Hierarchy and managers matter more than ever in the digital age: unexamined psychological transaction costs in bossless companies

In reviewing Why Managers Matter: The Perils of the Bossless Company, by Nicolai Foss and Peter Klein, I summarize their main argument, when both costs and benefits of bossless companies are considered, hierarchal form should be discriminately aligned with transaction characteristics. Then, I further illustrate that bossless firms: (1) allow for holdup, (2) motivate employee opportunism, and (3) prevent benevolence trust development. This is due to the locus of asset specificity in digital product development, as well as psychological transaction costs arising from employee motivations, and impediments to trust development in bossless companies. Using these dimensions, I predict bossless firms only efficiently govern digital age exchanges with low transaction hazards. Finally, I critically examine Foss and Klein’s biological argument for hierarchy and its link to gender, suggesting it undermines their main proposition for discriminating alignment. We are experiencing a digital transformation forecast to significantly change business and society (e.g., Schwab 2016). Experts predict this fourth industrial revolution not only requires substantial change to our skillsets (Lent 2018), who we manage (Borenstein 2011), how we manage (Wilson et al. 2004), and how we manufacture (Balakrishnan et al. 1999), but also how we organize our companies (e.g., Ganesh & Stohl 2020). Regarding the latter, popular wisdom suggests transforming all companies from traditional hierarchies to bossless companies in the digital age (e.g., Hamel 2011; Hamel & Zanini 2020; Laloux 2014). This one-size-fits-all organizational prescription is precisely what Foss and Klein deftly push back on in Why Managers Matter: The Perils of the Bossless Company. As such, their book could not have arrived at a more critical time for managers in the ever-changing landscape of the digital age, as the right organizational design may be the difference between profitability and bankruptcy. Foss and Klein persuasively argue the bossless company perspective only considers the benefits of flat organizations, while ignoring their downsides. When these costs are considered, they suggest both flat and traditional hierarchies have distinct strengths and weaknesses, making each more suitable to govern transactions with very different characteristics. Although they only allude to transaction cost economics (TCE) (Williamson 1985), Foss and Klein’s discriminating alignment logic is consistent with this approach. Additionally, I analyze novel psychological transaction costs in bossless companies arising from employee motivations and impediments to trust development. This further analysis reaffirms that TCE, also criticized as irrelevant in today’s environment (Downes 2009), is instead vital.

In reviewing Why Managers Matter: The Perils of the Bossless Company, by Nicolai Foss and Peter Klein, I summarize their main argument, when both costs and benefits of bossless companies are considered, hierarchal form should be discriminately aligned with transaction characteristics. Then, I further illustrate that bossless firms: (1) allow for holdup, (2) motivate employee opportunism, and (3) prevent benevolence trust development. This is due to the locus of asset specificity in digital product development, as well as psychological transaction costs arising from employee motivations, and impediments to trust development in bossless companies. Using these dimensions, I predict bossless firms only efficiently govern digital age exchanges with low transaction hazards. Finally, I critically examine Foss and Klein's biological argument for hierarchy and its link to gender, suggesting it undermines their main proposition for discriminating alignment.
We are experiencing a digital transformation forecast to significantly change business and society (e.g., Schwab 2016). Experts predict this fourth industrial revolution not only requires substantial change to our skillsets (Lent 2018), who we manage (Borenstein 2011), how we manage (Wilson et al. 2004), and how we manufacture (Balakrishnan et al. 1999), but also how we organize our companies (e.g., Ganesh & Stohl 2020). Regarding the latter, popular wisdom suggests transforming all companies from traditional hierarchies to bossless companies in the digital age (e.g., Hamel 2011;Hamel & Zanini 2020;Laloux 2014). This one-size-fits-all organizational prescription is precisely what Foss and Klein deftly push back on in Why Managers Matter: The Perils of the Bossless Company. As such, their book could not have arrived at a more critical time for managers in the ever-changing landscape of the digital age, as the right organizational design may be the difference between profitability and bankruptcy.
Foss and Klein persuasively argue the bossless company perspective only considers the benefits of flat organizations, while ignoring their downsides. When these costs are considered, they suggest both flat and traditional hierarchies have distinct strengths and weaknesses, making each more suitable to govern transactions with very different characteristics. Although they only allude to transaction cost economics (TCE) (Williamson 1985), Foss and Klein's discriminating alignment logic is consistent with this approach. Additionally, I analyze novel psychological transaction costs in bossless companies arising from employee motivations and impediments to trust development. This further analysis reaffirms that TCE, also criticized as irrelevant in today's environment (Downes 2009), is instead vital.

