Modern corporate changes: reinstating the link between the nature, boundaries and governance of the firm

Abstract

The theory of the firm and corporate governance are two fields of analysis traditionally tackled separately in the economic literature. This paper seeks to rediscover the link between the nature, boundaries and governance of the firm on the basis of changes in corporate industrial firms. We advance the argument that, to understand the human capital‐intensive firm, this analytical interconnection should be restored. On the basis of critical resource theory, we present an innovative vision of the nature, boundaries and governance of firms whose productive activity is built around its key partners’ human capital. The organisational mode of governance has changed, linked to a renewed conception of the firm. What we term the ‘multi‐resources’ model of governance of the firm depends on an original representation of the structure, organisation and power relationships of modern firms, whose value arises from the accumulation of specific human capital. Consequently, the multi‐resources model involves hybrid governance instrument in order to protect the integrity of the human capital‐intensive firm.

Keywords:

• human capital
• nature and boundaries of the firm
• corporate governance
• critical resource theory

JEL classifications:

• J24
• J41
• L22
• L23

Notes

1. The solutions often involve strengthening shareholders’ control rights and ability to negotiate contractual restraints on manager opportunism.

2. Competencies, know‐how and expertise, i.e. human capital, associated to a work organisation based on technologies and team production, are at the core of the productive activity of business services and computer engineering firms.

3. According to Williamson, a governance structure is a contractual mechanism in charge of transactions (for more details, see Williamson 1991).

4. Williamson reduces the firm to vertical integration which according to him is the ‘paradigmatic problem’ (Williamson 1985, 150).

5. We study this question in depth in the next section of the paper.

6. Information and communication technologies have supported the recent technological revolution (Greenwood and Jovanovic 1999; Hobijn and Jovanovic 2001; Brynjolfsson, Hitt and Yang 2002).

7. For a complete survey of stakeholder theory, see Donaldson and Preston (1995).

8. Stakeholders are groups of individuals who have legal rights on and duties in the firm. Stakeholders include shareholders, managers, creditors, employees, customers, suppliers, etc. and each of these families of economic agents makes critical investments and expects in turn that their interests will be satisfied (Freeman 1984).

9. Yet, some authors try to overcome this theoretical failure by developing a stakeholder vision of the firm based on ICT raising the question of the nature and the boundaries of the firm (Mahoney, Asher and Mahoney 2005).

10. A critical resource can originate in the talent or particular skill of one of the firm’s agents (the entrepreneur, a manager or another key employee). The critical resource can be a specific human capital and not a physical or an alienable capital.

11. We use the terms partners, stakeholders and employees interchangeably, to indicate corporate members whose characteristics are possession of human capital critical to the productive activity of the firm.

12. Regulation of access includes not only access rights to the critical resource, but also the cooperation of the person that is specialised to. Moreover, regulation of access is not only a momentary action, but a ‘process that cannot be continuously verified by courts’ (Rajan and Zingales 1998, 403).

13. This hold‐up manifestation is significant because 71% of the firms recorded in the Inc 500 list were founded by talented employees who imitated or changed a growth opportunity built by their former employing firm (Bhide 2000).

14. The list of governance mechanisms examined is not exhaustive. The paper mentions the more relevant ones.

15. Extrinsic motivation is achieved by actions that result in the attainment of externally tangible and intangible rewards, including pay, promotion, material possessions, prestige and the positive evaluations of others. Intrinsic motivation, on the other hand, is based on engagement in an activity for its own sake rather than to obtain material or social compensation. Moreover, motivations can be described along a control‐to‐autonomy continuum, from extrinsic motivations towards intrinsic ones (Gagné and Deci 2005).

16. In some cases, these resources are employees occupying low positions in the hierarchy.