Conference Thematic Stream: Governance of social enterprises Keywords: Governance, Stakeholders, Workers’ participation, Cooperative firm, Shared capitalism 1. Survey of literature The traditional wisdom of corporate... [ view full abstract ]
Conference Thematic Stream: Governance of social enterprises
Keywords: Governance, Stakeholders, Workers’ participation, Cooperative firm, Shared capitalism
1. Survey of literature
The traditional wisdom of corporate governance takes as granted that not-controlling financial partners (minority shareholders or financial partners) are subject to a risk of being expropriated by the controller of the firm, i.e. either entrenched management under a dispersed ownership structure, a controlling shareholder under concentrated ownership or the CEO elected by workers in a working cooperative (see Cornforth, 2004 and Spear, 2004). On the other hand, economic theory has increasingly begun to recognize the role of employees and other "non-shareholder constituencies". In our previous work (Ecchia, Gelter and Pasotti, 2012) we have shown that, in different types of firms, workers will generally not only benefit from protection by labor law, but also from provisions that protect shareholders against expropriation by the controller (managers). Hence this demonstrates that corporate law and labor law are interdependent in their effects on the expropriation of both groups.
Although both aspects may be important to corporate governance, their interaction has not yet been thoroughly investigated in the case of cooperative firms, where the interplay between different constituencies has an important role in the management of the firm (Hansmann, 1996). In his seminal work on the governance on the firm, Hansmann analyses different types of governance structure which arise as an efficient solution to the minimisation of transaction costs among the various stakeholders of the firm. In the case of cooperative firms (workers cooperatives, consumers’ cooperatives et al) this implies the need to exercise ownership power to limit inefficiencies arising with respect to other constituencies, in particular the actual management of the firm .
2.Research question(s):Following Conforth’s (2004) discussion of democratic character of cooperative firms and its impact on the relationship between owners and managers, we explore the possible tensions/conflicts between different stakeholders (management and owners, typically) in order to study governance in cooperative firms. In particular, we analyse the incentives that influence the decision by the (joint) controllers of the firm in the distribution of firm’s value among stakeholders. We also discuss how these incentives vary, according to the governance structure chosen by a certain cooperative firm (and hence by the width of the controlling rights granted to different groups of stakeholders) and to the degree of protection granted by the law.
3. Methodology
In this theoretical paper we study the incentives that influence the decision by the (joint) controllers of a cooperative firm to divert resources from other stakeholders in the firm. We present a simple model of cooperative firm to show that the effectiveness of diversion (i.e. the amount taken from the prior expectation of profits, wages or other implicit benefits) depends on the design of governance structure (defined by corporate law and firm’s internal structure ) and by labour law, respectively. The cooperative (workers’ cooperative) is formed by two groups of stakeholders: workers/owners and managers. For simplicity, all workers share the same objective and managers do the same so that the interplay between these two groups can be formalized as a two-players strategic interaction (manager/workers). In addition, since we assume incomplete contracting over the distribution of value added within the firm, we introduce the possibility that each party can perform some activity to increase her share of the value added to the detriment of the other (expropriation activity). These activities have a negative effects on the value of the firm but have also a private cost incurred by the agent. We then show that the effectiveness of cooperative firms in creating economic value depends crucially on the external regulatory environment in which they operate, in addition to the market competition they face.
