Skip to main content

Advertisement

SpringerLink
Log in

Shareholders Should Welcome Knowledge Workers as Directors

  • Published:
Journal of Management & Governance Aims and scope Submit manuscript

Abstract

The most influential approach of corporate governance, the view of shareholders’ supremacy does not take into consideration that the key task of modern corporations is to generate and transfer firm-specific knowledge. It proposes that, in order to overcome the widespread corporate scandals, the interests of top management and directors should be increasingly aligned to shareholder’ interests by making the board more responsible to shareholders, and monitoring of top management by independent outside directors should be strengthened. Corporate governance reform needs to go in another direction altogether. Firm-specific knowledge investments are, like financial investments, not ex ante contractible, leaving investors open to exploitation by shareholders. Employees therefore refuse to make firm-specific investments. To gain a sustainable competitive advantage, there must be an incentive to undertake such firm-specific investments. Three proposals are advanced to deal with this dilemma: (1) The board should rely more on insiders. (2) The insiders should be elected by those employees of the firm who are making firm-specific knowledge investments. (3) The board should be chaired by a neutral person. These proposals have major advantages: they provide incentives for knowledge investors; they countervail the dominance of executives; they encourage intrinsic work motivation and loyalty to the firm by strengthening distributive and procedural justice, and they ensure diversity on the board while lowering transaction costs. These proposals for reforming the board may help to overcome the crisis corporate governance is in. At the same time, they provide a step in the direction of a more adequate theory of the firm as a basis for corporate governance.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Adams, R.B. and D. Ferreira: forthcoming, “A Theory of Friendly Boards”, Journal of Finance

  • Addison J.T., Schnabel C., Wagner J. (2004) The Course of Research into the Economic Consequences of German Work Councils British Journal of Industrial Relations 42:255–281

    Article  Google Scholar 

  • Aglietta, M. and A. Reberioux: 2005, Corporate Governance Adrift. A Critique of Shareholder Value (Cheltenham et al.: Edward Elgar)

  • Amabile T. (1996) Creativity in Context. Westview Press, Boulder

    Google Scholar 

  • Arrow K.J. (1973) Information and Economic Behaviour Federation of Swedish Industries, Stockholm

    Google Scholar 

  • Asher C.C., Mahoney J.M., Mahoney J.T. (2005) Towards a Property Rights Foundation for a Stakeholder Theory of the Firm Journal of Management and Governance 9:5–32

    Article  Google Scholar 

  • Barney J.B. (2005) Should Strategic Management Research Engage Public Policy Debates? Academy of Management Journal 48:945–948

    Google Scholar 

  • Babcock L., Loewenstein G. (1997) Explaining Bargaining Impasse: The Role of Self-serving Biases Journal of Economic Perspectives 11(1):109–126

    Google Scholar 

  • Baysinger B., Hoskisson R. (1990) The Composition of Boards of Directors and Strategic Control Academy of Management Review 15:72–87

    Article  Google Scholar 

  • Bebchuk L.A. (2004) Making Directors Accountable Harvard Law Today December 2004:4–5

    Google Scholar 

  • Bebchuk L.A., Fried J. (2004) Pay Without Performance. The Unfulfilled Promise of Executive Compensation. Harvard University Press, Cambridge, Mass

    Google Scholar 

  • Berle A.A., Means G.C. (1932) The Modern Corporation and Private Property Macmillan, New York

    Google Scholar 

  • Black B.S. (1992) Agents Watching Agents: The Promise of Institutional Investors Voice UCLA Law Review 39:811–893

    Google Scholar 

  • Bies R.J., Shapiro D.L. (1988) Voice and Justification: Their Influence on Procedural Fairness Judgements Academy of Management Journal 31:676–685

    Article  Google Scholar 

  • Blair M. (1995) Ownership and Control. Rethinking Corporate Governance for the Twenty-First Century. the Brooking Institution, Washington

    Google Scholar 

  • Blair M. (2005) Closing the Theory Gap: How the Economic Theory of Property Rights Can Help Bring ‘Stakeholders’ Back into Theories of the Firm Journal of Management and Governance 9:33–39

