Firmalar kitab 7

i
Alternative Theories of the Firm
The Theory of the Firm is commonly viewed as axiomatic by business

school academicians. Considerations in spanning organizational
structures, their boundaries and roles, as well as business strategies all
relate to the Theory of the Firm. The dominant Theory of the Firm poses
that markets act perfectly to maximize the well-being of society when
people act to maximize the personal utility of their individual purchases
and firms act to maximize financial returns to their owners.
However, burgeoning evidence and discourse across the scientific and
policy communities suggests that the economic, social, and environmental
consequences of accepting and applying this theory in the organization of
business and society threaten the survival of the human species, among
countless others. This book provides the latest thinking on alternatives
to the Theory of the Firm as cornerstone of managerial decision-making.
Authors explore and elucidate theories that help us understand a firm dif-
ferently and suggest alternatives to the Theory of the Firm.
This book will be of value to researchers, academics, practitioners, and
students interested in leadership, strategic management, and the intersec-
tion of corporate interests and the well-being of the society.
Michael Pirson is William Loschert Professor of Management, Global

Sustainability, and Social Entrepreneurship at Fordham University and
Research Fellow at Harvard University, United States.
David M. Wasieleski is Albert P. Viragh Professor of Business Ethics in

the Palumbo-Donahue School of Business and Executive Director of the
Institute for Ethics in Business at Duquesne University, United States.
Erica L. Steckler is Associate Professor of Management and Co-Director

of the Donahue Center for Business Ethics and Social Responsibility
in the Manning School of Business at the University of Massachusetts
Lowell, United States.
ii
Humanistic Management
Series Editors: Michael Pirson, Erica Steckler,
David Wasieleski, Benito Teehankee, Ricardo Aguado
and Ernestina Giudici
Humanistic Management draws together the concepts of social business,

sustainability, social entrepreneurship, business ethics, conscious capit-
alism and cooperative capitalism to present a new humanistically-based
research paradigm. This new paradigm challenges the prevailing neo-lib-
eral ‘economistic’ approach that dominates twentieth-century manage-
ment theory and practice, and instead emphasises the need to protect
human dignity and wellbeing as well as economic drivers.
Aesthetics, Organization, and Humanistic Management

Edited by Monika Kostera and Cezary Wozniak
Motivation in Organisations
Searching for a Meaningful Work-Life Balance
Manuel Guillén
Humanistic Management and Sustainable Tourism

Human, Social and Environmental Challenges
Edited by Maria Della Lucia and Ernestina Giudici
Humanistic Tourism
Values, Norms and Dignity
Edited by Maria Della Lucia and Ernestina Giudici
Humanistic Management in Latin America

Edited by Consuelo A. García-de-la-Torre, Osmar Arandia and
Mario Vázquez-Maguirre

Edited by Michael Pirson, David M. Wasieleski and Erica L. Steckler
iii
Alternative Theories
of the Firm
Edited by
Michael Pirson, David M. Wasieleski
and Erica L. Steckler
iv
First published 2022

by Routledge
605 Third Avenue, New York, NY 10158
and by Routledge
2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2022 selection and editorial matter, Michael Pirson, David M. Wasieleski and
Erica L. Steckler; individual chapters, the contributors
The right of Michael Pirson, David M. Wasieleski and Erica L. Steckler to be
identified as the authors of the editorial material, and of the authors for their
individual chapters, has been asserted in accordance with sections 77 and 78
of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
in any form or by any electronic, mechanical, or other means, now known or
hereafter invented, including photocopying and recording, or in any information
storage or retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered trademarks,
and are used only for identification and explanation without intent to infringe.
Library of Congress Cataloging-in-Publication Data
A catalog record for this title has been requested
ISBN: 978-1-032-07785-7 (hbk)
ISBN: 978-1-032-07788-8 (pbk)
ISBN: 978-1-003-21154-9 (ebk)
DOI: 10.4324/9781003211549
Typeset in Sabon
by Newgen Publishing UK
v
Contents
About the Contributors vii
Introduction: Alternative Theories of the Firm 1

M I C H A E L P I RSO N , E RICA STE CKL E R AN D DAV ID M. WASIELESK I
1 From the Theory of the Firm to a Theory of the

Community 11
D AV I D K O RT E N
2 A Note on Alternative “Theories of the Firm” 23

J . - C . S P E N D ER
3 A Rightholding Perspective on the Firm and Principled

Governance: 10 Memos 56
A N N A G R A N DO RI
4 Theories of the Firm: The Logic of Multiple Criteria

for Assessing Outcomes 72
D U A N E W I N DSO R
5 Qualitative Growth: An Alternative to Solely

Quantitatively-Oriented Theories of Firm Growth 103
D I E TM A R S TE RN A D A N D GE RN O T MÖ DRITSC HER
6 What Are Corporations for?: Contemporary

Capitalism, Authority, and a Communicative Theory
of the Firm 120
TI M O TH Y K U H N
vi
vi Contents
7 Toward a “We”-Mode Team Production Theory of
the Firm: A Confucian Approach 151
A L A N S TR U DL E R, MATTH E W CA UL FIE L D A ND TAE WAN K IM
8 Strengthening Theory through Isolation and

Subsequent Confrontation: The Case of French
Convention Theory 184
A B D U L A . R A SH E E D, RICH ARD L . P RIE M
A N D A N N E - C ATH E RIN E P RO VO ST
9 What It Means to be Truly Human in Organizations:

Martin Buber’s Concept of I-Thou Relations 217
U L R I C H L E I C H T- D E O B A L D, LYN DO N E . GA R R ET T AND
L L O Y D E . S A N DE L AN DS
10 Business for Peace: A New Paradigm for the

Theory of the Firm 240
TI L M A N B A UE R
11 Lessons from Indigenous Social Enterprises:

An Alternative Management Model? 280
M A R I O VÁ Z QUE Z MAGUIRRE
12 Toward a Humanistic Theory of the Firm: An

Analysis of the Mondragon-Based Participative Model 303
R I C A R D O A GUADO , JO SÉ L UIS RE TO L A ZA AND
J O S U N E B A N IAN DRÉ S
13 How Human and Organizational Relationships Can

Be Explained by Natural Science 313
S H A N N TU R N B UL L
14 Capitalism as a Continuum: A Bioinspired Narrative

Framework to Assess Four Functions of the Firm 343
E L I Z A B E TH CA STIL L O
Index 365
vi
About the Contributors
Ricardo Aguado is a faculty member of Deusto Business School, University

of Deusto, Spain, in the economics department. He is also a senior
researcher in the Basque Institute of Competitiveness (IVC-Orchestra)
and a member of the Basque Agency for Innovation (Innobasque). His
research focuses on the economics of innovation, regional and national
systems of innovation, and the (micro) economics of competitiveness.
He has published articles in national and international journals in his
field and in other media.
Josune Baniandrés Avendaño received her Ph.D. in Economics and
Business Administration from the University of Deusto. She is cur-
rently a Lecturer at the University of Deusto in Bilbao. She lectures
on Human Resources and Leisure Management. At Deusto Business
School, she has been Vice-Dean for Academic Staff since September
2015 and Vice-Dean for Academic Organisation and Academic Staff
since September 2019. Her publications mainly focus on people and
team development and on gender mainstreaming in management. Her
other research interests focus on management innovation and teaching
innovation.
Tilman Bauer is a peace researcher originally from Finland and Germany.
Currently, he researches the nexus between business and peace as a doc-
toral candidate within Philosophy of Management at Aalto University
School of Business in Helsinki, Finland. He explores a new paradigm
for business thinking where ethical business can foster holistic peace
in society. He previously worked as assistant to the CEO at Autarkia
GmbH, which organizes the Green World Tour event series bringing
sustainability into the mainstream.
Elizabeth Castillo is an assistant professor of organizational leadership
at Arizona State University. Her research and teaching focus on cre-
ating a sustainable economy that works for everyone. Castillo is a
2020 recipient of the Aspen Institute’s Ideas Worth Teaching award,
a global prize for innovation and thought leadership that transforms
business education. She is Secretary of the International Humanistic
vi
viii About the Contributors

Management Association U.S. chapter and on the leadership team of
the International Integrated Reporting Council’s U.S. community. She
is active in the United Nations’ Principles for Responsible Management
Education (PRME) initiative and serves on the economic justice
advisory committee for the Nonprofit Quarterly. She received her
Ph.D. in Leadership Studies from the University of San Diego in 2016.
Her research is inspired by two decades of management experience
at the San Diego Natural History Museum and Balboa Park Cultural
Partnership. Her mission is to repair the world through scholarship
that promotes thriving organizations, fulfilled people, connected com-
munities, and a world we can be proud to pass on to our children.
Matthew Caulfield is a fifth-year doctoral candidate and Platt Fellow
in Business Ethics. His main research interests are in Business and
Society, Corporate Social Responsibility, Business and Human Rights,
and Business Ethics. His most recent research focuses on CSR theory,
organizational secrecy, and equality in markets and firms.
Prior to entering the program, he received a B.S. in Economics
summa cum laude from Wharton, where he was a Wharton Research
Scholar and a PwC Scholar.
Lyndon E. Garrett’s interests involve observing and analyzing social
processes of human connection in moments of interaction. Specifically,
to understand how organizations can create contexts that promote the
experience of genuine, meaningful, and energizing connections, espe-
cially in the face of organizational characteristics that often inhibit
such connection. His interests draw from intra-and interpersonal the-
ories of workplace relationships, group and team dynamics, identifi-
cation, meaning, and thriving. The analytic focus is on moments of
interaction, drawing primarily on qualitative approaches to observe
naturally occurring behavior.
Anna Grandori is Full Professor of Business Organization at Bocconi
University, she has been visiting professor in various universities
in Europe and the United States (e.g. NYU, Stanford, Chicago,
Copenhagen BS, Zurich, Tilburg); Director and President of two
Bocconi’s Research Centers; Scientific Director of various international
research programs; and Editor of academic international journals in
Organization and Management. Her approach integrates elements
from economic, organizational, and behavioral theories. Her research,
applied to topics as innovative decision-making, organization design,
interfirm networks, and the governance of enterprises and entrepre-
neurship, has been published in major journals in differentiated areas
(ASQ, JEBO, JOIE, Rationality and Society, Organization Studies)
and in various international books.
xi
About the Contributors ix

Tae Wan Kim is an associate professor of business ethics at the Tepper
School of Business at Carnegie Mellon University. Kim studies and
teaches business ethics. Two main themes of his research are the future
of the workplace and cross-cultural business ethics.
He has published in Business Ethics Quarterly, Journal of Business
Ethics, Ethics and Information Technology, Academy of Management
Learning and Education, Proceedings of ACM CHI, ACM/AAAI,
IEEE, and Oxford University Press. Kim is an editorial board member
of Business Ethics Quarterly and the Journal of Business Ethics.
David C. Korten (born 1937) is an American author, Former Professor
of the Harvard Business School, political activist, prominent critic of
corporate globalization, and “by training and inclination a student of
psychology and behavioral systems”.[1]‌ His best-known publication is
When Corporations Rule the World (1995 and 2001). In 2011, he was
named an Utne Reader visionary.
Timothy Kuhn is Professor and a Department Chair at UC Boulder’s
College of Media, Communication and Information. His research
addresses the constitution of authority and agency in organizational
practice, with particular attention to how knowledge, identities, and
conceptions of value emerge in sociomaterial and power-laden com-
munication practices. Outside the University, he is an associate editor
at the interdisciplinary journal Human Relations, a co-coordinator of
the “Organization as Communication” Standing Working Group at
the European Group of Organizational Studies (EGOS), and vice-chair
of the Organizational Communication Division of the International
Communication Association. He holds a Ph.D. from Arizona State
University.
Ulrich Leicht-Deobald does research at I.FPM –Institute for Leadership
and Human Resource Management, IWE –Institute for Business
Ethics, at University of St. Gallen.
Ulrich Leicht-Deobald earned his Ph.D. from the University of St.
Gallen (Switzerland) and received a three-year International Postdoc
Fellowship (IPF) to join at the University of St. Gallen’s Institute for
Business Ethics. Ulrich Leicht-Deobald was Co-Principal Investigator
(PI) of the three-year SNSF research project “Big Data or Big Brother?
Big Data HR Control Practices and Employee Trust”; he is cur-
rently Co-PI of the four-year interdisciplinary SNSF project “Socially
Acceptable AI and Fairness Trade-offs in Predictive Analytics”. Ulrich
Leicht-Deobald publishes his research in international journals. He is
Associate Editor at the Journal of Managerial Psychology. His research
focuses on New Ways of Working, particularly in the areas of AI and
HRM, New Forms of Work in Teams, Diversity in Organizations.
x
x About the Contributors

Gernot Mödritscher is Professor at the University of Klagenfurt, Institute
for Management, Controlling and Strategic Management, and Vice-
Dean of the Faculty of Economics. He is the scientific director of uni-
versity master’s courses and has been a lecturer in executive education
for 20 years.
Michael Pirson is a father and William Loschert Professor of Management,
Global Sustainability, and Social Entrepreneurship at Fordham
University. He cofounded the Humanistic Management Network, the
International Humanistic Management Association and is the Editor
of the Humanistic Management Journal. Michael is a full member of
the Club of Rome, an international think-tank that acts as “a global
catalyst for change”.
Richard L. Priem works at the Department of Management and Leadership
of the Neeley Business School at Texas Christian University. Richard
does research in demand- side strategies, top managers’ decision-
making, strategy processes, corporate governance, and corporate
illegality.
Anne-Catherine Provost has a Ph.D. in Management Sciences from the
Catholic University of Louvain. She is now teaching at UCL-Mons in
the field of accounting and performance management. Prior experi-
ence includes two years at the UTA (United States) and six years
at Iéseg (France). Professor Provost is adjunct-coordinator of the
Finance Department (LSM) and coordinates the major in Audit and
Accounting (“Revisorat et expertise comptable”). She is a member of
the Center for Research in Entrepreneurial Change and Innovative
Strategies (CRECIS) of the Louvain School of Management. Her
research focuses on performance management systems (with a focus
on the healthcare industry) as well as on innovation resulting from
public–private partnerships.
Abdul A. Rasheed is Eunice and James L. West Distinguished Professor
at the University of Texas at Arlington. He teaches in the areas of
Strategic Management and International Business. He has a Ph.D. from
the University of Pittsburgh and received his MBA from the Indian
Institute of Management, Calcutta. Professor Rasheed’s areas of
research interest include strategic decision processes, environmental
analysis, outsourcing, franchising, foreign market entry, international
comparisons in strategy and governance, and the implications of cap-
ital market integration for firm strategies. He has won numerous
awards for his teaching and research and serves on the editorial boards
of several journals.
José Luis Retolaza is an associate professor in the field of Economics
and Business. He is President of GEAccounting [Global Economic
Accounting]; President of EBEN [European Business Ethics Network]
Spain; 25 years as a director in Consulting Companies.
xi
About the Contributors xi

Lloyd E. Sandelands joined the faculty of the Stephen M. Ross School
of Business and the faculty of Psychology in the College of Literature,
Sciences, and the Arts, in 1989. Prior to that, he taught at the Graduate
School of Business at Columbia University (1982–1989). Professor
Sandelands received his AB in Psychology (1977) from Washington
University in St. Louis and his Ph.D. in Organization Behavior (1982)
from Northwestern University. His research focuses on the social and
spiritual dimensions of life in organizations. He teaches courses in
social and organizational psychology and management to graduate and
undergraduate students in Business Administration and Psychology.
J.C. Spender is currently a Research Professor at Kozminski University
in Warsaw. He received his Ph.D. from Manchester Business School
(United Kingdom). After various university engagements in Canada,
the United Kingdom, and the United States, he was appointed RBS
Professor of Small Business and Entrepreneurship. His dissertation
won the Academy of Management’s A.T. Kearney Research Prize and
was later published as Industry Recipes: The Nature and Sources of
Managerial Judgement (Blackwell 1989). Among his many honors
and awards, he received an honorary doctorate from Lund University
in 2014.
Erica Steckler is Associate Professor of Management and Co-Director of
the Donahue Center for Business Ethics and Social Responsibility in
the Manning School of Business at the University of Massachusetts
Lowell. Her scholarship includes conceptual and empirical work on
organizational authenticity, sustainability, corporate responsibility,
social entrepreneurship and change, business ethics, and humanistic
management and advances understanding of key dynamics and timely
opportunities for positive transformation among organizations, organ-
izational leadership, and stakeholders in global social issue contexts.
Her research is published in influential journals and edited volumes
and has been recognized with awards and honors. She has contributed
to the International Humanistic Management Association and U.S.
Humanistic Management Association in founding leadership roles and
has served the Social Issues in Management Division of the Academy
of Management in organizing capacities. She received her Ph.D. and
M.S. from the Department of Management and Organization at Boston
College, her MBA from Simmons University, and her B.A. in Russian
and East European Studies from Middlebury College. She strives to
steward dignity and flourishing in honor of humanity and nature and
in celebration of future generations, including her three children.
Dietmar Sternad is Professor of International Management and Program
Director of the International Business Management Master’s degree
at Carinthia University of Applied Sciences/Fachhochschule Kärnten
(Austria). Dietmar teaches several management and leadership-related
subjects at undergraduate, graduate, and executive levels. He has also
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xii About the Contributors

given lectures at universities and business schools in Belgium, Finland,
France, Ireland, Italy, Poland, and Slovenia. He has received several
national and international awards for creating case-based teaching
materials (e.g. from the Academy of Management and Emerald
Publishing) and for teaching quality (he was the first management pro-
fessor ever to receive the Austrian State Prize for Teaching Excellence
“Ars docendi”). He is a strategy consultant and has developed and led
several in-house executive leadership education programs for multi-
national enterprises.
Alan Strudler is a professor in the Wharton School’s Department of
Legal Studies and Business Ethics, where he has taught for more than
20 years. Before arriving at Wharton he taught at California Institute
of Technology, Stanford University, and Columbia University. His
current research includes a focus on corporate governance, compara-
tive management, negotiation, and Confucian ethics.
Shann Turnbull (B.Sc. (Melb); MBA (Harvard)) is the Principal of the
International Institute for Self-governance based in Sydney and
a cofounding member of the Sustainable Money Working Group
established in the United Kingdom. He is a founding life Fellow of
the Australian Institute of Company Directors, Senior Fellow of the
Financial Services Institute of Australasia, Fellow of the Governance
Institute of Australia, and Fellow of the Australian Institute of
Management. He co-authored in 1975 the first course in the world
to provide company directors an educational qualification and wrote
Democratising the Wealth of Nations. His bibliography reveals he is a
prolific author on reforming the theories and practices of capitalism.
Mario Vázquez Maguirre is Associate Professor of Management and
Social Entrepreneurship in the Universidad de Monterrey (UDEM). He
received his M.Sc. in Economics and Public Policy from Tecnológico
de Monterrey and his Ph.D. in Management from EGADE Business
School. His research focuses on social entrepreneurship, indigenous
social enterprises and sustainable development, humanistic manage-
ment, and corporate social responsibility. He has documented cases
of Indigenous Social Enterprises in Latin America and published his
findings in leading journals and book chapters.
David M. Wasieleski (Ph.D., University of Pittsburgh) is the Albert
P. Viragh Professor of Business Ethics in the Palumbo- Donahue
School of Business at Duquesne University and Executive Director
of the Institute for Ethics in Business at Duquesne. David also is an
Affiliate Research Professor at the ICN Business School in Nancy,
France. His academic research focuses on natural science approaches
to understanding ethical decision-making and the formation of social
contracts within organizational contexts. He also studies the effects of
cognitive biases and moral intensity on perceptions of ethical issues.
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newgenprepdf
About the Contributors xiii

His work has been published in Business & Society, Business Ethics
Quarterly, Organization & Environment, Journal of Applied and
Behavioral Sciences, and the Journal of Business Ethics. At Duquesne,
he teaches business ethics, organizational behavior, management, and
sustainability. Currently, he is Editor-in-Chief of Business and Society
Review.
Duane Windsor is the Lynette S. Autrey Professor of Management in the
area of strategy and environment. He has been with the Jones Graduate
School since 1977.
He received the Distinguished Service Award from the International
Associate for Business and Society (IABS) in 2014 and was elected
a Fellow of that organization in 2006. He served as the Editor of
Business and Society from 2007 to 2014 and as the Consulting Editor
for 2015 and 2016.
Professor Windsor received his B.A. in political science from Rice
University and his A.M. and Ph.D. in political economy and govern-
ment from Harvard University.
vxi
1
Introduction
Michael Pirson, Erica L. Steckler and
David M. Wasieleski
Overview
The theory of the firm is commonly viewed as axiomatic by business
school academicians. Considerations spanning organizational structures,
their boundaries and roles, as well as business strategies all relate to the
theory of the firm.1,2 The dominant theory of the firm posits that markets
act perfectly to maximize the well-being of society when people act to
maximize the personal utility of their individual purchases and firms act
to maximize financial returns to their owners. However, burgeoning evi-
dence and discourse across the scientific and policy communities suggests
that the economic, social, and environmental consequences of accepting
and applying this theory in the organization of business and society
threaten the survival of the human species, among countless others. As
individuals and firms continue to value and maximize private benefit and
ownership gain, the strength of shared global resources and conditions
that support life on Earth –e.g., healthy and accessible air, water, and
soil; stable and safe communities; bio-diversity; and so on –have been
compromised, perhaps irreversibly so.3 The price of continued adherence
to the conventional theory of the firm may well be our collective peril.
Responsible stewardship of life-conducive organizing –including inex-
tricable linkages among humanity, animal and plant species, and the nat-
ural environment –demands a new theory, or theories, of the firm. The
aim of this volume is to catalyze research on alternatives to the broadly
accepted theory of the firm. This compilation of thought leadership
provides a forum for stringent criticism of existing theory and the devel-
opment of alternatives applicable to firms, organizations, industries, and
organizing. The contributions in this volume provide a broader set of
basic frameworks to help scholars and practitioners envision, theorize,
and innovate managerial approaches to address current existential crises
facing business, society, and the planet.
Dominant western theories of the firm are rooted in antiquated
assumptions about humans and our relationships with each other and
with nature. Organizing structures, strategies, and behaviors have been
driven by narratives emphasizing the superiority of the market and Pareto
DOI: 10.4324/9781003211549-1
2
2 Michael Pirson et al.

optimal outcomes. Yet, we stand at the brink of catastrophe as business
as usual remains fixated on resource maximization and financial gain at
the expense of humanity and planetary well-being.
Background
The purpose of this volume is to spark innovation across the tenets of
organizations and organizing that honors the dignity of others and creates
and safeguards a sustainable future for all. The impetus for developing this
collection of thought-leading alternatives to the dominant theory of the
firm was animated by conversations within the International Humanistic
Management Association, a global network of engaged researchers,
practitioners, and policymakers committed to the protection of dig-
nity and promotion of flourishing; the urgency of the United Nations
Sustainable Development Goals (SDGs), the associated Principles for
Responsible Management Education (PRME), and the PRME Working
Group on Humanistic Management; and robust interest among members
of the Academy of Management, the preeminent professional associ-
ation for management and organization scholars. The contributors of
this volume propose a variety of possibilities to advance what we deem
necessary for transforming business and society: a novel set of conceptual
frameworks that allow us to theorize, teach, practice, and inform man-
agement and policy in order to steward the survival and well-being of
humanity and, more broadly, the living fabric of Earth systems.
This book volume features chapters with a diverse range of viewpoints
rooted in the ambition to provide alternative theoretical frameworks
that explain the existence, assumptions, and practices of organizations.
Chapters are arranged beginning with contributions that draw direct
links with existing and dominant theories of the firm and flowing into a
set of contributions that focus on the development of entirely independent
frameworks. Several chapters reference David Korten’s provocative essay
entitled “Towards a Theory of Community”, which we include as a
starting point for this volume. This essay was developed in conversations
with members of the International Humanistic Management Association
and shared with prospective authors as an invitation and provocation.
In the spirit of changing how we think about organizations and their
relationship with society and the natural environment, David Korten’s
work has inspired this edited volume. Dr. Korten asks us to rethink the
purpose of the firm. As Korten has argued (c.f., 2015), if the goal of
business is to maximize profit, organizations need to focus on maximizing
the number of consumer and employee stakeholders, among other con-
ventional management paradigms associated with resources, assets, and
growth orientations. However, if the goal is to maximize the well-being
of societal stakeholders and the planet as a whole, the entire business
model –intractably grounded in a “suicide economy” (Korten, 1995,
2015) –must be upended. According to Korten, “the proper purpose of
3
Introduction 3
any human institution is to improve the lives of the people who depend on
it”.4 As Korten notes, business schools have adopted a theory of the firm
rooted in a neoliberal narrative that emphasizes organizational decision-
making that is value-free and objective. This current dominant theory of
the firm fails to value or endorse interests in the quality of life of the full
spectrum of organizational stakeholders, including communities and the
natural environment.
We need both new and revised theories of the firm to address the human
and environmental crises outlined in this volume. While alternatives such
as stakeholder theory have made important inroads, there is much fur-
ther to go. In contrast to the conventional stockholder theory of the firm,
or managerial capitalism, and its premise that businesses exist primarily
to make profit for their owners, stakeholder theory has provided an
important set of updates based on the premise that without stakeholder
support, a firm risks its own survival. The stockholder theory of the firm,
dominated by economic models centered around the agency framework
that emphasizes the manager’s role as a steward of the owner’s objectives,
is rooted in limiting conceptions of rationality that assume managers are
self-interested toward short-term economic goals. The stakeholder theory
of the firm expands the domain of managerial rationality to account for
the understanding that stakeholders, defined as “any individual or group
that affects or is affected by the achievement of the organization’s object-
ives”,5 are foundational for achieving positive economic outcomes and
other mutual benefits.
The stakeholder theory of the firm, in its initial conception, argues
for a revised strategic management model that includes a concern for
stakeholders’ needs beyond those of the firm’s ownership. The stock-
holder theory of the firm acknowledges the requirement to obey requisite
laws and regulations in the pursuit of profit. Stakeholder theory cleverly
turns these obligations of the stockholder perspective on their head. Since
each regulation (in crisis theories of regulation) addresses the protection of
some social or environmental entity (e.g., consumers, employees, commu-
nities, suppliers, environment, and so on), it can be logically deduced that
business firm could be managed around these broader stakeholder interests.
For instance, organizations are expected to respect the rules dictated by
the Environmental Protection Agency, so it would be sensible to manage
operations of the firm at the outset to include a concern for the envir-
onment. In this way, the stakeholder perspective extends the traditional
purview of firms beyond the often narrow economic interests dictated by
owners or investors. “The stakeholder framework has been forwarded
to help managers to both define an organization’s social obligations and
manage relationships with respective stakeholders”.6 Yet, stakeholder
theory has not sufficiently addressed the complicated set of global crises
linked with business behaviors and organizing that are facing us today.
This volume is motivated by the need –and urgency –to revisit our core
assumptions, prioritize progress, and expedite substantive change.
4

Dialogue about what an organization is and how it is strategically
managed should be taking place at the broader community and even
planetary level of analysis. Reducing the natural environment and
humanity to one among many competing stakeholders of organizations
binds managers to a short-term, reactionary frame. We need not just a
better way to distinguish and prioritize the natural environment and soci-
etal well-being from the perspective of the firm and management, but
rather a new way to prioritize and promote the natural environment and
associated sustainability issues at the forefront of how the firm is defined
and managed. This is exactly what the authors of this volume offer. As we
step back to consider what meaningful next steps to take, this volume has
clarified the necessity for a complete revision and re-envisioning of the
relationships between organizations and stakeholders. Overall, a major
contribution of this volume is to inspire and motivate research, teaching,
practice, and policy work that shift emphasis away from the firm as a
priori in order to instead adopt the primacy of community and planetary
sustainability –including the protection of human dignity and promotion
of flourishing for all –as a new organizing principle.
Contributions
To begin, John Christopher (JC) Spender provides a thoughtful overview
of long-standing characteristics, tensions, and contradictions underlying
the mainstream theory of the firm. He reasons that a theory of the firm
must be normative, as a firm is part of an institutional web of political,
aesthetic, religious, and societal concerns. Spender explores a theory of
the firm that builds on theoretical and conceptual foundations provided
by Knight, Coase, and Penrose. He argues that there cannot be a nomo-
thetic and generalizable theory of a firm. Accordingly, a theory of the firm
must be idiographic, acknowledging that a firm is the result of a unique
entrepreneurial institutionalization process that fits a particular society,
set of political forces, and time. Spender proposes that it is the process
of entrepreneurial enactment and leadership that needs to be theorized,
rather than a circumscribed focus on a theory of the firm. He embraces
uncertainty and ethics to suggest a rhetorical basis for a theory of the firm.
Contributor Anna Grandori presents an alternative theory of the firm
focused on governance and organization. She presents an essay with ten
principles for a generalized theory of good governance based on classic
criteria of organizational effectiveness, decision quality, justice, and con-
stitutionality. She labels her contribution a “right holding” perspective
on the firm. In her essay, Grandori proposes that these principles provide
a more proper characterization of the firm than what has come to be
understood as the “theory of the firm”. She further argues that those
principles, even if based only on organizational effectiveness consider-
ations, prescribe a far more “humanistic” mix of practices than usually
contemplated both in the theory of the firm, as commonly intended,
5
Introduction 5
and in practice. Her chapter challenges us to probe beyond commonly
accepted assumptions of the firm in order to more accurately characterize
firms based on governance attributes and ultimately to clarify firm poten-
tial for positive transformation.
A different perspective on the shortcomings of and opportunities for
reconceptualizing the theory of the firm is provided by Duane Windsor.
He identifies a core insufficiency of performance-based theories of the firm
in terms of their tendency to rely on largely single, static, and economic
criteria for assessing societal and environmental objectives. His chapter
remedies this shortcoming by introducing a multiple-criteria approach
that assesses outcomes of concern to stakeholders and societies, and that
accounts for these as interactive instead of additive. Windsor builds on
the logic of multiple-criteria assessment to advance adaptive moral cap-
italism as an alternative theory of the firm. This alternative results in
better managerial decisions by leveraging institutional constraints such as
ethical and legal standards as well as stakeholder influences. Windsor’s
framework accentuates the microfoundations of responsible firm
behavior by highlighting the role of managerial judgment for negotiating
the evolving set of complex criteria faced by managers. An instructive
review of the literature, in addition to the thoughtful critique of anti-
capitalistic alternatives such as the theory of community advanced by
Korten, is a valuable feature of Windsor’s chapter.
The contribution by Dietmar Sternad and Gernot Moedritscher shifts
the focus to qualitative outcome criteria as the basis for a theory of the
firm. Building on Penrose, they redevelop the notion of qualitative growth
in the context of a firm. They define qualitative growth as the enhancement
or improvement of certain internal qualities and characteristics of a firm
over time with positive effects on stakeholder groups and/or the environ-
ment. Based on the behavioral theory of the firm and the resource-based
view of the firm, these authors develop an integrative framework of firm
growth that takes both quantitative and qualitative aspects into account.
At the core of the model are the “4 As” –aspirations, ability, activities,
and as a result of a dynamic interplay of these three factors, the advance-
ment of qualitative and quantitative growth variables. The model, as well
as further deliberations on qualitative growth and its interrelations with
quantitative growth, open new opportunities for taking a more compre-
hensive view of firm growth that fully acknowledges its multidimensional
nature.
The theme of authority and its relationship to the theory of the firm
is highlighted in Timothy Kuhn’s chapter. In probing the fundamental
purpose of the firm, Kuhn’s theorizing invokes authority and the com-
municative act as baselines for a renewed theory of the firm. He argues
that existing views of the firm, including governance and capabilities
approaches, are incapable of providing convincing responses to the
question “what are corporations ultimately for?”. He proposes an alter-
native theory, one that portrays firms as communicative practice –and
6

resonates with Spenders’ arguments. Kuhn’s communicative theory
of the firm (CTF) is a model of organizing that portrays the firm as a
contingent product of the interplay of a multiplicity of participants,
including those beyond what we traditionally consider the firm’s bound-
aries. Considerations of branding, corporate personhood, activism, and
agencement illuminate further opportunities to explore alternative firm-
defining, and by extension, firm-behaving perspectives.
Collaborators Tae Wan Kim, Matthew Caulfield, and Alan Strudler
propose an alternative perspective to the theory of the firm, drawing on
Confucian conceptualizations of production and collaboration. They base
their theorizing on Blair and Stout’s team production model of the cor-
poration (TPM), which has become an attractive alternative to principal-
agent models of the corporation. TPM literature has been developed to
address opportunism, that is, problems of exploiting one’s position within
an organization to acquire a benefit without giving anything (e.g., firm-
specific investments) in exchange. The problems of team production have
prompted a revival of the concept of authority within firms. The authors
argue that the prevailing conception of authority in the TPM literature is
market-based and therefore fails to address team production problems.
The authors offer an alternative conception of authority in team produc-
tion: a Confucian communitarian account of the internal workings of
a firm, including the production team and the hierarchy endowed with
the authority to govern it. This distinctly Eastern approach introduces
important new perspective-taking to the volume.
Co-authors Abdul Rasheed, Richard Priem, and Anne- Catherine
Provost revisit French Convention Theory (FCT) to inform the theory of
the firm. They argue that geographically or otherwise-isolated scholarly
communities initially can benefit from closure that allows them to nurture
nascent theories. Subsequent confrontation with theories representing
other scholarly communities is necessary, however, for the full develop-
ment of robust new theories. Instead, academic parochialism leads schol-
arly communities to rally around their long-cherished views and avoid
confrontation with new ideas. The authors illustrate the potential benefits
of even an incremental step toward increased intellectual engagement
among scholars representing differing theory traditions. FCT, developed
in relative isolation, serves as an example of a theory that could pro-
ductively confront both economics-based and behaviorally based North
American organization theories. The authors first describe FCT and
then show how institutional and stakeholder theories each could benefit
from a confrontation with it, because of potential new theory develop-
ment, theory extension, or theory reinforcement. Lastly, they discuss the
benefits and implications of such theory confrontations for strengthening
organization science.
The work of Martin Buber and his concept of I-Thou relations holds
promise for an alternative theory of the firm in the chapter by Ulrich
7
Introduction 7
Leicht-Deobald, Lyndon Garrett, and Lloyd Sandelands. Their contribu-
tion explores what it means to be truly human in organizations. These
authors argue that the theory of the firm and related theories depict
human relations in terms of their objects and instrumentalities. This con-
ception, however, precludes any metaphysical account of human relating.
In this chapter, the authors look to Jewish philosopher Martin Buber for
insight into the nature of human relations that has largely escaped notice
in contemporary organization studies. The authors begin by unpacking
Buber’s distinction between two modes of relating: I-It and I-Thou –first,
to recognize that it involves profound distinctions in how we come to
relationships, and particularly, how we understand their ontology, epis-
temology, and causality; and second, to recognize that it invites us to
think differently about business. Upon this foundation, the authors draw
also from allied ideas of the social teaching of the Catholic Church to
point the way toward a new language of business rooted in the being of
I-Thou relations.
Tilman Bauer revisits the theory of the firm through the paradigm
of peace. The notion of Business for Peace is proposed to provide an
overarching framework for the substance of “responsibility”, “sustain-
ability”, and “positive impact”, addressing shortcomings of the dominant
contemporary narrative. More specifically, the potential for business to
foster peace is highlighted based on the insight that the concept of peace
is much more than merely the absence of war or violence. Proposing
a fundamental shift in business ethics literature from corporate social
responsibility to Business for Peace, the chapter suggests that the con-
cept of peace can serve as the substance of positive impact in the business
context. Based on a historical reading of the firm, this proposal deviates
from the extant theory of the firm by placing the onus for generating posi-
tive societal impact on the individual firm rather than an unaccountable
broader utilitarian marketplace. The core of this position is that the true
philosophical purpose of the firm may be to create a positive impact in
and for society at large. If the core objective of business is indeed more
than the pursuit of profits alone, then our understanding of the nature
and role of business must be updated and defined more adequately than
what is found in the existing literature.
Indigenous social enterprise offers an alternative context and important
insights for reexamining and revising a theory of the firm. Contributor
Mario Vázquez Maguirre develops novel principles governing man-
agement based on learnings from indigenous organizing. He explores
the attributes of a management model derived from indigenous social
enterprises in Latin America. These enterprises are driven by local know-
ledge, values and ethics, a profound respect for human dignity, and a
social purpose that is also shared by the community. They also prioritize
the well-being of each stakeholder over profits or economic indicators.
Evidence suggests that indigenous social enterprises have achieved
8

sustainability and contributed to the common good by abandoning the
logic of control and value appropriation that is typical of profit-maxi-
mizing firms. Instead, they have designed empowerment mechanisms
that create value among stakeholders, strengthen their capabilities, and
promote the development of these groups according to their own terms.
Vázquez Maguirre’s chapter highlights opportunities for learning and
transformation, in theory and in practice, that the combination of indi-
genous organizing and social enterprise models offer to the traditional
organizing paradigms that have dominated scholarship and practice.
Extending lessons in organizing from another nontraditional context,
collaborators Ricardo Aguado, José Luis Retolaza, and Josune Baniandrés
explore principles of employee-owned cooperative enterprises. Based on
the case of the Mondragon Cooperative Corporation in Spain, these
authors develop ideas that move us toward a more humanistic theory
of the firm. They critically analyze the proposal sent to the Parliament
of the Basque Country and the Parliament of Navarre (two regions in
Northern Spain) by the Arizmendiarrieta Foundation (AF). Both the pro-
posal and the AF are the result of a joint effort from former managers
and current sympathizers of the Mondragon model in order to spread
the ideas of Arizmendiarrieta (the founder of Mondragon) to all kinds of
economic organizations. In that proposal, AF asked for a new model of
business, namely the Inclusive-Participative Model (IPM). The authors
argue that the IPM entitles workers to greater participation in the
organizational decision-making process in comparison with the classic
business model (focused on shareholders). However, in their chapters,
the authors propose a reformulation of IPM so that persons working in
and for corporations could be considered ends in themselves and not as
instruments (for the organization to obtain economic goals). They argue
for the incorporation of a wider and non-egocentric anthropological
model, and for consideration of integral human development as the final
objective of the firm.
In a far-reaching contribution, Shann Turnbull asks us to reconsider
relationships within an organization through a natural science lens.
Specifically, he offers a new unit of analysis through which social and
organizational activity may be measured. As an alternative to the ways
firms measure transactions, he introduces Transaction Byte Analysis
(TBA) as a pathway for revising Transaction Cost Economics. Turnbull
argues that all individuals in nature need transacting bytes to survive.
This logic translates to the organization in terms of the materials and
energy it takes to conduct business. Insights from Turnbull’s analysis are
translated into implications for business structures and governance.
Continuing in the natural science vein, in a final contribution by
Elizabeth Castillo, the author develops a theory of the firm inspired by
biology. Her chapter proposes to reorient commerce to sustainable pros-
perity and offers a new narrative of the firm based on principles from
9
Introduction 9
ecology, developmental systems theory, thermodynamics, and complexity
science. Collectively, these principles suggest that firms arise as a mech-
anism for relational development and coordination of resource flows to
produce cooperative surplus. This surplus makes innovation, dynamic
efficiency, and social and technological progress possible, leading to the
emergence of macro properties like evolvability, antifragility, and open-
endedness. It is sustainable to the degree that planetary boundaries are
respected and a portion of the surplus is reinvested in civil society, the
substrate that incubates resources for subsequent iterations of organizing
and exchange. This ecocentric understanding points the way for how
firms can operate in adaptive alignment with their operating environ-
ment through mutualistic rather than parasitic exchange practices. The
chapter concludes with examples of mutualistic commercial behaviors.
This bioinspired approach to organizing promotes expanded degrees of
freedom and flourishing among individuals, organizations, and the com-
munity through ongoing innovation and capability development at mul-
tiple levels.
In conclusion, our hope for this volume is to provoke alternative
thinking about the firm and its role within community and society in
order to transform business, management, and organizing in a direction
that holistically safeguards and dignifies life on Earth and that leads to
collective flourishing. In our role as scholars and teachers of business and
management, we acknowledge that we need to be both more rigorous
and more relevant –a recurring platitude. In parallel, in this time of mul-
tiple crises within business, community, and nature, we and our fractured
Earth desperately need different assumptions, models, and approaches to
steward fundamental solutions that embrace a concern for societal and
environmental well-being.
Notes
1 Coase, R.H. (1937). The nature of the firm. Economica, 4, 386–405.
2 Menz, M., Kunisch, S., & Collis, D.J. (2015). The corporate headquarters
in the contemporary corporation: Advancing a multimarket firm perspective.
Academy of Management Annals, 9, 633–714.
3 c.f., United Nations (2019). Remarks at 2019 Climate Action Summit, by
Secretary-General António Guterres. September 23, 2019. www.un.org/sg/en/
content/sg/speeches/2019-09-23/remarks-2019-climate-action-summit.
4 Academy of Management “Improving Lives” Talk, August 10, 2018; Korten,
D.C. (2015). Change the story, change the future: A living economy for a living
earth. Berrett-Koehler Publishers.
5 Freeman, R.E. (1984). Strategic management, a stakeholder approach.
Pitman, p. 46.
6 Driscoll, C., & Starik, M. (2004). The primordial stakeholder: Advancing the
conceptual consideration of stakeholder status for the natural environment.
Journal of Business Ethics, 49, 55–73.
01

References
Academy of Management “Improving Lives” Talk, August 10, 2018; Korten,
D.C. (2015). Change the story, change the future: A living economy for a
living earth. Berrett-Koehler Publishers.
Coase, R.H. (1937). The nature of the firm. Economica, 4, 386–405.
Driscoll, C., & Starik, M. (2004). The primordial stakeholder: Advancing the
conceptual consideration of stakeholder status for the natural environment.
Journal of Business Ethics, 49, 55–73.
Freeman, R.E. (1984). Strategic management, a stakeholder approach. Pitman,
p. 46.
Menz, M., Kunisch, S., & Collis, D.J. (2015). The corporate headquarters in
the contemporary corporation: Advancing a multimarket firm perspective.
Academy of Management Annals, 9, 633–714.
United Nations. (2019). Remarks at 2019 Climate Action Summit, by Secretary-
General António Guterres. September 23, 2019. www.un.org/sg/en/content/sg/
speeches/2019-09-23/remarks-2019-climate-action-summit.
1
1
From the Theory of the Firm to a
Theory of the Community
David Korten
We humans are a remarkable species with an extraordinary drive to

understand ourselves and our place in a complex and evolving universe.
In search of such understanding, we develop cultural narratives that
express our shared understanding of who we are and why. Science calls
these narratives theories. They guide us in making the individual and col-
lective choices by which we organize as families, clans, identity groups,
societies –and now as a global civilization.
If we get our narratives wrong, we get our choices wrong in ways
that can make us a threat to ourselves and to the living Earth from
which we evolved. That defines our current situation. The culture and
institutions of our now global civilization put us on a path to potential
self-extinction.
Our future, our survival as a species, depends on recognizing that
the narratives that currently define our global culture and institutions
are purely human creations subject to human choice. Of particular con-
cern are the narratives that define the institutions of money, markets,
corporations, and government. Together they have a powerful influence
on our individual and collective behavior. Nothing in nature can recog-
nize these institutions. Even humans cannot recognize them until taught
to do so. Given that they are purely human creations, there is no rational
reason for humans to cling to narratives or institutions that do not serve.
They are ours to change.
The outcomes of our cultural and institutional choices can be beau-
tiful, loving, and caring societies that provide us all with deeply ful-
filling lives. The outcomes can also be devastatingly destructive of both
people and nature and dehumanizing of rulers and ruled alike. The
variety of human cultures and institutions in different times and places
throughout our species’ history give us a sense of the diversity of our
human possibilities.
As we come to understand the variety of those possibilities and their
consequences, we come to recognize our potential to determine our col-
lective future by conscious collective choice. To get our future right, we
must get our theory right.
DOI: 10.4324/9781003211549-2
21
12 David Korten
Anatomy of a Potentially Terminal Crisis

Starting in the latter part of the 20th century, six powerful trends put us
on track to become the first species on Earth to choose its own extinction.
• Life Destructive Technologies. Our nuclear, carbon energy, genetic

modification, and artificial intelligence technologies give us extra-
ordinary new powers and possibilities, including the potential to
destroy Earth’s ability to support life and maintain the conditions
essential for our own existence.
• Consumption Beyond Earth’s Ability to Sustain. We consume at
a rate 1.7 times what Earth’s remaining regenerative capacity can
sustain. Yet growing consumption remains humanity’s defining eco-
nomic priority.
• Privatizing the Commons. The ecological systems that continuously
renew and regenerate Earth’s atmosphere, water, soils, and climate
constitute an intricately interconnected commons on which all life
depends. We divide it into separate private parcels subject to indi-
vidual human choices disruptive of Earth’s regenerative systems with
no regard for the implications.
• Corporate Influence on Government and Public Policy. We yield con-
trol of the commons to global corporations dedicated to maximizing
short-term private profits for an exclusive few.
• Extreme Inequality. We tolerate a growing division between the
extremely rich and extremely poor. In January 2020, the wealth of
just 26 billionaires exceeded that of the poorest half of humanity –
3.9 billion people. By July 2020, the fortunes of the 15 wealthiest
U.S. billionaires had grown by an additional $401 billion in just six
months, an average of $27 billion each, even as humanity struggled
with the devastation wrought by COVID-19.
• Loss of Institutional Legitimacy. We face social breakdown in
response to the failing legitimacy of the institutions that drive the
above-named trends and that lack an internal ability to self-correct.
The source of these trends traces to cultural, institutional, technological,

and infrastructure choices grounded in flawed narratives regarding
our human nature, needs, and possibilities. We now face an existen-
tial challenge of our own making beyond anything humans have previ-
ously faced.
A viable human future depends on transforming our relationships
with one another and Earth to provide all people with material suffi-
ciency in a balanced co-productive relationship with one another and the
living Earth that birthed and sustains us. This transformation requires
a guiding narrative that draws from our most advanced understanding
of our human nature, our potential as living beings, and the nature of
life itself.
31

To this end, this chapter proposes a Theory of the Community, a
metanarrative to guide us in making cultural, institutional, technological,
and infrastructure choices consistent with our true nature and potential
as a species with a distinctive ability to choose our shared future. The
implications run deep. Marginal adjustments will not suffice. We face an
imperative for civilizational transformation.
Imperial Civilization’s Final Days

The defining institutions of our 21st-century global society are the residue
of 5,000 years of an imperial civilization devoted to securing the power
and affluence of the few at the expense of the many in an ever more
intense competition to control and exploit the resources of a finite and
overstressed Earth. Imperial Civilization began with city-states, ruled by
imperial families that expanded their domains to become nation states
that became colonial empires.
In relatively recent times, populist revolutions led to the insertion of
elected leaders into top- down command and control institutions ori-
ginally created by ruling dynasties to control the people by controlling
the land and other resources on which all depend. As populist democ-
racy increasingly infringed on the power of family dynasties, those who
aspired to dominate turned from divine right of kings to the divine right
of property as the basis of their claim to legitimacy. They simultaneously
transitioned from monarchy to the profit-maximizing, limited-liability
corporation as their institutional instrument of choice for aggregating
control of essential resources while exempting themselves from personal
liability for the consequences of their actions.
Until the late 20th century, corporations were largely subordinate to
the nation states that created them. A collapse of classical empire that
followed World War II (WWII) freed the colonized people from the hold
of foreign nation states. This left the global corporation as the institution
of choice of modern elites seeking power over the world’s people and
resources free from public accountability.
As corporate power grew, corporate interests called for eliminating
national borders as barriers to their ability to control markets and
resources (including labor) on a global scale. Corporate elites used their
growing fortunes to buy the support of politicians for their agenda.
Governments were soon putting the interest of transnational corporations
ahead of the interests of their own people.
The corporate campaign to free themselves from the constraints posed
by national borders began to gain public attention in the mid-1990s as
corporations engineered a series of international agreements designed to
secure corporate rights beyond the reach of national laws and parliaments.
In 1994, the North American Free Trade Agreement (NAFTA) linked
the Canadian, U.S., and Mexican economies; and on January 1, 1995
the World Trade Organization (WTO) was launched to serve as a global
41
14 David Korten
body in which corporations could write and enforce new rules of global
commerce with relative freedom from concern for the interests of nation
states and the people whose interests nation states presumably represent.
The institutions of Imperial Civilization have taken new form, but the
basic pattern of rule of the many by the few through control of the means
of living remains intact.
Misdirected by Flawed Theory Posing as Science

The institutional system now driving humanity toward self-extinction is
guided and legitimated by a theory, obscure to most people, but embraced
by most economists and teachers of business management as their intel-
lectual sacred truth. Known as the Theory of the Firm, it assumes that
the purpose and responsibility of the firm is to maximize financial returns
to individual shareholders. The theory operationalizes the foundational
premise of neoliberal economics that the well-being of all is maximized by
free (unregulated) markets in which individuals and firms (corporations)
compete to maximize their financial gain.
The Theory of the Firm frames how we as a global society train the
politicians, board members, and managers who lead our corporate and
government institutions. It guides and legitimates choices that maximize
corporate profits, assuring us that these choices best serve the common
good by growing the wealth of all. This frame reduces relationships of
people with each other and with nature to transactions mediated by a
combination of markets, money, and legal contracts. The corporation’s
labor costs are to be minimized, and nature is to be valued only as a
source of resources and waste disposal at the beginning and end of linear
supply chains designed and managed by corporations to maximize finan-
cial gain.
The theory reduces humans to a species whose defining purpose is
to shop and consume. It ignores our dependence on clean air, clean
water, fertile soils, and a stable climate, as well as our emotional need
for relationships based on mutual caring. It affirms policies that strip
governments of democratic accountability and that limit governments’
role to subsidizing corporate supply chains, enforcing contracts, and
securing corporate assets through the application of military and police
powers.
In short, the theory denies all that makes us human, is blind to our
dependence on nature, dismisses government’s most essential functions,
and places no limits on the financial and political power that an indi-
vidual person or firm can acquire in the pursuit of financial gain.
The Theory of the Firm and the neoliberal theory it serves to oper-
ationalize, both promote collective choices that currently drive social and
Earth system collapse. Such choices include viewing money as the pri-
mary measure of value, growing GDP as the economy’s primary purpose,
51

and rewarding financial speculators as wealth creators although they
produce nothing of intrinsic value.
While proponents of these theories voice a commitment to ending
absolute poverty (defined by the UN’s Sustainable Development Goals as
the absurdly low income of less than $1.25 a day), they see no problem
with extreme inequality. They consistently advocate policies that shift
power from governments presumed to be accountable for the well-being
of people to corporations dedicated to whatever maximizes profit without
regard to consequences for people and planet.
Ignoring our nature as living beings that exist only as members of
Earth’s interdependent community of life, the Theory of the Firm
characterizes us as solitary individuals whose relationships with one
another and Earth are best mediated by money, legal contracts, free
market competition, and individual interests. Academics in prestigious
universities teach this theory to future leaders of business and govern-
ment in schools of economics and management, thus preparing them to
perpetuate the institutions and practices that constitute an existential
threat to our common future.
As we learned from Thomas Kuhn, a solid critique is not sufficient to
break the hold of a flawed theory. It must be replaced by a more compel-
ling theory. The Theory of the Firm and the ideology on which it rests
must be replaced by a new theory. The needs of our time are best served
by a Theory of the Community grounded in the rapidly advancing sci-
entific understanding of life and suited to guiding the needed transform-
ation of society’s defining institutions and management practices to align
with that understanding.
Toward a Theory of Community

Looking to the life sciences, we see an emerging recognition that life as
we know it exists only in communities of organisms that self-organize
to create and maintain the conditions essential to their individual and
collective existence. Healthy living communities are resilient and continu-
ously regenerative –two of life’s defining qualities.
The human body is an intimately familiar example. The holder of our
consciousness and the instrument of our intelligent agency, each body is
a community of tens of trillions of regenerating cells engaged in a con-
tinuous exchange of nutrients, water, energy, and information mediated
by the body’s heart, lungs, liver, brain, and other organs. If this exchange
suffers serious disruption, we die.
Science is only beginning to understand the complex communication
and decision-making processes by which our body’s cells achieve this mir-
acle. Our conscious mind not only does not control these processes, but
it also is generally unaware of them. Its role is to manage our body’s
engagement with its external environment.
61
16 David Korten
When we extrapolate this understanding to Earth, we see an even
more vastly complex living organism. Like any multicelled organism, the
living Earth survives only so long as its countless individual organisms
self-organize as interdependent communities to create and maintain the
conditions of climate, pure water and air, fertile soil, and all else on which
life –including human life –depends.
The challenge of organizing a human society of 7.8 billion intelligent
and self-aware people in symbiotic relationship with Earth seems almost
simple by comparison with the challenge that living Earth’s community of
life has mastered. In learning to manage ourselves in ways that work for
ourselves and for Earth, we have much to learn from healthy nonhuman
living communities that meet their needs through continuous exchange
between cells, organisms, and Earth with no evident equivalent of money,
command and control institutions, or legal adjudication.
Occasionally in nature, there is a clear and immediate quid pro quo, as
in the case of the cleaner fish that feeds on parasites that infest the shark’s
mouth. More commonly, the mutuality is less immediate and clear, some-
times playing out over periods that may span decades.
Life’s capacity to achieve its miracle of synergistic self-organization
and self- evolution is a product of its capacity for distributed intelli-
gent agency. Despite our current failings, it appears we humans are
the currently most advanced expression of evolution’s journey toward
ever-increasing intelligent, self-aware agency. We have yet, however, to
develop the wisdom and skills required to use this capacity in service to
the health and well-being of the Earth’s community of life on which our
own well-being ultimately depends.
A well-developed Theory of Community can guide us in fulfilling our
responsibilities to the whole of Earth’s community of life both locally and
globally. It will rest on the foundational understanding that is emerging
from the life sciences that:
Complex life exists only in multi- species communities that self-

organize to create and maintain through continuous regeneration the
conditions essential to their own existence. We humans are living
beings. We too exist only as members of regenerative, multi-species
living communities.
Our human well-being depends on the well-being of Earth’s holarchy of

living communities that are the source of life’s capacity for resilience and
regeneration. This explains the deep desire of mentally healthy humans,
when their behavior is not distorted by dysfunctional institutions and cul-
tural narratives, to be concerned for the welfare of others and Earth and
to perform generous acts of kindness to neighbors, strangers, animals,
and even plants, though there may be no immediate personal benefit
other than the satisfaction of doing so.
71
Purpose, Power, and Procreation

Securing the well-being of Earth’s holarchy of living communities requires
that we embrace regenerative/living communities as our defining units of
societal organization and manage them in accordance with three founda-
tional principles of a Theory of Community.
1: Purpose: The defining purpose of both society and the economy must
be the health and well-being of place-based living communities and their
members. All our choices relating to how we organize and manage our-
selves and our relations with nature properly follow from this purpose,
including our choice of the indicators by which we assess the perform-
ance of the economy and the firm.
All living beings that contribute to life’s health and beauty have
intrinsic value. The distinctive value of the human species resides
in our unique ability to serve life’s continuing regeneration, resili-
ence, and creative unfolding. We now must choose our defining
indicators of economic performance accordingly. GDP growth
works nicely as a defining economic indicator if our goal is to
grow corporate profits and the fortunes of billionaires. It is a dis-
astrous choice if our goal is the well-being of humans and Earth.
Living beings grow, but only within the continuing cycles of birth and
death. If our human body continues to grow past adolescence, it
generally means we need to change our diet and get more exercise.
In making perpetual GDP growth our defining human purpose, we
have made money our defining value and created an economy at
odds with our nature as living beings. We now have overwhelming
evidence that making GDP growth our defining purpose is an act
of madness, taking us on a path to human self-extinction.
Growing aggregate consumption can grow well-being only if Earth
has excess regenerative capacity and the benefits are equitably
shared. These conditions were largely present for a period of
about 25 years following WWII. Then they changed.
According to the Global Footprint Network, humans first exceeded
the limits of Earth’s regenerative capacity in 1970. At roughly
the same time, proponents of neoliberal economic ideology
mobilized to break up unions and advance new policies that
have since supported an ever-growing concentration of wealth
and corporate monopoly power delinked from public account-
ability. As the neoliberal assault on democracy and the middle
class played out, GDP growth delinked from well- being and
became an indicator of the rate at which the economy is killing
Earth, enriching billionaires, and reducing most people to lives
of growing desperation.
81
18 David Korten
Kate Raworth, the widely acclaimed author of Doughnut Economics,
suggests that managing a modern economy requires two indi-
cator panels. One panel warns when essential human needs are
not being met. The other warns when humans overburden one
or more of Earth’s critical regenerative systems. The goal is to
equitably meet the material needs of all people within the limits
of Earth’s regenerative capacity.
Raworth advises that we be agnostic on the use of GDP. Her primary
recommended indicators are nonfinancial. In my view, GDP is a
distraction that serves no useful purpose.
The firm must have profits sufficient to remain viable and provide a
modest return to investors commensurate with risk. Beyond that,
the firm’s only legitimate purpose is to maximize its contributions
to the well-being of the social and environmental health of the
communities in which it does business.
2: Power: To fulfill the purpose of society and the economy, power must
reside in communities of place that control and manage their resources
through deeply participatory processes consistent with the needs of the
whole. All institutions, including those of business, must ultimately serve
the well-being of and be accountable to deeply democratic bioregional
communities of place.
Living systems organize within structures that facilitate highly com-

plex synergistic decision-making by the community’s member
organisms as they interact to maintain community resilience and
regenerative health. The processes involved require decentralized
decision-making intimately responsive to constantly changing
local circumstances.
For humans, monopolistic concentrations of centralized power
managed through top-down processes to maintain central con-
trol do not serve. They are relics of our imperial past. They must
give way to local self-governance and environmental self-reliance
within a global system of nested communities (holarchy) in which
higher level governance structures support lower level resource
control and self-organization (subsidiarity) to meet local needs in
balanced relationship with nature.
This requires that power resides in deeply democratic communities
and is equitably distributed among community members who
contribute as circumstances require. Success requires constant
dialogue as community members learn together to make indi-
vidual decisions that together secure the well-being of the whole.
Ultimately, all institutions must be accountable to the people of the
community/communities they exist to serve. This is contrary to
the nature of the autonomous profit- maximizing corporation
favored by the Theory of the Firm. That institutional form is
91

now obsolete. It has no legitimate place in the 21st-century civil-
ization to which humanity must now transition.
Equally obsolete is the current system of monopolistic private for-
profit banks that create money by issuing interest-bearing debt
that can be repaid only so long as GDP growth is generating
sufficient new debt to pay the interest on outstanding debt. If
debt stops growing, interest cannot be paid, banks fail to meet
expenses and go bankrupt, money disappears, businesses fail,
jobs disappear, and essential basic needs go unmet. This system
must be transformed to make money creation transparent,
accountable, and supportive of productive investments that put
underutilized regenerative resources to work meeting unmet
community needs without creating ever-growing unpayable debt.
The governance internal to individual institutions is also at issue. The
most effective human teams and organizations are largely self-
organizing and self-governing, with people taking on such tasks
and roles as the situation requires, consistent with responsibil-
ities and agreements with neighboring communities. The greater
the need for creative local adaptation, the more essential these
self-organizing local processes become.
We can and must use our exceptional human capacity for self-aware
agency to meet our own needs in ways that simultaneously serve
others. Without a deep sense of responsibility for the whole of
which humans are a part, our capacity for agency makes us a
threat to ourselves and others. With a sense of responsibility to
and for the whole, we are capable of mutually beneficial creative
brilliance.
Success requires that our educational systems advance our species’
proficiency in making the choices before us with wisdom, intelli-
gence, and a deep sense of moral responsibility for the well-being
of the community that in turn cares for us. We must intuitively
recognize that individual freedom comes with corresponding
responsibility for the well-being of the whole. These are concepts
familiar to many indigenous peoples, but alien to most of us who
have lost contact with our indigenous roots.
3: Procreation: Each community must strive to maintain its capacity for

regenerative resilience and creative unfolding through continuing cycles
of death and rebirth and the constant sharing and recycling of nutrients,
water, energy, and information in balanced relationship with one another
and finite living Earth. By our support of these cycles, we support per-
petual growth in the beauty and creative potential of the whole.
Living organisms meet their needs for water, nutrients, and infor-
mation based on what is immediately available locally. They
work together with Earth’s geological materials, structures, and
02
20 David Korten
processes to continuously regenerate soils, aquifers, streams,
and rivers, they sequester excess carbons, toxins, and other
wastes, purify the air, and stabilize weather and local and global
temperatures.
Individual species may store for future needs and some may engage
in regular migration over significant distances, usually in ways
that make distinctive contributions to the communities through
which they traverse. Others forage over modest distances. Most
all provide beneficial services supportive of life’s regeneration
and species balance along the way, including serving as food for
others and selectively culling the species on which they them-
selves feed.
Natural ecosystems continuously adapt to changing local conditions.
They make constant adjustments to keep local populations in
balance with the local regenerative capacity. Other than the
droppings of migratory birds or nutrients from the bodies of
dying salmon, most everything needed is acquired and processed
from local resources. So long as each local community is meeting
its needs in balance with its local ecosystem resources, the global
ecosystem remains in balance.
Humans currently burden these systems far beyond the limits of finite
Earth’s capacity for resilience and regeneration. This burden
has implications not only for how we live, but also for how we
procreate.
Our children are humanity’s future. Their care must be a defining pri-
ority. Earth has more than enough abused and neglected human
children. What we lack is adequate attention to the care and
development of all our children to assure that they achieve their
full adult potential as intelligent, responsible contributors to the
well-being of the whole.
Imagine a world in which every human child –irrespective of race or
gender –is a wanted child who receives the loving care of family
and community needed to become a fully functioning adult cap-
able of self-care and committed to the well-being of others.
Finding Our Way to an Ecological Civilization

Human viability depends on transitioning to the culture, institutions,
technology, and infrastructure of a new civilization that aligns with the
essential requirements of our true nature as living beings –an Ecological
Civilization that aligns with 21st-century needs and understanding. It is
a monumental challenge that will ultimately require the commitment of
billions of people supported by thoughtful members of the academy who
recognize the failings of the theories currently taught in our schools of
economics and management.
12

The Theory of Community provides a foundational frame for restruc-
turing our institutions and preparing ourselves and our youth for our
respective roles in advancing civilizational transformation. The Theory
calls us to:
• Break up concentrations of corporate power, including private banks;

restructure the individual pieces to achieve equitable, locally rooted
participation in ownership; fund productive investments that address
real needs; and assure that every firm is dedicated to and ultimately
accountable for fulfilling a public purpose beneficial to the communi-
ties in which it does business.
• Take democracy to the next level as a participatory process of com-
munity self- organization, not just a competitive voting contest
between two or more candidates from opposing political parties.
• Replace GDP as the primary measure of economic performance with
measures of the health and well-being of people, communities, and
nature –giving priority to equality, material sufficiency, and spiritual
abundance for all.
• Eliminate financial speculation and free individuals, community
businesses, and governments from perpetual debt bondage.
• Redraw the boundaries of political jurisdictions to align as far as pos-
sible with ecosystem boundaries and seek to optimize environmental
and labor self-reliance within each jurisdiction.
• Strengthen non-monetized relationships between people and between
people and the lands and waters that sustain them.
• Encourage responsible parental choices consistent with a just and
prosperous future for all.
• Invest in life sciences research advancing understanding of the organ-
izing principles, structures, and processes of healthy living systems.
• Transform management education to provide future leaders with the
knowledge and skills needed to lead institutional transformation and
the creation of resilient self-governing communities.
• Organize material processes around continuous circular flows to
minimize the transfer of physical and energy resources within and
between communities.
We have only a partial inventory of proven methods for successfully

implementing these steps to the Ecological Civilization of our future.
Success requires rapid learning through doing.
Together we must –with all due haste –advance our understanding
of how life organizes our human nature and our human contribution to
creations continued unfolding as we find our way to a new civilization
consistent with our true human nature, needs, and potential.
David Korten is president of the Living Economies Forum, a member
of the Club of Rome, co- founder and former board chair of YES!
2
22 David Korten
Magazine, and the author of numerous influential books, including When
Corporations Rule the World, The Great Turning: From Empire to Earth
Community, Agenda for a New Economy: A Declaration of Independence
from Wall Street, and Change the Story; Change the Future: A Living
Economy for a Living Earth.
He holds MBA and PhD degrees from the Stanford Graduate School of
Business and is a former Harvard Business School professor. His current
work builds on lessons from the 21 years, he and his wife, Fran, lived and
worked in Africa, Asia, and Latin America on a quest to end global pov-
erty. Follow him on Twitter @dkorten and Facebook.
This is a revised and expanded version of a paper circulated to
participants in the February 2, 2018 “Necessary Conversation” webinar
sponsored by the International Humanistic Management Association. My
thanks to Michael Pirson for drawing my attention to the significance of
the Theory of the Firm and the need for a Theory of the Community; to
Fran Korten, Pirson, and Erica Steckler for their critical intellectual and
editorial guidance; to Pirson and Steckler for organizing and facilitating
the webinar; and to the many wonderful teachers and colleagues over the
course of my now 84 years on whose work and insights this essay builds.
32
2
A Note on Alternative “Theories
of the Firm”
J.-C. Spender
Many seek “alternative” theories of the firm (ToFs) because they find
the prevailing ToFs unsatisfactory, even offensive. For instance, some
believe the ToFs of economists like Milton Friedman, Michael Jensen,
and Willian Meckling conduce rapacious profit- maximizing and dis-
rupt firms’ more social/ethical tendencies (Friedman, 1970; Jensen &
Meckling, 1976). Of course, the claim that academics’ theories actu-
ally influence business peoples’ behavior, echoing Keynes’s famous aside
about “dead economists”, runs counter to management educators’ wide-
spread concern that their theorizing is “irrelevant” to managers’ practice.
Hence, our agonizing about “rigor and relevance” (Birkinshaw, Lecuona,
& Barwise, 2016; Fincham & Clark, 2009; Hodgkinson & Rousseau,
2009; Kieser & Leiner, 2009; Kieser, Nicolai, & Seidel, 2015; Lee, 1999;
Palmer, Dick, & Freiburger, 2009; Vermeulen, 2005; Worrell, 2009).
Despite these many doubts, and the fable about the cobblers’ children’s
shoes, we seem surprisingly reluctant to research our own business
and assess the impact of management education on business practice.
Thereby we fail to address the divide in our community between those
who bemoan our theory’s bad influence and those who wring their hands
over its lack of influence.
Notwithstanding the heroic assumption that our theorizing is influen-
tial, even if often for the worse, the ToF being vilified is seldom identified,
especially how and where it “goes wrong” or “offends”. Critics prefer
“blanket” criticism, presuming private firms always choose to pursue
their own interests and maximize shareholder value (MSV) rather than
society’s (Willmott et al., 2016). These critics presume a “straw-man”
ToF that induces offensive behavior because the MSV-producing ToF cor-
rectly characterizes firms as dedicated profit-maximizing machines. They
claim a “more enlightened” ToF –perhaps their own –would lead to
“better” business behavior. Yet the ToF proposed is seldom characterized
beyond replacing MSV by “more social” interests, whether or not these
can be determined or implemented. Thus, the alternative ToF sought is
defined by the “wrongs” presumed about today’s firms, rather than by
identified “rights”.
DOI: 10.4324/9781003211549-3
42
24 J.-C. Spender
It is always risky to define something in terms of what it is not. Absent
specification of the wrongs and rights the debate descends into a “culture
war”. Much of our conversation is “political” shouting, liberals to one
side perhaps, neoliberals to the other. This is too bad since every academic’s
most urgent social role is to help clarify the public debate, to open up new
language so that the discussion can move us forward toward better social
arrangements. The academics’ other roles, such as passing knowledge on
to a new generation or discovering new knowledge, is secondary, espe-
cially so when the knowledge being created or transferred does not seem
to help those in the “real world” beyond our “ivory towers”. For some
time, most obviously since WW2, the management academic community
has sought to clarify the debate about firms, managing them, and man-
aging their interactions with various stakeholders and others by pursuing
rigorous testable theories (Backhouse & Fontaine, 2010). This positivist
project has not gone well, at least it has not much clarified or changed
managerial practice. Rather it has helped institutionalize business man-
agement as a quasi-scientific discipline in spite of its negligible real-world
impact. It serves the academic community well but does not clarify the
ToF puzzle.
Meanwhile, especially since the 2008 Global Financial Crisis (GFC),
there is a pervasive sense that business interests everywhere have become
excessively powerful, protecting, and advancing private shareholders’
interests at the expense of the interests of the “rest of us”. Once again,
after quieting in the post-WW2 boom years, social inequities beyond race
have reappeared as major issues in every aspect of social life –education,
military service, healthcare, incarceration, gender discrimination, etc.
Many find parallels with the era of the Robber Barons and the Gilded
Age at the end of the 19th century, the times before national political
action, such as the Anti- Trust and labor movements, pushed private
investors’ powers back toward a less inequitable balance of public and
private concerns. Thomas Piketty’s highly academic 685-page volume of
empirical evidence about the “baked in” divergent rates of return on cap-
ital and on labor became a surprising best seller (Piketty, 2014, 2015).
Putting racial issues to one side yet again as too intractable, complemen-
tary volumes characterize business management as a political matter
rather than a scientific one (Boushey, DeLong, & Steinbaum, 2017;
Delsol, Lecaussin, & Martin, 2017). Many of those criticizing the current
ToFs do so on political grounds, pondering whether capitalism, even lib-
eralism, is increasingly irrelevant. In which case, the vast majority of the
theories underpinning business school (BSch) research and teaching need
trashing and replacing by radically new thinking more relevant to the
new socioeconomic system that has not yet been spelled out.
Some critics appeal to anti-capitalist Marxist or Socialist ideas, enraging
the dominant “free market” devotees. This Note does not attempt a
political view to justify the private firm’s future political and economic
roles, or its demise. Rather, it deals with our attempts to develop a clearly
52
Note on Alternative “Theories of the Firm” 25

capitalist but more managerially relevant ToF. With luck, this might
help clarify the political debate as well, giving private firms’ managers
and shareholders get a better sense of what might be done to address
the rising social concerns about their activity. The Western economies’
concerns about monopoly that led to political constraints on firms at
the end of the 19th century are rising again with Amazon, Google, and
so on, but there are new concerns about firms’ ecological and a-social
behavior. Likewise, there is renewed effort to establish business man-
agement as a socially validated “profession”, renewing the 19th century
effort (Khurana, 2007).
But questions abound. Is the alternative ToF sought one in which MSV
is simply replaced by MEV (More Ethical Values)? While we can go with
the exhortation be more ethical, does this get us anywhere near a more
relevant ToF? Is the calculus of MSV relevant to the values we are to
value more? Are these new values unidimensional and quantifiable or
pluralist and qualitative? Is the methodology of economics relevant to the
ToF we seek, or should aesthetics and/or faith be its basis? Are the ethical
burdens of business practice the same as those of professional practice
elsewhere; medicine, engineering, education, military, etc.? Are institu-
tional contexts not shaped by their “materiality”, ethos, and history? Are
their languages and rhetorical practices the same?
Surely each institutional context has its own singular language and
ethical foundation; the Hippocratic Oath versus West Point’s “Duty,
Honor, Country”? Along these lines this Note accepts the “separation
thesis” in the sense that business management differs from other profes-
sional fields. But the case for dismissing the thesis is strong, given many
presume human beings and their ethics are universal.
We must probe in what way the specifics of business institutions differ
from other “spheres of life”. This surfaces management education’s most
serious weakness; none of the ToFs available help us understand man-
agerial practice beyond its most trivial sense. One the one hand, we have
those in which managers exercising “managerial power” or “fiat”, but
power pervades society. It is not peculiar to firms, though they are clearly
“zones of power”, as are all social institutions. On the other hand, we
have managers as rational decision-makers, allocating resources, choosing
relations.
Again, intendedly rational decision pervades society, making our
biases and other “cognitive failures” to be fully rational an aspect of all
human activity, not peculiar to firms.
Thus, one reason to focus on the ToF, rather than on the political,
social, and legal institutions that constrain firms and force them to be
“better”, is that there is no agreement about which ToF best explains
why private firms exist in the first place and, hence, how their activities
might be justified under society’s constraints. Many analysts presume that
firms are inherently legitimate, “neutral” production functions or pro-
duction arrangements fully justified by social needs served, by the goods
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26 J.-C. Spender
and services they provide. Their firm is “ethically neutral”, a rational
apparatus, a scientifically designed “tool” in the hands of a management
team who choose to use it toward social or ethical ends, or otherwise.
Gas ovens are fine for baking bricks and bread, but not people.
The tool notion puts the analyst outside the “neutral” firm imagined,
the ToF challenge thereby condensed into reorienting the management
team’s decision-making about the tool’s use. There are tool issues about
making it more efficient, masking the ethical issues around valuing effi-
ciency over, say, “ready-to-handness” or its “affordances” or workplace
climate. Likewise, there are “internal” ethical issues when, for instance,
agency issues intrude, and greedy managers prioritize personal gain over
both shareholder return and social service. Other analysts focus on labor
relations, evaluating the individual costs, the bargain of contributions
and rewards for those employed, or on other social costs. This leads
toward stakeholder theory as a ToF. There are various problems with
this, such as how to “trade off” the incommensurate costs and benefits of
those involved. There are further problems about forecasting future costs
and benefits in an uncertain dynamic environment. But even then, stake-
holder analysis presumes rather than explains or justifies the firm as an
inter-interest arrangement.
The Current Inventory of ToFs

As we know, in 1937 Coase asked the economics community “Why do
firms exist?”, pointing out that we had no good answers whenever market
arrangements were available (Coase, 1937). New Institutional Economics
(NIE) proposed some answers to be discussed, and rejected, later (Klein,
2000; Klein & Sykuta, 2010; Langlois, 1989; Leathers, 1989; March
& Olsen, 1984; Ménard & Shirley, 2008; Powell & Bromley, 2015;
Rutherford, 1989, 2011; Vromen, 1995; Williamson, 2000). Still, NIE-
based ToFs may eventually supplement those ToFs presently in vogue.
In BSch today the leading ToFs are those of management teachers rather
than the economists, in spite of the economists’ political power within
the school. For the most part, management teachers simply assume firms
exist, visible all round us and ready to be theorized, and they are little
troubled by the doubts about the firm’s “nature” that post- Coasian
economists now admit.
Gareth Morgan’s charming Images of Organization offers eight models
favored by BSch teachers, variants of the two basic ToFs that underpin
management education today: bureaucratic theory and “community”
(Morgan, 1997). These are children of Ferdinand Toennies’s distinction
between Gesellschaft and Gemeinschaft (Toennies, 1971). Max Weber
took up Toennies’s ideas in his analysis of the four modes of rationality he
observed in human affairs: means-ends rational action (zweckrational),
value-rational (wertrational), traditional (its justification lost in the mists
of time), and affective (generated by a charismatic) (Kalberg, 1980).
72

Bureaucratic theory is at the limit of zweckrational. All choices are strictly
rational or intendedly so. It has been greatly criticized for leading to a state
of “disenchantment”; certainly, an appropriate way of characterizing the
life of “organization man” (Whyte, 1956), and work as “toil” rather
than “human flourishing” (Paulus PP.II, 1981). Contrasted against bur-
eaucracy some presume “community” means individuals fully engaged,
choosing to associate and participate, perhaps urged by charismatic lead-
ership, albeit with uncertain consequences or benefits. Others see firms
as communities of a rational sort arising from individuals’ free choices
about “selling” their labor for promised returns, wages, promotions,
healthcare, etc., under “incomplete” or “open-ended” contracts. At the
same time, the contexts of power and politics in which these “deals” are
made are downplayed; for instance, seeking work in a “company town”
or to get health-cover otherwise unobtainable.
Many critics of current ToFs have the a-personality or “dehuman-
ization” of bureaucratic theory in mind, arguing community is more
“humane”, “ethical”, and socially oriented. Their arguments are often
buttressed by the plentiful evidence of business’s unethical or anti-
social behavior. But presuming bureaucracy as the ToF being considered
has consequences. Weber was dismayed by the encroachment of
zweckrationalität in most, if not all, “spheres of life”. Disenchantment is
not merely about adopting a strictly instrumental dehumanized approach
to work, it also reflects a positivist belief that everything important can
be explained/understood on the basis of reason and logic that there is no
mystery left in the business sphere of life as there is, say, in the aesthetic
sphere. The disappearance of other “rationalities” leaves bureaucracy as
a “neutral” tool in the hands of its owners and managers, even when
“agency” problems separate them. The firm has no “nature”. Its ethics
are those of its managing persons as they guide their tool this way or that.
Much of the business ethics literature focuses on the ethics of the manage-
ment team, stripping away any sense of the firm’s inherent ethics, echoing
the argument that “guns do not kill, people do”.
Such “value- free” analysis is paradoxical, presuming findings uni-
versal yet still relevant to the specific uncertain “habitus” being inhabited.
Those adopting bureaucracy as their ToF seldom concede they abstract
radically from a specific “habitus”. With the straw man of bureaucracy
as our leading ToF, attempts to show managers actually pursue MSV are
fraught with assumptions about whether managers are “rational” in the
zweckrational manner presumed. There are further assumptions about
measuring and maximizing shareholder value. Given an economy not yet
(if ever) at equilibrium, how might shareholder value be determined in
a way that is not contingent on further unknown changes? Surely every
valuation is contingent on there being no unforeseen “disruption” by new
technology or government regulation? Thus, MSV is as much a straw
man as pure bureaucracy; neither doing much to explain or clarify man-
agers’ practice as they grapple with their firm’s uncertain future. The
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28 J.-C. Spender
more tractable part of the stakeholder debate is about the distribution
of the firm’s calculable costs and benefits among the various stakeholders
presently identified, to why MSV claims the owners’ interests dominate
all others’ in spite of the corporate law pertaining. This says little about
the interests of those whose interests have been “silenced”, excluded from
the analysis because they lack the power to take part in the debate among
those with power.
In spite of management writers assuming economists have universally
embraced MSV, closer examination shows they do not, far from it. While
not agreed, economists offer a variety of ToFs, mostly ignored by business
management and ethics writers. For instance, Fritz Machlup argued for
three types of ToF: marginalist, managerial, and behavioral (Machlup,
1967). Marginalist is abstract, the formal neoclassical economists’ theory
of Alfred Marshall and Williams Stanley Jevons. In contrast, manager-
ialist theories focus on power differences among those taking part in the
firm, separating owners, managers, and employees (and customers and
suppliers). Some label this “principal-agent” theory. The firm comprises
different power groups with divergent interests. For instance, managers
are presumed have the power to counter the owners’ power, or at least
take advantage of their ignorance or inattention, to then maximize their
own rewards whatever the consequences for owners and shareholders.
One managerial ToF presumes that managers strive to maximize firm
growth because that increases their personal rewards rather than the
owners’.
Behavioral theories likewise see that firms are made up of divergent
interest groups. Their behavior being based on observation rather than
on maximization or agency theories. Machlup based his analysis on
the Carnegie Mellon authors Richard Cyert and James March and saw
owners and managers negotiating five divergent “objectives”: produc-
tion, inventory, sales, market share, and profit (Cohen & Cyert, 1965;
Cyert & Hedrick, 1972; Cyert & March, 1963; Machlup, 1967:4). In
practice, “profit” is a highly debated slippery concept (Weston, 1950,
1954). In similar manner, Robert Gibbons argued for four potentially
formalizable ToFs: incentive theory, adaptation, property rights, and rent
seeking (Gibbons, 2005).
Nonzero Transaction Costs

Clearly economists’ ToFs vary widely, neither as simplistic nor as
“dehumanized” as the MSV tag suggests. Among these many models,
one issue stands out, an echo of French economists’ thinking in the 18th
century and the 2nd Law of Thermodynamics; nonzero transaction costs
(TCs). The 2nd Law claims that every process is irreversible and leads to
unrecoverable losses; entropy rises until the system dies a “heat death”. If
firms are analogous to thermodynamic systems, they can only persist by
generating new economic energy enough to cover these “losses”.
92

Coase is credited with introducing the notion of TCs. But he wrote
little about firms or their TCs after his 1937 paper, moving focus onto the
broader interactions between law and economics. Meanwhile, the paper
was “rediscovered” in the 1970s, eventually being brought to more gen-
eral notice by Oliver Williamson’s Markets and Hierarchies (Williamson,
1975). Williamson argued that firms are bundles of transactions that
incur nonzero costs. Claiming to “operationalize” Coase’s intuition,
Williamson argued that firms exist if and when managers are able to
reduce the relevant TCs to less than would arise if those transactions were
organized across the available markets. Williamson’s ToF was heavily
influenced by his Carnegie–Mellon training, seeing TCs arising the behav-
ioral causes explored by Cyert, March, and Herbert Simon.
Managers were able to reduce these by bringing individuals into
the managers’ zones of power or “fiat”. Williamson claimed empirical
research showed that his “TC economics” (TCE) would evolve into a
formal theory (Williamson, 2005, 2016).
While Coase certainly brought TCs to economists’ attention, hence his
1991 Nobel, Williamson, despite his own 2009 Nobel, may have missed
what Coase had in mind. In his Nobel lecture Coase thanked Williamson
for bringing his work to others’ attention (Coase, 1992). But until the
end of his long scholarly life, Coase argued that economists were heading
blindly in the wrong direction pursuing abstract theories and thereby
failing to address the practical questions he posed in 1937 (Coase, 2002;
Coase & Wang, 2012). This amounted to Coase claiming the economists’
inventory, even including the contributions of Williamson and the others
in the NIE school, still had no ToF that met the needs of real-world man-
agers better than Morgan’s hoary staples. Coase never directly criticized
Williamson’s work. Williamson’s reasoning was in CMU’s neo-bureau-
cratic tradition, based on the comparative costs of creating order as close
as possible to mechanical perfection. On the one hand, order arising from
the invisible play of free market forces; on the other that imposed by
managerial fiat, typically in response to individuals’ cognitive limits and
failings.
Order is presumed a virtue in and of itself, but also an economic
one, reflecting neoclassical economics’ notions of equilibrium and
maximized economic benefit. The irony is that order by fiat, drawing on
an entirely different power-centered tradition, is also read as an economic
virtue, without any justification (Wiebe, 1967). This echoes Scientific
Management’s 19th century reasoning and methods (Spender, 1996).
Organizational efficiency contrasts against and supersedes market effi-
ciency. Theorists choose between aiming at perfect markets or at perfect
organizations, deemed equally valid economic aims. This raises questions
about the different ToFs’ ethics, denying any presumed neutrality. The
choice of ToF is unavoidably ethical; absent total knowledge of the way
things are and might be there is no “neutral” option. The battle raging
today is between the ethics of free markets and the “economizing” ethics
03
30 J.-C. Spender
of command and control; yet in the second, managers decide for others
excluded from the decision-making.
There is a different way to read Coase’s thinking about TCs. Few
commenting on Coase’s “theory of the firm” note Frank Knight’s The
Economic Organization (Knight, 2013). This book is not highly cited,
even in comparison to Knight’s Risk, Uncertainty, and Profit (Knight,
1921). Knight’s 2003 book was assembled from teaching notes prepared
while at the University of Iowa around 1923. This was a hugely important
period in the development of Knight’s thinking about the nature of eco-
nomics, especially about its ethics. He eventually took up a position
opposed to Lionel Robbins’s classic argument that economics was the
study of the optimal use of scarce resources, potentially formalizable
mathematically (Robbins, 1932).
Knight, in contrast, took up an “institutional” position. For him, eco-
nomics was the study of the alternative institutional arrangements that
society generated to enable “the economy” to function. The economists’
challenge was always to come up with something better than “common
sense”, especially the practice-based commonsense of skilled business
people and politicians. Knight’s 2003 book implies contrasting the way
markets and firms facilitate economic interaction. Coase became an
institutionalist in the Knightian tradition. He was a student at LSE in 1932
when Knight’s lecture notes were being circulated in mimeo form among
the economics students. Though Coase never cited them, it is more than
reasonable to assume that he read them or heard other students, such
as his friends Abba Lerner and Ron Fowler, talking about them. Coase
said that he learned most of his economics from his fellow students.
This claim is strengthened by knowing the only LSE classes he took that
touched on economics were those from his mentor Arnold Plant, by no
means a mainstream economist (Coase, 1991a, 1991b, 1991c, 1991d).
While Coase attended some of Knight’s classes during his visit to Chicago
in 1934, he made little of them. His critiques of Knight’s ideas in the 1937
paper remind one of a dog catching hold of the postman’s trouser leg
and refusing to let go. Eventually, of course, Coase stated that Knight’s
thinking influenced his own more than did any other economist.
We can surmise Coase regarded “TCs” as “institutional” phenomena
rather than as computable costs in a rigorous maximizing model. Note
transaction costs would be un-differentiable from “factor costs” if they
could be computed, as Williamson presumed. Methodology is at issue
here, Coase thinking institutionally, Williamson thinking positivistically.
Coase intuited that transaction costs were generally, at least in part, non-
computable, in practice the costs of creating institutions, more precisely
those of institutionalization. Such costs are excised or ignored in formal
models.
Where did Coase get these institutionalist ideas? Coase’s oeuvre has
almost no discussion of his own “methodology”; so he does not answer
this query. But he did not start by presuming bureaucracy and design.
13

