The Two Institutional Logics: Exit-Oriented Versus Commitment-Oriented Designs for Companies

Throughout human affairs and even in mathematics, science, and engineering, there are two logics that are dual to one another (series-parallel duality). Albert Hirschman investigates the two logics as the parallel-oriented logic of exit and the series-oriented logic of commitment, loyalty, and voice. Economics focuses almost exclusively on the logic of exit so that all questions of institutional design are seen through that market-oriented lens. One goal here is to flesh out the alternative commitment-oriented logic of institutional design for corporations. The large Japanese-style firm is a major example of the commitment-oriented design in an organization. The large publicly traded American firm represents a muddle between the two design logics. Those who legally have voice, the absentee shareholders who are the de jure "members" of the firm, operate according to the opposite logic of exit, the Wall Street rule (sell your shares if you don't like how things are going). And what stability and efficiency the large American corporations have is not due to the exit-oriented behavior of the electronic herd of stock-traders but due to the commitment and firm-specific learning of the long-term staff of the company (the de facto members of the firm) even though the staff are legally just the external suppliers of labor without any formal voice in the company. The gap between the two design logics has allowed top corporate managers to wield corporate power in their own short-term self interests without any genuine legitimacy and without any long-term commitment to the company as a human organization. The conclusion is that American corporate law should evolve toward a coherent design that reunified the de jure and de facto firm in a commitment-oriented model. That is how to extend the virtues of the family firm and family farm to the large corporation.