Time Magazine’s “person of the year” is the “protestor.” Occupy Wall Street’s participants have generated discussion unprecedented in recent years about the role of corporations and their executives in society. The movement has influenced workers and unemployed alike around the world and has clearly shaped the political debate.
But how does a corporation really act? Doesn’t it act through its people? And do those people behave like the members of the homo economicus species acting rationally, selfishly for their greatest material advantage and without consideration about morality, ethics or other people? If so, can a corporation really have a conscience?
In her book Cultivating Conscience: How Good Laws Make Good People, Lynn Stout, a corporate and securities professor at UCLA School of Law argues that the homo economicus model does a poor job of predicting behavior within corporations. Stout takes aim at Oliver Wendell Holmes’ theory of the “bad man” (which forms the basis of homo economicus), Hobbes’ approach in Leviathan, John Stuart Mill’s theory of political economy, and those judges, law professors, regulators and policymakers who focus solely on the law and economics theory that material incentives are the only things that matter.
Citing hundreds of sociological studies that have been replicated around the world over the past fifty years, evolutionary biology, and experimental gaming theory, she concludes that people do not generally behave like the “rational maximizers” that ecomonic theory would predict. In fact other than the 1-3% of the population who are psychopaths, people are “prosocial, ” meaning that they sacrifice to follow ethical rules, or to help or avoid harming others (although interestingly in student studies, economics majors tended to be less prosocial than others).
She recommends a three-factor model for judges, regulators and legislators who want to shape human behavior:
“Unselfish prosocial behavior toward strangers, including unselfish compliance with legal and ethical rules, is triggered by social context, including especially:
(1) instructions from authority
(2) beliefs about others’ prosocial behavior; and
(3) the magnitude of the benefits to others.
Prosocial behavior declines, however, as the personal cost of acting prosocially increases.”
While she focuses on tort, contract and criminal law, her model and criticisms of the homo economicus model may be particularly helpful in the context of understanding corporate behavior. Corporations clearly influence how their people act. Professor Pamela Bucy, for example, argues that government should only be able to convict a corporation if it proves that the corporate ethos encouraged agents of the corporation to commit the criminal act. That corporate ethos results from individuals working together toward corporate goals.
Stout observes that an entire generation of business and political leaders has been taught that people only respond to material incentives, which leads to poor planning that can have devastating results by steering naturally prosocial people to toward unethical or illegal behavior. She warns against “rais[ing] the cost of conscience,” stating that “if we want people to be good, we must not tempt them to be bad.”
In her forthcoming article “Killing Conscience: The Unintended Behavioral Consequences of ‘Pay for Performance,’” she applies behavioral science to incentive based-pay. She points to the savings and loans crisis of the 80's, the recent teacher cheating scandals on standardized tests, Enron, Worldcom, the 2008 credit crisis, which stemmed in part from performance-based bonuses that tempted brokers to approve risky loans, and Bear Sterns and AIG executives who bet on risky derivatives. She disagrees with those who say that that those incentive plans were poorly designed, arguing instead that excessive reliance on even well designed ex-ante incentive plans can “snuff out” or suppress conscience and create “psycopathogenic” environments, and has done so as evidenced by “a disturbing outbreak of executive-driven corporate frauds, scandals and failures.” She further notes that the pay for performance movement has produced less than stellar improvement in the performance and profitability of most US companies.
She advocates instead for trust-based” compensation arrangements, which take into account the parties’ capacity for prosocial behavior rather than leading employees to believe that the employer rewards selfish behavior. This is especially true if that reward tempts employees to engage in fraudulent or opportunistic behavior if that is the only way to realistically achieve the performance metric.
Applying her three factor model looks like this: Does the company’s messaging tell employees that it doesn’t care about ethics? Is it rewarding other people to act in the same way? And is it signaling that there is nothing wrong with unethical behavior or that there are no victims? This theory fits in nicely with the Bucy corporate ethos paradigm described above.
Stout proposes modest, nonmaterial rewards such as greater job responsibilities, public recognition, and more reasonable cash awards based upon subjective, ex post evaluations on the employee’s performance, and cites studies indicating that most employees thrive and are more creative in environments that don’t focus on ex ante monetary incentives. She yearns for the pre 162(m) days when the tax code didn’t require corporations to tie executive pay over one million dollars to performance metrics.