Rather, his 1937 paper presumed that firms arose from entrepreneurial
judgments; he mentions entrepreneurship over 20 times, TCs not once.
He sketched a theory of entrepreneurship, albeit ignored in our current
entrepreneurship literature. He also presumed managerial power (fiat)
and employee subordination, alluding to Batt’s Law of Master and Servant
(Batt, 1933; Coase, 1937:391). In these ways, Coase’s under-articulated
institutionalism shifted from formal economic theorizing, which he
plainly never much cared for, and into entrepreneurial judgment and
sensemaking, nonformal modes of human thought, agentic and imagina-
tive rather than objective and computational. Knight’s influence was not
cited. Yet, one of the handful of remarkable papers Knight wrote during
his Iowa years was The Limitations of Scientific Method in Economics
(Knight, 1924). This borrowed from Max Weber’s analysis, most specif-
ically alluding to the distinction between zweckrational and wertrational,
today’s common contrast of objective and interpretive thinking, but also
alluding to traditional and charismatic modes of reasoning. Knight’s
paper fleshed out his earlier claim that economic thinking necessarily
went beyond zweckrationalität to embrace the other modes of thought.
Institutionalism
Douglass North argued that “institutions” are arrangements that free
individuals “create” to engage, ameliorate, or perhaps exploit, the uncer-
tainties in a specific sphere of their shared lives (North, 1971, 1990). The
process is not clear; institutions are not “designed” with total knowledge
to hand. Nor are they simply emergent, without agentic or entrepreneurial
intervention. They are creatures of some middle ground, also collective
rather than individual. Our market society’s institutions are a long way
evolved from those of their primitive predecessors such as the medieval
guilds. Karl Polanyi argued that three kinds of social characteristics must
be present before a market society can emerge: “redistributive”, “general
reciprocity”, and “householding”, the last seeing the family as the funda-
mental unit of economic activity (Polanyi, 2002).
A market society has freedoms that give it vitality and openness,
retaining an ongoing engagement with uncertainty. Thus, it can never be
wholly institutionalized. Likewise, no existing culture, national or pro-
fessional, can be fully described or theorized as if there was an analytic
vantage point outside it. Nonetheless, even if never fully understood, a
“society” implies an identifiable sense of stability and coherence, so com-
prising a plurality of institutions, while also persistent un-institutionalized
areas of activity. These may become more institutionalized later and go
on to influence other existing institutions. The popular DiMaggio and
Powell story is of institutional influence rather than the processes of insti-
tutionalization that Weber described as the “institutionalization of cha-
risma” (DiMaggio, 2001; DiMaggio & Powell, 1983; Jepperson, 1989;
Kraakman, 2001; Powell, 2001; Powell & DiMaggio, 1991; Weber,
23
32 J.-C. Spender
1968). Institutional theorists recognize that their literature has neglected
the processes of creating institutions (Greenwood, Oliver, Sahlin, &
Suddaby, 2008). In part, these lacunae persist because important aspects
of Weber’s approach to institutionalism, on which much current institu-
tional theorizing is based, have been lost.
Aside from his notion of charisma and institutionalization, Weber
presumed six discrete spheres of life –religion, the economy, politics,
aesthetics, the erotic, and intellectualism (Oakes, 2003; Weber, 1970).
These are not fixed axiomatic features of every society; more historic-
ally established. They are a methodological convenience for Weber, not a
“theory of human society”. His intuition was that a society of heteroge-
neous individuals could not be examined as a totalized objective phenom-
enon; only the institutionalized aspects of a society were stable enough to
be examined. Institutionalization renders an otherwise incomprehensible
society comprehensible.
Contra this methodological maneuver, positivistically inclined analysts
sometimes presume that a particular axiom provides a total concept of
society, a tendency evident among laissez faire enthusiasts who see society
as a market arising either unbidden or humanly “designed” from the twin
axioms of “perfect markets” and rational self-maximizing individuals.
Of course, such a market is not a recognizable or inhabitable society, it is
simply an aggregation of the individuals presumed, neither ordered nor
social, an anarchic dystopia.
Whenever it seems useful to say “society” exists (countering Margaret
Thatcher’s famous quip “there is no such thing as society”), other “models
of the individual” must be adopted. The resulting society’s institutions lie
within various “spheres of life”, characterized by the various roles these
differently defined individuals adopt; seekers of faith, seekers of gain
through exchange, seekers of power and order, seekers of beauty, seekers
of erotic satisfaction, and seekers of more persuasive ideas. Using the
term “society” then points to a sense of coherence across these various
spheres, an obviously problematic and tricky to justify claim.
Each sphere is characterized by its own institutions. Each institu-
tion presupposes an embedded ethic in the sense that an “ethic” always
appeals to a sense of an existing society, more specifically, to the under-
lying ethic of institutions within that society, locating it within that
society. For instance, “politics” is the debate among those with socially
legitimate power who strive to create widespread social arrangements
that constrain others while maybe maximizing their own power.
Such institutional arrangements are justified by claims they imple-
ment and pursue the “political” goal its proponents espouse. Specifically,
they intend a coherent and dominant orientation in the political sphere
of life. That might be to maximize social control or to minimize crime
or to prioritize the political power of specific religious beliefs, hence the
importance of the principle of separating Church and State. In our lib-
eral democratic society, maximum viable personal freedom is espoused
3

political goal, exemplified for most of us by the “four freedoms”. But
freedom is paradoxical, combining freedoms “to” as well as freedoms
“from”. Thus, laissez faire’s institutionalized that dispersive tendencies
must be supplemented by complementary institutional arrangements that
conduce collaboration and socialization.
Politicians pursue many different objectives, typically somewhat contra-
dictory, demanding subtle trade-offs between principle and practice, and
between competing aims. Arrangements in the political sphere almost
certainly “irritate” those in the other spheres, for the various spheres
can never be isolated from each other, even under the most repressive
political systems (Luhmann, 1995, 2002, 2003; Moeller, 2012). Modern
society is a plethora of interacting institutions that not only conduce both
stability and predictability but also lead to change in themselves and the
society’s other institutions, driven by their contradictions and irritations.
For example, a free press facilitates both stability and change in society,
one reason dictators work to diminish the press’s freedoms to express
views contrary to their own while still demanding they express their own.
To shut down the press entirely is to raise the influence of rumor and
people’s irrepressible hunger to communicate through whatever other
institutional arrangements they can find, for instance, when in jail.
Our current democratic capitalism harbors many different institutions
in its various spheres of life. Among these, private business firms are of
considerable, if not overwhelming, importance to our socio-economy.
They are obviously fundamental to our economic sphere; our economy’s
“engines”. But their existence is contingent on the arrangements in our
system’s other spheres; legal, political, and religious especially. Ultimately,
a “market society” is defined as one “dominated” by the doings in its eco-
nomic sphere. As noted earlier, Weber saw this as “disenchanting”, the
dominance of “zweckrationalität” over other modes of reasoning. But
such rationality is far from being the firm’s characterizing ethic; there is
a lot of rationality about (Lecky, 1910). A viable ToF requires something
that differentiates firms from other rational institutions. Profit provides a
clue but is too problematic to serve.
Knight argued that an analyst needed some basic “theory of economic
activity” before she/he would be able to consider how the existence of an
economy interacted with a society’s other spheres. That led to his belief
(and Coase’s) that a rigorous theory was possible along the marginalist
lines Alfred Marshall indicated, based on two axioms: (a) our desire for
more of what we value and (b) our tendency to value that less as we got
more. Knight felt that additional axioms, equally rooted in human nature,
would be needed before a “science” of economics could be developed. In
the meantime, until that theory appeared, he saw institutional approaches
as ways of clarifying democratic society’s economic sphere. Hence, he
asked an institutional question an order of magnitude more general than
the one Coase asked. Rather than Coase’s “why firms?” Knight asked,
“why an economy?”, the more so later in his life when he moved from
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34 J.-C. Spender
economics into “social philosophy”. Given this orientation, it is no sur-
prise that Knight wrote little about firms, and that Coase also moved on
from his 1937 focus on the ToF as he absorbed Knight’s thinking more
deeply. Given Knight’s recognition that adopting institutional methods
meant no existing economy could be comprehended in toto, as neoclas-
sical economists presumed, ignoring every real economy’s nonrational
institutional aspects and features, he argued that his “useful” economics
was the study and comparison of the various historically evident viable
modes of institutionalization. Coase followed, though at some distance.
Rather than seeking a single all-encompassing ToF, today’s economists
and management writers might make better progress toward a useful
clarifying economics of establishing and managing firms by following
Knight’s lead and contrasting the alternative economic arrangements
arising our socio-economy. He identified seven institutional arrangements
and, with the possibility of a rigorous theory of economics in mind,
focused attention on “free enterprise” (Knight, 2013:19). These days we
compare cooperatives, collectives, not-for-profits, worker-owned firms,
Mittelstand, and many other business arrangements. This can also lead to
discussing alternative “political” arrangements of power within the firm;
top-down versus bottom-up, etc.
But how might we tell which is “best”? How can we evaluate or com-
pare these alternative arrangements’ economic consequences when there
is no known connection between political and economic merit? In spite
of our biases and passions, there is little evidence that tight managerial
control is more economic, nor are more open and less “dehumanizing”
modes. As mentioned already, Williamson and other NIE theorists echo
the bureaucratic idea that “economizing” is about order, command, and
control reducing the costs arising from employees’ failure to be com-
pletely rational. There is no evidence that supports this assumption.
Jensen and Meckling touched on this as “monitoring” costs they pre-
sume measurable and computable (Jensen & Meckling, 1976). Order
may seem like rationality applied but again does not differentiate firms
from other instances of institutional order. Management may be the pro-
cess of institutionalization, but something other than mere command and
control or order must be the institution’s ethos.
Knightian Uncertainty
Coase may have intuited one way toward a realistic and useful ToF would
be to focus on the non-computable TCs of managing. While he noted the
costs of finding trading partners, legal services, and so on, he knew the
subtleties of engaging these others into the business. Employees might
be engaged through “subordination”, but this would not work for the
firm’s legal advisers. Coase had no business experience, but he had been
trained in “managerial accounting”, known in the United Kingdom and
Empire as “cost and works accounting” (Wang, 2014). Given the division
53

of labor, managers needed to understand how to manage the division of
costs and benefit to best effect. For instance, which products in the firm’s
product line were generating the best return? Which operations were
most costly and ripest for improvement or outsourcing? Coase under-
stood well the difference between financial accounting, the creation of
snapshot balance sheets required by investors and tax authorities using
“generally accepted accounting principles” (GAAP), and managerial
accounting focused on internal resource allocation choices that required
judgments about resources’ incommensurability and production flow
timing. More fundamentally, he may have been reflecting the managerial
work of assessing and engaging the situation’s Knightian uncertainties
and the nonmeasurable costs of doing this.
There are many debates about what Knight meant by “uncertainty”,
especially as contrasted against “risk”. One often advanced idea is that
Knightian uncertainty applies to circumstances that cannot be measured
and computed, where there is a lack of quantifiable knowledge. This
negative definition is not much help, its weight depending on what it
is not. Scholars of positivist disposition struggle to bring Knightian
Uncertainty (KU) into the realm of calculation nonetheless, sometimes
with sophisticated mathematics and statistics without bothering too
much with what Knight had to say on the matter. Their conclusions run
counter to Weber’s (and Knight’s) thinking. As John Locke remarked,
the faculty which God has given Man to supply the want of clear and
certain knowledge in cases where it cannot be had is judgement …
The mind sometimes exercises this judgement out of necessity, where
demonstrative proofs and certain knowledge are not to be had; and
sometimes out of laziness, unskillfulness or haste, even when demon-
strative proofs are to be had.
(Locke, 1928:298)
KU calls forth our imagination. This cannot be defined or fitted into a

causal model. We know imagination only through our own experience of
it. We can only impute it in others, observe its effects but never the phe-
nomenon itself as we experience it. The act of imagination can produce
a sense of closure or certainty in situations otherwise under-specified,
contradictory, or paradoxical. Contra positivists’ sense of what academic
activity should be about, generating generalizations, dealing with peoples’
imagination explores what is specific to the act, what differentiates it
from every other such act. It is also embedded in an instance of time.
Generalizations imply classes of instances, time-free. An individual’s act of
imagination is more “art” than deduction, the application of a universal.
Knight saw economic activity as an art form (Knight, 1923). At first sight,
this is simply tautological, judgment is “illogic”, what logic is not, and so
cannot have a logical explanation –perhaps nonsense. The imagination
cannot be theorized, no matter how many claim to know how to excite it
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36 J.-C. Spender
with a “whack on the head” or create the “prepared mind”. Like human
agency, imagination is “a cause without a cause”, a boundary condition
to our logical reasoning; the remarkable native ability we have to develop
confidence in conclusions beyond demonstrable reasoning.
Weber’s pluralism led to “interpretive” or “meaning- making”
approaches, presuming an individual exercising his imagination active
under conditions of KU. In such situations, bounded by the facts known
and so pointing toward what is not known, our imagination or judgment
steps in to “construct” actionable meaning. This is not free and uncon-
strained. It cannot be “whatever you want it to be”. It presumes facts and
is constrained by them, the resulting absence indicating an “opportunity
space” bounded by what is known. In a pluralistic universe, KU may also
refer to the irritations we sense between the spheres of life enabling us to
draw on our experience of other spheres and acts of imagination therein.
Lord Kelvin famously believed that science depended on measurement
and calculation, creating islands of scientific reasoning and comfort in the
confusing and incompletely grasped universe we inhabit. Knight argued
that economics could not be useful if so conceived. Indeed, a completely
understood world would have no economics, no bargaining based on
differing interpretations of economic value, thus neither markets nor
firms. The term knowledge would lose its meaning, for that depends on
experiencing “not knowing”, of discovering impediments to reaching
our imagined goals. Knowledge is always “bounded”. Economics
presupposes both knowledge and uncertainty, “not knowing”, different
people arriving at different valuations whether or not these are based on
scarcity or taste.
Even dedicated scientists often claim that “truth” lies less in facts
than in beauty or the simplicity of Occam’s Razor. The canons of beauty
and simplicity are not those of logical reasoning. This edges us toward
defining entrepreneurship as the capacity to draw on “knowledge” from
the noneconomic spheres of life to engage the KU appearing in the eco-
nomic sphere. This risks tautology once more; entrepreneurs are those
with the capacity or “trait” to be entrepreneurial, the old tautological
traitist notions that we know leaders by their ability lead, but in no other
way, such as education, upbringing, interpersonal skills, and so on.
While some may read Coase’s 1937 paper as a failure to define entre-
preneurship, it actually masked his intuitions about the practical impact
of KU and how managers deal with it. Certainty impels rigorous ana-
lysis. KU shifts the emphasis from thinking to action, from reasoning to
judgment, thereby from the general to the specific –what some call the
distinction between the nomothetic and the idiographic (Allport, 1962).
Practice is what, where, and how we experience, one at a time. We may
try and report or explain our experience as partially “covered” by some
general law, but something about the visceral character of experience
must always escape. In contrast, a judgment is not the application of a
general “covering” principle. A judgment is about the known and the
73

not known, and so experienced, “known” in a different way. Conversely
general principles can arise as the situation’s specifics dissolve and leave
the generalization exposed, especially when experiences are aggregated.
Knight argued against positivist methods that sought only the nomo-
thetic. Usefulness meant being able to relate the general with the specific,
to synthesize mutually incommensurate modes of thought.
The first step is to put the claim that valid human knowledge is always
and only “scientific”, about the reality “out there”, in its proper place. It
is no more than a claim, a working assumption, a judgment about what it
means to “know”. Thus, following Weber –and the Greek philosophers –
knowledge is what we use our imaginations to make or create as we
reflect on our experience, an “interpretive” notion. While KU cannot be
rigorously or logically defined –by definition –we can illuminate it by
pointing to our various practices as we collide with it in the pursuit of
our goals.
How do we set about “making knowledge”? The positivist notion,
presupposing a logical and thus knowable reality, frames the practice of
making knowledge as one of discovering the supposed reality. This type
of KU can be characterized as “ignorance” of the knowable facts.
The method here is of science, typically by generating and testing
hypotheses. Managers certainly labor to discover the relevant business
facts, to overcome their ignorance. But note the process involves bridging
between the idiographic and the nomothetic, the instance of the test
experience, and its relation to the universal of a law. Most of positivist
dispositions are happy with Karl Popper’s “falsification” idea –the
“logical asymmetry” between the hypothesis that “all swans are white”
and the appearance of a black swan that “falsifies” the hypothesis.
Unfortunately, neither Popper nor his followers paid much attention
to the illogicality of logical asymmetry (Ayer, 1971). We are stuck with
having no direct certain knowledge of reality, as Descartes reminded
us, nor do we have any language, even logic itself, that is free of our
assumptions. Human language cannot ever mirror or “correspond” with
reality. As Knight pointed out, language is the most fundamental of all
social institutions, without which society is not possible. We always have
a plurality of languages available to us, some more incommensurate than
others. Thus, falsification is meaningful only when the language of the
experiment or “test” is incommensurate with the theorizing language in
which the hypothesis is framed. Otherwise what we can say about the test
is stuck within the tautology that the language of the theory limits what
can be said. The relation between the experiment as a test “instance”
and the hypothesis’s “generality” is deeply problematic, always a matter
of the researcher’s judgment, never of logic, as the Duhem–Quine thesis
showed (Boylan & O’Gorman, 2003; Sawyer, Beed, & Sankey, 1997).
The point here is that neither knowledge nor KU can escape human
judgment and language. We judge everything we claim to know or not.
The types of KU are types of judging, arising because it is not given to
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38 J.-C. Spender
us to know anything “for certain”, as Giambattista Vico put it, “to enter
God’s Mind”.
When we judging to frame a situation as one of ignorance of what we
can know –“when does the flight leave?” –we thereby judge the prac-
tice to deal with it as “research”, the practice of leveraging systematically
from what we judge we know to frame the specific knowledge –absence
encountered –we Google or call the airline. While academics, especially
those of a positivist disposition, judge all uncertainties to be matters of
ignorance, ordinary people and managers recognize other types of KU.
Given Knight’s argument that economics is about interactions between
ordinary individuals, even when shaped by social institutions, one fun-
damental type of KU is the “indeterminacy” arising when two people
with different views and values interact. As Martin Shubik argued, inde-
terminacy is the overarching metaphor of game theory (Shubik, 1954,
2002). Managers often engage indeterminacy by negotiating with the
partners giving rise to it. Note the distinction between situations of ignor-
ance and of indeterminacy is itself a judgment. When a game-theoretic
“strategy” has been discovered, the indeterminacy collapses into ignor-
ance, as happens when one party knows the others’ bargaining strategy
and limits. The value of the distinction lies in guiding managers’ practice.
In some situations, managers judge negotiation to be more fruitful than
research.
Third and fourth types of KU arise because all human knowledge is
held in language, and every language strikes a balance between what is
assumed (its axioms) and what can then be said, deduced from or con-
tingent on those assumptions. Languages are “useful” rather than merely
entertaining when they are fit to real-world purposes, to the specific
challenges the living face. But their plurality means, as with the Duhem–
Quine thesis mentioned earlier, that their usefulness lies not in their
“objectivity”, what they capture about reality, but in how their incom-
mensurability helps us frame what we do not know about the situation’s
specifics and so act purposively or “mindfully”. Hence, it is the value of
the educational method of “contrast and compare”, the ancient dialectics
of colliding different aspects of what we know in the pursuit of deeper
insights that might suggest more effective practice.
The value of dialectical discussion, even in those despised business
meetings, lies in the insights generated as different views are “batted
about”, especially when the process leads to new language that seems to
grasp the situation and managers’ intentions better. Revolutions are born
in novel language; absent new language change is impossible. Those in
firms have to take part in meetings or risk losing contact with its idiosyn-
cratic language, for it is a dynamic, ever-moving train. The senior man-
agers’ primary task is to create, shape, and control the use of language
within the firm, for that continuously shapes the attention and imagin-
ation of those participating. Thus, the third type of KU, after ignorance
and indeterminacy, arises from lacking a relevant language for capturing
93

the experiences of the situation’s knowledge-absences and transforming
the imaginative responses into innovative practice. The fourth type of KU
follows close behind. If action is to be reasoned and mindful rather than
happenstantial, the plurality of languages being judged relevant to the
situation must be collapsed into simple “go, no-go” statements. Consider
the plurality of anxious discussions in advance of D –Day –weather,
troops’ morale, weapon preparedness, layers of attack and support, enemy
preparations, enemy intelligence, and so on; all condensed into “Go!”
Knight uncertainty covers all types of knowledge- absence as they
arrest action toward the goals chosen; both ignorance of what is taken
as factual, and the result of divergence between individual interests (inde-
terminacy) and ways of expressing them (incommensurability and irrele-
vance). The ToF implied is the idiosyncratic language that characterizes a
specific firm in a specific situation at a specific time with specific resource
availabilities and shortages. It bridges between thought and action. It
characterizes the firm as a rhetorical artifact, management as a rhetorical
practice focused on persuasion rather than direction, instruction, or proof.
Thus, the resource-based view (RBV) is deeply deficient in addressing
only parts of the ToF, ignoring the difficulties of establishing the specifics
of the situation or of building the language that enables those comprising
the firm to grasp the resources’ value in that situation. The RBV cannot
escape being trapped in the tautology of VRIN, mirroring the traitist
notions mentioned earlier, judging some resources “strategic” because
they are judged valuable to the firm rather than on the basis of their price
or creation/acquisition cost (Kraaijenbrink, Spender, & Groen, 2010).
RBV authors often claim Edith Penrose’s work as their theory’s founda-
tion yet ignore Penrose’s famous comment that the value of resources to
the firm lays in the services provided, not their cost (Penrose, 1959:25).
Thus, Penrose did not offer a ToF that addressed Coase’s question. She
presupposed the firm’s existence and focused on its growth as its manage-
ment team created useful languages with which to discuss the business
situation’s uncertainties and thus growth possibilities. But this undoubt-
edly reveals that Penrose had some alignment with Knight, especially
with his distaste for positivist thinking.
A Language-Based ToF
This excursion into KU helps establish a ToF of the firm as an idiosyn-
cratic natural language that shapes the participants’ attention, reasoning,
and imagination. This contrasts with “formal” theory-oriented ToFs that
presume the firm is a bundle of known resources or “capabilities” to
rationally allocate known resources with known consequences, so denying
imagination a place in the analysis. Bureaucratic theory highlights the
rational allocation of resources of known value toward known needs,
supported by command and control measurement. Order is presumed to
lead to productivity. Community-based ToFs are not so easy to connect
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40 J.-C. Spender
to the economic sphere of life. While encouraging a non-abusive work-
place seems like a “good” in itself its economic consequences are still
hotly debated. Post WW2 management education’s most comfortable
canard, allowing it to pillory Scientific Management and 19th work, is
that happy workers are more productive; for which there is no general
or conclusive evidence. Notwithstanding, for community ToF enthusiasts
the taken-for-granted causal link is from motivation to productivity.
Morgan’s two principal metaphors underpin the vast bulk of manage-
ment education. Neither engages KU nor nonzero TCs. The search for alter-
native ToFs is driven by what these two models cannot speak about. One
possibility is to focus on the contrast between them and the idea of syn-
thesizing their incommensurate implications, seeking “trade-offs”. Every
trade-off is idiographic, specific to time, persons, and place. They are never
general, for at that point the models merge into one. This makes for among
the most important moments in science, as when James Maxwell brought
electricity, magnetism, and light into a single coherent model, or when
Albert Einstein brought mass and energy together. In the social sciences,
we await the fruit of Max Weber’s project to synthesize economics and
sociology (Weber, 2019). But the idea that scientists are dealing with a plur-
ality rather than a single “covering law” can be illuminating (Courvisanos,
Doughney, & Millmow, 2016; Holcombe, 2008; Rescher, 1993).
One version for “managers as enquiring scientists” is this author’s plur-
alist FOPS model (Simon, 1952; Spender, 1976). It framed strategizing as
synthesizing financial, organizational, people, and society notions of the
business situation. Another is the Balanced Scorecard that framed strat-
egizing as trading-off between financial, internal organization, learning
and growth, and customer objectives (Kaplan, 2010; Kaplan & Norton,
1996). To focus on synthesizing shifts the methodological emphasis from
the positivist program of seeking universal covering laws to an institu-
tional or interpretive one where academics work to clarify where the
actor’s imagination might be most fruitfully projected. Note the meth-
odology chapter Michael Porter plainly excised from his 1980 book
appeared later as two papers that showed the switch from his early aca-
demic identity as a mainstream economist to an interpretivist strategist,
en route to becoming an adviser to governments (including Gadaffi’s)
without declaring his politics (Porter, 1983, 1991). He contrasted the the-
orizing of his first self against the “framing” of the second (Spender &
Kraaijenbrink, 2011).
Knight’s exploration of uncertainty and its economic implications

opens up further alternatives.
Thus far, my appeal is to the 2nd Law of Thermodynamics, nonzero TCs,

and the firm’s need to create new economic value if it is to exist and
persist. Most presume a relationship between creating new value and
14

being profitable, though that turns out to be more complicated than it
seems. But Knight also saw ethics as both foundational and complemen-
tary to rigorous theorizing. Knight wrote that all economic decisions are
ultimately matters of ethics. In spite of being almost completely ignored
by business ethics writers, Knight wrote about the ethics of economics
from the very first to the very last (Knight, 1916, 1966, 1967). Since he
regarded economic activity as individuals acting on their judgment, as
this Note fleshes out, it must be shaped by their ethics. While ethics is
often defined as systematizing, defending, and recommending concepts
of right and wrong conduct, it draws attention to beliefs an individual
might have about what is right and what is wrong, and how this plays
out against social norms. The ethics of economics might well be grounded
solely in the last, as implied by judging whether a firm’s purpose or eco-
nomic activity meets society’s legitimate needs. Knight dismissed this
approach with the first intuition in his PhD thesis that the economic
system shapes individuals’ and thus society’s needs at the same time as it
helps get them met (Knight, 1921). This brought his institutionalism into
play immediately as he asserts economic needs are institutionally defined,
neither religiously, politically, or philosophically “natural”, nor biologic-
ally grounded.
Knight had little time for those who tried to bring the ethics of the
noneconomic spheres of life into the economic sphere, seeing that man-
euver as a kind of ignorance that close reading of Weber would cure. Thus,
he found no value in the business ethicists’ familiar triad of deontology,
virtue, and consequence. A great deal of his writing focused on the ethics
and ethos specific to the economic sphere. Given the notion of eco-
nomic needs earlier, the economic sphere’s ethics could not turn on the
noneconomic needs being addressed. If a society chose guns over butter,
so be it. That was a matter for the other spheres, political or religious per-
haps. In many of his writings, such as The Ethics of Competition, Knight
found the ethics of games more informing, aligning him somewhat with
Johan Huizinga’s Homo Ludens (Huizinga, 1955). Knight considered
players, economic or otherwise, sought to win for the personal satisfac-
tion and public acclaim resulting.
Games were deliberately created situations of uncertainty that could
not be reduced to “strategies” by game theorists, for that would “dis-
enchant” them, rob them of their raison d’être. The ethics of all games
includes “sticking to the rules”, “giving the under- dog a break”,
“knowing when to stop”, and other homely and common sense notions
well known without any scholars’ help. Games generate uncertainties of
all the KU types, especially when played by teams that need context-spe-
cific languages to shape their collaboration. Referees also need to know
appropriate language if they are to manage the game. Game theory seeks
to “disenchant” our games, to excise the mystery that makes watching
them so compelling and exciting.
24
42 J.-C. Spender
Suggesting “playing the game” as an alternative KU- driven ToF
seems relevant to many real-world situations in industries such as oil,
hedge funding, airlines, and other industries that are “competitive”
and not dominated by monopolists or government fiat, as in a planned
economy.
The game’s rules frame the firm’s language and relations with the
situation. Porter’s popular 5- forces model can be reframed as an
institutionalized game of rent seeking within a set of rules defining
customers, suppliers, new entrants, etc. and government regulation,
the glaringly missing 6th force (Porter, 1979, 1980). But the personal
and public consequences of playing games do not deal with the most
fundamental aspect of the economic sphere’s ethos, the need to cover
nonzero TCs. The economic sphere is not one of abstractions and ideas.
The Knight/Coase economy is in the world, a practice that engages most
of the citizens in a capitalist democracy, increasingly facilitating and
constraining their lives. These two features, the need to cover nonzero
TCs and the concept of property, differentiate the economic sphere from
the others. While games may explore the interplay of the participants’
ideas and strategies, they do not generate economic value, nor do they
embrace property even though, as Adam Smith might have observed, star
players are often rewarded handsomely, even indecently.
Knight’s intuitions about the differences between resources (defined by
price in some market external to the firm) and the services they provide
within the firm were revealed in his vigorous debate with the “Austrian”
economists over the nature of “capital”. One the one hand, it is a store of
the fruits of labor, on the other an “eternal fund” (Knight, 1935a, 1935b,
1935c). The processes of production, transform capital into another
form of capital mirroring the First Law of Thermodynamics, the con-
servation of energy, though neither the Austrians nor Knight are clear
about where capital comes from in the first place. Penrose cited Knight’s
Risk, Uncertainty, and Profit a couple of times, without explanation or
critique, though her supervisor (Machlup) had engaged Knight in the
capital debate, somewhat acrimoniously, and covered several of Knight’s
works in the methodology lectures Penrose probably took from him at
John Hopkins (Machlup, 1935, 1978). Penrose wrote her famous sen-
tence about resources and services without citing Knight though virtually
the same language can be found in Knight (Knight, 1957:xxvii; Penrose,
1959:25).
Service
But what is “service”? Any dictionary will serve up several suggestions.
Services are provided by servants, including public services by public
servants. “The service” points to the military sphere of life, marked by
duty. Work done as bidden by a master. The duty a tenant is bound to
provide. The act of waiting at table or a paid member of a household.
34

Professional services provide useful labor that does not result in tangible
products. A central thread is that of “incomplete contract”, when the pre-
cise duty or labor to be performed is to be specified later, the antithesis
of “spot contract” what takes place outside “the immediately-clearing
market”. A second is the absence of a good which can be separated from
its provider and so marketed as goods can. Contracts for future service
are best understood in institutional terms, contingent on a plurality of
relevant and thus contingent laws (Horwitz, 1992; Steinfeld, 1991). The
Knight/Coase/Penrose notion of service is
a conditional on the firm as a social institution rather than as a bureau-

cratic machine or a society,
b time-and mind-full, seen in a longer legal perspective than a spot
relation or market exchange, and
c a relationship between particular individuals rather than classes of
individuals. The meaning of “service” cannot be anchored on market
equilibrium, as is the economic meaning of a “resource” when tied
up with its market price. The complementary “production” meaning
of a resource is tied up with “use”, but that meaning is contingent,
specific to the firm which is as free to misuse the resource as to make
good use of it. Owning a hand drill is of no use to those who do not
know how to use it. Conversely, those with a hammer ready-to-hand
see everything as a nail.
Likewise, Coase began his The Problem of Social Costs, the paper that
complemented his 1937 paper and secured his Nobel, by implying eco-
nomic activity was always reciprocal, open, between specific individuals
(A and B) rather than between an individual and the impersonal market
(Coase, 1960:2).
The openness of the service situation accentuates the need for the
participants to borrow or create a language to facilitate and govern
their interaction. Individuals A and B, and any others involved, have
to develop a language in which they can interact by stating their nego-
tiating positions and demands, deal with any relevant ignorances, and
synthesize the competing values with “trade-offs”. Contract is a major
element of the law. The processes are illustrated in Lianna Farber’s ana-
lysis of medieval trading (Farber, 2006). The participants identify what
and how they value the property or service, must find the moment to
consent to the exchange, and observe how the new language developed
might ripple out into the community as, for instance, the first traders
arrive with furs, establish a language and trading pattern that eventu-
ally appears fully institutionalized as customary. Thus, management’s
work on new languages to frame new possibilities radically re-
institutionalizes their firm as a locus of idiosyncratic language. Managers
are “institutionalizers”, especially when innovating, maybe acting rhet-
orically to emphasize their own charisma (do it because of me), or new
4
44 J.-C. Spender
disruptive technological possibilities (because it is more efficient), or
because there are new customers and markets to be spoken to with, say,
compelling advertising.
This suggests a dynamic, evolutionary, language-based ToF, which
is fine if the firm is understood as language alone, or more specifically,
language that best illuminates the dynamic interindividual relations that
actually comprise the firm as a complex of practice. But this picture fails
to address the nonzero TCs of all real-world practice that demarcate the
economic sphere.
Knight’s rejection of market-based valuation, his embrace of the flu-
idity, and subjective nature of economic value suggest value-creation
may be better understood as personal revaluation. When A and B have
developed their own “deal”, they have reached a win–win point at which
both have revalued upwards what they exchanged, otherwise there
would have been no deal. The total economic value available to them is
increased. New property has been created; learning and the acquisition
of property converge.
This extends Knight’s subjective view of value. Instead of economic
gain being at another’s expense, as when property is rivalrous, Knight’s
increase arises as the parties’ interaction lifts both to a new level, for
instance to better appreciate the value of some natural resource. Again,
this might seem to arise at Mother Nature’s expense, oil extracted and
burned makes some people richer but is an irreversible loss in the Earth’s
total resource inventory. Knight’s view embraces our discovering how to
make more productive use of the oil that there is no objective valuation,
no absolute limit to its usefulness to us, say as plastic rather than heat.
The argument for allowing the economic sphere to arise in a society is
that economic activity can lead to learning how to make better use of all
manner of property which is thus never entirely rivalrous, always basic-
ally non-rivalrous, only made rivalrous by us and our institutions. This
radically undercuts the neoclassical view of economics as the study of
choice under scarcity (Robbins, 1932).
Knight’s analysis complemented that of John R. Commons, espe-
cially the 77-page analysis of the concept of “transaction” in his Legal
Foundations of Capitalism, a book Williamson appears to have cited
only once in his oeuvre, and then only cursorily and without comment
(Commons, 1924; Madhok, 1996; Spender, 2018; Williamson, 1996a,
1996b, 1996c:386). Ignoring Commons’s lengthy analysis, Williamson
based his interpretation of “transaction” on the briefer, even popularizing,
discussion in Commons 1934 (e.g. Williamson, 1996a:371). Williamson
concluded that a transaction was “an exchange” –such as might occur in
any market (Williamson, 1975:124). The NIE notion is that “economic
transactions” can occur within firms as readily as in markets. There is
something exceeding strange about this, given markets are mechanisms
of distribution and firms are mechanisms of production. NIE presumes
they share some under-defined middle ground with, even given at their
54

extreme firms are contexts of total power and markets contexts of its
total absence.
The huge difference is that Commons articulated an institutional view
in which every transaction is embedded in a fivefold social interaction
between parties A and B, influenced by the presence of parties A’ and
B’, the “opportunity parties” who would have done a deal had A or B
dropped out, plus C, the authority presiding over the deal, establishing
and adjudicating the parties’ various rights, duties, and obligations
(Commons, 1924:65). This institutional analysis redefined “property” as
a set of specific reciprocal relations between individuals, not as a tangible
object standing apart from its owner, scarce, rivalrous, and ready to be
exchanged. Thus, Williamson “disenchanted” Commons’s (and Coase’s)
analyses with his CMU-based positivism and impolite claims to “oper-
ationalize” them (Spender, 2018).
The institutional approach is an alternative ToF that synthesizes
nomothetic and idiographic elements and brings ethics into its core. Its
merit is that it can illuminate management practice; its weakness is that it
does not dictate that, as so many positivist theorists aspire to. Thus, “the
market” is not an institutional concept despite Knight’s acceptance of this
commonplace of neoclassical economic theory (Knight, 2013:23). Yes,
there may be a physical or virtual market, a legislated and administered
place that facilitates interindividual negotiation. But “the market” is
not a notion that can illuminate the economic sphere for there is only a
seething mass of heterogeneous individuals engaged all the modes of KU
that actually spur their activity. These days the power of neoclassical eco-
nomic discourse is so great that we have imbibed its notions of market
and property. Yet, as Commons’s analysis showed, they are of little prac-
tical use to the very managers who are engaged in wealth generation.
Where is the market so many talk about? Wall Street? Chicago? On the
financial pages? In some high-speed trading virtual space? The market is
an imagined entity, part of an economics that does not understand itself
for it cannot answer either Knight’s question about the economy’s exist-
ence, nor Coase’s question about the firm.
Economic activity is institutional and time- contingent on individ-
uals’ sense of engagement with the KUs of their reciprocal relations with
others, in the absence of which they would not engage their attention and
imagination and there would be none of the interindividual interaction
to be shaped by the idiosyncratic language that characterizes “the firm”.
As suggested earlier, their economic activity creates “economic value”
by persuading participants to revalue the assets and services they pro-
vide existing firms whether as customers, suppliers, or labor. The eco-
nomic sphere presumes a notion of property that can be revalued in the
economic process. Economic activity presumes property rights. Protected
by laws and aspects of the legal sphere of life, in the economic sphere
property’s nature is of relations rather than objects, even quasi-objects
like patents. Coase discussed how a cave can be of use to many different
64
46 J.-C. Spender
parties. While these users may be subject to legislation, the economic
issue is what the various prospective users are prepared to pay (Coase,
1959:25). While the law sets boundaries, it does not determine.
There is little indication that Knight interacted with Commons, his
elder by 23 years, or paid much attention to his labor-oriented institution-
alism. It may be that Knight never read Commons’s analysis of “transac-
tion” which was his response to the work of Wesley Newcomb Hohfeld,
an American legal scholar (Cook, 1919). Knight was more interested in
the philosophical and sociological aspects of economics than in the legal
aspects that fascinated Coase. Hohfeld transformed US corporate law,
pointing out that a firm’s “property” comprised a bundle of reciprocal
rights, duties, and obligations rather than “real property” or tangible
exchangeable objects (Andrews, 1983; Fiorito, 2010; Hohfeld, 1913,
1917; Schlag, 2015; Vatiero, 2010). Title was always at the pleasure of
the State.
Coase’s 1960 paper suggested some familiarity with Hohfeld’s
thinking, perhaps because Coase encountered it on his trip to the United
States in 1948 to study the administration of broadcasting (Wang, 2014).
Broadcasting was deemed a public service in the United Kingdom where
the BBC managed the State monopoly. It was very different in the United
States where, after some misadventures, the government chose to admin-
ister broadcasting by auctioning the rights to use particular frequencies,
now called bandwidth, to private interests. When Coase returned to the
United Kingdom and suggested the BBC Trustees try making a market
in bandwidth it was considered a joke in extremely poor taste (Coase,
1961). The BBC operated by charging all radio owners a fixed license
fee; many chose to keep their ownership quiet (and still do after the
BBC demanded TV viewers get a similar license –currently $195 p.a.).
Hohfeld’s approach, of course, was far more practical, avoiding the
scofflaws, reinforcing Coase’s intuitions about the subtleties and import-
ance of researching relations between a nation’s laws and its economics.
Every arrangement was a new interaction of the legal and economic
spheres, ethically burdened. With somewhat similar concerns, Knight
often pointed out that slavery was grounded beyond the economic
sphere; in our democratic society, no one is able to sell themselves or
others into servitude, a legal and a political matter. Once stripped of their
legal and political citizenship, and so transformed into property, slaves
became a commodity to be bought and sold, and thereby revalueable.
It is seldom appreciated that slaves were among the most promising
capital investments in the mid-19th century in America (Cooke, 2003;
Rosenthal, 2018).
What Is “the Firm”?

The Knight/ Coase/Penrose firm is an institutional ToF comprising
interindividual relations in the economic sphere. That much seems
74

obvious. Less obvious is that such firms cannot be illuminated by the
management educators’ most popular metaphors –bureaucracy and
community. Yes, a firm “organized” is thus “an organization” and so
susceptible to “organizational analysis”. But there are organizations in
many spheres, religious, legal, political, military, and so on. Only in the
economic sphere must dealing with nonzero TCs be fundamental.
The implications are commonsense. Those engaged in the firm’s
practices are collaborating, just as Commons’s parties –A, B, A’, B’ and
C –are collaborating in “revaluing”. But Commons did not consider
nonzero TCs. The Knightian and Coasian firm is a different entity that
must “siphon off” part of the value being created by the individuals’ col-
laboration to sustain itself. It is like a State that taxes the citizenry to
support the provision of its legal, political, and social services, its public
goods and services. Whereas a State may attempt to hold and protect its
monopoly on the use of violence, the underpinning ethos of the political
sphere, a firm not only establishes its own domain of power with the
intent of control, as is well recognized, but also a domain of value-extrac-
tion (Hay, Lister, & Marsh, 2006).
The process of firm institutionalization parallels the creation of the
division of labor that, as Adam Smith suggested, is fundamental to “the
enterprise”, and the complementary power- based administration that
brings resulting parts into a whole. Given a firm exists only because
it engages carefully selected uncertainties, strategizing being the pro-
cess of selecting them, these uncertainties must be similarly divided and
distributed to the individual level. The firm exists as these individuals
engage these mini-uncertainties with their imagination. There are wide
variations across the firm. But each individual internalizes their own part.
While both Knight and Coase argued that in the absence of KU there
would be no firms, they did not follow up by noting that since the firm is
nothing but ongoing dynamic relations between individuals being shaped
by management’s rhetorical practices, the KUs must ultimately be borne
by these individuals.
To be an employee, individuals must bring this parsed uncertainty into
their lives and thereby become part of the economic sphere, specifically
the region or “island” within the economic sphere (the economy) that
demarcates the firm as a zone of language, power, and practice. Anyone
who has worked in a firm knows the multifaceted and ethically challen-
ging nature of this embrace.
Coase’s notion of “subordination” missed its dynamic nature for
employees can never give up their sense of self and so must deal with the
dynamics of its collision with their role of employee (Coase, 1937:391).
There is a balance between every individuals’ engagements with the alter-
native spheres, dubbed the “work/life” balance. Presuming the embrace
of KU onerous or “dehumanizing” misses the satisfactions of artistic
production, the sense of competence at work well done, that animated
Knight’s arguments; work can be fun and fulfilling for aesthetic reasons,
84
48 J.-C. Spender
showing interaction between the aesthetic and economic spheres. Work
can be a place of companionship, inspiration, succor. Invariably there is
tension between the ethos of the economic sphere and that of whatever
sphere anchors the individual’s sense of self, perhaps political, perhaps
religious. Just as the firm persists so long as there is KU in the economic
sphere that its management is able to engage, so the employee’s engage-
ment persists only so long as there is some uncertainty to be engaged.
Being an employee is a condition of persistent uncertainty and anxiety,
even when satisfying. Will the job disappear as a result of technological
change or owners’ whim or competition? The arbitrariness of managerial
power is a perpetual reminder of KU and the anxiety of inhabiting the
economic sphere.
Clearly, the processes of disenchantment roar ahead everywhere.
Public services are being privatized, public resources plundered, public
goods removed as public sector funding declines; everywhere the eagle
eye of the haves scans the environment for needs of the have-nots that can
be turned into business opportunities and monetized. Economizing is all.
McCloskey argues so powerfully that the rise of capitalism has reduced
the number of those living in poverty to historic levels (McCloskey, 2006).
But there is little of the necessary examination of the role or nature of
firms and, thus, of the precise mechanisms of these historic socioeconomic
changes. There is screaming need for a different ToF that illuminates both
the plusses and the ecological, social, and personal minuses of which we
are becoming aware. The Knight/Coase/Penrose ToF is a huge step for-
ward for it goes beyond explaining “the firm” as an increasingly powerful
apparatus to monetize others’ labor to the benefit of owners and their
capital (Jordà, Knoll, Kuvshinov, Schularick, & Taylor, 2017). We now
see it is also a legally and socially legitimated apparatus that monetizes
the imagination of many to the benefit of the few.
Concluding Comments
This Note seeks alternative ToFs. The impulse driving the search is that
the ToFs in use, underpinning the current discussion in BSch and else-
where, are wanting. The recent attention to “business ethics” has once
again raised questions about why firms exist and whether they are “neu-
tral tools”, whether the “separation thesis” applies. If so, there are sin-
gular ethical burdens about how the tools are used, perhaps for private
gain rather than the public good.
Most of the business ethics literature assumes this neutrality, leading
its authors to examine managers’ choices in a triad of incommensurate
analytic frames; deontological, virtue, and consequence.
The weakness here is that a real firm cannot be merely instrumental,
objective, or neutral. The firm is not neutral, politically or ethically.
A capitalist democracy’s “engines” are institutionalized into its political,
aesthetic, religious, and other spheres –unless, of course, the firm being
94

analyzed is no more than a figment of the rigorously inclined analyst’s
imagination, thereby carefully distanced from the real world, an abstrac-
tion framed to be consistent, perhaps, with neoclassical economics and
the “blackboard theorizing” Knight and Coase protested.
The Knight/Coase/Penrose ToF treats a firm as a unique institution
that inhabits a particular society’s economic sphere. It is an idiographic
notion, not a nomothetic one. Entrepreneurship, the process of creating
the firm, is a process of unique institutionalization, perhaps the applica-
tion of unique charisma, as Weber explored, or perhaps of design that goes
beyond disciplined application of the known to embrace the situation’s
KU imaginatively. Leadership is achieving such institutionalization, quite
different in the various spheres of life. Leadership’s principal mechanisms
are rhetorical rather than purely calculative. Its most proximate aim is
the creation of situation-specific language that can attract and direct the
imagination of those to whom the situation’s KU can be parsed effectively.
All of this is riven with ethical dilemmas and trade-offs. There are the
commonplace ethical dilemmas about directing the firm as a tool. There
are subtler questions about sustaining its relationships with society’s other
institutions. There are questions about the nature, use of and limits to
the interpersonal power within the firm. Bureaucracy is often welcomed
precisely because it sets boundaries to the domains and practices of
managerial power. But at a deeper level there are dilemmas about the
dynamic relations between the individuals’ selves and the duties, rules,
and obligations of the roles they are assigned.
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3
A Rightholding Perspective on the
Firm and Principled Governance
10 Memos
Anna Grandori
The common approach in all current ‘theories of the firm’ is to start

from the observation of the common configuration of those entities and
trying to find a rationale for them. Such an approach can be charged of
being trapped in a ‘naturalistic fallacy’ and of falling short from a critical
assessment of which traits are necessary or optional, functional or dys-
functional, historically determined and transitory or generally valid. Not
surprisingly, in that approach, the implications in terms of improvement,
redesign, or reform of the enterprise are rather limited.
In turn, many current available criticisms of the contemporary enter-
prise are based on empirical analysis of the distortions and negative
consequences caused by the current structuring of firms. Albeit useful,
the dysfunctions do not lead directly to the possible remedies and
sometime lead to focus on repairing a sail rather than on redesigning
the ship. How to reform or redesign always depend on the possible
alternatives. But efforts at developing possible ‘alternatives’ do not
abound.
The present contribution builds on insights available in various dis-
ciplines that can be utilized for distinguishing which traits of firms are
justifiable and which not, which are linked to particular conditions
and which are generally valid, which are unduly taken for granted
just because they are commonly applied, and which can be rationally
reconstructed as rational solutions to problems. Through this kind of
design-oriented reasoning, a contribution is given to an ‘alternative
theory of the firm’ not in the sense of providing a new justification of
what exist in practice (the firm in its common configurations), but in
the sense of prescribing an alternative ‘model of the firm’, the enter-
prise ‘as it might be’. The model is specified in ten attributes that an
enterprise and its governance should have, each justified in terms of
its functions in the organization of economic activities and relations
‘legal entity’, ‘societas’, ‘responsibility’, ‘public interest’, ‘constitution-
ality’, ‘democracy’, ‘knowledgeability’, ‘multiplicity’, ‘thirdness’, and
‘purposefulness’.
DOI: 10.4324/9781003211549-4
75
The Firm and Principled Governance 57
Legal Entity
To start with, firms belong to the important class of ‘organizations’ that
are constituted in ‘entities’, and more precisely not in de facto but in
de jure, legally defined and recognized entities. Even if consisting and
constituted by a single person, a primary function of having an entity is
to create another ‘juridical person’, different from the physical person.
Even though this characteristic is not possessed exclusively by firms, it
is important to discuss why and when an action in general, and economic
action in particular, needs an entity –after all a theory of the firm, i.e.,
a particular type of organization –could and should well be a part of a
more general theory or organization.
A first function of organized entities is to guarantee continuity, for
going beyond the fragility and possible discontinuity of physical persons’
commitments (Blair 2004), as a reciprocal guarantee among joining part-
ners, and toward external contractual counterparts. Such a function is
recognized both in economic organization theory, in definitions of the
firm as a ‘continuous association and dedication of assets’ (Demsetz
1999), and in law, in definitions such as a ‘professionally organized, con-
tinuous economic activity, conducted to the purpose of the production or
exchange of goods or services’ (e.g., Galgano 1974). However, continuity
in cooperation may be achieved on de facto, social, and relational bases.
Why a formal legal entity? Why just writing enforceable legal contracts
among partners or counterparts is not enough?
‘Societas’
According to the basic tenets of organizational economics, production
takes time and adjustment of actions to uncertain condition; hence, if
multiple resources have to be ‘associated and dedicated’ to activities to be
discovered, it cannot be effectively regulated by exchange (transactional)
contracts. So far, the argument goes. Where it becomes less tight is on
the alternatives to market contracting. The standard argument is that
what replace the market when transactional contracting fail are authority
relations, ‘command’, and ‘fiat’ (Coase 1937; Williamson 1975). An
alternative argument is that actually there are other forms of contracts,
more robust, actually designed for, ‘regulating an on-going cooperation’,
that do not ‘fail’ in the mentioned conditions. Those contracts establish
common legal houses, ‘condominiums’, ‘societas’, or ‘companies’ (that in
fact literally, means ‘cum panis’, sharing bread) (Goldberg 1976; Grandori
2019a). The basic shift may be seen from exchanging given good and ser-
vices to pooling the resources for generating (not yet specified) goods
and services. This observation explains why, rather than assuming that,
the firm is based on a ‘set of resources’ (Penrose 1959) or ‘pool of assets’
(Hart & More 1990). The firm is the association contract that governs
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58 Anna Grandori
the joining and dedication of assets. Then, if more than one actor provide
the resources, the minimal firm is a ‘society of actors’ (Grandori 2010),
established for governing the use of ‘pooled assets’ (Ostrom 1980) or
‘pooled interdependence’ (Vanberg 1994).
I call this attribute ‘societas’, using the Roman law term (which first
codified an associational contract of this type), because it refers to a
voluntary and ‘artificial’ system, corresponding to the German gesell-
schaft (in fact corporations are called ‘societies’ in all civil law systems)
rather than using the term ‘community’, deriving from the Roman
communitatem, as it refers to a more ‘natural’ ensemble, based on
kinship, similarity, and personal relations, corresponding to the German
gemeinschaft (Melè 2011). While establishing a ‘society’ is necessary to
establish a multiperson firm, a community of people may or may not
emerge in it. May be a parallel with other forms of society-establishing
acts or contracts as marriages, municipalities, and universities (Masten
2013), in which love and trust may or may not be present, is explicative.
With those two initial points, we already marked some distance with
respect to dominant economic theories, namely, transaction cost eco-
nomics, agency theory, and property right theory. A legal dimension is
important for understanding the firm (for the reasons also illustrated in
the next three points), but we cannot be more far away from the idea
that firms are ‘legal fictions’ made of nexuses of transactional contracts,
advanced in agency theory. They are ‘legal persons’, ‘legal realities’
rather than fictions. And they are not nexuses of market-like, trans-
actional contracts, but are established by a constitutional contract of
societas (or legal constitutional act) (Bottomley 1997; Grandori 2010,
2019a; Hansmann et al. 2006). In these mentioned works, economic and
organizational reasons are given not only explaining why it is so in law
(whereby the agency theory notion of the firm can be said to be juridic-
ally incorrect), but also why and when an entity and society establishing
contract is an efficient mode of organizing production. Hence, in the
first point, we marked a distance (or more bluntly ‘rejected’) a notion
of the firm, and of organization more generally, as not being anything
different from a market. The point is noteworthy not just for the sake
of theoretical rigor, but also for its practical relevance. Agency theory
views of the firm have been quite influential, and they can be charged
of having actually contributed to transforming the pooled, cooperative
interdependence behind organizations, into transactional, price and
incentive driven internal markets in conditions where those mechanisms
are not suitable, thereby contributing to widely observed and lamented
misbehaviors, such as managerial opportunism, short-termism, and all
the like.
In the second point, we marked a distance from the transaction cost
economics proposition that the alternative to market is a system based
on ‘authority’, ‘command’, and ‘fiat’ (Coase 1937; Williamson 1975) –a
95

tenet that may in turn have reinforced and provided a justification to other
lamented distortions in managerial behavior, as the overuse of authority
and command. Organizations, even if seen as an alternative to markets, do
not necessarily involve hierarchy or authority. They do involve ‘deliberate
voice based coordination’ rather than ‘spontaneous exit and price based’
coordination, but there are various alternative mechanisms of ‘deliberate
coordination’: in particular, there is a variety of horizontal, peer group
and ‘committee-like’, democratic decision-making devices (Sah & Stiglitz
1988). The limitation of Coase’s argument (after all it was 1937, and the
‘obsession’ of the times was that of the emerging ‘command economies’)
is not seeing that ‘deliberate direction’, in either states or enterprises, need
not be exerted by ‘command’, but also through democratic and joint deci-
sion–making, and that the principals in a hierarchy can be and often are
at the base of the organizational pyramid –as in all ‘representative hier-
archies’ in political institutions. This point is noteworthy, as the catchy
contrast between ‘markets and hierarchies’ has been dangerous, inviting to
think and behave as if organizations were ‘command systems’. However,
firms are not hierarchies; they are organizations that might employ the
coordination mechanism of hierarchy as any other organization (including
representative and democratic ones, and including inter-entity organiza-
tion) (Grandori 1997), especially when large.
If hierarchy is not a necessary trait of firms, the justification or reason
d’etre of firms should not be based on the properties of hierarchy. The
alternative reasons d’etre have been liked so far to the properties of
legal entity establishing. Are there any other property? Why a contract
establishing a ‘societas’ among a set of partners is not enough? (as it was
‘at the beginning’ in the Roman law economic ‘societas’, contemplated
for example for regulating the use of common waters). Actually entity
establishing has also other functions that explain why it is appreciated
and recognized by law.
Responsibility
A fundamental reason for the legal recognition of entities is responsibility.
Juridical literature almost identifies the establishment of a firm with the
‘assumption of responsibility’. It is such a primary function that applies
also to individual firms: establishing a continuous legal entity guarantees
the existence of an identifiable responsible legal person for any conse-
quence (Blair 2013), and in particular for all negative consequences and
externalities that may ensue from firm actions and products for any ‘third
party’.
An interesting implication of ‘firm responsibility’ (which is actually
the most central feature of a firm establishing contract or act in law)
is that it is an ‘erga omnes’ provision: hence, most notably toward
‘unknown’ subjects and ‘unidentifiable actors’, and for ‘unpredictable
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60 Anna Grandori
and unintended consequences’; hence, it is a responsibility toward society
(Grandori 2016). On that basis, it can and should be said that, at least
toward possible ‘consequence bearers’, ‘social responsibility is not an
optional’ (Grandori 2015), and it holds irrespectively of the ‘objectives’
pursued (profit or any other ‘lawful purpose’).
Hence, we should mark some other distances and differences here.
First, this reason d’etre of the institution of modern firm is as important
as forgotten in almost all ‘theories’ of the firm in management and
economics. Second, it may help seeing that some of the demands for
‘Corporate social responsibility’ should not be conceived as demands for
gracious concessions, to be motivated by clever long-run calculations that
being responsible pays-off etc. Social responsibility at least for negative
possible consequences is a duty, even a raison d’etre for the firm.
Public Interest
The ‘legal recognition of entities’ has a third function that is even less
often recognized in economics and management. As political scientists
have instead pointed out, historically, legal recognition implied a rec-
ognition of a ‘public interest’ function performed by entities –and was
initially granted to religious institutions and universities (Ciepley 2013).
With the development of large risky economic venture as the merchant
expeditions to explore far territories and markets, that would not be
undertaken without a state guarantee, the institute of ‘chartered societies’
emerged (Landes et al. 2010). Without such a ‘state-granted charter’,
firms would not exist at all (Singer 2018).
Hence, even if ‘private’, the firm has a public interest dimension. That’s
a fundamental reason why it is legally recognized and its constituents
are protected from bearing full risk. This feature remained particularly
explicit especially in German corporate law (Vagts 1966), standardized
in the procedure of ‘concession’ of a license to ‘incorporate’ by the
state, including the package of relative privileges and protections for the
investors and the firm’s assets, if a ‘purpose’ or ‘object of activity’ or
‘function’ of public interest is specified in the statute.
Perhaps those historical and juridical considerations may provide a
justifyable meaning to statements that otherwise may sound extreme,
such as that an (entirely) ‘private-purpose’ corporation may be considered
‘illegitimate’ (Korten, forthcoming).
Thirdness
A fourth core function of establishing a legal entity, more than ‘neglected’,
has been submerged and subverted by the ‘shareholder value myth’ (Stout
2012) of the past decades. The function is to ‘partition and shield assets’,
so that they are protected from the investors themselves (who are in turn
16

protected by limited liability). The legal person of the firm plays the role
of a ‘third party’ to which assets are entrusted.
The ‘thirdness’ of legal persons is actually an important device for
any organization not be ‘appropriated’, expropriated, and more gener-
ally misused by its constituencies: organizations should be defended from
constituencies, as much as constituencies from the organization.
The implications are important, and depart radically from common
wisdom and common places. As the economist John Kay stated in no
ambiguous terms (Financial Times 2015), ‘shareholders thinks they own
corporations –they are wrong’. In fact, ‘strictly speaking persons (legal
or not), cannot have “owners” as “things” ’ (Grandori 2015, 2019a) –so
strictly speaking, we should not speak of ‘firm owners’. What is owned
are titles on economic rewards, not assets directly. Assets are owned by
the legal person of the firm.
Another dangerous mistake deriving from the loss of thirdness is to
think that the agents delegated to decide and steer the firm are agents of
the investors. They are not: they are agents of the entity, not of any con-
stituency directly (shareholders or even stakeholders). This observation
can further justify and clarify why precisely the managerial hierarchy can
be seen as a ‘mediating hierarchy’ (Blair & Stout 1999).
However, if so, other traits of current governance systems, and even
other legal provisions, such as the allocation of the right to nominate
directors and decide on their pay and bonuses only to shareholders may
be criticized as inconsistent and possibly distortive. Transparent imper-
sonal ‘contests’ and independent commissions seem to be called for, if
directors are to be accountable to the firm as an institution and not to the
shareholders exclusively and directly.
Finally, the principle of thirdness would be an important integration
also with respect to the now popular ‘wider’ ‘stakeholder approach’.
What if stakeholders engage in opportunistic consummation of surplus,
to satisfy all their demands, to the damage of the system? Or what if
internal stakeholders collude in pursuing their parochial interests to the
damage of external actors? Examples of those behaviors are not rare
(Grandori 2016; Vagts 1966). A function of the ‘thirdness’ of the firm
person is also to limit those possible distortions, representing the interest
of the system as a whole, arbitrating those conflicts, and defending the
institution from its own stakeholders.
Constitutionality
Legal entities are constituted by ‘legal acts’ or ‘contracts of societas’,
formalized in ‘statutes’ and ‘pacts’ (Blair 2013; Grandori 2010, 2019a).
What is the required content of those acts and pacts?
For any society to work, it is necessary that its constitutional act spe-
cifies who has the right to enter the association and how, how exit is
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62 Anna Grandori
regulated, and who has the right to decide, i.e., a sort of ‘constitution
regulating the ongoing cooperation’ (Goldberg 1976). ‘A constitu-
tion both recognises and reinforces the place of individual constituents
within the institution, and also constitutes them as a group or collective’
(Bottomley 1997). These constitutional provisions are in part firm-spe-
cific and stated in the statute of any specific enterprise. But they are
also nested in, and should be consistent with, the more general consti-
tution regulating the society in which enterprises are embedded. Not all
statutes are legitimate, and enterprises do not float in a vacuum of right.
In modern constitutional democracies, general principles regarding rep-
resentativeness, transparency, legitimate voting schemes, rights of minor-
ities, control, accountability, and separation of powers are stated for any
legally recognized association, and firm statutes should conform to those
rules, be constitutional also in the sense that acceptable constitutions in
modern constitutional democracies have to respect the general principles
of democracy.
As a consequence, some notions of the firm employed in current the-
ories of the firm may even be criticized for ‘inconstitutionality’. Most
notably a notion in which there are some owners of technical assets, who
‘selectively hire and fire’ other resources and service providers ‘as they
see fit’, on the basis of bargaining power (Grossman and Hart 1986)
describe a pre-constitutional world, regulated by power rather than right,
in which both the firm as an institution and the state as a constitutional
order regulating economic relations and rights, are rather absent. That
was the 800s ‘capitalism’ described by Karl Marx. Are we still there?
Apparently, some theories of the firm are still there, while the XXI cen-
tury firms and legal systems evolved.
Democracy
Unusual as it may sound, a claim can be and has been made that all legally
recognized associations in democratic societies are democracies; hence,
firms should be seen as democratic institutions (Grandori 2015). A few
other contributions converge to or provide a basis for that statement.
First and foremost, Hansmann (1988, 2013) observed that the difference
in kind usually seen between ‘cooperatives’ –thought as democratic-
ally governed enterprises –and ‘corporations’ –thought as hierarchic-
ally governed –is over-stated, or even actually absent. He contended
that ‘corporations are cooperatives of lenders’, and that ‘all firms are
cooperatives’. Perhaps this is going too far, as those statements neglect the
difference between voting by head and voting by shares. But in fact, that
is the only significant difference: the principle of representativeness and
of majority-based voting (together with provisions protecting the rights
of minorities) is indeed a common denominator. In addition, even the
distinction between head-based and share-based voting rights is more a
matter of degree than a crisp boundary, as on some matters voting by
36

head can be prescribed in corporations, as well as a vote weighted by the
resources invested can be admitted in cooperatives (as ‘new generation
coops’). Other economic entities such as interfirm associations, in the
course of being defined ‘inter-organizational democracies’, typically face
the problem of whether and to what extent voting rights should be com-
mensurate to contributions, when those are different (Lammers 1993).
Second, in addition to representativeness and voting rights, other features
of democracy are of key importance in any system of some complexity: in
particular the separation of powers, and a system of ‘checks and balances’
through the presence of a plurality of ruling boards, and independent
control bodies. Bottomley (1997) articulates these principles as applied
to ‘corporate constitutionalism’ and ‘corporate democracy’, highlighting
that the separation of power finds realization in ‘dual chamber decision-
making’ (the general assembly of members, and the board), as well as in
the separation between those ruling bodies and monitoring and control
bodies, whose independence and absence of conflict of interest is a central
concern. Proposals of how to apply and further expand those principles
have been advanced: for example, through a mix of representative and
other types of voting rule (including random draws) for differentiated
chambers (Zeitoun et al. 2014); or multiply the number and function of
boards in a multiple-board governance structure Turnbull (2011).
‘Accountability’ and transparency are further features democratic
orders. Korten (forthcoming) aptly qualifies the principle of ‘account-
ability’ that should be present in enterprises as ‘democratic’, in the sense
that ‘all institutional power should be accountable to the society, to any
interested member of relevant communities’, not just to some types of
contributor as financial investors.
Thus defined, democratic governance is relevant also in the limiting
case of the individual firm. The ‘sole proprietorship’ is a particular case of
a constitutional democracy of one (Mocsary 2016) in which some rights
and obligations (as a specification of a voting scheme) may be irrelevant,
but not others (as accountability and control).
Representativeness, voting, and accountability still fall short to qualify
a well-functioning democracy though. There is a further attribute, as
important as neglected that has to do with knowledge and decision
quality, rather than with the representation of interests. Accordingly,
Bottomley (1997) identifies a third core aspect in ‘corporate constitution-
alism’ and democracy: ‘deliberative’ decision-making –namely, not only
voting and majority rules, but decisions taken after thorough discussion,
acquisition of new information, and development of alternatives.
Knowledgeability
‘Knowing for deliberating’ was the dictum of Luigi Einaudi, eminent
world-famous economist and one of the fathers and first presidents of
the Italian Republic. More written on institutions’ walls than practiced,
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64 Anna Grandori
the notion of ‘deliberative democracy’ is nowadays often used to high-
light that democracy is not just voting, in any governance system, private
or public (Gilbert et al. 2019). It is worth noticing though that the prin-
ciple of ‘knowledgeability’ and ‘deliberativeness’ of decision makers does
not apply only to democratic decision-making in a committee-like setting,
but also to how decision rights can be effectively allocated in the first
place (who should participate in the committee). This observation further
relates the argument to current theories of the firm. In fact, on this ground,
two common assumptions in economic theories of the firm are typically
made: (a) constituencies seek to maximize their decision rights, i.e., the
more they can decide what to do and how to use resources as ‘they see
fit’, the better (Grossman & Hart 1986); (b) the more homogeneous the
‘residual claimants’ on decision rights, the better, because decision process
costs and conflict resolution costs are reduced (Hansmann 1996). Both
assumptions are contestable, precisely because they neglect the knowledge
dimension of choices and its impact on the quality of decisions.
The first assumption neglects a basic design rule for any effective organ-
ization: decision power should be co-located with knowledge. It seems
obvious, but it is one of the most disregarded logical rules of effective
organizing. The common response to the question of who should decide
(especially who should have last word) in economic organizations is: the
investors or the owners.
However, one of the very reasons for the existence of agency relations
and for the separation of ownership and control is precisely that an agent
may know more about the right action than the ‘principal’ who is dele-
gating decision power. The possible insurgence of agency costs should not
hide the advantage justifying the transfer of decision rights to the know-
ledgeable in the first place. So, actors are often better off in giving out
decision rights, even of residual kind –patients may do so with doctors,
crew members with a skipper, electors with their representatives.
One may argue that knowledge relevant for decision-making may be
more or less distributed, according to the matter at hand. Indeed, in some
of its components, relevant knowledge may in fact be concentrated in
particular nodes: for example, firm-specific critical knowledge may be
constructed and concentrated by particular groups of participants to an
organization, as knowledge- intensive workers (Aoki 2010; Grandori
2016). But in other, more general components, relevant knowledge is
always not concentrated. To illustrate this point, the example of Olivetti
can be especially instructive. Some of the best philosophers, social
scientists, and designers of the time were called to contribute in stra-
tegic decisions and steering committees, and they generated solutions of
a quality, innovativeness, and beauty that no ‘stakeholder’ would have
even imagined. The logic behind that experience was not mere ‘repre-
sentativeness of interests’, but knowledge and imagination of how those
and other interests, as well as other parameters not related to immediate
interests of any party, might have been promoted.
56

For that reason, organizational practices supporting ‘diversity’ in
ruling boards, dishomogeneous rather than homogeneous decision-
making committees, should have a positive effect on the quality of deci-
sion, even though decision process costs may be higher. Empirical studies
on ‘board diversity’ seem to support the argument, whatever the origin
of that diversity (professional backgrounds, gender and age, international
experience). Hence, also the second assumption commonly accepted in
current theories of the firm, the ‘homogeneity assumption’, is contestable
for considering only process costs and not solution quality. After all, if
only decision process costs are considered, dictatorship would always be
the best system…
Admittedly though, even if maximizing homogeneity is not a good
rule, the proper alternative is not likely to be ‘maximizing diversity’. Both
knowledgeability and representativeness criteria nurture multiplicity. But
can anything be said on the effective type and degree of multiplicity?
Multiplicity
A degree of diversity and multiplicity greater than zero is effective for
decision quality reasons in any decision-making of some complexity. As
the Asch experiment and the studies on ‘groupthink’ taught us since a
long time, full homogeneity of judgment is the best recipe for maximizing
error rates in multiperson decision-making; but that just one deviant
opinion breaking the wall of consensus makes a major difference. While
this law is valid also in structured and even simple problems, it is also
known that as problems become more complex, or innovation is sought,
the ‘requisite variety of inputs’ notoriously increase (Ashby 1952).
Applying those general social science laws to the governance of
enterprises, it can be stated that some degree of diversity and multiplicity
in governance structure is always a functional trait, and that it should
increase as the system becomes more complex and activities more innova-
tive. In fact, for example, even in case of a minimal firm (imagine a young
start-up), entrepreneurs tend nowadays to come in ‘teams’ with multiple
competences. As further types of resources become necessary, multiplicity
typically increases by associating capital investors, technological experts,
university representatives, and more –both for representativeness and
knowledge reasons.
Hence, the structural contingency proposition should hold that the
higher the number and variety of constituencies, the higher the multipli-
city of actors that should be represented in governance structures.
To define which type of actor is to be considered a ‘constituency’ is no
easy task. The ‘stakeholder view’ has greatly simplified the complicated
issue of who has which rights and obligations and why. In fact, the
starting and still most used definition of a ‘stakeholder’, provided by
Freeman (1984) –‘any identifiable group affecting or being affected’ by
the firm’ –albeit well-intentioned, is not a very illuminating basis on
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66 Anna Grandori
how it is effective and fair to assign governance rights, as it does not dis-
tinguish between legitimate and illegitimate interest and power groups
that may ‘affect the firm’ (a mafia group?) and does not consider the
rights of ‘unidentifiable’ actors –not constituted in any group (future
generations?) (Grandori Forthcoming).
When instead ‘multistakeholder governance’ has been intended as
‘multi-rightholder governance’, two main criteria have been implicitly or
explicitly used: what makes an actor a ‘constituency’ and give rights to par-
ticipate in governance is the bearing of consequences and the investment
of resources (Sacconi 2014), both entailing risk bearing. It has been further
observed that most employees, rather than just selling a service, do invest
resources in the preparation of competences, both specific and general, and
in the possible depletion of their physical capabilities (Marshall), and do
bear an occupational risk that may be as much or even more significant
than the risk beared by a diversified financial investor (Kokhan 2002).
But even once agreed on the basis of the above criteria that a type
of actor, say investors or employees, is a ‘constituency’, it does not
follow automatically that all investors or all employees should have the
same rights and obligations –actually an unrealistic and possibly unfair
principle.
What would be needed are models of ‘contingent rightholding’ design.
Efforts in this direction do not abound, but some propositions have been
advanced. For example, constituencies based on consequence bearing
only may be entitled to weaker rights than constituencies who also invest
resources (Sacconi 2014). Among resource investors, rights should be
assigned proportionally to the size and criticality of contributions (Aoki
2010). Even using only those basic criteria, the resulting governance
structures, albeit differentiated, would all be significantly more pluralistic
and multi-rightholder than those commonly practiced and prescribed,
for example: they are unlikely to generate societies composed by homo-
geneous constituencies or ‘principals’ (as transaction cost-based govern-
ance models tend to prescribe); they are likely to assign different classes
of property rights to different actors (in contrast with the ‘bundle’ view
prevailing in property right theory); they are likely to assign governance
rights not only to internal actors but also to external actors.
Finally, if we take into account also the ‘knowledgeability’ criterion,
the set of constituencies is likely to further expand (Grandori 2013a):
actors without any special interest in a firm, neither consequence bearer
nor investors, can be assigned decision rights only for knowledge reasons
(as in the case of experts and professors in boards). As in the Olivetti case
cited above, it can bring about a sort of responsibility without stakes:
stake-free actors rather than stakeholder representatives, independent and
enlightened minds, in support of a more creative and farsighted govern-
ance even with respect to ‘multi-stakeholders’ governance as commonly
conceived.
76
(Free) Purposefulness
Many of the criticisms to the currently dominant theories of the firm of
economic origin, have been focusing on the ‘objectives’ of the firm, and
on how it would be proper to mitigate ‘profit pursuit’ (and its negative
externalities) with other objectives, like environmental sustainability, or
social welfare. Although those remedies can certainly help, a more radical
question is worth to be posed on whether is profit a default objective of
firms, or at least of private so-called for-profit firms. And the answer
may be negative.
No form of enterprise actually sets an ‘obligation’ to pursue profit
(Stout 2012): while some forms of enterprise permit a private profit pur-
pose (‘scopo di lucro’, ‘but lucratif’), operationalized in the possibility of
distributing profits and dividends (as corporations and limited liability
companies), other forms forbid the distribution of profits and oblige to
reinvest (part of or all) residuals to pursue a specified mission of the firm
(as benefit corporations, nonprofit firms, and foundations).
Furthermore, even in corporations and ‘for profit’ firms, the role of
the institution is more to institute rules and limits to profit pursuit than
to promote it: setting the procedures to be followed in defining object-
ives, the actors entitled to participate, the due diligence and informa-
tion requirements for ‘deliberative’ decision-making, the controls and
balances. Hence, as aptly noticed by the business historian Paul Windolf
(2004), ‘The modern firm is more a limit to the free pursuit of profit than
its very home’. In fact, there would be no need for such a complex insti-
tution as the firm for pursuing profit: merchants, usurers, and producers
of all types have been able to do so in all times. As John Elster noticed in
the masterpiece Ulisses and the Sirens, ‘modern institutions can be seen
more as a defense from the objectives of those who direct them than a
tool for pursuing them’.
In addition, profit is a much less straightforward and clear-cut con-
struct than it might seem.
First, even where the distribution of surplus is permitted, the members
of the ‘company’ or ‘societas’ always have the right to decide which part
to reinvest, and which part to distribute and to whom. The history of
conflicts on this issue in the so-called for-profit enterprises, since the Ford
versus Dodge case on (see Mocsary 2016 for an overview), highlights
how unclear the ‘profit objective’ is.
The lack of clarity of profit objectives originates also from other
sources, more cognitive in nature. Goal setting theory has shown that
the indication ‘do as much profit as you can’ is a very poor way of for-
mulating objectives –it tells almost nothing, it cannot guide action, it
does not generate strategies and projects, and in the end produces lower
performance than targets operationalized in concrete dimensions: what
and how should be reduced/increased? (Time? Space? Numbers of new
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68 Anna Grandori
products?) or what problem for whom should be solved?. Some ‘real’,
substantive purpose or problem or project –in a word hypotheses on
actions and their causal links to consequences –is a necessary logically
ingredient for ‘successful’ action (Grandori 2013b). Economic results will
follow if the project/hypothesis was correct. After all, ‘profit’ is a ‘residual
result’, and we should know that results are not the same things as object-
ives (Merton 1949). Actually, high economic results can be (often better)
achieved by pursuing a variety of substantive purposes.
Finally, as it used to be taught in business economics, even if conceived
as a result, profit is a ‘conjectured’ rather than objective measure of
results, an ‘index’ involving many estimates and judgments, hence sub-
ject to possible biases and measurement errors, when not of intentional
manipulations.
In terms of implications and practices, a recognition of the importance
of substantively described projects is at the basis of the recent proposals
of a ‘purpose-driven’ enterprise, eventually defined as a legal form of
enterprise (Hatchuel & Segrestin 2012). Such an approach would very
much in line with the current juridical tendency to introduce forms of
enterprise formalizing and protecting purposes of a specific kind, in par-
ticular social purposes, as the ‘Benefit Corporation’. Purpose protecting
provisions can reinforce and revitalize the originary juridical notion,
still present in various degrees in civil law, that the ‘contract of societas’
establishing an entity worth to be legally recognized, should specify an
‘object’ or ‘purpose’ of some general interest (see point 3 above). Under
common law, where this notion got transformed in the generic formula
that a corporation can be established for ‘any lawful purpose’, it may
help to recognize that an answer to the question –what purpose then? –is
in any case useful and may be worth of statutory formulation and legal
protection. In fact, the present lack of definition has given rise to endless
disputes, and court judgments contributed to the confusion rather than
to clarifying the matter as they ranged from restrictive object specification
requirements to complete agnosticism (Mocsary 2016).
In conclusion, the argument and the ten features specified in this chapter
provide foundations for ‘principled governance’ rooted in right and
organizational and economic effectiveness. A practical reason for that
approach is that without those types of argument, it is very unlikely that
any battle for reform can be won. In theoretical terms, it is also likely
that ‘alternative theories of the firm’ with any chance to compete with
dominant ones should be theories, not value statements or ethical calls
(which are useful, but are not theories).
The ten proposed ‘principles’ do not amount to define one single config-
uration of ‘good’ governance and organization practices. Defining sound
governance does not mean necessarily to specify one set of practices, as
actually it is most commonly done, not only by mainstream economic
approaches to ‘good governance’, but often also by their critics aiming
96

at developing an alternative set of ‘good practices’ (and the suggestions
provided by Korten in this volume –as specifying ‘life’ as purpose,
adopting holacratic structures, never separate labor and capital –seem to
share that universalistic character). A general methodological principle of
organization as a science, though, has been to admit that there is ‘no one
best way of organizing’. Defining a set of ‘properties’ generating different
configurations of practices under different conditions is more consistent
with that contingency methodological principle, as applied to governance
(Grandori 2004). In the approach advanced in this chapter, the general
and universal statements are the design rules or principles, but the gov-
ernance and organization configurations that may be designed with their
use are contingent, in particular on some dimensions: they can be more
or less pluralistic, articulated, and formalized governance structures,
depending on factors such as the multiplicity of constituencies and the
locus of relevant knowledge.
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27
4
Theories of the Firm
The Logic of Multiple Criteria for
Assessing Outcomes
Duane Windsor
Introduction
The ultimate role of all organizations including for-profit firms operating
in markets is to improve human welfare through avoidance of harm (bad
outcomes) to people and the natural environment and through promo-
tion of good outcomes for people and the natural environment. Profit
seeking is only a penultimate purpose for investors and managers, an
incentive for engaging in socially useful activity. An objective is a desired
future outcome. One can speak of objective or outcome.
From this perspective, the chapter addresses the fundamental question
of assessing competing theories of the firm (see Kay, 2014, 2016). The
inquiry draws on “… [Oliver] Williamson’s (2007) simple yet profound
advice [inspired by the ‘Carnegie Triple’]: cross disciplinary boundaries,
have an active mind, be curious, and ask, ‘What is going on here?’ ”
(Ketokivi & Mahoney, 2017, final paragraph). Concerning theories of the
firm, I ask “What is going on here?” and try to provide a disciplined and
cross-disciplinary proposal for the logic of multiple criteria of assessment.
By logic, I mean a reasonably systematic conception. The need for such
an assessment framework arises in continuing disagreements about the
proper normative theory of the firm and the increasing complexity of the
world’s decision problems.
A normative theory explains why a manager should act in a particular
way. The basic division in the literature is between economic perform-
ance and social and environmental responsibility approaches to a theory
of the firm. Both approaches are normative in prescribing management
conduct. I embed profit-seeking purpose within economic performance.
This basic division is thus between traditional reliance on markets and
increasing emphasis on nonmarket considerations.
Carroll’s (1991) corporate social responsibility (CSR) pyramid in
part sought to bridge this division through differentiation of respon-
sibilities including economic performance (within which is profit) and
infused by moral considerations. Triple bottom line (TBL or 3BL) per-
formance and corporate social performance (CSP) frameworks help to
point out some aspects of a useful multiple-criteria logic. I link the
DOI: 10.4324/9781003211549-5
37
Theories of the Firm 73

proposed approach to a critique of Korten’s (2018) conception of
humanistic management.
This chapter explains a proposed logic of using multiple criteria for a
more effective assessment framework suitable for a complicated world.
That proposed logic leads on to an alternative theory of the firm. That
alternative theory is adaptive moral capitalism: managers unavoid-
ably balance profitability, responsibility, and adaptation to changing
conditions. The alternative theory cannot be narrowly prescriptive in the
sense of a single-objective specification but must leave judgment to man-
agers to evaluate specific conditions. Theories of the firm are not about
the firm itself: both economic performance and social and environmental
responsibility approaches are about the context of the firm, and this con-
text determines the objective(s) pursued by management. Defining and
integrating multiple criteria are desirable for assessing the various existing
and conceptually possible theories of the firm. Both economic perform-
ance and social and environmental responsibility approaches may have
certain strengths and weaknesses. If so, then integrating the strengths
of each approach might prove a reasonable solution, theoretically and
practically, for offsetting weaknesses. The chapter develops a theory of
multidimensional management decisions, including relationships of vol-
untary and mandatory considerations. CSR might be voluntary conduct
by executives (McWilliams & Siegel, 2001) or mandatory obligation as
reflected in the India 2013 Companies Law, which requires CSR spending.
Multiple theories of the firm generate by varying a relatively small set
of foundations: motivating objectives (or goals), external context (market/
nonmarket environments), philosophies and values of managers and
investors, incentives (positive and negative), and power of stakeholders.
It is not sufficient to manipulate any one consideration such as objective,
although such manipulation is conceptually useful. The foundations are
arguably interactive and not simply additive. The reader should note that
this set of foundations includes but is not restricted to the idea of indi-
vidual psychological and social psychological microfoundations for CSR
(Aguinis & Glavas, 2012; Shea & Hawn, 2019).
Analysis can characterize this small set of foundations differ-
ently as variations in principals, principles, and environments. Law
defines “principal(s)” as whoever owns the firm. I expand this sense of
“principal(s)” to whoever has effective control of the firm. Ownership
and control can be separate. The “principles” are the governing object-
ives, philosophies, values, and incentives. Principals can be principled or
nonprincipled. “Environments” are the external influences on the firm,
including external context and power of external stakeholders.
The rest of this chapter structures as follows. The second section
provides the research background for the proposed approach in the form
of a general comparison of economic and responsibility approaches.
The third section discusses the family of economic theories of the firm.
Economic theories are typically single objective as the simplest modeling
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design. The fourth section discusses the issue of whether there can be more
than one objective for a firm. The fifth section explicates the proposed
logic of multiple criteria for assessment. These criteria must include social
and environmental responsibilities in some way. The concluding section
explains the value-added contributions and implications of this proposal.
Research Background
This section discusses the relevant literature bearing on the chapter.
A firm, enterprise, company, or business is an organizational entity oper-
ating in a market economy, which can be capitalist or socialist in design.
Variations in economic systems may work sufficiently well that one
cannot readily choose on weak empirical evidence (Williamson, 1991).
A continuum of multiple families of firm theories anchors at one end on
capitalism varieties and at the other end on socialism varieties. The next
subsection explains types of capitalist and socialist economies as possible
contexts for firms.
Capitalist and Socialist Economies

There are three basic kinds of capitalist market economy defined as cap-
ital moving to most profitable uses. One kind is laissez-faire capitalism,
practiced historically in the 19th century. Laissez-faire capitalism violated
any reasonable conception of humanistic management. A second kind is
socially regulated capitalism, practiced historically since the Progressive
era beginning roughly around 1890. In between those two kinds of capit-
alism is enlightened or voluntarily self-regulated capitalism (Baron, 2010).
This central kind of capitalism leads on to adaptive moral capitalism as
a theory of the firm. Literature on “varieties of capitalism” –and thus by
inference “varieties of socialism” –differentiates between liberal market
capitalism (the USA for example) and coordinated market capitalism
or “social economy” (Germany and Japan for example). Both varieties
fall within my category of socially regulated capitalism. A key debate
emerging in the United States is whether there should be a commercial
republic or a social democracy. A commercial republic emphasizes vol-
untary self-regulation. A social democracy emphasizes increasing social
control of the market economy. Arguably there is continuing effort in lib-
eral market capitalism to shift away from social regulation to voluntary
self-regulation.
There are two basic kinds of socialist market economy. One kind
features market-oriented enterprises permitted to operate in a command
economy if no longer strictly a centrally planned economy. Communist
China, Cuba, and Vietnam may still approximate this kind of socialism.
The other kind, practiced in communist Czechoslovakia, Hungary, and
Yugoslavia prior to the 1991 collapse of the USSR, features market-
oriented enterprises operating in a decentralized socialist economy. It is
57

feasible, conceptually, to formulate a theory of a state-owned enterprise
(SOE) operating in a socialist market economy in an approximation of
a pricing mechanism approaching Pareto efficiency outcomes (Lange &
Taylor, 1938; Lerner, 1936). Communist Czechoslovakia, Hungary, and
Yugoslavia adopted variants of this theory. Yugoslavia featured worker
self-managed enterprises.
Laissez-faire and command (or centrally planned) define the polar-
opposite extremes of types of economies. Varieties of capitalism (typ-
ically regulated mixed economies) and social economy (or sometimes
social democracy or democratic socialism) lie in between these extremes.
Laissez-faire capitalism barely exists in reality; and command economies
are now restricted to a few communist states in motion toward greater
market orientation.
The idea of an entity is that there is something more than a simple
buyer-seller contract between two individuals (Coase, 1937). The firm
lies between input sellers and output buyers (whether households or
other organizations of various types such as governments, nonprofit
organizations, or firms). The firm might simply transfer or transform and
transfer inputs. The same definition applies to a privately owned business
or a publicly traded corporation in a laissez-faire market economy or
a SOE in a socialist command economy. A capitalist entity or an SOE
might act on the same instruction to maximize profits.
The conventional juxtaposition for assessment has been between two
general approaches characterized here as economic performance and
social and environmental responsibility. Both approaches begin from a
different expectation about outcomes. The term “some” means in each
instance that there are proposed alternatives within broad families of eco-
nomic and responsibility theory. There are multiple and at least partly
competing theories of the firm. Model competition occurs both within the
economic tradition and against the economic tradition.
The Economic Performance Approach

The potential defect of a profit-oriented and shareholder theory of the
firm is that it may tend to slide into laissez-faire capitalism that ignores the
harms generated. The economic performance approach is some economic
model of a profit-oriented firm operating in a capitalist market economy.
The approach prescribes a single objective for a particular external con-
text. The origin for this approach is Adam Smith’s The Wealth of Nations
(1776). The process of economic development is one of creative destruc-
tion driven by innovation (Schumpeter, 1934). Historically, from the
mid-1800s, the proposed alternative to a market economy was some var-
iety of socialism or communism.
The economic tradition assumes that relatively free markets best gen-
erate rising material wealth. The economic development record since 1776
provides evidence (Jensen, 2000a, 2000b). Socialism and communism
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have fared much less well. This outcome expectation links to assumptions
about human motivation, economic incentives, and effective corporate
governance mechanisms. Walker (2017) provides a history of the main-
stream economic theory of the firm.
The Responsibility Approach

The potential defect of a responsibility and stakeholder theory of the
firm is that it may tend to slide into socialism that suppresses the market
economy. This approach, dating from the late 1800s with the Progressive
Era, is some CSR conception –extended today to include environ-
mental sustainability –of a more enlightened, or conscious capitalism,
or humanistic management firm operating in more complicated market
and nonmarket settings. Friedman (1970) explicitly linked discretionary
CSR activities by executives of publicly traded corporations to socialism.
Privately owned firms may do as they please with regard to altruism, as
such a firm is effectively a household (Friedman, 1970).
The humanistic management approach (Korten, 2018) in contrast
emphasizes human needs and values as much more broadly defined.
Frémeaux and Michelson (2017) illustrate one approach to humanistic
management. A responsibility model has a different expectation about
how outcomes must be conceptualized (and measured). A CSR-oriented,
stakeholder-friendly firm in a soundly regulated market economy (liberal
or coordinated) improves social welfare relative to neoclassical markets
or socialism.
Friedland and Cole (2019) contrast “homo-economicus” (defined in
terms of financial self-interest and economic incentives) to a proposed
“homo-virtus”. The latter involves moral self-awareness promoted by
system changes. Education might enhance moral self-awareness (Gintis
& Khurana, 2007; see Mladenovic, Martinov-Bennie, & Bell, 2019, for
a discussion of student-reported learning). While Adam Smith expected
businesses to operate generally on a principle of self-interest, he did not
regard business owners as simply devoid of moral sentiment and human
values (Hühn, 2019).
Specification of a responsibility theory of the firm involves a contro-
versy about whether a CSR or stakeholder or environmental sustainability
conception is superior. The CSR approach emphasizes management
obligations for ethical conduct, legal compliance, and at least limited
altruism. The increasing emphasis on environmental sustainability
expands this emphasis from people and society to the natural environ-
ment. The stakeholder approach emphasizes that value creation for mul-
tiple stakeholders is most important (Freeman, 2016). However, Freeman
leaves to management judgment how to generate this value creation. The
manager remains essential in the stakeholder value creation conception.
Similarly, specification of an economic theory of the firm involves a
controversy within economics about the best normative approach. There
7

are competing economic theories, although one can think of the profit-
maximizing shareholder firm as the mainstream conception. In addition
to the competition between economic and responsibility conceptions,
there is thus competition within each family of theories. An alternative
conception of adaptive moral capitalism as a theory of the firm draws on
selected elements of each family of theories.
The Economic Family of Theories

