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Employee ownership and internal governance
Journal of Economic Behaviour and Organization 6 (1985) 243-245. North-Holland
EMPLOYEE OWNERSHIP AND INTERNAL GOVERNANCE
A Perspective Oliver E. WILLIAMSON* Yale University, New Haven, CT 06520, USA
Final version received 28 March 1985
I concur with most of what Raymond Russell has to say in his interesting paper on employee ownership and governance structures. To bc sure, I would give greater emphasis to some of the differences that appear both within and between the activity groups that he examines. 1 But there is nothing to preclude subsequent development of the analysis along these lines. The main point is this: Not only are non-standard forms of market and internal organization interesting in their own right, but just as the assessment of non-standard forms of market organization often helps to inform the study of conventional market forms, so too will the examination of non-standard internal forms of organization improve our understanding of more conventional ownership and internal governance structures. The requisite orientation in each case is to adopt a microanalytic, discriminating point of view. Russell does precisely that and advances our understanding of economic organization in the process. Indeed, I find myself in such general agreement with most of what Professor Russell has to say that I am puzzled by his decision to introduce his article as an effort to "counter Oliver Williamson's hypothetical "Peer Group" model of organization' (emphasis added). I submit that the article is more accurately introduced with the following prefatory statement: 'This article supports the proposition that the hypothetical Peer Group is a romantic vision. Every mode of organization, the Peer Group included, must come to terms with the twin behavioral conditions to which Williamson repeatedly refers: bounded rationality and opportunism. Viable Peer Groups are ones that screen their membership *The author is Gordon B. Tweedy Professor of Economics of Law and Organization, Yale University. ISec the forthcoming paper by Ronald Gilson and Robert Mnookin in which they examine the organization of the law firm and the factors that are responsible for differences among them.
0167-2681/85/$3.30 © 1985, Elsevier Science Publishers B.V. (North-HoUand)
244
O.E. Williamson, Perspective on Russell
(hence are not open to all), engage in social conditioning (to unify values), penalize members who fail to behave responsibly (including even ostracism), and employ hierarchy for instrumental, and sometimes even for strategic, decision-making. Screening, social conditioning and incentive instruments are needed to check opportunism. Hierarchy is a concession to the relentless pound of bounded rationality. Pure Peer Groups are useful, at most, for reference purposes. Quasi-Peer Groups - - ones that acknowledge and make provision for bounded rationality and opportunism - - are the best that we can do. The studies of employee ownership and internal governance reported below bear this out.' Russell thus joins a growing list of students of economic organization who, upon recognizing that the Pure Peer Group is unattainable, 2 are engaged in comparative intitutional assessments of potentially viable modes. A leading - - indeed, I would say, the leading - - task of the study of economic organization is to develop apparatus by which to assign organizational modes (governance structures) to the differing needs of the activities to be organized (transactions) in a discriminating way. Which transactions are well supported by the Quasi-Peer Group mode and why? Within the set of transactions for which the Quasi-Peer Group is a possible contender, how and why will the particulars (screening, conditioning, incentives, decision processes) differ? Which transactions are poorly supported by the Quasi-Peer Group and why? Is the Quasi-Peer Group mode of organization particularly susceptible to life cycle hazards and why? To be sure, those with strong ideological predilections may insist that all activities be organized within a single preferred mode 3 Many of us, however, are not so encumbered. But whether we are or not, all can recognize wherein alternative modes have differential strengths and weaknesses and that these vary with the attributes of transactions. Working this through is an important and ambitious research undertaking. We have just begun to scratch the surface. Our understanding of economic organization will benefit if, like Professor Russell, more of us concentrate our research energies on this task.
2Others who have reached this conclusion include Branko Horvat (1982, ch. 8), and Keith Bradley and Alan Gelb (1980). 3Kenneth Arrow (1974) identifies the polar ideological strains as the New Left and the New Right. The former imposes 'a demand for what might be termed sincerity, for a complete unity between the individual and social roles, the notion that somehow in an ideal society there would be no conflict between one's demands on oneself and one's responses to the demands of society,' while the latter 'resolves the conflict... [by substituting instead] the worship of the market' (1974, pp. 15-16).
O.E. Williamson, Perspective on Russell
245
References Arrow, Kenneth J., 1974, The limits of organization (Norton, New York). Bradley, Keith and Alan Gelb, 1980, Motivation and control in the Mondragon experiment, British Journal of Industrial Relations 19, June, 211-231. Gilson, Ronald and Robert Mnookin, n.d., Sharing among the human capitalists: An economic analysis of the corporate law firm and how partners split profits, Stanford Law Review, forthcoming. Horvat, Branko, 1982, The political economy of socialism (M.E. Sharpe, Armonk, NY). Russell, Raymond, 1985, Employee ownership and internal governance, Journal of Economic Behavior and Organization, this issue.
