A firm as a nexus of different contributions

by eskokilpi

Corporations are the dominant mechanism by which economic activity is organized in our economies. How companies perform and what helps them to perform better are hence questions of huge importance. Corporations have such an enormous influence on our lives that corporate decision-making and actions might well deserve more attention right now than does discussing the new social tools. Or, to put it in another way: what kind of changes in our corporate thinking would enable maximum benefits to be gained from new technologies?

One key question in corporate governance is, who should have the right to make what decisions, and why.

Instead of thinking that we already know the answer, let’s look at what is going on. Companies that focus on their share price, which is the business press doctrine, have the incentive to shut down, or move operations that are not generating the best possible profits for their shareholders, even though those operations are still generating substantial economic value in the geographical area they are located in.

From the point of view of the people who are employed, and the society where those corporations are located, this is obviously not very efficient. It is doubtful whether maximizing the value of shares, maximizes social wealth. Can it be that the idea of maximizing of shareholder value is an incomplete performance standard in post-industrial economies?

I am not talking about social responsibility here. What I am claiming is that there are other parties, other than shareholders, who have made an investment in the enterprise. In order to understand this, we should start by asking who is contributing to the enterprise, and what, and who is bearing what risk. The question I am raising here is whether we can think of employees as generic labour any more.

It matters in a very specific way who does what. The contributions of knowledge workers cannot be understood as fixed-wage generic inputs, but they can easily be understood as risk investments, in the very same way as we today understand shareholders’ financial contributions. We should ask whether the current social construct of allocating risks and rewards is inevitable for some reason, or whether it is an outdated industrial artefact that should be redesigned?

A large part of the economic surplus that a company creates is paid to the employees as wages. This is treated as an operating cost. Naturally, costs should be lowered. The picture would look somewhat different if we understood employees as being investors of (human) capital, and treated them accordingly. Our system of industrial management creates a systemic inefficiency in knowledge-based work. It can only be removed if the worker’s role included a more active (managerial) responsibility leading to responsive, agile practices. This cannot be achieved unless our mental construct of the employer employee relationship changes radically.

The change would mean that employees would explicitly bear the entrepreneurial accountability for the success or failure of the company, as they do any way in the end and additionally benefit from any possible upside, just as shareholders do. From the point of view of corporate governance, it would mean that companies should be run in the interests of all their investors.

I don’t think that future firms have that many employees, more contributors of different resources – mainly financial capital and human capital. Some investors invest for a long term, some for a very short term.

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Thank you Gary Becker, Margaret Blair and Yochai Benkler