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Game theory and corporate governance: conditions for effective stewardship of companies exposed to climate change risks

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  • Lucas Kruitwagen
  • Kaveh Madani
  • Ben Caldecott
  • Mark H. W. Workman

Abstract

Engagement between investors and corporate boards has been suggested as a pathway to mitigate stranded asset and climate change risks. Debate is ongoing as to whether divestment or active ownership strategies are more appropriate to deliver long-term value and environmental sustainability. The paper tests the effectiveness of owner engagement strategies by studying the conditions for cooperation between investors and their companies. Characteristics of investors and companies are modelled in game theoretic frameworks, informed by semi-structured interviews with professionals from the energy and finance industries, and academia, NGO, and regulatory sectors. Conditions for mutual cooperation between investors and companies are characterized as prisoners’ dilemmas. A number of parameters are examined for their impact on the development of sustained cooperative equilibria, including: the benefits and costs of cooperation; the degree of strategic foresight; individual discount factors; and mutual history. Challenges in the formation of investor coalitions are characterized and solutions are proposed.

Suggested Citation

  • Lucas Kruitwagen & Kaveh Madani & Ben Caldecott & Mark H. W. Workman, 2017. "Game theory and corporate governance: conditions for effective stewardship of companies exposed to climate change risks," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 7(1), pages 14-36, January.
    • Handle: RePEc:taf:jsustf:v:7:y:2017:i:1:p:14-36
    DOI: 10.1080/20430795.2016.1188537
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    Cited by:

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    2. Simshauser, Paul & Akimov, Alexandr, 2019. "Regulated electricity networks, investment mistakes in retrospect and stranded assets under uncertainty," Energy Economics, Elsevier, vol. 81(C), pages 117-133.
    3. Collins, Benjamin C. & Kumral, Mustafa, 2020. "Game theory for analyzing and improving environmental management in the mining industry," Resources Policy, Elsevier, vol. 69(C).
    4. Zeynep Kantur, 2024. "The Impact of Decarbonization on Physical Capital Asset Utilization in Latvia," Discussion Papers 2024/01, Latvijas Banka.
    5. Sam Fankhauser & Sugandha Srivastav & Ingrid Sundvor & Stephanie Hirmer & Gireesh Shrimali, 2023. "Net zero portfolio targets for development finance institutions: Challenges and solutions," Global Policy, London School of Economics and Political Science, vol. 14(5), pages 716-729, November.
    6. Ali Zarei & Sayed-Farhad Mousavi & Madjid Eshaghi Gordji & Hojat Karami, 2019. "Optimal Reservoir Operation Using Bat and Particle Swarm Algorithm and Game Theory Based on Optimal Water Allocation among Consumers," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 33(9), pages 3071-3093, July.
    7. Manmeet Kaur & Kunjana Malik & Sakshi Sharma, 2021. "A Note on Boardroom Challenge, Board Effectiveness and Corporate Stewardship During COVID-19," Vision, , vol. 25(2), pages 131-135, June.

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