This section focuses on explaining the economic family of theories. The
reason is that the very conception of a theory of the firm originates in
the economic performance approach. In the latter, CSR, stakeholder, and
environmental sustainability are reasonably straightforward to under-
stand. The discussion of the economic family of theories is thus about the
nature and functioning of capitalism. The economic family helps to reveal
the debates within economics.
The essential features of the economic family of theories are a market
context and an assumption of some maximization process (which might
be relaxed empirically to something like satisficing). “… [T]‌here is a great
diversity of views about the proper objectives of a theory of the firm. (The
closest element to a common thread is the use of the maximization pro-
cess.)” (Cyert & Hedrick, 1972: 408). The economic “theory of the firm”
is a family of theories (such as neoclassical, behavioral, evolutionary, man-
agerial, strategic, and transaction cost) for explaining and predicting key
dimensions of profit-oriented business enterprises. This family assumes
and derives from the economic logic of markets. Key dimensions concern:
existence, boundaries (or scope), behavior (or decisions), ownership, gov-
ernance, and internal structure. Canonical neoclassical theory focuses on
agency and shareowner value maximization. Considerations are whether
the market environment is competitive (or some other industry structure)
and innovative and whether the nonmarket environment (competitive or
otherwise) involves low or high regulatory control.
Economic models of the firm fall into marginalist (or neoclassical),
behavioral, evolutionary, managerial, strategic, and transaction cost
versions. This list is not meant to be fully exhaustive of possible variations.
What marks an economic model of the firm is the assumption of a market
environment in which the firm as an organization seeks to do something.
“The theory of the firm is a priori in the sense that its behavior can be
deduced from assumptions that describe the environment” (Cyert &
Hedrick, 1972: 399). What management does and should seek to do and
why is a key source of variation among the various models.
The neoclassical microeconomic theory is marginalist in distinction to
behavioral or managerial approaches (Machlup, 1967). The neoclassical
microeconomic theory of the firm operating in relatively free markets
posits profit maximization (Friedman, 1970) or more technically profit
seeking as maximization is difficult to achieve (Jensen, 2000a, 2000b). In
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a profit-maximizing (or profit seeking) theory of the firm, management
should always make decisions that increase profitability or at least hold
profitability constant under dynamically changing conditions. Assuming
market and legal ability to do so, the firm should collect $2 rather than
$1 in profit per unit sold. The firm should not voluntarily accept $1
rather than $2. Price discrimination simply sets the maximum profit for
each customer segment. This theory is both prescriptive (what managers
should do) and normative (why they should do so). The normative foun-
dation rests on the predicted positive efficiency effects of profit maximiza-
tion in a market economy. In a market economy, the profit-seeking firm
increases social welfare through efficiency in resource allocation.
The agency theory of management reinforces prescription through
financial incentives to and monitoring of managers by owners (Jensen &
Meckling, 1976). The essence of agency is non-enforceable incomplete
contracts for executives (Hart, 1988). This theory might admit strategic
rationales for making less than profit-maximizing choices in the shorter
run that will increase profits over the longer run. For instance, a firm
might reduce prices today to reduce competition and attract customers,
permitting net higher prices in the future. But the strategic conduct of
the firm remains strictly profit-maximizing. “… [T]‌he theory of the firm,
which emphasizes profit and wealth maximization, should incorporate
a richer, more realistic account of the economics and ethics of agency”
(Rhee, 2008: 310).
The economic theories of the firm and agency cannot be devoid of

ethical considerations for they have significant impact on how man-
agers, who wield concentrated economic power, conceive their roles.
Lastly, they have significant influence on the formulation of the rules
of law, such as the business judgment rule, limited liability, takeover
defenses, and shareholder democracy.
(Rhee, 2008: 332)
[S]‌tandard neoclassical theory treats the firm as a black box. The firm
is taken as given; no attention is paid to how it came into existence,
the nature of its internal organization, or whether anything would
change if two firms merged.
(Hart, 1988: 120)
Behavioral and managerial approaches essentially provide alternatives

to profit seeking as the working goal of managers. The behavioral theory
focuses on decision-making within business organizations and admits pos-
sibilities of satisficing, slack, and imperfect knowledge (Cyert & March,
1963; Simon, 1955, 1959). The approach emphasizes empirical obser-
vation of real managers and real businesses (Earl, 2012; Gavetti, Greve,
Levinthal, & Ocasio, 2012; Joskow, 1975). Simon addressed behavioral
decision-making. Cyert and March placed behavioral decision-making
97

within an organizational setting. Behavioral and managerial theories
seek to add empirical content through empirical analyses of firm decision
processes and empirical observations of firm behaviors. Such theories typ-
ically do not advance maximization rules (Cyert & Hedrick, 1972: 399).
Managerial approaches basically substitute different objective
functions for the firm (Weinstein, 2012). Penrose (1959) provided a
theory of the growth of the firm. Marris (1964, 1998) modeled firm-
growth maximization. Penrose greatly influenced the resource-based view
(RBV) of modern strategy literature (Nair, Trendowski, & Judge, 2008).
Baumol (1959) modeled sales revenue maximization subject to some min-
imum profit requirement or constraint. Williamson (1963) modeled man-
agement utility maximization as a broader conception. These managerial
approaches assume management discretion. In each model, a manager
pursues some nonprofit-oriented goal –even if there is an assumption
that the goal will tend to support profitability or at least maintain
survivability.
An evolutionary theory of the firm essentially views survival of a firm
as a Darwinian-like natural selection (Aldrich et al., 2008; Hodgson,
1998) involving the interaction of the adaptive behavior of the firm
including innovation and organizational routines with changing external
(especially market) conditions (see Reydon & Scholz, 2014). Both firm
and environment evolve over time (Becker & Knudsen, 2012; Nelson &
Winter, 1982; Winter, 1975).
A strategic theory of the firm (Zenger, 2013) is a broad conceptualiza-
tion (Snow & Miles, 1983) in which management matches the resources
and capabilities of the firm to the opportunities and threats of the external
environment (Rumelt, 1984). One variant argues that all organizations
are dependent on their environments for resources: “… all organizations
engage in activities which have as their logical conclusion adjustment to
the environment” (Pfeffer & Salancik, 1978: 1).
The problem with the neoclassical theory is that it is not really a

theory of the firm. The existence of the firm is actually problematic
within the axiomatic framework of the theory and must be justified
by reference to entrepreneurship as a fixed factor.
(Rumelt, 1984: 559)
Profit or shareholder wealth maximization is not a strategy but a

resultant of a strategy and an organization (Banescu, 2009; Guerrera,
2009). Profit maximization is not a legal obligation (Stout, 2012). The
strategic approach might, however, tend to absorb CSR (Porter &
Kramer, 2006).
The transaction cost theory of the firm (Ketokivi & Mahoney, 2017)
draws on Coase’s (1937) insight that market exchanges (or trades) are
not costless. Transaction costs lead to the firm as an organization in
place of direct trades between buyers and sellers. These costs define the
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optimal scope of the firm. Williamson (1981, 1999) developed this view
into a theory of alternative governance institutions. The transaction cost
approach garnered Nobel Prizes in the Economic Sciences for both Coase
(1991) and Williamson (2009).
Key findings from a survey of the economic family of theories are
as follows. A manager behaves as dictated by the firm’s context. The
economic family posits a market economy, in which efficiency resource
allocation obtained by profit seeking best increases social benefits. Real
managers may deviate from strict profit-seeking decisions in several ways
characterized in the literature as differing objectives. However, each
variant of theory is a single objective. Nevertheless, an alternative theory
can draw on managerial, strategic, and evolutionary insights.
One Objective Versus Two or More Objectives

Jensen (2000a, 2000b) argues managers can handle only one objective –
which in a market economy must be profit seeking. Given that argument,
one must choose between principal and principle –and Jensen defends
principal’s wealth creation. The logically necessary step from the two com-
peting families of theories of the firm to a richer framework for multiple-
criteria assessment is to establish how to move from one objective to
two or more objectives. The competing families tend to emphasize a
single objective illustrated by profit or responsibility –or their variants.
A single-objective responsibility theory of the firm remains a priori: the
objective is asserted and derives from the external context of the firm.
A responsibility theory shifts from market to society (or stakeholders) as
the context. This section considers how to introduce two or more object-
ives for managers.
Managers are the key decision makers in the economic family of the-
ories. A reasonable concern about any multiple-criteria approach is that
perhaps real managers cannot handle too much complexity. In the neo-
classical economic approach, this objective normatively should be profit
seeking (Sundaram & Inkpen, 2004). The economic rationality approach
posits more broadly that a decision-maker should and can only aim at
one objective: utility for a household; profit for a business. I think a single
objective is neither necessary nor desirable in a stakeholder theory of the
firm (Windsor, 2002). However, the concern about managerial capability
remains legitimate. A possible expansion of a single objective model
would be a model of a specific hierarchy of objectives. The firm achieves
a profit target and then achieves a second target without reducing the
profit target, and so forth.
One approach within the logic of a single objective is to vary the prin-
cipal constituency possessing control (typically formal ownership) of the
firm (Cochran, 1994, 1996). However, this approach holds principles
and environments constant while varying principals. (Principles might
vary by principal, but this relationship is not necessary.) This approach
18

generates neoclassical, worker, consumer, and societal firms. The neo-
classical firm has one or more investor owners. Communist Yugoslavia
featured worker-owned firms operating in a socialist economy. There are
examples of consumer cooperatives (or mutual organizations). A SOE is
a societal (or public) firm. Each type of firm posits management in the
sole interest of the principal. One can expand the set of variations to
B (benefit) corporations, nongovernmental organizations (NGOs), and
family-owned and other privately owned businesses. This approach is
thus different from a multiple-stakeholder conception.
Strine, Chief Justice of the Delaware Supreme Court and previously
Chancellor of the Delaware Court of Chancery, expresses the view that
profit seeking is to be expected by businesses (Strine, 2012), and the solution
is B (benefit) corporations whose purpose is not profit seeking (Strine, 2014).
A preference or choice function can include more than one objective
or goal (Etzioni, 1986). Technically, it is possible to formulate multi-
objective or at least two-objective models of managerial decision-making.
A study reports multi-objective oligopoly models (Ahmed, Hegazi, &
Abd El-Hafez, 2003). One such modeling approach combines maximiza-
tion of profits and maximization of sales. Another modeling approach
maximizes profits and minimizes risk. However, those authors report
that weight assigned to profit maximization must be greater than a given
threshold or value.
It is not a difficult step conceptually to suggest a two-objective model
combining profits and ethics (or morality) in some way. Such a step
combines principles with principals.
This work shows that moral codes, public interest and social values
pose no threat to profit maximization of any firm. It is demonstrated
with the illustration of transfer pricing and public goods- based
economy that profits and ethics are quite compatible within the strait
jacket of societal norms and corporate goals.
(Ghosh, Ghosh, & Zaher, 2011: 72)
The guiding consideration is whether the researcher thinks the two

dimensions must be in conflict or can be coordinated. Barnett and
Salomon (2012) provide some empirical evidence in support of a positive
relationship between CSP and corporate financial performance (CFP).
They report a curvilinear relationship: while either negative CSP or posi-
tive CSP may associate with financial performance, positive CSP does
somewhat better. A different study reports that altruistic CSR is irrelevant
in a Modigliani-Miller model (Zivin & Small, 2005).
Multiple Criteria for Assessment

The next step is to move from two objectives to some framework of
multiple criteria –in effect, multiple dimensions to be addressed either
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hierarchically or simultaneously by managers. In a complex world, a
“theory” of the firm should involve multidimensional judgment about
behaviors and outcomes. Conflict between two or more objectives is not
only possible but also likely. Resolution of such conflicts (or tensions) is
a problem for management judgment.
There is disagreement even within the family of responsibility theories
over the best approach. Humanistic management concerns treatment
of consumers and employees and proper regard for human rights more
broadly. Political CSR advocates promotion of democracy and substi-
tute public goods. Corporate social irresponsibility (CSIR) theory argues
merits of reducing misbehavior and negative externalities relative to pro-
moting pro-social altruism. Neoclassical theory rejects altruism, while a
CSR-engaging firm behaves differently. The problem is how to align or
integrate these considerations. A firm might be neither irresponsible in
the sense of generating harms nor responsible in the sense of generating
social benefits beyond economic performance and moral conduct.
The idea of multiple criteria for assessing theories of the firm derives
from Carroll’s (1991) CSR framework, Wood’s (1991a, 1991b) CSP
framework, and the TBL or 3BL framework (Elkington, 2018; Slaper
& Hall, 2011). The CSR and CSP approaches seek to integrate (rather
than simply balance) multiple dimensions. Wood’s original was a
three-by-three conception for defining CSP. The three dimensions are
principles, processes, and outcomes. Within each dimension, there are
three subdimensions or elements. The outcome subdimensions are pol-
icies, programs, and impacts. Policies and programs are resultants of
the principles (or motives) and processes within a firm. I formulate the
logic of multiple criteria for evaluating choices and outcomes. The logic
is consequentialist in the sense that outcomes determine choices. But as
in Carroll’s (1991) pyramid, the whole logic should be understood as
infused with moral considerations of social welfare, environmental sus-
tainability, and human rights.
Alternatives to the Profit-Maximizing Approach

Empirically, the firm involves individual managers within an organ-
ization within an external environment. The firm’s environment or the
organization’s purpose or the individual managers (including their beliefs
and values) can vary and also change.
There are some basic alternatives to this profit-maximizing theory of
the firm in addition to varying the principals. One alternative is that the
firm’s nonmarket environment changes and thus, in turn, changes the
market environment. Society sets controls (in regulatory, tax, or stake-
holder pressure forms) on profitability. The nonmarket environment
somehow sets profit per unit sold at $1 rather than $2. A second alter-
native is that an organization’s purpose can change to be something
38

other than a firm. Ownership voluntarily exercises personal rationales
for choices that are substantially below profit maximization. Korten
(2018) combines the first and second alternatives. A third alternative is
that managers ignore the profit-maximizing theory in favor of personal
rationales for choices that are substantially below profit maximization.
Here, principles may be involved. For instance, Bob Patel, born in India,
is CEO of LyondellBasell Industries (in Houston). He has helped to
organize a nonprofit Alliance to End Plastic Waste, established in January
2019. Nearly 30 global companies have committed more than $1 billion.
A newspaper article associates this effort for Patel with the condition
that the holy Ganges River in India receives about 1.2 billion pounds of
plastics annually (Luck, 2019).
Managers matter. A study of corporate green investment decisions
under stakeholder pressures argues that managers’ responses are shaped
by managers’ characteristics and preferences (Schaltenbrand, Foerstl,
Azadegan, & Lindeman, 2018). The study draws on data from 247 man-
agers who address a vignette-based decision scenario varying types and
strength of pressure from consumers and the community. Employers’
financial performance but not employers’ market performance influences
managers’ investment choices for either high consumer or high commu-
nity pressure. More experienced managers respond more to consumer
pressure and less to community pressure. Another article (Hunoldt,
Oertel, & Galander, 2018) provided a qualitative process study of CSR
managers over 24 months. The article reports that CSR managers use
four strategies to promote CSR implementation and cope with tensions
occurring between social and environmental elements on the one hand
and economic and technical elements on the other hand. The article
reports that organizational characteristics influence intensity of strategy
application and thus organizational behavior. The findings suggest the
need for “a comprehensive, multilevel approach to CSR implementation”
(Hunoldt et al., 2018: 1).
In any except the most completely deterministic models, the values,

beliefs, and skills of top managers must be taken into account in
order to understand fully the functioning of an organization. … two
characteristics seem most relevant to this overlay: (1) managers’ phil-
osophies of management and (2) managers’ problem-solving styles
and orientations.
(Snow & Miles, 1983: 247)
Metaphorically, the firm is viewed as a miniature economy, an ‘island’

economy, in which asset ownership conveys the CEO the power to
define the ‘rules of the game,’ that is, the ability to restructure the
incentives of those that accept to do business on (or with) the island.
(Holmström, 1999: 74)
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It is the individual and not the corporation that bears moral
responsibility.
A corporation is not subject to the same moral responsibilities which

affect us all. As a separate entity, it feels no guilt for actions that
would universally be considered wrong, for example, the marketing
of a harmful drug following the suppression of test results indicating
that drug’s potential effect.
(Hirschtick, 1976: 976)
Dodd (1932) introduced the idea that managers could be trustees for
multiple constituencies. The stakeholder theory of the firm is a shift from
a market contract nexus to a multiple-constituency perspective. “The
modern theory of the firm, which is central to finance and corporate
law, views the corporation as a nexus of contracts among the various
corporate constituencies” (Boatright, 1996: 217). “The Berle- Dodd
debate, as restated and extended by [Milton] Friedman and [R. Edward]
Freeman, identifies competing goals for the corporate enterprise: maxi-
mizing shareholder value on the one hand versus balancing multiple
stakeholders’ interests on the other” (Nadeem, 2008: 38). This consid-
eration of multiple interests can be extended to “civic wealth creation”
as an integrative framework across categories of stakeholders (Lumpkin
& Bacq, 2019). In this framework, both “citizen engagement and entre-
preneurial commerce” interact in societal change efforts. Similarly, alter-
native organizational forms might affect how multiple actors appropriate
economic rents out of social value creation (Lazzarini, 2019).
Alternative Relationships of Business and Society

Assessment should be placed in societal context. Table 4.1 defines four
alternative relationships of business and society. The table is a stylized
game-theoretic setting with two phases: business moves first; government
moves second. The four alternatives will be labeled (1) win–win, (2) lose–
win, (3) win–lose, and (4) lose–lose. The sequence of play over time is
(1) and (2) in a market setting, and then (3) and (4) in an expanding state
setting. The object of the game is to improve social welfare over time.
The social choice issue is whether market exchanges advance social wel-
fare, or whether increasing governmental interventions are necessary and
superior in advancing social welfare.
The game-theoretic setting involves two general phases sequenced in
time. In the first phase, there is social deference to market institutions.
Business acts and wins. Business can win by improving society or by
harming society (Harris, 2010).
Cell (1) is an ideal condition in which both business and society win
by the former addressing social issues it did not directly generate. Within
phase one, business can adjust an error by voluntarily internalizing
58

Table 4.1
Four alternative relationships of business and society
Society
Market Government
(Aggregate Welfare) (Commonwealth)
Win Lose
business Win (1) “Creating shared (3) Expand regulatory
(capitalism) value” (CSV) state and public goods
Lose (2) Voluntary self- (4) Redistributive
regulation of “democratic
negative externalities socialism”
social costs (Coase, 1960) and paying compensation as needed. An inter-

pretation of (1) is something like “Creating Shared Value” (CSV) as
expounded by Porter and Kramer (2011). A criticism of CSV is that it
focuses managers on profitable opportunities resulting in a narrowing
of their understanding and practice of CSR (Crane, Palazzo, Spence, &
Matten, 2014). CSV may not be a solution for environmental sustain-
ability (de los Reyes & Scholz, 2019) and requires an ethical framework
presently missing (de los Reyes, Scholz, & Smith, 2017). CSV remains a
single-objective economic performance approach in which social welfare
improvement is a side-condition and not itself an objective but simply an
opportunity for profit. CSV addresses win–win but never win–lose situ-
ations (de los Reyes et al., 2017).
Cell (2) is a second-best condition in which society ultimately recovers
losses, which desirably are avoided by business in future through learning.
This Cell (2) corresponds to Crouch (2006: 1533)
defined as firms voluntarily assuming responsibility for their exter-

nalities, thereby setting the puzzle of how this can be reconciled with
the maximization of shareholder value as the central challenge of the
subject. … Such an approach has no need of a separate concept of
‘stakeholders.’
Cells (1) and (2) in combination tend to preserve social deference to

market institutions.
In the second phase, society (through government) reacts (or
overreacts) and then business loses. Cell (3) is a third-best substitute
in which business does not voluntarily self-regulate and government
expands the regulatory state and provision of public goods. The DuPont
pollution case analyzed by Shapira and Zingales (2017) illustrates the
failure of various approaches intended to avoid Cell (3). Those authors
use analysis of internal DuPont documents to rule out alternatives to a
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86 Duane Windsor
rational decision to pollute at reasonable expectations concerning likeli-
hood of discovery over decades. Those authors find that “legal liability,
regulation, and reputation” did not function as typically portrayed.
DuPont arguably polluted and got away with the misconduct for a long
period.
DuPont, one of the most respectable U.S. companies, caused environ-

mental damage that ended up costing the company around a billion
dollars. By using internal company documents disclosed in trials we
rule out the possibilities that this bad outcome was due to ignorance,
an unexpected realization, or a problem of bad governance. The
documents rather suggest that the harmful pollution was a rational
decision: under reasonable probabilities of detection, polluting was
ex-ante optimal from the company’s perspective, albeit a very harmful
decision from a societal perspective. We then examine why different
mechanisms of control –legal liability, regulation, and reputation –
all failed to deter socially harmful behavior. One common reason for
the failures of deterrence mechanisms is that the company controls
most of the information and its release. We then sketch potential
ways to mitigate this problem.
(Shapira & Zingales, 2017, abstract)
The extant literature generates CSR in quite different ways. One

approach is to avoid altruistic CSR in keeping with Friedman (1970)
but undertake profitable (or at least breakeven) CSR initiatives when
one or more stakeholder groups are willing to pay for such initiatives
(McWilliams & Siegel, 2001). The other approach is a business choice
to practice CSR in various ways (Crifo & Forget, 2015). This approach
is grounded either in management values or in reputational strategy
(Tomlinson, 2018; Vanberg, 2008). What separates these two views is
whether one envisions the world in terms of competition or a common-
wealth (Rufin & Rivera-Santos, 2012). Some investors do hold socially
responsible funds (Riedl & Smeets, 2017).
Windsor (2013) separates CSR viewed as a broad rubric into three
dimensions: avoidance of harm (labeled “business ethics”); mandatory
“legal compliance”; and provision of social improvements (labeled “cor-
porate citizenship” of which philanthropy is simply an instance). CSR is
a rubric conception for minimizing harms, obeying laws, and helping to
solve social issues. Alternatives (1) and (2) correspond to business ethics
in the form of avoiding harm to others. Alternative (3) obliges business
to practice legal compliance (except in specialized instances of civil
disobedience in which business ethics is superior to laws). Corporate
citizenship substitutes for (4). The narrow definition of corporate citi-
zenship excludes noncompliance with government policy (except on
moral grounds defining civil disobedience) or lobbying for pro-business
changes in government policy. Civil disobedience and lobbying are
78

topics for separate discussion. Minimizing harms, such as negative exter-
nalities, could be a significant step toward CSR (Lindorff, Jonson, &
McGuire, 2012).
Scherer and Palazzo and colleagues define political CSR in terms of
democratizing both society and business internally (Scherer, Rasche,
Palazzo, & Spicer, 2016). Business has a responsibility to help democ-
ratize society and to help provide public goods where government (espe-
cially in developing countries) lacks capabilities to do so. Neoclassical
theory assumes that firms have no power to influence “rules of the game”
(Friedman, 1970) –an assumption inconsistent with reality (Zingales,
2017). Market concentration increases ability and the need to gain polit-
ical power, generating a proposed “Medici vicious circle” increasing both
money and political power (Zingales, 2017).
A Critique of Korten’s Approach for Humanistic Management

This subsection explores humanistic management in greater detail. While
an alternative theory of the firm can embed certain desirable aspects of
humanistic management, the latter approach in essence eliminates market
capitalism. The ultimate outcome of state expansion is Cell (4) redis-
tributive “democratic socialism” (or social democracy) rejecting market
institutions. Korten (2018) proceeds by positing required institutional
performance outcomes. “The proper purpose of any human institu-
tion is to improve the lives of the people who depend on it” (Korten,
2018: 1). This assumption does not differ from the one posited at the
beginning of this chapter. The required “four systems outcomes” are
(1) earth balance, (2) equitable distribution, (3) life-serving technology,
and (4) democratic accountability (Korten, 2018: 7). I have included out-
come (1) earth balance in the guise of environmental sustainability and
outcomes (2) through (4) within the concept of human rights.
However, at this point I depart from and critique Korten as follows.
Within Korten’s perspective on humanistic management, “The private-
purpose corporation is an inherently illegitimate institution” (Korten,
2018: 5); “… the private-purpose corporation, and the neoliberal ideology
that affirms it, are major drivers of … social and environmental destruc-
tion …” (Korten, 2018: 1). The logical opposite of a private-purpose
corporation would be a public-purpose corporation. If one reduces profit
(defined as revenue above cost) to zero and maximizes benefits to con-
sumers, employees, communities, and the natural environment (as a first
list), then one has a public-purpose corporation in some form. A question
not directly addressed is whether a public- purpose corporation will
simply default to a state-owned or at least state-controlled entity.
Humanistic management broadly is a desirable shift in viewpoint
about labor and natural environment, as well as about consumers.
“The Carolina [rice] planters, like the West Indian sugar planters, were
proto-industrialists, running their [slave] plantations as capital-intensive
8
88 Duane Windsor
agricultural factories according to the principle of maximizing profit.
Most of the rice they produced was exported” (Collingham, 2017:
109–110).
Korten envisions a fundamental transformation to an “ecological civ-
ilization” drawing on ethical principles of the Earth Charter (Korten,
2018: 1). He invokes the Preamble to the Earth Charter: “We stand at
a critical moment in Earth’s history, a time when humanity must choose
its future” (Korten, 2018: 1). This statement may be valid descriptively
(Windsor, 2018). That is, an assertion that capitalism is ultimately
destructive and must be replaced can be argued. The associated problem
is what to choose and how to go about choosing. The common device is
to fall back on some problematic assertion of democratic accountability
(Korten, 2018: 7).
“A Theory of the Community” (Korten, 2018: 8) requires five design
features (Korten, 2018: 9): (1) “Money and business are means –not
ends”. (2) Any “institutions of business and banking” (like all other
“legally formalized institutions”) must serve and be “accountable to the
communities in which they function”. (3) There should be a system of
“nested communities” to “maintain rule-based local markets populated
by locally owned and accountable businesses”. (4) “Resource flows are
circular, not linear” in order to repair the earth. (This feature is the only
directly environmental sustainability item.) (5) The fifth design feature
reads: “Labor and capital are unified and equitably shared. Worker and
community ownership eliminate the separation of labor from ownership.
Financial and spiritual rewards are shared among those who contribute.
Absentee ownership is eliminated. Speculation and financial manipula-
tion are prohibited”.
This “transformative communitarianism” eliminates shareholder
or entrepreneur capitalism in favor of “Worker and [local] community
ownership”. What seems not addressed in Korten is whether process (or
intentional strategy) logically must be to destroy capitalism to give birth
to transformative communitarianism, or whether the steady emergence
and manifest performance superiority (and thus democratic popularity)
of the latter will simply replace the former through social evolution. “A
proposed better theory of capitalism should demonstrate first practi-
cality of prescriptive guidance for managers and second superiority of
its embedded value proposition for sustainable long-term performance”
(Windsor, 2009: 65).
Korten invokes ideology in criticizing neoliberalism. Destruction (or
transformation more neutrally expressed) need not be revolutionary
(as in the Marxist–Leninist–Maoist doctrine) but can be legislative (as
in German social economy or Rhine capitalism). Nevertheless, an ideo-
logical discussion opens a problem about the relationship between intel-
lectual elitism and popular democracy. A legislature (or community) may
declare anything legal (such as business lobbying and campaign finan-
cing) or illegal (such as corruption) (Kaufmann & Vicente, 2011). The
98

open issue is whether transformative communitarianism will develop
democratically (from the bottom up) (Goodman, 2019) or through polit-
ical elites (from the top down) (Brooks, 2019). The fundamental problem
of politics is not simply democracy but constitutionalism. That is, the
community must be able to control (Stone, 1975) business interests, but
individuals, groups, and businesses must be able to transform the com-
munity. Social contract theory assumes an existing society (or commu-
nity) as the basis for government. What scholars know about society
formation and transformation is much less explored.
In this subsection, I have provided a critique of the Korten conception
of humanistic management. The Korten approach is to destroy market
capitalism, on various arguments, and to substitute some fundamental
institutional and ideological transformation. A multiple-criteria frame-
work, laid out in the next section, includes an underlying assumption and
expectation of the continuation of the existing institutional framework
for market capitalism.
An Alternative Multiple-Criteria Theory of the Firm

This section details a proposed multiple criteria theory of the firm. This
alternative is adaptive moral capitalism as defined in detail below. This
alternative involves a shift in conceptualizing what a theory of the firm
means. Conventionally, theory of the firm has meant defining a specific
objective prescribed for managers. The proposed alternative approach
explores the feasibility to maintain the existing institutional and ideo-
logical context rather than destroying market capitalism and transforming
society. Evaluating the proposed alternative theory involves appreciating
the difference between objective and criterion. If one simply expands
from one objective to multiple objectives, then a theory instructs the
manager to maximize all objectives (such as profit, responsibility, and
adaptation) simultaneously if feasible to do so. Otherwise, a theory must
instruct the manager to maximize first one objective and then act to maxi-
mize the next objective subject to the constraint of having maximizing
the previous objective, and so forth through the set of objectives. In this
sequential maximization, the theory must still specify the first objective as
overriding –and thus defaulting to principal or principle.
Criteria function differently and are about assessing multiple
outcomes. A manager may have to determine trade- offs subject to
some minimum requirement for each dimension. The essential step
is assigning relative weights to dimensions. However, these rela-
tive weights are not necessarily fixed but may vary with the decision
problem. A firm may have to be not irresponsible rather than respon-
sible in some circumstances. A firm may have to reduce profitability
to avoid the DuPont outcome. Not engaging in irresponsibility may
be more important than being responsible defined as providing social
benefits beyond economic performance.
09
90 Duane Windsor
ECONOMY
Goods and Services (consumers)
Employment (labor and management)
Financial Performance (investors)
Human Rights
Stakeholders
SOCIETY (people)
ENVIRONMENT
(sustainability)
Figure 4.1
Multiple objective performance model.
Figure 4.1 depicts a multiple-criteria performance model adapting and

expanding the TBL or 3BL framework in light of Wood’s (1991) CSP
framework and Carroll’s (1991) CSR framework. From these frameworks,
I develop in Figure 4.1 a framework involving seven kinds of impacts or
desired outcomes. This framework is expandable to additional impacts,
reflecting the increasing complexity of business decision problems. The
highest possible outcome is an increase in all subdimensions (in Figure 4.1
a simultaneous seven- win outcome). The original exposition of TBL
concerns people (or society), planet (or natural environment), and profits.
Either the three dimensions can be improved jointly (win– win–
win
expanding Cell (1) of Table 4.1) or there must be some trade-off in which
people and planet are more important than profits in a responsibility per-
spective. The expansion in Figure 4.1 substitutes economy for profits as
the vertical axis. Economy comprises here three subdimensions for con-
sumers (goods and services), labor and management (employment), and
investors (financial performance). I use a two-axis depiction, such that
society and environment (planetary sustainability) are on the horizontal
axis. Social and environmental performance might fall at different points
along the horizontal axis. Above society and environment, Figure 4.1
superimposes stakeholders and then human rights. The rationale is that
stakeholder theory suggests satisfaction of all the key stakeholders in a
firm, a solution that does not necessarily occur on the vertical axis.
Lankoski (2008) points out that the essential problem in a multiple
objectives model is determining trade-offs. This determination logically
requires relative weights. Carroll’s (1991) four-dimensioned pyramid of
CSRs illustrates. Surveys of business executives suggested relative weights
within a budget of 100 (100%) of approximately (rounded up or down)
40 (40%) for economic responsibility, 30 (30%) for legal responsibility,
20 (20%) for ethical responsibility, and 10 (10%) for discretionary
responsibility (typically taking the form of philanthropy) (Aupperle,
19

Carroll, & Hatfield, 1985: 457). None of the economic, legal, or ethical
dimensions can be discarded theoretically.
Kang and Wood (1995) argued that the appropriate approach is to
invert the Carroll pyramid to the ordering (from bottom to top) of eth-
ical, legal, economic, and discretionary responsibilities. This inversion is
the purest or strictest form of social and environmental responsibility in
overriding the other dimensions of the Carroll pyramid.
Drawing on their Swiss Dialogue process, the authors [Meynhardt

and Gomez] argue that a four-dimensional pyramid does have heur-
istic value for managers. The advantage of this alternative pyramid
logic is that it may be contingently adapted to different cultural
contexts, because it allows adaptive internal reordering.
(Meynhardt & Gomez, 2019: 404)
Meynhardt and Gomez (2019: 404) build from a “public value con-
cept” drawing on “a microfoundation of psychological research into
basic human needs” as developed in the Swiss Dialogue process.
Numerical examples concerning weights generate various theories of
the firm from the dimensions of Figure 4.1. For instance, the neoclassical
marginalist theory assigns a weight of 1 (100%) to financial performance
of the firm. Any other dimensions have a weight of 0. The marginalist
theory assumes, however, that consumers and employees are sufficiently
satisfied for the firm to continue operating. Competition and innovation
destroy the firm (Schumpeter, 1934). Adapting Cochran (1994, 1996),
one can differentiate “stakeholders” into different kinds. In distinction
to the investor owner firm, a consumer cooperative assigns a weight of
1 to the consumer owners and an employee-owned firm assigns a weight
of 1 to the employee owners. All single constituency maximization the-
ories assign a weight of 1 to the controlling constituency and 0 to all
other constituencies. The TBL framework assigns roughly equal weights
of one-third to economic, environmental, and social performance. The
researcher (or manager or activist) can then adjust these relative weights
to preference. For instance, an adjustment might assign a minimum
weight (say 20%) to economic performance and 80% to the combination
of environmental and social performance.
A human rights approach must assign a weight of 1 to claimed human
rights as having overriding priority. Alternatively, a researcher (or man-
ager or activist) might assign a minimum weight to human rights greater
than 0. “Human rights” is a developing sense that all persons possess
some minimum set of rights, which can constitute duties for firms as
well as for governments. This sense leads on to the issue of strengthening
governmental obligation to address business abuses of human rights
(Chen, 2015). Based on a call by Ecuador and South Africa initially, the
UN Human Rights Council (UNHRC) established in 2014 a working
group to design an international treaty regulating business enterprises
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92 Duane Windsor
(McBrearty, 2016). The working group released a first (“zero”) draft
in July 2018. Negotiations on the draft occurred in Geneva in October
2018. Comments, by governments and stakeholders, were due by the
end of February 2019 (European Parliament, 2019). The International
Chamber of Commerce (n.d.) opposes the treaty approach. The proposed
treaty addresses rights abuses by businesses (domestic or foreign) and
not human rights abuses by governments which are supposed to regu-
late businesses. The UN “Protect, Respect, and Remedy” framework
presumes governmental obligation to protect human rights against third
parties (Glinski, 2017).
Table 4.2 illustrates how the proposed procedure can generate multiple
theories of the firm for comparison and assessment. The table structures as
follows. The vertical stub (down the left side) provides the three dimensions
of the TBL framework (economic, environmental, and social), to which is
added human rights. The horizontal stub (along the top side) differentiates
between stakeholders who can choose goals and predetermined goals
(typically imposed by the external environment). Within each horizontal
stub category, Table 4.2 further differentiates between single and mul-
tiple goals. The proposed approach is also informed by Brenner’s (1995:
80) stakeholder value matrix approach. This matrix involves assigning
weights to the values of various constituencies in a firm.
Theories of the firm featuring a single dominant constituency (investors,
consumers, employees, or the state) typically focus on economic perform-
ance on behalf of that constituency (Cochran, 1994, 1996). I assign a
weight of 1 to economic performance in Table 4.2 as an illustration (only)
of one approach. (A nonprofit organization might select environmental
Table 4.2
Illustrations of generating multiple theories of the firm
Stakeholders Predetermined Goals
Single Multiple Single Goal Multiple

Dominant Cooperating (Competition Goals
Constituency Constituencies for Policy) (Balancing
(Competition Policies)
for Control)
Additive (Σ) or Additive (Σ) or

integrative (Π) integrative (Π)
models models
Economic 1 C1, C2 1 or G1, G2

performance
Environmental 0 C3 1 or G3
performance
Social 0 C4 1 or G4
performance
Human rights 0 C5 1 G5
39

or social performance or human rights.) Generally stakeholder theory
envisions cooperation among multiple constituencies for mutual benefit.
In a single-goal approach, the dominant policy setter determines whether
economic, environmental, social, or human rights dimensions should be
weighted at 1. There may be a competition for policy control. For illus-
tration, the column is shown as choice among 1, 1, 1, or 1. Whichever
dimension is selected to be dominant, the other dimensions are then
weighted at 0. Generally a multiple goals approach attempts to assign
weights across the dimensions of the vertical stub. In either stakeholder
or goal approaches, there might be an additive approach or an integrative
(or multiplicative) approach.
In an additive approach, each constituency or goal receives some
weight out of 1 (100%) and the set of weights sums to 1 (100%). The
weights need not be equal. The additive model is simply 1 =Σ (E1 +E2 +
… En), where E (element) can be a constituency C or a goal G (but not
both). An additive model embeds the possibility of trade-offs across con-
stituencies or goals.
In an integrative (or multiplicative) approach, the weights must be
equal and thus effectively 1 for each stakeholder or goal. The overall value
is integrative and cannot be decomposed as in an additive approach. The
integrative model is simply 1 =Π (E1, E2, … En), where again E (element)
can be a constituency C or a goal G (but not both). Freeman’s (2016)
exposition of responsible capitalism features an integrative approach to
how stakeholder management should desirably work. The elements work
together rather than simply adding up.
The problem of relative weights occurs in setting executive and man-
ager compensation. A pure pay for profit performance compensation
system fosters profit seeking. The assigned weight is 1. This compensa-
tion approach can result in corruption, such as violating the U.S. Foreign
Corrupt Practices Act (FCPA) of 1977 (Bistrong, 2019). There are efforts
at reweighting compensation systems. For example, following corruption
scandals, Novartis (of Switzerland) linked sales representative bonuses
to ethical behavior (Paavola, 2018). Each employee receives a score of
1, 2, or 3. A score of 1 merits no bonus and precipitates further action
including potentially dismissal; a score of 2 meets expectations; a score of
3 constitutes “role model” eligible for up to 35% bonus (Paavola, 2018).
The corruption scandals occurred in China and South Korea and in
connection with payments to Michael Cohen (President Trump’s former
personal lawyer) for lobbying services (Paavola, 2018). Royal Dutch Shell
plans to link executive bonuses to targeted reduction of carbon emissions
(Kottasová & Shane, 2018).
Conclusion
This chapter formulates a multiple-criteria framework for assessing com-
peting theories of the firm and assessing outcomes of concern to societies
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94 Duane Windsor
and stakeholders. This framework draws on CSR, CSP, and TBL roots in
the literature to help managers think about assessing multiple outcomes.
I link this proposed framework to humanistic management, drawing
on Korten (2018) for an exposition of a specific, concrete approach to
humanistic management. An alternative theory can embed certain posi-
tive aspects of humanistic management. However, I point out significant
differences with Korten’s approach that seeks social transformation obvi-
ating the market economy. The purpose of the effort is to subject single-
purpose theories of the firm (whether by principal or principle) to critique
as overly narrow and unrealistic in an increasingly complex world. The
value-added contribution is to demonstrate the conceptual richness of
theories of the firm and thus of management behaviors for addressing
complex problems.
The multiple-criteria approach provides an alternative theory of the
firm, as developed in the previous section. The context for this alterna-
tive theory is an adaptive moral capitalism. This context provides institu-
tional constraints for a firm including ethical and legal standards defining
unacceptable harm and stakeholder influences favoring corporate citizen-
ship actions. A manager cannot simply decide to do something wrong to
generate profit or to practice altruism for no strategic purpose. Managers
(Freeman, 2016) should be moral (Carroll, 1991), act efficiently within
a capitalist market economy (Jensen, 2001a, 2001b), and decide how to
assign relative weights to dimensions of varying specific-decision problems
(Brenner, 1995). These dimensions may in future be an expanding set
of concerns for societies and stakeholders. The alternative is a theory
of the relationship between business and society oriented toward man-
agement assessment of outcomes desired by societies and stakeholders.
A single-objective theory will not suffice to handle increasing complexity
of business decision-making.
To set context for the alternative theory, I define three general
approaches: (1) regulated market capitalism; (2) adaptive moral capit-
alism; and (3) transformative communitarianism. The latter (3) reflects
Korten’s thinking. These three approaches lie along a continuum with
(1) regulation and (3) communitarianism as polar opposites. (Laissez-
faire capitalism in the 19th century tradition does not exist in practice.
Whether communitarianism is or will become socialism remains to be
determined.) Regulation has the sense of limited social control of business
and thus considerable liberty for market conduct. Communitarianism has
the sense of unlimited social control of business and potentially of indi-
vidual liberty of thought and conduct. Regulated market capitalism in
various forms is the current dominant approach. Historically, market
capitalism has greatly improved aggregate economic wealth and in con-
junction with constitutionalism swept away the once legal institutions of
guilds, serfdom, and slavery.
Korten rejects this approach and also an underlying “neoliberal
ideology” for market economy globalization. To do so, he must project
59

I think that the approach (1) will destroy human civilization through
severe planetary degradation. Simultaneously he must demonstrate that
transformative communitarianism (3) is superior and also planetary
and societal salvation. He may be proven right on both scores, but the
arguments are by assertion (or claim). I have argued elsewhere that the
solution is more likely to be technology innovation than institutional
adjustment (Windsor, 2018). If so, the issue becomes whether such tech-
nology emerges from regulated capitalism or transformative communi-
tarianism. Technological progress is uncertain.
This chapter, therefore, examines, as the likely context for the logic of
multiple criteria for assessment, the intermediate approach of adaptive
moral capitalism. By way of distinction, the conception of regulated cap-
italism focuses more on reduction of social harms and legal compliance
(Windsor, 2013). Adaptive moral capitalism must focus additionally
on social improvements and draw on ethical principles for judgments.
If social harms are reduced to zero, then social improvements become
the next expectation for business. Adaptive has the sense of evolutionary
rather than revolutionary, although either path may lead to transform-
ation. The idea of multiple criteria for assessment of theories of the firm
provides richer information about how firms do and can perform.
The key consideration in any normative approach (and theories of the
firm are normatively oriented) is moral leadership and how such moral
leadership emerges (Solinger, Jansen, & Cornelissen, 2019). Solinger et al.
define moral leadership as one or more individuals taking a moral stance
on some issue in a way that convinces other individuals to do so also. The
collective effect is to spur change. Those authors provide a process theory
of how moral leadership emerges and develops into a broader movement.
The key consideration is why and how individual managers are willing
to shift from single-objective thinking to multiple-criteria thinking. The
promoter of TBL thinking has expressed dissatisfaction with the actual
implementation and understanding of the approach and has suggested
recall for reworking (Elkington, 2018): “… [T]‌he TBL wasn’t designed to
be just an accounting tool. It was supposed to provoke deeper thinking
about capitalism and its future, but many early adopters understood the
concept as a balancing act, adopting a trade-off mentality” (Elkington,
2018, Paragraph 8). The vital purpose of TBL and also CSR, CSP, and
stakeholder theory is to trigger the rethinking of how capitalism can
function best –or at least better.
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5
Qualitative Growth
An Alternative to Solely
Quantitatively-Oriented Theories
of Firm Growth
Dietmar Sternad and Gernot Mödritscher
Introduction
The imperative to maximize profits and financial returns for shareholders
has long been a central tenet of the neoliberal Theory of the Firm (Jensen
& Meckling, 1976). To increase shareholder value as demanded by this
theory, firms need to grow. For decades, the growth of firms has been a
topic of utmost importance in the entrepreneurship literature. In most
cases, growth has been equaled with an increase in indicators like sales,
profits, number of employees, assets, market share, share price, or phys-
ical output (Davidsson, Achtenhagen, & Naldi, 2005). This is highly
remarkable, since many of these studies see themselves in the tradition
of Edith Penrose’s (1959) seminal theoretical work on the growth of the
firm. According to Penrose (1959), there are two different connotations
of the term “growth”: “It sometimes denotes merely increase in amount
[…]. At other times, however, it is used in its primary meaning implying
an increase in size or an improvement in quality as a result of a pro-
cess of development […]” (p. 1). The large bulk of the extant literature
of firm growth has been focused mainly on the results of quantitative
growth –on how firms are “getting bigger” in terms of size (turnover,
market shares etc.). Besides the assessment that the reasons for and the
process of growth are rarely considered, Penrose pointed out that there
is another side to growth, too –growth as an improvement in quality –
growth as “getting better.”
The Theory of the Firm has increasingly come under criticism, espe-
cially also for the negative effects that putting the maximization of share-
holder wealth before the interests of all other stakeholders can have on
human society and the natural environment (including the depletion of
resources and environmental pollution, rising inequality, or the pro-
liferation of potentially life- destructive technologies) (Korten, 2018;
McSweeney, 2008; Sternad, Kennelly, & Bradley, 2016). There are calls
for new theories that acknowledge, as Korten (2018) writes, that “[t]‌he
proper purpose of any human institution is to improve the lives of people
who depend on it” (p. 1). Improvements of people’s lives are, however, not
DOI: 10.4324/9781003211549-6
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104 Dietmar Sternad and Gernot Mödritscher

always measurable in quantitative (or even financial) terms. Yet, existing
theories of firm growth almost exclusively focus on the quantitative side
of growth. The qualitative side of growth has been rarely considered in
management research (Davidsson et al., 2005), despite the fact that most
firms actually do not grow much in size and possibly even do not want
to grow quantitatively (Daunfeldt, 2015; Hurst & Wild Pugsley, 2011).
After all, growth in size also entails financial risks, especially if a firm
has a tight resource base, as well as potential disadvantages for the well-
being of both entrepreneurs (who could, for example, lose the independ-
ence that they originally sought) and employees (e.g., as a consequence
of a deteriorating working atmosphere) (Wiklund, Davidsson, & Delmar,
2003; Wiklund, Patzelt, & Shepherd, 2009).
For many firms, other development goals are more important than
growth in size. For example, in family firms, ensuring the survival and
thriving of the firm for the next generations is often a key goal that
has precedence over sales or profit growth (Achtenhagen, Naldi, &
Melin, 2010). Stability, creating work for the family and employees,
personal development, and appreciation are further (qualitative) goals
that entrepreneurs sometimes put before an increase in size (Dalborg,
von Friedrichs, & Wincent, 2011). As Aldrich (1999) noted, quantita-
tive growth “is not […] a natural outcome in the life course of most
organizations” (p. 168). Reasons could lie in the “natural” small scale
of some industries, but also “the existence of non-pecuniary benefits of
owning a small business […] [that] may cause individuals to forgo some
natural benefits of agglomeration in exchange for higher utility” (Hurst
& Wild Pugsley, 2011, p. 42).
Consequently, not following a quantitative growth strategy does not
necessarily mean that entrepreneurs and managers of smaller firms do
not want to develop their businesses in qualitative terms. Even if they
do not grow their business in size, they can still be interested in growing
or developing capabilities, the quality of their products and services, or
the sustainability of their business. Following Korten’s (2018) suggestion,
they can use their firms to contribute to improving the lives of customers,
employees, or other members of a community rather than just slavishly
following a shareholder value maximization paradigm.
Empirical findings show that many firms, in particular Small and Mid-
size Enterprises (SMEs), do not necessarily have quantitative growth
goals, and that many entrepreneurs and managers deliberately follow a
qualitative rather than a quantitative growth path for their firms (de Souza
& Seifert, 2018; Pechlaner, Raich, Zehrer, & Peters, 2004; Pencarelli,
Salvelli, & Splendiani, 2008). Growth in quantitative terms can then be
the result of qualitative growth, but is not a primary objective. Thus, it
seems that academic research has been out of tune with entrepreneurial
and managerial practice in the field of firm growth, maybe also due to
the central role that the Theory of the Firm has played as a dominant
narrative in the field. While most studies use seemingly “objective”
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Qualitative Growth 105

quantitative measures, practitioners often see growth primarily as a pro-
cess of internal development (Achtenhagen et al., 2010). Instead of just
looking at “how much” and “why” firms grow in size, we might also
ask different questions: “Which forms of growth exist?”, “Which kind of
growth will improve people’s lives?”, and “How does something grow or
develop?” (Leitch, Hill, & Neergaard, 2010).
We will try to take one step forward in finding answers to these
questions in this chapter. On the one hand, we will try to point out that
firms can also grow and develop in terms of quality rather than just in
size. On the other hand, it is the aim of this chapter to provide a frame-
work that allows us to study growth as a developmental process in a more
integrated way, including both a quantitative and qualitative perspective.
For this purpose, we will first give an overview of the main strands of the
exhaustive literature on quantitative growth as well as of the relatively
scant literature on qualitative growth, trying to identify commonalities
and significant differences. The resulting framework captures the core of
both quantitative and qualitative growth processes and can be used as a
starting point for further research on the qualitative side of growth and
the interrelations between quantitative and qualitative growth.
Quantitative Growth
The word “quantity” has its roots in the Latin quantitas, which means
“size” or “amount”. When we study quantitative growth, we, therefore,
refer to the process which leads to an increase in size or amount of certain
variables over time.
Basically, there are two ways of looking at growth. We can see
growth as a result (i.e., as the dependent variable) of a process of devel-
opment in which, according to Penrose (1959) “an interacting series of
internal changes leads to changes in the characteristics of the growing
object” (p. 1). When we study firm growth, the growing object is the
firm, and the by far most frequently applied variable to measure the
result of quantitative firm growth (or “the characteristic of the growing
object” in Penrose’s terms) is increase in sales (Achtenhagen et al., 2010;
Delmar, 1997; Delmar, Davidsson, & Gartner, 2003). Increase in profits,
cash flows, and assets are alternative financial indicators and increase
in market share, physical output, and employment numbers alterna-
tive nonfinancial measures of quantitative growth (Achtenhagen et al.,
2010; Delmar, 1997). Already Penrose (1959), however, voiced “serious
conceptual objections” (p. 199) about the idea that one single measure
can adequately capture the amount of expansion of a firm, let alone its
internal development and its contribution to improving people’s lives.
The second way of looking at growth is to perceive growth as a pro-
cess of development in which a range of different variables interact. For
Audretsch, Coad, and Segarra (2014), for example, “firm growth is a het-
erogeneous, complex and dynamic process that involves economic, social
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and cultural factors” (p. 745). McKelvie and Wiklund (2010) have called
for more research on “how” firms grow instead of just focusing on “how
much” they grow. Actually, there has been a tradition of conceptualizing
growth processes as life cycle or stage models (for an overview see Levie
& Lichtenstein, 2010; and Phelps, Adams, & Bessant, 2007). One of the
most widely cited is Greiner’s (1972) five-phase model. According to this
model, firms need to go through several transition stages as they meet
different types of crises on their growth path. The stage model theories
usually imply that there are optimal activities and configurations for each
stage, an assumption that does not fully do justice to the complexities
and nonlinearity of real-world growth processes, as a lack of consistent
empirical evidence for many of these models shows (Davidsson et al.,
2005; Levie & Lichtenstein, 2010). Thus, as Furlan and Grandinetti
(2011) describe, “the numerous ‘stages of growth’ models have clashed
with the overwhelming variety of actual firm growth processes” (p. 196).
Levie and Lichtenstein (2010) propose to replace the stage theories with
a “dynamic states” approach. According to this approach, firms can go
through any sequence of dynamic states, which are defined as networks
of beliefs, relationships, systems, and structures that can lead to the
generation of resources and value creation for stakeholders (Levie &
Lichtenstein, 2010; Sternad & Mödritscher, 2020).
A further research path has focused on the effects of quantitative
firm growth. Examples include Eshima and Anderson’s (2017) study on
the influence of growth on the adaptive capacity of a firm or the work
of Wiklund et al. (2003), who found that growth in size is often also
associated with concerns for employee well-being and losing the positive
working atmosphere of smaller firms.
Regardless of whether the object of research is the results of growth,
growth as a development process, or the effects of growth, a vast majority
of the literature has equaled growth with quantitative growth. For Leitch
et al. (2010), “the predominant preoccupation with growth as ‘change
in amount’ is premature and overly simplistic” (p. 258). It is also not in
line with the growth perceptions of many entrepreneurs and managers
(especially in SMEs), for whom qualitative aspects of growth also play
an important role (Achtenhagen et al., 2010; Dalborg, 2015; Dalborg
et al., 2011; Pechlaner et al., 2004; Pencarelli et al., 2008), and fails to
acknowledge that firms can have different purposes than just maximizing
shareholder value. In recognition of the need for developing a more com-
prehensive and integrated understanding of growth, we propose that the
qualitative side of the growth of the firm should get more attention in
research.
Qualitative Growth
As quantitative growth, qualitative growth can be seen either as from a
results or a process perspective. The word “quality” stems from the Latin
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qualitas, which stands for the character (or “nature”) or a distinguishing
characteristic (or “quality”) of a certain object. As a result of qualitative
growth, certain characteristics or qualities of a firm change. The term
quality can be used either neutrally (i.e., in juxtaposing quality A and
quality B of an object without attaching a higher or lower value to any
of these qualities) or with an evaluative connotation (i.e., in the sense of
“A has a better/higher quality than B”). If we study qualitative growth
as a process of development in a Penrosian sense, we need to use the
term quality in its evaluative sense, as we can only then assess whether
certain characteristics of a firm have improved over time (Sternad &
Mödritscher, 2018).
First attempts to define the concept of qualitative growth have been
made at the beginning of the 1990s. Johannisson (1990), for example,
sees a need for firms to combine quantitative and qualitative growth,
defining the latter as “enhanced learning capabilities and influence in
the marketplace” (p. 33) and an “increased ability to diagnose and deal
with structural changes in the environment as well as with changes in the
entrepreneur’s own value system” (p. 34). He further points out that firms
also have a societal role, and that communities as well as entrepreneurs
can benefit from small companies with low quantitative growth rates.
Fleming (1992) also refers to societal and in particular also environmental
consequences when he defines qualitative growth as “any sustainable
strategy, involving a rate of growth less than that of balanced growth,
implemented with a view to reducing environmental impact” (p. 20). He
obviously sees a trade-off between qualitative and quantitative growth
and suggests that technological advances are a key to achieving qualita-
tive growth.
More recent articles have taken a broader perspective on qualitative
growth. Garengo and Bernardi (2007), for example, refer to qualita-
tive growth as “developments within managerial practices and systems”
(p. 520), highlighting the need for management systems to develop as a
precondition for quantitative growth. In this view, qualitative growth is
instrumental for quantitative growth. Muhos, Piila, and Iskanius (2007)
compare quantitative growth to the physical development and qualitative
growth to the mental development of people, defining qualitative growth
as “growth of qualitative factors such as organizational development,
competence development, and the development of processes” (p. 8).
Another recent conceptualization of qualitative growth is more oriented
toward describing the continuous enhancement of product and service
quality on several dimensions such as functionality, reliability/durability,
attention to detail, beauty (or style), generosity, simplicity, and ethicality
(Oden & Benedikt, 2016). Pencarelli et al. (2008), in turn, take a more
strategic perspective when they argue that “qualitative growth entails
strategic choices for development which do not necessarily implicate
growth in size, but which express the enterprise’s general tendency to
improve itself and to move towards paths of excellence” (p. 6).
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Dalborg et al. (2012) observe that many businesses that are founded
and led by women put a strong emphasis on qualitative growth, which
they define as “changes in the underlying characteristics of motivational
factors for growth, as well as a description of how a company’s qual-
ities can change over time and as it grows” (p. 296). In their study on
the growth aspirations of women entrepreneurs in Sweden, they further
cite one entrepreneur who says: “Growth is when a company develops
in a positive direction, not necessarily getting bigger, which will benefit
the owners as well as employees and society as a whole” (Dalborg et al.,
2012, pp. 303–304). The main qualitative growth aims that were identi-
fied in women-led enterprises are survival, stability, appreciation, work
creation, and personal development (Dalborg et al., 2012). These goals
are a much closer match to Korten’s (2018) notion of improving lives as a
defining purpose of human institutions than the typical financial growth
goals that have been in the center of traditional theories of firm growth.
If we summarize the various definitions of qualitative growth in the
prior literature, we can observe the following commonalities:
a qualitative growth generally refers to a process in which qualitative

results (certain qualities and characteristics of a firm) are enhanced
or improved over time;
b the qualities or characteristics that are enhanced or improved are
internal (e.g., learning capabilities, managerial practices or systems,
processes, or products and service quality) but have positive external
outcomes for different stakeholders’ groups and/or the environment.
Based on this summary, we suggest a comprehensive definition of

qualitative growth as the enhancement or improvement of certain internal
qualities and characteristics of a firm over time with positive effects on
stakeholder groups and/or the environment.
While qualitative growth and quantitative growth are clearly dis-
tinct concepts, there are also potential interrelations between them (see
Figure 5.1 for different patterns of interrelations between qualitative and
quantitative growth).
Quantitative growth can either lead to an accumulation of resources that
enable qualitative growth (Pattern 1 in Figure 5.1) or to a downgrading of
certain qualities of a firm (e.g., perceived working climate, individualized
customer service, or independence from certain stakeholder groups) as a
result of an increase in firm size (Pattern 2). Qualitative growth, in turn,
can also fuel quantitative growth, as the improved qualities of products
and services or the attractiveness of the firm as an employer can create
new possibilities for attracting both customers and talent (Pattern 3).
For example, Armstrong (2013) observed that competence-based strat-
egies (i.e., strategies that are oriented toward developing higher quality
and better service) can enable SMEs to grow in size. Finally, qualitative
growth can also potentially result in size reductions, for example, as a
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newgenrtpdf
Pattern 1: Pattern 2:
Qualitative growth as a result of size growth Lower quality as a result of size growth
Qualitative Qualitative
growth growth
1
2
2
1
Quantitative Quantitative
growth growth
Pattern 3: Pattern 4:
Size growth as a result of qualitative growth Size reduction as a result of qualitative growth
Qualitative Qualitative
growth growth
2

2
1
1
Quantitative
Quantitative
growth
growth
Figure 5.1 Patterns of interrelations between qualitative and quantitative growth (Source: Authors).
0
1

strategic move of a firm toward the premium end of the market reduces
the number of units sold (Pattern 4).
Thus, we can also perceive firm growth as a multidimensional phe-
nomenon, in which different quantitative and qualitative variables are
in dynamic interplay with each other. Furlan and Grandinetti (2011),
for example, consider growth in size as being highly interdependent
with two further (qualitative) dimensions of growth, capability growth
and relationship growth. Capability growth refers to the development
of new (functional, relational, or dynamic) capabilities over time, and
relationship growth to the widening of possibilities to use external
resources through building reciprocal relationships with other firms or
organizations (Furlan & Grandinetti, 2011). The company cases that
Furlan and Grandinetti (2011) present in their article confirm that growth
processes of firms include the interrelation of both qualitative and quan-
titative factors.
To study growth processes in their entirety, we therefore suggest the
following three extensions to the current mainstream of business growth
theories:
1 To include both quantitative and qualitative results variables in

studies of firm growth.
2 To create an integrative model of firm growth that can explain both
quantitative and qualitative growth.
3 To further explore the interrelations between qualitative and quanti-
tative growth variables.
In the next part of this article, we will try to take a first tentative step
forward in the second research desideratum and present an integrative
framework that allows us to study the growth of both quantitative and
qualitative results variables.
An Integrative Framework of Firm Growth

Although there is a clear difference between quantitative and qualitative
growth in terms of the results variable (“what is growing”), there are
some basic elements that are common to every growth process, whether
it is quantitative or qualitative. These elements can be summarized as
“4 As”: aspirations, ability, activities, and the advancement of certain
growth variables. These four elements form the core of the integrated
conceptual model of firm growth that we present in Figure 5.2.
Advancement of a certain growth variable. Growth is a phenomenon
in which a certain variable (or several variables, respectively) changes over
time, either in amount or quality. In case of quantitative growth, a vari-
able increases in size; in case of qualitative growth, a variable improves in
terms of quality. Quantitative growth is typically measured in terms of an
increase in sales, employee numbers, assets, or profits (Achtenhagen et al.,
1
Quantitative or
Internal development process Growth outcomes
qualitative results
Aspirations
External
influences Ability
Advancement of Effects on
Activities
growth variable X stakeholders
Growth reinforcement
Figure 5.2
An integrative model of firm growth as a development process (the “4
As of growth”) (Source: Authors).
2010). Qualitative growth can be related, for example, to the improve-

ment of capabilities, relationships, process quality, product or service
quality, sustainability, or other characteristics of the firm that lead to
outcomes which are important for stakeholders. Growth variables change
(or are “advanced” in the terms of our model) as a result of activities
that are set by firms and their management, respectively. These activities,
in turn, are triggered by aspirations of decision-makers and are enabled
by the requisite abilities that a firm first needs to develop. Aspirations,
ability, and activities form the basic building blocks of the internal devel-
opment process that leads to the advancement of certain (quantitative
and qualitative) growth variables.
Aspirations. Several studies provide empirical evidence that managers’
growth aspirations correlate with actual growth (Hansen & Hamilton,
2011; Wiklund & Sheperd, 2003). For example, there is a significant link
between entrepreneurial orientation (the willingness to innovate, take
risks, and proactively try out new approaches and offers on the market)
and the quantitative growth of SMEs (Wiklund et al., 2009). But where
do growth aspirations come from? Delmar (1996) highlights the role of
the intrinsic motivation and interests of the individual decision-maker
(entrepreneur or manager, respectively) for triggering and achieving firm
growth. The behavioral theory of the firm suggests that decision-makers
in firms first internally negotiate a hierarchy of goals, and then set certain
actions to close the discrepancy between the status quo and aspiration
levels for key goals (Cyert & March, 1963). Aspiration levels are often
found in comparison with peer groups, organizations that are deemed to
be similar than one’s own (Baum & Lant, 2003; Cyert & March, 1963).
If managers believe that organizational size has an impact on their firm’s
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1

efficiency (e.g., in the form of economies of scale effects) or legitimacy in
their particular industry, for example, they will set higher aspirational
levels regarding firm size (Greve, 2008). A potential effect of social com-
parison on size growth also found empirical support (Greve, 2008).
Aspiration levels regarding the development of qualitative variables could
have a similar effect. Actually, this has already been empirically shown
for the opposite effect, as it was found that lower quality aspiration levels
can lead to an industry-wide quality erosion in the service industry (Oliva
& Sterman, 2001).
Ability. Aspirations can only be translated into activities if a firm has
the capacity to conduct the respective activities. Before being able to grow
(either quantitatively or qualitatively), firms must develop the potential to
grow. As Penrose (1959) already pointed out (thus inspiring the resource-
based view of the firm), firms need resources and capabilities to grow.
Lichtenstein and Brush (2001) in their study of how resource bundles
change over time in new ventures come to the conclusion that “the firm
cannot develop over time without acquiring and developing additional
organizational resources” (p. 37). The sequence of resource building
can also play an important role as it was found that certain patterns of
resource development can generate higher growth than other patterns
(Pettus, 2001). The main resource and capabilities categories that have
been linked to firm growth are financial capital, human resources, and
network resources (Wiklund et al., 2009). In addition, a firm needs to set
up the internal structures and systems that allow it to use the resources
and capabilities in a way that is instrumental for achieving the desired
outcomes. Organizational and managerial capabilities can, therefore,
also be seen as a major precondition for the development and growth of
the firm (Garengo & Bernardi, 2007; McKelvie & Wiklund, 2010).
Activities. Growth variables are not changed by aspirations and abil-
ities alone. They are –as we pointed out before –changed through con-
crete activities that are performed by a firm. A particularly important role
in the context of size growth is attributable to innovation activities (Coad
& Rao, 2008), especially in the field of process innovation (Audretsch
et al., 2014). Likewise, research and development activities were found to
have positive effects on firm growth (Segarra & Teruel, 2014). Although
activities “may be the most difficult units for researchers to study at arms-
length distance” (Delmar, 2006, p. 51), it is necessary to put them into
the focus of research to be able to fully understand what is really going
on in internal development processes that lead to both qualitative and
quantitative growth.
The links between aspirations, ability, and activities. Aspirations,
ability, and activities are closely interrelated (see Figure 5.2). Decision-
makers’ aspirations can either directly translate into growth-related activ-
ities or are first directed toward building ability (for example, in the form
of resources, organizational capabilities, or relationships) that can later be
used to perform the activities that are necessary for achieving qualitative
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or quantitative growth goals. The availability of resources, capabilities,
and a network of relationships, in turn, can have a positive effect on the
aspirational levels of entrepreneurs and managers. For example, human
capital (as a form of ability) was found to have a positive impact on entre-
preneurial orientation (as a form of aspiration), which can, in turn, fuel
a manager’s intentions to grow a business (Wiklund et al., 2009). Ability
and activities are also reciprocally related with each other. While some
activities cannot be performed without the requisite ability (e.g., it is not
possible to set up a sales team without adequate human resources), other
activities are instrumental to building ability (e.g., research and devel-
opment activities as a prerequisite for building knowledge resources or
process capabilities). Optimal growth can be reached if resource-building
and resource-exploiting activities are well balanced (Pettus, 2001).
The role of external factors. The core of the “4 As” model are the
internal processes of development (i.e., the interplay between aspirations,
ability, and activity) that lead to qualitative or quantitative growth
results (the advancement of certain growth variables). We also need to
acknowledge, however, that external influences like the regulatory envir-
onment, market factors, or the industry environment can play a role in
fostering or hindering these internal processes. Small business growth
can, for example, be influenced by the industry context or the maturity
of a certain market (Audretsch & Mahmood, 1994; Baldwin & Gellaty,
2003; Gilbert, McDougall, & Audretsch, 2006; Wiklund et al., 2009).
External relationships are also vital to firm growth (Furlan, Grandinetti,
& Paggiaro, 2014). On the downside, there are institutional barriers
to growth such as labor market regulations, tax laws, or wage-setting
institutions (Davidsson & Henrekson, 2002). External influences can
affect aspirations (e.g., when a manager wants to keep pace with the
growth steps of the competition), ability (e.g., resource availability in a
certain location), and activities (e.g., certain activities are not allowed in
a particular regulatory environment). We, therefore, also include external
factors in our conceptual framework.
Effects on stakeholders. The growth of a firm can have effects on
various stakeholder groups. Quantitative growth of financial measures
(e.g., profits or cash flows) affects the wealth of shareholders but could
also have detrimental effects, for example, on the work-life balance of
owners (in the case of small firms) (Cliff, 1998), on the working climate
for employees (Davidsson et al., 2005), or on the natural environment
(Fleming, 1992). In a similar vein, qualitative growth can also have effects
on stakeholders. For example, there are potential benefits for customers
in higher product and service quality, for employees in creating higher
quality workplaces, for suppliers in developing tighter relationships, or
for society and the environment when the firm makes development steps
in terms of sustainability- related measures. Thus, qualitative growth
endeavors can also positively influence the lives of different stakeholder
groups.
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Reinforcement cycles. Firms that grow, either quantitatively or quali-
tatively, can enter a virtuous cycle, as a broader resource base (as a result
of a quantitative growth process) can help to attract even more resources
(thus also increasing the firm’s ability). Experience in developing high-
quality processes, products, and services (as a result of a qualitative
growth process), in turn, can ease further quality development steps
(i.e., enable further activities). We can, therefore, assume that there are
feedback mechanisms in growing companies that can reinforce growth
(Garnsey, Stam, & Heffernan, 2006). Wiklund et al. (2009) also use the
term “acquired taste” for business managers who see the positive effects
of firm growth, which, in turn, fuels their further growth aspirations.
This effect could also be applicable in both quantitative and qualitative
growth situations.
Discussion and Conclusion

Increasingly, academic authors come to the conclusion that “growth
is not one, but several different phenomena” (McKelvie & Wiklund,
2010, p. 280). The multidimensionality of growth has, however, not yet
adequately been represented in the research on firm growth as only “very
few attempts can be found in the literature to develop more compre-
hensive approaches to understanding business growth” (Achtenhagen
et al., 2010, p. 297). Specifically, it has been noticed that a purely quan-
titative view of firm growth is “a hasty and reductionist view of com-
plex phenomena” (Dalborg et al., 2012, p. 290). With this chapter, we
try to address these concerns and introduce a conceptual approach that
integrates three key aspects of the phenomenon of growth:
a The role of decision-makers and their diverse growth aspirations,

which are not necessarily linked to increases in firm size;
b Growth-result variables that can be either quantitative (representing
an increase in amount or size over time) or qualitative (representing
improvements of certain qualities and characteristics of firms over
time with a positive effect on different stakeholder groups).
c Processes of internal development in which an interplay of aspirations,
ability, and activities lead to the advancement of quantitative or
qualitative growth variables, respectively.
With our work, we make two main contributions to the literature on

the growth of the firm. First, we highlight the importance of the qualita-
tive side of studying the processes, results, and outcomes of growth. We
thereby acknowledge the multifaceted nature of growth processes, which
do not inevitably need to result in a change in amount or size but can also
include the development of competences, the improvement of systems,
structures, and processes that lead to more efficient routines, the devel-
opment of higher quality products, services, and customer experiences,
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or the creation of more sustainable organizations (Achtenhagen et al.,
2010). We thereby acknowledge that firms as human institutions are not
necessarily bound to maximizing shareholder value but can also be used
for the purpose of improving lives (Korten, 2018).
The shift of focus from a purely quantitative to a combined quanti-
tative and qualitative perspective on firm growth can also be compared
to the change from a pure shareholder value paradigm to a stakeholder
approach in the field of strategic management. Shareholder value is about
(quantitatively) increasing the wealth of one group (the shareholders),
while a stakeholder approach considers the (qualitative) needs of different
stakeholder groups. A “qualitative turn” in firm growth research could,
therefore, potentially also contribute to the development of growth the-
ories that are taking the interests of different stakeholder groups (as well
as the need to prevent environmental and social collapse) into account in
a more balanced way.
Our second main contribution is the “4 As” model of firm growth
that can function as a starting point for studying both qualitative and
quantitative growth processes in an integrative way. Indeed, there have
been prior attempts to create comprehensive growth models. Davidsson
(1991), for example, suggested that firm growth is based on three main
antecedents: need for achievement as the main driver of growth motiv-
ation (similar to the aspirations in our model), ability (as in our model),
and opportunity (as one particular external factor). Another model that
relates attitudes, resources, and environmental factors to growth results
was proposed by Achtenhagen et al. (2010). These approaches can defin-
itely be seen as important steps forward in gaining a more comprehensive
understanding of firm growth. They have been, however, only designed
to capture and explain quantitative growth phenomena, and do not focus
on the possibility of qualitative growth.
Of course, our work is also not without limitations. As we focus on
growth as an internal process of development, we only remain at the
surface regarding the processes that link external influences and growth
aspirations, ability, and activities. We also acknowledge that it will be
more difficult to operationalize qualitative growth variables than is the
case with straightforward, quantitative growth measures like sales or
employee numbers. It is not necessary, however, to use interval or ratio
scales to study growth processes in organizations. Ordinal scales in which
a quality status A can be considered as better or worse or higher or lower
as a quality status B could also suffice. As our model is still theoretically
derived (mainly from the behavioral theory of the firm and the resource-
based view), it also still remains to be empirically tested, which, however,
also opens various opportunities for future research.
First, we could imagine empirical studies that use qualitative growth
results (whether in the form of competencies growth, product or ser-
vice quality growth, or development in sustainability-related measures)
either as a dependent variable (to study antecedents of qualitative
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growth) or as an independent variable (to study potential effects of
qualitative growth on different stakeholder groups). It would also be
interesting to investigate the differences between qualitative and quanti-
tative growth processes, for example, in terms of resources, capabilities,
and relationships (i.e., “ability”) and activities that are fueling growth,
external conditions that are fostering or hindering growth, or outcomes
for different stakeholder groups. Further research could also try to shed
more light on the different patterns of interaction between qualitative and
quantitative growth variables. Firm growth as a multidimensional phe-
nomenon in which various variables develop and interact over time lends
itself well for being analyzed with a case study approach, especially also
in the form of real-time longitudinal case studies (McKelvie & Wiklund,
2010). Another interesting way of looking at growth phenomena would
be studying “growth episodes” (Garnsey et al., 2006), i.e., substantial
increases in size or improvements in quality that are taking place over a
relatively short period.
We fully agree with Leitch et al. (2010) that “business growth
should be defined, measured, and studied in a way that is meaningful
and relevant to entrepreneurs and their praxis” (p. 254). As we have
argued in this chapter, entrepreneurs and managers of firms can follow
very different types of growth aspirations, which are not necessarily
oriented to increases in size but are very often also focused on improving
nonquantifiable characteristics of a firm and on improving people’s lives.
As a socially constructed phenomenon (Leitch et al., 2010), growth is
what decision-makers see as growth, and growth-oriented aspirations
and goals of decision-makers (and, therefore, also firms) can and do also
change over time (McKelvie & Wiklund, 2010). We believe that it is time
for the academic perspective on firm growth to change, too –toward a
more integrative view with a stronger focus on the qualitative side of
growth.
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6
What Are Corporations for?
Contemporary Capitalism,
Authority, and a Communicative
Theory of the Firm
Timothy Kuhn
In January 2019, the world’s largest corporate investor, Larry Fink of

the firm BlackRock, issued his annual letter to the CEOs of the firms in
which his company invests its $6 trillion. The letter, which underscored
the claim of the preceding year’s missive, caused a stir in the investment
community and the business press because it called upon CEOs to steer
their firms toward purposes more noble than merely the generation of
profit. Perhaps unsurprisingly, Fink –whom Barron’s called “the new
conscience of Wall Street” (Norton, 2018) –situated this argument as
enhancing firms’ long-term value (i.e., that purposes produce profits in
the long run) but additionally proposed that the CEOs’ action was neces-
sary to redress the inability of governments to solve pressing social and
economic issues:
The world needs your leadership. As divisions continue to deepen,

companies must demonstrate their commitment to the countries,
regions, and communities where they operate, particularly on issues
central to the world’s future prosperity. Companies cannot solve every
issue of public importance, but there are many –from retirement to
infrastructure to preparing workers for the jobs of the future –that
cannot be solved without corporate leadership.
(p. 7)
Fink was, in other words, asserting that a change is needed in what

corporations are for. Setting aside the self-serving depiction of CEOs
as global saviors, the letter is remarkable not for its proclamation that
corporations1 should orient to values beyond the crudely fiscal –that much
is not new, even in investment circles –but for its implicit assumptions
that (a) firms are agents, the actions of which powerfully shape the world,
(b) those outside the traditional boundaries of the firm can make claims
on their action beyond the purely financial, and (c) firms take on the
purposes their (persuadable) CEOs want them to take on.
The larger question Fink’s letter (along with David Korten’s chapter in
this volume) conjures up is this: what are corporations for? Ignoring the
grammatical irritation associated with a dangling preposition, the phrase
DOI: 10.4324/9781003211549-7
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What Are Corporations for? 121

has two connotations relevant to this chapter. First, it suggests that
corporations might be understood as embodying, or representing, a set of
commitments that motivate them to pursue particular goals (e.g., “what
does the firm stand for?”); this is about guiding purpose(s). Second, it
frames firms as entities that can be employed to advance particular ends
(e.g., what’s it good for?); this is about the instrumental value generated
by the firm when it’s employed as a tool, including for goals not directly
related to the firm’s production processes. Unfortunately, theories of the
firm drawn from economics and management –the focus of the present
volume –present limited responses to these questions.
Theories of the firm address why firms exist, where their bound-
aries are, how they coordinate internally, and how they secure advanta-
geous positions in their external environment (Foss, 1996; Williamson,
2002). The two categories covering most of the field tend to foreground
either governance or capabilities. The governance approach to those
issues focuses on the mechanisms that lead to firm formation and shape
relationships with other firms. It portrays firms as nexuses of (implicit
and explicit) contracts that revolve around a legal fiction called the firm,
asserting that relationships between any two parties (including “the”
firm) can be understood in contractual terms. In these contracts, suppliers
offer specific assets to production, and firms are production systems that
efficiently coordinate transactions between the suppliers. A governance
stance argues that the firm’s economic performance is enhanced when it
exercises ownership control over complementary assets and governs them
intelligently (Oxley, 1997; Williamson, 1991). The nature of contracts
between parties to collective As Rhee (2008) makes clear, however, eth-
ical obligations tend to be beyond governance approaches’ conceptual
purview.
Capabilities approaches to the theory of the firm, in contrast, concen-
trate on decisions regarding the intraorganizational routines and resources
that generate distinctive and valuable competencies. Firms possessing,
creating, and adapting those routines and resources produce unique pro-
duction capabilities that create competitive advantage (Barney, 1991;
Foss, 1996). In these approaches, firms are said to possess advantages
over markets when the participants in team or joint production are linked
by firm-level codes and culture, creating an integrated whole: “Firms
exist because they provide a social community of voluntaristic action
structured by organizing principles that are not reducible to individuals”
(Kogut & Zander, 1992, p. 384).
Both governance and capabilities approaches emphasize a strong man-
agerial control over the firm and, as such, tend to be interested in struc-
turing contracts, assets, resources, and relationships; they tend to be less
interested in how the firm can be bound up in assertions about its proper
deployment and aims (i.e., what it should be for) beyond its manageri-
ally defined production functions (i.e., how forces outside its bound-
aries might make claims on its existence and operations). In governance
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122 Timothy Kuhn

and capabilities approaches, the aforementioned question of purpose is
reduced to a question of how a firm’s declared commitment to “social”
causes can reduce transaction and capital costs, diminish regulation, or
induce cooperation (both within the firm and with its stakeholders). They
therefore seek to restrict the multiple influences on its trajectory (Rhee,
2008) and ignore the ever-present tensions, contradictions, and fragmen-
tation characterizing the experience of organizing (Vásquez & Kuhn,
2019). They are also uninterested in the use of the firm to achieve aims
other than its production function (the “what’s it good for” connotation
earlier).
In short, then, governance and competence approaches cannot
adequately address the challenge Fink lays out because their simplifying
models of organization and managerial authority prevent it. They por-
tray firms as artifices geared only toward production or bounded (and
internally unified) production systems; in both cases, firms are guided
by managers who structure the systems for production efficiency, not
social purpose. Such simplifications prevent the governance and capabil-
ities approaches from developing responses to the “what are corporations
for” question that can foster substantive social change. Considering the
forces that animate firms and what interests they can be deployed to serve
are issues of purpose that require a conception of organization (as both
noun and verb) that the governance and capabilities approaches deny
(Thompson & Davis, 1997).
What is needed, then, is an alternative engagement with theories of
the firm. If, despite his statement’s obvious limitations, Larry Fink is
right about the need to redefine corporations’ reasons for existence in
ways that force them to engage more directly with pressing social and
environmental problems (along with activist groups working on those
problems), then the justification for such a change must be linked to
firms’ performance, boundaries, and operations. Because governance
and capabilities approaches are incapable of providing explanations for
how or why firms might pursue such redefinitions, this chapter turns to
an alternative source of inspiration: a communicative theory of the firm
(CTF). It begins by suggesting that late capitalism brings with it new
models of value production that create novel possibilities for practice,
and that an alternative theory can connect those changes to the firm’s
existence and operations.
Value Production via Communicative Capitalism

Whatever we take capitalism to be –a description of the mode and
relations of production, an explanation for accumulation, an ideology,
a sociopolitical system –it certainly suffers no shortage of analysts
seeking to describe its crises. One relatively recent entrant among these
diagnoses is the emergence of communicative capitalism (Dean, 2005,
2014; Hill, 2015), which describes a post-Fordist world where firms’
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value production is tied closely to the circulation of meanings associated
with intangible assets like images, knowledge, and emotions.2 A useful
shorthand for how firms’ approaches to value production increasingly
revolve around communication practices, the term indexes a recognition
that making meanings is increasingly more important than making things
(Arvidsson, 2006; Mumby, 2016, 2019). Next, I briefly highlight two
such ascendant (and connected) value- production practices: branding
and the dispersion of production.
Branding
Branding recognizes that the value of a good or service is due not merely to
the immediate material need it satisfies. Instead, as Arvidsson and Peitersen
(2013) note, value is about inspiring affective relations between a com-
pany and its various stakeholders (consumers, employees, governments,
suppliers, and the public), in part because these stakeholders occupy
a “consumer society” where identities form through affiliations with
images loosely associated with products. Certainly, there was a time when
brands were proxies for product quality, but brands’ informational cap-
acity now fades in relevance compared to their identity-signaling features.
For this reason, firms increasingly find it advantageous to define “pur-
pose” as assuming political stances on pressing social concerns: “brand
activism” encourages identification with the firm while also inhabiting a
moral space, encouraging an ever-closer connection between consumers’
selves and the corporation (Lee & Kotler, 2011; McEachern, 2014).
Brands have come to mediate our experiences of the everyday by guiding
meaning-generation processes, but they do so within the restricted set of
possibilities provided by the capitalist market-based system.
For generations, branding was understood as a function of marketing;
now it is a motif connecting a firm’s array of organizing practices. It
should not be surprising, then, that branding infuses the individual–
organization relationship, altering members’ identifications and shaping
managerial efforts to control employees. That control is particularly
interesting, and intrusive, when the brand reflects what the individual
sees as her “authentic” self, implying an attribution of agency to the cor-
poration with whom the person identifies (Fleming, 2009; Land & Taylor,
2010). Branding, in other words, is not merely about understanding how
companies appeal to, or cultivate, consumers’ desires regarding products,
but has become a trope for how image-based meaning-making activity
pervades value creation –and how that meaning-making activity relies on
an assumption of the firm as a (potentially moral) agent.
Dispersed Production
A second, and closely related, practice altering the character of value gen-
eration is the increased dispersion of production beyond the conventional
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124 Timothy Kuhn

boundaries of the firm. The industrial revolution brought with it a sep-
aration of production, which happened in the workplace (e.g., the fac-
tory), and consumption, which typically occurred in the home. Value
was a characteristic of the commodity, built into it during its creation,
a result of the factory’s combination of materials and labor power; con-
sumption devoured that value. Increasingly, however, the distinctions
between production and consumption are breaking down, leading to the
neologism prosumption (Ritzer & Jorgenson, 2010) to indicate that a
branded product’s value creation occurs well beyond the factory walls.
As Arvidsson and Peitersen (2013) note,
Today a brand is much more than a mere symbol of a product,

created by the designated marketing division. Rather, brands are
better understood as something akin to a common “ethos” that is
able to cohere consumers, employees, and other stakeholders around
a common “enterprise,” be this the reproduction of the particular
“feel” associated with a consumer brand or the co-construction of
the common sense of purpose that defines a corporate brand. . . .
literature on both consumer and corporate branding stresses the
necessity to involve consumers, coworkers, and other stakeholders as
active participants to the process.
(p. 32)
A brand, in other words, is the product of a network of participants

whose communicative activity generates the meanings that are the brand
(Kivinen & Hunter, 2019). This is seen in, for instance, online fashion
communities, where the meaning of the brand is the result of interactions
among dedicated and even sophisticated consumers –few, if any, of whom
are employed by the firm –who discuss the social value of fashion and the
individual designers. These conversations often “display an enlightened
disbelief in the morality of brands and branding” (Bertilsson, 2015,
p. 449). By way of example, the clothing firm Outdoor Voices markets
its “athleisure” products not to competitive athletes, but to fashion-con-
scious women more concerned with recreation. Those women, not coin-
cidentally, possess “real” bodies. They also post regularly (and usually
without compensation) to social media sites, using a hashtag condensing
the company’s slogan that burnishes both the brand and the poster’s mem-
bership in the Outdoor Voices community (Tolentino, 2019). Brands, in
short, are now produced well beyond the marketing department.
Dispersed production is also seen in crowdsourcing, where the “wisdom
of the crowd” is tapped through advanced information and communication
technologies (ICTs). The wisdom of the crowd becomes a “participative
online activity in which an individual, an institution, a non-profit organ-
ization, or company proposes to a group of individuals of varying know-
ledge, heterogeneity, and number, via a flexible open call, the voluntary
undertaking of a task” (Estellés-Arolas & González-Ladrón-de-Guevara,
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2012, p. 197). Crowdsourcing generally assumes one of four forms (see
Brabham, 2013): (a) where consumers or users provide data (sometimes
unwittingly through tracking technologies), to produce information about
an event or a practice (e.g., traffic blockages, fitness practices); (b) decom-
posing a large task into many smaller tasks that can be completed across the
members of the crowd, as with the micro-tasks of Amazon’s Mechanical
Turk (Irani, 2013); (c) creating a contest for members of the crowd to
work on a particularly thorny problem, offering a reward for a successful
response (e.g., at innocentive.com); or (d) asking the crowd for feedback
on a firm’s products and services. The ways in which the company engages
with the members of the crowd helps define that crowd as an ongoing
production resource (Piezunka & Dahlander, 2015, 2019). Across these
examples, prosumers contribute free labor to the brand identity through
fandom, posting reviews, and reacting to others’ posts on social media
(Banet-Weiser, 2012; De Kosnik, 2013). Prosumption, in other words, is a
recognition that brands are intimately woven into people’s lives, but brand
production escapes the firm’s full control.
Prosumption is but one manifestation of more encompassing techno-
logically mediated changes in organizational form. In the post-Fordist
organizational world, the combination of advanced ICTs and the influ-
ence of financial markets on firm governance has shifted the conventional
calculus regarding corporate conglomeration and vertical integration.
Dramatic reductions in coordination and transaction costs, coupled with
relentless pressure for profitability, created the conditions for the fissuring
(Weil, 2014), or “Nikefication” (Davis, 2016a), of the corporation: dis-
sembling the firm by reducing what is considered “the” corporation to be
only those elements most central to the provision of the key product, and
contacting with other firms for “nonessential” components. For instance,
professional service firms hire janitorial and security services, airlines
contract with ground service personnel, apparel manufacturers neither
own the factories nor employ the workers manufacturing their goods,
and ride-sharing companies consider drivers to be contractors rather than
employees. In such cases, the core competencies are understood to be
knowledge, design, marketing, and sleek platform-based coordination
mechanisms. The outsourcing of noncore functions can generate flexi-
bility for the firm’s management and reduce labor costs but can simultan-
eously increase the need to monitor contractors while sacrificing direct
control over work practices. And, of course, it contributes to the steady
precaritization of the workforce (Gill & Pratt, 2008).
Taken together, these two interconnected trends –branding and the
dispersion of production –signal sea changes in the generation of value.
But how do they make us rethink the firm? Put simply, they occasion a
shift in conceptions of “the” firm and its boundaries. What we take the
firm to be is no longer simply a nexus of contracts or a system inside of
which routines and resources combine, because many other forces clearly
participate in the firm’s existence and persistence. And if production is
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126 Timothy Kuhn

dispersed, the boundaries of the firm become considerably murkier. What
may be a more apt vision is an array of loosely coupled organizational
actors, animated by multiple and conflicting interests, exist in continual
renegotiation of influence and obligations (Davis, 2016b). Considering
the chapter’s guiding question, we would see that firms’ commitments
and goals (what corporations are for) are the ongoing outcomes of
interactions with an array of “stakeholders” –and that those interactions
are a key site of value generation.
Importantly, both trends discussed in this section are communica-
tive. This is so both in the way the multi-sited production of a brand
assumes center stage in an “attention economy” (Lanham, 2006) and in
the development of modes of coordination and control that afford the
possibility of distributed systems of production (Kuhn, 2012; Mumby,
2019). Any contemporary theory of the firm should be judged by its cap-
acity to account for such communicative practices in the constitution of
the firm. Moreover, given the focus of this volume, such a theory should
offer normative claims on firms’ activity that foster ethical corporate
action. Unfortunately, governance and capabilities approaches cannot do
so because they are limited in understanding the breadth of interactions
through which contemporary firms generate value (Benkler, 2002; Koza
& Thoenig, 2003; Scherer, Palazzo, & Matten, 2014). An alternative is
sorely needed.
A Communicative Theory of the Firm

How might we understand the firm –what should we consider the firm to
be –to account for, and to resonate with, these shifts in value generation?
Conventional theories of the firm, as mentioned in the introduction, see the
firm as an entity (even if a fictional one) that is the result of an aggregation
of either the transactions or resources comprising it. As mentioned earlier,
the simplifications of these models prevent them from responding to the
dual connotations in the “what are corporations for” question and limit
their ability to engage with the alterations in purpose guiding this volume.
What is needed is a theory that conceives of firms as both constituted by
the myriad of interests flowing through them and as responsive to the
models of value generation presented in the preceding section. To do so,
I draw upon Communication as Constitutive of Organization (CCO) the-
orizing (see Schoeneborn, Kuhn, & Kärreman, 2019). But because its
tenets and vocabulary are foreign to many in the interdisciplinary organ-
ization studies field, a brief introduction is warranted.
Communication as Constitutive of Organization

