Availableonlineatwww.sciencedirect.com
Revista
de
Administração
http://rausp.usp.br/ RevistadeAdministração52(2017)353–356
ThinkBox
Democratic
governance
and
the
firm
Anna
Grandori
BocconiUniversity,Milan,Italy
Abstract
Anintendedcontributiontonewthinkingonaninstitutionthatseemstohavelostmemoryofitsoriginsandfunctions,conductedwiththetools oforganization,lawandeconomics.Theargumentshowshowfarwecangoinreconceptualizingthefirmasademocraticinstitutionusingonly efficiencyandinnovationarguments.
©2017DepartamentodeAdministrac¸˜ao,FaculdadedeEconomia,Administrac¸˜aoeContabilidadedaUniversidadedeS˜aoPaulo–FEA/USP. PublishedbyElsevierEditoraLtda.ThisisanopenaccessarticleundertheCCBYlicense(http://creativecommons.org/licenses/by/4.0/).
Keywords:Economicdemocracy;Governancemechanisms;Theoryofthefirm
Introduction
Governanceisacentraltheme,ifnot ‘the’grandthemein contemporaryeconomicorganizationandmanagementtheory.
E-mail:anna.grandori@unibocconi.it
PeerReviewundertheresponsibilityofDepartamentodeAdministrac¸ão, FaculdadedeEconomia,Administrac¸ãoeContabilidadedaUniversidadede SãoPaulo–FEA/USP.
Among allgovernance mechanismsandforms examinedand assessed,though,themostimportantandcelebrateddevice gov-erningmoderncollectivesystemsisalmostnevermentioned.A remarkableblindspotindeed.Isdemocraticgovernanceuseless ineconomicorganization?Whatkindofentitythemodernfirm is,orhasbecome,thatseemstofloatoutsidethebasicrulesof ourselfcallingdemocraticsocieties?Thisessaypullstogether a seriesof studiesandelaborations that, properlyconnected, cangiveathreefoldresponsetotheabovequestion:first,where andwhydemocracyisactuallyasuperioreconomicgovernance mode;second, whereandtowhatextentit isactuallyapplied (morethanitisacknowledged);andthird,whatsomefounding featurescanbeofarenewedtheoryofthefirmthat,inthecourse ofbeingscientificallymorecorrect,isalsomoreconduciveto collectivewellbeingandgrowth.
Theapproachisefficiencybased,i.e.speaksthesame lan-guageofeconomicorganizationanalysis(hencehopefullyalso to organizational economists) and shows how far we can go in justifying democratic governance before introducing any motivational,ethical,orpoliticalconsiderationonthevalueof participation.
Theitinerarybringingtothepropositionssummarizedhere has beenlong, andtookmoment alsoin dedicatedinitiatives thatIpromotedalongallthe2000s,allowingdiscussionsamong scholarswithdifferentbackgroundsbutsimilarconcerns.1
1 Amongtheearliestinitiatives,therehasbeentheBocconiCentennial
Con-ference on‘Corporategovernance andfirm organization’,in 2002 roughly coincidentwiththeEnronscandalandpublishedinaneditedvolume(Grandori, 2004).Among themorerecentevents, therehave beentheCrora-Bocconi
http://dx.doi.org/10.1016/j.rausp.2017.05.008
354 A.Grandori/RevistadeAdministração52(2017)353–356
Democraticgovernanceinmoderneconomicentitiesishere arguedtoplayadifferentroleataninstitutionalandatan organi-zationallevel,that,therefore,willbekeptdistinctintheanalysis. The‘institutionallevel’ismeanttobethatofwhatarethedevices that‘institute’or‘constitute’aneconomicandjuridicalentity; itisthelevelthatinlargerentitiessuchasstatesisinfactcalled ‘constitutional’.What is thenature of the entity?Howcanit comeintoexistence?Whatisthegluekeepingittogether?The ‘organizationallevel’,instead,referstohowdecisionrightsand obligationsare‘partitionedandcoordinated’withintheentity. Democraticgovernanceplaysadifferentroleatthetwolevels because,itwillbeargued,inaconstitutionalsenseandata con-stitutionallevel,alllegallyrecognizedentitiesaredemocracies inmodernsocieties,althoughthenatureandnumberofthe prin-cipalsinthedemocracymayvary(Grandori,2015).Theinternal organizationofanentity,instead,obeystolawsofinternaland external fit among organizational mechanisms, givingrise to differentconfigurations,inwhichdemocraticmechanismsmay bemoreorlessrepresentedindifferentsituations(Grandori& Furnari,2008).
