From Hybrid Organizations to Social-purpose Hierarchies: Toward a Transaction Cost Economics of Social Enterprises

Abstract

Building on Oliver E. Williamson’s work, this article lays the basis for a transaction cost theory of social enterprises. It is submitted that the more proprietary-centred the creation of value is, the lower the governance costs of economizing on bounded rationality to protect patrons from the hazard of opportunism. Since not all productive activities can be organized within the range of the lowest governance costs, a discrete structural analysis is developed, with different ranges of governance costs suitable for different purposes depending on the kinds of value creation intended and the class of patrons to be protected. Accepting higher governance costs is justified by preventing the exploitation of bargaining asymmetries at the expense of selected classes of patrons like disadvantaged customers and stakeholders at large, subject to what is feasible, or Williamson’s remediableness standard.

JEL: D23, M14

Keywords

Transaction costs hybrid organizations social enterprises benefit corporations

Get full access to this article

View all access options for this article.

References

Agafonow

(2015). Value creation, value capture, and value devolution: Where do social enterprises stand? Administration & Society, 47(8), 1038–1060. Retrieved from http://doi.org/10.1177/0095399714555756

Agafonow

(2017a). Design thinking and social enterprises: A solution-focused strategy for social enterprise research. European Management Review, 1–15. Retrieved from http://doi.org/10.1111/emre.12152

Agafonow

(2017b). Transaction costs and business ethics. In Poff

D. C.

& Michalos

A. C.

(Eds.), Encyclopedia of business and professional ethics (pp. 1–4). Springer International Publishing. Retrieved from http://doi.org/10.1007/978-3-319-23514-1_175-1

Agafonow

(2018). Setting the bar of social enterprise research high. Learning from medical science. Social Science & Medicine, 214, 49–56. Retrieved from http://doi.org/10.1016/J.SOCSCIMED.2018.08.020

Akerlof

G. A.

(1970). The market for ‘lemons’: Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), 488–500.

Armendáriz

, & Morduch

(2010). The economics of microfinance (2nd ed.). Cambridge, MA: The MIT Press.

Bailey

(2015). What makes Zara so good? Retrieved from http://www.worldfinance.com/infrastructure-investment/what-makes-zara-so-good

Battilana

, & Dorado

(2010). Building sustainable hybrid organizations: The case of commercial microfinance organizations. Academy of Management Journal, 53(6), 1419–1440. Retrieved from http://doi.org/10.5465/AMJ.2010.57318391

Battilana

, & Lee

(2014). Advancing research on hybrid organizing—Insights from the study of social enterprises. Academy of Management Annals, 8(1), 397–441. Retrieved from http://doi.org/10.1080/19416520.2014.893615

10.

Battilana

, Lee

, Walker

, & Dorsey

(2012). In search of the hybrid ideal. Stanford Social Innovation Review, 10(3), 51–55.

11.

Bromley

, & Powell

W. W.

(2012). From smoke and mirrors to walking the talk: Decoupling in the contemporary world. Academy of Management Annals, 6(1), 483–530. Retrieved from http://doi.org/10.1080/19416520.2012.684462

12.

Coase

R. H.

(1937). The nature of the firm. Economica, 4(16), 386–405. Retrieved from http://doi.org/10.1111/j.1468-0335.1937.tb00002.x

13.

Cosmides

, & Tooby

(1994). Better than rational: Evolutionary psychology and the invisible hand. The American Economic Review, 84(2), 327–332. Retrieved from http://doi.org/10.2307/2117853

14.

Crilly

, Zollo

, & Hansen

M. T.

(2012). Faking it or muddling through? Understanding decoupling in response to stakeholder pressures. Academy of Management Journal, 55(6), 1429–1448. Retrieved from http://doi.org/10.5465/amj.2010.0697

15.

Donaldson

, & Preston

L. E.

(1995). The stakeholder theory of the corporation: Concepts, evidence, and implications. Academy of Management Review, 20(1), 65–91. Retrieved from http://doi.org/10.5465/AMR.1995.9503271992

16.