A first important element of CCO thinking is its move from a representa-
tional to a constitutive conception of communication. The typical concep-
tion of communication among organization studies scholars is to render
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it as that which occurs inside preexisting organizational forms, reducing
communication to messaging that expresses, or represents, the information
or intention held by the sender. Take, for instance, the notion of commu-
nicative ambidexterity, “the capability to simultaneously address different
and often conflicting communication needs that exist in an organization’s
internal communication, by achieving complementarity between different
communication modes” (Huang, Baptista, & Newell, 2015, p. 50).
Communicative ambidexterity is an outcome of the range of content
within messages and the diversity of the sources of (and channels for) those
messages; left unconsidered are the ontological status of the organization,
the origins of its “needs”, the local significance of the contrasting modes,
the motivations, and capabilities of the multiple participants in communi-
cation, and the inevitability of message ambiguity. When communication
is rendered in representational terms, analysts pay attention to efficiency,
speed, and veracity (whether messages match the “reality” they attempt to
represent). Communication, moreover, becomes epiphenomenal: an expres-
sion of other ontologically prior factors that possess no distinct generative
capacity of its own (Ashcraft, Kuhn, & Cooren, 2009). Such a view can be
useful when seeking to address relatively simple organizational problems,
such as those concerning the rate and accuracy of information transfer, the
reach of marketing messages, or the capture of information. Yet it stumbles
when consideration turns to more complex and ambiguous practices of
value generation, including branding amid prosumption. For endeavors
such as these, a more complex vision of communication is required.
An alternative family of perspectives portrays communication rather
differently than the representational view. In a constitutive stance, commu-
nication is understood as a practice that creates, recreates, and transforms
multiple and temporally fluctuating meanings (Putnam & Boys, 2006).
Importantly, a constitutive perspective sees meaning as exceeding human
actors: it is found neither in the messages actors exchange nor in their
individual minds, but in the practices in which they participate. Practices
do not simply index humans and their action; they involve a heteroge-
neous mix of that which we typically consider the material domain (e.g.,
artifacts, objects, sites, bodies) constitutively entangled with symbol-
using humans (Reckwitz, 2002). Communication, viewed as practice,
centers meaning generation while attending to the force of an array of
actors; it becomes “the process whereby human and non-human agencies
interpenetrate ideation and materiality toward meanings that are tangible
and axial to organizational existence” (Ashcraft et al., 2009, p. 42).
But how might this conception of communication produce an alterna-
tive vision of the firm? To address this, I turn to the notion of agencement.
Performativity and Agencement

One body of communication thinking extends CCO theorizing to pro-
vide a novel perspective on both the multiplicity of elements involved in
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128 Timothy Kuhn

constituting organizations and the conception of agency in organizing –
the issues on which the governance and capabilities approaches fall short.
This work finds its roots in Michel Callon and colleagues’ notion of eco-
nomic performativity, which explains how economic models create the
very phenomena (e.g., markets) they seek to describe. Of course, it is
not the mere presence of a model that brings a given reality into being;
it is the working of a complex and heterogeneous set of devices, discur-
sive resources, people, instruments, artifacts, tools, and spaces, bound
together in practice, that make performativity possible (see Callon, 1998,
2008; Callon & Muniesa, 2005). Borrowing from Deleuze and Guattari
(1987), Callon depicts this set as (an) agencement. Although the term
has no direct English translation, it signals simultaneously an assemblage
of elements, a noun, and is based on the verb agencer, “meaning articu-
lating, arranging, disposing, and setting” (Cochoy, Trompette, & Araujo,
2015, p. 3). As both noun and verb simultaneously, agencement draws
attention to the practices that create particular configurations of human
and nonhuman elements that become recognized as a particular social
form (Phillips, 2006).
Following this thinking, it is the agencement that acts –it is
action –rather than any of the individual components comprising it.
Most accounts of agency refer to ostensibly human characteristics
like desires, habits, and intentions, or to humanly created factors like
conventions, norms, and routines. Viewing agency in this way tends to
both reify and anthropomorphize the concept, considering action to be a
stable capacity of an established entity. To say that it is the agencement
that acts contests the typical conception of agency but is not a denial of
human intentionality. Nor is it an effort to ascribe agency to an abstract
collective actor with some version of “mind”. Instead, this move is a
recognition that agency is never a solitary accomplishment; every action
a person takes depends on an array of other factors for its accomplish-
ment (e.g., language to code and represent both the situation and the
action, along with tools and other persons to bring it to fruition), not
to mention the network of factors that created the conditions for the
person to be in the situation in the first place and to be recognized as a
choice-making font of intention.
That array of participants, for Callon and Deleuze, is vitally dynamic,
since agencements continually generate new relations in the conduct of
practice (Delanda, 2016; Gherardi, 2016). Agencement is thus also a call
to foreground flow (i.e., fluidity, becoming) in analyses of organizing,
thereby avoiding the conventional starting point of preexisting entities
(Chia, 1999). As a simple example, entrepreneurship scholars examine
how entrepreneurs use ICTs in their work by conceiving of persons and
work as ontologically stable and distinct; alternatively, a performative
engagement with agencement might examine how the continual circu-
lation of messages about entrepreneurial “hustle” combines with the
hybrid agency of bodies +ICTs +expertise +situations +capital +sites
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(as constitutively entangled participants) to become standard depictions
of entrepreneurial working and personhood (e.g., Bröckling, 2015).
Agencement, then, acknowledges the assortment of forces that need to
be assembled for action to occur, and agencements’ configurations differ
across the varied practices they produce, such that a financial market will
differ from a production system or an educational practice (Çalişkan &
Callon, 2010). The assembly occurs, and the configuration hangs together,
because of the meanings, produced in communication, that are bound
up in the agencement’s practice. If firms are agencements, moreover,
they are nodes through which production, economic exchange, image,
and the like flow. An analysis of the firm as agencement, accordingly,
would be interested in how flows generate the particular configurations
of participants that become defined as possessing the authority to act
as a corporation. Further, as mentioned earlier, agencement highlights
dynamism: “Multiple forces (e.g., random events, saying and doings of
distributed actors both powerful and weak, overflows and misfires) can
lead to shifts in agencements, which in turn changes the power of actors
to speak and act” (Garud & Gehman, in press, p. 8).
Key for the present purposes is that the constitution of the agencement
is a communicative process. Deepening the basic definition of communi-
cation offered above (by Ashcraft et al., 2009), a performativity stance
portrays communication as the symbolic-material process of meaning
construction associated with (a) inclusion or exclusion of elements in an
arrangement, (b) coupling of elements to generate (or constrain) agency,
delineating distinct spheres of activity, and (c) generating narratives
regarding a configuration that foster (or inhibit) particular forms of
action (Kuhn, Ashcraft, & Cooren, 2017). This is certainly a clunky and
opaque definition, but its upshot is that communication names the pro-
cess that generates the meanings that stich participants together in the
agencement. At the same time, communication is simultaneously the site
of action where tensions over meaning emergence unfold.
Authoritative Texts
A critical question confronts this positioning of communication as the
mode by which the agencement is created, sustained, and changed: what
is the selection process guiding the configuration (and thus also the inclu-
sion/exclusion) of participants? Who or what is able to decide upon
the elements considered “inside” and “outside” what is taken to be the
firm? These questions imply authority –but not the one most common in
organization studies.
Authority typically refers to a right (usually for an individual) to inhabit
a role and determine the actions of others toward presumably collectively
valued ends (Barnard, 1938; Grimes, 1978; Kahn & Kram, 1994). In this
sense, authority references decidability: having (or being seen to have)
the “right to the last word” (Simon, 1997, p. 182) in decision-making
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practices (Aghion & Tirole, 1997). Refracting authority through the lens
of performativity would frame the notion as not so much a feature of a
person or a position, but as a characteristic of a practice. Picking up this
line of thinking, a CTF (see Kuhn, 2008, 2012, 2017; Kuhn & Ashcraft,
2003) nominates a resource that shapes decidability in the agencement:
the authoritative text (Koschmann, 2013).
As participants are implicated in a given practice, the collective coalesces
around a set of emergent meanings that consolidate the characteristics of
the dynamic and heterogeneous practice we tend to truncate as “the”
organization. In so doing, a set of meanings allow the development of
a continually (re)accomplished narrative (as in the refined definition of
communication at the end of the preceding subsection) representing the
firm’s conception of identity, obligation, and direction: what the firm is
(and is not), where it should be going, and how it’s going to get there.
In performativity theorizing, this authoritative text is not a “text” in the
conventional sense, because it consists of a conglomeration of concrete
texts, those with a relatively tangible existence because they are inscribed
in a physical form (e.g., documents, email, images, objects), and figura-
tive or metaphorical texts, “abstract representations of practice sites . . .
inscribed with common or valued elements of the group and discourses of
the surrounding environment”) (Kuhn, 2008, p. 1234).
An authoritative text directs the becoming of the firm-as-agencement.3
First, because it is a narrative representation of a collective, it can mediate
local practices and link them to the encompassing logic of a practice
(Holm & Fairhurst, 2018). The content themes written into the authori-
tative text direct actors’ attention and discipline their activity (Fenton &
Langley, 2011; Koschmann & McDonald, 2015; Vaara, Sorsa, & Pälli,
2010). Second, because all texts can be seen as “authored” by the efforts
of participants to “inscribe” their interests onto the firm’s purpose and
operations, authoritative texts are the sites of struggles over meaning. In
other words, authoritative texts include and exclude particular interests,
and those interests shape decisions regarding ownership of the firm and
who can claim to be its legitimate representatives (Bencherki & Bourgoin,
2019; Taylor & Cooren, 1997). The next section elaborates this claim.
Communication as Writing the Trajectory of Practice

The authoritative text a key lever for an alternative theory of the firm
because it is not merely an ordering device (configuring the participants
comprising the agencement), but a narrative that functions strategically
in the attraction of capital. Strategy, says Grant (2019), refers to how
firms configure (a) goals and values, (b) resources and capabilities, and
(c) structure and systems within an environment. As one plank of an
authoritative text, strategy serves as a decision support, a coordination
device, and a statement of ambitions, all in the service of sustainable
competitive advantage (Barney & Clark, 2007). And configuration can
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happen only through the meanings emerging in communication. The CTF
addresses how the strategic character of the authoritative text influences
boundaries, capital, and the notion of the firm as a “gamepiece”.
Boundaries. When we see the authoritative text as a strategic commu-
nicative resource, two implications follow. First is about boundaries. The
notion of agencement can refer to a wide array of flows and the (non)
human participants implicated in them; analyses of practices of housing
markets (Lovell & Smith, 2010), hedge funds (Hardie & MacKenzie,
2007), and scallop fishing (Callon, 1984) show that the arbitrariness of
boundary-drawing implies that the configuration of agencement could
always have been otherwise –it could always include or exclude different
practices and participants. Because one of the key questions for a theory
of the firm, as mentioned earlier, is boundary specification, the CTF’s
response might appear unsatisfying. Agencement consists of all the flows
and participants involved in firm production –and by “production”, the
theory means both the sort of dispersed production of salable goods and
services discussed earlier, as well as the production of the firm as an agent
itself. Clearly, not all the elements involved in these sorts of production
lie “within” the constructed boundaries of the firm, as prosumers, legal
codes, suppliers, transportation infrastructure, and the like are often
rendered “outside” that which is considered “the” firm.
What is inside and outside is a question of what Deleuze and Guattari
(1983, 1987) call territorialization: the identification of conceptual and/
or physical space as belonging to a given practice. Territorialization is
ultimately an empirical question, one driven by the authoritative text and
its narrative of firm strategy. In its articulation of what the firm is (and is
not), where it should be going, and how it’s going to get there, the authori-
tative text adjudicates which flows and objects are to be considered inside
and which outside (and, as Oinas (2006) notes, the location of bound-
aries is likely to shift depending on the practice at issue). Of course,
such an adjudication is not merely the province of a firm’s executives:
witness contract workers employed by firms in the gig economy, where
firms like Uber and Lyft have found that narratives characterizing stra-
tegic boundaries get revised when they encounter the agency of other
parts of the agencement that executives had not adequately considered
(Burns, 2019). The point, however, is that there is no Archimedean point
from which we may view “the” organization and determine its bound-
aries unambiguously. Instead, the CTF looks to the models of authority
inscribed into authoritative texts to ascertain where the firm’s bound-
aries lie with respect to a given issue of concern, considering which flows
and participants comprise the enterprise in any particular case. What this
means is that the authoritative text operates in circular fashion, nomin-
ating the (human and nonhuman) participants taken to be organization-
ally authoritative and, at the same time, providing them a resource for
determining which participants are inside and outside the firm (i.e., which
ones are authorized to engage in the practice).
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132 Timothy Kuhn

Capital. A second implication of framing authoritative texts as
strategy narratives concerns the “what are corporations for” question.
Because the production of value always involves many competing parties
and interests (Laasch, 2018), the CTF portrays firms as the tension-
riddled outcomes of efforts to not only determine which interests gain
precedence, but also to attract capital from those sources. And the forms
of capital are many: economic (control over assets, including money and
other financial instruments), social (connections to others, particularly
those who provide support), cultural (forms of knowledge, a mastery of
language, or possession of socially valued goods), and symbolic (attribu-
tion of prestige or honor by others) (Bourdieu, 1991). Of course, these
types are intimately tied up in the production of one another: a brand, for
instance, may be situated as symbolic capital, but branding requires the
display of cultural capital and the presence of social capital in the pursuit
of economic capital. The CTF sees communication practices, guided by
the strategic narrative of the authoritative text, as creating an agencement
interested in attracting and accumulating those various forms of capital.
Communication is the mode by which (a) the human and nonhuman
elements of the agencement are configured, (b) the narrative of the firm
emerges and exercises influence, and (c) the firm charts its trajectory of
practice. Although the conventional version of shareholder value depicts
social, cultural, and symbolic capital as important only to the extent that
they aid in the attraction of economic capital (e.g., Coff & Rousseau,
2000), there are alternatives that suggest valuation, even in corporations,
can work rather differently than the shareholder value thesis would
suggest (Collins, 2017). The CTF holds the dominance of any particular
form of capital as an empirical question, one determined by the logic
of the practice marking an agencement –and thus one always open to
revision.
Gamepieces. One of the dual meanings of the “what are corporations
for” question is about the uses to which firms can be put. The CTF argues
against the notion that the firm is an entity “inside” of which activity
occurs; instead, it directs attention to how (what is taken to be) “the
firm” is marshaled as an agent in a wide range of commercial activities.
Legal scholars often frame this function of the firm as the corporate per-
sona (Blair, 2013), referring to a metaphorical move to allow the firm to
enter into contracts and attract identifications (though they are usually
unaware of the CCO scholarship on this topic). The CTF extends the
function of the textual representation of the firm, as a persona or other-
wise, to suggest that the firm becomes a critical “gamepiece” in efforts
to attract a variety of forms of capital (Kuhn, 2008). Describing the
agencement in terms of a gamepiece is enabled by flows associated with
encompassing traditions of corporate law that provide firms (as opposed
to other organizational forms) limited liability, magnification of voice,
centralization of control, principal-centric capital flows, and succession
in property claims –encapsulated in the notion of corporate privilege
31

(Millon, 1990). The point, then, is that the firm in the CTF is not a vessel
containing and bounding productive resources and routines (as in cap-
ability approaches) but is an outcome of the flows that enable a firm to
both exist and claim particular rights.
Summary. This section has presented a depiction of the firm as a contin-
gent communicative product, one generated by both encompassing flows
(of capital, legal codes, and the like) and local narratives of practice (as
represented by the authoritative text). Accordingly, one CTF response to
the “what are corporations for” question is that firms become gamepieces
deployable to serve the interests of those authorized by the authoritative
text to determine what it is to be used for (including the privatized accu-
mulation of capital). But because the conceptualization of the authorita-
tive text acknowledges that a multiplicity of participants seek to inscribe
their interests, the deployment of the firm is always potentially open to
contestation.
The second connotation of “what are corporations for” invokes both
strategy and belief (i.e., what do they stand or strive for). As a narrative
that authorizes particular actors to draw boundaries that include/exclude
participants, the authoritative text articulates a corporate purpose. As
suggested in the previous paragraph, authoritative texts are not simply
vehicles for managerial influence (again, a point of contrast with govern-
ance and capabilities approaches); they are sites of struggle over the firm’s
trajectory. If the CTF is to shed light on how firms’ purposes might serve
interests beyond those inside its conventional boundaries, the next step is
to consider how the CTF might frame practices that shape firms’ interests
(what the corporation is for) as generating value under communicative
capitalism.
Producing What Corporations Are for: Two Themes toward

an Agenda
This volume represents an effort to think against the grain when it comes
to firms and our theories about them. When it comes to considering
how corporations might be marshaled to produce societal benefit (as
Korten’s chapter and Larry Fink’s letter hope), governance and cap-
abilities approaches tend to have little to offer. Some authors accuse
commentators like Korten and Fink as misplacing responsibility:
corporations serve their shareholders/principals, they say, so the produc-
tion of social benefit should come only from governments, charities, reli-
gious orders, and NGOs (Davis, 1973; Husted & Salazar, 2006). Others
suggest that corporations suffer from a sort of myopia, where the sheer
scale of pressing social problems either prevents leaders from seeing
those issues as implicating the firm (Campbell, McHugh, & Ennis, 2019)
or encourages them to relegate such challenges to “business as usual”
(Wright & Nyberg, 2017). A CTF response starts, instead, with the claim
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134 Timothy Kuhn

that firms are the effects of boundary-creation activities engineered by
authoritative texts operating in agencement.
The stance in the preceding section argued that firms develop an
authoritative text to represent the collective’s narrative of identity, obli-
gation, and trajectory. Moreover, the authoritative text was described as
a guide for a firm’s efforts to configure the agencement. Taking Weber’s
(1947) identification of three primary sources of legitimate authority
(i.e., legal/
rational, traditional, and charismatic) can help trace the
relationships between the logic guiding the authoritative text and the con-
figuration of the agencement.
There is no simple one-way causality moving from a firm’s authori-
tative text to the participants and practices marking agencement; the
forces populating the agencement can alter the firm and its authoritative
text as well. Acknowledging that a communicative vision of influence
in and through agencement offers a different model for thinking about
the relationship between “stakeholders” (a well- worn term; activists,
social movement organizations, or counterpublics may be more apt) and
a focal firm, one path to producing societal benefit is to investigate how
the complex relations between activists and firms may produce substan-
tive change at the level of the corporation’s purpose (what it is for). Such
an investigation would necessarily decenter the firm and its principals
as the sole site of agency, and instead look to other participants in the
agencement, activated by (intentional and accidental) events, that can gen-
erate emergent reconfigurations. In short, a path toward understanding
“what corporations are for” is to consider how they can be affected by
particular interest advocates –which can lead to investigations of how
firms might be influenced in the pursuit of more broadly beneficial ends.
The next two sections engage with this issue.
Charismatic Authority and Corporate Personhood

One of the key moves for scholars interested in reforming corporations is
to take up the notion of corporate personhood, the Western (and largely
U.S.-led) tradition that the firm can be considered a person, as a legal
fiction, in the eyes of the law. To many in organization studies, the notion
of corporate personhood is confounding. Framed as something of a legal
accident that occurred via a misappropriation of an amendment to the
U.S. Constitution, corporate personhood anthropomorphizes a non-
human in a way that gives “it”, or its authorities, control over collective
resources while shielding actual humans from culpability for wrongdoing
committed in the corporation’s name (Hartmann, 2002; Ribstein, 1991).
Personhood is an ontological claim crucial to legal proceedings, but one
that often stands in opposition to organization studies’ interest in the
functions corporations play in society (Petrin, 2013). Consequently, the
notion of corporate personhood has been less central in organization
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studies, though some endeavor to exploit the notion by insisting that if
the corporation is a person, it should be encouraged to become a respon-
sible citizen, with the attendant obligations (Matten & Crane, 2005;
Néron, 2010). And although contemporary debates revolve around
concerns about the political power accruing to firms as a result of the
personhood doctrine, the legal notion has typically been marshaled for
progressive social causes that constrain corporate power (Johnson, 2012;
Winkler, 2018).
The intricacies of the debate around corporate personhood are outside
this chapter’s scope. To be clear, I am not interested in anthropomorph-
izing the firm; the interest here is in exploring how a given legal doctrine
enables a particular model of authority to be written into a firm’s trajec-
tory. Specifically, the corporate personhood notion tends to enable a cor-
respondence between the moral commitments of founders/executives and
“what the corporation is for” (Blair, 2013; Shever, 2010). The CTF can
guide analyses of how founders’/executives’ personal interests become
central to the operation of the firm (without insinuating anthropo-
morphism) by focusing on the authoritative text. Because the authorita-
tive text is a conceptual vehicle for grasping relations of obligation and
the firm’s trajectory, investigating the practices that inscribe themes into
it is a key to understanding how such a correspondence might occur.
Acknowledging that (human and nonhuman) participants of all sorts
vie to “write” their particular commitments into the firm’s authori-
tative text, a necessary analytical move is to consider the implications
of founders’ inscriptions for the practice of agencement. Consider two
(admittedly cursory) examples. First is Patagonia, the outdoor clothing
company. Founded in 1973 by Yves Chouinard and still privately
owned, Patagonia –taken as an entity, a noun, for the time being –
has demonstrated a commitment to attracting capital beyond the eco-
nomic. Early decisions by Chouinard to prevent the company’s products
from causing environmental detriment led to sacrificing one of its best-
selling items, as well as to use only industrially farmed cotton, both after
receiving pressure from activists. The commitment was thus written into
the firm’s authoritative text early on, and it also led to its recent certifica-
tion as a Benefit Corporation (B Corp). With respect to the agencement
in and through which it operates, Patagonia (via the agency associated
with agencement) draws from its authoritative text to opine in the public
sphere about U.S. government plans to develop public lands, share infor-
mation with competitors pursuing environment-friendly materials, and
cease co-branding its ubiquitous fleece vests with the logos of financial
services companies (Casey, 2007; Chouinard & Stanley, 2012).
A second example is Hobby Lobby, the (also privately held) American
craft store founded in 1972 by David Green. Green’s Christian beliefs
are a central element of the company’s practices: its 600 stores are closed
Sundays, and company funds support a network of activist groups that
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136 Timothy Kuhn

advocate for further encoding a Christian agenda in U.S. law (Clifton,
2014). In a book that is both business tome and biography, Green (2005)
provides his first key for retailing:
Run your business in harmony with God’s laws. This will keep you
on an ethical footing. Seek to please God in everything you do.
(p. 11)
In the same volume, Green discusses Hobby Lobby’s unequivocally reli-

gious character:
This whole assumption on the part of many people that there should
be a Jeffersonian ‘wall of separation’ between faith and business is a
view I have never accepted. I am who I am, a merchant who believes
in and respects Jesus Christ.
(pp. 163–164)
Green’s Christian commitments are embedded in the company’s everyday

practices: many of its advertisements are explicitly religious (many with
only a small notation of the company as sponsor), religious music plays
in its stores, the company refuses to stock ashtrays (“we believe cigarettes
as a poor way to take care of the body God created for every human
being”: p. 166), it employs a chaplain at its Oklahoma City headquarters,
and all employees receive a Christian “Character First” training as part
of orientation.
Among organization studies scholars, Hobby Lobby is probably best
known for its September 2012 U.S. Supreme Court case resisting the man-
date within “Obamacare” (the Patient Protection and Affordable Care
Act) that health insurance provided by employers include contraceptives.
Drawing upon the Religious Freedom Restoration Act, a conservative cus-
tomer base (along with conservative justices on the U.S. Supreme Court),
alongside the doctrine of legal personhood (especially in the case of a
“closely held” firm guided by the Green family’s religious beliefs), Hobby
Lobby won the case, weakening the law’s contraception requirement.
It may be tempting to judge one of the other of these companies as cre-
ating “the good”. But my interests turn more to what these tell us about
the relations marking agencement and the lessons for the CTF –and how
these cases can help answer the what are corporations for question. In
the terminology of Weber (1947), both firms appear to employ a charis-
matic model of authority, as a logic of practice written into the authori-
tative text. As a resource for legitimate authority, charisma refers to
how decidability results from signaling a renunciation of conventional
business practice, especially when established practices are portrayed
both as morally misguided and as associated with a social crisis. In the
case of Patagonia and Hobby Lobby, a charisma-based authoritative text
led both firms to stake positions associated with their founders’ personal
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interests. Those positions, predictably, provide a distinctive brand. An
authoritative text reliant on charisma would likely seek not only eco-
nomic capital, but also concentrate on capital’s symbolic and cultural
forms, particularly in terms of the prestige associated with the brand and
the relations the brand enjoys with respect to particular lifestyles (here,
outdoor, and religious lifestyles). Purposes like these, written into the
authoritative text, make it clear that what these corporations are for is a
direct result of the founder’s beliefs. At the same time, the firm becomes a
powerful gamepiece, one that generates greater influence: each firm is for
the more effective accomplishment of founder’s goals.
Stripping away the unwieldy vocabulary, the preceding point is fairly
straightforward: it is a restatement of one of Larry Fink’s assumptions
that opened this chapter (that firms take on the purposes their CEOs
want them to take on). The CTF, however, provides additional insight.
Drawing on the argument of Bennett (2010) that understanding practice
requires attending to what agency avoids, we can see that charismatic
authoritative texts make corporations into agents that benefit from (they
are for) crises flowing through the agencement. In the Patagonia and
Hobby Lobby cases, these crises would be environmental predicaments
and the absence of Christian morals in commerce. The lack of these flows
would strip the firms of both a key foil and a central plank of their reason
for existence. The CTF would urge analysts to consider participants in
the agencement as including not only persons, firms, and resources, but
also fleece vests, ashtrays, government- mandated contraceptive care,
investment banks, funds flowing to activist groups, gospel music, biblical
verses, public lands, and legal codes. By understanding organizing as the
configuration of these participants in an effort to attract multiple sorts
of capital, crises become central elements because they are key to the
claim of urgency. Obviously, the human actors who claim leadership over
Hobby Lobby and Patagonia see their activities as responses to (rather
than responsible for) such crises, but, given the aforementioned dispersal
of agency, the CTF would encourage an examination of how the model
of authority depends upon continued crises to attract cultural, symbolic,
and economic capital.
Following this reasoning, a crucial investigation would address
how authoritative texts transform when events affect the flow of crisis
through the agencement. Events that attenuate or disrupt the ongoing
production of crisis –those that alter the configuration by shifting
the grounds upon which the firm’s claim to (moral) authority rests –
modify the value calculus. Such crises could be long-simmering social
problems like environmental degradation or an iniquitous secular
society, but they could also be temporally bounded events. Though
the specifics are impossible to anticipate, the general categories of
events that could rewrite the authoritative text would likely include
(a) those that challenge the authenticity of the connection between
human leader(s) and the image of the firm (Guthey, 2004; Steckler
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138 Timothy Kuhn

& Clark, 2019), or (b) events that allow agencement participants to
replace the capital attracted from the firm (e.g., locating a superior
outlet for responding to a crisis). By way of example, in the past sev-
eral years in the United States, activists pushing for LGBTQ rights
have found success both in the legal system and in the court of public
opinion; when anti-LGBTQ laws passed in conservative legislatures,
activists used the legislation to spawn counter-events that pressured
corporations to threaten economic divestiture from those states
(Ashcraft & Kuhn, 2018; Surowiecki, 2016). Similarly, when activists
discovered that high-profile technology companies like Apple, Google,
Amazon, Salesforce, and Microsoft were collaborating with the
U.S. military and law enforcement agencies, activists’ efforts to expose
the agreements –an event calling attention to a crisis –led those firms’
employees to exert pressure on their managements to halt the projects
(Captain, 2018; Jenkins, 2018). Importantly, activism is not restricted
to preventing a firm from taking a particular action: Carberry, Bharati,
Levy, and Chaudhury (2019) found that interactions between envir-
onmental activists and corporate managers led to product and process
innovations in firms that would not have been realized in their absence.
What these examples show is that the simple assertion of commentators
like Larry Fink (that firms take on the values their CEOs hold), and which
would underwrite the stance taken in both the governance and capabilities
approaches to social responsibility, cannot be sustained. Organizing is far
more complex than that, and only a theory that attends to the complex
and shifting mix of forces, interests, actors, and events can account for
such complexities. Though the enactment of the authoritative text cannot
be known outside of a more detailed investigation of specific firms, these
examples illustrate how crises flow through agencements. Activists, in
turn, are important participants in the emergence and alteration of those
crises. What the CTF argues, therefore, is that the “what are corporations
for” question cannot be reduced to a charismatic founder’s imprinting
interests on the firm’s purpose, even if enabled by the doctrine of cor-
porate personhood. What the corporation is for, instead, is an accom-
plishment of the multiplicity of forces, including activism, producing
agencement –forces which constitute a firm’s authoritative text.
Activism and Algorithms

A second implication of pursuing the “What are corporations for”
question is a further consideration of the flow of influence from
participants in the agencement toward the authoritative text. Wherever
firms’ boundaries can be said to lie, corporate environments are
populated with actors seeking to alter practice. At the same time, as
mentioned earlier, firms use consumers as part of dispersed production
practices through the free labor that accrues from the consumer engage-
ment with a given firm’s (or its partners’) services. These engagements
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leave data traces produced by exchanges, such as those tracking physical
movements, charting online activity, and compiling records of messages
(like posts to social media).
Efforts such as these are by now a surprise to no one, and critics have
long expressed concern about the corporatization of electronic media
and its incursion into the private sphere (e.g., Feenberg, 1999). It is also
well known that the flow of data from the activities of its generators
to the firm meets significant resistance from counterpublics arguing for
greater privacy protection (Fuchs, 2014) and activists pushing for pub-
licly funded data analysis tools and greater government control over data
privacy (Victor, 2013). Framing the issue as one of simple resistance to
power, however, sacrifices an understanding of how firms are communi-
catively constituted. In other words, what is often understood as a power-
resistance dynamic is also a mode by which firms are generated; it is a
question of how the “outside” moves “inside”.
The CTF approaches this issue by acknowledging that the flow of data,
and the data’s processing by algorithms, is increasingly seen as essential
to corporate competitive advantage through enhanced decision-making
and micro-targeted resource planning. Decisions about hiring workers,
scheduling shifts, setting prices, purchasing inventory, highlighting par-
ticular content, targeting marketing messages, and anticipating con-
sumer preferences are increasingly the province of algorithms, which
can both consider much more data, be more sensitive to contingencies,
and choose more quickly than could any human (Mayer-Schönberger &
Cukier, 2013). Carbonell (2016), for instance, depicts agribusiness firm
Monsanto’s requirement that farmers using its seeds sign a “Technology
Use Agreement” that secures the gathering and transmission of data to
the firm. Through its subsidiary Climate Corporation, Monsanto places
sensors on equipment and links that with data from U.S. government
sensors and weather stations, potentially informing the farmer’s routine
decisions (with the more valuable information available via a monthly
subscription). The corporation
can monitor and track what is in the soil, what the weather is, what
kind of products the farmer is using, how much she’s producing, how
much profit she’s making; in short, laying bare all the intricacies of a
farmer’s business.
(n. p.)
Likewise, the global behemoth Amazon is well known for gathering

tremendous amounts of data regarding its own employees’ performance
from a myriad of sources, using those data to cull those who produce
relatively less in its “high-performance” workplace (Kantor & Streitfeld,
2015). Analysts often frame practices like these as reflecting a pervasive
logic of corporate practice where the model of authority promises effi-
ciency and superior yield. Consumers and employees become resigned
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140 Timothy Kuhn

to (and even profess to enjoy) these practices as they assume the roles of
data generator and object.
A model of authority rather different than that in the preceding section
appears to be operating in cases like these. Though firms of all stripes val-
orize the exploitation of data, the focus on programmed decision-making
and efficient operation evidence what Weber (1947) called a legal-rational
model of authority embedded in these firms’ authoritative texts. This
form of authority responds to a felt need for order (and a fear of disorder
and arbitrariness), which tends to associate legitimate authority with the
rules of an impersonal, bureaucratized system (Weber, 1978). The focus is
on rules and procedures that emanate from a “rational” system, assessed
by means-ends calculations in which economic capital is the only logical,
“objective” measure. Algorithms become one of the authorized sites of
decidability.
Yet many such algorithms are proprietary and behind firms’ (artificial
and proverbial) walls, leading critics to argue that algorithmic manage-
ment only further cements legal-rational forms of authority in corporations
(Schild, 2017; Totaro & Ninno, 2016). Activists –again, as participants
in firms’ agencements –are beginning to target these algorithms as sites of
potential intervention. Some of their efforts fall under the broad mantle
of hacktivism, a term addressing creating (or disrupting) computer code
to advance a particular political agenda. Hacktivism can take the form of
contributing to the circulation of messages on social media, or it can be
part of an attack on corporations’ digital assets, disrupting their ability
to conduct routine business. An expansion on this idea is the notion of
digital activism:
examining, manipulating, leveraging, and exploiting data, along-

side with resisting and meddling in their creation and use: in other
words, the “antiprograms” citizens enact as “line[s]‌of escape from
the determinism” of algorithmic-mediated big data. . . . it treats big
data simultaneously as the tool and the end of struggle.
(Milan, 2017, p. 153)
By way of example, take the case of Uber drivers –classified as contract

workers rather than employees –who have devised approaches to manipu-
late the company’s pricing algorithm. In large cities, drivers coordinate
times to log off the Uber app en masse, which is processed by the algo-
rithm to register as a lack of available drivers, triggering “surge pricing”
for customers, and thus higher fares for drivers (Möhlmann, Zalmanson,
& Henfridsson, 2017). Or consider activists’ efforts to define Twitter
hashtags. Because Twitter has become a site for the projection of a cor-
porate persona, data activists often engage in deliberate attempts to con-
test the company’s preferred image. In a study of two large corporations’
Twitter activity, Albu and Etter (2016) suggest that the communicative
constitution of the firms was the result of many hypertextual relations,
1
4

only some of which were controlled by the firms’ public relations units. In
other words, Twitter-based activists exploited the technological features
of the platform to disrupt the dispersed production of a brand so critical
to communicative capitalism. In these two cases, the actors pushing for
organizational change were not the firms’ employees but were certainly
part of the enterprises’ agencements.
When activists engage with a firm in these ways, management typ-
ically assumes a defensive posture, seeking to protect the firm’s assets
(such as algorithms and corporate image). Roberts (2004) even urges the
management of modern firms to “structure decision processes so they
are less susceptible to influence. Firm adherence to bureaucratic, inflex-
ible rules can be an example” (p. 101). The CTF, however, reframes the
value of the relation. Specifically, rather than viewing data activism as
a threat to firms’ property and managerial power, it becomes a partici-
pant in the agencement. In other words, rather than understanding data
activism as an impediment to the efficient flow of data and operation of
algorithms, it becomes a resource for amending the authoritative text to
break with a legal-rational stance and accommodate ongoing change.
How can it be thus, and what are the consequences of framing data
activism this way?
The CTF frames the key question as one of property: data generated
from physical locations, browsing activities, exercise habits, keystrokes,
sleep patterns, and the like are neither ephemeral nor immaterial –they
are human activity made into physical, tangible matter (Ritter & Mayer,
2017). Activists often ask if the relevant firms are in favor of (are they
for) harvesting, exploiting, and concealing the data that is (asserted to be)
the private property of human generators without compensation. Data
activists urge people to withhold their data, demand reimbursement, or
generate false data to push firms to alter their algorithmic management.
Activism of this sort could engender modifications to firms’ authorita-
tive texts if managements recognize a need to position their algorithms
as providing value to the participants from whom the data are drawn.
Activists might seek to become part of decision-making processes on this
basis or, alternatively, governments might stipulate shared governance of
algorithmic assets.
Regardless of the form of interest representation and the muscle
behind it, the claim here is that data activism need not be regarded
simply as a threat to business practices. Instead, the argument is for algo-
rithmic collaboration, one likely to produce the sort of new connections
agencement seeks: the attraction of cultural or symbolic capital through
fresh partnerships (Hoepner & Li, in press) or possibilities for product
or process innovations (Carberry et al., 2019; Laasch, in press). If firm
strategy and practice proceed through the dispersed production of value,
collaborating with data activists on the firm’s trajectory can be a route to
simultaneously protect generators’ data and create advantage for the firm.
From the perspective of the CTF, answering the “what are corporations
2
4
1
142 Timothy Kuhn

for” question requires a consideration of the many participants deter-
mining their interests and obligations.
Summary
Drawing on the CTF, this section has presented two implications that
sketch possibilities for influencing firms in the direction of social benefit.
The first, Charismatic Authority and Corporate Personhood, takes up
the notion that the legal resources of corporate privilege (Millon, 1990)
enable the alignment of founders’ (social and moral) commitments
and expressions of what their corporations are for. Connecting with
Weber’s notion of charismatic authority led to a recognition that
authoritative texts exist in relation to the flow of crisis through the
agencement, but that other participants and events can stimulate or
unsettle the crisis in ways that refashion a focal firm’s authoritative
text. The second, Activism and Algorithms, suggested that firms that
rely on algorithmic management display authoritative texts that tend
toward the legal-rational. Those firms can be made to be for alternative
engagements with property through digital activism when the benefits
of collaboration for capital attraction become evident. Both cases offer
novel (though admittedly speculative) possibilities for altering the value
calculus characterizing agencements and encouraging alterations in cor-
porate purposes.
Conclusion
This chapter pursued an alternative to existing theories of the firm by
asking a deceptively simple question: what are corporations for? It began
by suggesting that high-profile business commentators like BlackRock’s
Larry Fink see this sort of question as implying a need for corporate
purposes to foreground social and environmental concerns. An add-
itional connotation of the question encourages a consideration of how
firms become gamepieces in the service of particular ends, such that
corporations are useful for the ends authorized actors put them. Answering
the challenge issued by Fink, as well as Korten (this volume), requires a
theory rich enough to address organizing practices that extend beyond
what is conventionally taken to be “the” firm, including the branding and
dispersed production associated with communicative capitalism. Because
they depict firms as either artifices that foster production or systems
inside of which managers control resource deployment, governance, and
capabilities theories of the firm are unable to explain the dual conception
of the firm in the “what are corporations for?” question and constrained
in addressing value generation processes that extend beyond the conven-
tional boundaries of the firm.
In response, the chapter argued for the development of a CTF founded
on CCO theorizing. If the “what are corporations for?” question forces
3
4
1

us to consider the multiple (human and nonhuman) participants pro-
ducing corporate purposes and practices, a model of organizing that
portrays the firm as a contingent product of the interplay of a multi-
plicity of participants is necessary. The concept of agencement, and the
logic of practice encoded in the authoritative text, does just that. The
authoritative text becomes a vehicle to examine how various forces vie
to author a firm’s narrative of strategy and trajectory. The chapter then
built on that vision to develop two implications that can form research
programs that add flesh to the bones of the CTF. Running throughout has
been the claim that the CTF is superior to governance and capabilities
approaches because it relies on a more sophisticated model of organiza-
tion that explain how firms’ articulations of purpose are tied to struggles
over authority, which invoke participants and interests rendered periph-
eral to “the” firm in conventional theorizing. Further, the CTF provides
a justification for understanding firms as sites of heterogeneous interest
negotiation by showing how value generation is associated with openness
to contests over authority (e.g., from data activists).
Foster (2017) argues that developing a theory of the corporation must
disturb the common belief that corporations are things, entities that can
be understood only as distinctive kinds of property. Doing so “would
make more visible more of the web of connections among stakeholders
that comprise the operations of, for example, global energy or global food
corporations” (p. 128). By framing the corporation as communication
and not simply a site inside of which communication occurs; by framing
communication as meanings emerging from a complex agencement and
not as the representation of actors’ intentions; by framing authority not as
a position but as the practice of shaping decidability and trajectory; and
by framing authoritative texts as resources for grasping firms’ strategy
and activists’ influence simultaneously, the CTF provides insight into the
web of connections that generates –and transforms –what corporations
are for.
Notes
1 Although there is precedent for using “corporation” to refer to a legal/juridical
concept and “firm” to an economic one (Robe, 2011), there is also significant
conceptual overlap in the literature (Deakin, 2017). I shall therefore use the
terms interchangeably in this chapter.
2 Jodi Dean, who coined the term communicative capitalism, is a political the-
orist; her interests tend more toward the politics of everyday life and threats to
democracy. As such, she is relatively uninterested in the modes by which firms
make claims to value, so this section builds on the basic insight by drawing on
other thinkers who have picked up the notion.
3 The term “authoritative” marks the text’s power and influence over the config-
uring of the agencement’s participants, while also indicating that authority can
be associated with a text only if it is deployed in practice in a way that, through
its influence on decidability, shapes organizational trajectory.
41
144 Timothy Kuhn

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7
Toward a “We”-Mode Team
Production Theory of the Firm
A Confucian Approach
Alan Strudler, Matthew Caulfield and
Tae Wan Kim
One hundred years ago, Max Weber in Religion of China (1915/1951)

conjectured that Confucianism would not bring about economic devel-
opment. He asserted that the philosophy limits the separateness of indi-
viduals and each individual’s calculative rationality, which he famously
theorized as a key explanation for the industrialization of Europe and
capitalism (Weber, 1904–5). Yet, had Weber lived to see contemporary
East Asian societies, as Peter Berger (1988: 7) once imagined, Weber
would say, “Well, I was wrong!” Echoing this reality, the Harvard phil-
osopher Weiming Tu (1988, 1989, 1996, 2000) and the futurologist
Herman Kahn (1979) argued that Confucianism’s team-oriented values
including role obligations, authority, and harmony are major factors in
explaining the rise of industrial East Asia (see also Hofstede & Bond,
1988; Hofstede, 1980, 2007, 2011).
The Confucian perspective focuses on relationships, groups, and
organizations, not the discrete individual. This perspective aligns well
with recent advances in Western business research, including theories of
the firm, theories of strategic management, and theories of corporate gov-
ernance (Lau & Young, 2013), which recognize the fundamental role
that “team production” plays in firms (Alchian & Demsetz, 1972; Blair
& Stout, 1999; Foss & Lindenberg, 2013; Lan & Heracleous, 2010),
and which recognize the importance of “firm-specific commitments” that
various constituents make as strategic resources and (dynamic) capabil-
ities (Klein, Mahoney, McGaha, & Pitelis, 2012; Lindenberg & Foss,
2011; Mahoney, 2012; Mahoney & Kor, 2015; Rajan & Zingales, 1998,
2001; Wang, Zhao, & Chen, 2016).
A defining task of the team production model of the corporation
(TPM; e.g., Alchian & Demsetz, 1972; Blair & Stout, 1999) and theories
of the firm more generally is addressing problems of opportunism, that is,
problems of exploiting one’s position within an organization to acquire a
benefit without giving anything in exchange. In particular, TPM literature
is developed to address opportunism in the so-called team production
contexts where there is strong outcome interdependence, wherein com-
plex inputs from a number of different team members make it difficult to
DOI: 10.4324/9781003211549-8
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152 Alan Strudler et al.

specify each member’s discrete contribution and to encourage team-spe-
cific investments (see Machold et al., 2011). To address the problems of
team production, the concept of authority, which Coase (1937) posited
makes firms distinct from the market, has been revived (Blair & Stout,
1999; Conner & Prahalad, 1996; Rajan & Zingales, 1998). We main-
tain that the prevailing conception of authority in the TPM literature
is market-based and, therefore, fails to reflect some powerful ways to
address team production problems through authority. In particular, we
maintain that Blair and Stout’s (1991) disputes-oriented model –incorp-
orating a conflict-centric focus –does not fully describe the scope of
management’s power to encourage team-specific commitments and thus
does not reach the full potential of the team production paradigm. We
will maintain that the model of the team in TPM should become more
Confucian. Becoming more Confucian means not only incorporating cer-
tain elements of Confucian thought but also more freely viewing the task
of a “theory of the firm” as not exclusively normative or descriptive but
as incorporating elements of both, as a Confucian would.
The primary contribution that we make in this chapter is to offer an
alternative conception of authority in TPM. In doing so, we invoke philo-
sophical tradition contained in Confucianism. We argue for a distinct-
ively Confucian communitarian interpretation of the internal workings of
a firm, including the production team, hierarchy and authority, and the
process from which they emerge. In the standard market model of the team
and its authority (Alchian & Demsetz, 1972; Blair & Stout, 1999), each
team member uses the team and its authority as an instrument for advan-
cing her own personal interests; the team and its authority are instrumen-
tally valuable. On our Confucian alternative, team members see the team
itself as inherently valuable and are encouraged to create team-specific
investments; they act for the team’s sake, not merely their own. A firm’s
management, on this Confucian view, must do a lot more than find mutu-
ally beneficial ways for firm members to advance their personal good
or their interests as they might conceive them before joining the firm.
Instead, management should function much like the leader of an impro-
visational jazz ensemble, facilitating its members in creating a good that
brings members together as a community (Ivanhoe, 2013a,b). Credible
authority for managerial leadership, we argue, emerges from its role in
identifying and fostering a distinctive team good. By thus locating the role
of managerial leadership, we apply a conception of the firm developed
by other management theorists (Donaldson, 2012; Freeman, 1994;
Wicks, 1996), which regards normative and empirical elements of the
firm as ineluctably entangled and which rejects attempts to disentangle
these elements as unrealistic. The management and economics literatures,
despite often invoking authority, have largely ignored philosophical
concepts of authority. Though Western philosophers have interrogated
normativized conceptions of managerial authority (Anderson, 2017;
Maclagan, 2007; McMahon, 1989), invoking most notably the classic
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“We”-Mode Team Production Theory of Firm 153

Western conflict between autonomy and authority (Lee, 2018), we look
to Confucian philosophy for a new perspective, which offers a positive
view of authority and hierarchy as enhancing community and elevating
the virtuous.
Our focus is large, publicly traded business firms, such as Toyota,
Microsoft, and Merck, but our discussion has implications beyond such
firms. In Toyota and other large publicly traded firms, authority functions
through hierarchical governance structures, including relationships
between board and managers. Not all business organizations are hier-
archical to the same extent as Toyota, however. Co-ops and joint ventures,
for example, are less hierarchical. Even in these less hierarchical firms, at
least when they have significant complexity, authority exists: operational
efficiency requires that a person gets assigned the role of decision maker
within the organization; some individuals, for example, must make prac-
tical decisions about how to allocate resources within the organization.
By illuminating the structure of authority, studying hierarchical firms
has implications for understanding the role of authority in less hierarch-
ical firms.
Our second contribution is to strengthen earlier research that criticizes
individualism (e.g., Etzioni, 1988; Grant & Patil, 2012; Perrow, 1986;
Rocha & Ghoshal, 2006; Sen, 1977). We show that what holds a decent
firm together and makes it succeed cannot be captured by the concept
of self-interest. The Confucian concept of the organizational self that
we develop provides that what makes a person in a firm distinctive from
a person in a market is her capacity to have what we shall call “we”-
mode intentions and motivations. We also show that organizational
ritual is a powerful way for self-interested individuals in a market to
become team members. Hence, the Confucian concept of leadership that
we advocate is transformational in the sense that it proposes that self-
interested market persons become members of organizations, conceiving
of themselves from a “we” perspective rather than merely from an “I”
perspective.
Finally, we contribute to the comparative and cross-cultural literature
(Adler, 1983; Chen & Miller, 2010). We bring a cross-cultural perspective
that helps Western researchers distance themselves from their own situ-
ation to see the team production problem from a Confucian perspective,
while helping Easterners to understand the team production problem
through the lens of their own traditions. We hope that our compara-
tive perspective brings renewed interest to the idea that within an organ-
ization, individual identity can be logically intertwined with community
membership and that what we shall call a “we”-mode identity is an
effective solution to the team production problem and thus an important
reason that firms should exist.
In the “Background: The Rise, Fall, and Return of Hierarchy” section,
we review the TPM tradition, explaining why team production is a per-
spective important to understanding the nature of a firm. In the “The
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Problem: Alchian and Demsetz’s Rut” section, we explain why the existing
market-based view of authority in TPM has limitations to serve their
roles. In the “A Solution: A Confucian “We”-Mode Team Production”
section, we offer a Confucian alternative “we”- mode conception of
team production and authority. In the “How to Facilitate “We”-Mode
Team Production: A Confucian Answer” and “Contemporary Research
that Supports the Confucian “We”-Mode” sections, we strengthen the
Confucian “we”-mode conception of TPM by discussing contemporary
research that supports the Confucian “we”-mode TPM and how to facili-
tate the model. Finally, we discuss the limitations of this chapter and
conclude.
Background: The Rise, Fall, and Return of Hierarchy

Coase (1937) recognized both (1) the importance of hierarchy in
explanations of firm activity and (2) the limits of markets in explanations
of firm activity. He observed that the “invisible hand” (Smith, 1776) has
limited explanatory power with respect to the internal workings of a firm,
because firms are not markets but hierarchies directed by authority: “If
a workman moves from department Y to department X, he does not go
because of a change in relative prices, but because he is ordered to do so”
(Coase, 1937: 387). As we soon discuss, Simon (1957) endorses a con-
ception of authority –one which takes authority to provide distinctive
reasons for action independent of other considerations (See also Chandler,
1977; Conner & Prahalad, 1996: Appendix; Williamson, 1975).
In 1970s, researchers strayed from Coase’s (1937) ideas about hier-
archy, wringing new life out of the “invisible hand”. Notably, Alchian and
Demsetz maintained that hierarchy and authority are market transactions
in disguise. They wrote:
It is common to see the firm characterized by the power to settle

issues by fiat, by authority, or by disciplinary action superior to that
available in the conventional market. This is delusion…To speak
of managing, directing, or assigning workers to various tasks is a
deceptive way of noting that the employer continually is involved in
renegotiation of contracts in terms that must be acceptable to both
parties… Telling an employee to type this letter rather than to file
that document is like my telling a grocer to sell me this brand of tuna
rather than that brand of bread.
(1972: 777)
Alchian and Demsetz’s market approach had the large advantage of

motivating researchers to think hard about the role of incentives within
organizations. A market model of the firm, in which the firm is viewed
as a nexus of contracts, served as a platform for devising such incentive
structures.
51

Jensen and Meckling (1976, 1978) further developed the nexus of
contracts view. A cardinal issue for Jensen and Meckling (1976) was the
agency problem: how to best incentivize managers to serve the interests
of shareholders. To solve this problem, theorists proposed constructing
contracts that align the self-interests of managers and shareholders. Their
approach came to dominate work on the theory of the firm and govern-
ance (Eisenhardt, 1989; Shleifer & Vishny, 1997).
Agency theory has its value: It contributes to the understanding of
opportunism and its mitigation. That value is limited, however, because
agency theory relies on a conception of contracts that neglects essential
features of firm phenomena. First, agency theory relies on contracts that
are incomplete in ways that limit their explanatory value. Even agency
theorists acknowledge that firm contracts must be incomplete because
not all contingencies can be anticipated (Grossman & Hart, 1986; Hart
& Moore, 1990). How should managers respond when they face con-
tingencies not covered in contract? Clearly agency theory requires a
value outside contractual fidelity to answer this question. We will suggest
that the needed value derives from the realm of hierarchy and takes the
form of a thick conception of authority. Second, agency theory focuses
on contracts between managers and shareholders, but such contracts
hardly cover the spectrum of important managerial relations. In the con-
temporary business environment in which knowledge-based resources
(Mayer, Salomon, & Williamson, 2012; Wang, He, & Mahoney, 2009),
relational capabilities (Dyer & Singh, 1998; Orts, 2013), and social
capital (Adler & Kwon, 2002; Nahapiet & Ghoshal, 1998) are increas-
ingly important, agency theory’s focus on financiers neglects the strategic
importance of constituencies other than shareholders who provide firm-
specific resources (Asher, Mahoney, & Mahoney, 2005; Foss & Foss,
2005; Kim & Mahoney, 2005; Mahoney, 2012; Mahoney & Kor, 2015;
Orts, 2013; Wang et al., 2016), which have been regarded as crucial
factors in capturing and sustaining competitive advantage (Barney, 1991;
Nelson & Winter, 1982; Teece, Pisano, & Shuen, 1997; Wang & Barney,
2006). We suggest that managerial relationships involve a more complex
web of people and roles than agency theory recognizes. These limits −
the incompleteness of contracts, the importance of non-shareholders, and
the existence of non-agential relations in the firm − raise doubts about the
prospects of agency theory for a complete explanation of corporate
phenomena.
Aware of the limits of agency theory, a new wave of theorists (Blair
& Stout, 1999; Lan & Heracleous, 2010; Mahoney & Kor, 2015;
Rajan & Zingales, 1998) developed an approach that preserves Coase’s
(1937) original insight that firms are hierarchies outside the market,
not merely collections of contracts. Borrowing a phrase from Alchian
and Demsetz (1972), “team production” scholars view the firm as a
team. Its members include managers, employees, financiers, and others
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who contribute inputs to the success of the firm. By working together,
team members create a cooperative surplus wealth. The team faces two
important sets of problems: how to divide the cooperative surplus and
how to encourage the contributions of team members. In team produc-
tion, “it is difficult, solely by observing total output, to either define or
determine each individual’s contribution to this output of the cooper-
ating inputs” (Alchian & Demsetz, 1972: 779). Alchian and Demsetz
were aware of the allocation problem and offered their own solution to
it, a solution that eschewed hierarchy. They stipulated the existence of a
contract through which a class of team member − e.g., the shareholders
− becomes a “monitor” that has authority to fire and hire; the monitor,
in turn, would be compensated from the residual that remained after
the team’s members were compensated. Alchian and Demsetz’s theory
of team production views firms as extensions of market transactions.
Each member of the team pursues only her own interest, but interests of
team members are intertwined through market mechanisms, so it is in
the interests of team members to work together and help one another.
Alchian and Demsetz’s emphasis on the “monitor” influenced agency
theorists who argued that shareholders must be the monitors (e.g.,
Jensen & Meckling, 1976).
Blair and Stout (1999) reject agency theorists’ solution to the team
production problems. They point out that, in reality, shareholders do
not exercise rights to hire, fire, or control assets; therefore, shareholders
cannot play the authoritative monitoring role that Alchian and Demsetz
(1972) attribute to them. According to Blair and Stout, it is the corporate
board, acting on behalf of the corporations itself, that executes the role
as monitor. Blair and Stout explain:
The board enjoys ultimate decisionmaking authority to select future

corporate officers and directors, to determine the use of corporate
assets, and to serve as an internal “court of appeals” to resolve
disputes that may arise among team members… Knowing that
incorporating means losing influence over the corporation’s future
and over the division of the rents the corporation generates, why
would any of the team members do this? The answer is that team
members understand they would be far less likely to elicit the full
cooperation and firm-specific investment of other members if they
did not give up control rights … This analysis suggests that hierarchy
can perform a third function in addition to the two economists have
identified (streamlining information-gathering and decisionmaking,
and controlling shirking through the cascade of sequential principal-
agent contracts). This third function is encouraging firm-specific
investment in team production by mediating disputes among team
members about the allocation of duties and rewards.
(1999: 277–278)
“We”-Mode
157 Team Production Theory of Firm
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But that contention proves inconsistent with their own analysis of the
authority relationship within the firm, we will maintain.
The inherent nature of authority is in tension with market analysis.
Authority is by nature related to a duty to obey directives for reasons that
cannot be reduced to advancing self-interest. It is a well-established idea
in ethics, political philosophy, and legal theory that in a just society one
has authority over another person only if, when one gives that person an
order, the fact that one gives the order provides the person with a reason
to think that compliance is the right response (e.g., Perry, 2013; Rawls,
1996). In management literature, Simon (1957) reflects this conception of
authority when he says,
An individual accepts authority when he sets himself a general rule

that permits the communicated decision of another to guide his
own choice (i.e., to serve as a premise of that choice) independently
of his judgment of this correctness or acceptability of the premise
(italics ours).
If, as Alchian and Demsetz (1972), along with Blair and Stout (1999),
suggest, members of a production team obey an order only for instru-
mental reasons, that is, only to advance their own self-interest, they do
not act out of respect for authority but out of prudence. When team
members are motivated solely by prudence or self-interest, problems arise.
A team member who observes a divergence between her personal and
team interests will seek to advance her interests at the expense of team
interests. Ample theoretical reflection and empirical evidence suggests
that no matter how much organizational engineering one does, it will be
impossible to eliminate a divergence between such personal interests and
team interests, and excessively costly to try (e.g., Bridoux, Coeurderoy,
& Durand, 2011; Bridoux & Stoelhorst, 2016; Eisenhardt, 1989; Feher
& Fischbacher, 2002; Holmström & Milgrom, 1991; Kollock, 1998;
Olson, 1965; Ostrom, 2000; Perrow, 1986; Sweeney, 1973). The instru-
mentalist, limited by her conception of the self-interested motivation of
team members, cannot explain how to effectively encourage firm-specific
investments and construct an optimal production team. If a contract-
based self-interested approach like that of Alchian and Demsetz is not
sufficient to ground the firm, then we need a firm theory that conceives of
authority as a power that supersedes self-interest. Despite their laudable
efforts, Blair and Stout (1999) have failed to do this.
There is a way out of the problems arising from instrumentalism for
team production theory. Indeed, Blair and Stout (2001) themselves, in
a departure from their seminal TPM paper (Blair & Stout, 1999), point
to the way out of the problem, when they suggest that it is a mistake for
theorists of the firm to assume a self-interested model of human behavior.
We concur with Blair and Stout (2001) and offer a development of their
suggestion. As we soon contend, there exist excellent nonself-interested
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reasons for individuals within an organization to deliberate from a team
perspective rather than from a purely self-interested perspective. As we
will also contend, deliberation that takes seriously the team perspective
rather than a purely individualistic perspective requires recognizing the
presumptive authority of team leaders. When one takes the team per-
spective seriously, one’s reason for opportunistic behavior dissipates, as
opportunistic behavior would undermine team interests. Taking the team
perspective seriously, in a sense we soon define, results in a production
team that is better than the instrumentalist version. Why should an indi-
vidual take the team perspective seriously? In what follows, we explain.
A Solution: A Confucian “We”-Mode Team Production

For thousands of years, Confucianism has explored the nature of authority
in hierarchy (Ames, 1988; Angle, 2009, 2012; Bell, 2008; Chan, 2014;
Creel, 1970; Elstein, 2009; Graham, 2003; Hahm, 2003; Ivanhoe & Kim,
2016; Kim & Strudler, 2012; Pines, 2002, 2013). A distinctive feature
of Confucianism is its “frank acceptance of hierarchy and authority as
a necessary and even good aspect of a civilized and harmonious society”
(Schwartz, 1985: 68; see also Angle et al., 2017; Rosemont, 1991, 2015;
Tu, 1988, 1997, 2002). What, then, does Confucian theory say about
the source of authority? It gives a nonmarket answer: authority in a hier-
archy is a moral power (Angle, 2009, 2012; Bell, 2008, 2015; Chan,
2014; Graham, 2003; Ivanhoe, 2000, 2007; Kennedy, Kim, & Strudler,
2016; Poo, 1998; Schwartz, 1985; Tan, 2010; Tiwald, 2008). Authority
emerges not, as Hobbes sees it, from an individual’s pursuit of her self-
interest. Instead, authority emerges when an individual sees her interest
as merged into a community’s interest and recognizes the necessity of
authoritative leadership as the articulation of that community interest.
Thus, on the Confucian view, strangers in a market may join a production
team motivated by self-interest, but authority emerges when individuals
shift gears, moving from a self-interested mindset to a communitarian
mindset; authority grows to the extent that it helps market strangers
become committed team members.
Early Confucians, including Confucius himself, Mencius, and Xunzi,
defended a moralized view of authority; the moralized view stood in
contrast to ancient Chinese society’s aristocratic belief that authority in
hierarchy derives from pedigree (Allan, 2015; Creel, 1970; Pines, 2013).
Throughout Chinese history, the moralized view of authority became
further developed through two major Confucian notions: “Elevating
the Worthy” (shang xian 尚賢) − the morally legitimate should be the
authority (Pines, 2002, 2013) − and “Heaven’s Mandate” (tianming 天
命) − Heaven grants authority to the legitimate, and if the authority loses
its moral legitimacy, Heaven will seek and move on to the legitimate
(Chan, 2014; Ivanhoe, 2007). Soon we explain the distinctive moral
power Confucians find.
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For Confucianism, what makes us distinctively human is the individual’s
ability to conceive of her interests not purely in terms of her personal self
but instead in terms that include a relational and communal self (Kim &
Strudler, 2012; Kim, 2014). Etymologically, the meaning of humanness
(ren 仁) is “two people”. The Confucian’s recognition of the importance
of the communal self requires a distinctive perspective on authority. At
least since the time of the Enlightenment theorist Rousseau (1762/1987),
much work in Western philosophy and the social sciences concurs that it
is possible to deliberate in a “we”-mode (Bacharach, 2006; Gilbert, 2000;
Gold & Sugden, 2007; Sellars, 1967; Sugden, 2005; Tuomela, 2007), in
which a person conceives of her interest not individually but instead in
terms of a group with which she identifies. In this tradition, borrowing
terminology from Tuomela (2007), we will say that a person has a choice
about whether to reason in terms of her personal interests –that is, in an
“I”-mode –or whether to reason in terms of community interests –that
is, in a “we”-mode.
Confucian “we”-mode selves support, but are distinct from, the gen-
eral research on cooperative behaviors. A team for the general research,
is a set of fluid and interrelated “I”-mode selves who see themselves as
relational contractors who want to respect norms of reciprocity (give-
and-take; e.g., Grant, 2013). The Confucian team is a set of “we”-mode
selves who are not just more fluid and interrelated than the “I”-mode
selves, but reason and behave without the “I”-mode perspective but with
the “we”-intentionality. The Confucian “we”-mode selves see themselves
as constitutive elements of a new emerging whole entity. “We”-mode
reasoning may seem peculiar, but we think that it is, in fact, common.
Salient examples of “we”-mode reasoning occur in sports. Members of
sports teams wish to see the team as a whole perform well and are not
merely concerned with their own performance or even how the team’s
performance reflects on individual members of the team. Consider the
Confucian philosopher Craig Ihara’s (2004) basketball team spirit:
On sports teams, say basketball, people have assigned roles appro-

priate to their various talents. A point guard is, among other things,
in charge of running the offense, doing most of the ball handling,
setting up plays, and getting the ball to people in scoring position. A
center, usually the tallest player on the team, is responsible for dom-
inating the area under the basket, rebounding, blocking shots, and
scoring from inside. Suppose that on a specific occasion, the point
guard fails to pass the ball to the center who is wide open under the
opposing team’s basket. What might one say? That the point guard
made a mistake, did something wrong or incorrect, did not do what
she was supposed to, failed to do her job, messed up, or fouled up.
If, for whatever reason, she regularly misses such opportunities, she
can be regarded as a poor or bad point guard and is likely to lose
her position. Other members of the team can legitimately complain
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about her incompetence, lack of court sense, or selfishness, although
in the name of team spirit they should not be too quick to criticize.
(11)
In the basketball context, players ideally act in the “we”- mode. For
example, the center does not say that the point guard infringes her con-
tractual/property right or does not optimally maximize her interests when
the point guard fails to properly pass her the ball. For any team member
to view the game simply in terms of whether her interests are maximized
would undermine the foundation of the team (Strudler, 2008). We do not
mean to suggest that excellent team members must always ignore their
purely personal interests; there is room within a player’s utility function
for both individual and team interests. Hence, a basketball player may
reasonably act to avoid risking a concussion even when doing so might
get the team the few extra points it would take to win the championship
game. Still, a player who focuses only on her own interests is a failed
player (Jackson, 2013).
Ihara’s (2004) discussion of a basketball team serves as a reminder
that joining a team in sports can be a transformative experience. One
comes to see value not only merely in one’s own personal achievements
but also in the team’s achievements. Put differently, the preferences in
one’s utility function shifts from focus on oneself to focus on one’s team.
We do not maintain that everybody who joins a team becomes a team
player. Instead, we suggest that the transformation to a team player is
a possibility, the sort of possibility that the Confucian invokes as essen-
tial to fulfillment of one’s humanity. Moreover, there is much theoret-
ical and empirical evidence that this sort of transformation occurs (see
the “Contemporary Research that Supports the Confucian “We”-Mode”
section). Interestingly, Blair and Stout came to acknowledge the phe-
nomena of shifting from the “I”-mode to the “we”-mode. They explain
that when people join teams, it may have the effect of “enhancing feelings
of group identity” (2001: 1735) that lead to increased cooperation, not
because cooperation leads to individual advantage, but because it helps
the group as a whole attain its ends. In our terms, Blair and Stout are
observing the shift from “I”-mode to the “we”-mode, not in basketball
teams, but in the production teams that comprise business organizations.
Suppose, then, that the “we”- mode is a real possibility. The
implications for authority and governance seem plain. In the sports
realm, for example, team members must recognize the authority of their
coach. Nothing as complex as a sports team can exist without a leader, so
to join a team is to recognize the importance of leadership and, thus, to
recognize one’s own reason to follow the direction of the leader. In rele-
vant respects, a production team is like a sports team. In both cases, team
members have obligations to fulfill their roles on the team − call these role
obligations. Just as the coach has distinctive role obligations, the board
and derivatively higher ranking individuals in the firm, e.g., a CEO, have
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their own distinctive role obligations. For the board (and derivatively a
CEO) to fulfill its role obligations, it must have authority: the board’s
authority to allocate assets and revenues that various team members make
through firm-specific investments creates the possibility of an effective
and flourishing production team that minimizes opportunism, and cre-
ating such a team is the board’s role in Blair and Stout’s (1999) model. By
deferring to the board’s authority, team members acting together create
value that could not be created without the authority, no matter how
prodigious the talents of individuals outside team settings. The source of
the authority in the firm is, then, the “we”-mode in business: team pro-
duction itself.
The Confucian view offers a distinctive account of the nature of
authority within a firm. It does not identify authority instrumentally: as
a tool for advancing the preexisting interests of the individuals that com-
prise the firm. Instead, it identifies authority transformationally: as a way
for members of a firm to realize a new set of interests, the interests they
have as members of a community, the firm. Put differently, the instru-
mentalist account explains authority in terms of its role in achieving
good aims as one sees them before joining the firm; the transformational
account explains authority in terms of its role in achieving an elevated set
of good aims inherently tied to the community of the firm.
A person’s interests are inherently tied to what she sees as good for
herself (Feinberg, 1986). If a person joins a firm simply to enlarge her
bank account so that she can buy status goods, then she is motivated by
narrow self-interest and has a materialistic conception of what is good for
her. Not all people meet this description. When Roy Vagelos was CEO
at Merck, he had to make a decision about whether to pursue the devel-
opment of Ivermectin, a drug with important health benefits for people
stricken with River Blindness in sub-Saharan Africa. Vagelos recognized
that the drug that would produce only uncertain financial advantages
for the firm (e.g., Hanson & Weiss, 1991). In making his decision, one
of Vagelos’s concerns was his employees’ motivations. Vagelos observed
that his employees chose to work at Merck not because they were
motivated by narrow self-interest and a materialistic conception of the
good; instead he believed that his employees were motivated by desire
to achieve a good that transcended their individual interests. Vagelos
conceived of his role, as a leader at Merck, as requiring him to find a
way to unite his employees in achieving such good. He chose to execute
the Ivermectin project, at least in part, because doing so allowed him to
carry out this role. Vagelos, in our view, acted as an excellent Confucian
leader would; he moved Merck closer to the idea of a Confucian TPM.
He orchestrated his employees so that they could cooperate in creating a
good that transcended their own interests.
The Confucian model of the corporation that we outline confirms
ideas articulated by Freeman and others (Freeman, 1994, 2000; Freeman,
Wicks, & Parmar, 2004; Freeman et al., 2010; Harris & Freeman, 2008;
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Wicks, 1996), who maintain that an accurate description of the firm must
contain both normative and descriptive elements. In this respect, the con-
cept of the corporation is not unique. Both the fields of anthropology
(Geertz, 1973) and philosophy (Ryle, 1968; Williams, 1981) recognize
many concepts are “thick”, in the sense that they cannot be reduced to
either purely descriptive or purely normative elements (see also Kim &
Donaldson, 2018). Indeed, we maintain that a TPM model, as developed
by Blair and Stout (1999), must be understood as a thick concept because
it contains both a normative commitment to a “fair” resolution of disputes
among team members and a description of the incentive effects of the
relationship between the corporate board and corporate stakeholders:
“When disputes arise, however, they want a decision-making procedure
in place that all believe will be fair. The solution? They form a public cor-
poration” (Blair & Stout, 1999: 326).
Because they maintain that a commitment to “fairly” balancing
interests among stakeholders will result in a firm that is more profit-
able for shareholders, Blair and Stout’s model contains both descriptive
components (a picture of the firm as a hierarchal structure) and norma-
tive ideas (the idea that the firm ought to balance interests “fairly”). Blair
and Stout thus implicitly treat the concept of the firm as thick (see Alces,
2014; Kostant, 2001). We do so explicitly, because we see it as inextric-
ably tied to both normative and descriptive elements (Donaldson, 2012).3
We differ from Blair and Stout, however, on the nature of these elements.
Blair and Stout see the corporate board as leading the firm by “mediating
disputes among team members about the allocation of duties and rewards
…” (1999: 278). Their model as stated is consistent with the idea that the
board works with conflicts of preexisting interests among team members
and merely looks for an optimal resolution of these conflicts. By con-
trast, we see the function of leadership in the firm, whether exercised by
the corporate board or other levels of management, as introducing new
interests for team members, interests that might be articulated at a com-
munity level rather than individually. In the case of Merck, for example,
Vagelos promoted the idea that the firm as a whole could do something
good that would unify the firm, namely, introduce Ivermectin into the
sub-Saharan African population and fight River Blindness.
Our Confucian team production theory, like Blair and Stout’s (1999)
team production theory, reserves a specific role for corporate boards. In
line with other Hobbesian firm-theoretic approaches (Elson & Ferrere,
2013), they see the Board as mediating disputes and conflicting interests
among corporate team members. We see the Board as instead finding
and promoting a vision that transforms and unifies the interests of team
members and by doing so encourages firm-specific investments. Blair and
Stout (1999) see the board as the referee of a boxing match. Confucians
see the board as like the leader of a jazz ensemble, someone who fosters
others in making their own distinctive contribution to a group per-
formance. As Ivanhoe (2013a,b) explains, Confucians regard leaders
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as pursuing a harmonious good that reflects the diversity of those with
whom she engages:
[A]‌good leader . . . find[s] ways to bring together different and dis-

tinct views just as a great cook counterbalances and blends different
tastes or a great composer harmonizes different sounds. Harmony
requires the preservation of diversity and contrast.
(f5, Ch. 4)
The Board may pursue the good for the firm and even the good for
society more generally in ways that respond to the emerging concerns
and aspirations of the diverse variety of involved stakeholders. The good
that the Board pursues is thus not an entity the content or identity of
which is fixed antecedently to Board interactions with stakeholders.
Instead, it is a good that emerges through the process of conversation
among stakeholders, a process, as pragmatist philosopher Richard Rorty
(1989) explains, that generally underlies constructive politics. By insisting
on the role of the firm in fostering a communal good, we do not wish
to suggest that Blair and Stout’s (1999) model is obsolete. Conflict may
well be unavoidable within the firm (as biologist and author E.O. Wilson
(2014: 177) notes, “we are addicted to tribal conflict”), and Blair and
Stout’s (1999) model depicts it well. Nonetheless, we suggest the import-
ance of expanding the TPM to consider more than conflict.
How to Facilitate “We”-Mode Team Production:

A Confucian Answer
So far, we have investigated the connection between the “we”-mode,
authority, and opportunism –roughly, once the “we”-mode emerges,
authority emerges, and it coordinates team members’ motivations in
ways that avoid opportunism and encourage firm-specific investments.
But we have not discussed how the “we” – mode emerges so that
authority emerges in a team production. We must explain how indi-
vidual Hobbesian parties, who decide to enter a team production to
advance their self-interests, once they enter the team production context,
shift from the “I”-mode to the “we”-mode. Our explanation revolves
around the idea of corporate ritual (Deal & Kennedy, 1981, 1999; Islam
& Zyphur, 2009; Trice & Beyer, 1984, 1991). If Confucius were alive
today contemplating the contemporary firm, he might be drawn to the
following questions: If a set of employment contracts is the only source
of conferring authority to the board and, derivatively, to higher ranking
individuals, why do firms invest valuable corporate assets in rituals such
as annual shareholder meetings, Chair/CEO inauguration ceremonies,
or welcoming ceremonies for new employees (Bolman & Deal, 1992;
Deal & Kennedy, 1981; Guenzi, 2013; Islam & Zyphur, 2009; Pfeffer,
1981; Trice & Beyer, 1984, 1991; Trice, Belasco, & Alutto, 1969)? If an
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expiration of a contract is the source of ceasing to grant authority to the
board member or other higher ranking individuals, why do firms invest
their resources in rituals such as rites of degradation, farewell, or retire-
ment ceremonies? If the foundation of the authority is simply a collection
of contracts, a merger between two firms could be achieved by writing
a contract between the two firms that specifies who gets the authority.
Why do merging firms put so much cultural effort, including various rit-
uals, into combining the two authorities (Deal & Kennedy, 1999; Schein,
2010)? More fundamentally, why are there so many firm rituals, which
Trice and Beyer (1984, 1991) conceptualized as “rites of passage”, “rites
of degradation”, “rites of enhancement”, “rites of renewal”, “rites of
conflict reduction”, and “rites of integration” (Trice & Beyer, 1984,
1991)? The documentation of organizational ritual is extensive, and the
organizational theory surrounding it is rich (for a review, see Islam &
Zyphur, 2009). A Confucian answer for the phenomenon of organiza-
tional ritual is that it is deeply related to the formation of authority in
team production to solve team production problems.
A core idea that permeates Confucian theory is that ritual serves to
create and nurture a family-or sports team-like “we”-mode environ-
ment, through which members identify themselves with their groups by
realizing that they have, as team members, role obligations to achieve
team goals (Bell, 2008; Fan, 2012; Fingarette, 1972; Van Norden, 2002;
Woodruff, 2001; Zhang, 2012). By doing so, rituals confirm for team
members an understanding of their roles and associated obligations
within the social world (Iltis, 2012). Rituals change team members’ iden-
tities, outside the boundaries of the organizational or team production
activity (Alvesson & Kärreman, 2007; Ashforth & Mael, 1989; Bauer,
Morrison, & Callister, 1998; Van Maanen & Schein, 1979). Rituals’ role
in creating and sustaining organizational identity has been recognized
in management theory (Erhardt, Martin-Rios, & Heckscher, 2016). In
short, “[r]‌itual unites and it divides” (Engelhardt, 2012: 29). Rituals
create the boundaries of the team production and the firm itself.
Rituals also sustain a social reality (Ing, 2012; Puett & Gross-Loh,
2016; Seligman, Weller, Puett, & Simon, 2008). According to Seligman
et al. (2008), the Confucian tradition believed that ritual functions to nur-
ture “order, hierarchy, principle, and ethics to a world that is otherwise
chaotic, amoral, and indifferent –to live as if the world were actually
a moral, coherent universe” (20). This Confucian view about the social
function of ritual is also corroborated by Western anthropologists’ views
that ritual creates a social reality distinct from the enacted individualist
world (Bell, 2009; Goffman, 1967; Rappaport, 1999; Turner, 1982), as
well as by those held by sociologists who explore how social order is
maintained and how meaning is created at work (Durkheim, 1915; Miller,
1985). If, for example, Alchian and Demsetz’s (1972) leaders regularly
observed ritual (e.g., a kind of inauguration ritual) with their new man-
ager in which the workers bonded and came to appreciate the possibility
61

of a collective accomplishment, their doing so would not involve phys-
ical change, yet it could create a social world distinct from individualistic
world with which they began. The process should seem familiar to anyone
who has seen a group of recruits transformed into a sports team or a
collection of individual musicians transformed into an orchestra.
The Confucian view accordingly suggests that the board and,
derivatively, corporate managers can strengthen authority over various
stakeholders such as shareholders, in practice. This can happen if
stakeholders regularly observe rituals with the board or corporate man-
agers in which stakeholders socialize themselves to create and nurture
the “we”-framed identity, believing that they are performing a team pro-
duction activity together with the board and corporate managers. This
conception leverages managers’ recognized symbolic role and function
in legitimizing their organizational power (Brown, 1994; Pfeffer, 1981;
Jongbloed & Frost, 1985). Take, for instance, Berkshire Hathway’s ritual
of the annual shareholder meeting, in which shareholders gather with
board members in a series of ceremonial contexts –or, as a Financial
Times article dubs it, “the faithful arrive for Buffett Ritual” (Guerrera,
2007). Interestingly, in such a context, in contrast to agency theory’s view
that shareholders have authority over the board, it strikes us as perfectly
sound to construe that it may be the board, including Warren Buffet, who
has the authority and that shareholders act as if the board is their leader.
Contemporary Research that Supports the Confucian

“We”-Mode
At this juncture, one might say that the Confucian “we”-mode and the
transformative power of ritual sound great but are not empirically real-
istic in business organizations. But it seems that the “we”-mode forms of
deliberation and organizational behaviors that our Confucian approach
would entail are consistent with findings in empirical literature. Thus, we
hope to argue there is no reason to think our approach inviable.
Our Confucian account coheres well with the organizational citizen-
ship behavior (OCB) literature (see Lai, Lam, & Lam, 2013; Podsakoff
et al., 2009). A chief focus of the Confucian perspective is valuing the
success of the firm qua firm. The employee in our model would, therefore,
sometimes aim for the organization’s success, even when her behavior
is discretionary and not recognized by a formal rewards system (Elstein
& Tian, 2017). OCB is often defined in these very terms (Organ, 1988;
e.g., Matta et al., 2015), though sometimes it is cognized in more expan-
sive terms (Bolino, Turnley, & Bloodgood, 2002; Organ, 1997; Takeuchi,
Bolino, & Lin, 2015). Most OCB models seem to integrate at least one
factor that measures willingness to recognize and obey authority (LePine,
Erez, & Johnson, 2002). Organ (1988, 1990) puts his in terms of “con-
scientiousness”.4 Van Dyne, Graham, and Dienesch’s (1994) OCB model,
drawing on earlier work that integrated political philosophical concepts
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with management theory (Graham, 1991), incorporates the factors of
“obedience” and “loyalty”.5 Here, we offer an approach that sheds light
on such concepts –we offer a theory on why and how employees might
accept authority in these organizations.
Our Confucian approach to TPM also suggests a new subject of interest
in organizational behavior literature on collectivism. Most pertinent to
our theory in this line of research is “psychological collectivism”, defined
as an individual-difference (rather than cultural) variable (Jackson et al.,
2006). Psychological collectivism “represents the degree to which indi-
viduals hold a general orientation toward group goals, a concern for the
well-being of the group and its members, an acceptance of group norms,
and a tendency toward cooperation in group contexts” (Dierdorff, Bell,
& Belohlav, 2011: 247). In other words, collectivism favors a subordin-
ation of personal interests in the interest of the collective (Triandis, 1995;
Wagner et al., 2012). This collectivism is seen as closely connected to
increased cooperation in groups (for a meta-analysis, see Marcus & Le,
2013). Dierdorff, Bell, and Belohlav (2011) recently referred to the power
of collectivism to facilitate cooperation in teams as “the power of ‘we’ ”.
Collectivistic orientations have been shown to be positively correlated
with OCB (Moorman & Blakely, 1995; Podsakoff et al., 2000; van Dyne
et al., 2000).
The research on collectivism in groups seems to have significant overlap
with at least the empirical implications of the Confucian communitarian
construct we advance. One theoretical issue, however, is that groups
(such as teams) are typically seen as at a distinct organizational level from
the firm-wide level (Klein, Dansereau, & Hall, 1994). In Marcus and
Le’s (2013) meta-analysis on collectivism and cooperation, they adopt
Kozlowski and Bell’s (2003) definition of “groups” for the purpose of
examining extant findings on group-level cooperation, defining them as
distinct from the “broader entity” (in our case, distinct from the firm).6
For instance, team production has been used to examine corporate board
dynamics (Machold et al., 2011) as well as specify prescriptions regarding
corporate board recruitment and function (Ingley & Van Der Walt, 2004;
Kaufman & Englander, 2005). Some theorists have attempted to extend
the study of collectivism to the firm-wide level (Robert & Wasti, 2002),
but they have treated collectivism as a group composition variable –in
the case of Robert and Wasti (2002), as an attribute of organizational
culture. Our “we”-mode approach offers a theoretical extension of the
collectivism literature by positing a relationship between individual-level
collectivistic orientations towards firms at-large and positive firm-level
implications. This is because we are interested in how authority affects
individuals’ adherence to their own role obligations.
Our Confucian approach also develops the literature on normative
organizational commitment. Decades ago, Yoash Wiener (1982) articulated
what he called a “normative view” of organizational commitment,
positioned in direct opposition to “instrumental-utilitarian” approaches
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to commitment, which proceeded on the premise that “work behavior
may be determined not only by calculative-instrumental processes, but
also by normative pressures …” (Wiener, 1982: 426). Wiener focused
on how normative considerations of what one “should” do may prompt
individuals to make personal sacrifices for organizational well- being.
A similar notion of normative commitment constitutes one of the three
components of Meyer and Allen’s (1991) influential model of organiza-
tional commitment (see also Meyer & Parfyonova, 2010).
Most conceptualizations of normative commitment share a focus on
motivational factors of obligation as set apart from the motivational
aspects of desire, and some extensions of the construct acknowledge a
number of conceptually and empirically distinct normative pressures
(Meyer & Parfyonova, 2010). The Confucian perspective’s stress on
role obligations qua membership in the team fits nicely into this gen-
eral framework. To reinforce organizational authority, the Confucian
approach places a premium on defining and sustaining these obligations
with ritual. It additionally allows employees to recognize legitimate
authority by, among other things, identifying the virtuous.
Contemporary research in brain and cognitive science supports the
ancient Confucian thesis that people enter a “we”-mode, in which one
perceives herself and others as role-bearing selves. Dunbar (2003) shows
that the human brain has a specialized capacity for social bonding that
includes the capacity to distinguish team activities that involve group
goals and joint efforts from “I”-mode activities that do not involve such
group goals. Perception and action research confirm that once a person
perceives a team-framed situation, she immediately activates specialized
cognitive faculties for team activities (Sebanz, Bekkering, & Knoblich,
2006). Other empirical evidence indicates that when individuals recog-
nize that they are in a team activity, a specialized brain capacity actively
triggers participants’ cognitive faculties to understand and accept the nor-
mative belief that they have role obligations and should fulfill them in
a harmonious manner so that the team they belong to can effectively
achieve shared group goals (Echterhoff, Higgins, & Levine, 2009; Higgins
& Pitmman, 2008; Sebanz et al., 2006).
Evolutionary studies (Tomasello, Carpenter, Call, Behne, & Moll,
2005) strongly support the viability of “we” intentionality (Gilbert, 2000;
Tuomela, 2007) –namely, the distinctively human capacity for “we”
intention and “we”-mode team production. In particular, Tomasello et al.
write, “human beings, and only human beings, are biologically adapted
for participating in collaborative activities that involve shared goals and
socially coordinated action plans (joint intentions)” (2005: 676). This
evolutionary thesis is strikingly consistent with the Confucian belief that
what makes us distinctively human is the capacity to create and nur-
ture the “we”-mode. Tomasello et al. also show that joint/team produc-
tion activities that involve “we” intentionality are typically structured
by “shared symbolic artifacts such as linguistic symbols and social
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institutions” (2005: 675). In other words, the fact that so many business
organizations already use various rituals for their special events and daily
organizational lives may be a proxy by which we can infer that much of
real business organizations are like sports teams in which team members’
role obligations are harmoniously coordinated by authorities.
Finally, Haidt (2012) and his colleagues (with Kluver & Frazier, 2014)
maintain that human beings are factually what Durkheim (1915) dubbed
Homo duplex rather than Homo economicus. The individualist picture
of the self-interested person is only part of the story about who we are.
Humans have exceptional capabilities to reason and act as a group.
Haidt (2012) suggests that there exists what he calls a “hive switch”, by
which humans can switch their “I”-mode self to a “we”-mode self and,
most interestingly, that ritual is a powerful hive switch. He supports the
hypothesis about the hive switch with various anthropologists’ works on
ritual and group. Notably, Haidt cites the historian William McNeil’s
(1995) book that surveys military and religious settings in which ritual
plays a role of a hive switch. Consider McNeil’s personal experience of
military training in World War II as follows:
Words are inadequate to describe the emotion aroused by the

prolonged movement in unison that drilling involved. A sense of per-
vasive well-being is what I recall; more specifically, a strange sense of
personal enlargement; a sort of swelling out, becoming bigger than
life, thanks to participation in collective ritual.
(1995: 2)
Haidt (2012) also connects the “groupish” nature of human being to

corporations and leadership. Notably, Haidt cites Kaiser, Hogan, and
Craig’s (2008) work on leadership from an evolutionary perspective,
which writes:
Transactional leadership appeals to followers’ self- interest, but

transformational leadership changes the way followers see them-
selves— from isolated individuals to members of a larger group.
Transformational leaders do this by modeling collective commitment
(e.g., through self-sacrifice and the use of “we” rather than “I”),
emphasizing the similarity of group members, and reinforcing col-
lective goals, shared values, and common interests.
(104)
To use Kaiser et al.’s words, the Confucian perspective shows that

authority in a firm is recognized and strengthened (and, simultaneously,
team production problems are mitigated) to the extent that higher ranking
individuals exercise transformational leadership.
We acknowledge that the research streams introduced in this section do
not entail the full measure of viability of the Confucian “we”-mode TPM
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and its propositions about the source of authority. Nonetheless, we hope
that we have shown that the Confucian thesis about the source of authority
and the importance of “we”-mode team production merits serious further
scholarly attention, including theoretical and empirical development.
Limitations
Let us briefly discuss the limitations of this chapter. The most obvious
limitation concerns the nature of teams. Not all teams are morally
equivalent. Hitler had a team and the Golden State Warriors have a
team. Hitler’s team was evil but the Warriors are not. If an important
source of the effectiveness of authority on a team is its moral legitimacy
(Scherer & Palazzo, 2007; Suchman, 1995), then it is important to
understand the significance of the difference between those teams that
are evil and those teams that are not. Confucians recognize this diffe-
rence and maintain that legitimate authority inheres only in the virtuous
team. Nonetheless, they recognize that even an evil team can function
effectively. Indeed, even Hitler’s most evil organizations functioned
effectively for some time. But the Confucian model does not purport
to explain how all firms work. Instead it purports to explain how good
firms work. In this respect, the Confucian model is no different from
Alchian and Demsetz’s (1972) TPM. Even Alchian and Demsetz must
admit that organizations can function outside the market realm when,
for example, they are run by brute force. Alchian and Demsetz’s TPM
suggests, as does the Confucian model, that there are better ways to run
an organization that through brute force. Still, this suggests that for the
Confucian, the source of authority in the organization, the existence of a
proper team, relies on much more than the existence of ritual. For legit-
imate authority to exist, an organization must be morally decent, prop-
erly allocating burdens and benefits within the organization, upholding
responsibilities to the community. Spelling out the nature of a good firm
is necessary for even the aspect of the Confucian theory of the firm that
purports to merely explain authority in the firm –but that is more than
can be done here.
Relatedly, when Zingales (2000) summarized the major questions that
a theory of the firm should answer, the first three questions ask about the
source of the authority, whereas the fourth asks a bit different, although
related, question. Zingales writes, “The fourth and final question that
a theory of the firm should address is how the surplus generated by the
firm is allocated among its members” (1625). The Confucian perspective
developed in this chapter does not fully answer this question. To prop-
erly answer Zingales’ fourth question, we need to develop a Confucian
theory of value creation that addresses what a firm should create and
for whom. Nonetheless, let us briefly explore what we can say based on
the Confucian perspective developed in this chapter. In a hierarchy, the
board and derivatively higher ranking individuals do and should well
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understand the content of the special kind of role obligation –namely,
authority –which is to serve the “rites-bearers” (Ames, 1988; Rosemont,
1991) or team production members to achieve group goals that neces-
sarily include cultivating team members’ best “we”-mode selves (Chan,
2014; Ivanhoe, 2000; Tu, 1978/1998). From the Confucian team produc-
tion perspective, the legitimacy of the authority, thus, is deeply related
to the authority’s commitment and capability to create and nurture team
production environments in which all involved team members’ best
selves are activated, nurtured, thriving, and flourishing (Kennedy, Kim,
& Strudler, 2016).
What, then, is the Confucian definition of the best self or human
flourishing? The Confucian concept of self differs from that of neo-clas-
sical economics (Ivanhoe, 2000; Tu, 1978/1998). The Confucian self is
from the beginning in “we”-mode. Thus, self-cultivation is always under-
stood relationally and pro-socially. What does Confucianism mean by
the “we”-mode best self? Confucianism says that there is no one unified,
pre-ordered version of the best self. For Confucians, the good is con-
textually intelligent and particularistically valued (Angle, 2009).7 Indeed,
various important Confucian scholars have not only argued against the
conventions of their own society but have also offered strikingly different
visions of how exactly one realizes one’s best self. However, all of them
agree that the very process of seeking the best self through the “we”-
mode joint activity transforms us and our social world (Puett & Gross-
Loh, 2016).
Conclusion: Toward a “We”-Mode Team Production Theory

of the Firm
As Zingales (1998) points out, governance, by definition, means nothing
but the appropriate exercise of authority, while theory of the firm is a
study of the source of the authority in the first place. Hence, theories
of the firm that do not pay due attention to authority as a key concept
for understanding the nature of the firm fail to fulfill their own purpose.
The primary thesis that we have submitted is that a firm is like a sports
team. The source of authority in a firm –thereby, the foundation of cor-
porate governance –is the fact that a firm is nexus of role obligations
and authority is a special kind of role obligation created, nurtured, and
legitimatized by virtue of its membership in the “we”-mode production
team itself. More specifically, the Confucian approach identifies the pur-
pose of authority –thus, the purpose of a firm –as team production;
further, the Confucian approach identifies authority as a special kind of a
role obligation created and nurtured through notably, but not limited to,
rituals, rites, or ceremonies, in which individuals become “rites-bearers”
(Ames, 1988) who activate and nurture a teamwork-based, role-bearing
self or the “we”-mode self. In an “I”-oriented nominally joint production
team, guileful and opportunistic contractors, who activate and use the
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“I”-mode self (Alchian & Demsetz, 1972; Jensen & Meckling, 1976),
do not create enough room for respect for authority. In such an “I”-
framed Hobbesian team production, each contracting rights-bearer is
an authority by herself, and if everyone is the authority, no one is the
authority –a fundamental premise of the invisible-hand-and-nothing-else
approach –so there is not enough room for governance.
From the Confucian perspective, authority in a firm –thereby, govern-
ance –is strengthened (so the team production problem may be solved),
all other things equal, to the extent that the “we”-mode shared reality,
in which team production members realize that they as team members
have role obligations to create team-specific investments, is recognized
and strengthened. In contrast to the existing theories of the firm, the
Confucian perspective provides that the language of contract-, market-,
property right-, or more generally “rights-talk” (Glendon, 1991) may
undermine the foundation on which authority, corporate governance, and
team-specific investments can emerge, returning the team production to
be part of the market. If team members understand the organizational
life through existing theories of the firm, which rely primarily on the lan-
guage of contract or property rights, the instrumentalist understanding
may undermine the foundation in which good governance can emerge. By
developing the Confucian view of team production, this chapter maintains
that we need to bring back authority to the theory of the firm, which also
shows that we need to move beyond the “I”-mode nominal team pro-
duction toward the “we”-mode genuine team production. The Confucian
perspective offers that a firm can solve the team production problem by
being a genuine team that takes the “we”-mode mindset. By doing so,
team members can act upon team goals with managerial directives of the
authority and avoid shirking and wasteful rent-seeking behaviors.
Acknowledgments
Previous versions of this chapter have been presented at the Daniel
P. Paduano Research Symposium in Business Ethics, Business & Society
Program, Stern School of Business, New York University (2018), Society
for Business Ethics’ 2017 Annual Meeting, session on “Confucian and
Aristotelian business ethics”, Political Theory from East Asia Workshop,
Center for East Asian and Comparative Philosophy, City University of
Hong Kong (2016), and International Society of Business, Economics
and Ethics (ISBEE) 2016 Congress, Shanghai, China. We are indebted
to Phillip J. Ivanhoe (City University of Hong Kong and Sungkyunkwan
University), Sungmoon Kim (City University of Hong Kong), Joseph Chan
(University of Hong Kong), Andrew Wicks (Darden School of Business),
Jonathan Haidt (Stern School of Business), and Thomas Donaldson
(Wharton School of Business).
Compliance with ethical standards: Not funded by any grant.
Ethical approval: This chapter does not contain any studies with
human participants or animals performed by any of the authors.
3
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1