    Article  Google Scholar 

  • Blair M., Stout L.A. (1999) A Team Production Theory of Corporate Law Virginia Law Review 85(2):246–328

    Article  Google Scholar 

  • Blair M., Stout L.A. (2001) Director Accountability and the Mediating Role of the Corporate Board Washington University Law Quarterly 79(2):403–449

    Google Scholar 

  • Bolton, P., J. Scheinkman, and W. Xiong: in press, “Pay for Short-Term Performance: executive Compensation in Speculative Markets”, Journal of Corporate Law

  • Bontis N. (2001) Assessing Knowledge Assets: a Review of the Models Used to Measure Intellectual Capital International Journal of Management Reviews 3:41–60

    Article  Google Scholar 

  • Buchanan J.M., Tullock G. (1962) The Calculus of Consent University of Michigan Press, Ann Arbor

    Google Scholar 

  • Child J., Rodrigues S.B. (2003) Corporate Governance and New Organizational Forms: Issues of Double and Multiple Agency Journal of Management and Governance 7: 337–360

    Article  Google Scholar 

  • Child J., Rodrigues S.B. (2004) Repairing the Breach of Trust in Corporate Governance Corporate Governance 12(2):143–152

    Article  Google Scholar 

  • Coff R.W. (1999) When Competitive Advantage Doesn’t Lead to Performance: The Resource Based Vies and Stakeholder Bargaining Power Organization Science 10(2):119–133

    Google Scholar 

  • Daily Ch., Dalton D.R., Canella A.A. (2003) Corporate Governance: Decades of Dialogue and Data The Academy of Management Review 28(3):371–382

    Google Scholar 

  • Dalton D.R., Daily C.M., Certo S.T., Roengpitya R. (2003) Meta-Analyses of Financial Performance and Equity: Fusion or Confusion? Academy of Management Journal 46:13–26

    Google Scholar 

  • Dalton D.R., Daily C.M., Ellstrand A.E., Johnson J.L. (1998) Meta-Analytic Reviews of Board Composition, Leadership Structure, and Financial Performance Strategic Management Journal 19:269–290

    Article  Google Scholar 

  • Deci E.L., Ryan R.M. (2000) The ‘What’ and ‘Why’ of Goal Pursuits: Human Needs and the Self-determination of Behavior Psychological Inquiry 11(4):227–268

    Article  Google Scholar 

  • Dosi G. and L. Marengo: 2000, “On the Tangled Discourse between Transaction Cost Economics and Competence-Based View of the Firm: Some Comments”, in N.J. Foss and V.␣Mahnke (eds.), Competence, Governance, and Entrepreneurship. Advances in Economic Strategy Research, Oxford University Press, pp. 80–92

  • Dosi G., Freeman C., Nelson R., Silverberg G., Soete L. (1988) Technical Change and Economic Theory Pinter Publishers, London

    Google Scholar 

  • FitzRoy F.K., Kraft K. (1993) Economic Effects of Codetermination Scandinavian Journal of Economics 95:365–375

    Article  Google Scholar 

  • Foss K., Foss N.J. (2000) Competence and Governance Perspective: How Much Do They Differ? And How Does it Matter. In: Foss N.J., Mahnke V. (eds) Competence, Governance, and Entrepreneurship. Oxford University Press, Oxford, pp 55–79

    Google Scholar 

  • Foss, N.J. and M. Iversen: 1997, Promoting Synergies in Multiproduct Firms: Toward a Resource-Based View (Copenhagen Business School: Department of Industrial Economics and Strategy)

  • Freeman, R.B. and E.P. Lazear: 1996, “An Economic Analysis of Works Councils”, in J.␣Rogers and W. Streek (eds.), Works Councils – Consultation, Representation, and Cooperation in Industrial Relations (Chicago and London), pp. 27–49

  • Frey B.S. (1997) Not Just for the Money: An Economic Theory of Personal Motivation. Edward Elgar, Brookfield

