

Actors

Appropriators

Provisioners

Organization

Stakeholders

Underlying Structure Institutional Arrangements Governance Arrangements

Source of

Conflict/Problem

Collective Action Problem

Free-Riding/Opportunism

Collective Action Problem

Opportunism/Withdrawal of

Contributions

Rule-Creation and

Decision-Making

Participatory and

Collaborative

Participatory and

Collaborative

Soft Mechanisms

Trust, Reciprocity and

Reputation

Trust, Reciprocity and

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

33

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

34

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).

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.

Governance

(joint decisions about rules to govern behavior & relationships)

Administration

(implementation of collaboration - rules, responsibilities, monitoring &

coordination)

Norms of Trust and Reciprocity

(fundamental ingredients for long-lasting relationships)

Autonomy

(balance of self-interest vs. collective-interest)

Mutuality

(win-win solutions)

4. Synthesis

35

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

36

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

37

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

38

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


Contributing stakeholders must be authorized to make some own rules and consent to

decisions in establishing governance arrangements.

4. Synthesis

39

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

40

The fourth of Ostrom’s (1990) design principles contains valuable information and can be


Organizational monitoring, including stakeholders and their interest, audits behavior and rule

conformity to ensure ongoing contributions towards joint value creation processes.

4. Synthesis

41

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

42

The fifth of Ostrom’s (1990) design principles contains valuable information and can be


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

43

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


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

44

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


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

45

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


Larger organizations and their stakeholders nest governance arrangements and rules across

multiple levels and subsidiaries.

4. Synthesis

46

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.

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

Stakeholders who contribute to an organization’s valuecreation by supplying resources and capabilities must beclearly identified as well as the subjective concept of valuewithin each stakeholder relationship.

1. Clear Definition of Stakeholders and Their Subjective Concept of

Value

Creation of rules that foster a fair cost-benefit equilibriumfor stakeholders and are suitable to the economicenvironment and organizational conditions.

2. Cost-Benefit Equilibrium Suitable to Economic Environment and

Organizational Conditions

Contributing stakeholders must be authorized to makesome own rules and consent to decisions in establishinggovernance arrangements.

3. Collective-Choice Arrangements

Organizational monitoring, including stakeholders andtheir interest, audits behavior and rule conformity to ensureongoing contributions towards joint value creationprocesses.

4. Monitoring

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


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


Governance arrangements established by stakeholders andorganizations should receive minimal recognition byexternal authorities as long as they do not violate higherlaws and regulations.


Larger organizations and their stakeholders nestgovernance arrangements and rules across multiple levelsand subsidiaries.

8. Governance Arrangements and Rules are Nested Across Multiple Levels and Possible Subsidiaries

5. Conclusion

47

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

48

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

49

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

50

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

51

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

52

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

53

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.

References

54

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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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stakeholder value creation: a collective action approach

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