Implications of High Performance Production and Work Practices for Theory of the Firm and Corporate Governance

Abstract

Theories of the firm based on agency theory, transaction cost economics, and the nexus of contract conception have gained currency in the past three decades. These theories emphasize the central constitutive role of contracts for firms. Critics have charged that these theories ignore crucial aspects of firms, such as human capital, and thus serve as incomplete models of economic organization. This article seeks further expansion of this viewpoint. Specifically, it seeks to deepen the insights of the human capital turn in theory of the firm through a comprehensive analysis of the changed role of employees in production and the intricate workings of contemporary business organizations. Together both analyses support a theory of the firm that relies on an understanding of organizational capabilities as the focal point for gathering these varied inputs. This expanded understanding of the firm also helps reconceptualize corporate governance. This article argues that, given the critical function of knowledge and improvements in performance in new flattened out organizations, governance structures must be realigned to maximize the potential of such factors. Some version of the team production model of corporate governance is best able to integrate and govern these varied inputs. The article thus posits a model of the firm that builds on the notion of organizational capabilities, such as those described in the account of contemporary production offered here, and relies on a governance structure that makes boards of directors responsible for coordinating the inputs of all members of the corporate team. The article concludes by considering some implications of this argument for corporate law and regulatory compliance.