Abstract
Mainstream economic theories of the firm argue that the boundary between firm and market is determined by efficiency-enhancing logics which optimise coordination or bargaining outcomes. Drawing on social anthropological work, this paper critiques these accounts, arguing instead that firms are socially embedded and that firm boundary formation should therefore be understood as an attempt to fix the limits of certain relational rights and obligations that are moral in their conception. Consequently, boundaries are often contested and subject to renegotiation. We employ the parsimonious concepts of ‘dams and flows’ to examine how attempts to curtail the claims of some stakeholders and extend the claims of others at any one historical moment produce boundaries of different kinds. To illustrate this, we first trace the moral arguments used to advance limited liability rights to shareholders during the Companies Act in the mid-nineteenth century, which cut or ‘dammed’ obligations at a particular point and moment, directing new flows of obligation and wealth. We then explore the different moral reasoning of agency theory—the foundation of the financialised firm—which foregrounds the property rights of shareholder principles and obligations of managerial agents to them. We argue that this moral reasoning led to new dams and flows that have changed corporate governance and accounting practice, producing—counterintuitively—a reinvigorated form of managerialism, leaving the firm financially and morally unstable; its boundaries increasingly unable to contain its relational tensions.
Highlights
Mainstream economic theory has traditionally understood firm boundary formation as the result of optimising processes which respond to and resolve transaction cost problems, coordination difficulties or bargaining inefficiencies in markets
One stream has argued that firm boundaries do not emerge ineluctably and optimally to resolve market-based problems; rather firm boundaries are shaped by shareholder preferences and expectations which may produce suboptimal strategic, allocative and social outcomes
This stream argues that investors award premiums to companies that spin-off or outsource low-return parts of their business producing disaggregated corporate structures that generate larger profits from fewer assets (Davis & Kim 2015; Zuckerman 1999). This may allow CEOs to articulate simpler corporate narratives about performance drivers and strategic intent (Froud et al 2006), but can hollow out important skills, resources and innovative capacities (Lazonick 2015). Another stream focuses less on investor perceptions and more on managerial conceptions of control— i.e. shared understandings about how best to organise and run corporations for profit—and how a shareholder value conception of the firm encouraged the same processes of corporate disaggregation (Fligstein and Shin 2007)
Summary
Mainstream economic theory has traditionally understood firm boundary formation as the result of optimising processes which respond to and resolve transaction cost problems, coordination difficulties or bargaining inefficiencies in markets. We develop our alternative theory of boundary formation, drawing on the idea that conceptions of rights and obligations, extended or curtailed, constitute an entity through processes of exchange To clarify this argument, we apply those ideas to the moral arguments made in support of limited liability in the Companies Acts of the mid-nineteenth century, and the forms of relationality and obligation envisaged and show how a certain set of relational obligations—the claims of commercial debt providers on shareholders—were limited (or dammed) in order to create a new entity—the modern limited liability company (LLC1 hereafter)—that directed flows of wealth in new directions through the corporate form. In a final concluding section, we discuss how the shareholder value revolution produced a form of managerialism which fostered modes of relationality and obligation—new dams that direct flows— which facilitated greater intra-firm inequality and increased the strain on the firm as an economic and moral entity
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