Stout’s application of these behavioral science theories provide guidance that lawmakers and others may want to consider as they look at legislation to prevent or at least mitigate the next corporate scandal. She also provides food for thought for those in corporate America who want to change the dynamics and trust factors within their organizations, and by extension their employee base, shareholders and the general population.
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Massey Energy and Walmart made headlines last week for different reasons. Massey had the worst mining disaster in 40 years, killing 29 employees and entered into a nonprescution agreement with the Department of Justice. The DOJ has stated in the past that these agreements balance the interests of penalizing offending companies, compensating victims and stopping criminal conduct “without the loss of jobs, the loss of pensions, and other significant negative consequences to innocent parties who played no role in the criminal conduct, were unaware of it, or were unable to prevent it.”
Massey’s new owner Alpha Natural Resources, has agreed to pay $210 million dollars in fines to the government, compensation to the families of the deceased miners and for safety improvements (the latter may be tax-deductible). The government’s 972-page report concluded that the root cause was Massey’s “systematic, intentional and aggressive efforts” to conceal life threatening safety violations. The company maintained a doctored set of safety records for investigators, intimidated workers who complained of safety issues, warned miners when inspectors were coming (a crime), and had 370 violations. The mine had been shut down 48 times in the previous year and reopened once violations were fixed. 112 miners had had no basic safety training at all. Only one executive has been convicted of destroying documents and obstruction, and investigations on other executives are pending. However, the company itself has escaped prosecution for violations of the Mine Safety and Health Act, conspiracy or obstruction of justice. Perhaps new ownership swayed prosecutors and if Massey had its same owners, things would be different. But is this really justice? The miner’s families receiving the settlement certainly don’t think so.
Walmart announced in its 10-Q that based upon a compliance review and other sources (Dodd-Frank whistleblowers maybe?), it had informed both the SEC and DOJ that it was conducting a worldwide review of its practices to ensure that there were no violations of the Foreign Corrupt Practices Act (“FCPA”). Although no facts have come out in the Walmart case and I have no personal knowledge of the circumstances, let’s assume for the sake of this post that Walmart has a robust compliance program, which takes a risk based approach to training its two million employees in what they need to know (the greeter in Tulsa may not need in-depth training on bribery and corruption but the warehouse manager and office workers in Brazil and China do). Let’s also assume that Walmart can hire the best attorneys, investigators and consultants around, and based on their advice, chose to disclose to the government that they were conducting an internal investigation. Let’s further assume that the incidents are not widespread and may involve a few rogue managers around the world, who have chosen to ignore the training and the policies and a strong tone at the top.
As is common today, let’s also assume that depending on what they find, the company will do what every good “corporate citizen” does to avoid indictment --disclose all factual findings and underlying information of its internal investigation, waive the attorney client privilege and work product protection, fire employees, replace management, possibly cut off payment of legal fees for those under investigation, and actively participate in any government investigations of employees, competitors, agents and vendors.
Should this idealized version of Walmart be treated the same as Massey Energy? (For a great compilation of essays on the potential conflicts between the company and its employees, read Prosecutors in the Boardroom: Using Criminal Law to Regulate Corporate Conduct, edited by Anthony and Rachel Barkow). Should they both be charged and face trial or should they get deferred or nonprosecution agreements for cooperation? Do these NPAs and DPAs erode our sense of justice or should there be an additional alternative for companies that have done the right thing -- an affirmative defense?
A discussion of the history of corporate criminal liability would be too detailed for this post, but in its most simplistic form, ever since the 1909 case of New York Central & Hudson River Railroad Co v. United States, companies have endured strict liability for the criminal acts of employees who were acting within the scope of their employment and who were motivated in part by an intent to benefit the corporation. As case law has evolved, companies face this liability even if the employee flouted clear rules and mandates and the company has a state of the art compliance program and corporate culture. In reality, no matter how much money, time or effort a company spends to train and inculcate values into its employees, agents and vendors, there is no guarantee that their employees will neither intentionally nor unintentionally violate the law.