Notes
1 A Hobbesian subject might calculate her self-interest either in response to the
prospect presented by a single choice she faces, or in response to the prospect
of a sequence of choices she faces. As Gauthier (1987) shows, the latter form
of calculation can lead to more stable and higher utility outcomes.
2 Interestingly, although Blair and Stout (1999) adopt Hobbes’s instrumentalist
approach to authority in one of their earliest and perhaps most influential
papers, we shall see that Blair and Stout (2001) later soften their approach to
bring it much closer to the Confucian approach that we endorse.
3 Thomas Donaldson (2012) has formally demonstrated that theories of cor-
porate governance must be thick concepts in this sense, since one cannot
provide “advice” or offer prescriptions from purely descriptive premises. He
correctly points out that “[a]‌ny true theory of governance must allow for
‘good’ versus ‘bad’ corporate governance … [and] [n]o purely positive theory
can do this” (Donaldson, 2012: 266). His analysis is built explicitly upon
Coase’s likeminded proclamation, invoking Frank H. Knight, that “[p]roblems
of welfare economics must ultimately dissolve into a study of aesthetics and
morals” (Coase, 1960: 43).
4 In Podsakoff et al.’s (2009: 123) words, Organ’s “conscientiousness (often
called compliance) is behavior indicating that employees accept and adhere to
the rules, regulations, and procedures of the organization”.
5 Obedience and loyalty respectively account for the degree to which an indi-
vidual “demonstrates respect for a rational structure of rules and regulations…
and displays allegiance to the organization as a whole …” (Van Dyne, Graham,
& Dienesch, 1994: 775).
6 Behavioral findings on groups defined as such in the literature, whether on
team-level or other group levels, are therefore, without further theoretical and
empirical extension, not readily translatable to the firm-level.
7 Confucianism, with its emphasis on the notion of the good, has close connections
to American pragmatism. Several authors reinterpreted Confucianism
through the lens of pragmatism. David Hall, who wrote influential books on
Confucianism with Roger T. Ames (1995, 2015), had begun his academic career
as an American pragmatism researcher (1973, 1993). Tan (2003) also used
John Dewey’s pragmatism to reinterpret Confucianism to develop a notion of
Confucian democracy. In this respect, Confucianism has shared interest with
stakeholder theory, whose philosophical root is pragmatism (Freeman, Wicks,
& Parmar, 2004). So, it is a promising research topic to explore the two the-
ories’ relationship, though doing so is beyond the capacity of this chapter.
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8
Strengthening Theory through
Isolation and Subsequent
Confrontation
The Case of French Convention
Theory
Abdul A. Rasheed, Richard L. Priem
and Anne-Catherine Provost
The evolution and maturity of an academic field often is accompanied

by scholarly introspection and self-analysis. Organization studies is no
exception. Scholars over the years have attempted to summarize organ-
ization theory’s central issues (e.g., Astley & Van de Ven, 1983; Stern
& Barley, 1996), trace its intellectual history (e.g., Augier, March, &
Sullivan, 2005; Perrow, 1973; Scott, 1987), and defend its domain
and legitimacy (e.g., Scott, 1996). A special issue in the Academy of
Management Review recently asked: “Where are the new theories of
organization?”, noting “that most of the theories of organization used by
contemporary management researchers were formulated several decades
ago” (Suddaby, Hardy, & Huy, 2011: 236). Even more recently, a debate
in Organization Science addressed the long-discussed “divide” between
American and European researchers in organization studies (in this case
focusing on strategic management), with Baum (2011) arguing that
similar citation patterns suggest the “objectivist-subjectivist” divide is
narrowing, due in part to communication advances, and Lampel (2011)
countering that institutional differences between the United States and
Europe result in a continuing research diversity that benefits the field
(Shapira, 2011).
The Organization Science debate identified an elemental problem –
academic parochialism –that may be the chief contributor to the absence
of new organizational theories. Some parochialism may be due to the
perceived U.S.–Europe geographic divide that spurred the initial debate.
Yet scholarly differences can be quite extreme and following his analysis,
Baum (2011) warned that scholarly subgroups, rallying around long-
cherished views and avoiding confrontation with new ideas, may be the
biggest barrier to advances in organization science. We agree. Indeed,
some scholars, while trying to protect in- group views, may actively
suppress contrary thinking (Kuhn, 1962; Wijnberg & Gemser, 2000) or
DOI: 10.4324/9781003211549-9
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Isolation and Subsequent Confrontation 185

even contrary evidence (see Koestler, 1971, for an especially egregious
example).
Given academic parochialism, what can be done to stimulate new
organization theories? Suddaby et al. (2011) offered interesting ideas
for how more new theories might be developed. These included: moving
from “borrowing” theories to a two-way “blending” process (Oswick,
Fleming, & Hanlon, 2011) and inductive, “top- down” theorizing
involving constant comparisons to identify contradictions in the litera-
ture (Shepherd & Sutcliffe, 2011).
We take a different approach in this article. First, we build on the
ideas of March (2005) that the relatively isolated development of diverse
theories can be a positive for our field, because then new theories are
allowed to fully develop before they confront more established theories
advocated by other subgroups. That is, new theories need the protection
of their isolated subgroups, with theory building primarily within rather
than between subgroups, until a new theory is thoroughly developed
and strong enough to confront other established theories. Yet as we
have seen from the earlier discussion of academic parochialism, there
also is little incentive for scholars supporting either new or established
theories to seek a confrontation rather than protect the status quo.
Second, we illustrate the potential benefits of even an incremental step
toward increased intellectual engagement among scholars representing
differing theory traditions. We attempt to do this by describing an
isolated-yet-well-developed research stream that recently has occupied
center stage in the French sociology of organizations. The relatively
few English-language articles on this stream have translated its name
as follows: the theory of conventions, the economics of conventions,
the convention school, and other variations. Henceforth, we will use
the label “French Convention Theory” (FCT) for consistency, and to
distinguish our topic from other convention-based theories from dis-
ciplines such as economics and linguistics, which we discuss later. We
then provide an initial evaluation of the implications this stream may
hold for North American organization theory by illustrating how an
engagement with FCT can enrich other well-established organization
theories such as institutional theory and stakeholder theory. A purely
market-based conceptualization of organizations provides only a par-
tial explanation of organizations and their actions. What is worse,
market- based rationalizations based on purely economic consider-
ations have led to a number of broader negative social outcomes such
as increasing income inequality and environmental degradation des-
pite delivering greater economic prosperity. We argue that FCT can
provide not only richer and deeper understanding of organizational
phenomena but also a theoretical mechanism to incorporate both eco-
nomic and noneconomic goals and the resolutions and compromises in
the conflicts among them.
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186 Abdul A. Rasheed et al.
Background
Organization theory is unquestionably eclectic, having borrowed,
augmented, and integrated insights from disciplines as diverse as soci-
ology, psychology, biology, political science, operations research, eco-
nomics, and anthropology. This extraordinary eclecticism is seen in the
field allowing, and even encouraging, a level of theoretical pluralism that
arguably is unrivaled in other disciplines.
The early development of organization theory involved scholars
from around the world, with seminal contributions coming from Burns,
Stalker, Woodward, Penrose, and Child in England; Weber in Germany;
Donaldson in Australia; Brunsson in Sweden; and from scholars based
on North America. March notes, however, that more recently the field is
becoming increasingly “organized in a geographically fragmented way,
with linguistic, national, cultural and regional boundaries separating
relatively autonomous scholarly communities” (2005: 5). Contrary to
much conventional wisdom, March argues that this relative isolation
between the scholarly communities in North America, Europe, and Asia
can be beneficial for knowledge development. This is because isolation
prevents nascent-but-deviant ideas from being squelched by a dominant,
worldwide orthodoxy; instead, such ideas can be developed more fully
within a relatively protected geographical enclave, and perhaps can
become part of that enclave’s theory base before confronting poten-
tial critics or opposing theories from other geographies. This type of
closure (Coleman, 1988) within scholarly communities has the benefits
of decreasing variation within a community, providing a high level
of information flow, and encouraging the development of a common
language, each of which supports in-depth theory building. After the
more detailed yet potentially deviant new theories are developed, when
confrontations among ideas generated by different scholarly communi-
ties finally occur, they represent true (and severe) tests that can stimulate
debate and advance knowledge in organization studies. This is the major
benefit March (2005) argues can result from scholarly “chimneys” sep-
arating the continents.
Yet despite enormous advances in organization theory, especially
earlier in its history, current scholarly parochialism may represent exces-
sive isolation –even given March’s (2005) arguments about the benefits
of protecting deviant ideas. There long has been divergence between
Anglophone North America and continental Europe concerning research
directions for organization theory. Augier, March, and Sullivan asserted,
for example, that “scholarly fields often bury their early and geograph-
ically distant contributors through some combination of ignorance,
localized ambitions for recognition, and convenient conceptions of pro-
gress; and the field of organization studies in North America clearly
exhibits such myopia” (2005: 85).
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Nevertheless, according to the arguments of March (2005), both isola-
tion (i.e., within-community idea closure) and confrontation (i.e., across-
community idea brokerage; Burt, 2005) are necessary to strengthen
worldwide knowledge development in organization theory; neither is
sufficient alone. And although it may well be that excessive closure in
North America is contributing to a perceived slowdown in knowledge
discovery, it also may be that an absence of intercommunity confron-
tation is the greater restraint on organization theory advancements. We
next present a theory, nurtured in relative isolation.
French Convention Theory

The diffusion of FCT to the Anglophone organization theory world has
been slow for two practical reasons. First, many of the major texts and
research papers were initially published in French. Second, the writing
style and terminology is often rather idiosyncratic, making English trans-
lation a formidable task. Rojot, for example, characterized the writing
in FCT as “highly abstract, very theoretically oriented, high minded,
grounded in classical authors of political philosophy and expressed in a
complex self-referring abstract vocabulary” (2002: 289).
Two recent developments have helped FCT gain some visibility in the
English-speaking world. First, in 2006, Boltanski and Thévenot’s sem-
inal 1991 book –De La Justification: Les Economies de la Grandeur –
was translated and published in English under the title On Justification:
Economies of Worth by the Princeton University Press. Accessible
English-language reviews of this book have appeared in political science
(Creppell, 2007), sociology (Dodier, 1993), and recently management
journals (Naccahe & Leca, 2008), both before and after the transla-
tion. Also, around this time, efforts were made to present the theory in
English-language economics and sociology journals (Jagd, 2004a, 2007;
Rojot, 2002; Wagner, 1999; Wilkinson, 1997). More recently, empirical
studies based on the FCT approach have begun to appear in mainstream
journals in English (Patriotta, Gond, & Schultz, 2011; Ramirez, 2013).
We draw from these sources in English, plus from sources in the ori-
ginal French, to describe FCT for the Anglophone organization theory
audience.
FCT is distinct from other convention-related theories that have been
developed in disciplines such as economics and linguistics. Game theory
in economics relies on conventions, for example, and especially the
Nash equilibrium that enables coordination through rational conformity
(Leibenstein, 1982, 1987; Schelling, 1960). A more recent tradition in
economics views conventions not as strategic (as in game theory) but as
mechanical (Young, 1996). In this view, conventions emerge not from
strategic capabilities of agents but from a Darwinian dynamic among
competing conventions. In linguistics, language is seen as governed by
conventions that are elemental for communication (e.g., Grice, 1957;
81

Lewis, 1969). FCT, on the other hand, represents a more realist and
interpretive perspective that especially recognizes the reflexive nature of
conventions, the plurality of “worlds” in which they develop, and the dis-
tinctive role of organizations in buffering conflicts among these worlds’
values.
Biggart and Beamish (2003) point out that economic organization and
market order are central concerns of fields such as economics, economic
sociology, and organization theory. Most models of human interaction
from these fields are based on three fundamental assumptions, human
actors are rational; they act upon objects; and a mechanism is required
for coordinating their actions. The assumption that actors are rational is
necessary primarily because irrational behavior is impossible to model.
The conceptions of rationality in different models tend to differ, however.
While neoclassical economics is built upon the conception of rationality
as maximizing behavior (i.e., the strong form argument), organization
theory takes the approach that individuals are boundedly rational and typ-
ically engage in satisficing behavior (the semi-strong form). Evolutionary
and Austrian economics use a weaker form of rationality, which they
refer to as “organic” rationality (Williamson, 1985).
Second, human interactions involve relevant objects that are exterior
to the actors. In a market interaction, for example, the relevant objects are
either products or services. Neoclassical economic theories take market
objects for granted and investigate how firms and individuals behave,
or should behave, in markets that are exogenously given. A more recent
tradition in economics, represented by the new institutional economics
and transaction cost economics (e.g., Alchian & Woodward, 1987;
Williamson, 1979), has taken the transaction as its unit of analysis while
still viewing market objects as givens. Although dealing with similar sub-
ject matter, economic sociologists have asked different questions. White
(1981) and Fligstein (2001), for example, have studied how markets are
socially constructed and how coordination is achieved within the market.
Zajac and Westphal (2004) argued that even market value is socially
constructed. Velthuis’s (2005) exploration of the meaning of prices and
Zelizer’s (1994) study of the meaning of money show that even elemental
concepts such as prices and money, which are typically considered as
objective and given, are socially constructed.
Third, as suggested previously, there is a need for mechanisms that
bring about coordination among actors. These mechanisms could include
rules, routines, or institutions that exist explicitly to bring about coord-
ination. Notably, the realization that market prices alone are insufficient
for coordination in many contexts has been growing, even within main-
stream economics. For example, the new institutional economics (Alchian
& Woodward, 1987), principal-agent theory (Jensen & Meckling, 1976),
and the property rights literature (Alchian & Demsetz, 1972) all reflect
greater recognition of and attention to the coordination problem. This
also is the primary focus of FCT.
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Foundations of French Convention Theory

The seminal contribution of FCT lies in the multiple explanations it
provides for coordination and order –explanations that are based
not just within the marketplace but also in other key spheres of social
action that include domestic, civic, spiritual, and even “pop culture”
values. FCT has three core assumptions (Thévenot, 2002): (1) there
are multiple forms of coordination beyond pure market exchange;
(2) actors refer to objects in order to reduce uncertainties from the mul-
tiple coordination forms, and these objects aid in justifying and coord-
inating behaviors via different possible conventions; and (3) because
both 1 and 2 require careful deliberation by actors, procedural ration-
ality (Simon, 1976) is assumed. Finally, organizations are devices that
allow actors a common arena for coordination, even if using differing
conventions. We describe the key building blocks of present-day con-
vention theory next.
Conventions. Conventions make exchanges possible among actors
in the face of external uncertainty and internal limits on rationality.
They emerge as a human response to uncertainty because coordination
requires some common framework of external reference that actors
agree upon. Languages, for example, contain many conventions that
together provide a common framework allowing effective commu-
nication among actors. Not surprisingly, the study of conventions is
important in linguistics. Lewis (1969: 58), for example, formally defines
a convention as:
A regularity R in the behavior of members of a population P when

they are agents in a recurrent situation S is a convention if and only if
it is true that, and it is common knowledge in P that, in any instance
of S among members of P,
(1) everyone conforms to R;
(2) everyone expects everyone else to conform to R; and
(3) everyone prefers to conform to R on the condition that others do,
since S is a coordination problem and uniform conformity to R is
a coordination equilibrium in S.
If one follows this definition of a convention, ambiguities concerning

the actions and behaviors of other actors disappear. FCT takes a slightly
different and nuanced view that emphasizes interpretation and reinter-
pretation of conventions. The goal of a convention is not to make all
ambiguity and uncertainty about other actors’ actions disappear, but
instead is to establish the presence of a “collectively recognized refer-
ence, which stops, temporarily, the speculation concerning the intentions
of other actors” (Orléan, 1994: 26). That is, conventions are neither
immutable nor always successful in solving problems of coordination.
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Instead, they are dynamic, not static, and they emerge or change through
processes of trial and error that become second nature to all actors
through practice. Conventions therefore result from learning processes
instead of external imposition or a priori common agreement; thus, a
convention will change if it fails to bring about intended coordination,
or when circumstances change, or if the actors reinterpret circumstances
(Storper & Salais, 1997). While conventions restrain the actions of the
agents by their agreement, they are also the result of the agents’ actions.
Thus, agents develop through trial and error collective cognitive devices
(Favereau, 1989) –i.e., conventions –which should be understood as
clarification mechanisms that are recursively interpreted by actors in given
situations. The scope of these conventions is “dynamically determined by
a process of permanent justification [i.e., value explanations] and testing”
(Wilkinson, 1997: 318).
Conventions develop through interpretations of actions, mutual
adaptation of interpretations, and a gradual determination of the modes
of agreement. When conventions with wide spatiotemporal applic-
ability are identified, they become in effect institutions (Wagner, 1994).
Conventions can be considered as “attempts to order the economic pro-
cess in a way that allows the production and exchange to take place
according to expectations which define efficiency” (Storper & Salais,
1997). Conventions typically have three dimensions: rules of spontan-
eous individual action, agreements among individuals, and institutions
in situations of collective action. Initially, conventions have a hypo-
thetical character, but over time, they become routines. Conventions
are not exogenously imposed; instead, they evolve endogenously from
actions of the actors. As Wilkinson points out, conventions “emerge
within the process of actor coordination. …they represent a response to
problems arising within such co-ordination and should be understood
as mechanisms of clarification which are themselves also open to future
challenge” (1997: 318).
Conventions mitigate uncertainty. When the quality of a good is
known and there is no uncertainty about the future, markets accom-
plish perfect coordination through the price mechanism. But neither of
these assumptions holds in the world outside neoclassical economics:
there are many market situations that permit multiple equilibria, or
where the quality of a good cannot be ascertained prior to a transac-
tion. FCT considers such situations more the norm than the exception.
That is, coordination among agents must take place within a context of
pervasive uncertainty (Salais & Storper, 1992), and coordination is pos-
sible only if the actors can, in common, identify the situation as one in
which certain conventions apply. This identification, in turn, is based on
the actors’ (hopefully joint) interpretation of the situation. French con-
vention theorists see the production of this agreement and the resulting
coordination as the key issues requiring analysis.
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Orders of Worth and the Plurality of Coordination Modes

The “economies of worth” idea developed by Boltanski and Thévenot
(1991, 2006) occupies a central position in FCT because it is essential for
analyzing the agreement-reaching process. They began by developing six
basic axioms or principles useful for identifying different forms of coord-
ination. These principles are:
1. Principle of common humanity: In order to model any situation

requiring coordination, the members who constitute a population
must be identified. The principle of common humanity assumes a
fundamental equivalence among these members.
2. Principle of differentiation: Members within a population can
be in different states, and, theoretically, there could be as many
states as individuals. For example, a person can be well known or
unknown; a person can be efficient or inefficient.
3. Principle of common dignity: A fundamental tension exists
between the principle of common humanity and the principle
of differentiation. Any situation wherein states can be perman-
ently attributed to individuals violates the principle of common
humanity. FCT therefore assumes that all members have identical
opportunity to access all states. This multistate humanity leads to
agreements and disagreements.
4. Existence of orders of worth: Disagreements and disputes among indi-
viduals within a polity can be resolved only if the states are ordered.
Such an ordering of states –which is necessary to coordinate actions
and justify distributions among states –is expressed through a scale
of values for the goods or happiness attached to these states.
5. Investment formula. Although all members have access to all
states, and although the states themselves are ordered, not all
members are in the highest state because there is an investment
formula that links the benefits of a higher state to the costs or
sacrifices required of individuals who wish attain that state.
6. Common good: Individuals holding a lower state aspire to the
benefits attached to the higher state. Happiness, goods, or utility –
which increase as one moves from a lower state to a higher state –
is beneficial to the polity as a whole (i.e., it is a common good).
The power of these six basic principles lies in their usefulness for identi-
fying and describing various frameworks for coordination among actors.
Boltanski and Thévenot (1991) identified and described six commonly
occurring frameworks. Referred to as cités in French, these frameworks
have been translated as polities, orders of worth, common worlds, and
cities in English versions. For consistency, we henceforth will refer to
the different frameworks as “worlds”, each of which employs a different
“order of worth” as its underlying basis for coordination.
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Boltanski and Thévenot (1991) derived their six common worlds by
applying the basic principles to three bodies of data: field data on processes
of disputation, classic texts from the field of political philosophy, and
popular “how to” business books. The six commonplace worlds they
identified are the world of markets, the world of inspiration, the domestic
world, the world of renown, the civic world, and the industrial world. We
provide a brief description of each world in the following paragraphs.
For the first, market world, we illustrate how the basic principles apply
to defining that world. For subsequent worlds, we provide more concise
descriptions. A summary comparing the worlds is shown in Table 8.1.
The market world. Not surprisingly, the classic text from which
Boltanski and Thévenot (1991) derived their market world is Adam
Smith’s Wealth of Nations. Individuals in this world are motivated by
a desire for scarce goods that can be acquired only by paying the mon-
etary value dictated by supply and demand. In this world, the pursuit
of wealth is the basis for a harmonious order which transcends the con-
fusion of individual interests (Hirschman, 1981). In the market world,
the principle of common humanity identifies the actors in the market
and distinguishes them from the goods that are exchanged. The prin-
ciple of differentiation allows individuals to be in different states (e.g.,
wealthy vs. poor; possessing a good vs. without that good). These states
are valued based on a clearly specified order of worth. The legitimacy
of the market system is based on the principle of common dignity; all
actors have the opportunity to become wealthy. Attaining wealth, how-
ever, involves costs and requires investments on the part of the individual.
Finally, in the market system, the wealth attained (i.e., the value created)
is a common good that is beneficial to all. According to Boltanski and
Thévenot,
in the market polity, every disagreement can become a formal dis-

pute to be settled in a market test that the persons involved agreed
to undergo. The violent encounter between antagonistic appetites
is thus calmed in a market to which persons can refer, as a higher
common principle, in the search for agreement.
(2006: 79)
The world of inspiration. The canonical text from which the world of
inspiration is derived is St. Augustine’s City of God. The higher common
principle in this world is inspiration. The attainment of worth is the
attainment of grace. Grace is not humanity’s due but is a pure gift from
God. Grace cannot be attained by human action; it flows solely from
God’s compassion. It is completely independent of recognition by others.
Inspiration is manifested through holiness, artistic or scientific creativity,
or imagination. In the world of inspiration, the relevant actors are artists,
scientists, mystics, and others who are worthy because they are odd,
wonderful, and emotional. The central tensions for actors in this world
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newgenrtpdf
Table 8.1 A comparison of common worlds
World of Domestic World of Civic World Market World Industrial World

Inspiration World Fame
Higher common Inspiration, Generation, Others’ The collective good Competition for Efficiency,
principle innovation, hierarchy, opinions is preeminent scarce goods performance
one’s muse tradition matter
State of worthiness Spontaneity, Trustworthiness, Fame, Contribution to the Desirability and Contribution to
based on an actor creativity, faithfulness, renown, collective monetary value of productivity
genius appreciation visibility goods possessed
Subjects Artists, scientists, Forebears, Celebrities Community Competitors, Professionals,

mystics ancestors customers experts
Objects Dream, mind Good manners, Brands, Legal forms of Consumer goods, Tools, methods,
gifts, dwelling messages, community money wealth tasks, plans,
fashions representation quantity
Investment by actors Thought, time, Duty, Sacrifice Solidarity, forego The pursuit of wealth; Continuous
and effort consideration of one’s personal in favor time and effort improvement
family members privacy of collective and learning
Relation of worth Uniqueness Authority, Identification Membership, Ownership Control
subordination election,
representation
Elementary relation Passion Trust and respect Recognition Solidarity Exchange Linkages to
functions
Format of relevant Emotional, not Oral Semiotic Formal Monetary Measurable:
information measurable production
statistics
Time horizon A visionary Customarily, the Vogue, Perennial Short term Long-term,
moment past fashion, planned future
trend, fad
Sources: Adapted from Boltanski and Thévenot (1987, 1991, 2006), Lamont and Thévenot (2000), and Rousselière and Vézina (2009).
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are conflicts with the worlds of renown or market worlds. For example,
when an inspired artist accepts fame, recognition, and money, conflicts
among worlds may necessitate inevitable compromises.
The domestic world. The classic text from which the domestic world
was derived was Bossuet’s La politique tirée des propres paroles de
l’Ecriture sainte (Politics Drawn from the Very Words of Holy Scripture).
Bossuet applied a domestic model to construct a world quite distinct from
the family in its limited sense. Instead, he grounds the legitimacy of the
kingdom on the forms of domestic relations exemplified in the scriptures.
Order is established and individual worth is derived from generation,
hierarchy, and tradition. An actor’s worth comes from placement within
a network of dependencies, the judgment of the superior, and because
tradition considers it proper. Actors cannot be separated from the groups
to which they belong, be it a family, an organization, or an estate. The
king is the greatest being in this world, and his role is that of a father who
makes sacrifices for his children.
The world of renown. Boltanski and Thévenot (1991) derive their
world of renown from Hobbes’s Leviathan. Worth in this world comes
solely from others’ opinions, and it is measured by visibility. The more an
actor is recognized by others, the greater is that actor’s worth. A brand
name, a label, or a badge all signal recognition and, likely, identification.
An actor can identify with another actor (a celebrity) or with an object (a
luxury car). The fundamental conflict in this world is between self-esteem
and recognition by others. Indignation over lack of recognition is unjus-
tified, however, because self-esteem is subject to evaluation error and to
believe that one is the sole possessor of inspired truth (as in the world of
inspiration) is a mark of folly.
The civic world. The canonical text from which the civic world is
derived is Rousseau’s Social Contract. Civil peace and common good
come from a sovereign who is impartial and above private interests.
Unlike the domestic world, however, this sovereign comes into being as a
political body, formed by the convergence of individual wills when actors
give up their individual interests for the sake of a common good. Higher
states of worth are not attained by actors but are instead determined by
the collectives to which actors belong or represent (e.g., union members
or leaders, a senator). The objects of interest in the civic world are legis-
lation, codes, and policies. Actors gain respect by sacrificing personal
interests for the good of the collective.
The industrial world. The industrial world was derived primarily
from the works of the 19th-century French sociologist Saint Simon, espe-
cially his L’industrie. The criteria for worth in this world are efficiency
and performance. The objects of interest are factors of production such
as machines and processes. Actors with expertise helpful to achieving
higher productivity are more worthy than those without such expertise.
Interestingly, identical vocabulary is used to describe actors and objects
in this world (i.e., people and machines are described as productive,
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efficient, and so on). Organization, measurement, and standardization
are essential to smooth relationships.
Justifying a Particular Mode for Coordinating Action

The same action by an individual can be justified with reference to one or
more of the above six worlds. Morand and Stagl (2001) provide an illus-
tration of how a vineyard owner might invoke justifications from each of
the worlds, as shown next:
I grow vines because it pays more than sheep- farming (the

market world)
I grow vines because I have the right to do so (civic world)
I grow vines because it is so beautiful in the fall (the world of
inspiration)
I grow vines because it is what my father did (the domestic world)
I grow vines to become a famous vineyard (the world of renown)
I grow vines because I am trained to do so (the industrial world).
But justifications from different worlds can conflict. For example, a

formal evaluation of performance may be easily justified at work but
could escalate a dispute at home. When individuals interact, they often
experience dissatisfaction when their justifications draw upon different
worlds, which can lead to disputes or conflict at home, at work or in pol-
itics. The imperative of justification is fundamental during such disputes.
That is, individuals involved in the dispute must offer justifications for
their own actions and criticisms of others’ actions. This need for justifica-
tion forces parties to refer to a worldview that can tackle both agreement
and disagreement. Such a worldview must establish equivalence between
situations, so precedents from the past can be applied to the current dis-
pute and must be able to link people and objects (i.e., who should wash
the plates, who should inherit the deceased father’s estate, etc.).
Individuals and organizations move between different worlds on a
regular basis, even within the same day. Such movement can potentially
result in a continuous process of clashes, justifications, denunciations,
and compromises. As summarized by Amblard, Bernoux, Herreros, and
Livian (1996), according to FCT, there are three possible scenarios when
controversies occur between worlds. The first is one of conflict in the
same world, which is normally resolved through clarification in that
world. For example, when an engineer is criticized by his superior for
being inefficient, any dispute can be settled by referring to an expected
standard of productivity. The second scenario involves the interaction
and coexistence of different worlds when a dispute is accommodated by
local arrangement. In such a scenario, individuals or groups stay in their
own worlds but find a local and temporary arrangement for resolving
a dispute. For example, an employee facing personal difficulties might
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find a local arrangement with the employer for, say, a modified work
schedule. The arrangement is nevertheless local, temporary and for only
the one, particular transaction; it cannot be generalized. Such coexist-
ence is often fragile and situation specific and is not based on a superior
common principle on which both sides agree. Finally, there could be
ongoing conflict between two different worlds. In such situations, either a
durable compromise will be reached by extracting objects from different
worlds and associating them positively or the logic of one world will pre-
vail over the other because of an agreed-upon superior justification, or
the unresolved conflict will continue. For example, a durable compromise
might be reached in a dispute between a sales department representing
the market world and a production department representing the indus-
trial world, if a task force with sales and production members could agree
on which conflicting logic from their respective worlds is superior for that
situation.
Wagner (1994) gives an example of superior justification that occurred
after a politician was criticized for transferring public resources to a
friend or family member. The politician’s action could be justifiable in the
domestic world, namely, taking care of one’s own, but is unacceptable
in the civic world. In such situations, resolution consists of asserting the
greater applicability of the civic logic and denouncing the application of
the domestic logic.
In many situations, however, such resolutions are not easily evident.
Boltanski and Thévenot (1999) discuss the situation of a professor
administering a test to his students while the student body of the univer-
sity is engaged in a civil rights protest outside, and the police are beating
them up. The professor’s actions are justified in the industrial world, but
subsequent denunciations of his actions follow the civic logic. That is,
those referring to the civic world believe he failed to demonstrate soli-
darity with the students who are protesting for a greater cause.
FCT also highlights how a pure economic analysis can result in
problems being construed too narrowly. Thévenot (2002) expands on
an example of conflicting justifications for giving blood discussed by
Williamson (1975: 38) to show that coordination may be especially
problematic in critical situations. Following the example, consider an
individual who is donating blood. Blood has a market value and can
be sold for a market price. Is the donor generous or naïve? And can a
health-care system succeed while depending heavily on generosity? The
simplistic answer would be that any decline in generosity of donors can
be offset with an increase in the price offered for blood. Williamson
points out, though, that the standard economic model “assumes that
individuals regard transactions in a strictly neutral, instrumental manner.
However, it may be more accurate, and sometimes even essential, to
regard the exchange process itself as an object of value” (1975: 36). That
is, transactions cannot be understood without considering the actors
involved and their interpretations.
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INTERPRETER Civic Sympathetic Greedy
Naive Realistic
Market
Civic Market
ACTOR
Figure 8.1
Conflict between the civic and market worlds: an example.
The same situation can also be analyzed with the actor and another
interpreter referring to either the civic world or the market world. If both
refer to the same world, they will agree upon the assumptions underlying
the action. If they follow the market justification and the actor is selling
blood, both will interpret the action as “realistic”. If both follow the civic
justification and the actor donates the blood, both will interpret the act
as “sympathetic”. But when the actor sells blood using the market justifi-
cation and the interpreter uses the civic justification, the interpreter will
see the act as “greedy”. In the opposite case, the blood donation would
be seen as “naïve”. Thus, FCT views human rationality as more interpret-
ative than calculative and argues that without applying justifications
drawn from alternate worldviews, with their differing orders of worth, it
is impossible to understand the conventional actions of others and coord-
inate with them. Such an understanding has both cognitive and evaluative
dimensions, as this example clearly illustrates. As Wagner argues,
the “identification of the situation determines the applicability of the cri-
teria; to create a consensus on the character of the situation means closing
the controversy” (1994: 283) (Figure 8.1).
Organizations as Compromise Mechanisms

While transaction cost theory views firms as originating from market
failure, FCT does not rely on market failure as an intellectual justifi-
cation for the existence of firms. Instead, FCT views organizations as
mechanisms for compromise between the logics of the different worlds
discussed earlier. More precisely, FCT sees organizations and institutions
“as bundles of conventions that have emerged as pragmatic solutions
to economic problems and have become reified as normal” (Biggart
& Beamish, 2003: 458). Before discussing organizations as com-
promise mechanisms, however, we must clarify that in FCT there is no
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one-to-one correspondence between specific organizations or institutions
and different orders of worth. That is, it would be a mistake to assume
that the civic worth corresponds to the state and local governments, the
inspiration worth to the church, and the domestic worth to the family.
Instead, all organizations must cope, through compromise, with critical
tensions among these different orders of worth. We next illustrate the
critical tensions and compromises with specific examples.
The delivery of public services has recently generated considerable
controversy in the United States. Debates have become common over
issues such as increasing the use of toll roads, reducing public funding for
public universities, and cutting postal services. In each of these instances,
the debates are based on a critical tension between the civic and market
orders of worth. Generally, what previously was taken for granted as a
necessary public service now often is denounced using market logic as too
costly. A “citizen” who assumed entitlement to public services becomes a
“customer” who is unwilling to pay fully for the services consumed. The
valorization of public services using the market world’s order of worth
can, in turn, lead to protests from “citizens” employing the civic order
of worth. One compromise in this situation could involve promoting the
notion of a “user” to resolve the critical tension between market and civic
logic without necessarily accepting one logic’s primacy over the other
(Thévenot, 2001).
Turning to for-profit firms, many characteristics of the internal markets
discussed by Williamson (1985) evoke the domestic order of worth.
The domestic order is grounded in a temporal dimension of usage and
precedent, a spatial dimension of proximity, and a hierarchical dimen-
sion of authority. The resulting relationships essentially substitute for
market mechanisms (Favereau, 1986). Thus, within firms, we observe
characteristics of the domestic order in terms of “precedent which endures,
closeness which specifies, and authority which encompasses” (Thévenot,
2001: 415). The domestic logic applies not only within the firm, but
also in relationships between the firm and its customers, especially for
service businesses where individual attachments and aversions play an
important role and relationships take on more of a human character.
From the “personal shoppers” assigned to customers by Nordstrom’s
to the relationships between doctors and patients or money managers
and high-net-worth clients, we see the domestic order of worth in action.
Thus, in the functioning of banks, hospitals, and money management, the
industrial, market, and domestic orders of worth are in a state of critical
tension calling for specific compromises.
Family firms are dominant in many economies and clearly exhibit
the typical tensions –and various compromises –among the industrial,
market, and domestic orders of worth. Agricultural and food-related
industries also design compromises, especially between the domestic
quality of products (i.e., an emphasis on tradition and locality, the use
of domestic characters such as Betty Crocker in advertisements) and
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industrial conceptions of quality (i.e., mass production, standardization,
detailed specification of inputs). There are many other examples of indus-
tries that compromise among multiple orders of worth. This suggests
that, as Stark (1996) points out, a plurality of modes of coordination
can make an economic organization more adaptable and endow it with
dynamic efficiency.
Convention Theory and Markets

FCT also has addressed the study of product markets, labor markets, and
financial markets. Not only do conventions play a central role in each
of these markets, but nonmarket orders of worth or logics are at play in
these markets as well.
Product markets. In the neoclassical economic tradition, the price of a
product already contains all information about the quality of a product.
Such assumptions of transparency and self- sufficiency do not corres-
pond to the sociological idea that quality itself is socially constructed in
many industries. Markets cannot function without prior definition of the
quality of products to be exchanged (Wilkinson, 1997). Therefore, unlike
in the neoclassical perspective in which the world is seen as constituted of
natural elements such as goods and money, convention theory attempts
to “denaturalize” the world of economic action. White (1981) viewed
markets as self-reproducing system of niches for competing firms. He
identified different types of markets, such as ordinary markets, advanced
markets, and paradox markets, based on variance in firm choices in a
quality/price space. In a recent work, Favereau, Biencourt, and Eymard-
Duvernay (2002) demonstrated that each of these markets is based on
a different quality convention. More specifically, ordinary markets are
based on the merchant quality convention, advanced markets on the
industrial quality convention, and paradox markets on the domestic
quality convention. A similar attempt at developing a typology of different
kinds of industries and identifying conventions of quality applicable to
each has been undertaken by Salais and Storper (1992). Conventions
of quality become coordinating principles for firms connected through
supply chain relationships as well as between the firm and its customers
(Diaz-Bone, 2008).
Labor markets. Convention theory holds that the functioning of labor
markets cannot be understood based on standard theories of supply and
demand with wages as the coordination mechanism. FCT also rejects
the opposing sociological position that coordination occurs in the labor
market through rules imposed from outside (e.g., labor laws) or intern-
alization of organizational goals and values by employees. Instead, FCT
holds that such coordination occurs through unwritten conventions that
constitute a system of reciprocal expectations regarding competence,
behavior, and rewards (Favereau, 1986). The employer’s interest is in
the work and the resulting product, whereas the employee’s interest is
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in wages, thus leading to a situation that is “indissolubly conflictual and
cooperative” (Salais, 1992: 281). Convention theory does not exclude
the possibility of such conflict. Instead, it views conventions as providing
a framework within which conflicts can be conceptualized and resolved.
Salais (1992) identifies four conventions of labor, namely, market
labor, intellectual labor, industrial labor, and non-quality labor, which
differ among each other in terms of evaluation of work and the wage
relationship.
Financial markets. Financial markets are institutions created with
the specific purpose of making property rights liquid. Such liquidity
produces opportunities for constant reevaluation of value, which causes
fluctuations in security prices. The differences in the evaluation of finan-
cial capital and productive capital can be explained by the divergence
between the market and industrial conventions of qualification. Unlike
consumer goods, whose conventions of quality can be established and
agreed upon by participants in the market, financial securities have an
additional problem related to specification of quality (e.g., bond ratings
show how conventions of quality appropriate for consumer goods are
applied to financial products). The financial markets attain “coordin-
ation by opinions, where a set of heterogeneous opinions is transformed
into a reference value” (Eymard-Duvernay, Favereau, Orléan, Salais, &
Thévenot, 2005: 11). Mimetic behavior is the norm leading to specula-
tive bubbles and subsequent crashes. Since qualification is by opinion, the
logic of the world of renown is as much at play in financial markets as is
market logic. The celebrity status of investment gurus from Jim Cramer
to Peter Lynch illustrates the applicability of the world of renown to what
we might otherwise consider as the closest approximation to perfect or
efficient markets.
How Permanent are Conventions?

Conventions come into existence as a response to uncertainty, so a theory
of conventions is incomplete unless it can also explain how conventions
can change over time. There are several studies in economics showing
that technical standards tend to persist long after they have become sub-
optimal. At a fundamental level, convention theory sees rules as neither
prior to action nor as exogenous to action. Instead, they evolve out of the
efforts of the actors to attain coordination. Conventions are constantly
challenged and modified, and they evolve through a dynamic process of
permanent justification and testing. Boyer and Orléan (1994) present a
detailed model of endogenous diffusion of new conventions which results
in transition from one set of conventions to a different set of conventions.
First, conditions of general collapse such as a market crash, a world war,
or a change in political system such as the transition from communism to
market systems in Eastern Europe can create an environment conducive
for the emergence of new conventions. Second, a context of invasion can
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give rise to new conventions. For example, Japan immediately after the
Second World War underwent many changes while under U.S. occupation.
The context of invasion is not necessarily limited to situations of armed
conflict. The diffusion of Japanese management practices into the United
States, and the spread of U.S.-style stock options pay to other countries
(Buck & Shahrim, 2005; Fiss & Zajac, 2004; Sanders & Tuschke, 2007)
both fall into the category of contexts of invasion. Third, a dynamic of
translation occurs when one set of conventions is convertible to another
or cumulatively evolves into another (Wilkinson, 1997). A fourth and
final type of transition is transition by agreement which requires ex ante
coordination among actors.
Organizational Research on Conventions

The use of convention theory as a tool for organizational analysis is evi-
dent from studies that have appeared in recent years. Beunza and Stark
(2004) studied a Wall Street trading room and explained arbitrage as
discrepancy between different evaluative devices. Boisard and Letablier
(1987) studied the cheese industry in France and confronted two radic-
ally different modes of production: an industrial model based on mass
production (the normalized Camembert) and an artisanal model oriented
on the search for high-quality product (the Norman Camembert). Wissler
(1989) analyzed loan applications as moments of expression of various
worlds of worth and compromise between the domestic, civic, industrial,
and market logics. Ponte and Gibbon (2005) explain the governance of
global value chains by applying the conventions of quality to specific
industries such as coffee and clothing. Moursli and Cobbaut (2006)
explained the coexistence of different organizational forms (for profit,
nonprofit, and state owned) within the nursing home industry in Belgium.
They demonstrated that when facing a plurality of forms of justification
which are under tension, the nursing homes must compromise between
many different logics, which results in a certain conception of the quality
of their services. Their analysis showed that the quality of the services
offered by the for-profit nursing home reflects a compromise between the
industrial and market logics and was defined in terms of efficiency, rigorous
organization, qualifications of the personnel, appropriate equipment, and
new services in order to meet and satisfy the demand and needs of the
customers. The public nursing home offers services defined in terms of
accessibility to all elderly persons, their social role, and abundance of
staff, if not overabundance, reflecting a compromise between the civic
and fame logic. Finally, the nonprofit nursing home reflects a compromise
between the civic, domestic, industrial, market, and fame logic. The ser-
vices offered are defined in terms of helping the elderly and handicapped
persons, in terms of respect, dignity, and affection, but also in terms of
reputation and profit as long as it is in compromise with the other logics.
Other applications of FCT include the compromise between business
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orientation, solidarity, and reputation in Rotary clubs (Camus, 1991);
the rules of evaluation used for ranking students in schools (Derouet,
1992); and avant-garde artistic work and the forms of contestation of
its value (Heinich, 1993). Patriotta, Gond, and Scultz (2011) used FCT
to explain how various stakeholder groups engage in institutional repair
and legitimacy maintenance in the aftermath of a nuclear power plant
accident in Germany. Similarly, Ramirez’s (2013) study of change in the
institutional logics of the British audit profession also draws heavily from
FCT. Kozica and Brandl (2015) applied FCT to explain how the per-
formance appraisal system of a public sector organization in Germany
handled the paradoxical tensions between the accountability and profes-
sional logics. Dumas and Louche (2016) explained the approach of the
financial community in the United Kingdom to the ideas of responsible
investment in terms of one set of conventions being replaced by another.
Most of the studies using FCT have been done in France or Europe. The
theory has received relatively little attention in the United States, with
McIneney’s (2008) study of nonprofit technology providers as one of the
few exceptions. We now turn to the potential for new theory develop-
ment that could occur if FCT were to confront several North American–
based organization theories.
Potential Contributions to Anglophone Organization Theory

Naccache and Leca’s review of On Justification: Economies of Worth
(English translation) concludes that “this highly original work provides
potentially important avenues of research for organizational theorists,
and [Boltanski & Thévenot] themselves point out that organizations are
the perfect setting in which to apply their framework” (2008: 764). Yet
until true and vigorous confrontation occurs between FCT and each of
the many, eclectic Anglophone organization theories, one cannot accur-
ately predict the theoretical advances that will result. Nevertheless, we
now suggest several organizational theories where confrontation with
FCT might be especially fruitful. For two of these –institutional theory
and stakeholder theory (especially as it relates to organizational goals and
corporate governance) –we try to provide some specific guidance toward
where potential advances might occur. For several other theories, we offer
less detailed guidance.
Institutional Theory
In FCT, there are three elemental institutions: language, money, and law.
Bessy and Favereau argue, for example, that “there is no individual ration-
ality without language, no market economy without money, and no plur-
alist society without law” (2003: 136). The goal of FCT is not to propose
a theory of institutions, however, but instead to “analyze the relation-
ship between individual action and different collective frames [worlds] of
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action” (Jagd, 2004b: 30). Moreover, although these “worlds of action”
are external to individuals, they are created, actualized, and questioned
through individual action. Thus, institutions are endogenous to a popu-
lation, and the reflexivity of actors engaged in the act of coordination
plays an important role in ultimately resolving the problem of coordin-
ation by establishing institutions. This interaction –between individuals’
actions and the resulting conventions that may become normalized as
institutions –is likely where a confrontation of FCT and institutional
theory might be most productive.
One reason we suggest that an engagement between institutional theory
and FCT might be productive is because of similarities in the organiza-
tional phenomena that each theory is trying to explain. Institutions
arise from and constrain social action, as do conventions. An important
element of institutional theory is the notion of institutional logics, which
are the “axial principles of organization and action based in cultural
discourses and material practices prevalent in different institutional or
societal sectors” (Thornton, 2004: 3). These logics provide the “rules
of the game” that shape both the cognitions and actions of individuals
within organizations. Thornton’s (2004) insightful study of the publishing
industry, for example, shows how the industry shifted over time from an
editorial logic to a market logic, and from the logic of personal capitalism
to market capitalism. Similarly, Scott, Ruef, Mendel, and Caronna (2000)
documented the transformation of health-care organizations from profes-
sional dominance to managed care, with the attendant changes in insti-
tutional logics. While these studies document in painstaking detail the
transition from one set of institutional logics to another, and the resulting
organizational changes, they have been criticized for not adequately
explaining why one order fell apart and a new order came into exist-
ence (Light, 2003). This is indicative of a general criticism of institutional
theory for treating institutional logics as exogenous and “analytically
removed from the more active struggles over meaning” (Lounsbury,
Ventresca, & Hirsch, 2003: 3), and therefore for its failure to explain the
emergence and change of institutional structures (Hallet & Ventresca,
2006). Barley and Tolbert (1997: 92) also found fault with institutional
theory research for its failure to explain “how institutions are created,
altered, and reproduced” and attributed this failure to underdeveloped
models of institutionalization as a process. A second reason why engage-
ment between institutional theory and FCT could be productive is that
while institutional theory recognizes that organizations are embedded
within the market, the state, the professions, religion, and the family, all
of which provide a distinct set of often-contradictory logics that form the
bases of conflicts (Thornton, 2004), it provides an inadequate explan-
ation for how these conflicts are actually resolved.
FCT could make a meaningful contribution in addressing both these
criticisms by helping to explain how conventions evolve and change,
and how compromises are generated when different logics collide. Two
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North American articles, for example, used an institutional perspective
in explaining (1) how actors can affect normative institutions (Sherer &
Lee, 2002) and (2) how institutions can affect actors’ behaviors (Oakes,
Townley, & Cooper, 1998). Together, these articles show the reflexive
nature of institutions and the coordination by actors that is argued by
French convention theorists. Sherer and Lee (2002) examined the transi-
tion among law firms from the Cravath system of six years for achieving
partnership and then “up or out”, to a new system where associates who
do not become partners may nevertheless stay at their firms on a non-
partner career track. Sherer and Lee (2002) note that this transition was
spurred by a shortage of newly graduated lawyers as input to the “up
or out” system, and by the waste that resulted as many quite competent
lawyers were forced to depart their firms after six years. The transition
was made possible, however, only after the largest and most prestigious
firm made the change first. Once this legitimacy was granted, the transi-
tion quickly diffused down the “prestige ladder” of law firms, resulting in
the replacement of the normative institution of “up or out” with a new
normative institution that included a non-partner career track. Sherer
and Lee (2002) carefully analyzed and explained this complex process
from the institutional and resource dependency perspectives.
The application of FCT to the same situation could provide additional
insight. For example, the initial institution relied on justifications from
the industrial world’s order of worth –i.e., lawyers were valued solely on
their productivity, and only the most productive could remain with a firm
if the firm was to be successful. This normative institution was threatened
as new lawyers became progressively fewer and therefore more expen-
sive. Ultimately, the central actors in the most prestigious firm found a
compromise that balances the pressures of the market world’s supply
and demand justification with the needs of the industrial world’s prod-
uctivity justification. Thereby, this organization initiated a compromise
mechanism between two worlds with different orders of worth, and the
innovation developed by this prestigious law firm soon changed the nor-
mative institution of the entire legal profession in a way that showed
firms a method for successfully managing both their market and indus-
trial values. Examining these orders of worth and how they affected the
compromise could have added another layer of depth to the analysis.
Moreover, introducing FCT to situations currently partially explained
with institutional and resource dependence theories could expose unex-
plained aspects of phenomena under study, thereby spurring new theory,
theoretical integration, or both.
The article by Oakes et al. (1998) offers an example of change initiated
from the top, wherein the decision by the provincial government in
Alberta, Canada to adopt business planning changed the behaviors
of actors in the province’s museums. Oakes et al. (1998) explain how
the introduction of business planning terminology into the museums’
training, documentation, and measurement procedures shifted the
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attention of museum workers from successfully preserving the history
and artifacts of the province for its citizens, to successfully running their
“business” by attracting customers to raise revenues while controlling
costs to maximize profitability. Their analysis focused on how the lan-
guage of business altered behaviors of the museums’ actors. A confronta-
tion with FCT may also add insight in this case, by further explaining the
shift that occurred during the transition from one world’s order of worth
to another’s. Specifically, the museum actors initially operated based on
the order of worth of the civic world –i.e., collective benefit, or that
which is best for the common good. At that time, museum workers were
valued based on their contributions to the collective’s goal of protecting
Alberta’s historical artifacts. But as the government’s decision caused
their language to change toward business terminology, the museum
actors shifted (often unknowingly) to the orders of worth represented
by the industrial world (productivity) and the market world (gaining
wealth for the museum). Then, museum workers were valued more for
their contributions to productivity and profitability, respectively, than
they were for their ability to preserve and protect Alberta’s artifacts.
Not surprisingly, the workers turned their attention away from the value
order of the civic world and toward the value orders of the market and
industrial worlds. Again, examining these orders of worth and how they
affected the change could have exposed unexplained process aspects of
the phenomenon and thereby spurred theory modification or new theory
development.
There has been growing recognition of the potential that FCT holds
for acting as a substitute or complement to institutional theory among
organization theory scholars in recent years. Cloutier and Langley
(2013) argued that FCT can address the main limitations of institutional
theory and suggested that a rapprochement between the two theoret-
ical approached could prove to be productive. Boxenbaum (2014) and
Bullinger (2014) have also outlined some of the benefits of applying the
FCT perspective to situations that have been previously studied using the
institutional perspective. Diaz-Bone (2014) elaborated on the differences
between institutions and conventions while recognizing their shared core
idea of a pluralism of deeper structures of coordination in organizational
fields.
Stakeholder Theory
Stakeholder theory argues that not only shareholders but also many
other groups –customers, suppliers, employees, and communities, among
others –invest in firms, and all of these investments are necessary to a
firm’s success (Donaldson & Preston, 1995; Freeman, 1984). The cooper-
ation of each group helps the firm to deliver value for shareholders and
also to other stakeholders. Therefore, effective managers must empha-
size building relationships with all of the firm’s stakeholders. Moreover,
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decisions about values are inseparable from business decisions. Managers
must make values-based decisions that move beyond purely economic
concerns if they are to balance stakeholder preferences and thereby retain
their stakeholders’ ongoing cooperation in the overall value creation
project (Freeman, Wicks, & Parmar, 2004). Thus, stakeholder theory
represents a normative theory of management that has implications for
both strategic management (“what actions should be taken to maintain
long-term success?”) and corporate governance (“whose values should be
given what weights in decision-making?”).
While considerable support has been expressed for stakeholder
theory’s ideas that values and multiple stakeholders must be incorporated
into firms’ strategic decision- making (e.g., Donaldson & Preston,
1995; Freeman et al., 2004; Hosmer, 1994), other scholars have made
arguments for maintaining a shareholder focus (e.g., Friedman, 1970;
Jensen, 2001; Sundaram & Inkpen, 2004). One interesting and recurrent
argument in this debate is that those running a corporation simply cannot
optimize multiple objective functions; that is, corporate governance will
be ineffective if managers and boards of directors try to attend to multiple
stakeholders (e.g., Heath & Norman, 2004; Jensen, 2001; Sundaram &
Inkpen, 2004). Stakeholder theorists’ response has generally been to note
that attention solely to shareholders will produce a “moral myopia” that
increases the likelihood of Enron-like illegalities and, conversely, that
when stakeholder “relationships are managed well, shareholders will
reap the profits” (Freeman et al., 2004: 367).
How does one prioritize among organizational and stakeholder goals,
and what actions are likely to be effective? FCT may be able to make
a unique contribution in addressing these questions with more detailed
action guidelines than have been available to date, for several reasons.
First, FCT confirms the importance of combining economic analysis and
social analysis; that is, the FCT view is that firms’ major function is as a
compromise mechanism between coordination according to the market
world’s order of worth and coordination according to other worlds’ orders
of worth. Second, FCT delineates a hierarchy of values within each world
and thereby can be used to clarify managers’ understandings of stakeholder
positions and to guide managers in making value judgments. This could
be a step toward better integrating ethical decision-making into strategic
management (Hosmer, 1994). And third, FCT provides mechanisms –ran-
ging from superior justification through true compromise –that hold the
potential for agreement on a superior principle rather than engaging only
in recurrent bargaining from relatively fixed positions. Thus, by applying
justifications drawn from alternate worldviews with their differing orders
of worth, managers may find it possible to better understand the multi-
attribute utility functions of various stakeholders and to coordinate with
them. Developing such understandings could advance the normative goals
of both economics-based governance theories and stakeholder theory.
Furthermore, FCT could provide the impetus toward building context
7
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theories of corporate governance (see, e.g., Bamberger, 2008) that would
combine economic and social components and explain how complex gov-
ernance relationships change across contexts. Again, the confrontation of
FCT with another theory could spur theory development.
Other Potential Contributions

FCT occupies a privileged position for theory generation because it resides
in-between economics-based organization theories such as transaction
cost economics (Williamson, 1979) and behavior-based organization the-
ories such as the behavioral theory of the firm (e.g., Cohen, March, &
Olsen, 1972). FCT therefore can address the dialectical tension between
under-and over- socialized theory, because it subsumes both market
relations and personal, trust- based relationships. Theories of social
embeddedness proposed by authors such as Granovetter (1985) and
Uzzi (1997) take proper aim at the conception of the atomized, under-
socialized individual in classical economics. Yet to some extent, these the-
ories deal instead with over-socialized individuals whose motivations and
actions can be explained almost solely by the network of relationships
within which they are embedded. Neither type of theory is fully separ-
able from the other, however. In under-socialized theories, for example,
although market relationships are characterized by anonymity and dis-
continuity, even such relationships can be seen to involve some specific
forms of social relationships. And in over-socialized theories, although
strong ties are characterized by durable, intense relations based on rela-
tional proximity, even such relationships can be affected by economic
relations (e.g., Uzzi, 1997).
Economists in recent years have extended their analyses to issues
such as family, power, politics, and organizations –areas that were
once considered outside the scope of economic analysis. Sociologists,
on the other hand, have extended their realm to include the analysis
of economic action. Modes of coordination in sociological analyses
of economic action are based on social groups, however, with coord-
ination based on social practices and representations substituting for
the market coordination framework. A potential advantage of FCT is
that it allows for a plurality of forms of coordination, including both
market and social coordination (Eymard-Duvernay et al., 2005). FCT
affords us an opportunity to study the conflicts between different orders
of worth and the compromises worked out by organizations and the
society in general. Nyberg and Wright (2013), for example, studied cor-
porate environmentalism as a response to environmental degradation
and climate change. Their finding was that corporate sustainability
initiatives are temporary resolutions of competing social worlds and
that they contribute to the corruption of the social good of the envir-
onment and convert it into a market commodity through justifications
derived from the market world.
8
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Swedberg (2006) sees three major distinctions between economic soci-
ology and FCT. First, one of the most fundamental differences between
FCT and economic sociology is that FCT endows the economic actor
with both flexibility and independence, attributes not recognized by eco-
nomic sociology. FCT sees the agent as involved in a constant adjust-
ment of behavior based on the different worlds of justification that he
is using. An agent’s behavior is made intelligible to the other agents by
his justifications, and it is this understanding that makes coordination a
social process. Second, while classical economics views price as the coord-
ination mechanism, coordination has not been a central issue in economic
sociology. FCT’s focus is on coordination and it sees conventions as
the mechanism that brings about coordination. The third major diffe-
rence involves the role of values. While contemporary economics defines
values as utility, economic sociology takes a highly relativistic position
and misses out on the normative dimension. The six orders of worth
presented by Boltanski and Thévenot (1991, 2006) introduce alternative
value systems and thus bring evaluation to center stage in the coordin-
ation process.
Limitations of French Convention Theory

We have provided a discussion of the fundamental features of FCT and
how various organization theories might benefit by confronting and per-
haps incorporating some of the insights developed by this school. It also
is important to discuss some of the limitations of FCT, in part because
they suggest how FCT might benefit by confronting other theories. First,
while at a general level, there is agreement that common frames of ref-
erence make it possible for actors to coordinate with each other, it is
unclear how they arrive at a consensus on these common worlds. In
recent years, in addition to the six common worlds discussed in this art-
icle, additional common worlds such as a “green” world (Latour, 1998;
Thévenot, Moody, & Lafaye, 2000), an “information” world (Thévenot,
1997), and a “project” world (Boltanski & Chiapello, 1999) have been
proposed. These are in addition to the four worlds of production proposed
by Salais and Storper (1992) and the four models of labor conventions
suggested by Salais (1992). The rapid proliferation of common worlds
has the potential to sacrifice the goal of parsimony that was the original
intention behind the identification of these common frames of analysis.
Second, convention theory has also been criticized for its lack of explicit
discussion of power relations (Ponte & Gibbon, 2005). Although, the-
oretically, conventions arise from the aggregation of micro-actions by
actors, clearly some actors have greater power and influence than other
actors (Sherer & Lee, 2002). Third, because of its focus on coordination
among actors, convention theory stops short of explaining conflict, i.e., a
breakdown in coordination and the resultant coordination through force
(Creppell, 2007).
9
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2
Conclusion
The perceived lack of new theories in organizational studies may be the
result of over-isolation among scholarly communities, not only between
scholars from different geographies but also between adherents of
differing theoretical perspectives within the same geography. Isolation
allows a scholarly community to develop strong ties among its members,
agreed-upon norms and procedures for scientific progress, and shared
goals and terminology. Such closure is most effective in nurturing the
further development and exploitation of a community’s existing theories.
With time and continuing isolation, however, theoretical advances likely
will become increasingly incremental and banal. Thus, confrontation is
necessary among well-developed theories from different scholarly com-
munities if our field is to “stir the pot” of new ideas.
We have attempted in this chapter to encourage future confrontation
between FCT and several accepted North American organization the-
ories. We hope that we have shown –through the example of FCT –
that such confrontations among theories have the potential to stimulate
new theory creation or theory integration. Just as March (1991) has
argued that organizations must balance exploiting existing capabilities
with exploration for new capabilities, organization science also must
balance exploitation of existing theories with exploration for new ones.
That is, communities’ closure to nurture theories should be balanced by
brokerage to challenge them.
Making theory confrontation a more regular occurrence, however,
could be challenging. First, exploration across the boundaries of scholarly
communities would be required, yet parochialism and increasing special-
ization by scholars can make such boundary crossing difficult. Second, as
Kuhn (1962) and others note (Baum, 2011; Koestler, 1971), the adherents
of different perspectives may not wish to see their cherished theories
compared or challenged; they may instead increase closure within their
community and so ignore both withering criticism and disconfirming evi-
dence. Such “theory inertia” and parochialism may be occurring even (or
especially) in the current pluralistic, pre-paradigmatic stage of organiza-
tion studies.
We hope the FCT example we discuss in this article may help spur
intellectual engagement among organization theory scholars representing
different scholarly communities. We used FCT as an example “bridging”
theory that is ripe for confronting other theories because we believe it can
interact productively with both economics-based and behaviorally based
organization theories. Stark is quoted as noting similarly that FCT “does
not fit neatly into any of the dominant approaches, but precisely because
of this, it may prove highly inspirational for work in various traditions”
(Naccache & Leca, 2008: 764). Nevertheless, other theories may prove
equally or even more useful. More engagement across scholarly subgroup
borders in the future could result in more confrontations among more
0
1
2

theories and, thereby, increase theory creation and theory depth. More
engagement is not, however, our prediction.
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9
What It Means to be Truly Human
in Organizations
Martin Buber’s Concept of I-Thou
Relations
Ulrich Leicht-Deobald, Lyndon E. Garrett
and Lloyd E. Sandelands
Theories in social science make assumptions about human nature. These

assumptions matter because they inform our research and the methods we
use to study organizations. They also influence the options we propose
to design organizations. One of the most influential theories in organ-
izational scholarship is the theory of the firm, also referred to as agency
theory (Jensen & Meckling, 1976). This theory assumes that people
behave rationally according to a utility function of stable preferences in
order to maximize personal gains. Similar assumptions have been made
in other dominant theories in organizational research. For example,
social exchange theory builds on the premise that human relationships
develop based on people’s intention to gain profits and avoid punishment
(Emerson, 1976). Similarly, social network theory builds on the notion of
self-interested behavior, positing that people use their social networks to
capitalize on personal gains, such as increases in influence, power, or pay
(Ghoshal, 2005). Furthermore, social network theory reduces persons
and their human relations to structural properties of a network consisting
of “nodes” and “ties” (Burt, Kilduff, & Tasselli, 2013).
These conceptions of human relationships are not wrong or morally
condemnable; however, they offer a limited view on the world of human
relationships. One problem of such accounts is that they model human
behavior upon a narrow premise of self-interested behavior. Another, yet
related, problem is that such accounts rely upon a limited few axioms
that reduce the reality of human relations to an abstract level, casting out
much of the richness of human relations in organizational life. A third
and more profound problem is that such accounts preclude the metaphys-
ical dimensions of human relations. These accounts offer words for the
many and various objects of human relations (e.g., individuals, groups,
tasks, jobs, leaders, followers, owners, employees, products, services,
buyers, sellers, and so on), but no words for the spirit or “being” of
human relations, no words for such things as their living possibilities, or
their joy, solidarity, and common good.
DOI: 10.4324/9781003211549-10
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218 Ulrich Leicht-Deobald et al.

These conceptions of human relationships are of decisive practical sig-
nificance because they shape how social relationships are experienced and
conducted. Traditional views of the firm promote a depersonalized social
structure that puts economic concerns for efficiency and the division
of labor over concerns for personal connection and community. These
views define relationships by the purposes they serve and organize them
according to the objective roles they define. In this rationalist view, the
genuine concerns of persons for one another succumb to the artificiality
of economic contingency.1 Thus, by depicting human relations in terms
of their objects and instrumentalities, these conceptions define what we
are (declaring in effect that we are self-seeking objects). However, by con-
ceding nothing of spirit or being to human relations (not to mention their
living possibilities, joy, solidarity, or common good), these conceptions
say nothing about who we are.
It could be no surprise then that when social scientists first observed
the advent of the modern business corporation, they were concerned that
the depersonalization and deliberate prevention of emotional connection
in organizations would be alienating (Weber, 1904/1958, 1920/1984).
Durkheim (1933) warned that seeing each other as means to economic
ends, not unlike material objects, would create an “anomic division of
labor”, leading to a lack of sensitivity and moral regard for each other’s
needs. Ferdinand Tönnies (1887/1957, p. 36) contrasted the mechanical
relations in organizations (Gesellschaft) with the more organic relations
in community (Gemeinschaft). Gemeinschaft is characterized by inter-
personal connections based on emotional depth, personal intimacy, and
involving the whole person, whereas Gesellschaft is characterized as
“mechanical” because it is seen as artificial fictions operating under logic
and rationality that dehumanizes interpersonal connections. Unifying
human themes such as trust become corroded and mutated into some-
thing mechanical and external such as rigid contracts. In the Gesellschaft,
people are reduced to mere commodities.2
This depiction from decades ago of work relationships as mechanical,
transactional, and impersonal seems to be only growing in relevance in
recent years. Americans are reportedly forming fewer nontransactional
relationships at work (Cappelli, 1998; Pfeffer, 2006), and the number of
Americans who see work as a place to make friends is declining (Grant,
2015; Kacperczyk, Sanchez-Burks, & Baker, 2013). This corresponds with
a broader trend of increasing social isolation, demonstrated in the land-
mark book by Putnam (2000), Bowling Alone, but as Pfeffer (2006, p. 5)
states, “We are not only ‘bowling alone,’ we are increasingly ‘working
alone’ ”. We all need human connection, but its significance seems to be
drowned out when viewing relationships as functional and instrumental
(e.g., Sayer, 2007). David Korten (2019, p. 1) invites us to challenge this
outlook of organizations, suggesting that the “proper purpose of any
human institution is to improve the lives of the people who depend on it”.
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Truly Human in Organizations 219

In this chapter, we aim to broaden our understanding of the nature
of human relationships at work by looking back to the work of Jewish
philosopher Martin Buber, a key historical figure in the philosophy of
human relations.3 In his landmark book, I and Thou (1923/1958), Buber
suggests that we encounter others in two different existential modes: I-It
and I-Thou. In the I-It mode, one sees the other person as a discrete object
in space and time. He/she is a composition of objective and measurable
properties to be judged by his/her potential value or usefulness. In con-
trast, in the I-Thou mode, one beholds the other person in the fullness of
his/her being and with regard for his/her inalienable human dignity. In the
light of Buber’s thinking, it is apparent that, by the assumptions they make
about human relationships, the theory of the firm and related theories are
strictly predicated on the I-It mode of relations and focus entirely upon
the objective, instrumental, and impersonal. By precluding the I-Thou
mode of relations, these theories keep people from their full humanity at
work. And while being fixed on I-It relating orients organizations toward
instrumental and individualistic ends, it closes organizations off to the
profound purpose and moral solidarity of I-Thou relating.
In this chapter, we offer an expanded conception of human relating at
work, beginning with Buber’s concept of I-Thou relations and drawing
upon allied ideas from the social teaching of the Catholic Church. We
begin by unpacking Buber’s distinction between I-It and I-Thou; first,
to recognize that it involves profound distinctions in how we come to
relationships, and particularly how we understand their ontology, epis-
temology, and causality; and second, to recognize that it invites us to
think differently about business. Upon this foundation, we then point the
way toward a new language of business rooted in the being of I-Thou
relations. In particular, we call attention to ideas of the human person,
human communion, and the logic of gift. In so doing, we follow the call
of Korten (2019) to offer a piece of theoretical spadework to help develop
an emerging Theory of Community in organizations. With this chapter,
we hope to lead the reader and the field of organizational studies beyond
the existing and dominant account of human relationships in business
predicated upon self-interested behavior, to a more humane account of
these relationships predicated upon their real being, illuminating their
beauty, truth, and goodness.
Between the I-It and the I-Thou

Martin Buber was a Jewish philosopher and one of the pioneers of the
philosophy of dialogue in the early 20th century. Considering himself a
philosophical anthropologist, Buber sought to explore and understand
the wholeness of human beings from the particularity of lived experience.
While studying in Vienna, Buber was inspired by the world of theatre and
the give-and-take format of university seminars to develop a philosophy
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of dialogic intersubjectivity, contending that humans only fully come into
being in relations of mutual confirmation with other humans. Many of
his essays and lectures have been compiled and published in two volumes:
Between Man and Man (1947; essays from the 1920s and 1930s) and
The Knowledge of Man (1965; essays from the 1950s). In these essays,
he offers a dialogic answer to Kant’s question “What is man?” –that
is to be in relation. Or as Buber writes, “In the beginning is the rela-
tion” (1923/1958, p. 18). Buber’s writings inspired philosophers Gabriel
Marcel, Emmanuel Levinas, and others in a philosophical movement criti-
cizing the obsession with empiricism and objectivity brought in during
the Enlightenment as the dominant way to understand and relate to the
world. Buber and his followers recognize empiricism and objectivity as an
abstraction of realty and a contrived way of relating to the world.
Buber’s most influential work was his book, I and Thou (1923/1958),
in which he develops a distinction between two fundamental modes of
relating, I-It and I-Thou. I-It is the mode of relating in which we most
frequently engage with others, experiencing the other as an object with
certain characteristics and capabilities, with some functional motivation
driving the exchange. For example, in a recruitment process, an HR man-
ager might scan the profile of a job candidate based on an evaluation of
the candidate’s personality and abilities according to predefined criteria.
Managers might see their subordinates as impersonal human resources.
Coworkers might see each other by their roles rather than the persons
inside the roles. Such knowledge, by its very nature, is impersonal, making
no distinction between persons and things. I-It is monologic and produces
one-way relationships with objects and object-like persons.
For Buber, however, the primary mode of relating is the dialogic I-
Thou relation. I-Thou is not merely a thing among others (Lent, 2013).
Rather, I-Thou relating “points to the quality of genuine relationship in
which partners are mutually unique and whole” (Kramer, 2003, p. 15).
This mode of being in relation is characterized by “mutuality, directness,
presentness, intensity, and ineffability” (Friedman, 2002, p. 65), affirming
the other not as an object, but as another subject that cannot be objectified
or labeled. In a recruitment process, for example, an HR manager might
engage in a genuine dialogue with the job candidate, allowing him/herself
to be truly moved by the presence of the other person without objectifying
her or him. Managers and coworkers might take in and wonder at the
beauty and magnificence of each other in their uniqueness and wholeness,
realizing at the same time a sense of oneness in their shared humanity.
Buber (1923/1958) acknowledges both the necessity and value of
objective knowledge or I-It relations for living in the world (Lent, 2013),
as we tend to organize our everyday around the I-It to reduce our exist-
ential anxieties, which is not necessarily wrong nor evil. We objectify the
world in a self-indulgent way to possess it, to master it, and to create
order. We employ quantifiable measures to capture images of “reality”
for science. We see employees as human resources as a way to maximize
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efficiency. Many great scientific and organizational achievements can be
credited to the I-It. But I-It comes with a price, as the profound limitations
of I-It leave us alienated from each other, and even from ourselves. Buber
contends that I-It only has meaning in the service of I-Thou:
It is not as though scientific and aesthetic understanding were not

necessary; but they are necessary to man that he may do his work
with precision and plunge it in the truth of relation, which is above
the understanding and gathers it up in itself.
(1923/1958, pp. 41–42).
Both modes of being are exclusive: we are either in the mode of I-
It or I-Thou. Although Buber acknowledges that we spend most of our
lives in the I-It mode of being and only occasionally enter the I-Thou, he
emphasizes that the I-Thou is essential for becoming fully alive as person,
as “without ‘It,’ a man cannot live; but he who lives with ‘It’ alone is not
a man” (1923/1958, p. 52). Thus, business that is disconnected from the
relational underpinnings that give it meaning is a hollow pursuit with
potential to alienate or corrupt; I-Thou gives meaning to business and
makes it a fully human enterprise.
Buber stresses that there should be an appropriate rhythm of alter-
nation between the I-It and I-Thou modes of being. This alternating
between I-It and I-Thou allows for a dynamic turning to the other as an
act of inclusion without giving up the “ground of one’s consciousness”
or the ability to “see through one’s own eyes” (Friedman, 2002, p. 357).
Kramer (2003, p. 159) describes the experience of switching from I-It
to I-Thou as “turning toward the other with unreserved spontaneity by
opening to an indwelling presence between persons… turning away from
a self-reflexive monologue consumed in self-enjoyment and towards the
wordless depths of genuine I-Thou”. One turns away, therefore, from a
preoccupation with self, while turning toward the other as Thou in an
invitation to genuine dialogue. As I meets Thou, the connection is defined
“in between” both, as self and other are reciprocal partners engaged in a
“dynamic of elemental togetherness” (Kramer, 2003, p. 24).
But our culture has increasingly become absorbed into the world of It.
Many have contested that the rise in technologically mediated interaction
has increased the perceived artificiality of social connection (Couldry &
Hepp, 2017; Mallaby, 2006; Marche, 2012; McPherson, Smith-Lovin,
& Brashears, 2006; Olds & Schwartz, 2009; Sigman, 2009; Stoll,
1999; Turkle, 2015). Technology permits a more careful and deliberate
presentation of the self. But for Buber, genuine dialogue requires each
respondent to bring what is really in his or her head to the dialogue,
“without artifice, seeming, or pretense” (Cooper, 2003, p. 138). Related
to the I-It versus I-Thou distinction, Buber draws a distinction between
being and seeming. Reitz (2015, p. 109) describes seeming as “attempting
to ‘read’ the group and sensing how to respond to our perceptions in the
2

right way”. Friedman (2002, p. 99) explains, “The origin of the tendency
toward seeming is found in the human need for confirmation. It is no easy
thing to be confirmed by the other in one’s being; therefore, one looks to
appearance for aid”. But this deep-seated concern about being accepted
by others and our felt need for protection leads us to be “encased in an
armour” (Buber, 1965, p. 10), which inhibits I-Thou relation both by
masking the I and shielding against the Thou.
Buber emphasizes the importance of embracing and revealing one’s per-
sonhood to enable entering an I-Thou relation. An I-Thou relation is “a
relation of person to person, of subject to subject, a relation of reciprocity
involving ‘meeting’ or ‘encounter’…” (Herberg, 1956, p. 14). Indeed, the
“I” of a person differs between I-It and I-Thou. In I-Thou a person becomes
whole through a relation to another self. The formation of the “I” of the I-
Thou relation takes place in a dialogical relationship in which each partner
is affirmed as a whole being. Only in I-Thou relation can the “I” truly
develop as a whole being, as participants move toward a union with each
other that affirms the distinctiveness and authenticity of each other.
As much time as Buber spent thinking and writing about the I-Thou
relation, he offers no clear steps to cultivating I-Thou encounters. In a
speech at the 1930 Convention of Jewish Youth Organizations in Munich,
Buber stated,
But if you asked me, ‘What is to be done’ I would have to tell you
that I do not have a prescription in my pocket, and I have nothing
that resembles a prescription. For this call of the moment that all of
you ought to hear cannot be translated into a formula.
(Biemann, 2002, p. 254)
This reflects his commitment to the ineffability of I-Thou relations.