    Google Scholar 

  • Frey B.S., Benz M., Stutzer A. (2004) Introducing Procedural Utility: Not Only What, But Also How Matters Journal of Institutional and Theoretical Economics 160:377–401

    Article  Google Scholar 

  • Frey B.S., Osterloh M. (2002) Motivation – a Dual–Edged Factor of Production. In: Frey B.S., Osterloh M. (eds) Successful Management by Motivation. Balancing Intrinsic and Extrinsic Incentives. Springer, Berlin, Heidelberg, New York, pp 3–26

    Google Scholar 

  • Frey B.S., Osterloh M. (2005) Yes, Managers Should Be Paid Like Bureaucrats Journal of Management Inquiry 14(1):96–111

    Article  Google Scholar 

  • Gittell J.H. (2000) Paradox of Coordination and Control California Management Review 42(3):101–117

    Google Scholar 

  • Grandori A. (2001) Neither Hierarchy Nor Identity: Knowledge-Governance Mechanisms and the Theory of the Firm Journal of Management and Governance 5:381–399

    Article  Google Scholar 

  • Grandori A. (2004) Introduction. Reframing Corporate Governance: Behavioral Assumptions, Governance Mechanisms, Institutional Dynamics. In: Grandori A. (eds) Corporate Governance and Firm Organization. Oxford University Press, Oxford, pp 1–27

    Google Scholar 

  • Grandori A. (2005) Neither Stakeholder Nor Shareholder ‘Theories’: How Property Right and Contract Theory can Help in Getting Out of the Dilemma Journal of Management and Governance 9:41–46

    Article  Google Scholar 

  • Grandori A., Kogut B. (2004) Dialogue on Organization and Knowledge Organization Science 13(3):224–231

    Article  Google Scholar 

  • Grant R.M. (1996) Towards a Knowledge-Based Theory of the Firm Strategic Management Journal 17(Winter Special Issue):109–122

    Google Scholar 

  • Habermas J. (1987) The Theory of Communicative Action (2nd edition). Beacon Press, Boston

    Google Scholar 

  • Hall B.J., Murphy K.J. (2002) Stock Options for Undiversified Executives Journal of Accounting and Economics 33:3–42

    Article  Google Scholar 

  • Hansmann H. (1996) The Ownership of Enterprise Harvard University Press, Cambridge, Mass

    Google Scholar 

  • Hart O. (1995) Corporate Governance: Some Theory and Implications The Economic Journal 105(430):678–689

    Article  Google Scholar 

  • Hermalin B.E., Weisbach M.S. (2003) Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature Economic Policy Review 9(1):7–26

    Google Scholar 

  • Hillman A.J., Dalziel T. (2003) Boards of Directors and Firm Performance: Integrating Agency and Resource Dependence Perspectives The Academy of Management Review 28:383–396

    Article  Google Scholar 

  • Jensen M.C. (1993) The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems Journal of Finance 48:831–880

    Article  Google Scholar 

  • Jensen M.C. (2001) Value Maximization, Stakeholder Theory, and the Corporate Objective Function European Financial Management Review 7:297–317

    Article  Google Scholar 

  • Jensen M.C., Meckling W.H. (1976) Theory of the Firm. Managerial Behavior, Agency Costs and Ownership Structure Journal of Financial Economics 3:305–360

    Article  Google Scholar 

  • Jensen M.C., Meckling W.H. (1979) Rights and Production Functions: An Application to Labor-Managed Firms and Codetermination Journal of Business 52:469–506

    Article  Google Scholar 

  • Jensen, M.C. and K.J. Murphy: 1990, “CEO Incentives – It’s Not How Much You Pay, But How”, Harvard Business Review May–June: 138–153

  • Jensen, M.C., K.J. Murphy and E.G. Wruck: 2004, “Remuneration: Where We’ve Been, How We Got to Here, What Are the Problems, and How to Fix Them”, Finance Working Paper 44/2004. (European Corporate Governance Institute)

  • Klein B., Crawford R.G., Alchian A.A. (1978) Vertical Integration, Appropriable Rents, and the Competitive Contracting Process Journal of Law and Economics 21:297–326

