Abstract
The article constructs a model of firm governance that considers the wider effects of economic activity, thus bridging the organisational level and the macro level. The theoretical framework builds on Hansmann’s ownership model and introduces an alternative. The “total cost model” advanced directs attention to concerns that are not entirely addressed by standard transaction cost theory and suggests that, when the external costs are high, a firm may need to extend the governance function to multiple patrons and absorb some external costs in pursuit of multiple public goals. Who should be included in the strategic control function will depend on the anticipated effects in terms of the external costs and the costs of organising. The article argues that this set-up helps to explain the “public organisation”, defined as a private organisation with public interest objectives, and further claims that this model helps to justify the recent emergence of multi-stakeholder social enterprises.
Highlights
Economic activity often takes place through the use of long-term multi-actor solutions that involve economic organising, contractual agreements, or market exchanges
We show that the emergence of firms in which strategic control is shared among different groups of patrons can be explained as a way to economise on negative external costs and move towards a fairer distribution of the net public utility produced by organisations
We propose a model that: (a) considers strategic control rather than ownership; (b) associates strategic control with membership; and (c) identifies incomplete membership as the source of external costs, which we introduce into the governance economic calculus, in addition to the costs of internal coordination
Summary
Economic activity often takes place through the use of long-term multi-actor solutions that involve economic organising, contractual agreements, or market exchanges. Understanding who has access to the strategic decision-making function is essential to appreciate the potential total effects of economic activities In their analysis of corporate governance, Hymer (1972), and later Cowling and Sugden (1998) and Ietto-Gillies (2012), suggested that uneven distribution of strategic control among patrons is responsible for concentrating the benefits of production activities in the hands of members while denying benefits to non-members, despite their interests. This becomes more apparent the greater the market failure is.
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