The DOJ has reiterated this 1909 standard in its policy documents. And because so few corporations go to trial and instead enter into DPAs or NPAs, we don’t know whether the compliance programs in place would have led to either the potential 400% increase or 95% decrease in fines and penalties under the Federal Sentencing Guidelines because judges aren’t making those determinations. The DPAs are now providing more information about corporate compliance reporting provisions, but again, even if a company already had all of those practices in place, and a rogue group of employees ignored them, the company faces the criminal liability. The Ethical Resource Center is preparing a report in celebration of the 20th Anniversary of the Sentencing Guidelines with recommendations for the U.S. Sentencing Commission, members of Congress, the DOJ and other enforcement agencies. They are excellent and timely, but they do not go far enough.
A Massey Energy should not receive the same treatment as my idealized model corporate citizen Walmart. Instead, I agree with Larry Thompson, formerly of the DOJ and now a general counsel and others who propose an affirmative defense for an effective compliance program- not simply as possible reduction in a fine or a DPA or NPA.
While the ideal standard would require prosecutors to prove that upper management was willfully blind or negligent regarding the conduct, this proposed standard may presume corporate involvement or condonation of wrongful conduct but allow the company to rebut this presumption with a defense.
In the past decade, companies drastically changed their antiharassment programs after the Supreme Court cases of Fargher and Ellerth allowed for an affirmative defense. The UK Bribery Act also allows for an affirmative defense for implementing “adequate procedures” with six principles of bribery prevention. Interestingly, they too are looking at instituting DPAs.
I would limit a proposed affirmative defense to when nonpolicymaking employees have committed misconduct contrary to law, policy or management instructions. If the company adopted or ratified the conduct and/or did not correct it, it could not avail itself of the defense. The company would have to prove by a preponderance of the evidence that: it has implemented a state of the art program approved and overseen by the board or a designated committee; clearly communicated the corporation’s intent to comply with the law and announced employee penalties for prohibited acts; met or exceeded industry standards and norms; is periodically audited and benchmarked by a third party and has made modifications if necessary; has financial incentives for lawful and penalties unlawful behavior; elevated the compliance officer to report directly to the board or a designated committee (a suggestion rejected in the 2010 amendments to the Sentencing Guidelines); has consistently applied anti-retaliation policies for whistleblowers; voluntarily reported wrongdoing to authorities when appropriate; and of course taken into account what the DOJ has required of offending companies and which is now becoming the standard. The court should have to rule on the defense pre-trial.
Instead of serving as vicarious or deputized prosecutors, under this proposed standard, a corporation’s cooperation with prosecutors will be based on factors more within the corporation's control,rather than the catch-22 they currently face where if employees are guilty, there is no defense. And if the employees are guilty, this would not preclude the government from prosecuting them, as they should.
Responsible corporations now spend significant sums on compliance programs and the reward is simply a reduction in a fine for conduct for which it is vicariously liable and which its policies strictly prohibited. A defense will promote earlier detection and remedying of the wrongdoing, reduce government expenditures, provide more assurance to investors and regulators, allow the government to focus on companies that don’t have effective compliance program, and most important provide incentives for companies to invest in more state of the art programs rather than a cosmetic, check the box initiative because the standard would be higher than what is currently Sentencing Guidelines.
Perhaps only a small number of companies may be able to prevail with this defense. Frankly, corporations won’t want to bear the risk of a trial, but they will at least have a better negotiating position with prosecutors. Moreover, companies that try in good faith to do the right thing won’t be lumped into the same categories as those who invest in the least expensive programs that may pass muster or worse, engage in clearly intentional criminal behavior. If companies have the certainty that there is a chance to use a defense, that will invariably lead to stronger programs that can truly detect and prevent criminal behavior.
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The last two weeks have witnessed dramatic victories against two very different lawbreaking networks. First the death of Bin Laden removed the leader of al Qaeda. Second, the conviction of Raj Rajaratnam represented a major victory for prosecutors against the so-called expert insider trading networks. Although the two lawbreaking networks have a multitude of differences – in terms of social harm, motivations, and structure – they also have important similarities.