    Article  Google Scholar 

  • Kogut B., Zander U. (1996) What Firms Do? Coordination, Identity, and Learning’ Organization Science 7:502–518

    Article  Google Scholar 

  • Larson M.S. (1979) The Rise of Professionalism University of California Press, Berkeley, CA

    Google Scholar 

  • Lawler III E.E., Finegold D. (2006) Who is in the Boardroom and Does it Matter: The Impact of Having Non-Director Executives Attend Board Meetings Organizational Dynamics 35:106–115

    Article  Google Scholar 

  • Lev B. (2001) Intangibles: Management, Measuring, and Reporting Brookings Institute, Washington DC

    Google Scholar 

  • Lev, B. and S. Radhakrishnan: 2003, The Measurement of Firm Specific Organizational Capital (NBER Working Paper No. W958)

  • Lindenberg S. (2002) Relationship and Relational Signaling. In: Nooteboom B., Six F. (eds) The Trust Process Within Organizations. Edward Elgar, Cheltenham, pp 37–57

    Google Scholar 

  • Lindenberg S. (2004) Myopic Opportunism and Joint Production: a Relational Approach. In: Grandori A. (eds) Corporate Governance and Firm Organization. Oxford University Press, Oxford, pp 212–231

    Google Scholar 

  • Martin, R.: 2003, The Wrong Incentives. Executives Taking Stock Will Behave Like Athletes Placing Bets http://www.rotman.utoronto.ca/rogermartin/wrongIncentive.pdf. Accessed Jan. 8, 2005

  • Meulbroeck, L.: 2000, The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Option (Working Paper Harvard Business School No.␣00-056)

  • Moreland R.L. (1999) Transactive Memory: Learning Who Knows What in Work Groups and Organizations. In: Thompson L., Messick D., Levine J. (eds) Shared Cognition in Organizations: The Management of Knowledge. Erlbaum, Mahwah, NJ, pp 3–31

    Google Scholar 

  • Murphy K.J., Zabojnik J. (2005) CEO Pay and Appointments: A Market-Based Explanation for Recent Trends American Economic Review: Papers and Proceedings 94(2):192–196

    Google Scholar 

  • Nickerson J.A., Zenger T.R. (2004) A Knowledge-Based Theory of the Firm - The Problem-Solving Perspective Organization Science 15:617–622

    Article  Google Scholar 

  • Organ D.W., Ryan K. (1995) A Meta-Analytic Review of Attitudinal and Dispositional Predictors of Organizational Citizenship Behavior Personnel Psychology 48:775–782

    Google Scholar 

  • Osterloh M. (2005) Human Resources Management and Knowledge Creation. In: Nonaka I., Kazuo I. (eds) Handbook of Knowledge Creation Oxford University Press, Oxford (forthcoming)

    Google Scholar 

  • Osterloh M., Frey B.S. (2000) Motivation, Knowledge Transfer, and Organizational Firms Organization Science 11:538–550

    Article  Google Scholar 

  • Osterloh M., Frey B.S., Frost J. (2002) The Dynamics of Motivation in New Organizational Forms International Journal of the Economics of Business, Special Issue on New Organizational Forms 9:61–77

    Google Scholar 

  • Osterloh M., Frey B.S. (2004) Corporate Governance for Crooks. The Case for Corporate Virtue In: Grandori A. (eds) Corporate Governance and Firm Organization. Oxford University Press, Oxford, pp 191–211

    Google Scholar 

  • Osterman P. (1999) Securing Prosperity. Princeton University Press, Princeton, N J

    Google Scholar 

  • O’Reilly III C.A., Main B.G., Crystal G.S. (1988) CEO Compensation as Tournament and Social Comparison: A Tale of Two Theories Administrative Science Quarterly 33:257–274

    Article  Google Scholar 

  • Ouchi W.G. (1978) The Transmission of Control Through Organizational Hierarchy Academy of Management Journal 21:173–192