For Buber, “The Thou encounters me by grace—it cannot be found by
seeking” (1923/1958, p. 62). In fact, deliberately attempting to construct
an I-Thou encounter is already succumbing to an I-It mode. Relatedly,
Buber acknowledges that every Thou by its nature fates to become a thing,
or continually reenter into the condition of things (Lent, 2013), making
I-Thou encounters “perilous” and “unreliable” (1923/1958, p. 77). No
person can permanently stay in an I-Thou relation, and, as a matter of
principle, no I-Thou encounter lasts forever. These moments fade away
and become sediments of objective manifestation and artifacts. Hence, we
must find ways to nurture and renew those moments of direct, genuine,
and spontaneous encounters if we are to cultivate generative relationship
with other persons.
Applying Buber’s Framework to Social Life in Organizations

In the following, we will offer a review of important differences between
the I-It and the I-Thou regarding their mode of understanding, ontology,
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Table 9.1
Characterization of I-It versus I-Thou
I-It I-Thou
Mode of understanding Seeing Beholding

Ontology Constellation of things Enfolding process
Epistemology Variance theory Process theory
Causality Efficient causes Final causes
epistemology, and causality. First, we suggest that there are two alterna-
tive modes of understanding corresponding to the I-It and I Thou: seeing
objects and beholding being (see Table 9.1) (Sandelands, 2017). In the
I-It, a thing is seen as an object. In this perspective, seeing is to regard
things with certain ideas in mind –in particular, that they are material
entities in the dimensions of space and time, that they therefore have
parts and that they have certain perceptible properties, and that they
stand in relations of cause and effect to other objects. In the I-Thou, by
contrast, being is beheld by taking it into ourselves and allowing our-
selves to be conformed to it. In this perspective, beholding is to receive
and integrate the other being into our own according to our capacities
of body and mind. These different modes of understanding of I-It and
I-Thou are mutually exclusive; we cannot see objects and behold being
at the same time.
Second, we propose that there are different ontologies underlying
these alternative modes of relating: the I- It corresponds with seeing
relationships as constellations of objects, whereas the I-Thou corresponds
with understanding relationships as processes of eventful encounters (see
Table 9.1) (Mohr, 1982). From the I-It perspective, relationships are made
of stable material objects that change according to their positioning in
space and time only. Relationships develop and adapt in association with
properties of other objects in the world, but they do not change in their
substance (Van de Ven & Poole, 2005). Social network analysis is a good
example of this kind of perspective. According to this view, persons and
their relationships can be reduced to the structural properties of nodes and
ties, assuming that these nodes and ties only change in response to some
external property of other things, but not in their own substance.
By contrast, the ontology underlying I-Thou acknowledges the pro-
cessual nature of relating. Such ontology embraces being as a verb rather
than a noun, focusing on “relating” as a process rather than “relation”
as a thing (Mohr, 1982; Tsoukas, 2005). The essence of process phil-
osophy is nicely captured by Heraclitus’ statement: “Process is funda-
mental: The river is not an object but an ever-changing flow; the sun is
not a thing, but a flaming fire. Everything in nature is a matter of process,
of activity, of change” (Rescher, 1996, p. 10). The different ontologies
underlying I-It and I-Thou reflect two different versions of the world: the
first one related to I-It that sees the world as made of objects in which
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processes represent change in objects; and the second one related to I-
Thou that understands the world as made of processes in which objects
are reifications of processes (Tsoukas, 2005).
The ontology of I-Thou has been much less readily embraced by
philosophers in the 19th and 20th centuries than that of I-It (Van de Ven
& Poole, 2005). Notable exceptions include the American pragmatic and
processual approaches of Charles Sanders Peirce, William James, John
Dewey, and Alfred North Whitehead (Van de Ven & Poole, 2005) and
the European life philosophy and phenomenology of Wilhelm Dilthey,
Georg Simmel, Edmund Husserl, Martin Heidegger, and Hans-Georg
Gadamer. Buber was most familiar with those continental traditions
of life philosophy and phenomenology, because he attended lectures of
Dilthey and was invited to Simmel’s private tutorial when studying at the
University of Berlin (Wood, 1969). Nevertheless, Buber never system-
atically laid out an explicit ontology of the I-Thou in his own writings
(Wood, 1969).
Third, there are two distinct epistemologies emanating from these
alternative ontologies underlying I-It and I-Thou: variance theory and
process theory (see Table 9.1). The I-It corresponds with variance theory;
the I-Thou corresponds with process theory. In the business sciences, vari-
ance theory has been the dominant idea of what constitutes knowledge
of business. An important characteristic of a variance theory is that it can
be formulated in mathematical terms. The theory of the firm is a good
example of this kind of theory, as the original statement of this theory
was laid out as a mathematical function (Jensen & Meckling, 1976). In
variance-theory terms, explanations take the form of causal statements or
models incorporating variables (e.g., X causes Y, which causes Z) (Van de
Ven & Poole, 2000). An implicit goal of such deterministic explanations
is to establish the conditions necessary and sufficient to bring about an
outcome (Mohr, 1982; Van de Ven & Poole, 2000). Variance theory pri-
marily uses research designs such as experiments and surveys, applying
quantitative statistical methods built on the general linear model, such
as Analysis of Variance (ANOVA), regression, factor analysis, and struc-
tural equation modeling (Van de Ven & Poole, 2000). Poole, Van de Ven,
Dooley, and Holmes (2000, p. 29) attribute the predominance of variance
theory to organizational scientists’ one-sided graduate school training,
pleading for a more balanced use of variance and process theory: “Give a
child a hammer, and everything seems made to be hit; give a social scien-
tist variables and the general linear model and everything seems made to
be factored, regressed, and fit”.
The I-Thou, in turn, corresponds with the epistemology of process
theory. Whereas variance theory draws on variables, process theory
builds on events, providing narrative explanations of how a process
enfolds as a sequence of events (Drazin & Sandelands, 1992; Mohr,
1982; Pentland, 1999). Process theory can, for example, include crit-
ical events, turning points, rites of passage, interaction rituals, formative
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patterns, or contextual influence, that give direction to how a process
enfolds (Collins, 2004; Poole et al., 2000; Turner, 1969).4 In process
theory, the order of events matters, which is different from the epistem-
ology of variance theory (Abbott, 1988). Even the meaning of concepts
and events can change over time, as the involved actors’ interpretations
of those concepts and events change as the process enfolds (Abbot, 1988).
As such, process theory tends to be more complex than variance theory
due to the potential nonlinearity of the underlying events (Tsoukas &
Chia, 2002). Different than variance theory, process theory can only
establish necessary conditions to bring out a particular outcome but not
sufficient conditions (Mohr, 1982). In its purest form, process research
uses qualitative research designs, such as case studies or ethnographies,
and builds on qualitative methods, such as interviews or participatory
observation (Poole et al., 2000). The subjectivity inherent in the interpret-
ative process –be it the subjectivity of the involved actors being studied
or the subjectivity of the researcher –is not seen as “error variance” to
be explained away, but understood as a valid source of information that
helps gain insights into the very nature of a phenomenon.
Finally, I-It and I-Thou differ in their underlying mode of causality:
the I-It corresponds with efficient causes; the I-Thou corresponds with
final causes (see Table 9.1). According to Aristotle (1999), an efficient
cause is what brings an entity into being. As such, an efficient cause can
be thought of as a push-type causality (Mohr, 1982). In the more tech-
nical terms of variance theory, an efficient cause is a force that links an
attribute X of an entity with an attribute Y of the same or another entity,
such that attribute X is conceived as acting on the attribute Y (Van de
Ven & Poole, 2000). For example, the quality of a work relationship X
(i.e., an attribute of an entity) could be thought of as changing the work
satisfaction of an employee Y (i.e., an attribute of another entity). To
qualify as an efficient cause, the precursor X (in our example, the quality
of a work relationship) must be necessary and sufficient to cause the out-
come Y (the work satisfaction of the employee). Efficient causation is the
predominant mode of explanation in modern social sciences today (Van
de Ven & Poole, 2000). In variance theory, efficient causation is even
thought of as the only legitimate type of causal reasoning (Mohr, 1982).5
Final causation, by contrast, is what determines the purpose of an
entity (Aristotle, 1999). Aristotle envisaged this type of causality only for
living beings (Mohr, 1982). A final cause can be thought of as a pull-type
causality (Mohr, 1982). For example, one could think of a final caus-
ation much like the development of a seed toward becoming a plant: the
means of becoming a plant is already inscribed in the seed as a poten-
tial, becoming actualized when the seed grows toward being a plant; the
purpose, however, of being a plant is already inherent in the seed right
from the beginning of its being. Modern social science has abandoned
Aristotle’s metaphysical understanding of final causes altogether, not least
because it requires assuming a natural purpose inherent in living beings
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or supposing a supernatural entity determining the purpose of all beings
(McKelvey, 2004). Social science today refers to final causes only in a
metaphorical sense (Mohr, 1982). In process-theory terms, a final cause is
understood as “an endpoint to whose existence connotes the occurrence
of certain prior events” (Mohr, 1982, p. 59). In this view, a final cause
is understood merely as a probabilistic process but not as a purposeful
development inscribed in the being itself or imposed by a supernatural
entity. As such, contemporary social scientists do not permit themselves
to think of final causation in broader Aristotelian terms. However, when
reading Buber, particularly his earlier mystic writings (Buber, 1908, 1908/
1931, 1909), we cannot help but think that Buber holds that it is essen-
tially through final causation in the broader Aristotelian sense that I-Thou
encounters support a divine higher purpose coming into being.
Toward a Language of Being in Business

After this review of characteristic differences between I-It and I-Thou,
we now turn our attention to what the notion of I-Thou portends for
our thinking about relationships in business. Heretofore, management
scholars and business ethicists have rarely referred to the concept of the
I-Thou directly. One of the few exceptions is Peter Drucker (1980) who
met Buber when Drucker was a student at the University of Frankfurt.
From this early life experience, Drucker was familiar with Buber’s work.
In Drucker’s classic writings on management, he particularly emphasized
the importance of receptiveness in managerial communication which was
influenced by Buber’s notion of I-Thou relations. However, Drucker does
not mention Buber’s concept of I-Thou relations directly (Schwartz, 2004).
Similarly, the business ethics literature has also seldomly referred directly
to Buber’s concept of I-Thou relations (Schwartz, 2008). One of the few
exceptions is Robinson (2015) who compared Islamic notions of dialogue
with more Western conceptions, such as Buber’s I-Thou relations. Besides
these few exceptions, management and business ethics scholars have
stayed silent about Buber’s ideas. Buber’s work, however, resonates with
concepts from the humanistic management perspective, such as human
dignity and flourishing (Pirson, 2017; Pirson, & Lawrence, 2010).
There is also some literature in business ethics, most notably from the
social teaching of the Catholic Church, that draws upon ideas of the fun-
damentally relational nature of being that resonate with Buber’s concept
of I-Thou. This resonance can be traced perhaps to the common root of
Catholic Christianity and Buber’s Jewish philosophy in the monotheism
of Abrahamic religion –both begin in the article of faith that all being
begins and ends with God. In any case, this ancient Abrahamic perspec-
tive is lost upon the modern political philosophy underlying most of the
organization sciences that is loath to embrace metaphysical assumptions
about human nature that cannot be scientifically verified. Catholic
social teaching augments this ancient perspective with the metaphysics
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Collective level Participating

in a Community of
Persons
Dyadic level
The Logic of Gift

Encountering
I-Thou
Relations
Individual level
Being
a
Person
Figure 9.1
A summarizing model of I-Thou relations and related concepts.
of Aristotle and Aquinas (Sison & Fontrodona, 2012, 2013) to develop

ideas about person (e.g., Acevdeo, 2012; Mele, 2009; Sandelands,
2009), community (e.g., Melé, 2012; Sison & Fontrodona, 2013), and
the logic of gift (e.g., Baviera, English, & Guillén, 2016; Frémeaux &
Michelson, 2011).
We believe that these ideas might help situate the concept of I-Thou
in the business ethics literature and enrich our understanding of I-Thou
relations in organizations. Figure 9.1 depicts a summarizing model of I-
Thou and the related concepts of being a person, participating in a com-
munity of persons, and the logic of gift.
Being a Person
We begin our walk through ethical concepts allied to the I-Thou with
the human person (see summarizing model in Figure 9.1). The notion
of a person shares close intimacy with the concept of I-Thou, because
Buber (1923/1958) understands being aware of one’s personhood as
an important prerequisite to engage in I-Thou relations. According to
Catholic social teaching, a person is a unique, absolute being, possessing
self-conscience and self-determination (Melé, 2009). As a result of those
faculties, man can act morally and reflect his own actions (Melé, 2012).
In this view, human beings are a reflection of God’s absoluteness, which
implies that we partially mirror God’s perfection. As such, a person has
absolute dignity, but at the same time the natural ability to feel guilt,
shame, and remorse when disregarding his or her dignity and acting dis-
honest (Acevedo, 2012). As such, a person can transcend itself in the very
act of making free decisions (Melé, 2012). Virtue ethics can be thought of
as a way to cultivate acting in accordance with one’s dignity (Melé, 2009).
8
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Most notably, a person is characterized by being “someone” and not
“something” (Spaemann, 2006), which also resonates with how human-
istic management conceptualized human dignity (Pirson, Goodpaster, &
Dierksmeier, 2014).
Similar to Buber (1923/1958), Catholic social teaching understands a
person as a process or event rather than as a state or object. According to
this doctrine, man is an image of God; though an imperfect one (Acevedo,
2012). As such, personhood is the latent structure of our being. By our
very existence, we have an unqualified inherent dignity as a person (Sison,
Ferrero, & Guitián, 2016). But it is a dignity that we must live up to by
our conduct. As a person, we can only develop fully when we exercise our
reason and free choice toward the end of perfecting ourselves in the image
of God. To this end the Catholic Church and other spiritual movements
offer practices by which we can become the person we are created to be,
often by detaching us from the trials and tribulations of the world of I-It
relations in acts of silence, meditation, reflection, and prayer to reclaim
the peace and solace of the I-Thou relation. Buber (1923/1958), however,
emphasizes too that I-Thou encounters are not restricted to such quiet
solitary moments but can be experienced while engaging in the world
with any living being (humans, animals, even plants) so long as we open
ourselves to their being in acts of real relating.
Human work can serve an important function in nurturing one’s per-
sonhood, as labor allows developing one’s dignity by engaging in the
world (John Paul II, 1981; Sison et al., 2016). Organizations are important
contexts that can serve or hinder this aim to develop as a person. Catholic
social teaching values the subjective dimension of work more highly than
the objective one (John Paul II, 1981), another parallel to Buber’s dis-
tinction between I-Thou and I-It relations. The “human significance” of
work is more important than its objective “professional significance”. As
Pope John Paul II puts it: “The proper subject of work is Man” (p. 14).
This is obviously counter to traditional accounts of business, such as the
theory of the firm, that priorities profit maximization over other potential
aims and purposes of organizations (Jensen & Meckling, 1976). The pre-
eminence of the subjective dimension of work over the objective dimen-
sion has also important implications for how to design organizations:
if one values the subjective dimension of work more than its economic
outcome, one could design organizations in ways that help employees
reflect on the morality of their decisions, also offering them the discretion
to make value-based decisions on their own.
Finally, the concept of a person is inherently relational (Clarke, 1993;
Sison et al., 2016). A solitary person without this dual striving for substan-
tiality, on the one hand, and relationality on the other is not conceivable
(Clarke, 1993). This belief stands in sharp contrast to the conceptu-
alization of man according to the modern political philosophy (Melé,
2009), which describes man as an “individual”, a rational actor with
self-interested behavior maximizing its own utility (Jensen & Meckling,
9
2

1976). According to Catholic social teaching, a person is not an isolated
thing, but a social being with a natural inclination to build human
connections with others and develop shared communities (Melé, 2009).
Being a Community
The word “community” stems from the Latin word communitatem
meaning “common” or “shared by all or many” (Melé, 2012). We believe
that a community of persons needs moments of I-Thou encounters to
really come alive (see summarizing model in Figure 9.1). However, we
suggest that a community of persons cannot build on I-Thou encounters
alone and needs some shared higher purpose, around which community
members can gravitate. This higher purpose cannot be generated sim-
plistically by the top management such as by issuing a vision statement.
A vision statement might help remind community members of a higher
purpose, but a true vision needs to be tied back to human beings –to
what is required to live truly as persons in communion. Such a vision
must be a final cause in the broad Aristotelian sense of a purpose that
inheres in and informs our living being.
Drawing upon Aristotle, a higher purpose may include any “cultiva-
tion and improvement (by whatever standards) of its members as well as
its own perpetuation” (Solomon, 1994, p. 275), serving the flourishing
and dignity of members in a community (Acevedo, 2012). According to
Catholic social teaching (and Buber’s view), and contrary to the theory
of the firm, business is not to put its private good of profit before the
public common good of community (Acevedo, 2012; Mele, 2009). This
idea is also well in line with the humanistic management perspective
(Pirson & Lawrence, 2010). Thus, business leaders are not to lord over
customers or employees under their control but are to submit to them
as their servants (Acevedo, 2012; Sandelands, 2014). Leadership, in this
view, has but one supreme good: to affirm the dignity and to support
the flourishing of each and every person (Whetstone, 2002). Such lead-
ership is perhaps hard to imagine in many industries to today, such as
investment banking, in which the defining ethos is to maximize private
self-interest. And such leadership is hard to hope for from those business
managers who because they are preoccupied with financial outcomes
are loathe to spend any resources on “people issues” (van Dierendonck,
2010; van Dierendonck & Patterson, 2015). And so, it is to regret that
modern accounts of business say very little about how leaders can affirm
their followers’ human dignity and generate a transforming vision that
can become known in I-Thou encounters and materialize as a higher pur-
pose for members of an organization.
According to Catholic social teaching, the one higher purpose that can
truly serve as the final cause of business is the principle of the common
good. The common good is “the good human life of the multitude, of a
multitude of persons; it is their communion in good living” (Acevedo,
0
3
2

2012, p. 207). It does not sacrifice the good of the person to the good
of the community but is at once the good of both (Melé, 2009). The
common good encourages cooperation to promote human flourishing for
all members of a community (Acevedo, 2012). In Buber’s terms, this good
entails that organizational members relate to their fellow organizational
members as I-Thou, which awakens a sense of oneness in being and pur-
pose. But the common good should be pursued even in circumstances and
practices that pertain to the realm of the I-It, as, for example, in designing
organizational rewards in a way that they are perceived appropriate and
fair by the people affected by them.
This view has interesting implications for stakeholder theory.
Stakeholder theory is a movement toward recognizing the claims of all
actors with real interests in a firm and not just those of its shareholding
owners (Freeman, 1984; Laplume, Sonpar, & Litz, 2008). Traditionally,
the theory of the firm and related theories think of human relations within
a firm as being based on contracts (Donaldson & Preston, 1995). Those
relations outside of the organization with customers are thought of as
market transactions; competitors are characterized as enemies (Jensen &
Meckling, 1976). Applying Buber’s idea of I-Thou relations, competitors
might be seen as fellow sportsman rather than enemies, entailing a notion
of solidarity and comradeship (de Peyrelongue, Masclef, & Guillard,
2017). The concept of a community of persons would also entail that a
firm is embedded in a larger community, such as a region or a country
(Melé, 2012). According to the social teaching of the Catholic Church,
the solidarity of organizational members is not an exclusive solidarity but
should also generalize to the greater good of those bigger communities.
The principle of the common good, however, does not prescribe a quan-
titative logic, exact algorithm, or a definite metric of how the flourishing
of different stakeholders can be prioritized. As such, the common good
principle does not explain how to solve dilemmas or tradeoffs in div-
iding resources between stakeholders, such as employees, customers, or
shareholders (Mitchell, Agle, & Wood, 1997). Drawing from Buber’s
work on dialogue, a meeting might be set up in a way that may foster I-
Thou relations between different stakeholders and genuine understanding.
This approach might also help toward accepting hardships in favor of a
greater good of the organization, as the common good principle entails.
Such stakeholder dialogues would require really opening up to beholding
the needs of other stakeholders and becoming present to each other as
fellow persons. At the same time, Buber would hold that people in an
I-
Thou encounter cannot quantify their interests. Hence, those non-
quantifying and non-objectifying elements beyond stakeholders’ interests
should also be included in a stakeholder dialogue.
Finally, a community of persons can provide recognition for its
members and people outside of the community. As such, individual
flourishing necessarily entails a communal aspect: individual flourishing
can be achieved only together with the flourishing of others (Sison et al.,
1
3
2

2016). The social teaching of the Catholic Church is aware that members
of a community have a demand for mutual recognition and acknowledg-
ment (Sison et al., 2016). According to this view, communication does
not only serve instrumental aims but can provide a sense of belonging.
Thus, the communication among members of a community ought to be
based on trustworthiness (Melé, 2012). Different than theoretical lenses
that base their argument on social contracts, like the theory of the firm
(Jensen & Meckling, 1976), the social teaching of the Catholic Church
acknowledges a deep bond of humanity between persons (Sison et al.,
2016). The resulting solidarity of this bond is thought to be not limited
to the members of the own community, but in principle encompasses any
person, because any person has an uncompromised human dignity (Sison
et al., 2016). As such, this perspective offers a broad idea of solidarity
going beyond simply distressing over the misfortune of others. Rather
it proposes to act with benevolence, goodwill, and compassion toward
people who need help, and guiding them to change their situation (Sison
et al., 2016). Acting with such benevolence does not mean disregarding
to provide services and goods in an efficient, profitable, and competitive
manner (Melé, 2012). However, this stance requires a delicate balance
between acting with care and compassion and generating profits for the
community without violating the human dignity of its members or the
people affected by the community (Melé, 2012).
Person, Community, and the Logic of Gift

Finally, we end our stroll through concepts allied to the I-Thou with the
logic of gift (see our summarizing model in Figure 9.1). The logic of gift is
defined by free and unconditional giving (Baviera et al., 2016; Frémeaux
& Michelson, 2011). In Figure 9.1, we depict this logic by arrows linking
the other concepts (i.e., being a person, encountering I-Thou relations
and participating in a community of persons) because we think of this
logic as a generative principle tying together these other parts of our sum-
marizing model.
Catholic social teaching describes the logic of gift as consisting of acts
of loving and knowing (Faldetta, 2011): “The only proper and adequate
way to relate is love”, writes Wojtyla (1993, p. 41). Loving, according to
Catholic social teaching, is defined as taking care of others in the spirit
of benevolence. Such loving is directed toward others’ well-being and
helping them flourish. Obviously, this notion of loving is broader than
physical attraction or personal liking (Melé, 2009). According to this
idea of loving, no human should be treated only as a means to an end
(Acevedo, 2012). Notice, furthermore, that according to this view, loving
comes before knowing (Melé, 2009; Sandelands, 2017). Knowing in this
perspective involves the whole person, including body and soul, not just
merely cognitive faculties, as theories stemming from modern political
philosophy, building on Cartesian dualism between mind and body,
2
3

would suggest. As such, knowing includes aspects of intuition, perception,
reason, and conscience in interacting with the world (Acevedo, 2012).
A paradigmatic case for the logic of gift is friendship (Baviera et al.,
2016). Aristotle (1925) differentiates between three types of friendship:
utilitarian, hedonistic, and virtuous friendship. First, utilitarian friendship
is characterized by a common interest (Melé, 2012). For example, in
an organization, people may work together because the results of the
group’s work benefit their careers. This type of friendship is based on
material gains (i.e., I-It). Second, hedonistic friendship is characterized
by pleasure and enjoyment (Melé, 2012). For example, in an organiza-
tion, people may engage in a project because it is fun to work with the
other persons on a team (i.e., still I-It). Finally, virtuous friendship is
characterized by goodwill toward the others and taking care of them.
This type of friendship is the exemplary and most intensive form of ben-
evolence (Spaemann, 2000) and is based on its inner beauty, truthfulness,
and nobility (i.e., I-Thou) (Melé, 2012).
Of those three types of friendship discussed earlier, virtuous
friendship is the only type that qualifies as sharing the logic of gift. In the
Nicomachean Ethics, Aristotle (1925) distinguishes secondary goods and
primary goods. Secondary goods are desired because they are instrumen-
tally useful for obtaining other goods; primary goods are desired because
they are good in themselves. Utilitarian and hedonistic friendships refer
to secondary goods because both include a calculated exchange (for
material benefits or pleasure). Virtuous friendship, in turn, is a primary
good because it is enacted for its own good (Baviera et al., 2016).
Sharing the logic of gift can help persons be more fully present to
each other, engage in I-Thou encounters, and participate in a commu-
nity of persons. First, the logic of gift helps people to acknowledge their
personhood (Argandoña, 2011); it does so by opening possibilities that
other kinds of instrumental exchange or duty cannot. For example, it can
support forgiveness and the repair of trust after a conflict has damaged a
relationship, or it can make space for people to give back the same way
they have had the experience of receiving unconditionally from others
(Baviera et al., 2016). Moreover, the logic of gift can open the possibility
to be grateful (Baviera et al., 2016). Second, the logic of gift helps people
to encounter I-Thou relations. It does so by making people recognize the
unqualified dignity and worth of others. Moreover, the logic of a gift’s
noninstrumental nature is also conducive to entering I-Thou encounters.
Finally, the logic of gift helps a community of persons flourish (Baviera
et al., 2016): “Civic love or friendship is the very soul or animating form
of every political society”, writes Maritain (1951, p. 209). Such uncon-
ditional giving can help inspire efforts to contribute to a greater good in
ways that defy any calculated strategy of personal benefit (Baviera et al.,
2016). At the same time, the relationship between the logic of gift and
a community also works in the other direction: an organizational com-
munity of persons can help generate a logic of unconditional giving that
32

helps cultivate I-Thou relations and, grounded in practices of care and
compassion, can make its organizational members become fully alive.
Conclusion
This chapter invites us to reexamine the theory of the firm and to think in
a profoundly different way about what it is to be human in business. With
Martin Buber and with Catholic Social Teaching, we are invited to begin
our thinking, not with the autonomous and economically rational indi-
vidual, whose primary motivation is self-interest (i.e., to have more for
self), but with the human person in communion, whose primary motiv-
ation is to will the good of others as one’s own (i.e., to be more with
others). In a word, we are invited to not think in economic terms of effi-
ciency, but in human terms of real being.
Do we limit ourselves to accepting the I-It as the only possible or prac-
tical mode of relating in organizations, or do we allow ourselves to think
of organizations as places where the I-Thou can and should emerge? In
this chapter, we first criticized the theory of the firm and related theories
for conceptualizing human relationships based upon a narrow premise of
self-interested behavior, relying upon a limited few axioms, and precluding
the metaphysical dimensions of human relations. Based on this critique,
we offered an extended ontology and epistemology of human relating
at work, beginning with Martin Buber’s concept of I-Thou relating and
drawing upon allied ideas of religious faith. We follow Buber’s lead in
inviting a rehumanization of social life in organizations, and a resistance
to the oppression of rationalization that so often inhibits human beings at
work, and constrains the study and conceptualization of organizations. In
doing so, we suggest that I-Thou makes businesses truly human enterprises
and us as humans come alive, because as Buber writes, “without ‘It,’ a
man cannot live; but he who lives with ‘It’ alone is not a man”.
Notes
1 This emphasis on the pursuit of instrumental goals can be traced back to early
views that relational concerns are inappropriate in work settings, referred
to as the Protestant Relational Ideology (e.g., Sanchez-Burks, 2002). The
Protestant Relational Ideology holds that “No intimacy, affection, brother-
hood, or rootedness is supposed to sully the world of work” (Hampden-
Turner & Trompenaars, 1993, p. 133). This belief resulted in a culturally
unique relational work style in America (Lenski, 1961), and over time these
beliefs about maintaining impersonal and emotionally detached work settings
were secularized and incorporated into contemporary corporate culture
(Fischer, 1989).
2 Wrote Tönnies:
[I]‌n the Gesellschaft they [humans] are essentially separated in spite of all
uniting factors… [E]verybody is by himself and isolated, and there exists
4
3
2

a condition of tension against all others. Their spheres of activity and
power are sharply separated, so that everybody refuses to everyone else
contact with and admittance to his sphere; i.e., intrusions are regarded as
hostile acts.
(p. 65)
3 Here we follow the Historical Figures Research Approach of Werhane,
Freeman and Dmytriyev (2017) to illuminate important aspects of human
relating ignored by contemporary organizational scholarship.
4 For examples of process research in the organizational sciences see Gersick
(1988), Lee, Mazmanian, and Perlow (2020), and Metiu and Rothbard (2013).
5 It should be noted that while the scientific causality of variance theory resembles
that of Aristotle’s efficient causality, it is the brainchild of Scottish philoso-
pher David Hume and is actually quite different. Whereas efficient causality
for Aristotle was the “how” by which a potency of form is actualized, scientific
causality for Hume was a conjunction of events that we experience and call
cause and effect but that we cannot rationally justify.
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10
Business for Peace
A New Paradigm for the Theory
of the Firm
Tilman Bauer
Introduction
The chapter1 challenges the notion embedded in the mainstream Theory
of the Firm (Dietrich & Krafft, 2012; Jensen & Meckling, 1976) that
society benefits when firms collectively pursue profit maximization as
their sole, or primary, objective.2 It departs from extant approaches that
follow a limited understanding of the firm according to which profit is
the quasi-exclusive raison d’être of business. As corporate social respon-
sibility (CSR) has been treated as a turn toward a more ethically informed
understanding of business (e.g., Mason & Simmons, 2011), this chapter
recognizes that it lacks conceptual clarity (e.g., Sharin & Zairi, 2007) –
particularly in distinguishing between that which is “good” versus that
which is merely less harmful, or “responsible”. More importantly,
CSR lacks a broader repositioning of the true business objective as
encompassing a greater good, extending beyond mere profit maximiza-
tion (Sabadoz, 2011).
The notion of Business for Peace is proposed to provide an overarching
framework for the substance of “responsibility”, “sustainability”, and
“positive impact”, addressing the shortcomings of the dominant con-
temporary narrative. In this chapter, “Business for Peace” is placed in
the center of corporate activity rather than under the umbrella of CSR,
as promoted by the United Nations Global Compact (Guthrie, 2014;
Williams, 2008). Following the argumentation in Donaldson and Preston
(1995), this conceptualization aims to be descriptive (ethical business
fosters peace), instrumental (how business can foster peace), normative
(business should foster peace), and managerial (recommending practices
that constitute a peace management philosophy, as business can use tools
to evaluate its impact on peace). Business for Peace seeks to address the
issues outlined by Donaldson and Dunfee (1995) and potentially provide
an adequate pathway toward a hypernorm theory that is capable “of
expressing the moral complexity necessary to provide practical normative
guidance for many business ethics contexts” (ibid.).
More specifically, the potential for business to foster peace is
highlighted based on the insight that the concept of peace is much more
DOI: 10.4324/9781003211549-11
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Business for Peace 241

than a mere absence of war or violence. Determining whether certain
business decisions are beneficial or detrimental to peace is necessary for
progress in the 21st century, not only for the individual firm but for
humanity at large. Accordingly, this chapter presents a philosophical
basis for treating peace as an essential pursuit of the firm. It proposes
that the true objectives of a business might be better served by directing
resources toward greater peace, with growth and profit targeted insofar
as such pursuits foster and do not threaten peace. The sustainability of
business is (in most cases) bounded by peace within the ecosystem in
which it operates, including the need for progress within the broader
community.
Proposing a fundamental shift in business ethics literature from CSR
to Business for Peace, this chapter suggests that the concept of peace can
serve as the substance of positive impact in the business context. Based
on a historical reading of the firm, this proposal deviates from the extant
Theory of the Firm by placing the onus for generating positive societal
impact on the individual firm rather than on an unaccountable broader
utilitarian marketplace. The core of this position is that the true philo-
sophical purpose of the firm may be to create positive impact in, and for,
society at large. If the core objective of business is indeed more than the
pursuit of profits alone, then our understanding of the nature and role
of business must be updated and defined more adequately. Indeed, as
businesses are the machinery that most often provides nearly everything
that constitutes our modern lifestyle –including food, clothing, shelter,
recreation, and universities that are legally “for-profit” organizations –
their purpose must be defined beyond the mere acquisition of profit. In
fact, the survival and progress of our species in the present economic
system is dependent on the sustainability of the business collective. It is of
great risk to society to continue to act as if profits were the sole purpose
of business. That is why the firm itself is seen as a vital vehicle for the
pursuit of peace, a means to an end.
The business–peace connection appeared for the first time in print
in the 17th-century idea that trade fosters peace through international
cooperation (Crucé, 1623). However, this link has been eroded with the
emergence of an ethically questionable business culture that climaxed in
the 20th century. This broken link should be re-forged because peace is
in the interest of both society and business (excluding certain war indus-
tries). This entails recognizing that creating positive impact, i.e., fostering
peace, is at the crux of the purpose of the corporation, as it refers to cre-
ating value for society.3 Business can contribute to peace, for example,
through impact assessments, self-regulation and certification, diversified
hiring, clear standards and policies, stakeholder dialog, and other ethical
core business practices. Further, efforts include supporting human rights,
promoting gender equality, and respecting the environment. Finally,
more holistic peace-fostering activities entail more abstract notions such
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242 Tilman Bauer

as nurturing a higher purpose, transcending self-interest, and embodying
moral excellence. All of these are relevant for business –and represent the
hallmarks of the Business for Peace notion (Bauer, 2019b).
Prior research on business and peace (e.g., Bouckaert & Chatterji,
2015; Fort, 2007, 2011, 2015; Fort & Schipani, 2004; Oetzel et al., 2010)
largely tends to consist of, or rely on, empirical studies according to which
business can benefit a very limited definition of peace by reducing vio-
lence in conflict-prone areas. However, this approach limits the ability for
research to produce revelatory or groundbreaking solutions to the chal-
lenging global problems. While empirical research certainly has its place,
I argue that a conceptual/philosophical approach (cf. Baggini & Fosl,
2010; Cappelen, Gendler, & Hawthorne, 2016; D’Oro, 2017; Kakkuri-
Knuuttila, 2013) has greater leverage to formulate groundbreaking ideas
because empirical research, by definition, operates within the bounds
of phenomena that already exist in some form. Creating a better world
through research requires pioneering approaches that transcend the
limits of current practice. Clearly, however, such new approaches are
fathomable, albeit not quite yet followed. As David Korten (2019:102)
comments:
Over the past few decades, the revolution in air travel and com-
munication technologies has brought humans together as a highly
interconnected and interdependent species with significant know-
ledge of the range and consequences of our cultural and institu-
tional choices. These developments now position us as a global
species to create together—by conscious collective choice—a world
of peace, shared resources, beauty, material security, and spiritual
abundance for all. We have chosen, however, a different path. As
humanity’s cultural and institutional fragmentation has given way
to an interconnected global society, we have embraced money as our
defining common value, competition for power and resources as our
dominant mode of relating, and private-purpose, profit-seeking trans-
national corporations as our defining institutions. This set of choices
puts humanity on a path to environmental and social collapse, pos-
sible self-extinction, and potential destruction of Earth’s capacity to
support life.
By taking a conceptual and philosophical approach, this chapter provides

insights that challenge fundamental concepts of the role of business and
lay foundations for a new understanding of its modus operandi in society.
This is the starting point for the development of the Business for Peace
paradigm. It follows and aligns with the recent trend, or social movement,
of Humanistic Management, which recognizes the ethical shortcomings
of the contemporary, yet in essence outdated, paradigm of profit maxi-
mization (e.g., Korten, 2019; Pirson, 2017).
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What Is Business?
The objective of this section is to discuss the philosophical meaning and
purpose of business in society.4 This is an important question that we
must address first because, simply speaking, we need to know what the
purpose of business is, or ought to be, when we want to develop a new
normative theory around it. What is business, why do we have or do it,
what is its role in society, and what are the fundamental tasks, responsi-
bilities, functions, and characteristics of business? Why do we, as society,
not only tolerate but also encourage, subsidize, and promote business?
And: what is “good” business? Let us start with a seemingly simple
question: what is this thing called “business”? William Kline (2018:223)
points out that:
The Oxford English Dictionary lists at least twenty- two entries

for “business” […]. Nonetheless, this list of entries if finite, so the
meaning of “business” has boundaries: not everything is business.
Clarifying what constitutes these boundaries will help us to better
identify what should and should not count as business, and why.
Kline starts his analysis of the “what is business” question with the
recognition that business can refer to organizations, on the one hand,
and activities on the other. This insight is based on Gini and Marcoux’s
(2012) Concise Introduction to business (and business ethics, in par-
ticular) in which the authors describe various types of organizations
(corporations, partnerships, privately held companies, cooperatives, or
sole proprietorships, among other forms) and activities (trading, exe-
cuting exchange transactions, buying, selling, bargaining, and negoti-
ating, all of which are sought for profit) that can be considered business.
Profit is the central notion of business. In fact, the very Theory of the
Firm that is being critiqued in this book is based on the notion of profit
maximization (Murphy, 2019):
What Is the Theory of the Firm: The theory of the firm is the micro-
economic concept founded in neoclassical economics that states that
a firm exists and make (sic) decisions to maximize profits. The theory
holds that the overall nature of companies is to maximize profits
meaning to create as much of a gap between revenue and costs. The
firm’s goal is to determine pricing and demand within the market and
allocate resources to maximize net profits.
However, as Gini and Marcoux (2012:28–29) state:
Does this mean that by pursuing the alternative [for-profit, rather

than charitable, donation- based, or hobbyistic] path the medical
clinic, the television station, and fountain pen enthusiast would be
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244 Tilman Bauer

“just in it for the money”? Does this mean that profits are ends in
themselves? No. Profits are the ends of business activity. People seek
profits through business activity so they can use those profits to
pursue other things. No reasonably reflective person wants money
for its own sake. She wants money because it facilitates other projects
she values. Consequently, nothing here depends upon the idea that
people (even business people) are motivated exclusively, or even
primarily, by profit. The idea is that people pursue their objectives
through business – rather than through other means – when they aim
to transact in an intentionally profit-generating (self-sustaining) way.
Business is the pursuit and execution of intentionally self-sustaining
transactional activity.
Kline (2018:223) adds that business means “attempting to profit by pro-

ducing a good or service for trade”. If profit, or being profitable, is at the
heart of business and the “facilitator” of pursuing objectives in a self-
sustaining way, then I would argue that profits are an enabler, and indeed
a requirement, for doing business – but not the purpose of business. This
is a very important insight for the pursuit of developing alternative the-
ories of the firm. In the words of Linda O’Riordan (2017:420):
Although profits are undoubtedly essential to the long-term success

of the business and the precondition for ensuring a sustained flow
of positive organisational impact, an overly narrow ‘obsession’ with
exclusive monetary return as the main entrepreneurial purpose of
organisations is short-sighted. In contrast, the stance adopted in this
book is that the purpose of business is serving society with commer-
cial solutions in the form of products and services. Profits derive as a
consequence. The evidence suggests that the world’s most successful
companies in terms of profits and shareholder value tend to be those
which are motivated by factors other than profit (e.g., Grant &
Jordan, 2015, p. 22). This assumes that while profits are essential to
a business as breathing is essential to life, profits do not define the
inherent purpose of the business nor its potential to generate positive
impact. [emphasis in original]
Is the purpose of business to “serv[e]‌society with commercial solutions

in the form of products and services”, as O’Riordan states earlier? The
mainstream answer to the long-standing and ongoing (e.g., the Berle –
Dodd Dialog summarized in Kim & Scheller-Wolf, 2019; Kline, 2006;
Lankoski & Smith, 2017; Sundaram & Inkpen, 2004; Weiner, 1964)
purpose-of-business question is that business is about shareholder value
creation. This view – famously condensed by Milton Friedman (1970) as
“The Social Responsibility of Business is to Increase its Profits”/or “the
business of business is business” (generally attributed to Friedman) – is
still believed to be true by some people today, among them Prof. Francis
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Fukuyama at Stanford University.5 In the words of Julie A. Nelson
(2007), this view can be summarized as “saying that the economy is a
huge machine driven by the energy of self-interest – and this is good”.
However, others (e.g., O’Riordan, 2017) argue that the idea that business
is about profit maximization does not adequately portray the role of
business in today’s society. In the words of Nelson (2018:130–131): “The
popular idea that corporations single-mindedly maximize profits does not
come from the law itself or the actual observation of business practices.
It is an offshoot of economic dogma, plain and simple”.
So, what is business about, then? The alternative answer is that business
is about “doing good” or some variation thereof, such as welfare, con-
tributing to the common good, creating shared or societal value, creating
positive impact, creating general public benefit, or simply creating value
(e.g., Windsor, 2017). Interestingly, being mission-and values-driven is
seen as a primary characteristic of ethical business, as if that would be a
distinct type of business (Ardichvili, Mitchell, & Jondle, 2008). (I would,
personally, start from the general, normative assumption that all business
should be ethical, therefore, not needing a special category for ethical
business.)
While I agree with this alternative point of view, I put forward the idea
that this answer is not sufficient. After all, what exactly do the terms such
as “doing good”, “shared value”, “positive impact”, or “public benefit”
mean? From a philosophical or semantic point of view, it becomes obvious
that these terms do not mean much by themselves, as the aspired impact
or purpose depends on the context. Yet, to develop an alternative general
(rather than context-specific) theory of the firm, we need a general yet
specific and meaningful answer to the purpose-of-business question.
Looking into the very beginnings of the concept of business to under-
stand why it was invented, we find that homo sapiens started bartering,
or doing “business”, for the purpose of prosperity and peace in the so-
called primitive times (Surdam, 2020). Could human survival be the
original purpose of business? Certainly, it is clear that the purpose of
business was not the maximization of financial profit, as this capital-
istic notion was introduced later. However – and whenever – profit
maximization became the perceived raison d’être of business (cf. Stout,
2012), such was clearly not the case from the early beginnings. As Nelson
(2007:24) writes:
A more thorough look at the history of “profit maximization” shows

that it is no more than a theoretically convenient assumption of neo-
classical economists, run amok. It was invented by them because,
as expressed by legal scholar Lynn A. Stout, it “lent an attractive
patina of scientific rigor” to the study of corporations. It entered
popular discourse because the business press found that it offered
“an easy-to-explain, sound-bite description” of what corporations
are and do.
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246 Tilman Bauer

What seems to be the case is that the purpose of business was under-
stood as maximizing profits because it was assumed that maximizing
self-interest would be in line with the human nature (and, according to
welfare economics, in the interest of progress). However, according to
Daniel P. Brown, Professor of Psychology at Harvard University, state-
of-the-art research shows that this is not true.6 His research suggests
that human beings are most strongly motivated by contributing to the
common good (Brown & Elliott, 2016). Besides, “ ‘welfare’ in the First
Fundamental Theorem of Welfare Economics does not include the well-
being of those who are not able to participate in markets, or whose par-
ticipation is hampered by caring responsibilities” (Nelson, 2007:20).
Again, in the words of Nelson, “[o]‌ne can summarize the market critic
view as saying that the economy is a huge machine driven by the energy
of self-interest – and this is bad” (ibid.). Therefore, logically, if the basic
premise of advocating profit maximization as the purpose of business was
based on a wrong appreciation of human nature (although there certainly
are other reasons, as well, as put forward by welfare economics), then
it must be wrong to claim that the purpose of business is to maximize
profits on the basis of this anthropological premise.
Questioning the most fundamental and prevalent assumptions, business
is, in its essence, not about maximizing profits (“shareholder primacy”)
but rather about creating positive impact, or value, for society at large.
While the purpose(s) of business may be negotiated socially and polit-
ically, there are ways to distinguish right from wrong in the context of
the role and purpose of business in contemporary society. Assuming that
the purpose is to create positive impact, then the question is what does
“creating positive impact” actually mean? Does it refer to satisfying the
purported fundamental desire of human nature to maximize self-interest,
as Prof. Fukuyama believes,7 or does it, perhaps, go even beyond the stake-
holder value approach (“stakeholder primacy”), or, to reference Michael
E. Porter and Mark R. Kramer (2011), beyond creating shared value?
Etymologically and practically, the category of “positive impact” is
mostly devoid of meaning, as there is no general answer to what “impact”
in substance should be.8 Nor does the maxim of creating a positive impact
dictate any concrete practices or specific logic per se. The same applies
to the concept of “responsibility”, leading to a plethora of definitions
of CSR (Dahlsrud, 2006; Sharin & Zairi, 2007). Promoting the mere
idea of fostering positive impact (as practiced in sustainability circles) is
worthwhile but logically insufficient without a substantial definition of its
content. To suggest minimizing negative impact (such as CO2 emissions)
is logically viable because it is identifiable upon existence. This might be
a reason why minimizing negative impact is more common than maxi-
mizing positive impact. Yet, being “less bad” is still bad and not good
enough (McDonough & Braungart, 2002).
Essentially, as business produces and provides virtually everything we
use in our lives –food, clothing, shelter, equipment, books, entertainment,
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and sometimes even art –its purpose cannot be mere profit maximiza-
tion. The function of business is to produce efficiently that what society
needs – and to foster life (Frederick, 2012). In fact, our very survival
today is dependent on the existence of business. Accordingly, I argue that
we, as society, would not tolerate our own survival being dependent on
an institution if it its true purpose were only profit maximization. Mayer
(2018) argues similarly but rests on defining “a purpose” as the purpose
of business. While “purpose-driven business” is a step in the right dir-
ection, philosophically speaking, this is still insufficient, as it does not
provide a general conceptualization of what the purpose ought to be. As
I will discuss next, fostering peace can be defined as the central and argu-
ably the only viable purpose of business.
If it is true that the purpose of core business activities is not only
profit maximization, then our basic understanding of the true nature
of business needs to be updated. Moreover, as ethical business can be
recognized as the “glue” of a functional society, the Business for Peace
framework may contribute to the development of a new mindset for the
Theory of the Firm for the 21st century. Such a new vision for business
needs to provide an overarching notion serving as the substance of
“responsibility”, “sustainability”, and “impact” to seal this logical gap –
and be sufficiently broad and encompassing, yet permissive of context
independence.
Richard Cyert and James March ([1963] 1992) discuss the basic prem-
ises of the Theory of the Firm. In their monograph, the authors start from
the general characterization that “the objective of the firm is to maxi-
mize net revenue […]” (ibid.:5), i.e., “profits, or expected profits”. This
premise does receive a fair critique through the discussion of two basic
challenges to the profit maximization assumption: first, profit maximiza-
tion not being “the only” (ibid.:8) objective of business firms and, second,
maximization not describing what firms do. The authors state that
entrepreneurs may engage in business for a number of different personal
reasons. However, this does not address the fundamental purpose of
business in society. Therefore, “[a]‌n alternative to a utility-like preference
function is substituting a different summum bonum for profits” (ibid.:9).
Cyert and March cite K.W. Rothschild (1947:308):
Profit maximisation has up till now served as the wonderful master-

key that opened all the doors leading to an understanding of the
entrepreneur’s behaviour. True, it was always realised that family
pride, moral and ethical considerations, poor intelligence and
similar factors may modify the results built on the maximum profits
assumption; but it was rightly assumed that these “disturbing” phe-
nomena are sufficiently exceptional to justify their exclusion from the
main body of price theory. But there is another motive which cannot
be so lightly dismissed, and which is probably of a similar order of
magnitude as the desire for maximum profit […].
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248 Tilman Bauer

What Rothschild refers to is the objective of surviving as a business.
While Rothschild (as well as Cyert and March) interprets profit maxi-
mization as a means toward business survival, the end of survival can
be generalized further. Could the purpose of business be to increase the
chances of survival of humankind? While I do agree with this to some
extent, mere survival seems quite pessimistic. Is survival all we can do?
Next, I will show that thriving and peace are, in fact, on the positive side
of the coin while survival is on the negative.
What Is Peace? And Why Should We Be Talking About It?

It is well established that we need a new Theory of the Firm – and, hence,
the need for the present book. As should be clear by now, this chapter does
not take an incremental approach of simply modifying the extant theory.
Rather, my intention is to start from a clean slate. Thus, let us engage in
a thought experiment. Let us assume that we as homo sapiens with some
knowledge of the human nature landed on Planet Earth in the present age
with the need to develop a societal system for 7–10 billion people from
scratch. What would be the ultimate aim of this system? Would it be
well-being, thriving, happiness, progress, prosperity, or something else?
I would advocate that it would need to encompass all of those, yet, at the
same time, allow for entirely opposite viewpoints, as human beings have
conflicting wishes, desires, wants, needs, and dreams. It sounds like only
a supreme God could realize a notion of that magnitude.
However, do we really need to resort to religious notions to define
what we want as a society? Of course, spirituality is indeed a useful guide
in the search for nonmaterialistic, transcendent meanings of life and work
(Bouckaert & Zsolnai, 2019; Zsolnai, 2004; Zsolnai & Flanagan, 2019).
Yet, keeping in mind the differences between spirituality and religion, and
the latter being in stark contradiction to the scientific mindset, we may
want to look elsewhere for guidance. What could be the nonreligious and
scientific counterpart to that what God represents? It turns out that the
concept of peace comes close. I would argue that no other nonreligious
concept encompasses both the invisible power of life that peace has –and
the magnitude. Peace is the glue that holds society together on all levels,
from the individual and interpersonal to institutional and global, and it is
a prerequisite for a thriving and sustainable civilization.
If we agree that the purpose of business has thus far not been
conceptualized sufficiently, then we must embark on a philosophical
journey to find a better answer. What could be the purpose of business if
it is not profit maximization –and if “creating positive impact” is logic-
ally an insufficient answer, as discussed in the previous section? Earlier,
I proposed that “survival” might come close to answering this question.
However, survival alone is quite a pessimistic reason for something as
ubiquitous as doing business. There must be a more positive reason
why this thing called business exists. 17th-century Dutch philosopher
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Baruch Spinoza offers the following inspiring quote: “For peace is not
mere absence of war, but is a virtue that springs from force of char-
acter” (Spinoza, 1670:314). Could peace in this sense be the purpose of
business? To approach this question, I analyze the meaning of peace in a
recent publication (Bauer, 2020:81–82):
I propose that any positive impact –or service –to society can have,
in substance, the meaning of contributing to one or more aspects
of peace. To see why this could be true, we need to appreciate that
peace is much more than merely the absence of war. Since the estab-
lishment of the academic field of Peace Studies in the 1960s, the
“father” of the discipline, Johan Galtung (1967, 1969), coined the
distinction between “negative peace” and “positive peace.” Negative
peace refers to the absence of physical violence, and positive peace
to the absence of structural or cultural violence and to the presence
of justice. Going beyond Galtung’s negative/positive peace frame-
work, we see that the peace concept can be expanded further to
include any positive value that is deemed useful for society (Bauer,
2019a). While it may appear that such a drastic expansion of the
concept is overstretching its boundaries, it is conceivable that the
absence of the notions that contribute to the smooth functioning of
society –such as education, equality, justice, trust, and satisfaction
of human needs –would reduce peace, which may lead to dissat-
isfaction and the escalation of conflicts. Therefore, contributing to
the benefit of society can be said to be contributing to peace (cf.
Popper, 2018).
To further strengthen this argument, Table 11.1 offers some examples of

positive contributions to society and how they are connected with the
expanded concept of peace. The purpose of Table 11.1 is not to compile
a full list of all potential positive contributions to society. Rather, the
point here is to argue that any positive impact can, in substance, have the
meaning of contributing to (an aspect of) peace.
From this, it is inducible that any positive impact that contributes

to the functioning of society –whether to the essential minimum or
high-level thriving –will likely be linked to peace. The philosophical
basis of this claim rests on the idea that peace could be the ultimate
value for society.
(Bauer, 2020:82)
We know from prior research that ethical business has the potential to
have such positive impact and that this can refer to peace (Bauer, 2019b).
The expanded concept of peace has the power to guide responsible and
ethical business with the help of the various dimensions and meanings
of peace (e.g., Bauer, 2019a, 2020; Danesh, 2011; Dietrich, 2012; Fox,
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Table 11.1 Exemplary dimensions of service to society as aspects of peace
Positive
Contribution
 Connection to Peace (Excerpts) Exemplifying
References
to Societya
Security Peace and comprehensive human and • Wæver (2008)

national security or safety are closely • Dietrich (2012)
associated. Peacebuilding contributes
to the promotion of security at
the personal, institutional, and
structural–cultural levels.
Freedom Peace implies freedom on different • Barnett (2008)
planes: political and religious
freedoms, economic and social
opportunities, transparency, as well
as freedom from fear and violence.
Peace, freedom, and development are
linked.
Trust Social capital contributes to • Cox (2009)
peacebuilding through trust and • Väyrynen (2000)
dialog. In other words, trust is • Oelsner (2007)
essential and a type of “currency” in
communities.
Equality Equality is at the heart of Galtung’s • Galtung (1967)
positive peace. Inequality significantly • Adolf (2009)
contributes to undermining the • McLeod and
creation of a shared society and O’Reilly (2019)
multiplies tension within society
by cementing or exacerbating
differences. Also, feminism should
receive a more prominent role in
critical peace and conflict studies.
The role of women in peacebuilding
is increasingly emphasized.
Health Optimizing health is considered a • Adolf (2009)

means to contribute to peacebuilding; • Arya (2017)
in other words, peace ultimately • Garber (2002)
becomes a result of health promotion
activities. This stems from the idea
that health is a requirement for, and
enabler of, life.
Justice Justice and peace go hand in hand. • Galtung (1969)
Peace is often defined as the presence • Sriram (2007)
of justice. Justice does not only just
assume looking back at the past but
also provides resources for a better,
nonviolent future, thus being an
important part of peacebuilding.
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Table 11.1 Cont.
Positive
Contribution
References
to Societya
Human rights The satisfaction of human rights • Jeong (2000)
is intrinsically related to, and a • Bell (2005)
requirement for, peace. Treating other
human beings with dignity and equality
is the foundation of peaceful relations.
Prosperity Prosperity and economic development • International

represent important opportunities Alert (2015)
for building peace. The need and
aspiration for access to, and control
over, resources can be a cause of
conflict. Poverty and severe inequality
increase the risk of wars.
Well-being Human well-being describes the • Webel and
complex phenomenon of individuals Galtung (2007)
and communities achieving • Fox (2014)
psychological and physical, inner, • Yarnell and Neff
and outer, well-being in an insecure (2013)
world. Many international political
actors have incorporated well-being
and human security as part of their
mandate and policy agenda, including
in their peacebuilding attempts. Well-
being is a vital element of peace.
Education Education contributes to developing • Kant (1795)
the skills for peaceful interhuman • Montessori
relations, good governance, (1949)
and peacebuilding. Education • Hymel and
is capable of building capacity Darwich (2018)
and social relationships for • Danesh (2011)
democratic, inclusive, and just
conflict transformation by
influencing individual and collective
understandings, competencies, values,
norms, opportunities, etc. Teaching
social and emotional learning skills in
schools can foster peace. Education is
a necessary requirement for peace.
Spirituality Spirituality and peace are closely related: • Bauer (2019a)
the wider the definition of peace, • Curle (1995)
the more intertwined it is with the • Dietrich (2012)
concept of spirituality. There is the
idea of introspective spiritual peace of
a person: inner peace leads to outer
peace. The focus of these practices is a
process of individual transformation,
which brings positive consequences
for society in terms of peacebuilding.
(continued )
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252 Tilman Bauer

Table 11.1 Cont.
Positive
Contribution
References
to Societya
Happiness Conflict and peace are correlates of • Online
happiness. People who feel they have Etymology
a self-actualized life will be better at Dictionary (n.d.)
transforming conflicts and fostering • Marcantonio
peace. Moreover, peace has an (2017)
etymological meaning of happiness.
Sustainability Efficient environmental management • Shiva (2005)

is of great importance to providing • Brauch et al.
stable and sustainable peace. (2016)
Environmental degradation can be a
cause of war. Social sustainability and
peace are directly linked.
Livelihood Livelihood creation and peace are • Lederach (2008)
creation interconnected, as poverty can be a
cause of conflict. Earning a livelihood
brings with it a basic satisfaction
with life, including economic
necessities.
Satisfaction Through reducing direct and • Galtung (1980)
of human structural violence, peacebuilding
needs processes contribute to the equitable
satisfaction of human needs for
security, identity, well-being, and
self-determination.
Technological Technological development corresponds • Miklian and
development to the creation of new opportunities Hoelscher (2018)
for multilateral cooperation for • Puig Larrauri and
peace, global governance, state- Kahl (2013)
society relations, and sustainable
development. A case in point is
the notions of “peacetech” and
“peace innovation”. As a result of
technological progress, new ways
of participation in, engagement
with, and accountability of societal
developments are emerging. All these
developments change how people
participate in peace processes.
Mentality Contributing to a peaceful mentality • Fox (2014)
reduces not only physical but also • Danesh (2011)
structural and cultural violence.
Peace is also shaped by a person’s
view of reality, human nature,
purpose of life, and interpersonal
relationships. Peace psychology deals
with post-traumatic stress disorders,
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Table 9.1 Cont.
Positive
Contribution
References
to Societya
addressing a wider variety of
mental health issues, such as grief
and depression, along with key
psychosocial issues such as family
separation, interpersonal and
intergroup distrust.
Access to Information is at the heart of • Popper (2018)
information development, democracy, decision- • Puig Larrauri and
making, and peace. Conflicts Kahl (2013)
are often caused or promoted by
the unavailability of, or wrong,
information. Moreover, access to
information and knowledge promotes
a better understanding between
people of different origins, opinions,
and beliefs, thus having the potential
of preventing or eliminating conflicts.
Source: Taken with permission from Bauer (2020).

a This list of positive contributions to society is not comprehensive and merely exemplary
for possible positive impacts. The purpose, here, is not to argue that each dimension is
positive in all cases.
2014; Jeong, 2000). Indeed, if ethical business is expected to make a posi-

tive contribution to society, then fostering peace seems to be a logically
congruent outcome. The following argument (adapted from Bauer, 2020)
is at the heart of this insight:
• If any positive impact refers to any improvement of the human con-

dition or awareness in a sphere of desired human interaction, percep-
tion, feeling, or understanding; and
• if such betterment corresponds to contributing to an aspect or dimen-
sion of peace, such as health, happiness, spirituality, prosperity, well-
being, justice, and so on; in other words, if peace is to society as,
metaphorically speaking, health to medicine, or money to Wall Street
bankers; then
• any company that wants to have a positive impact on society can
declare fostering (an aspect of) peace as one of its aims.
Finally, we can answer the question “What is Peace?”. Peace is a multi-

layered concept that covers (1) the absence of any type of physical, struc-
tural, or cultural violence; (2) the presence of any positive values, ideals,
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254 Tilman Bauer

or virtues such as justice, well-being, dignity, health, or happiness; and
(3) the ultimate aspiration of the highest nonmaterialistic or spiritual
purposes such as aiming for a higher purpose, transcending duality, bliss,
and holistic well-being (Bauer, 2019a, 2019b, 2020). I have defined these
levels of peace as weak peace, strong peace, and holistic peace. In the next
section, I will discuss how business can relate to these conceptually dis-
tinct, but in practice overlapping, levels of peace.
General Principles for a New Theory of the Firm: Toward a

Business Peace Index
What are the implications for management? The analysis of the poten-
tial for business to foster peace shall be based on the findings from the
first two sections regarding the meaning of business and the notion of
the expanded concept of peace. First, fostering peace can be seen as the
substance of creating positive impact in the business context and that it
is at the crux of the purpose of business, as it refers to the ultimate value
for society. More specifically, answering the question of what business
can do to foster peace requires comparing the insights from the question
“What is Business” (functions of business) with the insights from the
question “What is Peace?” (levels of peace) within the proposed frame-
work of a new, alternative Theory of the Firm (peace as the ultimate pur-
pose of business) to build a methodological matrix of the fundamental
responsibilities of business. In this section, I suggest that such responsibil-
ities can be classified into different categories with distinct contributions
to (weak, strong, and holistic) peace.
The most fundamental task in the operationalization of peace for
business is the assessment of such contributions. For this purpose, we
need to build a Business Peace Index to evaluate the impact of business
on peace and its various stages.9 In other words, the mission is to oper-
ationalize the full scale of the expanded peace concept, as defined in
the previous section, in the business context through tools that allow
benchmarking and evaluation of a company’s peace-fostering perform-
ance. I believe that improving a company’s score on a Business Peace
Index actually means climbing up the “ladder of morality” (Bauer,
2019b) where attention is shifted away from just not being unethical to
being more ethical. As Timothy Fort and Cindy Schipani (2004) argue,
business fosters peace through core business activities if business is done
ethically. In the end, the act of fostering holistic peace could embody, or
represent, moral excellence. Essentially, a Business Peace Index would
give companies a tool to measure their positive impact on society and
offer a guideline for devising actions that leverage core business activities
for the common good. In a sense, one could say that a Business Peace
Index is to the new Theory of the Firm that what the income statement
is to the old.
52

A Business Peace Index should comprise a number of components
to track a company’s progress toward being a force for peace. Its aim
could be to be independent of context so as to be useful to any company
regardless of industry or culture. In other words, a Business Peace Index
is metaphorically speaking a ladder but not a wall, a tool but not the end
in itself. To encourage change in corporate behavior, a Business Peace
Index would suggest how to climb up the ladder –i.e., foster explor-
ation of not only external sources of pressure (such as peer pressure and
legislation) but also internal, or intrinsic, motivations to be more respon-
sible and useful to society. There is some first evidence based on informal
discussions that companies may be interested in using a Business Peace
Index, as it would help them to better assess, manage, and control their
impact on society.
The need for the development of a Business Peace Index becomes
apparent from the observation that mainstream business thinking appears
to be transitioning from the old paradigm of minimizing negative impact
to creating or maximizing net positive impact (peace).10 In line with this
paradigm shift (cf. Capra, 1982, 1996; Capra and Luisi, 2014; Edwards,
2005; Senge et al., 2010), a Business Peace Index would incorporate
the principles of a new paradigm for business thinking to integrate it
with the rationale of business fostering all three stages of peace: weak
peace, strong peace, and holistic peace. This shall help companies to self-
evaluate their stance and incorporate the insights from the study of why,
and through what activities, business can and should foster peace (Bauer,
2019b). The ultimate aim is to instill principles of responsible business
that have the raison d’être of creating peace (value, in old parlance) for
society as a whole.
Typically, the general purpose of an index is to perform certain calculations
in order to come up with a number in the end, as “benchmarkable” indices
tend to be the norm. This score is usually compared to the results of other
companies or industries. One size does not fit all, though, as the Rate the
Raters project concludes (SustainAbility, 2010b:4):
While a growing number of ratings cover specific issues, industries

and regions, the “universal” rating –one which spans multiple issues,
industries and/or regions –remains the norm. While the prevalence
of such ratings might be inevitable given the global nature of business
in the 21st century, it is always difficult –and meaningless in some
cases –to rank companies across sectors and geographies on the
same set of issues.
A Business Peace Index, however, the way I envision it here, aims at pro-
viding individual companies with a self-evaluation tool that does cover
the “same set of issues” but does not emphasize comparability. Therefore,
a Business Peace Index could be used as a subjective guideline, or as a
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256 Tilman Bauer

management tool, within one particular company. Here, not only the end
result matters but also each sub-score of each individual component. In
other words, every improvement that a company can achieve is helpful.
Thus, the end score should not be taken as an absolute measure. Rather,
each sub-score can be tracked over time to guide companies’ efforts to
evolve and become more responsible. The qualitative significance here
is that the tool would give companies an overview of a range of topics
that could be addressed. It is important to note that such self-evaluation
does not intend to measure any operations, as it is impossible to gener-
alize whether topic A or B is more important. For instance, if a company
excels in caring about children (for example, beyond merely banning
child labor) but fails to care about the environment, then it is not pos-
sible to say whether this is “better” or “worse” than another company
that cares for the environment but not for the children. Business in the
21st century will need a context-independent framework for tracking a
range of ideas for positive impact creation –and this is what a Business
Peace Index should offer.11
Putting the self-evaluation principle into a wider context,12 a purpose
here is to encourage companies to change to become “better”. The trad-
itional point of view is that companies can be influenced only through
the law. This is, however, an inefficient means because legal/regulatory
frameworks differ widely across jurisdictions. A by-product of globaliza-
tion is that companies have, in principle, a possibility to evade unfavor-
able laws by moving to another jurisdiction. A second means to influence
companies is through stakeholder pressure, which includes industry self-
regulation, certification schemes, consumer activism, and benchmarking.
Both legal and stakeholder pressure are, by definition, external sources of
change triggers. Another major source of external influence is manifested
further through management consultants. In addition to these external
sources, however, I argue that an internal source can offer a similar incen-
tive to climb up the ladder of morality: the intrinsic desire to be more
responsible, to become better in a holistic sense. This corresponds to
what Frederic Laloux refers to as the “inner rightness as compass” or
“internal yardsticks” in “Evolutionary-Teal” organizations (2014:44).
Accordingly, I depart from the idea that an index should be a tool for
benchmarking for horizontal comparison among companies. Thus, no
industry standards can be calculated. Rather, each company is analyzed
by itself over time. This is in line with the numerous difficulties associated
with coming up with universal sustainability assessment methods, as well
as with the fact that different sustainability indices are not comparable due
to different methodologies. Each company is in a unique situation facing
unique challenges with its own values, mission and vision statements, and
strategies to compete; so, the only comparison that makes sense is to its
own peace-fostering performance and changes in it over time.
An important question is how to define the sphere of companies to
which a Business Peace Index is relevant and applied. Are there any
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industries that should be prevented from using a Business Peace Index?
Some indices (such as Islamic Shariah Compliant Indices, which are at
the forefront of “ethical” investing) exclude a number of industries that
are deemed unethical (such as arms, alcohol, tobacco, and adult enter-
tainment) and are sometimes called “controversial” or even “sinful”
industries (e.g., Jo & Na, 2012; Sjöström, 2008). Székely and Knirsch
(2005:633) call this “negative screening”, i.e., “the exclusion of certain
companies or industrial sectors […] on the basis of their inability to meet
various social, ethical and environmental criteria”. The authors also talk
about “positive screening”, i.e., “actively including companies […] on
the basis of their strong performance on social, environmental or eth-
ical issues. Examples include environmental policy, codes, management
systems and respect for human rights and working conditions” (ibid.).
However, going beyond negative or positive screening, an alternative
approach is to welcome any company in the hope that applying a Business
Peace Index will help them to become more responsible, no matter
how irresponsible the company currently is. Of course, the question
of irresponsibility of certain industries is debatable. For instance, arms
manufacturers might argue that handheld weapons, in fact, foster peace
because any potential murderer can be killed before he/she acts if every
member of the general population carried a gun. This can be construed
as the “peace through security” imperative in the modern view (Dietrich,
2012). However, even if this view were true,13 such companies, at the very
best, foster weak peace, as their theory of change is that more guns mean
less violence. Climbing up the ladder of morality would entail tapping
into areas that go in the direction of strong and holistic peace (which do
not leave space for arms).
Another problem arises regarding the question of weighting the
different components of a Business Peace Index. Despite many assertions
that weighting is crucial in the development of an index, I argue that
weighting does not make sense, as it is per se a judgment for the pur-
pose of increasing or decreasing the importance of the item in question.
Böhringer and Jochem (2007:6) recognize that “weightings will in general
be associated with subjective judgments (if one does not decide a priori
that various problem dimensions are incomparable)” and that they are
in general “associated with subjective judgments” (ibid.:7). It is argued
that the burden of proof rests with those who use differentiated weighting
rather than those who do not.
Yet, as mentioned earlier, it is impossible to judge whether one area
(such as recycling) is more important than another (for instance, human
rights). This argument is in line with the criticism of the Triple Bottom
Line accounting concept (Elkington, 1998) that the social and environ-
mental dimensions are not real bottom lines that can be quantified in a
meaningful way (Norman & MacDonald, 2004). Another reason why
weighting is counterproductive is that it potentially causes misrepresenta-
tion of reality. Let us assume that the first component or question was the
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258 Tilman Bauer

most important criterion of the index. Consequently, it would deserve a
high weighting. This would, however, potentially enable a company with
an otherwise bad track record to undeservedly raise the total score. On
the other hand, the score of a company that otherwise fulfills all criteria
with excellence, but fails this one point, might be undeservedly lowered.
To illustrate this, the first question might be, for instance: “Does
the company express the intrinsic desire to sell ethical products or ser-
vices?” This is, of course, the very foundation of responsible business,
as lacking desire to be ethical is deemed unsustainable. A hypothetical
example comes to mind: a producer of gambling services would probably
fail the first question. The question would have to be weighted so heavily
that, even if the gambling company has an otherwise perfect record (for
instance, through heavily investing into the wellbeing of a certain commu-
nity14), it would nonetheless get a low total score. Yet, highly weighting
the desire to be ethical undeservedly raises the score of companies in more
ethical industries that otherwise perform very poorly in terms of responsi-
bility or sustainability. Reducing the weighting to moderate levels (rather
than heavily weighting a question) only reduces the effect but does not
solve the issue created by the weighting. The alternative to weighting
is simply counting the areas in which a company excels versus areas in
which it performs poorly. This form of non-weighting appears to be a
better solution to the abovementioned problem than simply excluding
certain unethical industries.
What could or should the actual content of a Business Peace Index
contain? Next, I suggest eight potential components that relate to
the following domains15: purpose, mindset, products/ services, ethics,
stakeholders, social development, principles of a new paradigm, and
leadership for peace.
A) Purpose
The idea of a Business Peace Index is to operationalize the peace concept
and to offer guidance to companies that want to navigate the “mental
map” of the business–peace nexus. To cover the whole range of possible
positive impacts, the operationalization must cover the three areas of
weak peace, strong peace, and holistic peace. This is so because the three
stages of peace form a continuum, or a moral ladder, on which responsible
business leaders can locate their activities. As mentioned before, regular,
ethical business activities tend to foster at a minimum weak peace. In
other words, the transition from focusing only on regular business activ-
ities to a mindset of fostering peace at the lowest level is simply one of
acknowledging the positive impact of business on society, which is a
primary raison d’être of business in the first place (Smurthwaite, 2008).
Thus, “the purpose of the company” should be the first component of a
Business Peace Index, as it is the most fundamental question pertaining to
the company’s willingness and ability to foster peace.
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There are a multitude of views on what the purpose of the corporation
is, ranging from Milton Friedman –who claims that “there is one and
only one social responsibility of business –to use its resources and engage
in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free competi-
tion without deception or fraud” (Friedman, 1962:133; cf. Friedman,
1970) –to Santa Barbara, Dubee, and Galtung (2009) with their book
Peace Business: Humans and Nature Above Markets and Capital, arguing
that responsible business includes ecological and social sustainability as
well as positively contributing to both nature and society through its day-
to-day operations.
Marilise Smurthwaite (2008) studies the purpose of the corporation
and suggests, on the basis of her analysis, five broad categories:
1 Make a profit for shareholders/owners;

2 Make a profit as well as develop individuals and serve the common
good;
3 Make a profit and be a good citizen;
4 Make a profit while helping to form good human beings and contrib-
uting to community as a whole; and
5 Make a profit while being socially responsible (for example, projects
relieving poverty).
Upon closer inspection of these unorthodox statements, all categories,

with perhaps the exception of the first, exhibit aspects of peace. The
common good, contributing to the community, and (holistic) prosperity of
the human family are related to one of the three stages of peace described
in the previous section. For example, relieving poverty belongs to weak
peace; contributing to the community and good citizenship belongs to
strong peace; and serving the common good, taken literally, is a link to
the holistic stage of peace. Smurthwaite earlier might not have the same
interpretation of “serving the common good” as I have (as she puts it
second after a profit-only motive), but the exact order of the four peace-
fostering categories is not of relevance. Rather, the question is how to
distill indicators that somehow measure the extent to which a company
interprets its purpose, its raison d’être, to include aspects of an expanded
understanding of the purpose of the corporation in society. The more
the company’s interpretation of its purpose includes aspects of peace, the
higher the score should be.
When explaining why defining peace as the raison d’être of a com-
pany gives the highest score, it is crucial to understand the importance
of such a decision. Korten (2015) reasons that the mantra of free trade
and capitalism has created a power imbalance in the world, resulting
in social and ecological deterioration. I argue that it is not only in the
self-interest but also the ethical duty of responsible business to set peace
as the telos, the goal, or the aim, of corporate positive impact (cf. Fort,
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2001). In other words, business should identify peace as the overarching
substance of its impact –both as the corporate social impact and as the
impact of products/services. As business will need to show significant
efforts toward creating positive impact for society in a responsible and
sustainable manner, setting peace as the goal of corporate activity will
ensure retaining the corporate license to operate. The only alternative is
unprecedented regulation of commercial activity. If Korten (2015) talks
about ecological destruction, the loss of civil freedoms, the erosion of
democracy, and community disintegration, it is exciting to notice that the
very opposites –respecting nature, civil well-being, legitimate decision-
making, and community integration –are aspects of peace.
B) Mindset
Having discussed the importance of a company having a corporate pur-
pose that alludes to peace, the extent to which a company has a long-term
mindset, i.e., how the company deals with shorter term versus longer
term performance pressure, is directly related to this (cf. Polman, 2016;
Tang & Greenwald, 2016). Essentially, the argument is that being solely
driven by quarterly profits does not leave space for long-term value cre-
ation for society at large. Rather, the size of profits –which can be seen
as a requirement for, and enabler of, business but not the purpose, as
discussed earlier –should depict the extent to which the company is
successful in achieving its purpose over the long term. Therefore, having
a long-term mindset is crucial. Contrary to common belief, it is no longer
a legal requirement for listed public companies in the European Union to
publish quarterly financial earnings (European Union, 2013; Financial
Conduct Authority, 2014). The United States seems to have caught
up with the refocus on stakeholder primacy away from shareholders.
Relevant is also the question how frequently a company engages in finan-
cial reporting. As Unilever under Paul Polman’s leadership has shown,
it is possible for a publicly listed company to opt for biannual reporting
rather than adhering to the quarterly paradigm. Other notable companies
that have jumped on the bandwagon of less-frequent financial reporting
include Nestlé and Carrefour. Furthermore, “mindset” covers the psy-
chological dimension of the individual manager, that of inner peace (cf.
Bauer, 2019a).
C) Products/Services
In addition to the fundamental purpose and mindset of a company, the
nature of the company’s products/services affects the company’s con-
tribution to peace. Good and responsible business fosters peace if its
products/services fill a human need in a socially, environmentally, and
economically sustainable way. Ideally, this component would measure
the amount of positive impact of the products/services. However, it may
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not be possible to devise metrics that are suitable for impact measure-
ment across industries and types of products or services. Therefore, the
extent to which the products/services of a company satisfy a human need
is an approximation of positive impact creation, and, thus, the third
component of a Business Peace Index. The underlying reasoning is that,
if a product or service does not satisfy, directly or indirectly, a human
need, then it is unlikely that it has a positive effect on peace. Satisfying a
human need, on the other hand, can contribute to weak peace through
securing an aspect of bare livelihood; to strong peace by instilling posi-
tive elements into people’s lives; and to holistic peace through enabling
self-actualizing or spiritual activities. Ekins proposes (in the context of
assessing whether economic growth deserves to be endorsed as a concept)
that “goods and services [should be] inherently valuable and beneficial”
and “distributed widely throughout society” (Ekins, 1986:6). Here, the
emphasis is on inherent value and benefit for customers and, eventually,
society as a whole. The central question is whether a company’s products
or services contribute to a higher purpose for the benefit of weak, strong,
or holistic peace. Transcending self-interest does not refer to neglecting
one’s own interests but to the perceived obligation to show leadership
for a better future.
D) Ethics
Moving on to the next component, related to the question of the purpose
of the company and its products/services is the extent to which the com-
pany embodies integrity and moral maturity. The question arises whether
a company would want to exploit loopholes in an ethically questionable
zone, or represent responsible leadership for an ethically sound future
and the embodiment of moral excellence?16 Fort and Noone (2000:546)
state that “[e]‌thical business behavior is best fostered when human beings
can meaningfully connect their self-interest with the welfare of others”.
An effective leader must have high morals, as Burns (1978) stipulated
(in the context of Transformational Leadership), or at least be “mor-
ally uplifting” (Bass & Steidlmeier, 1999:186). “Transforming leaders
‘raise’ their followers up through levels of morality” (Burns, 1978:426).
According to Kuhnert and Lewis (1987, as cited in Bass, 1999:14), mature
moral development is a clear requirement for good leaders. Nonaka and
Takeuchi (2011:5) refer to wisdom, which enables business leaders to
“make decisions knowing that the outcomes must be good for society as
well as the company”.
Ethics is further addressed in Fort and Westermann- Behaylo’s
(2008:57) chapter on moral maturity:
[A]‌corporation seeking to actualize a contribution toward peace

through its activities has to have a fairly sophisticated level of moral
maturity. Corporations that operate on a profit-only basis will not
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take into consideration a sufficient number of financially ambivalent
factors necessary to contribute to peace.
On the other hand, Van Tulder et al. (2014) identify a number of

“tipping points” that enable a company to transition to a higher level of
sustainability: once a tipping point is reached, an organization is unlikely
to fall back to a lower level of sustainability. Could it be that a similar
mechanism works with levels of moral maturity, or the ladder of morality
for that matter? Does fostering peace require a certain minimum level of
moral maturity?
As Fort and Westermann-Behaylo (2008) point out, companies may
not always possess the required moral maturity to foster peace in day-to-
day business. However, partnering with nongovernmental organizations
“can not only promote contributions to sustainable peace but, indir-
ectly, can inspire improvements in the moral development of the firm”
(ibid.:57). Fort’s (2007) concept of “Total Integrity Management” lends
itself to this development, as it elaborates on three levels of trust. First,
“Hard Trust” refers to the expectation and accountability that laws and
agreements are just and complied with. Second, “Real Trust” entails
virtues such as honesty, doing good, positive impact, fairness, and so on.
Finally, “Good Trust” is about moral excellence and spiritual identity.
In a sense, these three stages of trust correspond to weak peace, strong
peace, and holistic peace. The more moral and responsible a company
wants to be, the higher it goes up the ladder of fostering peace.
Existing indicators that evaluate a company’s moral maturity tend
to refer to a black-and-white distinction between ethical and unethical
behavior (such as legal and illegal behavior), perhaps with gray shades of
almost-ethical behavior (Laasch & Conaway, 2015), or “emerging eth-
ical” (Reidenbach & Robin, 1991) behavior.17 The underlying assumption
seems to be that “doing the right thing” refers to only one action. Yet,
what the action of “doing the right thing” is depends on how high the
individual, or the company, climbs up the ladder of morality.
It is important to note that accepted standards of ethics and mor-
ality depend on culture and context. Therefore, a Business Peace Index
should not measure whether a company is moral. Rather, “embodying”
moral maturity depends on the accepted standards. Who decides what
the accepted standards are? This is a question that society has to answer.
Certain attempts to foster consensus-building, intergenerational, inter-
faith, and intercultural dialog exist. A notable example is the Earth
Charter.18
E) Stakeholders
The next component focuses on company stakeholders. It assesses the
extent to which a company positively evaluates its role and responsi-
bility toward fostering true well-
being of various stakeholders. This
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is also important due to the insight that peace is essentially relational
(Bauer, 2019a). Suder (2008:4) defines peace as: “the balance of interests
of communities, and their proper communication, dialogue and actions
regarding challenges and issues they may have, acting responsibly so as
to prevent violence”. Thus, acting responsibly requires considering the
interests of communities. Indeed, one of the central tenets of respon-
sible business is “stakeholder value optimization” (Laasch & Conaway,
2015:97), which suggests that the needs and expectations of each stake-
holder –local communities, employees, customers, etc. –are considered
individually with the help of key performance indicators, such as
employee welfare or customer satisfaction. As Myllykangas, Kujala, and
Lehtimäki (2010:65) conclude, “the question of who and what really
counts should be replaced by the question of how value is created in
stakeholder relationships”. What matters here is the underlying motiv-
ation of stakeholder engagement.
F) Social Development
A related concept to that of stakeholder engagement is the idea that
businesses can significantly contribute to the social development of
individual underprivileged communities, as well as entire countries
or regions. Adhering to the notion of “social responsibility” describes
the social responsibility of companies to create positive value for com-
munities, especially underprivileged communities in which a company
operates. Most initiatives in the field of “responsible business” fall into
this category, the United Nations Global Compact being the primary
example. Its ten principles –divided into Human Rights principles, Labor
principles, Environmental principles, and an additional Anti-corruption
principle –offer a good proxy for social responsibility. As corporate per-
formance in all these areas has the potential to affect communities, the
United Nations Global Compact is, thus, a useful source of criteria to
assess the extent to which a company takes responsibility for the social
development of underprivileged communities. Moreover, companies can
create value for underprivileged communities, for example, at the Base or
Bottom of the Pyramid (BOP) that includes billions of people living on
less than a few dollars per day. Here, people in impoverished areas are
considered potential employees as well as potential customers. The lower
purchasing power simply requires a different approach to these billions of
people worldwide (Kandachar & Halme, 2008).
Essentially, the underlying argument of this component of a Business
Peace Index is that it is the moral responsibility of a company to consider
its opportunities to contribute, through core business activities (rather
than activities that fall under the concept of CSR), to the social develop-
ment of underprivileged communities. Related to the products/services
component, a company should ask itself and evaluate what human needs
its products/services satisfy, and then explore opportunities to develop or
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modify existing products/services to address the needs of underprivileged
communities. This principle remains valid regardless of a company’s pri-
mary target market.
G) Adherence to a New Paradigm

The most fundamental question that any Business Peace Index should
address is the extent to which a company follows principles of a new para-
digm of commerce for the 21st century. In this new, emerging paradigm,
everything is interconnected and affects everything; what matters are the
relationships between units in a network, as Fritjof Capra (1982:266)
postulates: “Systems are integrated wholes whose properties cannot be
reduced to those of smaller units”. Capra’s systems theory approach dir-
ectly relates to chaos theory to which “an underlying interconnected-
ness that exists in apparently random events” (Briggs & Peat, 1999:2) is
essential. Chaos theory, then, is the basis for the concept of self-organiza-
tion. Dee Hock combines these two concepts by coining the concept of
“chaordic” organizations. Hock defines “chaordic” as “the behavior of
any self-organizing and self-governing organism, organization, or system
that harmoniously blends characteristics of chaos and order [or as the]
characteristic of the fundamental, organizing principle of nature” (Hock,
2005:13).
Using Hock’s terminology, the new paradigm is about chaordic self-
organization. However, important is also the realization that topics
historically not part of the academic world –such as spirituality or
love –are now becoming acceptable. Coupling this with Dietrich’s (2012)
transrationality, a new awareness of unity emerges between cosmos,
nature, human beings, and all systems within and between. We are
moving away from duality. Now, we cannot always say whether some-
thing is right or wrong. We realize more and more that the truth might
seem contradictory at first. However, if we learn to appreciate diversity
and the interconnectedness of elements in a system, then we can advance
into new realms of fostering holistic peace. It is indeed central to the
new paradigm to set holistic peace as the ultimate pinnacle of business
activity. I argue that asking a mere question like “how can our company’s
products and services make a positive contribution to peace in society?”
is a tipping point that will lead to more responsible business practices (cf.
Van Tulder et al., 2014), as it encourages reaching higher levels of moral
maturity (cf. Scharmer & Kaufer, 2013).
In order for business to claim its position as a peace-fostering entity,
a total change of the value system might be necessary. This attacks some
of the fundamental traits of business that requires a competition-based
market economy, as competition is, thus far, the best means available
to regulate supply and demand. However, this contradicts one of the
principles of the new paradigm, cooperation through interconnectedness,
as exemplified by ecosystems in nature: “Detailed study of ecosystems
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over the past decades has shown quite clearly that most relationships
between living organisms are essentially cooperative ones, characterized
by coexistence and interdependence” (Capra, 1982:279). The mantra of
competition and profit maximization essentially requires companies to try
to grow faster than competing companies, as a lack of (sufficient) growth
can lead to the company being swallowed by competitors or going bank-
rupt. However, such a system does not seem to be truly benefitting society
as a whole. Instead, we need to develop a system that is independent of
the growth maxim by allowing companies to grow as much or as little as
needed. We know from state-of-the-art positive psychology research and
evolutionary evidence that “cooperation and collaboration are hardwired
in humans” (Chapter 10 in Brown & Elliott, 2016).
Perhaps the most fundamental change for business, however, is the
way in which organizations are perceived. In the old paradigm, managers
aim at controlling an organization like a machine, designing every part of
it to maximize profits. Change, control, innovation, creativity –these are
thus top-down concepts. In the new paradigm, however, organizations are
considered “living” (Capra, 2002:102) systems where creativity emerges
through chaos and self-organization from the bottom up. This entails
networking, communities of practice –a wholly different approach that
managers need to recognize and appreciate.
As the “new paradigm” is an emerging phenomenon, it cannot be pre-
cisely defined with certainty. Only in retrospect will we be able to iden-
tify characteristics of a historical era. The earlier discussion has merely
paraphrased the status quo of our understanding of the direction that
the new paradigm is likely to develop. The cited literature consists of
both a priori conceptual analyses and a posteriori empirical analyses
of emerging cases where evidence of a new paradigm can be observed.
Examples include “teal organizations” such as the ones studied by Laloux
(2014): Patagonia, FAVI, and Buurtzorg, to name a few. To summarize,
the principles of the new paradigm will likely revolve around notions
of systems thinking, chaos theory, self- organization, transrationality,
transcending duality, interconnectedness, interdependence, and collab-
oration. Moreover, the new paradigm will likely declare peace as the
ultimate objective because its various stages offer a framework that aids
achieving human flourishing.
H) Corporate Leadership for Peace

The implication of the abovementioned is that managers need a new
concept, a new understanding of leadership. Such new understanding
is offered by Capra (2002:121–122) who distinguishes two leadership
paradigms:
Finding the right balance between design and emergence seems

to require the blending of two different kinds of leadership. The
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traditional idea of a leader is that of a person who is able to hold
a vision, to articulate it clearly and to communicate it with passion
and charisma. […] The other kind of leadership consists in facili-
tating the emergence of novelty. This means creating conditions
rather than giving directions, and using the power of authority to
empower others. Both kinds of leadership have to do with creativity.
Being a leader means creating a vision; it means going where nobody
has gone before. It also means enabling the community as a whole
to create something new. Facilitating emergence means facilitating
creativity.
Margaret Wheatley comments (2006:14):
In motivation theory, attention is shifting from the use of external

rewards to an appreciation for the intrinsic motivators that give us
great energy. We are refocusing on the deep longings we have for
community, meaning, dignity, purpose, and love in our organiza-
tional lives.
The key to future business success is to transform outdated concepts

of the old paradigm and cede control to new and fresh ideas of trust,
mutual support, and peace. Only then can business show “exceptional
leadership” (Chaudhry, 2011) for a better world. Of course, the extent
to which a company shows leadership for peace is a fundamental compo-
nent and indicator for transitioning to a new and peaceful future. Groff
and Bouckaert (2015:9) connect the trajectory of business thinking with
an emerging paradigm that embraces the concept of peace:
Since the postwar period, the nature of business has undergone a

permanent evolution because the conditions in its environment are
in continuous change. Although many business leaders do not realize
fully the new conditions and keep thinking in terms of “business as
usual”, they are yet confronted with the ecological, psychological
and social effects of the change. More enlightened entrepreneurs are
aware of the paradigm shift from a capitalistic towards a holistic and
post-capitalistic idea of doing business. It is striking how this para-
digm shift in business follows a parallel track as the evolving concept
of peace. Moreover, the evolution is not only one of parallelism but
of reciprocal influence and interaction. If business can be considered
as a lever for peace, peace is a necessary condition for a flourishing
economy.
Moving toward the new paradigm requires strong leadership from actors
across society. Business plays a crucial role in this process, and individual
companies need to show leadership, so that others can follow. However,
I argue that the only type of leadership that addresses the intricacies of
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the new paradigm in the business context is corporate leadership for
peace. Due to the magnitude of our contemporary challenges –from the
COVID-19 pandemic to the climate emergency –such leadership must be
rooted in the conviction, commitment, and credibility of a strong CEO
who sees his/her company as a forerunner for holistic excellence. The
following section summarizes the basic tenets of a Business Peace Index.
Summary of General Principles for a Business Peace Index
• A Business Peace Index should incorporate the principles of a new

paradigm for business thinking to integrate it with the rationale of
business fostering ideally all three stages of peace: weak peace, strong
peace, and holistic peace.
• This will help companies to self-evaluate their stance and incorp-
orate the insights from the study of why, and through what activities,
business can and should foster peace as well as principles of respon-
sible business that has the raison d’être of fostering peace for society
as a whole.
• A Business Peace Index can be a subjective guideline, or manage-
ment tool, within one particular company, and its score should not
be compared to that of other companies –although that could tech-
nically be possible. The tool gives companies an overview of a range
of topics that could be addressed. It is not a tool for benchmarking,
and no industry standards can, or should, be calculated.
• A Business Peace Index does not make use of differential weighting,
as all components are of equal importance. The alternative to dif-
ferential weighting is simply counting the areas in which a company
excels versus areas in which it performs poorly, and to calculate an
average score.
• A Business Peace Index should evaluate the purpose, the mindset
of a company, its products and services, morality/ethics, as well as
contributions to the true well-being of stakeholders and especially of
underprivileged people. Thus, adherence to the principles of a new
paradigm and the capacity to show corporate leadership for peace
are assessed.
To pinpoint the managerial relevance of the components: with the help of

the Business Peace Index, companies can identify a range of opportunities
along the eight components introduced earlier (A – H) to become more
responsible and more valuable for society. The following list identifies
exemplary questions for each component for companies that expresses
the desire to advance in the business-for-peace paradigm:
A) Why was your company founded? What problem does the entre-
preneurial spirit of your company address in society? What vision
is promoted by the values that the organization embodies? Could
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this mission or vision be connected, or elevated, to one of the stages
of peace?
B) Having identified the purpose of your company in the previous com-
ponent, does it inspire leaving a legacy to future generations? This
entails adopting a long- term mindset when developing corporate
strategy.
C) Do some of your company’s products or services, directly or indir-
ectly, address some human needs? Why is the world a better place
because of your products/services? Can this benefit be scaled through
modifying or developing new products? Might this also lead to new
business opportunities?
D) How would you defend your company’s ethical stance to a religious
or nonreligious moral authority of your choice? How could you climb
the ladder of morality? This entails, as a starting point, learning from
past mistakes and, from now on, adopting a zero tolerance for uneth-
ical behavior. Can this, organically and instrumentally, improve your
company’s reputation in the long run?
E) Does your company care for the communities in which it operates,
for the environment, and for other stakeholders that are, directly or
indirectly, affected by your company’s operations? What would it
entail to truly care? Adopting a win–win mindset, what benefit could
your company bring to these stakeholders?
F) If certain products/ services of your company could significantly
improve the living standards of a group of people, would your com-
pany pursue the opportunity? What changes are necessary to make
the product/service useful and beneficial for underprivileged commu-
nities? Which of your products/services have the greatest potential
to tap into new markets where your company can create positive
impact? Are there any logical starting points for marrying profit-
ability with societal gain?
G) Are you aware of your company’s systemic role as a peace-fostering
entity? Do you allow for synchronicities to appear? Does your com-
pany actively foster inner and outer peace in various spheres inside
and outside of the organization? Do you allow people in your com-
pany to self-organize and self-govern? Do you appreciate diversity
and interconnectedness? Do you enable, allow, and trust creativity
to flourish in “dark corners” of your organization? Does your
company’s organizational culture value every human being equally?
H) How does your company facilitate the emergence of novelty? Does
your company empower leaders on all levels of the organization
to be creative through intrinsic motivation to foster peace through
business activities?
It needs to be noted that all components are reciprocally reinforcing each

other and may, therefore, partly overlap. This is conceptually intended
to increase the likelihood that, in practice, satisfying the requirements of
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one component may also satisfy those of some others. This is a trait of a
tool that intends to affect corporate behavior. For instance, if the mission
statement of a company explicitly states that the company wants to foster
peace, then it is likely that the products/services are designed with this
mission in mind. On the other hand, embodying moral excellence will
likely entail transcending the limitations of a short-term mindset. A third
example: if stakeholders are engaged with the intention to foster peace,
then the social development of underprivileged communities will likely be
a priority, as well. Finally, if a company recognizes the need for a para-
digm shift, it will probably show strong leadership for peace.
Concluding Remarks
The potential for business to address some of society’s grand challenges is
an exciting topic –and rethinking the role of business in today’s world is
likely a key factor in the pursuit of holistic solutions. It is my belief that
the idea of Business for Peace has the potential to guide the development
of a new Theory of the Firm and to make the world a more peaceful
place, whilst aligning with the collective objective to promote sustain-
able development and to change the world for the better. The ultimate
goal of the Business for Peace notion is to help companies become more
responsible and more useful to society as a whole. This chapter will have
achieved its purpose if it offers a way toward an emerging, new paradigm
for business in which peace serves as the central tenet.
The chapter presents a renewed understanding of the role and purpose
of business in society. One of the things that the business-peace concept –
an under-researched field within modern business theory –has is the poten-
tial to solve the conceptual problems inherent in CSR, as the latter is not
able to solve the very issues it promised to solve. Contrary to CSR, the
concept of peace does have a robust set of inherent meanings across times
and cultures. We have a vast history of thought –spanning much of human
civilization –on the meanings, interpretations, and requirements of peace
(Dietrich, 2012). All of us as individuals, as long as we are able to transcend
the common misconception that peace is no more than merely the absence
of war, have an intuitive idea of what peace can mean. Not being violent to
nature and our globe is a critical aspect of peace, too. Not exploiting one’s
workforce is also part of peace. Doing good is central to peace.
Business for Peace couples the idea of contributing to the common
good with actionable insights from peace literature. The idea that
business is only about profit is one of the biggest misunderstanding of the
last 100 years. This is not to say that profits are not important. They are
a requirement, an enabler, and, one might say, a necessary and convenient
side effect of business, but the true purpose of business is to produce the
products/services that foster the well-being of society as a whole and, thus
(an aspect of) peace. By conceptualizing the modern role of business in
fostering peace in society, this chapter sets new expectations for business
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behavior. This provides the basis for the development of a holistic
Business Peace Index introduced here that operationalizes weak, strong,
and holistic peace in the corporate context and helps companies evaluate,
and take practical action to fulfill, that role. As it has been shown that
the concept of peace is relevant for business, the goal of a Business Peace
Index is to elevate the responsible business discourse to a new level. It
is not enough to be merely sustainable, as responsible business needs to
create value for society at large. Peace is the substance of such positive
impact.
This study defines essential criteria for a Business Peace Index at the
three stages of peace: weak, strong, and holistic peace. These criteria
form a ladder of morality because each higher level represents, contains,
or entails activities that require a higher level of moral maturity. A total
of eight critical components were devised to offer individual companies a
management tool for self-evaluating their stance vis-à-vis the potential of
business being a force for peace. These components draw a roadmap to
peace, and each component score suggests on what level a company finds
itself on the respective aspect of this journey, as subjectively determined
by the firm. The eight components are related to purpose, mindset,
products/services, ethics, stakeholders, social development, a new para-
digm, and corporate leadership for peace.
Quintessential to a Business Peace Index is the premise that a business
needs to adopt a holistic approach if it wants to climb up the ladder
of morality and be a force for peace. Such holism implies following a
higher purpose that goes beyond self-interest. Business being a force for
peace means that it has a socially, environmentally, and economically
sustainable corporate legacy that contributes to the flourishing of human
potential and society as a whole. Moreover, climbing up the ladder of
morality postulates having a zero tolerance for unethical behavior and
always aiming for the most ethical (rather than merely ethical) action.
Business for Peace –and a holistic Business Peace Index, in particular –
has the potential to offer guidelines toward some form of a postcapitalist
society (this is not to be against capitalism, per se, but, rather, to tran-
scend or further develop capitalism toward an even better system). By
drawing on these principles outlined in this chapter, I hope it answers the
question of why the purpose of responsible business should be seen to
foster peace, which is at the crux of demands of creating positive impact –
and of a new Theory of the Firm –and that the criteria developed con-
tribute to our understanding of a new paradigm that puts human needs
and nature at the center of corporate attention.
Notes
1 This chapter is based on my in-progress doctoral research at Aalto University
School of Business.
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2 In the words of John R. Boatright (1996:217–218), “finance theory and cor-
porate law postulate shareholder wealth as the objective of the firm”. Further:
“In economics, neoclassical marginal analysis regards the firm as a profit maxi-
mizing unit in order to explain various economic phenomena” (pp. 219–220).
3 Creating value for society refers to holistic value in the most comprehensive
sense (cf. Windsor, 2017).
4 Why do I talk about the philosophical purpose of business and not simply
about the purpose of business? In my view, “philosophical purpose” refers
to the ultimate net benefit of business to society (the reason of why we, as
society, continue to do, have, encourage, or tolerate business), whereas “non-
philosophical purpose” may include anything from the individual motivation
of the entrepreneur to context-specific problems that need to be solved.
5 F. Fukuyama, personal communication, Stanford University, November
2, 2017.
6 D.P. Brown, personal communication, Stanford University, October 31, 2017.
7 F. Fukuyama, personal communication, Stanford University, November
2, 2017.
8 One notable exception is William McDonough’s and Michael Braungart’s
(2000, 2013) concept of “Cradle to Cradle”, where products are
expected to deliver “positive nutrients” to the “biosphere” and/or to the
“technosphere”.
9 This section on a Business Peace Index is based on my unpublished Master’s
Thesis at Erasmus University Rotterdam School of Management, supervised
by Prof. Muel Kaptein and Dr. Ben Wempe, in 2016.
10 A case in point is the Helsinki-based Upright Project founded in 2017 by
Annu Nieminen: www.uprightproject.com/.
11 The Rate the Raters project (SustainAbility, 2010a:6) comments on the
problem of “apples-to-oranges comparisons” that,
evaluating companies across sector, geography, revenue and different
issues is very difficult. Is it reasonable to compare a company like
United Natural Foods (a $3.4B distributor of natural and organic
goods) with a company like Shell (an oil company with $278B in rev-
enue)? This of course raises critical questions around the universe of
companies, the issues evaluated, and weightings given to the various
issues. Furthermore, many ratings insufficiently consider the context
of certain companies, industries, and issues. For example, evaluating
companies on water risk should factor in geography, as for example
a company with a footprint in the US. Pacific Northwest would face
different water constraints than a company with a footprint in Sub-
Saharan Africa.
12 This paragraph is inspired by a discussion with Prof. Hagen Henry on June
14, 2016, as well as by an interview with Noel Morrin, then Executive Vice
President, Sustainability, at Stora Enso Oyj, on May 27, 2016.
13 In reality, it may not be sound to argue that more guns lead to less violence,
because studies indicate that the more guns are in the general public, the more
homicides happen (Duggan, 2001).
14 In Finland, offering gambling services is a monopoly given to RAY (Raha-
automaattiyhdistys), Finland’s Slot Machine Association, a governmental
gambling company whose profits go to domestic charity. In the United States,
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the casinos in Native Indian reservations, and in the United Kingdom, The
National Lottery, are further examples.
15 It needs to be acknowledged that this list of domains does not claim to be
complete. There may be others. Here, my aim is to provide an operational
approach that can, and should, be re-examined through further research
to elucidate what this theory of the firm around Business for Peace would
look like.
16 An underlying philosophical assumption, here, is that the concept of ethical
responsibility is not limited to the individual human being but can also be
applied to collectives, such as a company.
17 According to Laasch and Conaway (2015), the objective of ethics manage-
ment is moral excellence. However, “moral excellence” is defined as “above-
average ethics performance” (ibid.:140). This is clearly insufficient for a
Business Peace Index that covers the expanded range of the peace concept.
Moreover, Reidenbach and Robin (1991) fail to transcend the perceived
dilemma between ethics and profits. For the authors, an ethical company
needs to “balance” ethics with profits, rather than use ethics as a source of
(peace-fostering) innovation.
18 http://earthcharter.org.
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Lessons from Indigenous Social
Enterprises
An Alternative Management Model?
Mario Vázquez Maguirre
Introduction
The theory of the firm is an economic concept that privileges wealth gen-
eration and the maximization of individual utility, implying that the pur-
suit of personal benefit also ultimately benefits the entire society. This
theory has been taught dogmatically in universities as if it were an abso-
lute truth that should govern the behavior of organizations. The man-
agement discipline has had a predisposition to technicality, efficiency,
and productivity, while the spirit of exploration and creation has been
limited. In recent years, scholars have sought to revive the debate on the
principles governing management, little by little gaining voice and forums
for debate. This chapter aims to contribute to this conversation.
There is increasing evidence of the negative impacts that firms gen-
erate, which contribute to great inequality, poverty, instrumentalist use
of labor, and unsustainable practices. However, the analysis of these
negative stakeholder externalities has been minimized. The field of man-
agement has largely adopted a tendency to accept these shortcomings,
sometimes blaming them on a lack of sufficient ethics or morality (Quinn
& Jones, 1995; Shum & Yam, 2011) of the individuals who manage and
lead organizations. It is necessary to explore other theoretical perspectives
that may solve such issues and ultimately generate, in practice, better
organizations for society.
Within the wide spectrum of organizations that exist, there is a sub-
group that usually generates different –and arguably better –dynamics
with internal and external stakeholders. This chapter seeks to explore
the attributes of a management model derived from indigenous social
enterprises by examining the ontological, epistemological, axiological,
and praxiological dimensions of such initiatives. As a result, the inte-
gration of the four dimensions constitutes a management model for
organizations, purpose of which is related to the common good1 and sus-
tainability2 as ultimate goals. These two elements are considered central
in the raison d’etre of these enterprises and constitute a new paradigm
that is opposed to that of companies managed mainly under the principle
of profit maximization, value appropriation, and stakeholder control.
DOI: 10.4324/9781003211549-12
1
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Lessons from Indigenous Social Enterprises 281
Indigenous Entrepreneurship and Indigenous Enterprises

