The Firm As a Subsociety

Abstract : We propose a view of firms as subsocieties that are shaped by shared perceptions of purpose and justice. Applying insights from political and legal theory, we discuss how employees are members of these mini-societies who have exchanged certain rights, such as formal authority over their work and compensation structure, for the benefits of membership in the firm. For these employees, expectations arise that are similar to those held by members of civic society at large; namely, that norms of justice and common social aims will be upheld. This view suggests a unique role for those who own and manage firms, as well as a different mechanism from standard theories of the firm for shaping firm boundary decisions. Boundary choices, in addition to their efficiency effects as described by existing theories, are also evaluated by employees for consistency with the espoused purpose and standards of justice of the firm. In general, this subsociety perspective suggests that theories of the firm should account for both societal and efficiency effects when assessing optimal governance of transactions.

---

Corporate Purpose and Acquisitions

Abstract : This study analyzes the relationship between acquisitions—a centerpiece of corporate strategy—and employees’ sense of purpose. Using data from more than 1.5 million employees, we find that purpose is substantially weaker in companies following recent acquisitions. This association is driven by unique acquisitions and those with opaque disclosed rationales. We explore the performance implications of this relationship. We first isolate the component of purpose directly attributable to the deal, and then relate this component to subsequent performance. We find that deals associated with stronger purpose outperform, and those with weaker purpose do not. Together, our evidence suggests a possible tension between strategic and motivational determinants of acquisition success: while firms benefit strategically from uniqueness, it may also erode the sense of purpose within firms.

---

Pushing the Boundaries of Williamson’s ‘science of Economic Organization’ - Knowledge and Pluralism Challenges

Abstract : This contribution welcomes Williamson’s invitation to continue to ‘push the boundaries’ of his ‘science of economic organization’, integrating economics, organization and law. The essay reviews the boundary expanding revisions of Williamson’s model (by himself and others) highlighting the issues and areas where the integration with organizational and juridical theories has been more successfully performed, and areas calling for future research. A substantive proposition resulting from this analysis is that if the notion of contract is extended (using law more intensively), and if the notion of the firm is disentangled by that of hierarchy (using organization theory more intensively), the contractarian approach developed by Williamson becomes more robust in explaining and designing also knowledge intensive and pluralist forms of economic organization, and less specific to the vertically integrated and hierarchical industrial enterprises that stimulated its birth.

---

The Contractual Governance of Transactions Within Firms

Abstract : A central theoretical premise is that firms internalize transactions that are not suited for formal contracting. Yet, there is growing evidence that firms rely on formal contracts to govern some of their transactions within the firm. This paper discusses why firms use formal contracts between units and develops a set of propositions for when formal contracts arise. Internalization does not eliminate transactional problems and informal agreements for transactions between units often suffer from problems in understanding what the other unit will do and whether it will actually do what it promises. We argue that many of the features that make formal contracts valuable tools for market exchange are beneficial within firms, even if court enforcement of the contract is not possible. We suggest that formal contracts between units serve as communication and commitment devices that address coordination and incentive problems within the firm by providing clarity and credibility on the rights allocated to the units in the transaction.

---