Thefirmasdemocraticinstitution
Supposeinthebeginningthereisnofirm.Wheredoesthe firmcomefrominthefirstplace?
Wecanrespondintwowaystothisquestion,andinbothways (arationalreconstructionof)historyhelps.Wecanaddressthe appearanceofthefirmasaspecies(a‘form’ofeconomic organi-zation)andasanindividualsubject(afirmgettingestablished). Firmsarecalled‘companies’or‘societies’inlaw.Bothterms comefromthemotherofallwesternlaw,i.e.RomanLaw.They both indicated the formation of a ‘partnership’: ‘cum panis’ (fromwhich‘company’)literallymeans‘eatingbreadtogether’, andtheRoman‘societas’wasanagreementstipulatedamong peopleforthecommonuseofaresource(Hansmann,Kraakman, &Squire,2006).Businesshistorianshavetaughtusthatthefirst stepbeyondthosesimple‘societasofpeople’appearedinhigh MiddleAgeandfluorishedinRenaissancewastakenwiththe formcalled‘Commenda’:anagreementcapableofassociating avarietyofresourcesanddedicatingthemtoaprojectinfrontof uncertainresults.Veryclosetowhata‘firm-like’organizationis supposedtobe:a‘continuedassociationsamongco-specialized, dedicatedassets,coordinatedbyconsciousdirection’(Demsetz, 1991).Whicheconomicactivitiesorproblemsinitiatedinthat period to which that kind of contract was a response? The relativelynewphenomenonwastheundertaking ofeconomic projects,as‘silkroute’expeditions,involvingalevelofscale, riskanduncertaintyformerlyexperimentedandreservedonly tostates’actions.
Ithasbeenobservedthat thefeaturesofthoseearly agree-mentsare interestingly closeto thoseused to establish firms
Think-Tank Dayon ‘Democracyin and around economic organization’ in September 2012; the Keynote panel at theEURAM Conference 2013 on ‘DemocratizingManagement’;theSpecialPanelon‘Thefirmasademocratic institution’attheISNIEConference2013.
whenforconductingriskyuncertainprojects,likemodernstart ups(Brouwer, 2005):investmentsof assetsthatdifferinkind intoanewentity,andresidualrewardanddecisionrightsshared by thedifferent typesofinvestors (theentrepreneurinvesting mainlytheprojectandknowledgeassets,andactorslikefinancial angelsandventurecapitalistsinvestingmainlymoney).
Hence,thebirthofthefirm,intendedbothas‘theinvention oftheenterprise’asaspeciesandastheestablishmentofa sin-glefirm,isfoundedontheuseofapartnership-likeagreement (Landesetal.,2010);thatintheCivilLawsystemsclosertothe Romaninheritage,asEuropeandLatinAmerica,infactcalled ‘contract of societas’ (Società/Sociètè/Sociedad/Gesellshaft) (Grandori,2010).Theessentialingredientofsuchanagreement istheestablishmentofathirdjuridicalperson,differentfromthe socii,intowhichassetscanbeinvestedanddedicatedtoa proj-ect(withoutexposingtoriskallotherinvestors’assets),while resource providers stipulatetoshareresults withoutknowing themex-anteinamountoreveninkind.
That’stheglue.Nopower,nohierarchy,notevennecessarily any‘poolingoftechnicalassets’(allassetscanbeimmaterial) norany‘employmentrelation’(theremightbenoemployees) arenecessaryingredientsforestablishingafirmandkeepingit together;butanagreementinwhicha‘societas’isestablished, inwhichallthesociiareprincipals.Giventhatassetsbecome propertyofthesocietas(thefirm),andwhatthesociihaveand shareareresidualrewardsrights,afurthercomplementary mech-anism, isnecessaryforthecontracttobeacceptable:asortof ‘constitution governingthe on-going cooperation’(Goldberg, 1976).Inotherterms,itisnecessarytoestablishwhohasthe righttodecide,asthingsevolve.Howcanthoserightsbe‘shared’ amongmultipleactors?