    Article  Google Scholar 

  • Penrose E.T. (1959) The Theory of the Growth of the Firm. Oxford University Press, Oxford

    Google Scholar 

  • Rajan R.G., Zingales L. (1998) Power in a Theory of the Firm The Quarterly Journal of Economics 113:387–432

    Article  Google Scholar 

  • Romme G.L. (2004) Unanimity Rule and Organizational Decision Making: A Simulation Model Organization Science 15:704–718

    Article  Google Scholar 

  • Rousseau D.M. (1995) Psychological Contracts in Organizations: Understanding Written and Unwritten Agreements Sage Publications, Thousand Oaks: London and New Delhi

    Google Scholar 

  • Rumelt R. (1984) Towards a Strategic Theory of the Firm. In: Lamb R. (eds) Competitive Strategic Management. Prentice Hall, Englewood Cliffs: NJ, pp 556–570

    Google Scholar 

  • Scott W.R. (1966) Professionals in Bureaucracies – Areas of Conflict. In: Vollmer H.M., Mills D.L. (eds) Professionalization. Prentice Hall Inc. Englewood Cliffs, NJ, pp 265–275

    Google Scholar 

  • Shleifer A., Vishny R. (1997) A Survey of Corporate Governance Journal of Finance 52(1):35–55

    Article  Google Scholar 

  • Spector B. (2003) The Unindicted Co-Conspirator Organizational Dynamics 32:207–220

    Article  Google Scholar 

  • Spender J.C. (1996) Making Knowledge the Basis of a Dynamic Theory of the Firm Strategic Management Journal 17(Winter Special Issue):45–62

    Google Scholar 

  • Steinmann, H.: 1990, “Corporate Governance”, in E. Grochla, et al. (eds.), Handbook of German Business Management. (Stuttgart: Poeschel), pp. 580–590

  • Strassmann, P. A.: 1999, “Measuring and Managing Knowledge Capital”, Knowledge Executive Report, June 1999

  • Teece D. (1987) Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy. In: Teece D. (eds) Competitive Challenge. Ballinger, New York

    Google Scholar 

  • Teece D.G., Pisano G., Shuen A. (1997) Dynamic Capabilities and Strategic Management Strategic Management Journal 18:509–533

    Article  Google Scholar 

  • Topel R.C. (1991) Specific Capital, Mobility, and Wages: Wages Rise With Job Security Journal of Political Economy 99:145–176

    Article  Google Scholar 

  • Tyler T.R., Blader S. (2003) Procedural Justice, Social Identity, and Cooperative Behavior Personality and Social Psychology Review 7:349–361

    Article  Google Scholar 

  • Wegner D.M. (1986) Transactive Memory: A Contemporary Analysis of the Group Mind. In: Mullen B., Goethals G.R. (eds) Theories of Group Behaviour. Springer, New York, pp 185–208

    Google Scholar 

  • Williamson O.E. (1985) The Economic Institutions of Capitalism. the Free Press, New York

    Google Scholar 

  • Zingales L. (1998) Corporate Governance. In: Newman P. (eds) The new Palgrave Dictionary of Economics and the Law, Vol. 1. Macmillan, London, pp 497–503

    Google Scholar 

  • Zingales L. (2000) In Search of New Foundations The Journal of Finance LV(4):1623–1653

    Article  Google Scholar 

  • Zwick T. (2004) Employee Participation and Productivity Labour Economics 11:715–740

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Institute for Organization and Administrative Science, University of Zurich, Plattenstrasse 14, 8032, Zürich, Switzerland

    Margit Osterloh

  2. Institute of Empirical Research in Economics, University of Zurich, Bluemlisalpstrasse 10, CH-8006, Zürich, Switzerland

    Bruno S. Frey

Authors
  1. Margit Osterloh
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Bruno S. Frey
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Margit Osterloh.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Osterloh, M., Frey, B.S. Shareholders Should Welcome Knowledge Workers as Directors. J Manage Governance 10, 325–345 (2006). https://doi.org/10.1007/s10997-006-9003-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10997-006-9003-4

Keywords

JEL Classification

Search

Navigation