EMPLOYEE OWNERSHIP AND INTERNAL GOVERNANCE
A Perspective Oliver E. WILLIAMSON* Yale University, New Haven, CT 06520, USA
Final version received 28 March 1985
I concur with most of what Raymond Russell has to say in his interesting paper on employee ownership and governance structures. To bc sure, I would give greater emphasis to some of the differences that appear both within and between the activity groups that he examines. 1 But there is nothing to preclude subsequent development of the analysis along these lines. The main point is this: Not only are non-standard forms of market and internal organization interesting in their own right, but just as the assessment of non-standard forms of market organization often helps to inform the study of conventional market forms, so too will the examination of non-standard internal forms of organization improve our understanding of more conventional ownership and internal governance structures. The requisite orientation in each case is to adopt a microanalytic, discriminating point of view. Russell does precisely that and advances our understanding of economic organization in the process. Indeed, I find myself in such general agreement with most of what Professor Russell has to say that I am puzzled by his decision to introduce his article as an effort to "counter Oliver Williamson's hypothetical "Peer Group" model of organization' (emphasis added). I submit that the article is more accurately introduced with the following prefatory statement: 'This article supports the proposition that the hypothetical Peer Group is a romantic vision. Every mode of organization, the Peer Group included, must come to terms with the twin behavioral conditions to which Williamson repeatedly refers: bounded rationality and opportunism. Viable Peer Groups are ones that screen their membership *The author is Gordon B. Tweedy Professor of Economics of Law and Organization, Yale University. ISec the forthcoming paper by Ronald Gilson and Robert Mnookin in which they examine the organization of the law firm and the factors that are responsible for differences among them.
0167-2681/85/$3.30 © 1985, Elsevier Science Publishers B.V. (North-HoUand)
244
O.E. Williamson, Perspective on Russell
(hence are not open to all), engage in social conditioning (to unify values), penalize members who fail to behave responsibly (including even ostracism), and employ hierarchy for instrumental, and sometimes even for strategic, decision-making. Screening, social conditioning and incentive instruments are needed to check opportunism. Hierarchy is a concession to the relentless pound of bounded rationality. Pure Peer Groups are useful, at most, for reference purposes. Quasi-Peer Groups - - ones that acknowledge and make provision for bounded rationality and opportunism - - are the best that we can do. The studies of employee ownership and internal governance reported below bear this out.' Russell thus joins a growing list of students of economic organization who, upon recognizing that the Pure Peer Group is unattainable, 2 are engaged in comparative intitutional assessments of potentially viable modes. A leading - - indeed, I would say, the leading - - task of the study of economic organization is to develop apparatus by which to assign organizational modes (governance structures) to the differing needs of the activities to be organized (transactions) in a discriminating way. Which transactions are well supported by the Quasi-Peer Group mode and why? Within the set of transactions for which the Quasi-Peer Group is a possible contender, how and why will the particulars (screening, conditioning, incentives, decision processes) differ? Which transactions are poorly supported by the Quasi-Peer Group and why? Is the Quasi-Peer Group mode of organization particularly susceptible to life cycle hazards and why? To be sure, those with strong ideological predilections may insist that all activities be organized within a single preferred mode 3 Many of us, however, are not so encumbered. But whether we are or not, all can recognize wherein alternative modes have differential strengths and weaknesses and that these vary with the attributes of transactions. Working this through is an important and ambitious research undertaking. We have just begun to scratch the surface. Our understanding of economic organization will benefit if, like Professor Russell, more of us concentrate our research energies on this task.
2Others who have reached this conclusion include Branko Horvat (1982, ch. 8), and Keith Bradley and Alan Gelb (1980). 3Kenneth Arrow (1974) identifies the polar ideological strains as the New Left and the New Right. The former imposes 'a demand for what might be termed sincerity, for a complete unity between the individual and social roles, the notion that somehow in an ideal society there would be no conflict between one's demands on oneself and one's responses to the demands of society,' while the latter 'resolves the conflict... [by substituting instead] the worship of the market' (1974, pp. 15-16).
O.E. Williamson, Perspective on Russell
245
References Arrow, Kenneth J., 1974, The limits of organization (Norton, New York). Bradley, Keith and Alan Gelb, 1980, Motivation and control in the Mondragon experiment, British Journal of Industrial Relations 19, June, 211-231. Gilson, Ronald and Robert Mnookin, n.d., Sharing among the human capitalists: An economic analysis of the corporate law firm and how partners split profits, Stanford Law Review, forthcoming. Horvat, Branko, 1982, The political economy of socialism (M.E. Sharpe, Armonk, NY). Russell, Raymond, 1985, Employee ownership and internal governance, Journal of Economic Behavior and Organization, this issue.