Taking Authority Seriously—Institutional Implications

Abstract:

This article argues that the notion of authority involves key theoretical and institutional issues. Drawing on McMahon, I define authority as a collective and normative device whose justification is to facilitate mutually beneficial cooperation among people with divergent aims. I then show that agency theory, the economic theory of the firm that normatively influenced the shareholder governance model, denies that authority is a core attribute of firms. By contrast, an authority-based theory of the firm normatively demands that firms are governed by reflexive authority, a kind of workplace democracy in which the authoritative directives guiding workers’ behavior are collectively determined. I end by suggesting co-determination as a possible form of reflexive authority.

Keywords:

• authority
• theory of the firm
• workplace democracy
• corporate governance

JEL Classification Codes:

• A12
• A13
• J50
• M50

Notes

1 We are obviously aware that, besides authority, power under the form of coercion does pervade work environments.

2 Even transaction cost theories of the firm, which, following Coase and Simon, recognize that authority and hierarchy play a crucial role in the functioning of firms, have insufficiently explored the distinction between authority and power in both theoretical and normative terms.

3 McMahon makes it clear that his conception of authority differs substantially from that of Weber, notwithstanding many points of convergence.

4 Jensen and Meckling (1976) is the third most cited paper in economics of those published since 1970 (Kim et al. 2006). When writing the article, the authors were thinking of shareholders as principals and chief executives as agents, but the terms have since been generalized to all kinds of principal-agent relationships.

5 Although they recognize that firms have responsibilities to other stakeholders, the OECD Principles of Corporate Governance, revised in 2015, still state that this should be the primary objective of corporate firms.

6 Shareholders only own their shares of the corporation, not the economic organization that comprises the firm; while shareholders suffer or benefit from their share (de)valuations, they are not accountable for the firm’s economic performance (their limited liability is associated with ownership of shares only). It is crucial to distinguish the firm, which is an economic entity, from the corporation, which is a legal entity; nobody owns the firm (Robé 2012).

7 Note that conceiving firm governance as reflexive authority implies that stakeholders like consumers or creditors, whose actions are not directed by the firm, do not participate in corporate boards.

8 It is perplexing that the literature provides no theory or economic argument that theoretically accounts for why this form of firm governance happens to exist (Favereau 2018).

Additional information

Notes on contributors

Helena Lopes

Helena Lopes is Associate Professor at the ISCTE-Instituto Universitário de Lisboa and a researcher affiliated with DINAMIA’CET-IUL in Portugal. The author is grateful for the insightful and constructive comments and suggestions of the Editor and two anonymous referees that contributed to improving the manuscript. The article also greatly benefited from the project “Corporate firms, ownership and accountability,” at the Collège des Bernardins, and in particular from the stimulating discussions with Olivier Favereau, Baudoin Roger and other project participants.