Discriminant alignment of hierarchical forms
Foss and Klein's main assertion is that bossless companies are not always the most effective organizational form in the digital age, despite current management rhetoric. Instead, when both strengths and weaknesses of bossless organizations are considered, the authors argue for discriminating alignment between hierarchical form (bossless versus traditional) and transactions characteristics, rather than always embracing flat organizations in the digital age.
Their valid critique and resulting argument stem from basic logic underlying TCE (Williamson 1985), which Foss and Klein refer to indirectly when suggesting basic economic theory argues firms would not exist without managers "otherwise everyone would be an independent contractor" (pg. 15). In fact, recent studies by Foss and co-authors (Foss and Weber 2016;Weber et al. 2023) apply TCE logic to choosing an efficient hierarchical form. Specifically, they dimensionalize simple hierarchies, U-forms, M-forms, and project matrices; and match them to transaction characteristics for efficient internal governance. In their book, Foss and Klein begin to extend this thinking to the choice of bossless companies. Like Williamson (1985), the authors point to specific exchange characteristics that increase the potential for transaction costs. However, instead of holdup, they focus on coordination. Foss and Klein correctly argue coordination is particularly critical in the digital age, as the turbulent environment increases the likelihood of unexpected disruptions, requiring quick and frequent adaptation. Further, they suggest when tasks are time-sensitive, complex and/or interdependent, coordination is necessary. Alternatively, they argue when tasks require simple technology, are in a stable industry, or are decomposable, coordination is unnecessary.
Echoing Williamson (1991), the authors dimensionalize bossless and traditional governance forms on the basis of coordination. They argue traditional hierarchy facilitates coordination through fiat, well-defined roles, and rules, while bossless companies hamper coordination because they lack "structure, transparency, supervision, and leadership" (pg. 16). Thus, they propose traditional hierarchy more efficiently governs exchanges requiring coordination than flat hierarchy.

Psychological transaction costs in the digital age
The bossless company perspective argues blockchain technology and intrinsic motivation of millennial and Gen Z employees eliminate opportunistic behavior, so traditional hierarchy's administrative mechanisms are no longer required. However, while these aspects of the digital age may reduce some transaction costs, I argue bossless companies themselves create novel psychological ones (e.g., Weber and Mayer 2011). Moreover, when they are accounted for, bossless companies are not as well-suited for the digital age as suggested by the current rhetoric.
Bossless companies allow for holdup Asset specificity (Williamson 1985), which drives holdup, is still a key source of holdup in the digital age. While the bossless company narrative argues holdup is eliminated by blockchain technology, it omits that individuals coding smart contracts are boundedly rational. So, just like formal contracts, these instruments are also incomplete, suggesting they cannot address frequent unexpected disturbances characteristic of the digital age. Thus, these unanticipated disturbances are likely to lead to holdup, as employees attempt to adapt to unexpected exchange conditions.
In the digital age, many products are digital (e.g., NFT, clothing and real estate in the meta-verse), suggesting that knowledge assets developed by either individuals or AI are required. When the asset is usable only in a single transaction, asset specificity creates the potential for holdup (Williamson 1985). When an individual develops the asset, human asset specificity increases the likelihood of holdup in the event of an unexpected disturbance. In contrast, if AI creates the same specific asset, hold up is unlikely, as at least non-sentient AI is unmotivated to withhold the specific asset for financial gain. Thus, transaction costs from holdup still arise in bossless firms because of human asset specificity.
Bossless companies motivate employee opportunism Further, bossless companies do not prevent employees' opportunistic behavior, but rather promote it. Millennials and Gen Z employees are said to be intrinsically motivated, implying that managerial monitoring demotivates them (Laloux 2014). Yet, most employee motivation studies suggest these generations have mixed motives at work. For example, millennials employees are largely extrinsically motivated to avoid guilt or anxiety. In contrast, Gen Z workers are both extrinsically motivated by material rewards and intrinsically motivated (Mahmoud et al. 2020). Thus, both millennial and GenZ employees may behave opportunistically, depending on the situation.
Furthermore, the organization itself influences employee motivation (Weber et al. 2023). In bossless companies, individuals join transient teams. As such, their individual identity is salient, leading to the dominance of individuallevel motivations. Individual-level hedonic goal frames typically dominate, motivating effort or visceral opportunism in employees in bossless companies. Additionally, individuallevel gain goal frames in their cognitive background spur financial and status opportunism. Thus, bossless companies create novel psychological transaction costs by motivating all forms of individual opportunism, rather than preventing them. In contrast, Weber et al. (2023) argue traditional (simple) hierarchy motivates firm-level cooperation, mitigating opportunistic behavior, and as a result, reducing these same costs.
Bossless companies prevent benevolence trust development Bossless companies also prevent benevolence trust development, which can mitigate opportunism in ex post haggling (Bromiley and Harris 2006). When an exchange is positively executed, three types of trust may develop: integrity, ability, and benevolence (Mayer et al. 1995). See Table 1.
Automatic exchange execution under blockchain generates high integrity trust (doing what is expected) in the exchange technology, and perhaps in the partner who agreed to these exchange terms. However, ability trust is unlikely to develop, given blockchain is best suited for more market-like exchanges, such as resource transfer inside firms. In addition, employees cannot develop benevolence trust because no one is vulnerable to another. While ability and integrity trust matter when employees consider with whom to enter into an internal exchange, benevolence trust is necessary to reduce opportunistic behavior when an unexpected disturbance arises (Bromiley and Harris 2006). Yet, blockchain prevents this trust from forming.
When an unanticipated disturbance occurs, blockchain still automatically executes the exchange, despite the unexpected circumstances. This outcome often leads one party to perceive unfair treatment, leading to negative emotions that increase the likelihood of opportunistic behavior, creating psychological transaction costs. In contrast, traditional hierarchy requires manual contract execution, so renegotiation can occur before exchange execution. Further, manual exchange execution allows for vulnerability, fostering benevolence trust between employees, which facilitates negotiations and lowers psychological transaction costs.