For one thing, both terror networks and insider trading networks present an opportunity to study social networks in a rigorous manner. “Networks” are more than just loose metaphor, but instead the subject of the emerging field of network theory that borrows from and links computer science, sociology, economics and a host of other fields. “Emerging” does not mean new: some of the germinal research stretches back over four decades. For example Granovetter’s work on “weak ties” in sociology. Mark Lemley and David McGowan authored a wonderful piece on network effects and law over 10 years ago and the legal literature continues to blossom (from Aviram to Zaring). Network theory has arrived.
And it is being put to use. A number of years ago, media reports suggested that the U.S. intelligence agencies were seeking to use network theory to crack Al Qaeda (see here for a law review article by Christopher Borgen on network theory and terrorism). The extent to which financial regulators and prosecutors have done the same with respect to insider trading is not clear, although scholars have recently suggested new potential approaches.
We may not know for a long time the extent to which network theory is influencing law enforcement. You can understand that intelligence and law enforcement would be unwilling to disclose the methods they use to catch bad guys. But the secrecy means that their methods do not enjoy the benefits – one could even say network effects – of being subject to the scrutiny of a larger community. Observers could help answer vital questions, such as “how effective are these efforts against lawbreakers?” and “could they be improved?” According to Linus’s Law: “given enough eyeballs, all bugs are shallow.” Aside from questions about efficacy, there are lingering and legitimate concerns about the implications of national security surveillance over internet communications.
But even the information we have learned about the two recent victories against anti-social networks leads to some interesting, if tentative observations. First, the ultimate value of these government operations is not in traditional deterrence alone, but in disrupting networks. In other words, successful operations against networks rely not only on crude deterrence of criminal behavior by scaring off would-be criminals. After all, it isn’t clear that a jihadist will be sobered by Bin Laden’s fate. By contrast, one thing that does disrupt networks is interfering with their capacity to send signals. Driving bad guys off the net seriously interferes with their ability to conduct business. From news reports, it doesn’t look like Bin Laden was all that successful in managing operations without an internet connection or a phone line. (Some reports suggest that the one time he did use a phone contributed to his location by U.S. intelligence.) Of course, government surveillance is thwarted not only by encryption, but by the daunting task of finding a needle in a haystack of data. Old-fashioned informants will still prove a critical tool.
Indeed media reports suggest that the government is heavily relying on informants in cracking the expert insider trading networks. From the perspective of law enforcement, this is important not only because it may lead to prosecutions, but also because it might disrupt the thing that these networks most rely on: trust.
So network theory suggests that we pay more attention to the marginalia of the Rajaratnam story. It is not the conviction alone that matters. It also argues for looking at other policy tools – such as a use of bounties in corporate crime – in another dimension, namely engendering distrust and thwarting the development of illegal networks. Of course, bounties for corporate crime and promoting snitching can create their own perverse incentives and pernicious effects. (Eleanor Brown penned an interesting essay on snitching, immigration, and terrorism that uses network theory.)
Another problem with a broader use of these tools is that they don’t always yield headline grabbing successes. No one sees the insider trading or terror attacks or law breaking that didn’t happen. The political economy of deterrence rewards prosecutors for victories in the courtroom, not necessarily for crime prevented.
Still, the events of the last week should give new life to study of network theory. There is evidence that network theory has become white hot. Consider this graph (from Google’s nifty Ngram tool) that plots the rising use of “network effect” compared to “deterrence effect” in books from1970 to mid 2007.
One can now also see a lot of those neat network graphs (see below) in news reporting.
Of course, the popularization of theory also threatens to reduce the intellectual rigor. Let’s hope the network effects of this line of inquiry are positive.
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The final tally on the Patient Protection and Affordable Care Act:
- 219 Democrats voted in favor.
- 178 Republicans and 34 Democrats voted against
Of the 34 Democrats who sided with Republicans, most (not all) were in Republican leaning districts.
The Tea Party was out in force in Madison, yesterday, but to no avail. In the immediate wake of the vote, a number of my friends' Facebook status updates touched on health care. While some of them yearned for change in November, many others had the following flavor:
O beautiful for patriot dream--That sees beyond the years; Thine alabaster cities gleam--Undimmed by human tears! America! America! God shed his grace on thee; Till nobler men keep once again Thy whiter jubilee! I am extraordinarily proud to be an American on this Historic Day.