The indigenous or aboriginal peoples are so called because they are the
descendants of those communities that inhabited a country or geographic
region before the arrival of people from different places and cultures and
who became dominant through conquest, occupation, settlement, or
other means (General Assembly of the United Nations, 1997). Indigenous
entrepreneurship is a growing area of research because it seems to have
particular elements that differ from the broader field of entrepreneur-
ship. Indigenous entrepreneurship usually addresses an urgent problem:
improving the living conditions of indigenous communities, many of which
suffer chronic disadvantages (Peredo & Anderson, 2006). For example,
Dana and Anderson (2007) stated that indigenous cultural values are
generally incompatible with the assumptions of dominant entrepreneurial
theories. These values are related to ecological balance, solidarity, holistic
worldview, and preservation of culture (Curry, Donker, & Michel, 2016).
Likewise, Morris (2004) suggests that indigenous ventures do not place
much emphasis on the generation of wealth, so the theory of the firm may
not be the most appropriate in this context. Instead, entrepreneurship
could be an instrument to maintain indigenous cultural values (Peredo &
Chrisman, 2006) and prevent such communities from migrating to urban
contexts where they can face more difficult social and environmental
challenges (Vázquez-Maguirre, Portales, & Velásquez, 2018).
Indigenous enterprises are usually the result of entrepreneurial
initiatives. In these entities, economic goals are generally a mean to
achieve social and environmental goals (Peredo et al., 2004), and the
emphasis is usually on the development of the indigenous commu-
nity (Berkes & Adhikari, 2005), self-determination and environmental
empowerment (Giovannini, 2012), and sustainability (Vázquez-
Maguirre, 2018). Indigenous enterprises are formed based on the trad-
itional knowledge that each community transmits from generation to
generation (Berkes & Adhikari, 2005; Igwe et al., 2018); so, they fre-
quently do not incorporate traditional management knowledge in their
design. Therefore, traditional performance indicators may not be the
most adequate to evaluate these enterprises (Toledo-López et al., 2012).
Indigenous enterprises have dynamics that resemble those presented by
social enterprises, which is why they are generally related to such litera-
ture (Peredo & Chrisman, 2006).
Social Entrepreneurship
The definition of social entrepreneurship has been evolving since the
1990s, when it was an emerging issue for administrative sciences, until
recent years, when it has become an important discipline for scholars.
Social entrepreneurship is frequently associated with entrepreneur-
ship, sustainability, and corporate social responsibility. Authors such as
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Campbell (1997), Leadbeater (1997), and Cornwall (1998) define social
entrepreneurship in terms of the company’s social purpose and the search
for improvement in the community. Borins (2000), the Canadian Center
for Social Entrepreneurship (2001), and Peredo and Chrisman (2006)
suggest that the term is related to innovative initiatives to address a
social problem in a different way. Dees (2007), Weerawardena and Mort
(2006), and Bornstein and Davis (2010) emphasize that the priority is
the creation of sustained social value and permanently solving a social
issue. Martin and Osberg (2007) and Megre et al. (2012) add that these
initiatives must be scalable to have a high social impact.
Scholars have recently studied new dimensions or characteristics of
social entrepreneurship that differentiate it from other types of entre-
preneurship. The latest definitions also introduce the idea of sustainable
initiatives as those that generate positive economic, social, and environ-
mental impacts at the same time (Vázquez-Maguirre & Portales, 2014).
In this sense, Filipe Santos (2012) defines social entrepreneurship as
the search for sustainable solutions to problems of neglected positive
externalities. Santos argues that social entrepreneurship is a fundamen-
tally different phenomenon from other forms of economic organization
(NGOs, foundations, commercial entrepreneurship, etc.). Although eco-
nomic theory is based on the assumption of economic actors interested in
themselves, Yunus (2010) argues that profit maximization is not the only
motivation of individuals; people are multidimensional actors who can
generate utility by improving the well-being of other members of society.
Santos (2012) argues that these motivations can create organizational
structures that are different from commercial enterprises.
The main characteristics of social entrepreneurship, which
differentiates it from commercial entrepreneurship, are as follows: (1)
the need to achieve a sustainable solution; (2) the adoption of a logic
of stakeholder empowerment, which is opposed to the logic of stake-
holder control of profit-maximizing organizations; and (3) the search for
the creation of economic and social value in every stakeholder, which
is opposed to the dynamic of value appropriation followed by profit-
maximizing organizations (Santos, 2012). The internal rate of return, for
example, is a measure of appropriation of value. Although sustainability
and value creation are frequently viewed as dimensions of social entre-
preneurship, the relationship of empowerment with social entrepreneur-
ship has been less frequently considered. The World Bank (2002) defines
empowerment as “the expansion of assets and capabilities of poor people
to participate in, negotiate with, influence, control, and hold accountable
institutions that affect their lives” (p.11). In this way, the empowerment
of actors inside and outside organizational boundaries seems to be one of
the main characteristics of social entrepreneurship, which differentiates it
from other fields.
Social entrepreneurs generally create mechanisms and tools that reduce
stakeholder dependency from the organization and at the same time
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increase their capacities so they can increase their well-being (Vázquez-
Maguirre et al., 2018). For this purpose, these initiatives frequently
establish alliances with other organizations (Santos & Eisenhardt, 2006).
Santos (2012) also suggests that one of the possible contributions of
social entrepreneurship to the management field is the analysis of these
empowerment approaches and how they are integrated into new business
models and organizational structures that facilitate the fulfillment of
the social mission. The elements that characterize social entrepreneur-
ship also contribute to the analysis of indigenous social enterprises; in
addition, a framework such as the philosophical rhombus could provide
a useful guide to further examine their different levels of meaning and
expression.
Methodology
This chapter explores the characteristics of a management model derived
from indigenous social enterprises that is different in nature from the
principles of the theory of the firm. For this purpose, the philosophical
rhombus of Bédard (2003) is used as a tool of analysis. The evidence
presented next is the result of the documentation of cases in indigenous
social enterprises. Four cases were documented in Southern Mexico
(Mayan and Zapotec ethnic groups), one case in Peru (Cajamarquinos/
Inca ethnic groups), and one case in Guatemala (Mayan ethnic group).
Primary data was collected from 2011 to 2018 through a qualitative
method based on three techniques: semi-structured interviews, observa-
tion, and secondary data analysis. The cases correspond to different ethnic
groups in Latin America; however, there is convergence in the elements
that form each of the dimensions analyzed. That is, indigenous social
enterprises in Latin America might be considered a homogeneous phe-
nomenon due to the values shared by the different cultures that inhabit the
region. The differences that may arise regarding the praxiological dimen-
sion in particular are discussed in the last section of the chapter. Besides
presenting primary data from the cases, the discussion (next section) also
incorporates literature (including articles that have also analyzed these
four cases) that reinforces the emerging categories.
Discussion
The philosophical rhombus was born for the analysis of administrative
sciences; it is an analytical tool that allows the integration of dimensions
that are often approached separately (Bédard, 2003). The tool is versa-
tile, may have a descriptive or explanatory purpose, and may be inductive
or deductive. Table 11.1 describes the elements of indigenous social
enterprises that form each of the four dimensions of the philosophical
rhombus.
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Table 11.1 Philosophical rhombus of indigenous social enterprises
Dimension Elements
Ontological Common good, sustainability

Epistemological Phenomenology, humanistic management, stakeholder
theory
Axiological Dignity, equity, equality, self-determination, holistic
worldview, legitimacy, accountability, participation
Praxiological Democratic and participatory decision making, reporting,
social and environmental investment, cultural
reaffirmation, protection of minority groups, circular
economy, benefits for employees, horizontal structure,
entrepreneurial ecosystems, stable growth, healthy finance
Source: Self-elaboration with primary data.
Ontological Dimension
This dimension constitutes the principles and nature of the three add-
itional dimensions. The ontology is responsible for establishing the raison
d’etre of a particular phenomenon through the generation of meanings
and general principles that determine its own nature. These meanings
and principles determine the kind of rational and moral validity that
epistemology and axiology will use to validate the actions, behaviors,
and practices that are displayed on the praxiological dimension (Bédard,
1995). Indigenous social enterprises have different purposes to provide
decent work, prevent migration, protect dignity, advance social and eco-
nomic development, alleviate conditions of vulnerability, and son on.
However, two elements seem to be present as common rationale of such
efforts: generating and safeguarding the common good and ensuring com-
munity sustainability. The ontological dimension of indigenous social
enterprises seeks the development of the common good and sustainability
of the community.
Common Good
The indigenous holistic cosmovision seeks the unity of the individual
with everything that surrounds her. It implies an interest in the common
good and general well-being as the only path to personal well-being.
The intrinsic value of human beings and the protection and promotion
of their dignity implies a concern for every member of the community.
Indigenous social enterprises seek to avoid the exploitation of the indi-
vidual, no matter what stakeholder she represents. These enterprises
usually produce social innovations that prioritize holistic health and
well-being and have a strong link to social justice agendas (Waterloo
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Institute for Social Innovation and Resilience, n.d.). They also seek to
promote dynamics that protect human dignity and self-determination,
which includes protecting the environment; this is an essential element to
achieve sustainability (Vázquez-Maguirre & García, 2018).
Sustainability
Indigenous people also manifest a sense of long- term view in their
decision-making, probably as a result of their holistic cosmovision and
the fact that they have lived on the same land for generations. They have
clear responsibilities to other human beings, including past and future
generations, and to the environment (Kastelic, 2018). In this sense, they
seek to preserve the ecosystems they have lived in as a nonnegotiable
element when they create ventures to increase their well-being and gen-
erate economic development. Indigenous communities are aware that
many of the efforts they make today will impact the welfare of the next
generations. In this sense, there is a tendency to analyze any project from
various dimensions (economic, social, cultural, and environmental);
wealth generation is usually secondary to social and environmental ends
(Peredo, Anderson, Galbraith, Honig, & Dana, 2004). Also, this long-
term vision is needed for the community to transcend, prevail, and live
harmoniously with the environment that surrounds it. By extension, the
raison d’être of these communities is the sustainability of the ecosystem
(individuals included), and the search for the well-being of every stake-
holder that is part of it (Vázquez-Maguirre, 2018).
Epistemological Dimension
The epistemological dimension is related to knowledge in all its forms,
including the formation, creation, and transformation of scientific the-
ories, methodologies, and research techniques (Bédard, 2003). This
dimension incorporates the processes of knowledge creation that try to
understand and make sense of indigenous social enterprises. Epistemology
exerts a function of critical vigilance in the search for truth and validity
in connection with such indigenous entrepreneurship initiatives. The
following elements are identified as fundamental contributors to the cre-
ation and validation process: phenomenological approach, humanistic
management, and stakeholder theory.
Phenomenological Approach
The phenomenological approach relies on methods such as ethnography
and case study to document and analyze the dynamics in which indi-
genous social enterprises are embedded. This approach analyzes the
meanings attributed to social phenomena by those who live them, so
the context becomes vitally important. Through the phenomenological
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approach, information linked to embodied ways of knowing is obtained:
the five senses and feelings (Bédard, 2003), which facilitate the diagnosis
of elements immersed in a deep and particular context such as in indi-
genous social enterprises and indigenous communities. Ethnography and
case study are preferred research strategies to provide more detailed and
nuanced contextualization of enterprises of this nature (Anderson et al.,
2006; Hockerts, 2010). Also, the exploratory stage of this emerging topic
necessitates data collection that focuses on how individuals are making
sense of the social enterprises they are designing and managing.
Humanistic Management
The nature of the human species shares features such as reason, psyche,
language, and the word. One of these traits is also work, seen as creation
in itself and creation of oneself (Bédard, 2003). Humanistic management
starts from the conception that human beings comprise the ends, and not
merely the means, of any organization. The objective of an enterprise is
to generate dynamics of well-being in and for its members. Indigenous
social enterprises also share this objective, making humanistic manage-
ment a fundamental discipline to understand these entities and build
knowledge (Vázquez-Maguirre & García, 2014). Pirson (2017) argues
that human dignity is at the core of humanistic management. It is the cen-
tral objective of an organization to restore, protect, or promote the dig-
nity of every human being involved in its operations. In parallel, Bédard
(2003) suggests that organizations not only need to place human beings
in the center of any organization but also must recognize, respect, and
value individuals’ particularities. Such particularities are a source of fer-
tility for any organization. The indigenous worldview generally implies
that every organization must be at the service of human beings as a means
to achieve the common good and sustainability. Hence, it places the
human being as an essential, sacred figure that needs to be cherished and
recognized through the policies, processes, and dynamics created within
social enterprises.
Stakeholder Theory
One of the approaches that can better explain the phenomenon of indi-
genous social enterprises was proposed by Edward Freeman in 1984.
Stakeholder theory suggests, in general terms, that an organization will
have a better chance of survival if it seeks to generate value for its many
stakeholders instead of concentrating exclusively on shareholders and
financial indicators. For Freeman, the vision of the stakeholders must be
integrated with an emphasis on sustainable activities as a means to ensure
the survival of the organization and its stakeholding constituents in the
long term (Cancino & Morales, 2008). Each actor involved in the enter-
prise, either directly or indirectly, must contribute to adding value and
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common well-being (Freeman & Gilbert, 1992). This theory questions
the principles of the theory of the firm, which mainly focus on financial
metrics and the shareholder as a legitimate beneficiary of the process of
profit maximization. In this sense, indigenous cultures around the world
are relational at their core; they are organized around extended families
that create a natural helping system (Kastelic, 2018). Therefore, these
entities naturally seek to serve their stakeholders as a means to achieve
common good and sustainability. In this sense, there is a tendency in
these organizations to analyze every project considering the impacts to
every stakeholder. The mechanism of democratic participation that is
common in indigenous social enterprises is one of the forms to achieve
this end (Vázquez-Maguirre, Camacho, & García, 2016). This common
search for value creation among stakeholder is why stakeholder theory
might contribute to the generation of knowledge in indigenous social
enterprises.
Axiological Dimension
Axiology analyzes the field of individual and collective values, the
principles that determine traditions, ethics, and morality. Although a
great deal of traditional knowledge, including customary laws and folk-
lore, has been undermined and destroyed by colonizers and postcolonial
states (United Nations, 2019), some indigenous communities still preserve
their values and traditions. In the case of indigenous social enterprises,
it is fundamental to identify the values, principles, and rules of behavior
in indigenous communities where they are embedded. Indigenous
enterprises tend to incorporate those values in their design, governance,
and operations. This dimension also exerts a critical action that legitimizes
these enterprises and their actions toward society. Axiological analysis
allows for a consideration of whether ethical and moral principles of
indigenous social enterprises are better aligned with society in general
than the principles prevailing in the theory of the firm. If so, it can be
assumed that a management model based on these principles could pro-
vide greater congruence and legitimacy within and across stakeholders.
The principles identified in indigenous social enterprises are holistic
worldview, dignity, equity, equality, legitimacy, accountability, partici-
pation, and self-determination.
Holistic Worldview
Indigenous people have a holistic worldview that promotes unity with
their community and the environment (Curry, Donker, & Michel,
2016). They are usually the first inhabitants of their lands, which causes
a strong commitment to preserve the ecosystems so future generations
may also have an opportunity to enjoy a healthy environment. This type
of long-
term vision is also adopted by indigenous social enterprises;
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decision-
making usually takes into account immediate and long- term
social and environmental impacts for the community (Vázquez-Maguirre,
2019). In this sense, indigenous communities do not believe that the envir-
onment is a resource to be spent; on the contrary, indigenous enterprises
could even be structured to evenly split any profits between social, eco-
nomic, and environmental dimensions (Vázquez-Maguirre, Portales, &
Velasquez, 2018).
Dignity
The purpose of any venture in indigenous communities is usually human
well-being. Indigenous social enterprises are means for this end. The pro-
tection and promotion of dignity, understood as the inherent value of
the human being, is a central element in indigenous social enterprises
(Vázquez-Maguirre & García, 2014). By respecting the particularities
of each individual (ethnic origin, religion, age, gender, and personality),
enterprises seek to generate mechanisms to promote economic security,
protect human rights, and create the capabilities that allow the different
members of each stakeholder to reach desired fulfillment (Vázquez-
Maguirre, Portales, & Velasquez, 2018). The principle of equity further
supports the protection and promotion of human dignity.
Equity
Equity is also an important principle that governs indigenous communi-
ties. Equity is based on giving everyone what they deserve in a context
of fairness and impartiality in the distribution. Although the ownership
of the land is communal and is split evenly, its usufruct depends on indi-
vidual effort and entrepreneurial spirit. In indigenous social enterprises,
equity implies promoting those individuals who excel at their job and are
better prepared (Vázquez-Maguirre, Camacho, & García, 2016). Also,
equity translates in providing employees, suppliers, and other groups
with policies that allow them fair access to the benefits generated by the
social enterprise (Vázquez-Maguirre, 2019). This creates an environment
of healthy competition and meritocracy that is supported by a principle
of equality.
Equality
Equality is a fundamental principle in indigenous communities. The
indigenous cosmovision of the world implies that any form of exist-
ence in nature is considered equal (Cunningham, 2013). Among human
beings, the intrinsic value of each member of the community, regard-
less of income, position, or social, political or religious status, results
in each individual having the same rights and obligations within the
community. The norm of equality in Latin America is dictated by the
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usos y costumbres (uses and customs) of each community. In indigenous
social enterprises, equality is reflected in the work opportunities that
the members of the community have (minorities included) salaries that
are fixed according to the position, not age or gender; social benefits
that are granted to every employee; a one-person one-vote scheme to
elect some authorities within the social organization; and equal access
to training and promotions (Vázquez-Maguirre, Portales, & Velasquez,
2018). Equality is also a means to legitimize the actions of the company,
which are strengthened when everyone has access to the same rights and
opportunities.
Legitimacy
Legitimacy implies consent to the actions of an organization based
on the conviction that its purpose is also shared by the community.
Legitimacy in indigenous communities is not usually granted by law
but by the co-responsibility and alignment of objectives between the
community and the social enterprise (Vázquez-Maguirre, 2018). This
principle is fundamental for the enterprise not to lose credibility in
moments of institutional crisis that often leads to unpopular decisions
that are necessary to achieve stability and balance among the mul-
tiple dimensions that it serves. Managers of social enterprises usually
have an active role in the community so that different stakeholders are
informed of the company’s social and environmental actions; especially
young people, since the search for sustainability mainly benefits future
generations (Vázquez- Maguirre & Portales, 2014). One of the key
components that prompts the generation of legitimacy among different
stakeholders is accountability.
Accountability
Accountability is related to the ability to be responsible for your actions
and providing satisfactory responsiveness to stakeholders. It is usually
the result of good governance in Indigenous organizations (Morley,
2015). Indigenous communities practice this principle during participa-
tory assemblies, where leaders are accountable for the results of their
management and also the scrutiny of future projects. Indigenous social
enterprises follow a similar scheme: stakeholders, mainly employees and
the community, are usually active participants in corporate assemblies
where managers present their results. Also, a vigilance committee is often
created to supervise and examine the actions and resources exercised by
the managers. Additionally, there are reports, development plans, and
meetings destined to inform different stakeholders of every process, pro-
ject, and outcome. Accountability is also strengthened by the level of par-
ticipation that individuals have in the community and indigenous social
enterprises (Vazquez-Maguirre, 2018).
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Participation
Participation is based on the right of individuals to be part of the decision-
making process on issues that affect them directly or indirectly. The sense
of community and the search for the common good motivate the majority
of individuals in indigenous communities to participate proactively in
public matters. Indigenous people are more oriented to cooperation
rather than competition (Dana & Anderson, 2007). Voluntary commu-
nity work, known as tequio in southern Mexico, or minga in Peru, is
part of the norms in these societies. It implies an uncompensated con-
tribution to a project that improves the community. Indigenous social
enterprises internalize this sense of participation and promote days of
reforestation, construction of infrastructure, cleaning of rivers, and
organization of festivities, among other activities; participation can
also occur when employees choose a manager, make a proposal for new
projects, share their experience to solve a problem, or design a strategy
to achieve better performance (Vázquez-Maguirre, Camacho, & García,
2016). Participation is accompanied by the principle of self-determin-
ation, whereby communities decide on the use and distribution of their
resources, governance, and strategies to generate well-being.
Self-Determination
Although land titling has been a great achievement for the indigenous
communities in Latin America, they are still far from having real control
and face serious threats from different industries (United Nations, 2009).
Many of these communities still live in a state of vulnerability and are
excluded from the decision-making and policy frameworks of the nation-
states, which makes them frequent target of abuses and discrimination
(United Nations, 2019); however, most countries in Latin America have
laws that protect the self-determination of indigenous communities. Due
to the process of conquest, domination, or confinement to which many of
these ethnic groups were subjected, efforts have been made to protect their
cultural legacy and values. Self-determination imply seeking and striving
for self-realization, maintaining cultural values, and improving the well-
being of disadvantaged segments in indigenous communities (Peredo &
Chrisman, 2006); a useful vehicle toward these ends is through collective
ventures with a social mission (Giovannini, 2012).
Since many of these communities share little knowledge of traditional
managerial models and practices, designing indigenous organizations
entails novel structures and mechanisms that respond to community
interests (Vázquez-Maguirre & Portales, 2018). In this sense, the eth-
ical and moral principles that are present in indigenous enterprises seem
also to be valid within their larger community context. As Bédard (2003)
states about the axiological dimension, the principles are worthy of being
believed and executed, well founded, and admissible toward the future.
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This criterion of value legitimizes the future actions carried out by indi-
genous social enterprises. Such actions are analyzed in further details
within the praxiological dimension.
Praxiological Dimension
This dimension examines every aspect of human activity, ranging from
behaviors and activities of creation, production, and manufacturing to
attitudes, practices, work methods and procedures, materials, techniques,
and technology (Bédard, 2003). This part of the philosophical rhombus
is more visible in organizations. As such, it reflects the elements of the
other three dimensions. Regarding indigenous social enterprises, evi-
dence suggests that one of the more noticeable characteristics is the cre-
ation of empowerment mechanisms. While a commercial company has a
logic of value appropriation, social enterprises promote a logic of stake-
holder empowerment (Santos, 2012). Indigenous social enterprises in
particular, since they usually have little knowledge of traditional man-
agerial practices, tend to design innovative empowerment mechanisms
that create value and help these entities to reach their purpose.
Empowerment mechanisms designed by social enterprises change
over time and are diverse. To examine their impact in different areas,
they are classified in four dimensions: governance, social, economic, and
environmental.
Governance
Today, there is an increasing appreciation of the value and potential of
traditional knowledge in Indigenous communities (United Nations, 2019).
Governance is one of the dimensions where this local knowledge is more
noticeable. Governance in indigenous social enterprises is probably the
dimension where there are greater differences when compared with trad-
itional management models that are based on the theory of the firm.
The governance system of the community is usually adapted to create
a functional structure for social enterprises. They usually share similar
governance mechanisms; two of the main elements are democratic and
participatory decision- making (Vázquez- Maguirre, 2018). The highest
governing body in indigenous social enterprises is the general assembly,
which is mostly composed by workers from the community and those first
settlers that have collective ownership of the land. The general assembly
makes democratic and participatory decision- making: the governance
process is democratic because decisions are made by majority of votes
under a one-person one-vote scheme; and it is participatory because the
assemblies are generally open to stakeholders, and each individual is free
to suggest new projects, promote people for managerial positions or other
committees, or demand transparency of any project. The general assembly
appoints the general manager as well as members of other committees.
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9
General
Assembly
Board of
Directors
Supervisory
Board
Educational Electoral
Committee Committee
General
Manager
Department Department Department

Department Department Deprtment of Fish of Dairy
of Tourism of Livestock of Forestry of Agriculture
Farming Products
Figure 11.1 Organizational structure of Granja Porcón in 2013 (elaborated by

the author).
There is usually a board of directors and supervisory committee that over-

sees the actions of the general manager and departmental managers. The
board of directors and the supervisory board are formed by a president, a
vice president, secretary, and their alternates. They are usually elected for
a three-year period. Other committees can be created depending mostly on
the needs of the community and the enterprise. For example, Figure 11.1
shows the organizational structure of Granja Porcón, an indigenous social
enterprise in Perú. The General Assembly, composed of 85 members
(workers and members of the communal land ownership scheme) decided
to create an Electoral Committee for the renewal of the committees and
an Educational Committee to promote education of children in the com-
munity. Granja Porcón elects its general manager for a five-year period
(personal communication, May 1, 2013).
Indigenous social enterprises usually choose horizontal structures to
promote democratic and participatory decision-making. Structures often
have few hierarchical levels (maximum 3 or 4) between the general man-
ager and the employee of lower rank. This type of structure also implies
low CEO–worker pay ratios that usually contribute to more equal soci-
eties. Finally, reporting is a fundamental element to achieve account-
ability and transparency. This practice involves gathering and validating
data, monitoring, and presenting the results in assemblies, or elaborating
reports for different stakeholders. During assemblies, sessions tend to be
open to debate and exhaustive scrutiny by stakeholders.
Social
The social purpose of indigenous social enterprises usually generates
broad social value for the stakeholders. There are multiple mechanisms or
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strategies to generate social value. To examine them, they were grouped
in four categories: social investment, protection of minorities, benefits for
employees, and cultural reaffirmation.
Social investment can be funded by permanent policies in some social
enterprises that divide profits evenly between the economic, social, and
environmental dimensions. This generates a perpetual budget to make
social investments in the form of public infrastructure (roads, public
squares, government buildings, schools, sports facilities, etc.), access to
nonexistent products and services, support to local suppliers, machinery
to increase the productivity of farmers, health and education campaigns,
celebration of religious festivities, etc. Some of this infrastructure is built
in alliance with governmental authorities.
One of the key elements to increase community well-being is the pro-
tection of minorities. Women and young people are part of these pol-
icies, since they have often been excluded from the labor market (see
also Vázquez-Maguirre, Camacho, & García, 2016). Despite the male-
dominated context in these communities, where women predomin-
antly stay at home to raise their children, gender equality policies have
generated job opportunities for women who otherwise would not have
the chance to have a source of income. Indigenous social enterprises in
Latin America tend to have a high rate of women employed (see also
Vázquez-Maguirre, Portales, & Velasquez, 2018). Not only that, internal
policies are adapted to women’s needs: flexibility of schedule for children
caring and attending social government programs, and an eight-hour
workday so they can spend time with their families. Although an eight-
hour workday is mandatory by law, workday can extend to more than
ten hours in these communities. Meanwhile, young people also receive job
opportunities that are unusual in the labor market. Enterprises tend not
to hire young people who have just graduated from university or who are
still studying. “how are they going to gain any experience if no one gives
them the chance to work?” asks an employee of Grupo Ixtlán, a group
of indigenous social enterprises in southern Mexico where young people
are given the opportunity to work (personal communication, March 6,
2012). Not only that but the meritocracy created in these enterprises,
where the best workers are promoted to managerial positions, have given
excellent results: four of the eight companies are managed by young
people under 40 years old, and three of them are managed by women.
Hence, young people and women have equal access to opportunities to
obtain a promotion. Women employment in Latin America is associated
with higher levels of well-being in the household, especially children edu-
cation (Muñoz-Boudet, 2011); Vázquez-Maguirre, Camacho, and García
(2016) also find evidence in this regard in indigenous communities of the
region.
Benefits for employees such as holidays, profit sharing, Christmas
bonus, health insurance, and overtime payment should be mandatory.
However, companies in Latin America often do not provide these benefits;
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53% of the workers of the region are affected by job informality, which
usually translates into irregular and lower income, longer working hours,
and the lack of social security (International Labour Organization, 2018).
Indigenous social enterprises not only pay these benefits, but they have
also established additional benefits to empower employees, including
emergency loans, punctuality bonuses, assistance to build housing (free
wood, machinery), a retirement fund, and a no dismissal policy. The
empowerment and economic security is such that some employees have
started businesses and left the company due to their successes establishing
internet-cafes, restaurants, laundries, hotels, and grocery stores, among
others (see also Vázquez-Maguirre, 2019).
Regarding cultural reaffirmation, indigenous social enterprises also
promote local customs and culture. Employees frequently build reli-
gious altars in the facilities, they can wear their traditional clothes at
work, and they can also attend religious and cultural festivals. Indigenous
social enterprises usually fund these celebrations, generating strong levels
of legitimacy among the community and other stakeholders (Vazquez-
Maguirre et al., 2018).
Economic
Indigenous social enterprises have the social obligation to be profit-
able to finance the social and environmental investment they make (if
not, they have to rely on charity or the government). The first mech-
anism of the economic dimension is healthy finance. To achieve finan-
cial equilibrium, these enterprises need an efficient operational design
that guarantees the necessary profit margins to maintain finances. One
of the elements to achieve this is by implementing state-of-the-art tech-
nology; for example, Chicza is an indigenous social enterprise located
in the Mayan rainforest that produces organic chewing gum from the
chicozapote trees. They have developed from scratch the technology to
produce, package, and export its products to more than a dozen coun-
tries, including Germany, Italy, and Japan. Chicza is the only enterprise
in the world that produces organic chewing gum, benefiting through a
fair trade scheme more than 2,000 small producers (personal communi-
cation, October 20, 2018).
Indigenous social enterprises must also have stable growth to scale
their impact. Economic growth is usually not indefinite or a priority
in indigenous social enterprises; instead, it is controlled and based on
existing and emergent needs in the community. In this sense, the para-
digm of indefinite growth does not seem to be part of the indigenous
social enterprises; many of them have already identified optimal limits
of growth. These cases present slower levels of growth than profit-maxi-
mizing enterprises as a result of higher operating costs and social and
environmental investments. Therefore, resources available for accelerated
growth are limited.
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Another common mechanism is seeking regional development through
alliances. Indigenous social enterprises need to generate alliances that
trigger positive economic dynamics to create jobs and to supply the
products and services the community demands to increase its well-
being (Morley, 2015; Vázquez-Maguirre & García, 2014). In this sense,
these enterprises tend to generate alliances with other actors to promote
regional development (Vázquez-Maguirre, 2018). For example, alliances
with the government to build public and productive infrastructure are
frequent. Long-term partnerships with local suppliers are also common,
since social enterprises identify that they can also promote regional devel-
opment by building a local supply chain. There are also partnerships with
local universities to recruit young people through internships and social
service, or do applied research to find new business opportunities. For
example, Wakami is a social enterprise that employs indigenous women
in Guatemala. This enterprise creates and manufactures fashion acces-
sories with natural and local inputs that are sold in 20 countries. They
have built partnerships with large corporations, foundations, and the
Inter-American Development Bank to train groups of women in different
rural communities. The methodology implemented by Wakami helps
these women generate an income, get education about finance, manage-
ment, nutrition, etc., and improve their homes (personal communication,
November 29, 2016).
Another mechanism that promotes community well-being is the creation
of entrepreneurial ecosystems (Vázquez- Maguirre, 2018). Indigenous
people usually live in remote rural areas, far from job opportunities,
which force them to develop an entrepreneurial orientation (Hindle &
Lansdowne, 2005; Peredo et al., 2004). Indigenous social enterprises
finance the creation of new companies through different strategies: from
interest-free loans for employees, to a microcredit institution for the local
community. To increase their survival rate, social enterprises also provide
technical advice and seek to include new ventures in their supply chain.
Also, social enterprises usually support local farmers and artisans so they
can be more productive or can find a market for their products, and they
also build ecotourism facilities that also prompt different kind of new
businesses for tourists (Vázquez-Maguirre, Portales, & Velásquez, 2018).
Environment
In the environmental dimension, indigenous social enterprises naturally
seek to protect and improve the ecosystems where the community has
lived for generations. A common policy for these entities is to minimize
the negative environmental impacts of every project. They achieve this
by following four main mechanisms: awareness, restoration, circular
economy, and green attributes.
Indigenous social enterprises seek to increase environmental awareness
among their stakeholders, especially the community. With this objective,
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they organize reforestation days; they can also focus on cleaning rivers,
organizing fire brigades or teams of forest rangers to protect the fauna
and combat illegal logging (Vázquez-Maguirre & Portales, 2014). The
next strategy is restoration, where mechanisms exist such as policies that
prohibit the use of pesticides, plastics, and antibiotics in livestock; for-
estation programs that seek to increase the amount of trees; programs
that protect endangered species; and programs that teach families how
to grow fruits and vegetables at home, among others.
Indigenous social enterprises also present some practices related to cir-
cular economy. For example, these enterprises might engage with solid
waste recycling and wastewater treatment or the use of waste for pro-
ductive purposes (waste wood used as firewood or to heat water; the
use tree bark to make fertilizer, etc.). Also, these enterprises tend to
have suppliers nearby, build long-term relationships, and make syner-
gies to increase efficiencies, extend the life of machinery and infrastruc-
ture, and share machinery with the community to help small producers
to raise their productivity in activities such as agriculture and construc-
tion. Finally, circularity is also important in terms of design processes
that minimize waste and are less intrusive with the environment, which
respect biological cycles. The last mechanism is a focus on environment
friendly or green attributes that differentiate the products and services
of these enterprises from that of competitors. For example, indigenous
social enterprises often prioritize organic products, handcrafts that use
natural dyes, products certified by the Forest Stewardship Council, green
ecotourism parks, and production with local inputs (Vázquez-Maguirre,
Portales, & Velasquez, 2018).
New Management Model Based on Indigenous Social

Enterprises
The praxiological dimension of indigenous social enterprises provides
evidence of the main attributes of a management model that privileges
the common good and sustainability. Based on principles and values
deeply rooted in indigenous communities, indigenous social enterprises
design empowerment mechanisms that provide different stakeholders
with the necessary tools and knowledge to increase individual well-being.
Table 11.2 summarizes the attributes of the management model.
The management model has primarily a phenomenological approach
to the generation of knowledge based on two theories: humanistic man-
agement and stakeholder theory. The former promotes principles such as
dignity, equality, equity, and self-determination with the aim to protect
the intrinsic value of the human being, also placing her at the center and
as the ends, never the means, of the organization. The latter is related
to principles such as holistic worldview, accountability, participation,
and legitimacy, which are the basis for a healthy relationship between
the different groups that affect or are affected by the organization. These
same principles govern indigenous social enterprises and help to create
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9
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Table 11.2 Management model of indigenous social enterprises
Axiological
Common Good Sustainability
Epistemological
Phenomenological Approach
Humanistic Stakeholder Theory
Management
Axiological Equality Holistic worldview
Dignity Accountability
Equity Participation
Self-determination Legitimacy
Praxiological
Empowerment Mechanisms
Governance Social Environmental Economic

Reporting Social Awareness Healthy finance
investment
Democratic Cultural Restoration Stable growth
decision-making reaffirmation
Participatory Protection of Circular Alliances
decision-making minorities economy and regional
development
Horizontal Benefits for Green attributes Entrepreneurial
structure employees ecosystems
Outcomes = raison d’etre
Common Good Sustainability
Source: Self-elaboration with primary data.
empowerment mechanisms that generate win– win relationships with

stakeholders. The mechanisms can be classified in the economic, social,
environmental, and governance dimensions. These dimensions are also
cornerstones of sustainability models frequently used by transnational
companies.
The praxiological part of the model describes the main mechanisms of
each dimension. It does not necessarily imply that each indigenous social
enterprise applies the exact same mechanism; they can vary by industry,
type of issues addressed, level of community development, or the con-
text. For example, there are social enterprises where every employee has
the right to vote, others where only employees from the local community
can vote, and others still where only the first families that have com-
munal rights over land can vote. Similarly, a popular mechanism is to
finance new ventures in the local community. Some social enterprises pro-
vide zero-cost loans for employees who want to start a business; other
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entities practice intra-entrepreneurship with the employees’ ideas; some
other enterprises create microfinance institutions that provide loans to
groups or individuals, and that may or may not follow ethical banking
principles. The amounts and terms of these loans also vary from one
entity to another.
In the long term, each successful indigenous social enterprise finds the
best mechanisms to reach its goals. In this sense, the impact generated
may be also an indicator of the congruence of the management model.
Bédard (2003) suggests as an ideal that the four dimensions of the philo-
sophical rhombus converge harmoniously. In this sense, the congruence
of the model could be measured by examining if its raison d’être, in this
case the common good and sustainability, is aligned with the outcomes
of the model. Indigenous social enterprises have had favorable results
in terms of more sustainable organizations and communities, with
also a favorable balance for their main stakeholder (see also Vázquez-
Maguirre, 2018; Vázquez-Maguirre, Portales, & Velasquez, 2018). Well-
being metrics in the community before the appearance of an indigenous
social enterprise and at the time when the cases were documented suggest
important improvements. Although these metrics cannot be entirely
attributed to these organizations, levels of development are still notable,
especially when compared with neighboring communities that do not
have successful social enterprises. Local communities also show evidence
of more entrepreneurial activities and higher job generation, better sal-
aries, higher percentage of households with access to public services and
internet, and better public infrastructure.
Conclusions
The theory of the firm has led to unprecedented economic growth, which
has also increased levels of well-being throughout the world. However,
there have also been negative impacts derived from the implementation
of this theory in organizations. We are facing increasingly unequal soci-
eties, rising insecurity, corruption, stress and psychological illnesses,
health problems, exploitation of human beings, institutional crises,
pollution, and overexploitation of flora and fauna. These problems have
been dogmatically accepted as residual elements of an economic model
that privileges this dimension and some stakeholders over others. As
David Korten (2018) suggests, we need institutions that serve the ends
we seek as a global community: earth balance, equitable distribution,
life-
serving technology, and democratic accountability. This chapter
explores an alternative management model that could solve the nega-
tive elements generated by the theory of the firm while preserving some
positive elements: innovation, fair competition, entrepreneurship, and
efficiency.
This alternative model is derived from the indigenous worldview of
communities in Latin America. Cultural practices, traditions, and values
92

of indigenous peoples can play a critical and positive role in advancing
and promoting gender equality, human rights, and other sustainable
development goals set by the international community (United Nations,
2019). Indigenous enterprises, driven by local knowledge, values, ethics,
and a social purpose that is also shared by the community, can play a
fundamental role toward these ends. They represent an organizing model
designed to respect the dignity of every human being, prioritizing the
well-
being of each stakeholder over profits or economic indicators.
Evidence suggests that indigenous social enterprises achieve sustainability
and the common good by abandoning the logic of control and value
appropriation that is typical of profit-maximizing firms (Santos, 2012).
Instead, they have replaced it with empowerment mechanisms designed
to create value among stakeholders and ensure the development of their
capabilities.
Importantly, indigenous social enterprises are not exempt from
drawbacks or crisis. Efforts to compete in price-driven markets where
profit-maximizing companies usually have lower production costs pose
important tensions in these social entities. This competitive pressure
often affects decision-making by privileging the economic dimension at
the expense of community well-being and sustainability. In addition, the
power struggle between different stakeholders can reduce cooperation
and the legitimacy of indigenous social enterprises. Further exploratory
research is necessary to better understand and effectively address these
issues and shortcomings.
Overall, successful indigenous social enterprises have generated
mechanisms to deal with the organizational tensions that arise with dual-
or multipurpose (social and economic, also environmental) initiatives
and stakeholder power struggles. Many have adopted new organiza-
tional structures and governance mechanisms to deal with these tensions,
compete successfully, and empower individuals (Vázquez- Maguirre
& Portales, 2018). This process of adaptation and innovation to find
arrangements that better serve the purpose of both the organization
and the indigenous community is in constant evolution. Further study
of indigenous social enterprises is needed to advance new insights and
contribute to alternative management models that privilege the common
good and sustainability.
Notes
1 Common good “consists primarily of having the social systems, institutions,
and environments on which we all depend work in a manner that benefits all
people” (Andre & Velasquez, 1992, p.1).
2 Sustainability is defined as “meeting the needs of the present without com-
promising the ability of future generations to meet their own needs” (United
Nations Brundtland Commission, 1987).
03

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Toward a Humanistic Theory
of the Firm
An Analysis of the Mondragon-
Based Participative Model
Ricardo Aguado, José Luis Retolaza
and Josune Baniandrés
Introduction
The Inclusive- Participative Model (IPM) states that it conforms to
a new business model that makes possible the engagement of all
stakeholders in a common and shared business project. The model itself
has been developed by the Arizmendiarrieta Foundation- AF (http://
arizmendiarrietafundazioa.org/). This foundation was created by a
group of people (former Mondragon Cooperative managers, current
politicians, academics, managers from other institutions) interested in
the development of a new business model, able to incorporate the main
principles put in place by the founder of the Mondragon Cooperative
movement (Fr. Arizmendiarrieta) to all kinds of corporations, not only
cooperatives.
With this aim in mind, it is worth investigating which are the real
contributions of the Inclusive-Participative Model (IPM) in relation to
the current theory of the firm. Is it a complementary addendum? Is it
an alternative model? Is it a realistic approach or a utopia? Is it still
applicable only to the cooperative movement or has it reached a global
validity to all kinds of corporations? In short, is the IPM the base for
a new theory of the firm or is it just another small correction to the
current one? The main aim of this chapter will be to analyze IPM and
build a critical and argued answer to all previous questions. To ful-
fill this aim, in the first place, we will develop the main characteristics
of IPM. Second, we will analyze critically if those characteristics may
allow IPM to be the base of a new theory of the firm, or just to correct
certain points of the existing one. In the third place, we will explore
which could be the main conclusions of this chapter. In this line, we will
propose specific ways to convert IPM into a transformative tool inside
corporations. The chapter ends with a section explaining the limits of
this research and highlighting possible lines for future research in rela-
tion to IPM.
DOI: 10.4324/9781003211549-13
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304 Ricardo Aguado et al.
Main Features of the Inclusive-Participative Model (IPM)

Arizmendiarrieta Foundation has developed the main characteristics of
its IPM in a document1 that was presented, and approved, by both the
regional Parliaments of Navarre and Basque Country. This document is
the one that we are going to take into consideration for the following
analysis.
According to that document, the reason that is in the origin of the IPM
is “to consider the potential and important contribution of corporations
to the common good”. The model is based on six principles: (1) respect of
human dignity for all persons; (2) search for the common good, meaning
that the common project of the organization is more important than the
interests of particular stakeholders (shareholders, employees, or others);
(3) clarify that the aim of the corporation is not to maximize profits
in the short term, but the satisfaction of the needs of stakeholders in a
balanced way; (4) to promote the participation of employees in man-
agement, results, and ownership of the firm; (5) to keep internal soli-
darity principles among stakeholders; (6) to develop solidarity policies
with the community in which the corporation operates. The model is
organized around four dimensions. Dimension 1: modify management
practices and culture, so that they are based on trust, transparency, and
cooperation to achieve competitiveness and sustainability. Dimension 2:
build a narrative for the corporation shared by shareholders, managers,
and employees, in which priority is given to the common objectives of
the firm over the interests of any stakeholder. Dimension 3: overcome the
confrontational dynamics between capital and labor, through the partici-
pation of employees in management, results, and ownership of the cor-
poration. Dimension 4: consideration of the social impact of the actions
taken by the corporation, and engagement in some of the social problems
of the local community.
IPM: Instrumental or Alternative Model?

Although IPM is presented as a new business model, it is not clear if
IPM is finally an alternative or complementary proposal in relation to
the current theory of the firm (which will be identified as the share-
holder model [SM]). The SM has an instrumental approach to human
beings: employees are just another input (which must contribute to the
objective of the firm, profit maximization). In the first case, IPM could
question the traditional theory of the firm (the one that is taught in
microeconomics textbooks). In the second case, IPM would be one of
the possible formulations of SM. In this section, we will discuss if IPM
has the potential characteristics to be considered an alternative view of
the firm.
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Toward a Humanistic Theory of the Firm 305

If we consider the six principles enunciated in the “Main features
of the Inclusive- Participative Model (IPM)” section (human dignity,
common good, balanced satisfaction of all stakeholders’ interests,
employee participation in the ownership, results, and management of
the firm, internal solidarity among stakeholders, and solidarity with
the local community), IPM could be considered an alternative model,
at least in some of its features. IPM gives priority to people and social
interactions over economic results. However, a relaxed interpretation
of the six aforementioned principles could make IPM perfectly com-
patible with SM. The point in which IPM introduces an innovation in
comparison with SM is about the participation of employees in man-
agement, results, and ownership of the corporation. If we continue the
analysis with the four dimensions highlighted in the “Main features of
the Inclusive-Participative Model (IPM)” section, the idea of IPM as an
instrumental model (employees are inputs oriented to profit maximiza-
tion) seems more accurate, because the four dimensions are compatible
with SM. In addition, in those four dimensions, the duality of capital/
owners vs labor/ employees is recognized. After considering the four
dimensions, it seems that IPM can be considered an instrumental model,
which tries to introduce changes in favor of employees and social well-
being. In this perspective, IPM is not considered an alternative model,
because persons are considered means (to maximize profit) and not as
ends in themselves. In this approach, the measure of success of IPM
should be found in its economic results. Corporations following IPM
should generate a higher added value. We can express this statement in
the form of five research hypotheses.
H1. The result of IPM corporations should be higher than non-IPM

corporations.
Different studies have pointed out that employees’ participation in the

management of the firm may have a positive effect on the results of the
firm (Batt & Appelbaum, 1995). Participation in results, planification,
and control can mitigate the agency problem (Jensen & Meckling, 1976;
Fama, 1980), increasing the result obtained by the firm. However, this
correlation is not fully demonstrated. Cooperative corporations, which
are by definition participated by their employees, do not have on average
better nor worse efficiency ratios than noncooperative corporations in any
significative ratio regarding productivity or profitability. To defend IPM
from the utility generated for the firm, it would be necessary to prove a
causal relationship between participation of employees and higher results
in terms of profits for shareholders, benefit for society or any other form
of value creation (social value, for example).
From the perspective of a theory focused on employees, it would be
arguable to focus on the value generated for persons, and not only on the
economic result.
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H2. Participation benefits employees. Corporations that encourage
the participation of employees in management activities pay them
higher salaries in comparison with non-participative corporations.
However, participation is not positive for workers in all cases. Some

studies (Irvin & Stansbuty, 2004) question benefits in case of employee
participation. This idea is present in the work presented by Cooke &
Kothari (2001) under the title “Participation: the new tyranny?”. Other
studies limit the positive outcomes of that participation (Fantasia et al.,
1988). Considering the salaries received by cooperative workers in com-
parison with their colleagues in noncooperative firms, it is not possible
to conclude that participative corporations pay higher salaries. A way
to maintain H2 could be to incorporate in salaries the emotional and
nonmonetary retribution. This last step generates H3.
H3. Workers of participative corporations receive a higher retribu-

tion [market+non-market+emotional] in comparison to workers of
non-participative corporations.
An idea to propose participation is its positive effect on employees through

nonmarket and emotional retribution. This is linked to the empowerment
of employees as a result of their inclusion in the decision-making process
of the firm and a feeling of belonging to the firm. This argumentation,
valid from a theoretical point of view, should develop mechanisms to
make possible an empirical contrast. It is not clear that participation is an
appreciated value by all workers in all kinds of organizations.
H4. IPM is able to include persons in risk of exclusion.
In the name of IPM, the words inclusive and participative are keys.
However, the term “inclusive” is used in reference to the incorporation
of current employees in the decision-making process of the corporation.
It is not clear if the term “inclusion” refers also to the possibility of
incorporating into the corporation (and to economic activity, in a broad
sense) persons in risk of social exclusion. In this second case, the model
would be innovative and would widen the traditional perspective about
employees based on their productivity/efficiency. However, in this case, it
would be necessary to explain in a systematic way how to combine inclu-
sion and competitiveness.
H5. IPM generates a higher value for the territory in which participa-
tive corporations are located.
The model states in its formulation that it is an instrument to “increase

economic activities at the social level”.2 However, the model does not
explain this statement. Why is better for the region IPM and not the
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traditional model? How can we measure this comparison? If the new
situation is better mainly in terms of the profit generated by corporations,
then we could go back to hypothesis 1.
In short, the instrumental understanding of IPM is possible. From this
perspective, IPM could be an intermediate model between cooperatives
and for- profit corporations focused on shareholders. Its value as an
instrumental model could rest in its capacity of creating a higher value
to some of the stakeholders of the corporation: shareholders, employees,
public administrations, or society as a whole. The demonstration of this
possibility is a major empirical challenge for IPM, and a task that will not
be completed easily taking into account the current data about the eco-
nomic results of all kinds of corporations.
However, IPM can refer not only to an instrumental approach but
also a finalist one. To do so, IPM should develop concepts related to
the centrality of the person inside organizations. We highlight six fun-
damental aspects based on the literature about humanistic management
and the new story of business (Freeman & Ginena, 2015; Melé & Schlag,
2015). The first aspect is the development of a humanist perspective (cen-
trality of the person, and not of economic results) (Aguado et al., 2015).
The second is a new narrative of business, shifting from transactional
interactions to relational ones (Freeman & Ginena, 2015; San-Jose,
Retolaza, & Freeman, 2017). The third aspect is the construction of a
non-egotistic anthropological model. The theory of human action (THA)
proposed by Pérez López (1991) establishes a framework to understand
economic activity as a result of egotistic and non-egotistic decisions, all
of them rational. The fourth challenge is to accompany the evolution of
agency theory toward stewardship theory (Davis et al., 1997; Donaldson
& Davis, 1991). The fifth aspect is to foster integral human development
inside corporations (Barret, 2003). Finally, a last key aspect is to expand
the notion of stakeholders from a narrow group of agents to the whole
set of agents affected by corporations, including shapeholders and non-
stakeholders (Retolaza et al., 2018).
The humanistic management perspective (Aguado et al., 2015) seems
to be included in the model. References about dignity and the centrality
of the person in economic activity are constant. However, the model
should change the understanding of the way in which value is generated
in corporations so that the centrality of the person in those processes
could be asserted (Melé & Schlag, 2015). In the model, references about
the priority of economic results are also frequent, and the tension between
integral human development and profits is not clarified. This question is
crucial to determine if IPM is an alternative or an instrumental model.
To be an alternative model focused on the person, IPM should state
clearly that integral human development is the objective of the cor-
poration. In this case, profit would be an instrument devoted to that
development. The change from a narrative based on a transactional
understanding of economic activity to a narrative based on a relational
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one could be helpful. This is the path that stakeholder theory is exploring
(San-Jose, Retolaza, & Freeman, 2017). Still, IPM follows the narrative
present in SM.
A comprehensive way to understand relationships that take place inside
organizations and their impact on stakeholders demands an anthropo-
logical model wider than the homo economicus model, based on self-
centered utilitarianism. This kind of model tends to prioritize economic
results in favor of shareholders. The THA developed by Pérez López
(1991) is a good example of the anthropological foundation needed
by IPM in its finalistic approach. THA is represented in Figure 12.1, as
follows.
THA considers three kinds of consequences of an interaction between
two economic agents. The first one is the intrinsic result, obtained by
the active agent (AA) in relation to the satisfaction of his/her egocentric
interest. The second one is the internal result for the AA, both in terms
of moral satisfaction and learning about the rule of decision-making used
in the process. The third one is the external result for the reactive agent
(RA), both in terms of moral satisfaction and learning about the rule
of decision-making used in the process. It is important to highlight that
THA points out the existence of a learning process in the agents that
participate in economic activity. This means that each economic inter-
action creates virtuous or vicious cycles depending on the results of a
given interaction and the moral satisfaction of participating agents. An
anthropological model like this is able to consider learning processes that
are excluded from the traditional homo economicus model. In addition,
THA takes into account moral criteria applied to economic decisions,
creating a linkage between ethics and economics. This gathering between
ethics and economics has been demanded by different institutions, such
as United Nations (UNGC, 2015), OECD (Better Life Index, 2019), the
Catholic Church (Francis’ encyclical, 2015), and even global investment
REACTION
MORAL
SATISFACTION AA RA T1
ACTION
LEARNING
AA´ RA´ T2
Figure 12.1 Theory of human action (THA).

Fuente: Own elaboration, based on Pérez López (1991).
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funds (Fink, 2019). At the same time, it is compatible with the principles
of IPM stated in the “Main features of the Inclusive-Participative Model
(IPM)” section.
This change in the anthropological model from an egocentric one to
a wider one (THA), where the person is considered a complex decision-
maker, should contribute to a substitution of some of the theories used
in the management of human behavior. In this line, agency theory should
move toward stewardship theory, where the AA does not have as an
objective the maximization of his/her own utility, but the utility of the
principal-
agent. In accordance with IPM, the principal- agent should
not only be limited to shareholders but also amplified to employees and
the rest of the stakeholders. This idea is aligned with the proposal of
multistakeholder governance (Boatrigth, 2013; Moriarty, 2016) and the
new narrative of business (Freeman & Ginena, 2015).
In addition, IPM in its finalistic approach defends the centrality of the
person in economic activity. This leads to the consideration of integral
human development as the main objective of the firm. In the first view,
those persons could be identified with employees. When we consider
integral human development, we are taking into account not only basic
factors such as security and salary (Herzberg, 1966) but also all motiv-
ational aspects of Maslow (1943), and even spiritual factors (Barrett,
2003, 2013). According to Barrett, motivation is not self-centered but
focused in the rest of persons (common good). In the motivational
model of Barrett, the highest motivational stadium is called “service to
humanity”. This model is aligned with stewardship theory and compat-
ible con THA.
Lastly, to shift from an instrumental to a finalistic model, it should
be necessary to clearly highlight the centrality of the person in IPM. In
short, IPM should contemplate all persons affected by the firm through
its action (stakeholders), delegation (shapeholders3), or omission (non-
stakeholders). This step would widen the responsibility of the firm from
employees only to all persons/organizations that interact with the cor-
poration. The alignment of IPM with the new narrative of stakeholder
theory could help IPM to achieve the potential needed to become a true
alternative to the SM.
Conclusions
In its finalistic perspective, IPM is overcoming economistic models based
on the framework of utilitarian analysis (Becker, 2013; Hardford, 2010).
IPM allows the substitution of economic result as the central element of
the model by the value generated for people (Retolaza et al., 2017), in line
with the proposals that develop the concept of humanistic management
(Aguado et al., 2015). This is a fundamental shift regarding the trad-
itional theory of the firm, where the human being is considered an input
with the aim of maximizing the final economic result. In contrast, IPM in
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its finalistic perspective subordinates economic result to integral human
development.
This perspective allows and demands a new narrative for both eco-
nomic activity and the role of the corporation, aligned with the current
development of stakeholder theory (San- Jose, Retolaza, & Freeman,
2017). A model in which the economic result is instrumental regarding
the development of employees requires a new accounting model. Financial
accounting is focused on calculating the economic result, but it is not
thought to calculate the contribution of the corporation toward inte-
gral human development. At the same time, financial accounting is not
designed to integrate the value created for all different stakeholders. This
situation could generate a governance problem for corporations with a
multistakeholder perspective (Jensen, 2002). To manage a new model
focused on people and stakeholders, a new accounting model is neces-
sary, based on the principles of social accounting (Retolaza et al., 2016b).
That model should be able to integrate the value that organizations gen-
erate in the market with the value generated outside the market (emo-
tional value). In this line, some academics developing the concept of
humanistic management propose the idea of homo humanus, overcoming
the traditional homo economicus (Melé & Gonzalez- Cantón, 2014),
empowering stakeholders. As a result of IPM, it is possible to propose
a change for organizations, based on a new understanding of the role of
the firm and its mission in society, placing integral human development as
the aim of corporations. This new role is compatible with other initiatives
coming from international organizations, such as the UN Sustainable
Development Goals, the OECD Better Life Index, or Francis’ encyclical
(2015) Laudato Si.
Limits and Future Lines of Research

IPM has the potentiality of introducing deep changes in the theory of
the firm. However, in its current situation, the model has not been tested
or implemented entirely in any organization. This situation is the most
important limitation to assess the validity of the model. Due to this fact,
the identification of corporations and organizations that follow the main
lines of IPM should be a priority in the study of IPM. Second, the empirical
contrast of the six principles stated in the “Main features of the Inclusive-
Participative Model (IPM)” section could be helpful to identify current
organizations following the model. On the other hand, several for-profit
and non-for-profit organizations have showed interest in implementing a
business model closer to the achievement of integral human development
and social well-being. The participation of thousands of corporations in
initiatives such as the UN Global Compact, the OECD Better Life Index,
the B-Corp movement, or the integrated reporting exemplifies this kind of
interest. In this line, universities (and specifically researchers in business/
management schools) could help corporations in the introduction of
13

social accounting systems, and in the process of shifting from the trad-
itional theory of the firm to a humanistic management practice and con-
ception of the firm.
Notes
1 http://arizmendiarrietafundazioa.org/documentacion/toward-a-more-ethical-
inclusive-participatory-company-model
2 http://arizmendiarrietafundazioa.org/documentacion/toward-a-more-ethical-
inclusive-participatory-company-model
3 Shapeholders act as the representatives of both stakeholders without voice
in the board and non-stakeholders (e.g., persons excluded from economic
activity) (Retolaza et al., 2018).
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How Human and Organizational
Relationships Can Be Explained
by Natural Science
Shann Turnbull
Introduction
The purpose of this chapter is to show how human and organizational
relationships can be explained by natural science. This is achieved by
using bytes as the unit of analysis (Turnbull, 2000c). Humans have
neurological and physiological limits to transact data measured in bytes.
Table 13.1 presents these limits. While it is not possible to quantify in
a physical form the social constructs of information, knowledge, or
wisdom, no change in their status can occur without the transaction of
bytes. All human relationships depend on transacting bytes. No human or
other creature can survive without transacting bytes to procure materials
and energy to survive, thrive and reproduce.
Bytes are represented by perturbations in matter and/or energy that
make a difference. The difference could be bytes transacted in either
digital or analogue form. Minimizing bytes minimizes data processing
resources and so costs. In this way, transaction byte analysis (TBA)
grounds management, governance, and many aspects of social analysis
generally in the natural sciences (Turnbull, 2001, 2002b,c,d, 2005, 2008,
2012b, 2013b,e).
Table 13.1 establishes physical criteria for understanding, evalu-
ating, or designing the control and communication channels in any type
of human organization. Table 13.1 is limited to the five senses used by
humans. Humans sustain their existence through their senses and how
their DNA has hard wired their bodies to be self-regulating and their
social interactions self-governing. This outcome is required for them to
survive birth, thrive, and reproduce in unknowable dynamic complex
environments.
Self-regulation and self-governance require a massive diversity of feed-
back and control data. This would introduce data processing overload
and delays if centrally processed. To reduce both communication and
processing bottlenecks, decentralized distributed data collection and decision-
making architecture is required. This introduces preprocessed data with
local micro- feedback control adjustments creating semiautonomous
components of distributed intelligence. A strategy creates a “prodigious
DOI: 10.4324/9781003211549-14
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314 Shann Turnbull

Table 13.1 Human constraints in transacting bytes (K =kilobytes, M =megabytes)
Input Smell Taste Touch Sound Sight Constraints in

channels humans to transact
bytes created by
Capacity <10 <15 <15 100K 1000 M
in bytes/sa
Nature of 1 RECEPTION through organs Physiology

trans- 2 STORAGE through nervous system Physiology
acting 3 PERCEPTION/UNDERSTANDING Neurology,
bytes in through the activation and experience,
humans strengthening of neural networks, pattern recognition,
which correlate current patterns training,
with previous ones motivation, and
psychological status
4 INSIGHTS/KNOWLEDGE through As above plus size
sequential processing in neo-cortex and architecture
limited to around 200 calculations of neo-cortex and
per second (Kurzweil, 1999: 103) psychological status
5 EXTERNAL RESPONSES transmitted Proximity/distance,
by movement and vocal cords environmental
conditions, culture,
literacy, and
numeracy
Output Touch Signs Writing Sound Speech Data can be received
channels 10,000 faster than
Capacity in <15K <15K <15K <100K <100K the rate at which it
bytes/sa can be transmitted
a Sources of channel capacity: Cochrane (1997, 2000), Shuman (1997), Rapplean (2012).
reduction in data transmission and in data complexity” (Mathews, 1996:

30). Control and communication architecture that achieves such “prodi-
gious reduction in data transmission and complexity” is described as a
“holon”. The word “holon” was coined by Koestler (1967: 48) from the
Greek “holos”, which means whole, the suffix “on” being used to indi-
cate that the entity could simultaneously also be a part of a larger system
as observed by Smuts (1926) like a “proton” or “neutron”.
Koestler (1967) built on the work of Simon (1962) who used prob-
ability analysis to explain why and how nature creates complexity by
using simpler building blocks that Simon described as: “a sub-assembly”
(p. 472), “stable intermediate forms” (p. 473), or “nearly decomposable
systems, in which the interactions among the subs-systems are weak, but
not negligible” (p. 474). Koester coined the word holon to describe such
building blocks that in turn could be made up of holonic subcomponents.
A feature of holons is that they possess complementary ~ contrary
characteristics like centralization ~ decentralization, bottom-up ~ top-
down, autonomous ~ integrated, order ~ ambiguity/chaos (Mathews,
1996: 52–25). Likewise, creatures including humans are hard wired to
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Human and Organizational Relationships 315

possess such Ying ~ Yang, approach ~ avoidance behavior (Kelso &
Engstrøm, 2008). Kelso and Engstrøm (2008) introduced the tilde “~”
sign to indicate such contrary ~ complementary behavior.
TBA provides an analytical tool for explaining why humans obtain
sustainable advantages from being hard wired to possess contrary ~ com-
plementary behavior and how such behavior in organizations can like-
wise provide sustainable advantages.
The explanation is based on identifying in creatures and organizations
a phenomenon that biologist Ingber (1998) describes as “the architecture
of life”. All living things are constructed with physical components that
possess contrary ~ complementary characteristics. Buckminster Fuller
(1966) noted that this created what he described as “Tensional Integrity”.
He coined the word “Tensegrity” to describe this phenomenon.
This chapter identifies how tensegrity can arise in social organizations.
TBA also provides a basis to explain how either individuals or
organizations can obtain operating advantages from tensegrity. It also
explains how small-brained insects with minimal data processing power
can learn how to sustain their existence in unknowable, dynamic com-
plex environments.
TBA answers the quest identified by Barney and Ouchi (1986: 8)
who were seeking: “a new paradigm for understanding and studying
organizations”. They were searching for:
a more general framework, a framework that will include the insights

of the traditional theory, but will place those insights in a context
that allows the theorist to explain a wider diversity of economic and,
particularly, organisational phenomena.
The following section identifies how TBA subsumes and extends trans-
action cost economics (TCE) developed by Williamson (1985). Also, it
shows how TBA makes a contribution to the theory of a firm or any other
type of social organizations in any culture. The “The Natural Laws of
Governance” section identifies how bytes introduce cybernetic insights to
governance scholarships. The “Utility of TBA for Investigating Network
Governance” section illustrates how holonic architecture has arisen in
some organizations and how this has produced a prodigious reduction
in the transacting of bytes for the individuals involved. The “Concluding
Remarks” section outlines the contributions of TBA, including a hypoth-
esis to explain why DNA hard wires creatures to possess contrary
behavior.
How TBA Subsumes and Extends

This section explains how TBA subsumes and extends TCE and offers
insights on the theories of the firm and organizations in general. TBA is
based on minimizing the transaction of bytes that require perturbations
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316 Shann Turnbull

in matter and/or energy while TCE is based on minimizing the social
construct of cost arising from transactions. Both costs and transactions
introduce difficulties in their identification.
TBA subsumes TCE because minimizing the involvement of matter
and/or energy also minimizes the use of these resources and so costs.
A practical strategic reason for data processing entities to minimize the
transaction of bytes is to minimize their physical size and energy they
consume. This strategy is used in computers, the Internet, and creatures,
including humans.
The importance of data processing ability for human survival is
indicated by how much energy the brain requires in relationship to the
rest of a human body. The human brain only weighs 2% of a human
body, but it absorbs 25% of the body’s nutrients (Statistic Brain, 2016).
The Economist (2016) reports that: “a human brain consumes about 20
watts of power. That makes it roughly 10,000 times more efficient than
the best silicon” based computers. In 2011, a Super IBM computer called
“Watson” required 80,000 watts. The global importance of data pro-
cessing is that: “Data centers already consume 2% of all the electricity
produced in the world” (The Economist, 2016).
An operational reason for designing organizations to minimize the
transaction of bytes is the need for humans to avoid: “information over-
load” (Williamson, 1985: 281); their “information- processing limits”
(Williamson, 1975: 46); and “bounded rationality” (Simon, 1947: 198).
Williamson (1979: 21) explained that “Bounded rationality involved
neurophysiological limits on the one hand and language limits on the
other”. Also “As uncertainty increases, the problems of organization
become increasingly complex, and bounds on cognitive competence are
reached” (Williamson, 1985: 133). “The physical limits take the form
of rate and storage limits on the powers of individuals to receive, store,
retrieve and process information without error” (Williamson, 1975: 21).
Without these physical limits “economic problems vanish” (Williamson,
1979: 99).
Information can be thought of as being data that provides meaning. No
changes in meaning can arise without transacting bytes. Knowledge can
be considered how to use information with wisdom being the knowledge
of when to use information. This means that any errors in transacting
bytes can degrade the integrity of information, knowledge, and wisdom.
The limited ability of humans to transact bytes as identified in Table 13.1
is just one of a number of sources of errors considered next.
TBA extends TCE because Coase (1937) and Williamson (1985)
limited their analysis to for-profit firms that were not labor managed.
Coase (1937) limited his analysis to centrally controlled “authority”
system with a “master or servant” or “employer and employee” rela-
tionship. Williamson (1985: 265) stated his book was “mainly pre-
occupied with assessing the capitalist modes of organization” and that
labor-managed firms like those at Mondragón presented a “Dilemma”
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requiring “further study”. However, as noted by Radner (1992: 1392)
and Zingales (2000), there was no analytical framework for analyzing
firms with distributed control as found in those at Mondragón and/or
those controlled by stakeholders. TBA provides a framework to fill these
analytical gaps.
The use of bytes as a unit of analysis furthers the suggestion by both
Simon (1984: 40) and Williamson (1990: xi) who saw the need “for
observing the phenomena at a higher level of resolution”.
The phenomena under study by Williamson (1985: 3) were
“transactions”. These he “regarded as the basic unit of analysis” to
create what he described as TCE. Coase (1937) argued that firms exist
when the cost of productive transactions organize by “some authority”
becomes less than when contracted out through the marketplace. A fun-
damental problem is that the concept of a “transaction” in an organiza-
tion introduces ambiguity and so uncertainty. In addition, transactions
have questionable relevance in discussions within boardrooms or between
management, employees, and/or stakeholders. As noted by Fischer (1977:
322), “Transaction costs have a well-deserved bad name as a theoretical
device”.
Bytes overcome these problems and can become subjected to measure-
ment. In this way, TBA provides a basis for empirical research into how
to “invent governance structure” (Williamson, 1985: 305) to improve
operations. “Network governance” (Craven, Piercy, & Shipp, 1996) as
illustrated by the human brain is such an “invention”. The brain has “no
Chief Executive Officer neuron” (Kurzweil, 1999: 84).
Williamson (1985: 283) noted: “the problem of organization is pre-
cisely one of decomposing the enterprise in efficient information pro-
cessing respects”. However, this problem was first overcome by nature to
make living things self-regulating and self-governing.
TBA achieves the objective of Williamson (1985: 7) who predicated
that a new microtheory would arise which “will, and should, deal with
the economic foundations or organizations and institution, and this will
require us to have an economics of information and a more sophisticated
treatment of the technology of transacting” (Citing Smith, 1974: 332).
Another fundamental shortcoming of TCE recognized by Williamson
(1975: 42) is in determining the value of a social construct like cost,
because fixed “set up” costs may not relate to the cost of associated
transactions. Williams (1985: 21) states: “costs of both types are dif-
ficult to quantify”. Bytes on the other hand depend upon measurable
perturbations in energy and/or matter and so subject to natural laws –
not social constructs. Bytes provide a way of grounding the theory of
the firm, and sociology in general, in the natural sciences. This was why
Simon (1984: 40) saw the need “for observing the phenomena at a higher
level of resolution”.
A fundamental limitation in the theory of the firm presented by Coase
(1937) is his assumption that there are only two ways for governing
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318 Shann Turnbull

transactions: “Markets and Hierarchies” (Williamson, 1975). Prices and
so markets are only efficient because they contain so few bytes. However,
as Ashby (1957: 34) points out, “prices represent second order informa-
tion” dependent on first-order qualitative description of what is being
transacted. Qualitative data may best be communicated through the add-
itional modes of governing transactions through families, clans, associ-
ations, networks, and the State identified by Hollingsworth and Lindberg
(1985).
A summary of how TBA subsumes and extends TCE is presented
in Table 13.2 based on the above comments and additional details
presented in earlier versions of Table 13.2 in Turnbull (2000c: 255,
2005). The earlier versions did not make explicit that TCE is limited to
Table 13.2 Comparison of TCE and TBA boundaries
Framework of TCE (Coase/ TBA (Turnbull, 2000c: 255,

analysis→ Williamson) 2005)
1 Type of social For-profit firms not Any type of social organization

institution labor managed in any place, culture, or
specie
2 Unit of analysis Transactions Bytes
3 Objectives Economizing costs Economizing the transaction of
bytes with requisite variety to
maintain accuracy
4 Basis for objective Normative to Physiological and neurological
maximize profits limits in creatures to transact
bytes
5 Subjects of analysis Transactions and Individuals and the quanta
their costs (bytes) of data and so the
information, knowledge, and
wisdom they acquire and/or
process
6 Relationship of Master/servant or Any, e.g., family, cooperative,
individuals competitive competitive, associative, and
so on
7 Communications Markets and Sense, semiotics, language, and
and control by hierarchies numbers
8 Individual behavior Self-interested Contrary, e.g., altruistic, self-
interest, and so on
9 Governance model Efficient monitoring Multiple stakeholder interests
10 Modes of Markets, Any combination of clans,
governance hierarchies, and associations, networks,
hybrids of both hierarchies, or markets
11 Firms exist because Markets fail to Complex tasks can be carried
economically out with individuals
provide cost data economizing bytes and/or to
provide simpler services
9
1
3

the “efficiency” model of governance rather than to multiple stakeholder
interests (Turnbull, 2000c: 45).
TBA is based on a unit of analysis that did not exist in the time Coase
(1937). Today “Byte” has become a common word used to describe the
capabilities of the Internet, computers, phones, and cameras. Bytes can
now also be used to describe the capabilities of humans to receive, pro-
cess, store, and transmit data (Cochrane, 2000; Rapplean, 2012; Shuman,
1997). TBA also contributes to alternative theories of the firm and
viewpoints about governance in a similar way. These are considered next.
Alternative Approaches
There are other theories of the firm and a number of ways of analyzing
corporate governance as reviewed by Turnbull (1997a). While TBA does
not subsume these alternative ways of analyzing corporate governance
like it does with TCE, it extends them. This arises from TBA being applic-
able to the alternative modes of governance identified by Hollingsworth
and Lindberg (1985) and Ostrom (1993, 1998, 2009). Alternative modes
of governance as well contrary behavior of individuals were recognized
in the “Economics of biology” (Hirshleifer, 1977). The TBA perspective
allowed the dimensions of the Hirshleifer framework to be extended as
demonstrated by Turnbull (2000c: 68).
TBA also extends corporate governance scholarship to firms that
are not command and control hierarchies such as found in all non-
trivial stakeholder-controlled enterprises that have sustained their exist-
ence over generations of managers (Bernstein, 1980). Notable examples
of such stakeholder firms are the John Lewis Partnership in England,
the Mondragón Corporacion Cooperativa (MCC) in Spain, VISA
International incorporated in the United States, and networks of firms
that form a Keiretsu in Japan. One striking feature is that these firms exist
in jurisdictions where centralized command and control hierarchies are
the dominant form. Yet they exist in diverse cultures without facilitating
legislation. This indicates that there is no legal impediment for these types
of firms to be replicated.
A second striking feature of stakeholder- controlled enterprises is
that they have all adopted a “compound board”. The term “compound
board” describes “the existence of two or more control centers whether
or not they are required by law, the constitution of the firm or are created
by relationships external to the firm” (Turnbull, 2000c: 27). This def-
inition means that the majority of publicly traded corporations (PTCs)
around the world possess a compound board created by the presence of
a dominant shareholder who possesses control rights (Porta et al., 1999).
Compound boards are also created by Venture Capitalists and
other financiers who obtain control rights from a shareholder or loan
agreement. Loan agreements with private firms can reserve rights for the
lender to control the appointment of directors, auditors, and the payment
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320 Shann Turnbull

of dividends and executive remuneration. A leveraged buyout (LBO)
association creates a compound board as investors establish their own
board to supervise the executive board. Jensen (1993: 869) noted that
such arrangement provided “a proven model of governance structure”.
TBA not only applies to firms but to any form of social organization,
institution, or form of governance in any culture and even for any specie.
As noted earlier, no coordinated activity can occur between creatures
without transacting bytes. The introduction of nonhuman coordination
was included in the description of cybernetics. Wiener (1948) defined
cybernetics as “The science of control and communications in the animal
and the machine”. TBA allows the science of cybernetics to be extended
to social organizations and to society in general to create the “science of
governance” (Turnbull, 2008), and specifically, the “science of corporate
governance” (Turnbull, 2002d). These extensions of cybernetics are next
considered.
The Natural Laws of Governance

While this section limits its considerations of the natural laws of gov-
ernance to their implications for corporate governance scholarship, it
suggests two hypotheses for natural scientists that also have implications
for governance scholars.
The hypotheses for natural scientists are:
1 The most efficient way for creatures to acquire knowledge on how to

learn to sustain their existence in unknowable, and dynamic complex
environments is for their DNA to establish behavioral tensegrity.
2 Tensegrity drives evolutionary processes.
The word “efficient” refers to the need for both DNA and the creatures
it produces to minimize the need for materials and/or energy for learning
how to sustain their existence in “unknowable, dynamic complex
environments”.
3 The most efficient way organizations can reliably acquire knowledge

on how to learn to sustain their existence in unknowable, dynamic
complex environments is to establish behavioral tensegrity.
4 Tensegrity drives organizational adaption.
5 A compound board is a necessary but not sufficient condition to
introduce tensegrity to an organization.
6 Diverse stakeholder voices with contrary ~ complementary
viewpoints are a necessary but not sufficient condition to introduce
organizational tensegrity.
Support for the hypothesis for both natural scientists and governance
scholars arises from the science of cybernetics that is next considered.
1
2
3
Cybernetic Laws
The word “cybernetics” shares the same Greek origins as the word
“governance” based on the Greek verb “κυβερνάω” –being “the art
of steermanship” (Ashby, 1957: 1). “The truths of cybernetics are not
conditional on their being derived from some other branch of science.
Cybernetics has its own foundations” (Ashby, 1957: 1). The two natural
laws that are most relevant for governance scholars are the cybernetics
laws of requisite variety.
Ashby (1957) demonstrated mathematically how the control or regula-
tion of many variables is dependent upon there being a requisite number
of controllers. This “law of requisite variety” also applies to the accuracy
of communication channels. Shannon (1949) showed mathematically
the impossibility of improving the accuracy of signals sent through a
single channel subject to distortions, noise, and missing data. However,
accuracy could be improved as much as desired by introducing a requisite
number of cross-checking channels.
The communication inaccuracy problem is illustrated by the party
game known as “Chinese whispers” or “telephone”. The game involves
different teams competing to accurately relay a message through each
member privately one at a time without losing its meaning. In a party
game, the participants are competing to be accurate. In a command-and-
control hierarchy, participants may have a strong incentive not to com-
municate any problem for which they could be seen by their superiors
to be responsible. So beside natural errors and language ambiguities,
incentives can exist for subordinates to introduce biases, distortions,
omissions, and wrong information.
This communication problem is illustrated in Table 13.3, “Loss and
distortions of information in a hierarchy” (Downs, 1967: 116–118).
Downs makes what may be generous assumptions that subordinates:
Table 13.3 Loss and distortions of information in a hierarchy, follows the ana-

lysis by Downs (1967: 116–118)
Hierarchy Information upwards
Public or private sector Volume, 50% Correct, 85% of Missing or wrong

lost/level (%) lower level (%) meaning (%)
Legislature/Ministers or
Shareholder(s) 1.6 0.6 99.4
Board of directors 3.1 1.4 98.6
Chief executive officer 6.3 3.3 96.7
Senior management 12.5 7.7 92.3
Middle management 25.0 18.1 81.9
Team leaders 50.0 42.5 57.5
Workers 100.0 100.0 0.0
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322 Shann Turnbull

(a) convey to their superiors 50% of the information available to them,
(b) only 10% of the true meaning of information is lost each time it is
relayed through each level of a hierarchy, and (c) only 5% is loss from
errors in each transmission. This means that the loss of meaning and
errors reduces the correct information by 15% at each level. As a result,
correct information received by a CEO with four levels of subordinates
reduces to 3.3%.
Table 13.3 reveals the difficulty of nonexecutive directors (NEDs) to
obtain reliable data to carry out their duty to direct and monitor the CEO.
PTCs may have no systemic process for directors to obtain crosschecking
data or for obtaining contrary data to tell the other side of the story
reported by managers. Managers typically have an incentive to report
good news rather than problems.
PTCs in a Japanese Keiretsu are an exception. In a Keiretsu, sup-
plier and/or customer firms to a producer firm report independently to
their common major shareholder through the Keiretsu Council. Other
exceptions are stakeholder firms that obtain feedback from different
classes of stakeholders that possess contrary interests, consistent with
hypothesis 6, to allow them to systemically challenge the hegemony of
management reports. This can trigger strategic and tactical “adaptations”
described by Alchian (1950) and consistent with hypothesis 4. A response
recognized by Williamson (1985: 282) stating: “Evolutionary systems
that are subject to such bimodal disturbances will, under natural selec-
tion, necessarily develop two distinguishable feedbacks” (Ashby, 1960:
131). This observation could explain why DNA hard wires bimodal con-
trary behavioral in creatures as proposed in hypothesis 3 (Turnbull 2021).
So compelling were the competitive advantages obtained by Keiretsu
firms compared with US firms from management being exposed to sys-
temic contrary stakeholder feedback that Porter (1992:17) recommended
that US corporations should “Nominate significant owners, customers,
suppliers, employees and community representatives to the board of
directors”. However, Porter’s recommendation was ignored. A board
accountable to everyone becomes accountable to no one. What Porter
missed was that a Keiretsu had a compound board as considered in
hypothesis 5. The dominant shareholder in a Keiretsu obtained infor-
mation independently of management of views that could be contrary to
those of management and their self-interest.
The feedback arrangement illustrates the value of applying Shannon
law of a requisite variety of independent communication channels to
increase the integrity of information. It also illustrates how firms obtain
competitive and/or operating advantages from possessing systemically
embedded contrary viewpoints to trigger bimodal adaptations noted
above. Anglophone legal systems are based on courts being exposed to
contrary viewpoints as is too anglophone democracy that institutionalizes
a “loyal opposition”.
3
2

However, firms with a centralized command and control hierarchy
lack such institutionalized challenges to management groupthink or
incentives to discover “unknown unknowns” (Rumsfeld, 2002) or create
new adaptive solutions (Alchian, 1950). Fink (2018) identified “group-
think” of boards as problem in meeting his objective accepted by also
his US Business Roundtable CEO peer group. This was a commitment to
provide benefits to all their corporate stakeholders (BRT, 2019).
A cultural problem is that dissent is discouraged in boardrooms that
value collegial consensus making. Network- governed firms provide a
way to overcome the problem by establishing more efficient, nuanced,
and continuous competition for corporate control to improve operations
without the need to be publicly traded as proposed by Pound (1992,
1993a,b).
Possessing the information, incentive, and power to act is not suffi-
cient if there is not also the capability to act (Pirson & Turnbull, 2011a;
Turnbull & Pirson, 2012). Ashby’s law of requisite variety of control
explains why an individual or an institution may not possess the cap-
ability to act because of a lack of a requisite variety of control agents.
The idea of simply hiring more agents to obtain a requisite variety simply
expands centralized control cannot work as this need not increase the
required diversity of information, incentives, and powers. This problem
is explained by a corollary of Ashby’s (1957: 206) law of requisite variety
states that it is impossible to directly amplify control/regulation.
Regulation can only be amplified indirectly by introducing a requisite
variety of supplementary co-regulators (Ashby, 1957: 265). Likewise,
it is impossible to directly amplify a free-to-air TV signal. However, it
becomes possible indirectly through the introduction of a supplementary
source of power provided by household electricity. In organizations, the
requisite variety of control and communications channels required to
provide reliable data could be achieved by introducing a requisite variety
of stakeholders into its governance architecture. This means that complex
firms require network governance to be reliably monitored, controlled,
and/or regulated either internally or externally.
The impossibility of direct control/regulation has profound implications
for CEO’s and government regulators. It becomes in the interest of gov-
ernment regulators and CEOs, their NEDs, and investors to introduce
indirect regulation through stakeholders. It is stakeholders who can pro-
vide the requisite variety of information, incentives, and power necessary
to improve the integrity of both feedback communications and control as
much as is desired.
Suggestions on how to systemically establish network governance with
a requisite variety of independent communication channels supplemented
by co-regulation by stakeholders are presented for the public sector in
Turnbull (1995a), for the nonprofit sector in Turnbull (2000b, 2013c),
and the private sector in Pirson and Turnbull (2011a,b, 2012, 2015,
2016) and Turnbull and Pirson (2012). The systemic problems in current
4
2
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324 Shann Turnbull

so-
called best practices are discussed in Turnbull (2000a,b,c, 2002a,
2003, 2007b, 2012a) with operating advantages of network govern-
ance for organizations, their directors, management, stakeholders,
auditors, regulators, and society outlined in Turnbull (2010a,b, 2012a,
2013a,d,e, 2014).
Division of Powers to Create Network Governance

A fundamental requirement to establish network governance is for cor-
porate constitutions to introduce a division of powers to create an internal
compound board consistent with hypothesis 5. This allows (i) the intro-
duction of checks and balances and (ii) a requisite variety of stakeholder
boards to generate a variety of cross-checking control and communica-
tion channels (Turnbull, 2000a,b,c).
However, the theory and practice of decentralized control is a
neglected topic in the literature of corporate governance scholarship not
engaged in political science literature of Ostrom, Pound, and DiermeIer
and Myseron (1999: 1185). The latter observe that “there are few theor-
etical papers that probe the consequences of dividing legislators into sep-
arate chambers which represent the same voters”. Three female scholars
are notable exceptions such as Dallas (1992, 1997), Givens (1991), and
Ostrom (1993, 1998, 2010).
The analysis of Person, Roland, and Tabellini (1996) showed that a
division of power provides a rational basis for developing trust as power
differentials are reduced and agents became more interdependent. Trust
introduces operating advantages by allowing monitoring and agency
costs to be reduced. Nahapiet and Ghoshal (1998: 257) identify trust as
a basis for developing social and intellectual knowledge and knowing.
The substantial cost savings and competitive advantages achieved
through “Just in Time” (JIT) delivery of supplies and “Total Quality
Management” (TQM) for customers requires rich and frequent
communications as well as trust. Markets and hierarchies do not pro-
vide sufficient information richness and are inimical to developing trust.
This means that modern management practices like JIT and TQM require
associative relationships between suppliers, employees, and customers to
establish trust with rich and frequent exchange of information. Wruck and
Jensen (1994: 248) define TQM “as a science-based, non-hierarchical,
and non-market-oriented organizing technology that increases efficiency
and quality”. TBA provides a framework to investigate how “non-hier-
archical and non-market oriented organising technology increases effi-
ciency and quality”.
Persson, Roland, and Tabellini (1996) provide a mathematical model
of why stakeholders volunteer their resources to participate in advisory
councils to promote the self- interest of themselves and the firm. An
example is Citizens Utility Boards (CUBs) reported by Givens (1991) and
the many examples identified since premodern times by Ostrom. Ostrom
5
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3

shared the Nobel Prize on Economics for identifying how polycentric
user associations can govern common resources without either markets
or hierarchy in either public or private sectors (Press Release, 2009). An
example of polycentric user associations is provided by the MCC.
The next section uses the MCC to illustrate both network governance
and how TBA could be used to research and evaluate network governed
firms. In particular, to investigate how network governance changes
the numbers of bytes, each individual needs to process to govern net-
work firms.
Utility of TBA for Investigating Network Governance

This section presents the control and communication architecture of
the MCC to illustrate network governance and the utility of TBA as
a tool to empirical test its efficacy. The MCC architecture is also used
to illustrate holonic architecture that is found throughout the universe
with the formation of a hierarchy of holons described as a “Holarchy”
(Mathews, 1996).
Holons are referred to by many other names as documented by
Mathews (1996). The founding CEO of VISA International, Dee Hock
was apparently not aware of the holonic literature and coined his own
word “Chaord” by combing the words “Chaos” and “Order” to describe
the organizational architecture he invented in 1970 for VISA (Hock,
1999: 189).
Hock (1999: 30) defined a Chaord as: “Any self- organising, self-
governing, adaptive, nonlinear, complex organism, organization, com-
munity, or system, whether physical, biological, or social, the behavior of
which harmoniously combines characteristics of both chaos and order”.
A defining characteristic of holons is that they possess contrary
characteristics as indicated by the words used by Hock to coin the word
“Chaord”. Besides VISA, these contrary features are found in other
stakeholder governed network firms like the MCC and The John Lewis
Partnership (Turnbull, 2000c: 190–194).
Organizations and physical structures that possess components
with contrary characteristics are described as possessing tensegrity.
Ingber (1998) describes how biological structures are made up of
subcomponents with contrary properties. It is also a feature that is found
in components that self-assemble like “large molecules self-assemble into
cellular components known as organelles, which self-assemble into cells,
which self-assemble into tissues, which self-assemble into organs”. These
include muscles that are designed to best operate in tension and bones
that best operate in compression. The result is a body organized as a
holarchy with various systems within systems.
The MCC grew in a similar manner (Turnbull, 1995b). The evolu-
tionary emergence of complex physical structures from simpler and near
similar components has been explained by Simon (1962) and developed
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326 Shann Turnbull

by Ingber (1998). Figure 13.1 reproduced from Turnbull (1995b) outlines
the emergence of the control and communication network of the MCC
with dates at which some of the components were established.
The middle shaded area of Figure 13.1 describes the internal
components of a Primary cooperative compound board. It identifies
five decision-making centers: Work units: Social Council, Watchdog
Board, Supervisory Board, and Management Board. Groups of Primary
cooperatives become federated into a Relationship Group that also has a
compound board with similar components. The Primary cooperatives are
serviced by Support cooperatives with a similar compound board. Both
Relationship Groups and Support cooperatives federate to create a third
level of the holarchy governed by the Council of Cooperative Groups
and the Mondragon Congress. The Relationship Groups introduce a stra-
tegic level of “bi-model” feedback identified by Ashby (1960: 131) and
discussed by Williamson (1985: 282) and Turnbull 2021.
Table 13.4 presents the holonic typology of the MCC group. The
first cooperative was established in 1957. In 1992, the total number of
workers was 25,000. The group expanded through the global finan-
cial crisis of 2008 to a total of 74,017 workers in 2014 (MCC, 2014).
Table 13.5 reveals in rows 10 and 11 how the holonic architecture of
the MCC described above follows the holarchy architecture of the phys-
ical world from atomic particles to galaxies. In each step, entities with
contrary properties become associated to create a new type of entity as
described by Simon (1962) with new properties emerging not found in its
component parts.
A contribution of TBA is to create a framework for analyzing and
evaluating complex social systems like the MCC. One way to under-
take this task is to identify how a MCC compound board takes over the
tasks that would otherwise be undertaken by a unitary board Turnbull
& Guthrie 2019. The tasks typically undertaken by a unitary board are
described by Tricker (1994: 245 and 287) are set out in Figure 13.2. How
the five components of a MCC primary cooperative compound distribute
the activities of a unitary board is set out in Table 13.6.
Table 13.6 has five columns for each of the “control centers” of a
primary cooperative compound board that are related to a sixth column
for an “Anglo” unitary board. Each column indicates the approximate
number of people in each control center or board with their functions and
activities. An “X” in each column indicates that its activities involve one
of the four undertaken by a unitary board as set out in the four quadrants
shown in Figure 13.2. This reveals that four of the five components of the
compound board only involve half the activities of a unitary board. Only
the watchdog board has three of a unitary board’s four activities, and
the frequency of its duties could be expected to be much less (Turnbull,
1993, 2000a).
The missing long-term fourth activity is undertaken by the Supervisory
Board and Social Council as well as by: (i) the Coops General Assembly
7
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3
Mondragón Corporacion Cooperativa (MCC)

with dates of establishment
Mondragón Congress
Founder/Architect established 1987
Don José Maria Acción Católica
Arizmendiarrieta (utilised 1941)
1915-1976
Council of Cooperative Groups
established 1987 League for
Education and
Manage Culture (LEC)
Mondragón (1948) Hezibide
Fund for Intercooperative Elkartea (1988)
Corporación
Solidaridy (FISO) 1987
Cooperativa
Relationship Association or Group (MCC 1990)
Support Co-ops
Education (PPS)
Central Social Group Governing Initiated by LEC 1943
Councils Councils Social Security
(Lagun-Aro) 1959
Primary worker and Work experience
General Manager
hybrid co-ops (Alecop) 1966
associated into 12 (first 1970) Retail (Eroski) 1969
groups R&D (Ikerlan) 1974
Entreprenuer 1959
(LKS-1990)
General Assembly of Group. Shares all or Bank (CLP) 1959
part of surpluses, first est. 1960
General Assemblies of
x support co-ops made
up of delegates
Social
Supervisory Board Elect
Council Watchdog
Council
Primary worker co-op Delegate(s)
Elect Management General Nominate for

each vacancy
Elect Delegate(s)
Council Manager
Elect
Elect
Executives
Nominate 1 of 3
for each vacancy Elect
Appoint
Work General Assembly of each of cooperative elect
place units representatives to councils of their own co-op
of 10-20 & delegates to participate in General Assemblies
of second order coops and Mondragón Congress
First co-op established 1956, with over 150 by 1992
Members Citizens who participate in Mondragón activities as customers

Vote suppliers or community representatives vote
National government, regional government and town councils

Vote, appoint, delegate, manage: Advise or nominate: Start up:
Sources: CLP, 1992; MCC, 1992; Mollner, 1991; Morrison, 1991; Whyte & Whyte, 1988
Figure 13.1 Mondragón Corporacion Cooperativa (MCC).

