It's Time for a Corporate Refoundation
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It's Time for a Corporate Refoundation

DEMOCRACY IN GOVERNANCE, CONSTITUTIONAL CONTRACTS AND MORE RES PUBLICA IN THE PRIVATE SECTOR: AFTER THE CRISIS, IT IS CRUCIAL TO REFLECT ON HOW WE CAN RETHINK COMPANIES

by Anna Grandori, Dept. of Management and Technology, Bocconi
Translated by Alex Foti


In the debates on business organization raised by the crisis, there is a lack of foundational thinking on how to redesign the corporation. The remedies proposed for corporate misbehavior have two limits: they are either teleological and voluntaristic (social targets, values, ethical principles) or incrementalist (correctives are implemented so that the interests of stakeholders are added to those shareholders; not only profit, but also social responsibility).

If we proceed this way, however, the risk is to build heavy, redundant, costly corporate structures. An approach that could avoid this proliferation of ad-hoc practices that put a patch on the hole in the ship, could be to redesign the ship from scratch. For this we need to know how the main attributes of the corporation emerged in history and law and which organizational functions still just justify them.

From the renaissance to the 1900s

Historically, the earliest companies (such as La Commenda) emerged out of the Renaissance. They combined resources of various nature for risky and uncertain projects, such as mercantile explorations. They had traits that are still present today, such as rights to residual earnings in proportion to the resources invested.

But it’s in the 1900s that the modern corporation emerged in economic and legal theory as an independet and juridical personal responsible towards society at large, in which investors are protected by limited responsibility and the assets invested (to quote Hansmann) are separated and protected from the investors, from their engagements and also their interests, seen as contractual parts supplying only one input among several.

My scientific work on business organization, contracts, and the nature of the firm has led me to advance the proposition that the corporate contract, and more in general, all contracts that combine resources for an indefinite period of time are constitutional contracts with flexible guarantees. They can be justified as efficient responses to the failure of transactional contracts in conditions of uncertainty. The alternative (logically, also the most correct one) to market contracts, it’s not authority, power or the plan: it’s the association or incorporation contract (which can then be internally organized in a more or less centralized fashion).

Taboos and rights

The main argument is not so much the above notion of the firm is right and constitutional because it is embedded in existing laws and the constitution (an argument that still carries weight, though), but the inverse relationship: existing laws find justification in economic and organization theory (so that it would be wise not to transform them beyond recognition). Also, the corporation can be defined as constitutional in the sense that, to be constituted, a company or association necessitates a constitutional contract that regulates the continuous interaction among internal and external actors.

Many consequences descend from these few foundations. For instance, nobody would rationally enter a pre-incorporation contract if shareholders weren’t guaranteed rights and democratic rules in decision-making; and in fact, the constitution says that any legally constituted association must be democratically governed (in spite the principle being violated in practice). The use of the term democracy when it comes to the corporation to many is taboo, but the fact is that in modern constitutional democracies, companies are democratic institutions from a legal point of view. The redesign of corporate governance should start from here, posing the problem on how to outline the boundaries of a given societasand the mechanisms to integrate its various stakeholders on well-founded theoretical or empirical bases. It is a legitimate question to ask whether, after a historical period when there was a transfer of management techniques from the private to the public sector, the time has come to transfer the methods for governing complex systems from the res publica to the corporation.

 

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