Equity-based Governance Structures: Private Constitutions for Private Orders

Abstract: Long neglected or even discarded as irrelevant, the diversity of the governance landscape beyond “markets” and “hierarchies” is increasingly acknowledged in economics. Among this underestimated variety of arrangements are the numerous modes with multiple ‘parents’ develop joint governance to manage segments of their activities while remaining independents. The empirical significance of such hybrid organizations in many different sectors is striking from cooperatives in the agrifood sector, franchisees-owned franchised chains in the retail sector, joint-ventures in high tech sectors, housing cooperatives or condominiums in the housing market. Despite their empirical significance, there is only very limited knowledge concerning the mechanisms of governance implemented in “multilateral hybrid organizations” like the ones described before. In particular, how are the preferences of the various owners aggregated? We rely on a case study of a complex venture involving 35 French millers to look at the details of the decision-making process. We exhibit two critical features of the control process regulating the venture: first, the governance structure creates and allocates new decision rights not only over newly created assets but also over existing ones; second, the existence of different decision making processes according to the type of decisions at stake, within the same arrangement. Both the size of the committee of decision-makers and the majority required depend on the type of decision. We analyze this match between the decision-making rules and the nature of the decision as an alignment made to economize on the costs of collective decision-making. We consider these aspects relevant for all ownership/equity-based governance structures including in particular the traditional firm. This suggests that works in the political science/public choice literature might be fruitfully applied to collective decision-making in private organizations.