What is it about the health care debate that produces such division and such emotion? Before answering that question, I offer some thoughts on what the health care debate is not about:
- This is not a populist story about the people triumphing over big corporations. After all, some of the scariest corporate bogeymen -- hospitals, health insurance companies, and drugs companies -- will be among the primary beneficiaries of the bill.
- This is not just an extension of the abortion debate, though that accounts for a great deal of emotion on the margins of the debate.
- This is not primarily about President Obama. Health care has been a divisive issue for as long as I can remember, which (thankfully) is much longer than Obama has been President.
- This is not primarily about government spending. The Congressional Budget Office estimates that the new bill will reduce the federal budget deficit by $138 billion from 2010 to 2019. Count me among the skeptics. (Here, too.) In the end, however, the cost of this bill is not the main issue here.
- Perhaps most surprising, this is not primarily about health care. Many of the tens of millions of uninsured Americans who will now get health insurance are people in good health, and even for those who are sick, the question of access remains. As noted by one perceptive commentator, "There will be no new access to health care if we do not have physicians to provide it." Some people are arguing that the bill will help control health care spending, but you can count me among the skeptics about that, too. I don't know whether this bill will improve health care in the United States. I hope that it does, but I do not believe the debate over health care was motivated primarily by the merits.
James Dyson of vacuum fame describing an anecdote of failed engineering: "We saw in the moment of failure ... an idea that had huge advantages in another field."
Was he talking about the new Air Multiplier?
Whatever he was referring to, his core point about learning from failure jumped out at me because I was having a discussion with a colleague on this topic earlier this week. Some of us have a high tolerance for failure, and we learn from our own mistakes, but vicarious learning is also important. Two years ago, my friend Anne Miner who published "Vicarious learning from the failure and near-failure of others: Evidence from the U.S. commercial banking industry," in the Academy of Management Journal. This paper has a lot of interesting nuggets, but I like this one: "the individual failures that made up the industry experience represented negative situations from most observers’ viewpoints. Yet, aggregated into industry experience, the same bad outcomes had potentially positive learning value for others."
Of course, those of us who spend our time in law schools know all about learning vicariously from failure. If you approach law transactionally, that may be the main point of studying judicial opinions.
Are you searching for a New Year's Resolution? Here is a suggestion: don't be a bad apple.
This American Life recently did a program entitled "Ruining it for the Rest of Us," and the first part of the program featured an interview with Will Felps, a professor at Rotterdam School of Management in the Netherlands. As a grad student at the University of Washington, Felps studied the effect of bad apples (slackers, depressive pessimists, and jerks) on teams and found that bad apples can indeed spoil the whole bunch. The results are based on experiments using college students -- and the teams were formed for only 45 minutes -- so all of the obvious disclaimers apply, but this is pretty fascinating stuff and it comports with some of my own experiences.
Here is the abstract of Felps' article, How, when, and why bad apples spoil the barrel: Negative group members and dysfunctional groups:
This paper presents a review and integrative model of how, when, and why the behaviors of one negative group member can have powerful, detrimental influence on teammates and groups. We define the negative group member as someone who persistently exhibits one or more of the following behaviors: withholding effort from the group ["slacker"], expressing negative affect ["depressive"], or violating important interpersonal norms ["jerk"]. We then detail how these behaviors elicit psychological states in teammates (e.g. perceptions of inequity, negative feelings, reduced trust), how those psychological states lead to defensive behavioral reactions (e.g. outbursts, mood maintenance, withdrawal), and finally, how these various manifestations of defensiveness influence important group processes and dynamics (e.g. cooperation, creativity). Key mechanisms and moderators are discussed as well as actions that might reduce the impact of the bad apple. Implications for both practice and research are discussed.
If you want to hear Felps describe his work, go listen to the podcast.
By the way, the TAL website lists the song "One Bad Apple" as being performed by the Jackson 5, but it was the Osmonds. If you just listened to the following clip, you would think it's Michael Jackson, but that's Donny ...