Efficient governance in the digital age
When these three aspects are considered together, bossless firms do not efficiently govern exchanges featuring human asset specificity in the digital age. Human asset specificity allows for holdup. If this type of exchange is governed by a bossless company, holdup occurs because employees are motivated by financial or status opportunism. While blockchain automatically executes the exchange to prevent holdup, this only works if the exchange environment is stable. In the digital age, this is not the case. Instead, frequent unanticipated disturbances coupled with automatic exchange execution allows for holdup during ex post haggling. Moreover, benevolence trust is not developed in bossless firms to smooth these negotiations, so they do not efficiently govern exchanges characterized by human asset specificity in the digital age.
In contrast, when specificity arises from AI, there is no opportunity for holdup to occur, so a bossless organization is efficient even in the turbulent environment of the digital age. As a result, bossless firms only efficiently govern low transaction hazard exchanges in the digital age, while traditional hierarchy is needed for exchanges with human asset specificity. Thus, bossless firms are not a panacea for the digital age, but rather are likely to be more well-suited to internal exchanges in stable environments. See Table 2 for a summary.

The problem with humans hardwired for hierarchy
While Foss and Klein's main argument for discriminating alignment is both strong and logical, one assertion is less convincing and in fact undermines their main claim, the biological basis of hierarchy and its link to persistent gender differences in top management positions. Specifically, the authors argue humans are biologically wired for hierarchy, pointing to support from an MRI study, and experiments on fluency and group composition with varying testosterone levels. They then link this biological evidence to gender roles in family hierarchies and finally to formal business hierarchies. In doing so, Foss and Klein make a case for men leading both the family and firms, with women playing a subordinate role.
However, there are three issues with their argument. First, the fluency study offered as evidence for a biological basis of hierarchy does not support this point. Instead, it shows a preference for hierarchy when it is the familiar choice, not necessarily in all cases (Zink et al. 2008;Zitek and Tiedens 2012). Thus, it provides evidence that individuals are biologically wired for familiarity, not hierarchy. Second, significant evidence refuting their point exists but is not presented, leading to an echo of their critique of "cherry-picking" leveled at the bossless company narrative. For example, they cite a study showing groups of students with mixed versus (2) lower childhood socioeconomic status may simultaneously lead to shorter stature, less education and less opportunities for management positions (e.g., Case et al. 2005); and 3) persistent social barriers to women's advancement in organizations through the years (e.g., Ragins et al. 1998). Moreover, other evidence suggests testosterone induces both stereotypical male (aggressive) and female (prosocial) behavior (Van Honk et al. 2011). Additionally, many similarities, but no systematic differences have been observed in comparisons of male and female brains in numerous MRI studies (e.g., Joel et al. 2015). Thus, there is significant evidence to argue that there is no biological basis for hierarchy nor for specific positions within it based on gender. More importantly, however, the argument for a biological basis for hierarchy undermines Foss and Klein's strong argument for discriminant alignment of hierarchical forms. If a strong biological basis for hierarchy existed, individuals would automatically form them even when they are inefficient. This innate tendency would significantly weaken the authors' argument for discriminating alignment and efficient governance. Thus, this argument is not only a distraction to the otherwise strong contribution of their book, but actually undercuts their key point.

Conclusion
To summarize, Foss and Klein's book Why Managers Matter: The Perils of the Bossless Company is a strong critique of the bossless company narrative prevalent today. As such, I would strongly encourage managers to read this book before undertaking this costly and misguided step of reorganization in the digital age. Foss and Klein's argument of a discriminating alignment of transaction characteristics and governance traits of bossless versus traditional hierarchy is logical, well laid out and easy for managers to follow. Further, their main idea can be extrapolated to understand when holdup is likely in the digital age and how bossless companies exacerbate rather than mitigate it, by creating psychological transaction costs based on motivation and impediments to trust development. This insight highlights the importance of examining psychological transaction costs when determining an efficient hierarchical form, and the need for TCE in the digital age. Finally, the authors' deviation into the biological basis of hierarchy and its connection to gender roles is not only an unnecessary distraction but undermines their thesis of discriminating alignment and efficient governance.
Author contributions LW wrote and edited the paper. The author read and approved the final manuscript.
Data availability There is no data used in this manuscript.