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328 Shann Turnbull

Table 13.4 Holon typology of Mondragón
Concatenated holons Integrity holons to Integrity holons

assure coordination internal structure
Productive Intra-support and support of all possesses lateral
vertical recursivity component holons recursivity
in the system
(with recursive
intra-support)
25,320 Biological Cultural imprinting General Assembly

Individuals components (Hezibide Work groups
(MCC, 1992) (brain, nervous Elkartea) Social Council
system, and other Schooling (EPP) Supervisory Board
support organs) Social security Watchdog Council
(Lagun-Aro)
Retail store
(Eroski)
Retail banking
(CLP)
150 Firms General Assembly Trade and General Assembly
(MCC, 1992) Work groups professional Work groups
Social Council schools (EPP) Social Council
Supervisory Board Work experience Supervisory Board
Watchdog Council (Alecop) Watchdog Council
Wholesale
banking (CLP)
R&D (Ikerlan)
12 Groups or General Assembly Entrepreneur General Assembly
“Relationship of groups and imprinter Work groups
Associations” Group Social of “holonic Social Council
(MCC, 1992) Council architecture” Supervisory Board
Group governing (LKS) Watchdog Council
council
Mondragón Mondragón Fund for inter-
Corporación Congress; Central cooperative
Cooperativa Social Council; solidarity
Council of
Groups
not included in Table 13.6, (ii) the second-order “Relationship Group”,

and (iii) third-
order “Council of Cooperative Groups”, all shown
in Figure 13.1. This is how higher level holons steer its “stable inter-
mediate” “sub-assemblies to create a nearly decomposable systems, in
which the interactions among the subs-systems are weak, but not negli-
gible” (Simon, 1962: 474).
Table 13.6 reveals how a compound board decomposes decision-
making of a unitary board in variety of ways consistent with the findings
of Neumann (1947) to improve accuracy in decision-making. First, a
compound board spreads its activities over five control centers that are
9
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3

Table 13.5 Holarchy: hierarchy of holons, in nature (rows 1–7), society (rows
8–13), and engineering (rows 14 and 15)
Discipline/Subject First level Second level Third level
1 Physics Particles Atoms Molecules

2 Chemistry Molecules Compounds Bases
3 Genetics Bases DNA Genes
4 Biology Genes Chromosomes Cells
5 Anatomy Cells Organs Individuals (Biota)
6 Environment Biota Ecological systems Gaia (Earth)
7 Astronomy Earth Solar system Galaxy
8 Sociology Individuals Families Communities
9 Organizations Autonomous Firms Keiretsu/groups
cells/divisions
10 Mondragón Work groups Social Council General Assembly/
co-op co-op
11 Mondragón Cooperative Cooperative MCC
system (MCC) groups
12 VISA card Geographic unit Member bank VISA international
13 [Sporting orgs.] [Local clubs] [Regions/States] [National bodies]
14 [Sporting orgs.] [National [Int. Federations] [Olympic
bodies] Committee]
15 Government Communities Regions/States Nations
and towns
16 Engineering Components Subassemblies Machine
17 Software design Subroutines Routines Object-orientated
programs
Conformance functions Performance functions

Accountability Strategic thinking
• Reporting to shareholders • Reviewing and initiating strategic
External
• Ensuring statutory regulatory analysis

compliance • Formulating strategy
• Reviewing audit reports • Setting corporate direction
_____________ Appointment and rewarding _____________
chief executive
Supervision Corporate policy
• Reviewing key executive • Approving budgets
Internal
performance • Determining compensation policy for

• Reviewing business results senior executives
• Monitoring budgetary control • Creating corporate culture
and corrective actions
Short term Long term
Figure 13.2 Functions and activities of a unitary board.

(Source: Tricker, 1994: 245 and 287)
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Shann Turnbull
Table 13.6 Mondragón compound board compared with unitary board (degrees of decomposition of information processing labor indicated
by allocations of “X”)
Board type Mondragón compound board Anglo
Control Watchdog Council Supervisory Mgr. Board Social Council Work Unit Unitary
centersa Board Board
Members 3 5–8 4–6 ~5–25 ~10–20 ~4–12

Functionb Governance processes Appoint mgt. Organize Worker welfare Production, Elec. Manage
board operations Soc.C.
Activities Efficacy and integrity Integrate strategic Efficient resource Establish working Job organization Direct and
of processes stakeholders allocation conditions and evaluation control
Internalb X X X X XXXX
Externalb X X XX
Short termb X X X XXX
Long termb X X XX
a Omits the General Assembly, which elects Watchdog Council and Supervisory Board.
b Descriptions follow typology of Tricker (1994: 244 and 287) with the typical number of people involved in each board.
1
3

unlike subcommittees of a unitary board it cannot control its components.
Second, the workload is spread over many more individuals in the firm
whose appointment they cannot control and whose decisions they cannot
overturn as a unitary board can with its various subcommittees. Third,
the Coops compound board spreads decision-making to every individual
in the firm directly through the work units and indirectly through electing
representatives to the other control centers. In this way, governance
becomes integrated with management.
A fourth feature not shown in Figures 13.1 and 13.2 is that the members
of the Supervisory Board may contain representatives of one or more
supplier, community, and/or customer stakeholders to introduce contrary
viewpoints, contestability, and independent feedback of intelligence. The
intelligence could include the strengths, weaknesses, opportunities, and
threats (SWOT) of the business. In this way, risk management is enhanced
with the need and opportunities for adaption. Cross-checking is obtained
of not only of the known knowns, and the known unknowns, but also
exposure to the unknown unknowns (Rumsfeld, 2002). Knowledge of
the unknown unknowns could emerge from “adaptive” behavior arising
from stakeholder co- regulation and feedback considered by Alchain
(1950), Ashby (1960: 131), and Williamson (1985: 282).
Table 13.6 also indicates the utility of TBA. It shows how empirical
research could be used to identify the transaction of bytes in each “X”
and so for each individual involved in each control center or board.
The digitalization of information facilitates such research. While there
could remain a number of conceptual challenges, the TBA framework
provides a physical basis for grounding corporate governance research
and scholarship.
Concluding Remarks
By using bytes as a unit of analysis, TBA links the control and com-
munication systems within and between all creatures including humans
and those found within and between firms, organizations, and society in
general (Zeleny, 1990, 1991). Stafford Beer pioneered the application of
cybernetics to management systems within a firm, but he did not apply
cybernetics to the study of how firms were steered, controlled, regulated,
and/or governed.1
TBA establishes what Williamson (1991: 12) describes as the “elu-
sive science of organisation”. This arises from the statement of Ashby
(1957: 5):
Cybernetics offers one set of concepts that, by having exact

correspondences with each branch of science, can thereby bring them
into exact relation to each other…cybernetics is likely to reveal a great
number of interesting and suggestive parallelisms between machine
and brain and society. And it can provide a common language by
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which discoveries in one branch can readily be made use of in the
others … Prominent among the methods for dealing with complexity
is cybernetics.
An example of “suggestive parallelisms” arises from the findings of Ingber

(1998: 32) who explained that in organic structures tensegrity creates “a
maximum amount of strength for a given amount of building material”.
The insight of Ingber (1998: 32) arose from Buckminster Fuller (1961)
who explained how geodesic domes covered the maximum area for a
given amount of building material. Fuller also inspired Aaron Klug in
1959 who won a Nobel prize in 1982 in part for discovering how viruses
establish their shape stability using a geodesic architecture (Caspar, 1980).
Ingber (1998) describes how the shape of a cell can determine its function.
The tensegrity architecture of a cell allows it to be stable in many shapes as
demonstrated by the human body. This allows external physical forces that
change the shape of a cell can change its function that in turn can change
its behavior to sustain its existence. This led to the conjecture in Turnbull
(2000c: 134) that tensegrity provides “a maximum amount of control
(strength) for a given amount of bytes (building material)” for creatures
to sustain their existence in “unknown dynamic complex environments”.
Self-Regulation and Self-Governance

Self-regulating and self-governing feedback mechanisms arise in holonic
organizations like the MCC as posited in Turnbull (2000c: 135–136),
reproduced below.
Just as the physical stability of simple carbon compounds, complex cells,
tissues, and the human body is established by combining both compression
and tension components, one can hypothesize that sustainable stability
of social organization depends upon providing opportunities for compe-
tition and cooperation or selfishness and selflessness together. Like Ying
and Yang, too much of either characteristic can be dysfunctional; a balance
of both is required. The phrase “sustainable stability” is used to differen-
tiate from organizations, which maintain their stability or viability, from
special attributes of key personalities who happen to be influential in their
operations at a particular time. The distribution of power in a Mondragón
cooperative described in Chapter 6 of Turnbull (2000c) creates a situation
in which competitive and cooperative “forces are distributed and balanced
within the structure” as described by Ingber (1998: 31).
Pound (1993b) has suggested that competition for power, status, and
influence within a firm provides a much more efficient incentive to make
firms competitive than rely on the more costly and uncertain market for
corporate control. Evidence is provided in Chapter 6 of Turnbull (2000c)
that both Mondragón and Visa are internationally competitive. Neither
is publicly traded and both have holonic architecture. This supports the
view that firms need not be publicly traded to be competitive.
3

It also supports a corollary to Coase’s insight of why firms exist. Coase
(1937) proposed that firms exist because markets fail to efficiently com-
municate information to govern productive transactions. One can then
form a corollary that markets exist when social organizations are not as
effective in providing information for governing production.
This raises the question if the use of the design principles identified by
TBA provides a basis for making government-owned firms controlled by
stakeholders more efficient than publicly traded firms, and stakeholder
owned firms more efficient than government-owned firms. TBA offers
rich opportunities for research. TBA creates a rich area for “normal
science” (Kuhn, 1970: 10) to determine the details of how to improve the
effectiveness of organizations.
TBA and the case studies presented in Turnbull (2000c) indicate
advantages of appropriate power-sharing through a compound board
such as:
• A basis for establishing trust and so informational efficiencies in

governing transactions;
• Advantages from specialization in decision-making labor;
• Reduced information overload and “bounded rationality” for
individuals;
• Improved accuracy of information;
• Quicker responses to operating variables from distributed control;
• Improved capability of individuals to control the variables affecting
both themselves and the business;
• A basis for constructively utilizing the contrary attributes of individ-
uals to be altruistic/selfish, trusting/suspicious, or cooperative/com-
petitive to increase the efficiency of a firm without the need to rely on
markets for corporate control; and
• The ability for corporations to become self-governing, to reduce the
cost of regulation, in both the private and public sectors.
• Testing the efficacy of TBA
The above observations lead to eight general propositions for testing the
efficacy of TBA as set out below:
1 Firms obtain operating advantages by adopting communication and

control architecture, which keeps the transactions of bytes within the
capability of its personnel by decomposing decision-making through
a compound board.
2 Firms obtain competitive advantages by adopting communication
and control architecture, which provides the richest information to
and from their customers, employees, and suppliers by involving
them through a compound board to activate alternative governance
mechanisms.
3 Firms obtain operating advantages by introducing a plurality of:
4
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334 Shann Turnbull
• Communication sources to reduce errors in decision- making

data by introducing stakeholder advisory boards;
• Computation centers to reduce information overload and create
interdependencies to develop trust while allowing for competi-
tion within the firm from a division of power through a com-
pound board;
• Control centers and processes with sufficient variety to manage
the complexity of their environment (e.g., introducing stake-
holder councils);
• Concatenated holonic components to provide requisite variety to
manage complexity (e.g., spin-off and/or decompose a firm into
almost self-governing components on a recursive basis as much
as necessary to satisfy proposition (a) above);
• Traits in its personnel, such as selfishness/selflessness, trust/sus-
picion, and competitiveness/cooperativeness to facilitate social
tensegrity with remuneration and advancement determined by
peer groups.
4 Compound boards are a condition precedent for sustaining non-
trivial labor-owned firms, which are not professional partnerships;
5 Holonic architecture provides competitive advantages for firms
dealing with complexity by their ability to prodigiously reduce the
transaction of bytes;
6 Firms exist because markets fail to provide data for governing pro-
ductive activities as efficiently and effectively as alternative methods;
7 Markets exist to the extent that firms have not adopted the most
effective and efficient architecture for governing production;
8 TBA introduces unique insights not available from other perspectives
which it may complement and/or subsume and allows the architec-
ture, form, and culture of firms to be considered a variable rather
than as a given.
TBA provides a basis for understanding the operating advantages of

holonic organizational architecture from their prodigious reduction in
data transmission and data complexity as explained by Mathews (1996:
30). Without TBA, compound boards are seen as introducing unneces-
sary complexity. But as pointed out by Hock, “Nothing can be made
simpler without becoming more complex”.
TBA allows cybernetic principles to be introduced to explicate the
operating advantages of compound boards, especially when they are
part of holonic architecture. TBA allows the natural laws identified by
Neumann (1947), Shannon (1948), and Ashby (1957: 2005) to become
part of organizational analysis. Specifically, compound boards can be seen
respectively as way of providing: (i) distributed intelligence to decompose
and/or cross check decision-making, (ii) additional feedback channels to
correct errors in communications, and (iii) providing requisite variety in
control.
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To sum up the above points, TBA makes a contribution by assisting in
the explication of:
• Why nontrivial employee-owned industrial firms have more than

one board;
• Why self-regulation and self-governance of nontrivial firms cannot
be assured without a compound board;
• How compound boards can simplify the role, knowledge, duties, and
liabilities of directors;
• The competitive advantages of appropriate compound boards in
relation to unitary control systems;
• How to compare and evaluate the relative advantages and
disadvantages of firms with different ownership and control
structures; and
• How to compare the relative efficacy of hierarchical and
nonhierarchical firms be they in the private, nonprofit, or public
sector.
Even without empirical research, the introduction of cybernetics laws to

governance scholarship introduces new insights not identified by existing
theories and models. One example is the idea of introducing independent
channels of communication channels as is commonly practiced in law
cases and by editors of investigative journalists who typically seek the
other side of any stories. Scholars like Porter (1992) have presented
empirical evidence on the efficacy of firms obtaining independent con-
trary feedback from stakeholders who possess the information, incentive,
power, and capability to act.
A contributing reason for the lack of action could be that without
TBA, governance scholars do not have a language let alone a framework
or model to analysis firms with a “compound board”. TBA fills a research
gap identified by Zingales (2000) and Radner (1992: 1384) who were
looking for a way to “compare the relative efficiency of a hierarchical and
non-hierarchical organizations within a common model”.
The science of governance reveals the operating advantages of the
human brain possessing distributed intelligence without a central control
center. Cybernetic laws of requisite variety in communication (Shannon,
1949) and control (Ashby, 1957) explain the operating advantages of
network governance created by a “compound board” (Turnbull, 2000c:
27) in the public, private, nonprofit, or government sectors.
Wider Implications of TBA

TBA provides a basis for not only providing an alternative theory of a firm
(Turnbull, 2001) but also for grounding sociology in the natural sciences
(Turnbull, 2002b) and sociology in cybernetics (Turnbull, 2002c).
6
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336 Shann Turnbull

Most of the bytes communicated, stored, and/or shared within and
between modern organizations are now typically automatically metered
in electronic devices whose processing capabilities exceed those of
humans. This facilitates field research into the degree that any individual
in any organization may be subjected to the need to receive, process,
store, retrieve, use, and/or transmit data beyond their physiological,
neurological, and other operating limits. It also means that the laws of
reliable communication, identified by Shannon (1949) and of reliable
control, identified by Ashby (1957), can be applied to the analysis, evalu-
ation, design, and regulation of any type of social organization.
The insights of TBA have a number of implications for the structure
of firms, organizations, and government. As the complexity of society
increases, so will the need to recognize the limitations of governing
society through hierarchies and markets. Neither markets nor hierarchies
have the capacity to provide requisite variety in information or control to
effectively govern complex activities. Markets provide too little informa-
tion and hierarchies aggregate too much information for humans to either
communicate or process reliably. As the development of self-regulation
requires the participation of all the stakeholders who can be affected by
the firm, the involvement of stakeholders in corporate governance would
enrich the quality of democracy in corporations and the broader society.
The quality of democracy would be increased by introducing the
principles of self-regulation into all other social institutions such as
nonprofit and community organizations. This would in turn reduce the
need and scope of public-sector organizations, which could likewise be
established with stakeholder participation to improve their ability to
become self-governing.
Note
1 Stafford Beer read an early version of Turnbull (1997b) in Toronto on August
3, 1996. He advised the author that he had not extended his cybernetic insights
to the governance of firms. Beer had been President of the World Organization
of Systems and Cybernetic since 1987. He encouraged the author to publish in
the Systems Science literature as undertaken in Turnbull (2005, 2007, 2012c,
2013b).
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14
Capitalism as a Continuum
A Bioinspired Narrative Framework
to Assess Four Functions of the Firm
Elizabeth Castillo
Why do organizations exist? How can they remain viable in the face
of ever-changing conditions? This chapter outlines why conventional
answers to these questions grounded in efficiency and economistic ration-
ality are no longer sufficient and how these narratives promote a cul-
ture of fear, dehumanization, and environmental degradation. To reorient
commerce toward sustainable prosperity, it proposes a new account of
the firm based on principles from ecology, developmental systems theory,
thermodynamics, and complexity science. This interdisciplinary framing
suggests firms arise through a process of relational development and
coordination of resource flows to produce cooperative surplus. This sur-
plus production is sustainable to the degree it respects planetary bound-
aries and reinvests a portion into civil society, the substrate that incubates
resources for subsequent iterations of organizing and exchange. This
multilevel production of cooperative surplus makes innovation, dynamic
efficiency, and social and technological progress possible, enabling the
emergence of three macro- properties: evolvability, antifragility (the
ability to transform randomness and perturbations into opportunities),
and open-endedness (ongoing production of novelty). This ecocentric
model points the way to how firms can operate in adaptive alignment
with ever- changing operating environments by adopting mutualistic
rather than parasitic exchange practices.
To assess the degree to which firms engage in prosocial (e.g., mutual-
istic, communitarian) or antisocial exchange (e.g., extractive, parasitic),
the chapter outlines an analytic framework based on four ecosystem
services: provisioning, supporting, cultural, and regulating. Through
this functional analysis, capitalism is not a unidimensional system of
exchange. Instead, it is operationalized as a multidimensional continuum
based on firm behaviors (e.g., information asymmetry versus transpar-
ency). The chapter closes with a discussion of how organizing for pro-
social exchange promotes developmental potential by expanding degrees
of freedom that increase flourishing among individuals, organizations,
and the community.
DOI: 10.4324/9781003211549-15
43
344 Elizabeth Castillo
The Economistic Narrative: The Theory of the Firm

Capitalism is touted as a system of economic exchange that promotes
freedom and prosperity through competition, self- regulating (free)
markets, and ownership of private property (Smith, 2001; Weede,
2016). In management and economics, the emergence of firms is gener-
ally explained through the lens of market logic. For example, firms are
hypothesized to reduce transaction costs, uncertainty, and risk (Coase,
1937; DeMiguel et al., 2020; Williamson, 1979); maximize profit by
leveraging property rights (Grossman & Hart, 1986; Hart & Moore,
1990; Hillard & McIntyre, 2017); develop and exploit economies of scale
(Shaikh, 2016; Tirole, 1988); and maximize personal utility for executives
(Baumol, 1959; Pearce & Tombs, 2019). Underlying assumptions of this
market logic are that people are self-interested and make decisions based
on utility maximization. Cumulative micro-level actions are said to give
rise to collective well-being by balancing tensions between supply/demand
and individual/societal interests (Bloom, 2017; Smith, 1776).
To help firms remain stable and navigate effectively in the midst of
dynamic market forces, systematic management practices gained traction
in the early 20th century. These practices in part were due to the influ-
ence of Max Weber, who characterized history as a process of increasing
rationalization so that “one can, in principle, master all things by cal-
culation” (Weber, 1946, p. 139). Instrumental rationality is concerned
fundamentally with goal attainment and developing effective and effi-
cient means to achieve those goals. In the context of capitalism, this typ-
ically means narrowing focus to a single end –profit –and reshaping
the means of production to become ever more calculable, predictable,
and controllable through practices such as command and control, hier-
archical organizing, planning, and coordination (Fayol, 1949). Scientific
management similarly rationalized the firm through standardization
and time studies (Taylor, 1947). The mindset of instrumental rationality
still drives productivity practices in many firms today, such as Amazon
(Guendelsberger, 2019).
Weber recognized the dangers of instrumental rationality, e.g., the possi-
bility that means become more important than ends, and bureaucratization
overshadows individual and collective well-being. His prescription was to
recommend authoritative, take-charge leadership as a way to mediate the
tension between rationalization and values. However, he conflated lead-
ership (the process of social influence for mutual benefit) with patriarchal
traits such as authoritarianism, charisma, heroism, and imposition of will
(Bass & Stogdill, 1990; Klein, 2016). Over time, management adopted
instrumental rationality as an unquestioned assumption, obscuring the fun-
damental role that norms and values play in creating and selecting goals,
and failing to attend mindfully to the impacts a firm has on its external
environment. For example, the theory of the firm claims that business exists
to increase the margin between revenue and costs. Yet, it fails to account
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Capitalism as a Continuum 345

for the externalities this creates or the effects of its privileging shareholders
over other types of stakeholders. Similarly, while stakeholder theory is
inherently normative (Freeman, 1999), instrumental stakeholder theory
argues that firms should attend to stakeholders only to the degree they
enhance competitive advantage (Donaldson & Preston, 1995). Accounting
and other performance management systems likewise implicitly prescribe
values upon those who are “managed”, rather than equitably listening to
and integrating stakeholders’ values and interests (Broadbent & Laughlin,
2009). In the latter half of the 20th century, rationalization and market
logic became the basis for bolder claims, e.g., that firms existing solely to
maximize shareholders’ wealth (Friedman, 1970; Keown & Petty, 2013).
Collectively, such instrumental and economistic conceptualizations of
exchange and management morphed into dominant cultural narratives
(Waddock, 2016). Examples include that firms exist to maximize profits
(theory of the firm); people and society will thrive to the extent that
businesses thrive; resources trickling down will provide for the welfare
of people; and firms must impose control internally and externally to
remain stable.
For decades, these narratives have guided economic policymaking,
organizational management, and governance. However, with the rising
level of economic inequality over the last 40 years, the 2008 recession, and
global environmental degradation, this paradigm increasingly has come
into question. For example, there is growing awareness that economistic
management creates moral hazards and systemic risk (Colander et al.,
2009; Streek, 2016) and may serve as a disciplinary technology for social
control rather than performance enhancement (Martinez, 2011). Scholars
also note that practices such as input/output accounting, metrics and
quantification, reward/punishment, division of labor, and labor allocation
experiments trace back to plantation and slavery management practices
that created wealth by leveraging power differentials and constraining
autonomy (Rosenthal, 2018).
While the functional failures of these economistic narratives have
become apparent (Pirson, 2017), less attention has been paid to how this
worldview limits autonomy, creates dependency, and induces anxiety.
Dependency arises as well-being becomes contingent on employment.
While obviously problematic for elders, children, and others outside the
workforce, it is also problematic for low-wage earners and those who
do not own property. Whereas people once had the ability to hunt and
gather for survival, that option for self-sufficiency disappeared with sys-
tematic privatization of property. To compensate for that lost oppor-
tunity, some countries created social supports. In other countries like
the United States, workers were assured they would survive and prosper
through employment. However, outsourcing, automation, and cost
containment practices over the last 40 years have eroded this promise,
making it increasingly difficult for people to provide for a family or save
money for the future. This loss of opportunity feeds structural inequality,
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with higher wage earners and those inheriting wealth gaining cumula-
tive advantage through their ability to save and generate increasing
returns through investment rents. Racial and gender disparities further
contribute to structural inequality at the macro (McCall, 2002; Pulido,
2016) and meso levels through inequality regimes –mutually reinforcing
practices, policies, and processes that foster systematic inequality in work
organizations (Acker, 2006).
Bohm-Bawerk’s economic example of marginal utility reflects the risk
associated with such a contingent existence. In that tale, a farmer has five
sacks of grain –two to feed himself, one to feed his chickens, one to make
brandy, and one to feed his pet parrots:
Then the farmer lost one sack of grain. Instead of reducing every
activity by a fifth, the farmer simply starved the parrots as they were
of less utility than the other four uses, in other words they were on
the margin. And it is on the margin, and not with a view to the big
picture, that we make economic decisions.
(Tittenbrun, 2011, p. 24)
This expendability incites anxiety as people, either consciously or impli-

citly, realize their marginal position in the economic order (Salzman,
2001). This fear makes people susceptible to psychological colonization,
latching on to dominant cultural narratives to align oneself with economic
and political power (LaMothe, 2016). Rather than demanding prosocial
economic policies to eliminate contingent existence that fuels structural
inequality, the marginalized are encouraged to dehumanize and blame
out-groups as the source of their problems. Adopting this “othering”
behavior provides psychological protection –it reduces uncertainty and
anxiety by creating cognitive closure, e.g., limiting the amount of informa-
tion that needs to be processed for decision-making (Marginson & Sawir,
2012). Collectively, these dynamics reinforce the economic status quo, per-
petuate power differentials, and create a market society where economistic
values displace humanistic, relational, and care-based ethics, policies, and
practices (Polanyi, 2001). Over time, this can weaken democracy globally
(Holmes, 2019), increase volatility of a firm’s operating environment, and
foster an instrumental rather than integrative approach to management
that decouples the firm from nature and society (Gao & Bansal, 2013).
A New Narrative Inspired by Nature

If egocentric narratives based on market logic and theory of the firm
no longer suffice, what is the alternative? Some scholars have proposed
nonmarket explanations. Examples include explanations of organizing
based on identity and social norms (Akerlof & Kranton, 2000); as a reac-
tion to social pressures (Malmendier, te Velde, & Weber, 2014); as an
outcome of social movements and cultural innovation (Rao, Morrill, &
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Zald, 2000); and as network effects that lead to cooperative production
(Benkler, 2006). Institutional and political logics have also been used to
explain the development of state-centric economies (McNally, 2013).
However, these logics have been criticized as perpetuating economic
injustice through their systemic reproduction of inequality (Amis, Munir,
Lawrence, Hirsch, & McGahan, 2018).
To remedy this dysfunction, Korten (2019) calls on management scholars
to develop a theory of community to supplant the theory of the firm. He
argues that a communitarian theory should be based on how complex life
organizes (e.g., self-organization, interdependence, and nested systems).
It should also honor the planet’s carrying capacity, equitable distribu-
tion, support for the commons, insistence on life-serving technology, and
assurance of democratic participation and accountability (Korten, 2019).
Five proposed elements are: (1) recognizing that all firms and institutions
exist to support life, not as ends unto themselves; (2) place-based com-
munities are the primary unit of organizing; (3) organizing is structured
through locally attuned, interdependent holarchies (nested systems) rather
than top-down hierarchies; (4) resource flows are circular, rather than
linear; and (5) tangible and intangible rewards are shared among commu-
nity members (Korten, 2019).
In a similar vein, ecological theories of organizational emergence and
evolution have also been proposed, including
an organizational genetics view that emphasizes random variation;

an environmental conditioning view which considers variation to be
contextually constrained; and an emergent social systems view which
considers variations in organizational forms to be the products of
embedded social-organizational interactions.
(Romanelli, 1991, p. 79)
These coevolutionary perspectives seek to integrate context with micro

and macro levels of analysis (Lewin & Volberda, 1999).
While these psychosocial, communitarian, coevolution, and adap-
tation narratives offer insights into the necessity and mechanisms of
organizational emergence and evolution, they do not explain holistically
why organizational forms arise and change, and how firms can remain
viable over time. This lack of explanatory power inhibits effective theory
building (Whetten, 1989). Furthermore, it is essential to understand this
why to develop effective policies and practices that promote sustainable
commerce and thriving communities.
Thermodynamics, Ecology, and Energy Exchange as Drivers of

Organizational Formation
Thermodynamics offers a starting point for this explanatory
understanding. Through the lens of energetics, firms can be seen as
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arising from the flow of energy moving through a system. That flow acts
to organize the system (Morowitz, 1979). This process of self-organiza-
tion enables a system to optimize itself by creating a more stable struc-
ture through more efficient allocation of energy (Rickles, Hawe, & Shiell,
2007). Energetic transformations can occur through positive feedback,
where a system’s outputs cycle back to become new inputs. Through this
process, a system can reach a threshold point where it reorganizes itself
to redistribute a buildup of energy. An example is water changing from
liquid to vapor as it reaches the boiling point. This type of qualitative
state change reflects that “a current ordered state can create a configur-
ational phase transition which enhances the flow of energy by forming
a new channel between the environment’s input and output reservoirs”
(Morowitz, 1979). The emergence of organizations can be seen similarly
as a qualitative phase transition that redirects individualized energies
into coherent, coordinated action. Steady-state and other nonequilibrium
systems generate more complex forms of organizing when energy moves
in ways that promote continuous net flow (Morowitz, 1979). Firms can
therefore be thought of as energy transductors that obtain, process, trans-
form, and channel energy in ways that increase complexity, overcome
entropy, and foster energy evolution (Frederick, 2012). Living organisms
tend to “… organize their surroundings, that is, produce ‘order’ where
formerly there was disorder” (Bridgemen, 1941, quoted in Morowitz,
1979, p. 2).
With the emergence of coordinated action through firms, the next
question is, for what purpose? Some ecologists believe an explanation
for energy reorganization is that it enables the development of higher
qualities of energy. For example, Odum (1983) examined how energy
moves and transforms across levels of a system, such as trophic levels in
food webs. Odum (1988) hypothesized that nature self-organizes in ways
that expand degrees of freedom. The purpose for expanding degrees of
freedom is to generate long-term thermodynamic efficiency while sim-
ultaneously increasing developmental potential of the organism and the
environment. According to this principle of maximum empower (1988),
self-organization promotes more efficient power transfer (e.g., energy
conversions, cascades) over time, rather than attempting to maximize
power output at a particular moment.
The principle of maximum empower suggests that optimal organiza-
tional designs balance trade-offs between now and later in ways that also
strengthen the operating environment. That is, a system is optimal when
it maximizes energy conversion at multiple levels. Successful designs
manage this tension in ways that simultaneously support power optimiza-
tion in both the organism and its fitness landscape. This echoes Ghoshal
and Moran’s (1996) description of dynamic versus static efficiency, and
Bohm-Bawerk’s (2006) notion of roundaboutness, where value is created
through indirect exchange and conversion of resources. This multilevel,
recirculating, long-
term approach to power transfer provides energy
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feedback, e.g., some of the dispersed energy is stored in ways that can
cycle back to help energize the system later. If dispersion is too rapid,
this potential energy is lost through entropy and therefore unavailable as
a future input. In human systems, civil society may function as a storage
substrate from which organizations and individuals can draw resources
to support future provisioning and development.
The notion of probabilistic epigenesis from developmental systems
theory (Oyama, Griffiths, & Gray 2001; Valsiner, 2007) extends these
ideas. As an organism interacts with its environment, its development
reflects a process of bidirectional coaction rather than linear causation.
This qualitative restructuring arises from interactions across multiple
levels such as genes, neural activity, behavior, and cognition (Valsiner,
2007). The organism draws support from the environment to increase its
fitness (its ability to survive and reproduce). At the same time, its actions
impact that environment. The cumulative effects of these interactions
expand or reduce future developmental possibilities for the organism
and its progeny (Gottlieb, 2003). Evolutionary potential is enhanced by
increasing the quality of an organism’s fitness landscape, e.g., its oper-
ating environment –the dimensions of a system and their interdepend-
encies (McKelvey, 1999). Functions such as exchange (how an organism
trades inputs and outputs with the environment) and metabolism (how
the organism processes inputs and disposes of waste materials) are two
types of functional interactions. Function is important because it gives
rise to morphological structure and can increase fitness.
In the context of commerce, the type of resource exchange a firm
engages in with its operating environment may shape the form that a firm
takes. Whereas firms have conventionally been categorized based on their
tax status and ownership structure (e.g., nonprofit, publicly held corpor-
ation, privately owned firm), an ecological perspective suggests the need
for functional categorization. The type of exchange a firm conducts can
serve as this functional basis. Nature employs three basic types of sym-
biotic exchange: parasitism (one organism uses another to the detriment
of the host); commensalism (exchange benefits one organism with neutral
effects to the other); and mutualism (exchange benefits both organisms;
over time, these exchanges may produce larger systemic benefits). An
example of mutualistic exchange is pollination. As various pollinators
visit various plants, both the organisms and species benefit from those
interactions. Repeated interactions over time generate cross-pollination,
strengthening the biodiversity and resilience of the ecosystem. Sustainable
firms may be seen as “cross-pollinators” that promote energy and resource
transfers in ways that simultaneously benefit themselves and their oper-
ating environment.
Mutualistic interactions can also create conditions for the emergence
of properties like generativity, evolvability, antifragility, and open-
endedness. Generative complexity is a potential mechanism by which
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species and life evolve by means of variation, adaptation, and selection
through adaptive coupling with the fitness landscape (Kauffman, 1993;
Smith & Smith, 2001). Evolvability is the capacity of a system to find
novel variations that increase fitness (Whitacre & Bender, 2010). A neces-
sary ingredient for evolvability is the ability to transform new traits into
functional improvements as an organism develops in tandem within
its fitness landscape (Whitacre, Rohlfshagen, Bender, & Yao, 2010).
Antifragility is a macro-level quality that increases the system’s capacity
to thrive under unstable conditions by leveraging setbacks, stress, uncer-
tainty, and chance occurrences (Taleb & Douady, 2013). Mutualistic
exchanges may also foster open-endedness, the ongoing generation of
novelty through variation, emergence, and qualitative state changes
(Lehman & Stanley, 2011). Rather than pursuing a pre-established goal,
open-endedness seeks only to increase the number of available options.
Open-endedness is proposed as “… a ubiquitous feature of biological,
techno-social, cultural systems, and many other complex systems that
develop in a self-organized manner” (Banzhaf et al., 2016, p. 131).
Systems that foster open-endedness process information across multiple
scales. At the micro level, they produce open-ended events, e.g., actions
that generate novelty and innovation. At the macro level, open-ended
systems are those capable of producing open-ended events. Collectively,
generativity, evolvability, antifragility, and open-endedness are seen as
desirable qualities for system design because they can increase fitness
through their ability to generate novelty under challenging conditions
(Jones, 2014). In the context of commercial firms, the hybridization of
organizations, such as social enterprises and B corps, mirrors this pattern
of searching for open-endedness in ways that return benefits to the oper-
ating environment.
In sum, viewing organizations through the lens of thermodynamics,
ecology, developmental systems theory, and complexity science offers
novel insights into how and why organizations emerge. As individuals
come together to coordinate their actions, they organize and redistribute
their energy to produce cooperative surplus, similar to how “each of us
accedes to being governed … because joining a society creates a ‘coopera-
tive surplus’ from which we may all benefit” (Koch, 1990, p. 431).
Cooperative surplus can be described as an emergent property that arises
through mutualistic interactions that promote fitness of the firm, its con-
stituent parts, and its operating environment. This in turn fosters innov-
ation, evolvability, open-endedness (generativity), and antifragility (the
ability to transforms shocks, noise, and setbacks into opportunities). This
eco-inspired understanding reconciles two key sustainability challenges,
the tension between now/later and individual/collective. In contrast, para-
sitic firms close off resource flows to the micro and macro levels. Over
time, this prevents the rise of emergent properties like cooperative surplus
and innovation (i.e., open-endedness).
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Capitalism as a Continuum: Exchange as Four Functions of

the Firm
What does this new eco-inspired understanding mean in practice? This
section introduces an exploratory analytical framework based on firm
behaviors. This framework characterizes exchange practices along a spec-
trum, from extractive (parasitic) to mutualistic. Rather than being binary,
behavior can fall anywhere between the two extremes of a dimension,
akin to a sliding indicator. These aggregated indicators suggest the degree
to which a firm engages in extractive or mutualistic exchange.
Methodology
The proposed framework was developed using a modified version
of narrative synthesis (Popay et al., 2006). This analytic approach
synthesizes findings from multiple studies to describe, explain, and inte-
grate results in ways that tell a story by identifying thematic patterns
from disparate studies. These themes become building blocks for a
descriptive narrative that develops coherent meaning across the studies’
data (Bailey, Madden, Alfes, & Fletcher, 2017; Briner & Denyer, 2012).
After developing a preliminary synthesis, relationships between the elem-
ents are analyzed to create a conceptual framework. This methodology is
used in fields such as management and healthcare. While meta-analyses
using statistical assessments are better at identifying moderating effects of
variables, narrative synthesis generates more robust descriptive insights
for informing policy development and guiding future research (Rodgers
et al., 2009).
Thematic Categories
The analyzed behaviors were drawn from the management literature.
They were categorized into four functions that ecosystem services provide
to people: provisioning, supporting, regulating, and cultural (Millennium
Ecosystem Assessment, 2003). Ecosystem services are processes and
conditions in nature that sustain and fulfill human life (Daily, 1997).
These services are the elements that produce human well-being (Boyd
& Banzhaf, 2007), with human energy required to activate some (Braat
& de Groot, 2012; Fisher, Turner, & Morling, 2009; Odum, 1983). The
construct of ecosystem services is a suitable thematic framework because
it bridges the natural and social sciences and links economic development
to sustainability (Ehrlich & Ehrlich, 1981). In the management litera-
ture, firms have been characterized as providers (Brown, 2000; Garcia-
Appendini & Montoriol- Garriga, 2013), cultural influencers (Loader,
1999), creators of supportive services, e.g., networks and infrastructure
(Kale, Dyer, & Singh, 2002), and fulfilling regulative functions (Nonaka
& Toyama, 2007). The exploratory framework presented below aligns
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with such conceptualizations and is now discussed through the four cat-
egories of provisioning, supporting, regulating, and cultural.
Provisioning
People, organizations, and communities require products such as food,
water, and raw materials to survive. In the context of organizations, three
behavioral examples of provisioning are as follows: (1) how a firm gets
its resources, e.g., through value extraction (e.g., rent-seeking) or value
creation; (2) the types of resources it recognizes (financial only, or both
tangible and intangible capital); and (3) its recruitment and compensation
practices.
Value extraction versus value creation. Value originates from both
private and public resources through interdependence and connect-
ivity (Lepak, Smith, & Taylor, 2007). An organization’s values choices
determine how and what kind of value it creates or extracts. Extractive
organizations acquire wealth primarily through practices like rent-
seeking, the use of resources to obtain economic gain from others without
providing reciprocal benefits back to society through productivity and
value creation (Johnson, 2005). Examples of rent-seeking include wealth
derived from lobbying for favorable rulemaking to gain a competitive
advantage, e.g., through trade laws, establishment of monopolies, or cre-
ation of subsidies (Tullock, 1967). A growing number of economists view
rent-seeking as a fundamental component of global economic dysfunc-
tion and erosion of the middle class (Stiglitz, 2013; Varoufakis, 2015).
In contrast, mutualistic organizations generate wealth through value cre-
ation, providing benefits to customers and other stakeholders in the firm’s
operating environment (Tantalo & Priem, 2016).
Types of resource investments. The building blocks of value creation
are tangible and intangible forms of capital developed through innov-
ation and creative processes (Amabile, 1996). However, most firms
account only for forms of capital depicted on financial statements. This
leads firms to privilege financial capital in their decision-making, con-
fusing a means with an end. Extractive firms base their resource allo-
cation decision-making and reporting on financial capital. Mutualistic
organizations invest in multiple forms of capital. The rationale for recog-
nizing resource diversity stems from the law of requisite variety (Ashby,
1960), which states that “the internal diversity of any self-regulating
system must match the variety and complexity of its environment if it is
to deal with the challenges posed by that environment” (Morgan, 2006,
pp. 108–109). A multiple capitals approach enhances requisite variety by
recognizing and replenishing the heterogeneous elements of the matrix in
which it is embedded.
Recruitment and compensation practices. Pay ratios between chief
executive officers and workers depend on the balance of power between
them (Faleye, Reis, & Venkateswaran, 2013). Compensation policies
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and practices reflect power differentials and values such as equity (Shaw,
Gupta, & Delery, 2002). How and to what degree a firm compensates its
workers is important because this is the primary way it incentivizes and
rewards employees (Pfeffer, 1997). Furthermore, consumers show a pref-
erence for firms with more equitable CEO-worker pay ratios (Mohan,
Norton, & Deshpande, 2015). A large gap in pay ratio may lead to higher
employee turnover (Wade, O’Reilly, & Pollock, 2006). It can also increase
social costs, as minimum-wage workers often require public assistance to
support their families (Smiley, 2015). Extractive firms permit high levels
of wage difference between executives and frontline workers. Mutualistic
firms attend to equity and limit extreme wage differences (Enderle, 2018).
Supporting
Supporting services are indirect services required to produce provisioning,
regulating, and cultural services (Millennium Ecosystem Assessment,
2003). In the natural world, they include things like soil formation and
photosynthesis. In the context of business, externalities, time horizons,
and strategy can be conceptualized as supporting services.
Types of externalities produced. Organizations produce effects that go
beyond their boundaries. These effects are known as externalities –costs
and benefits that affect others but are not reflected in the price of the
good (Buchanan & Stubblebine, 1962). Negative externalities privatize
profits while socializing costs (Khemani & Shapiro, 1993). Pollution
is an example of a negative externality. Public goods are examples of
positive externalities. A firm can be viewed as extractive to the degree it
creates negative externalities or mutualistic to the degree it creates posi-
tive externalities. For example, social enterprises seek to produce social
good through their business activities.
Time horizon. A key tension that firms face in their decision-making
is what time horizon to adopt. A typical time horizon in cost–benefit
calculations is ten years, but climate scientists argue for time horizons
of at least 100 years (Fearnside, 2002). Extractive firms are likely to use
shorter time horizons (e.g., maximizing next quarter’s earnings), while
mutualistic firms adopt longer time horizons for considering the impacts
of their decisions (Sewchurran, Dekker, & McDonogh, 2019).
Strategy –growth vs. development. Economic growth is often
conceptualized as an increase in a nation’s productivity. In contrast,
development can be seen as an increase in novelty and complexity of
organization over time, such as new structural and functional properties
(Oyama, Griffiths, & Gray, 2001). The emergence of these novelties is a
result of horizontal and vertical coactions among the organism, its parts,
and its environment (Gottlieb, 1991a, 1991b, 2003). Firms that focus
on expansion (growth) can be described as parasitic, whereas firms that
invest in development may be seen as mutualistic.
4
5
3
Regulating
Regulating services are benefits provided by processes that enable and/
or constrain behaviors (Millennium Ecosystem Assessment, 2003). In
nature, regulating services include climate regulation and pest control.
In the context of commercial exchange, regulating services can be seen as
accountability mechanisms –to whom does the firm hold itself account-
able, and how (e.g., upward versus distributed). Because extractive firms
seek to maximize rent-seeking, shift negative externalities onto others,
and engage in suboptimal competition, they concern themselves pri-
marily with upward accountability to rule-makers, seeking to gain legal-
istic advantage. In contrast, mutualistic organizations practice distributed
accountability, holding themselves accountable to multiple stakeholders
(Freeman, 2010).
Cultural
Cultural services are intangible benefits that ecosystems provide to people
(Millennium Ecosystem Assessment, 2003). In terms of the natural world,
these include things like spiritual and aesthetic value, group identity, and
recreational opportunities. In the context of business, examples include
symbols and meaning-making, relational strategy (competition or cooper-
ation), risk exposure and management, information distribution practices,
and mental models about the purpose of a firm (Frederick, 2012).
Balance between competition and cooperation. Competition has played
a valuable role in driving technological innovations that have improved
wealth (well-being), such as reduction in infant mortality, better sani-
tation, and greater crop yields. Competition is beneficial to society “…
when individual and group interests and incentives are aligned (or at least
do not conflict). Difficulties arise when individual interests and group
interests diverge” (Stucke, 2013, pp. 179–180). While a degree of com-
petition can motivate enhanced performance, some types of competition
(e.g., suboptimal) can be damaging. Suboptimal competition promotes
divergence between individual and collective interests (Fisher, 1907).
Types of suboptimal competition include status- based competition
(e.g., conspicuous consumption) and firms’ exploitation of consumers’
bounded rationality or willpower (e.g., buying things beyond one’s means
through debt financing, Stucke, 2013). A firm can be characterized as
extractive to the degree it engages in and promotes suboptimal competi-
tion. It is mutualistic to the degree that it engages in cooperative behavior
(e.g., partnerships and alliances for mutual benefit and improvement of
its fitness landscape).
Other cultural behaviors include type of risk exposure (speculative or
pure risk), risk management strategy (transfer risk to others or develop
antifragility and evolvability), and information distribution practices
53

(asymmetry vs. transparency). Parasitic firms can be seen as engaging
in speculation, risk transfer, and gaining advantage through informa-
tion asymmetry, whereas mutualistic firms engage in exchange transpar-
ently and experience primarily pure risk, seeking to transform shocks,
noise, and crises into opportunities through innovative co-creation with
stakeholders.
Parasitic firms also tend to view people through the lens of mistrust,
employing strict control to manage what they see as principal/agent
problems. In contrast, mutualistic firms adopt approaches like human-
istic management, viewing people as intrinsically worthy and supporting
their dignity, well-being, and autonomy. Finally, why a firm sees itself as
existing is also fundamental to how it operates. Parasitic firms organize
themselves around the purpose of profit and are willing to do almost
anything to achieve that goal. In contrast, mutualistic firms embrace a
higher purpose, usually seeking to create mutual benefit and strengthen
civil society through social impact. They thus pursue open-endedness or
what author Simon Sinek calls the infinite game –conducting business
in ways that keep the game in play while making us better each day
(Sinek, 2019).
Figure 14.1 presents an overview of these organizational behaviors
as a continuum of exchange. On the far left is the direct exchange (i.e.,
barter, where goods or services of relatively equal value are exchanged
with benefits received immediately, Graeber, 2001). On the far right is the
gift economy (goods and services are provided with no certainty of recip-
rocation, Mauss, 1990/1922; Mirabella, 2013). Both the direct exchange
and the gift economy are bracketed as being beyond the analysis of this
framework. In the center is the indirect exchange (the object of analytical
focus) in the context of capitalism.
Contributions, Limitations, and Implications for Practice

The exploratory analytic framework presented here is a very basic
starting point for reimagining firms, the economy, and society. Many
other behaviors can surely be added. The purpose of this chapter is not to
develop an exhaustive model but rather to inspire a new way of thinking
about firms –how they arise, why they exist, and how they can be finan-
cially viable and environmentally sustainable over time. Its central thesis is
that instead of relying on anthropocentric constructs, researchers should
develop theories using concepts and functions from nature (e.g., eco-
system services) as guiding principles for how we understand organizing.
Building theory based on concepts from the natural sciences and inte-
grating these into management research through interdisciplinarity holds
much promise for advancing management theory and developing sustain-
able management practices (Wasieleski, Waddock, Fort, & Guimarães-
Costa, 2020). As the introduction of this chapter explained, it is no longer
sufficient to think of the purpose of firms as being solely about profit,
6
5
3
newgenrtpdf
Gift Economy
Uncertain
356
Direct exchange
Immediate reciprocal Continuum of Indirect Exchange reciprocal
exchange
exchange, e.g. barter Extractive Transactional Mutualistic (Mauss, 1922;
(Graeber, 2001) (parasitism, zero sum game) (commensalism, tit for tat) (produces mutual & systemic benefits)
Elizabeth Castillo
Mirabella, 2013;
Baviera, English,
Growth Strategy Development
& Guillén, 2016)
Negative Externalities Created Positive
Short-term Time Horizon Long-term
Ecosystem Services Static Type of Efficiency Dynamic
Supporting Reduce Complexity & Heterogeneity Increase
Provisioning Rent-seeking Source of Wealth Value creation
Regulating Financial Capital Investment Multiple capitals
Commodification Recruiting & Compensation Reciprocity

Cultural (e.g. outsourcing)
Oligarchy, Upward Governance & Accountability Democratic, Polycentric
Suboptimal Competition Cooperation
Speculative Risk Exposure Strategic

Plus pure risk (hazard & operational) for all types of exchange
Transfer to others Risk Management Leverage randomness

(generativity, evolvability)
Opportunistic Human Nature Assumptions Altruistic
Information Asymmetry Information Distribution Transparency
Profit Purpose Mutual flourishing
Figure 14.1 A functional-behavioral typology of firms.

7
5
3

or to view capitalism as a singular construct. New conceptualizations
are needed to systematically identify behavioral differences in how firms
operate and illuminate why current market exchange practices are dys-
functional. A bioinspired approach to reconceptualizing firms offers a
scientific foundation for explaining why economistic practices are patho-
logical. The analysis also suggests a promising pathway for investigating
conceptual puzzles such as static versus dynamic efficiency (Ghoshal
& Moran, 1996), organizational slack, i.e., x-inefficiency (Leibenstein,
1966), and the rise of social enterprises and hybrid organizational forms
(Doherty, Haugh, & Lyon, 2014).
Framing capitalism as a spectrum of behaviors that can range from
parasitic (extractive), to commensalistic (transactional), to mutualistic
(generative over multiple levels) provides a stepping stone for reinte-
grating the economy with nature, ourselves, and our communities. To
create and maintain a society that is able to innovate consistently, mutual-
istic exchange is essential because it fosters evolvability, antifragility, and
open-endedness. We must begin to understand interdependence both in
terms of connectivity between entities across micro, meso, and macro
levels, and in the biological sense of resources supplied by one organism
that benefit others and later recycle back to benefit of the first organism
(Leigh, 2010). Ultimately, firms will be sustainable to the degree they nur-
ture interdependence and align with the principles of nature (Frederick,
2012). Just as virtue ethics offers a road map to evolvability, antifragility,
and open-endedness through practical wisdom (Trinh & Castillo, 2019),
eco-inspired principles provide a functional guide for creating manage-
ment practices that promote mutualistic exchange.
Values and practices that recognize this interdependence across mul-
tiple scales (individual, organizational, community, global) are equally
essential. Economic exchange is constitutive, not just instrumental.
It shapes culture and power relations in ways that can either foster or
thwart human development (Bowles, 1991). When considering a theory
of the firm, we must recognize this constitutive power across multiple
levels –individuals, organizations, communities, and the planet. The
lens of ecosystem services and protecting the dignity and autonomy of
all stakeholders are keys. Without grounding the economy in prosocial,
developmental, and inclusive qualities, firms and societies are at risk of
stagnation and eventual collapse (Diamond, 2011; Wilson, 2019).
The good news is that lessons from thermodynamics, ecology, and com-
plexity science give us new options for designing sustainable organizations
and exchange practices that promote mutualism. Mutualistic firms recir-
culate resources in ways that simultaneously enrich themselves and the
community –the civil soil in which they grow. A bioinspired model
transcends the theory of the firm by developing a theory of the com-
munity (Korten, 2019) to encourage beneficial, multilevel coaction
effects across time. This model entails a circular flow of tangible and
intangible resources, some of which can be created endogenously. This
8
5
3

conceptualization of value creation over a longer time horizon for the
purpose of creating higher qualities of energy (e.g., novelty and innov-
ation) is a way to promote both technological and social progress, e.g.,
achievement of the UN Sustainable Development Goals (SDGs) and long-
term sustainability.
Perhaps most importantly, this bioinspired view of the firm suggests
three new narratives for sustainable economics: (1) people, firms, and
communities will thrive to the extent that civil society thrives; (2) resource
development and recirculation across multiple levels enable human and
planetary flourishing; and (3) firms can remain dynamically stable by
fostering autonomy and self-organization. Rather than trickling down,
bioinspired thinking about organizing suggests a “spiraling- up” of
resources through the development of social capital and other commu-
nity capabilities (Emery & Flora, 2006, p. 19). This ecocentric, communi-
tarian understanding transcends egocentric mental models that constrain
others’ autonomy and fail to recirculate resources equitably. It thus offers
a potential remedy to structural injustice and systemic inequality.
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Wasieleski, D., Waddock, S., Fort, S., & Guimarães-Costa, N. 2020. Natural
sciences, management theory, and system transformation for sustainability.
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Max Weber: Essays in sociology: 134-156. New York: Oxford University Press.
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Whitacre, J., & Bender, A. 2010. Degeneracy: a design principle for achieving
robustness and evolvability. Journal of theoretical biology, 263(1), 143–153.
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Wilson, D.S. 2019. This view of life: Completing the Darwinian revolution.
New York, NY: Pantheon Books.
5
6
3
Index
3BL see triple bottom line behavioral theories 28

performance ‘Benefit Corporation’, legal entities
(firms) 68
academic parochialism 184–5 Berkshire Hathaway 166
accountability, indigenous social Blair, M. 156–7, 158
enterprises 289 Blair and Stout’s (1999) team
activism and algorithms, purposes of production theory 156–7, 158,
corporations 138–42 161–4
agencement, communicative theory Boltanski, L. 191–2, 194, 196
of the firm 127–32, 133–4, 135–8, boundaries, communicative theory of
140, 141–2 the firm 131
agency theory, “We”-Mode Team branding, purposes of corporations
Production Theory of the Firm 155 123–6
agency theory of management, broadcasting 46
economic family of theories 78 Buber, Martin 217–34; see also
aim/purpose of this volume 1, 2 I-Thou relations
Alchian, A. 154, 155–6, 158 Buffet, Warren 166
Alchian and Demsetz’s rut 157–9 Business for Peace 240–72; business
algorithms and activism, purposes of ‘doing good’ 245, 262, 269;
corporations 138–42 Business Peace Index 254–69;
alternative multiple-criteria theory business purpose 243–8; origins
of the firm 89–95; human rights 241–2; ‘peace’ 248–62, 264–70;
approach 91–2 positive impact 244–7; prior
alternative relationships of business research 242; profit maximization
and society 84–7 242–8; service to society as aspects
Amazon, purposes of corporations of peace 249–53
139–40 Business Peace Index 254–69;
antifragility 350 adherence to a new paradigm
a-personality, ToF 27 264–5; “chaordic” organizations
Arvidsson, A. 124 264; components 255, 257–8,
Ashby, W. R. 331–2 267–9; corporate leadership for
authoritative texts, communicative peace 265–7; ethics 261–2; general
theory of the firm 129–30 principles 267; mindset 260;
axiological dimension, indigenous premise 270; products/services
social enterprises 287 260–1; purposes 254, 255, 256,
258–60; questions 267–9; social
background of this volume 2–4 development 263–4; sphere of
Barney, J. B. 315 companies 256–7; stakeholders
Bauer, T. 249, 253 262–3; uses 255–6; wellbeing 258
63
366 Index
capabilities approaches, purposes of communicative theory of the firm
corporations 121–2 130–3
capital, communicative theory of the communication inaccuracy,
firm 132 transaction byte analysis (TBA)
capitalism as a continuum 343–58; 321–4
antifragility 350; commensalism communicative ambidexterity,
349; economistic narrative: communicative theory of the firm
the theory of the firm 344–6; 127
evolvability 350; exchange as communicative capitalism, purposes
four functions of the firm 351–8; of corporations 122–6
generative complexity 349–50; communicative theory of the firm
instrumental rationality 344–5; 126–33; agencement 127–32,
marginal utility 346; maximum 133–4, 135–8, 140, 141–2;
empower principle 348–9; authoritative texts 129–30;
mutualism 349–57; new narrative boundaries 131; capital 132;
inspired by nature 346–7; open- Communication as Constitutive
endedness 350; organizational of Organization (CCO) 126–7;
formation drivers 347–50; communication as writing the
parasitism 349; probabilistic trajectory of practice 130–3;
epigenesis 349; roundaboutness communicative ambidexterity,
348–9 127; constitutive stance 127;
capitalist economies, multiple criteria epiphenomenal communication
for assessing outcomes 74–5 127; gamepieces 132–3;
Capra, F. 265–6 performativity 127–9; purposes of
Catholic social teaching, I-Thou corporations 126–33; summary
relations 228–31, 233 133; territorialization 131
CCO (Communication as Constitutive community wellbeing, wellbeing 293,
of Organization), communicative 295
theory of the firm 126–7 community-based ToF 39–40
centrally planned (command) compound boards, transaction byte
economies, multiple criteria for analysis (TBA) 326, 328–31, 333–5
assessing outcomes 75 Confucian “We”-Mode Team
“chaordic” organizations: Business Production 159–70
Peace Index 264; network constitutionality, legal entities (firms)
governance 325 61–2
charismatic authority, purposes of constitutive stance, communicative
corporations 134–8 theory of the firm 127
Coase, R.H. 26, 29–31, 33–5, 36, 43, consumption beyond Earth’s ability to
45–9 sustain, crisis trend 12–13
command (centrally planned) contributions to this volume 4–9
economies, multiple criteria for control and communication channels,
assessing outcomes 75 transaction byte analysis (TBA)
commensalism 349 313–15
common good: indigenous social corporate influence on government
enterprises 284–5; wellbeing 284 and public policy, crisis trend
Commons, John R. 44–5 12–13
communication and control channels, corporate leadership for peace,
transaction byte analysis (TBA) Business Peace Index 265–7
313–15 corporate personhood, purposes of
Communication as Constitutive corporations 134–8
of Organization (CCO), corporate power, Imperial
communicative theory of the firm Civilization’s final days 13–14
126–7 corporate social performance (CSP)
communication as writing frameworks, multiple criteria for
the trajectory of practice, assessing outcomes 72–3
7
6
3
Index 367
corporate social responsibility (CSR) theory 77–9; profit maximization
76, 82, 86–7; multiple criteria for 77–9; strategic theory of the firm
assessing outcomes 72–3; multiple- 79; transaction cost theory of the
criteria performance model 90–1 firm 79–80
corporations’ purposes see purposes of economic performance approach,
corporations multiple criteria for assessing
corruption 88–9, 93 outcomes 75–6
Craig, S. B. 169 economic sociology, vs French
creating shared value (CSV) 85 Convention Theory (FCT) 208
crisis trends 12–13 economistic narrative: the theory of
Crouch, C. 85 the firm, wellbeing 344–5
crowdsourcing: prosumption 124, energy, organizational formation
125, 127; purposes of corporations driver 347–50
124–5 entrepreneurship: indigenous 281;
CSP see corporate social performance social 281–3
CSR see corporate social environmental dimension, indigenous
responsibility social enterprises 295–6
CSV (creating shared value) 85 eonomic purpose, indigenous social
cultural problem, transaction byte enterprises 294–5
analysis (TBA) 323 epiphenomenal communication,
cultural services, exchange 354–5 communicative theory of the firm
current inventory of ToF 26–8 127
cybernetic laws, Natural Laws of epistemological dimension, indigenous
Governance 321–4 social enterprises 285–7
cybernetics 320–4, 331–2, 334–5 equality, indigenous social enterprises
288–9
democracy, legal entities (firms) 62–3 equity, indigenous social enterprises
Demsetz, H. 154, 155–6, 158 288
dignity 355, 357; common dignity ethics, Business Peace Index 261–2
192; community members 229, 231, evolutionary theory, economic family
232; Inclusive-Participative Model of theories 79
(IPM) 304, 305, 307; indigenous evolvability 350
social enterprises 8, 284–5, 287, exchange: contributions 355–8;
288, 296–7, 299; inherent dignity cultural services 354–5; exchange
227–8; motivation theory 266; as four functions of the firm 351–8;
protection of dignity 2, 4; wellbeing functional-behavioral typology of
288 firms 355, 356; implications for
dispersed production, purposes of practice 355–8; limitations 355–8;
corporations 123–6 organizational formation driver
‘diversity’, legal entities (firms) 65, 66 347–50; provisioning 352–3;
dominant ToF 1 regulating services 354; supporting
Drucker, Peter 226 services 353
DuPont 85–6
family firms, French Convention
Earth’s holarchy of living Theory (FCT) 198–9
communities, wellbeing 16–21 FCT see French Convention Theory
ecological civilization 20–1 financial markets, French Convention
ecology, organizational formation Theory (FCT) 200
driver 347–50 Fink, Larry 120
economic family of theories 77–80; firms’ growth see qualitative
agency theory of management 78; growth
evolutionary theory of the firm 79; First Fundamental Theorem of
managerial approaches 79; multiple Welfare Economics, wellbeing 246
criteria for assessing outcomes Fort, T. L. 261–2
77–80; neoclassical microeconomic freedoms, ‘four freedoms’ 32–3
8
6
3
368 Index
French Convention Theory (FCT) (TBA) 315, 320–5, 332–5;
184–210; academic parochialism see also Natural Laws of
184–5; background 186–7; the civic Governance; network governance
world 193, 194; conflict between governance approach, purposes of
the civic and market worlds 197; corporations 121–2
convention theory and markets government and public policy,
199–200; vs convention-related corporate influence 12–13
theories 187–8; conventions Green, David 135–6
189–90, 200–2; coordination growth, firms’ see qualitative growth
188, 191–7; the domestic world
193, 194; vs economic sociology Haidt, J. 169
208; family firms 198–9; financial Hart, O. D. 78
markets 200; foundations 189–90; Hirschtick, S. R. 84
the industrial world 193, 194–5; Hobby Lobby, purposes of
institutional theory 202–5; corporations 135–7
justifying a particular mode for holistic worldview, indigenous social
coordinating action 195–7; labor enterprises 287–8
markets 199–200; limitations 208; Holmström, B. 83
the market world 192, 193; orders holonic architecture: holarchy
of worth 191–5; organization 329; holon typology 326, 328;
theory 186–8; organizational transaction byte analysis (TBA)
research on conventions 201–2; 314–15, 325–6, 328–32, 334
organizations as compromise human relationships: natural science
mechanisms 197–9; permanency 313–36; transaction byte analysis
of conventions 200–1; plurality (TBA) 313–36
of coordination modes 191–5; human rights approach, multiple-
potential contributions 207– criteria theory of the firm 91–2
8; potential contributions to humanistic management 76, 82;
anglophone organization theory ecological civilization 88; Inclusive-
202–8; product markets 199; public Participative Model (IPM) 307,
services 198; stakeholder theory 308–9; indigenous social enterprises
205–7; superior justification 196; 286; Korten’s approach 87–9, 94–
the world of inspiration 192–4; the 5; Theory of the Community 88;
world of renown 193, 194 transformative communitarianism
functional-behavioral typology of 88–9; wellbeing 286
firms, exchange 355, 356 humanistic theory of the firm see
future lines of research: Inclusive- Inclusive-Participative Model
Participative Model (IPM) 310–11;
wellbeing 310 Ihara, Craig 160–1
Imperial Civilization’s final days
gamepieces, communicative theory of 13–14
the firm 132–3 Inclusive-Participative Model (IPM)
games, playing 41–2 303–11; dignity 304, 305, 307;
Gemeinschaft vs Gesellschaft, I-Thou employee benefits 305–6; features
relations 218 304; finalistic perspective 309–10;
generative complexity 349–50 future lines of research 310–11;
Ghosh, D. 81 humanistic management perspective
Ghosh, D. K. 81 307–9; instrumental or alternative
Gini, A. 243–4 model? 304–9; intermediate
Gomez, P. 91 model 307; limitations 310–11;
governance: indigenous social principles 304, 305; theory of
enterprises 291–2; legal entities human action (THA) 307, 308–9;
(firms), ‘multi-stakeholder wellbeing 305
governance’ 66; self-governance indigenous entrepreneurship,
332–5; transaction byte analysis indigenous social enterprises 281
9
6
3
Index 369
indigenous social enterprises 280–99; knowledgeability, legal entities (firms)
accountability 289; axiological 63–5, 66
dimension 287; common good Korten, David 242
284–5; dignity 288; dimensions Korten’s approach for humanistic
283–96; discussion 283–4; management 87–9, 94–5
environmental dimension 295–6; KU see Knightian Uncertainty
eonomic purpose 294–5;
epistemological dimension labor markets, French Convention
285–7; equality 288–9; equity Theory (FCT) 199–200
288; governance 291–2; holistic laissez-faire economies, multiple
worldview 287–8; humanistic criteria for assessing outcomes 75
management 286; indigenous language-based ToF 39–42
entrepreneurship 281; legitimacy legal entities (firms) 56–7;
289; management model 296–8; ‘accountability’ 63; ‘Benefit
methodology 283; ontological Corporation’ 68; constitutionality
dimension 284–5; organizational 61–2; democracy 62–3; ‘diversity’
structure 291–2; participation 290; 65, 66; knowledgeability 63–5,
phenomenological approach 285–6; 66; multiplicity 65–6; ‘multi-
praxiological dimension 291–6; stakeholder governance’ 66; public
self-determination 290–1; social interest 60; (free) purposeness 67–9;
entrepreneurship 281–3; social responsibility 59–60; ‘societas’
purpose 292–4; stakeholder theory 57–9; ‘stakeholder approach’ 61;
286–7; sustainability 285; wellbeing thirdness 60–1; transparency 61,
290, 295, 296, 297, 298 62, 63
inequality, crisis trend 12–13 legitimacy, indigenous social
institutional legitimacy loss, crisis enterprises 289
trend 12–13 life destructive technologies, crisis
institutional theory, French trend 12–13
Convention Theory (FCT) 202–5 Locke, John 35
institutionalism 31–4 logic of gift, I-Thou relations 231–3
IPM see Inclusive-Participative Model López, Pérez 308–9
I-Thou relations 217–34; being a
community 229, 231–3; being a management model, indigenous social
person 227–9, 231–3; Catholic enterprises 296–8
social teaching 228–31, 233; managerial approaches, economic
Drucker, Peter 226; Gemeinschaft family of theories 79
vs Gesellschaft 218; between the Marcoux, A. 243–4
I-It and the I-Thou 219–22; I-It vs marginal utility 346
I-Thou 222–6; language of being maximize shareholder value (MSV)
in business 226–7; logic of gift 23, 25, 27–8
231–3; social life in organizations maximum empower principle
222–6; stakeholder theory 230; a 348–9
summarizing model 227–8 MCC see Mondragón Corporacion
Ivanhoe, P. J. 171 Cooperativa
McNeil, William 169
Just in Time (JIT) delivery of supplies Merck 162
324 MEV (More Ethical Values) 25–6
Meynhardt, T. 91
Kay, John 61 Miles, R. E. 83
Knight, Frank 30–1, 33–9, 40–9 Mondragón Corporacion Cooperativa
Knight/Coase economy 42, 43, 46–9 (MCC): network governance 319,
Knight/Coase/Penrose firm 46–8 325–9; transaction byte analysis
Knight/Coase/Penrose ToF 48–9 (TBA) 319, 325–30, 332
Knightian Uncertainty (KU) 34–9, More Ethical Values (MEV) 25–6
40–1; types 37–9 Morgan, Gareth 26–7
0
7
3
370 Index
multiple criteria for assessing “Obamacare”, purposes of
outcomes 72–95; alternative corporations 136
multiple-criteria theory of the firm objectives: one objective vs two or
89–95; alternative relationships more objectives 80–1; principal vs
of business and society 84–7; principle 80–1
capitalist economies 74–5; centrally OCB (organizational citizenship
planned (command) economies 75; behavior) literature, “We”-Mode
command (or centrally planned) Team Production Theory of the
economies 75; corporate social Firm 166–7
performance (CSP) frameworks ontological dimension, indigenous
72–3; corporate social responsibility social enterprises 284–5
(CSR) 72–3, 90–1; economic open-endedness 350
family of theories 77–80; economic organization theory, French
performance approach 75–6; Convention Theory (FCT) 186–8
humanistic management 82; laissez- organizational citizenship behavior
faire economies 75; multiple- (OCB) literature, “We”-Mode Team
criteria performance model 90; one Production Theory of the Firm
objective vs two or more objectives 166–7
80–1; profit-maximizing approach, organizational formation drivers
alternatives 82–4; responsibility 347–50; ecology 347–50; energy
approach 76–7; socialist economies 347–50; exchange 347–50;
74–5; triple bottom line (TBL or thermodynamics 347–50
3BL) performance 72–3 organizational relationships: natural
multiple-criteria theory of the firm, science 313–36; transaction byte
alternative 89–95; human rights analysis (TBA) 313–36
approach 91–2 organizational research on
multiplicity, legal entities (firms) 65–6 conventions, French Convention
‘multi-stakeholder governance’, legal Theory (FCT) 201–2
entities (firms) 66 organizational structure, indigenous
Murphy, C. B. 243 social enterprises 291–2
mutualism 349–57 O’Riordan, Linda 244
Ouchi, W. G. 315
NAFTA (North American Free Trade
Agreement) 13–14 parasitism 349
narratives theories 11 participation, indigenous social
Natural Laws of Governance: cultural enterprises 290
problem 323; cybernetic laws peace connection, wellbeing 251, 252,
321–4; network governance 254
324–31; transaction byte analysis Peitersen, N. 124
(TBA) 315, 320–5 performativity, communicative theory
Nelson, J. A. 245–6 of the firm 127–9
neoclassical microeconomic theory, phenomenological approach,
economic family of theories indigenous social enterprises
77–9 285–6
neoliberal economics, wellbeing Pirson, M. x, 1–10, 22, 70, 226, 228,
14 229, 237, 242, 277, 286, 301, 323,
network governance: ‘Chaord’ 338, 339, 342, 345, 362
325; “chaordic” organizations Popper, Karl, falsification idea 37
325; Mondragón Corporacion Porter’s 5; forces model 42
Cooperativa (MCC) 319, 325–9; power, Theory of Community 18–19
transaction byte analysis (TBA) praxiological dimension, indigenous
324–31 social enterprises 291–6
nonzero transaction costs 28–31 principal vs principle 80–1
North American Free Trade privatizing the commons, crisis trend
Agreement (NAFTA) 13–14 12–13
1
7
3
Index 371
probabilistic epigenesis 349 RBV (resource-based view) 39
procreation, Theory of Community regulating services, exchange 354
19–20 resource-based view (RBV) 39
product markets, French Convention responsibility, legal entities (firms)
Theory (FCT) 199 59–60
profit maximization 13, 264; responsibility approach, multiple
alternatives 82–4; Business for criteria for assessing outcomes 76–7
Peace 242–8; economic family of Rhee, R. J. 78
theories 77–9 role obligations, “We”-Mode Team
profit pursuit 67–8, 80–1, 259 Production Theory of the Firm
prosumption, crowdsourcing 124, 161–2
125, 127 Romanelli, E. 347
protection of minorities, wellbeing Rothschild, K.W. 247–8
293 roundaboutness 348–9
provisioning, exchange 352–3 Rumelt, R. P. 79
public interest, legal entities (firms) 60
public services, French Convention self-determination, indigenous social
Theory (FCT) 198 enterprises 290–1
public services privatization 48 service 42–6; Knight/Coase/Penrose
purpose, Theory of Community 17–18 notion 43; service to society as
purpose/aim of this volume 1, 2 aspects of peace 249–53
(free) purposeness, legal entities Shapira, R. 86
(firms) 67–9 Simon, H. A. 158
purposes of corporations 120–43, Snow, C. 83
259–60; activism and algorithms social development, Business Peace
138–42; Amazon 139–40; branding Index 263–4
123–6; capabilities approaches social entrepreneurship 281–3;
121–2; charismatic authority characteristics 282–3; dimensions
134–8; communicative capitalism 282–3
122–6; communicative theory of the social life in organizations, I-Thou
firm 126–33; corporate personhood relations 222–6
134–8; crowdsourcing 124–5; social purpose, indigenous social
dispersed production 123–6; enterprises 292–4
governance approach 121–2; socialist economies, multiple criteria
Hobby Lobby 135–7; “Obamacare” for assessing outcomes 74–5
136; purpose of the firm 2–3; Uber societal and environmental, wellbeing
drivers 140; value production via 9
communicative capitalism 122–6 ‘societas’, legal entities (firms) 57–9
spheres of life, Weber’s 32–3, 36, 40,
qualitative growth 103–16; ability 41–2
112–13; activities 112–13; ‘stakeholder approach’, legal entities
advancement of a certain growth (firms) 61
variable 110–11; alternative to stakeholder theory: French
solely quantitatively-oriented Convention Theory (FCT) 205–7;
theories of firm growth 103–16; indigenous social enterprises 286–7;
aspirations 111–13; effects on I-Thou relations 230; wellbeing
stakeholders 113; external factors 286–7
113; integrative framework of firm stakeholder ToF 3–4
growth 110–14; key aspects of stakeholders, Business Peace Index
the phenomenon of growth 114; 262–3
quantitative growth vs qualitative Steckler, E. L. xi, 1–10, 22, 70
growth 104–10; reinforcement stockholder ToF 3
cycles 114; wellbeing 104 Stout, L. A. 156–7, 158
quantitative growth vs qualitative strategic theory of the firm, economic
growth 104–10 family of theories 79
2
7
3
372 Index
subordination, Coase’s notion 47–8 compound boards 326, 328–31,
suggestive parallelisms, transaction 333–5; control and communication
byte analysis (TBA) 331–2 channels 313–15; cultural problem
summary, communicative theory of 323; cybernetic laws 321–4;
the firm 133 cybernetics 320–4, 331–2, 334–5;
supporting services, exchange 353 functions and activities of a unitary
sustainability: indigenous social board 326, 328–31; governance
enterprises 285; wellbeing 285 332–5; holonic architecture
314–15, 325–6, 328–32, 334; how
TBA see transaction byte analysis TBA subsumes and extends
TBL see triple bottom line 315–20; human relationships
performance 313–36; insights 335–6; limitations
TC see transaction costs 317–19; Mondragón Corporacion
TCE see Test Composition Cooperativa (MCC) 319, 325–30,
Environment; transaction cost 332; Natural Laws of Governance
economics 315, 320–5; natural science 313–36;
team production model (TPM) network governance 324–31;
6, 151–4, 157–9, 162–3, 167, organizational relationships
169–70; see also “We”-Mode Team 313–36; self-governance 332–5;
Production Theory of the Firm self-regulation 332–5; suggestive
terminal crisis trends 12–13 parallelisms 331–2; transaction cost
territorialization, communicative economics (TCE) 315–19; utility
theory of the firm 131 330, 331; wider implications 335–6
Test Composition Environment (TCE) transaction cost economics (TCE) 29;
58 transaction byte analysis (TBA)
THA (theory of human action), 315–19
Inclusive-Participative Model (IPM) transaction cost theory of the firm,
307, 308–9 economic family of theories 79–80
“the firm”: Knight/Coase/Penrose firm transaction costs (TC), nonzero
46–8; public services privatization transaction costs 28–31
48 transparency, legal entities (firms) 61,
Theories of the Firm (ToF): 62, 63
misdirected by flawed theory posing trends, crisis 12–13
as science 14–15; a-personality 27 triple bottom line (TBL or 3BL)
Theory of Community 15–21; actions performance, multiple criteria for
required 21; foundational frame assessing outcomes 72–3
21; foundational principles 17–20; Turnbull, S. 318–19, 333–4
power 18–19; procreation 19–20;
purpose 17–18 Uber drivers, purposes of corporations
theory of human action (THA), 140
Inclusive-Participative Model (IPM) unitary boards, functions and
307, 308–9 activities 326, 328–31
Theory of the Community 13
Thévenot, L. 191–2, 194, 196 Vagelos, Roy 162
thirdness, legal entities (firms) 60–1 value production via communicative
Tirole, J. 157 capitalism, purposes of corporations
Tittenbrun, Jacek 346 122–6
ToF see Theories of the Firm
Total Quality Management (TQM) Wasieleski, D. M. 1–10, 70, 279, 355,
324 363
transaction byte analysis (TBA) wealth, wellbeing 354
313–36; alternative approaches Weber, Max 344–5
319–20; communication and wellbeing 1–2, 4, 8; Business Peace
control channels 313–15; Index 258; common good 284;
communication inaccuracy 321–4; community wellbeing 293, 295;
3
7
Index 373
dignity 288; Earth’s holarchy hierarchy 154–7; Berkshire
of living communities 16–21; Hathaway 166; Confucian
economistic narrative: the theory of “We”-Mode Team Production
the firm 344–5; First Fundamental 159–70; contemporary research
Theorem of Welfare Economics that supports the Confucian “We”-
246; flawed theory 15; future Mode 166; evolutionary studies
lines of research 310; humanistic 168–9; facilitating a “We”-Mode
management 286; Inclusive- Team Production: A Confucian
Participative Model (IPM) 305; Answer 164–6; limitations 170–1;
indigenous social enterprises 290, organizational citizenship behavior
295, 296, 297, 298; neoliberal (OCB) literature 166–7; rituals
economics 14; participation 290; 165–6; role obligations 161–2; team
peace connection 251, 252, 254; production model (TPM) 6, 151–4,
protection of minorities 293; 157–9, 162–3, 167, 169–70
qualitative growth 104; societal and wertrational 26, 31
environmental 9; stakeholder theory Westermann-Behaylo, M. 261–2
286–7; sustainability 285; wealth Wheatley, Margaret 266
354 World Trade Organization (WTO)
“We”-Mode Team Production 13–14
Theory of the Firm 151–72;
agency theory 155; Alchian and Zaher, A. 81
Demsetz’s rut 157–9; background: Zingales, L. 86
the rise, fall, and return of zweckrational 27, 31, 33
4
7
3

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i

Alternative Theories of the Firm

The Theory of the Firm is commonly viewed as axiomatic by business

Michael Pirson is William Loschert Professor of Management, Global

David M. Wasieleski is Albert P. Viragh Professor of Business Ethics in

Erica L. Steckler is Associate Professor of Management and Co-​Director

Humanistic Management draws together the concepts of social business,

Aesthetics, Organization, and Humanistic Management

Humanistic Management and Sustainable Tourism

Humanistic Management in Latin America

Alternative Theories of the Firm

First published 2022

About the Contributors vii

Introduction: Alternative Theories of the Firm 1

1 From the Theory of the Firm to a Theory of the

2 A Note on Alternative “Theories of the Firm” 23

3 A Rightholding Perspective on the Firm and Principled

4 Theories of the Firm: The Logic of Multiple Criteria

5 Qualitative Growth: An Alternative to Solely

6 What Are Corporations for?: Contemporary

8 Strengthening Theory through Isolation and

9 What It Means to be Truly Human in Organizations:

10 Business for Peace: A New Paradigm for the

11 Lessons from Indigenous Social Enterprises:

12 Toward a Humanistic Theory of the Firm: An

13 How Human and Organizational Relationships Can

14 Capitalism as a Continuum: A Bioinspired Narrative

About the Contributors

Ricardo Aguado is a faculty member of Deusto Business School, University

viii About the Contributors

About the Contributors ix

x About the Contributors

About the Contributors xi

xii About the Contributors

About the Contributors xiii

2 Michael Pirson et al.

4 Michael Pirson et al.

6 Michael Pirson et al.

8 Michael Pirson et al.

10 Michael Pirson et al.

We humans are a remarkable species with an extraordinary drive to

Anatomy of a Potentially Terminal Crisis

• Life Destructive Technologies. Our nuclear, carbon energy, genetic

The source of these trends traces to cultural, institutional, technological,

Theory of the Firm 13

Imperial Civilization’s Final Days

Misdirected by Flawed Theory Posing as Science

Theory of the Firm 15

Toward a Theory of Community

Complex life exists only in multi-​ species communities that self-​

Our human well-​being depends on the well-​being of Earth’s holarchy of

Theory of the Firm 17

Purpose, Power, and Procreation

Living systems organize within structures that facilitate highly com-

Theory of the Firm 19

3: Procreation: Each community must strive to maintain its capacity for

Finding Our Way to an Ecological Civilization

Theory of the Firm 21

• Break up concentrations of corporate power, including private banks;

We have only a partial inventory of proven methods for successfully

Note on Alternative “Theories of the Firm” 25

The Current Inventory of ToFs

Note on Alternative “Theories of the Firm” 27

Nonzero Transaction Costs

Erica L. Steckler is Associate Professor of Management and Co-Director

Complex life exists only in multi- species communities that self-

Our human well-being depends on the well-being of Earth’s holarchy of

Alternatives to the Profit-Maximizing Approach

An Alternative Multiple-Criteria Theory of the Firm

Figure 4.1 depicts a multiple-criteria performance model adapting and