Charles Handy is commenting again over on Marketplace. You may remember Handy's interesting views on markets, which we discussed here. Yesterday he offered an intriguing commentary on the optimal size of organizations:
Americans think big. This has helped make them the most powerful nation on Earth, but bigger is not always better, either for our bodies or, I suggest, for our organizations. If I were to visit a symphony orchestra and ask them about their growth plans for the future, how would they respond? They would talk about their plans to extend their repertoire and to bring their work to new audiences, not about increasing the number of violinists. The same holds true for a school or a hospital. Once they get to the appropriate size, they strive to be better not bigger.
Why should it be different for business? Why does almost every business that I know seek to grow in size, year after year, in fact, as if there were no limit? Why can't they be content with doing more with less? I ask because large organizations are not usually, or even often, nice places in which to spend the best part of our lives. Humans are most comfortable in clusters of 10 to 12, family-sized groups. Put them in armies of hundreds and thousands and they cease to be individuals, but only human resources, just numbers in jobs. Humanity too easily yields place to bureaucracy.
An executive in the project I am working on at the Drucker School in Claremont, California calls the business he created a "bonsai" organization, after those small Japanese trees. These trees need to be trimmed and reshaped, but they don't grow beyond their ordained size. So it is, he says with his organization, and if you really have to be bigger, then maybe the challenge is to create woods of bonsai trees. This way, the economies of scale and the personal ambitions of our leaders won't run up against the constraints of human nature, because if we aren't careful, organizations can become the prisons for our souls.
Notice the implicit assumption of Handy's first sentence: that organization size is culturally contingent. Is it? I suspect the folks at orgtheory.net might have some insights, but I am so accustomed to thinking about this issue through the lens of Ronald Coase's Theory of the Firm that Handy's first sentence struck me as a surprising starting point.
Handy's commentary also prompted thoughts of Louis Brandeis and his series of Harper's Weekly articles that were compiled under the title Other People's Money--and How the Bankers Use It. Brandeis was concerned about trusts, and he rails against large business organizations in expansive language. Brandeis was right to be concerned about monopolies, of course, but "woods of bonsai trees" do not occur spontaneously in nature. Indeed, Brandeis never figured out how to create a Japanese garden through regulation. The landscape of creative destruction is much messier.
Over the past two days, I have been nestled in at the Sundance Resort in Provo, Canyon, attending the BYU Comparative Organizations Conference. The conference was organized by Dave Whetten of BYU's business school, along with junior colleagues Brayden King and Teppo Felin of orgtheory.net. Kieran Healy, Omar Lizardo, and Fabio Rojas of orgtheory.net are also present, as is Peter Klein of Organizations and Markets. I am the only law professor in the group, which comprises mostly sociologists and management scholars.
The conference is premised on the notion that organizational scholars "are incapable of delineating a theoretically-sound justification for 'organizations are different.'" If you find this premise surprising, my guess is that you are a lawyer or an economist. Peter Klein and I were wondering why comparative studies in law and economics didn't seem to count. Joe Galaskiewicz provides a possible answer: lawyers and economists are interested in "incentives, choices, and outcomes," while sociologists and psychologists tend to be interested in "behavioral patterns and environmental selection." Only within the latter group would the statement "organizations are different" be controversial.
I've just returned from spectating at my first panel at the Law and Society conference in cloudy Berlin (cloudy and cool, which, along with tons of rain, is what I dream about when I dream about Europe, but boy, the southern part of the continent, I can attest from experience, is hot hot hot). It was on secrecy in government - and it is a au courant topic, given all the claims of privilege being made by the government today. I think it is fair to say that the panelists were critical of all this secrecy, and maybe that is appropriate, since the government does, in theory, serve as an agent to the principal that is its people.
But it seems to me that you have to make a principal-agent sort of argument to justify transparency in government (which, believe me, I am for). Does anyone really think that there aren't benefits to secret, private deliberations? Corporate boardroom debates, as the HP case underscored, are private on pain of the duty of loyalty, and companies in general - that is, private ordering - choose, in general, to be as secret as heck.
Politicians like Mitt Romney tout their business experiences as a reason for election. Al Gore sought to reinvent government to make it run more like a business. And I think that regulators have increasingly adopted the language of business when they do their jobs - say, by promulgating "best practices" instead of rules. My future colleague Cary Coglianese calls this management-based regulation.
