A relational approach to Corporate Governance design

The paper outlines a new pluralistic method for analyzing, assessing and improving corporate governance structures in their traits relevant both for financial and for human capital providers. The framework seeks to enlarge the rather universalistic approach to governance structures ‘ranking’ used in the economic (principal-agent) approach, introducing sensitiveness to some relevant contingencies. Among the contingencies, task complexity and innovativeness is supposed to matter, as well as the configuration of motivations and preferences of capital providers – which are supposed not to be uniform but to be predictable in their main configurations. The framewok is design-oriented and aimed at improving corporate governance configurations in a generative way, based on the discovery of superior matches between the preferences of different cathegories of capital providers over governance mechanisms (rather than focused, as usual, on the comparative assessment of discrete realized ‘models’). The approach is relational in two ways: it builds governance structures on pairwise analyses of effective matches among preference configurations; it builds governance structures as nexuses of complementary governance mechanisms (effective matches among mechanisms). The three fundamental ‘factors’ of production and value generation – capital, land and labor – are not factors in the same sense. While capital and land are resources, assets, ‘potential energy’ for generating services and value, labor is itself a service. Therefore a different concept would be needed for representing the ‘potential’ for labor service generation, the stock of valuable knowledge and competences which are combined with other assets for value generation, a concept like those of ‘human capital’ or ‘human assets’, and ‘social capital’ that today have become of common use both in the sociology and economics of organization (Becker 1986; Williamson 1979; Burt 1997). The firms and sectors in which the provision of labor services involves more than the sale of those services, implying investments of critical human assets, are of growing importance in economic life, high tech and new economy sectors being examples. What do these investments in different types of assets imply for governance structures? To what extent the now popular yardstick of ‘shareholder value’ is adequate for regulating the behaviors of those firms? This paper aims at contributing to the debate on corporate governance structures by extending currently available governance design models to incorporate those concerns. It builds on advances both in theoretical and empirical research, and propose a new framework for designing those aspects of governance structures relevant for the ‘governance of agents’ who qualify as human capital providers. Shareholders, stakeholders and ‘capital providers’ value If the owner and providers of human capital put it at risk in association with other assets, it is both efficient and fair to allocate to them some rights on the results of the economic use of their assets (Hart and Moore 1986). It is not simply a case in generic ‘stakeholding’the bearing of relevant consequences from a firm’ activities – but it is a case in the direct investment of resources, which should be adequately attracted, rewarded and coordinated with other resources. In agency theory, the standard assumption is that the financial investments in a firm are the more specific, the most difficult to recover, the most critical for success, then financial capital providers should be considered the ‘principal’ in principal-agent analysis of governance structure (Shleifer, Vishny 1986). That assumption is not ubiquitously valid. There are situations in which human capital investments are very specific, difficult to recover and critical for success. This paper explores some substantive and methodological consequences of taking all capital providers ‘on board’ in the governance structure optimization problem. By the way, the approach enlarges the perspective even towards financial and technical capital providers – with respect to the usual shareholder value maximization approach – as not all those capital providers are shareholders. When an ‘investment of human capital’ is in order rather than just the sale of a labor service? Tipically when knowledge and competence (the capital) and tasks (the service) can not be easily