Whatcountsiswhovotes(Hansmann,1988):thecore mech-anismfor sharingdecisionrightsamongasetofprincipalsis democracy–directorrepresentative,simpleorweighted.That isthesenseinwhich‘allcompaniesaredemocracies’(Grandori, 2015) (and an efficiency rationale for modern organizational law,prescribingthatanylegallyrecognizedassociationshould be governed inademocratic mode).Andthat’s why, I think, Hansmann(1988)oncesaidthat‘corporationsarecooperatives oflenders’.True,inthesensethatbothestablishsocietiestobe governedbysomedemocraticwayofformingdecisions. Prob-ably false, however,in the sense that the difference between voting rightsattachedtoheads orweightedbythe amountof investedresources(attachedtoshares)isnottrivial.A constitu-tionmaybedemocraticbutvotingproceduresandtheidentity ofprincipalscanmakeahugedifference(Masten,2013).
A.Grandori/RevistadeAdministração52(2017)353–356 355
thanthevotingprocedure,iswhichtypeofresourcesproviders arerepresented,namely theidentityof the principalsandthe widthofthesociety.Whoshouldbeprincipalandwhy?What aretheefficientboundariesofasocietas?.
I found the study of new firms most enlightening in this respect.Infact,whatregularlyhappensinthosesettings,isthat someoneinvestingmillionsinmoneygetsaminorityofshares, whilesomeoneinvestinglittlesumsofmoneybutprovidingthe projectonwhichthefirmisbasedownsamajorityofshares.How canitbe?Thepointisthatknowledgeassetsbecomeproperty ofthefirm(theyarenotsubjecttobewithdrawnatwill,as prop-ertyrighttheoriststypicallyclaim)(Hart,1995);andthehuman capitalinvestorgetspropertyrightsinthefirminexchange,as anyinvestorshould.Thisargumentimpliesthatallinvestorsof anykindofresource,inparticularinvestorsofhumancapitalin smallorlargeamounts,shouldbeentitledpropertyrightsinthe firm,inproportiontotheirinvestment(Grandori,2013).Should suchaprinciple,andincentivetoinvest,beappliedthe bound-ariesofthesocietyofprincipalswouldbesignificantlyenlarged withrespecttocurrentpractices.Furtherexpansionsoftheset of principalswouldensue bythe application ofother organi-zationaleffectivenessandeconomicefficiencycriteriasuchas: allocatingdecisionrights(alsoofresidualkind)totheactorswho knowbestwhatthebestactionsare,andholdcriticalknowledge assets(Alchian&Demsetz,1972;Aoki,2010;Grandori,2016); andallocatingresidualrewardrightstoallactorswhose comple-mentaryresources,specificandgeneral,contributetogenerate thefirmsurplus(orquasi-rent)(Aoki,1984).
Insumenterprises,evenaccordingtoexistinglaws,areinfact democraticinstitutions,butlikeinAthen’sdemocracy,the prob-lemisthattheboundariesofthesocietas,thesetofprincipals, areusuallytoonarrowlydefined.
Democraticcoordinationmechanisms
Ithasbecomecommontosaythatfirms‘are’hierarchies.In spiteoftherethoricalsuccessofthemarketsversushierarchies opposition,strictusensutheoppositionislogically unsatisfac-toryandempiricallycounter-factual.Whilethe statementthat thelargeindustrialenterprisesofthelastcenturytendedtobe organized in a hierarchical way is empirically supported by observation;we canalsoobserve manyentitiesthat are firms donotemployhierarchy;asmuchasmanyentitiesthatarenot firmsemployhierarchyextensively.Hierarchyinfactisnotan institution,whichisalways multi-mechanism,as amarket is. Hierarchyisjustacoordinationmechanismthatcanbeemployed inanyentity,andactuallyalsoacrossentities(Grandori,1997; Hennart,2013).Democraticinstitutionsalsomakealargeuse ofhierarchy,frompoliticalpartiestothestateitself.
Assumingthatcompaniesorsocietasaredemocraticsocieties attheinstitutional level,adifferentquestionistowhatextent democraticcoordinationmechanisms,basedonjointdecision making,areappliedattheorganizationallevel;withrespectto centralhierarchicaldecisionmaking,andtostillotherpossible coordinationmechanisms(asrulesandroutinesforexample).