I suspect that the increasing use of the language and methods of business in government regulation is one of the more notable changes in regulation in the current era (others might point to the ever increasing power of the presidency/OMB, or e-government, or perhaps the war on terror). But am I right about this? I wondered if the readers of this blog had any thoughts. Do you have a favorite business buzzphrase that you're seeing generals, regulators, or heck, whoever, use?
I'm looking for interesting examples because I'm hoping to write a book called "From Good to Great [Bureaucracy]." (I kid.) But if it turns into a wiki, I promise to share the revenues equally with the readers of the Glom, as any good anarcho-syndicalist businessman might.
My colleague Anne Miner in the UW Business School studies, among other things, how organizations learn vicariously from the failure of others. "Learning from failure" is novel in business schools and in some other quarters. For example, at Bob Lawless' recommendation, I picked up and started reading Scott Sandage's book, Born Losers: A History of Failure in America. So far, so good. But I had to chuckle at the Prologue, where Sandage argues for the novelty of his approach:
Deadbeats tell no tales, it seems. Distinguished libraries saved the papers of history makers, but where might one look for scraps from the fallen -- the dead letter office?
Actually, as Sandage recognizes, law reporters are a good place to start. They are full of failures, cover to cover. So much so that in law schools we struggle to stave off cynicism in ourselves and our students.
Usually without success.
Brayden King is mulling over some thoughts about identity and organizational decision making.
The much anticipated day is here. Contracts as Organizations -- my paper with Brayden King -- is now available on SSRN. We have submitted the paper to law reviews, but we welcome further comments. Here is the abstract:
Empirical studies of contracts have become more common over the past decade, but the range of questions addressed by these studies is narrow, inspired primarily by economic theories that focus on the role of contracts in mitigating ex post opportunism. We contend that these economic theories do not adequately explain many commonly observed features of contracts, and we offer four organizational theories to supplement – and in some instances, perhaps, challenge – the dominant economic accounts. The purpose of this Article is threefold: first, to describe how theoretical perspectives on contracting have motivated empirical work on contracts; second, to highlight the dominant role of economic theories in framing empirical work on contracts; and third, to enrich the empirical study of contracts through application of four organizational theories: resource theory, learning theory, identity theory, and institutional theory.
Outside the economics literature, empirical studies of contracts are rare. Even management scholars and sociologists, who generated the four organizational theories just mentioned, largely ignore contracts, both in theoretical and empirical analysis. Nevertheless, we assert that these organizational theories provide new lenses through which to view contracts. While economic theories of contracting focus primarily on one purpose of contracts – mitigating ex post opportunism – the four organizational theories help us understand the multiple purposes of contracts.
In addition to AALS this past weekend, the American Economics Association held its own annual meeting in Chicago. Over at the Organizations and Markets blog, Peter Klein has posted links to noteworthy AEA papers on organizations. These include a paper on Firm Boundaries in the New Economy: Theory and Evidence, by Krishnamurthy Subramanian. "Subbu," a co-author of mine on a couple of projects, is a new, up-and-coming finance professor at the B-school here at Emory (Goizueta). Here's what his paper is about:
The theory in this paper highlights the trade-offs that knowledge intensive firms confront when deciding among mergers/acquisitions, joint ventures, alliances, and arm’s length contracts. I define a knowledge intensive firm as a collection of the knowledge assets that it owns and the agents who have full access to such assets. Therefore, boundary decisions between two firms are modeled using access to knowledge and ownership of knowledge. Modeling boundary choices using ownership cannot provide optimal incentives since ownership affects incentives asymmetrically, and ownership can encourage over-investment. In contrast, modeling the boundary choices using access and ownership can provide first best incentives since access and ownership complement each other in providing incentives: access affects incentives symmetrically while ownership affects them asymmetrically. The theory explains why some mergers/ acquisitions in knowledge intensive industries are successful while others fail and in what situations an alliance or a joint venture dominates a merger/ acquisition and vice-versa. Using a sample of alliances and joint ventures in the high technology industries, I provide empirical evidence to support the theory.