Foranorganizationtowork,allthosemechanismsneedto presenttoacertainextent.Thisisoldwisdominorganization
Table1
Averagescoresofdemocraticandothermechanisms,inhighandlowperforming majorItalianfirms.
Market-like Bureaucratic Communitarian Democratic
Highefficiency 2.2 2.4 2.2 2.1
Highinnovation 2.8 2.1 2.7 2.1
Lowefficiency 1.4 2.5 2.1 1.0
Lowinnovation 1.4 2.5 2.0 1.3
design theory (Galbraith, 1974; Thompson, 1967)and social theory(Fiske,1992).Recently,aseriesofconfigurational stud-ies, based on quantitative datafrom questionnaires, provided supporttothattraditional idea,enrichedbyaspecificenquiry into the application of democratic mechanisms as a separate class of organizational practices (Grandori & Furnari, 2008, 2013).Inthosestudies,fourclassesoforganizationalpractices havebeenconsidered:‘Market-like’(e.g.payforperformance, internallabormarketflexibility);‘Bureaucratic’(e.g.degreeof vertical andhorizontal partitioning of structure, formal deci-sion,controlandHRMrulesandprocedures);‘Communitarian’ (e.g. knowledge sharing,team work);and ‘Democratic’(e.g. diffusionofpropertyrightsandrepresentationrightsinruling bodies; taskself-determinationrights).The operationalization of democratic mechanismsinthosestudies, included bothan organizationalcomponentofempowerment,jobenrichmentand participation,andameasureofwhatwehavecalledtheboundary ofthesocietas,i.e.howdiffusedtheallocationofpropertyrights is.Eachclass wascomposedby4 practicesandthe presence of each practicemeasured asa0–1 dummy;hencethe inten-sityofmarket-like,bureaucratic,communitariananddemocratic mechanismscouldvaryfrom0to4.Thesampleconsistedin80 validquestionnairesreceivedfromacontactedpopulationofthe largest500Italianfirmsin2006.ThroughQualitative Compara-tiveAnalysistechniques,weenquiredintowhichcombinations ofthosepracticesormechanismsmadeadifferenceinobserving (ornotobserving)aboveaverageperformanceintermsof inno-vationandefficiencyindicators.Weprovideheresomespecific elaborationsonthisdatabase,presentedinvariousconferences andcirculatedinResearchReportsbutpublishedonlyinItalian inthisformat(Grandori,2015),thatarespecifically usefulto highlighttheroleofdemocraticpractices(Table1).
356 A.Grandori/RevistadeAdministração52(2017)353–356
provides afourthorganizationalalternative, nexttothe tradi-tionalformsofmarket,bureaucracyandclan(Ouchi,1980)fit toconditions wherethose otherforms areknown to fail:the governanceofdifferentiatedinterestsandknowledge,coupled with hightask complexity and uncertainty (Grandori, 2016). By contrast, underwhat conditions,what kindof democratic mechanisms,atwhatlevelofintensity,cancontributeto organi-zationalefficiencywheretasksaresimplerandnotknowledge intensiveisamuchlessaddressedtopic,atleastinrecenttimes; andshouldrankhighintheagendaforfutureresearch.
Concludingremarks
Thestudyof ‘organizationalalternatives’shouldrankhigh in the researchagenda, particularly because the recenttimes havebeentroubledtimesofeconomiccrisis(AMPSymposium, 2016).Theaboveargumentandstudiescontributedtoan emerg-ingcriticalrethinkingonthenatureoffirmanditsgovernance, aimingat correctingthe trendsin the oppositedirection that haveoccurredinpractice,andthatmaywellhavesignificantly contributedtothecrisis:verticalizationofpower,increasingly unequalandunproductivedistributionofsurplus,lossofsightof thefunctionsoffirmsasadifferentpersonwithrespectto finan-cialinvestors,increasing disregardtoward thecontributionof laborandtransferoffirmrisktocollaborators,narrowingdown oftheboundariesofcitizenshipinthefirm‘societas’.Therefore timesare morethanripeforrevitalizingthestudy ofhowthe democraticgovernanceofeconomicinstitutionscansustainnot onlyinnovation,butalsoefficiencyandgrowth.
Conflictsofinterest
Theauthorsdeclarenoconflictsofinterest.
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