Ebrahim

, Battilana

, & Mair

(2014). The governance of social enterprises: Mission drift and accountability challenges in hybrid organizations. Research in Organizational Behavior, 34, 81–100. Retrieved from http://doi.org/10.1016/j.riob.2014.09.001

17.

Evan

W. M.

, & Freeman

E. R.

(1993). A stakeholder theory of the modern corporation: Kantian capitalism. In Beauchamp

T. L.

& Bowie

N. E.

(Eds.), Ethical theory and business (3rd ed., pp. 97–106). Englewood Cliffs, NJ: Prentice Hall.

18.

Fiss

P. C.

, & Zajac

E. J.

(2006). The symbolic management of strategic change: Sense giving via framing and decoupling. Academy of Management Journal, 49(6), 1173–1193. Retrieved from http://doi.org/10.5465/AMJ.2006.23478255

19.

Freeman

E. R.

, Harrison

J. S.

, Wicks

A. C.

, Parmar

, & Colle

S. de

. (2010). Stakeholder theory. The state of the art. Cambridge, UK: Cambridge University Press.

20.

Hansmann

H. B.

(1980). The role of nonprofit enterprise. The Yale Law Journal, 89(5), 835–901.

21.

Hansmann

H. B.

(1988). Ownership of the firm. Journal of Law, Economics, & Organization, 4(2), 267–304.

22.

Hansmann

H. B.

(2000). The ownership of enterprise. Cambridge, MA and London, UK: The Belknap Press of Harvard University Press.

23.

Hennart

J.-F.

(1993). Explaining the swollen middle: Why most transactions are a mix of ‘market’ and ‘hierarchy’. Organization Science, 4(4), 529–547. Retrieved from http://doi.org/http://dx.doi.org/10.1287/orsc.4.4.529

24.

Hill

C. W. L.

, & Jones

T. M.

(1992). Stakeholder-agency theory. Journal of Management Studies, 29(2), 131–154. Retrieved from http://doi.org/10.1111/j.1467-6486.1992.tb00657.x

25.

Jay

(2013). Navigating paradox as a mechanism of change and innovation in hybrid organizations. Academy of Management Journal, 56(1), 137–159. Retrieved from http://doi.org/10.5465/amj.2010.0772

26.

Jensen

M. C.

(2002). Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12(2), 235. Retrieved from http://doi.org/10.2307/3857812

27.

Jones

T. M.

, Donaldson

, Freeman

E. R.

, Harrison

J. S.

, Leana

C. R.

, Mahoney

J. T.

, & Pearce

J. L.

(2016). Management theory and social welfare: Contributions and challenges. Academy of Management Review, 41(2), 216–228. Retrieved from http://doi.org/10.5465/amr.2016.0012

28.

Kahneman

, Knetsch

J. L.

, & Thaler

(1986). Fairness as a constraint on profit seeking: Entitlements in the market. The American Economic Review, 76(4), 728–741.

29.

MacLeod Heminway

(2017). Corporate purpose and litigation risk in publicly held U.S. benefit corporations. Seattle University Law Review, 40(2), 611–682.

30.

Mair

, Mayer

, & Lutz

(2015). Navigating institutional plurality: Organizational governance in hybrid organizations. Organization Studies, 36(6), 713–739. Retrieved from http://doi.org/10.1177/0170840615580007

31.

Marcoux

A. M.

(2003). A fiduciary argument against stakeholder theory. Business Ethics Quarterly, 13(1), 1–24. Retrieved from http://doi.org/10.5840/beq20031313

32.

McGregor

(2016). The ‘zombie directors’ who lurk on corporate boards. The Washington Post. Retrieved https://www.washingtonpost.com/news/on-leadership/wp/2016/11/07/the-zombie-directors-who-lurk-on-corporate-boards/?utm_term=.6846a82e7f57

33.

McMullin

(1978). Structural explanation. American Philosophical Quarterly, 15(2), 139–147.

34.

Ménard

(2010). Hybrid organizations. In Klein

P. G.

& Sykuta

M. E.

(Eds.), The Elgar companion to transaction cost economics (pp. 176–184). Cheltenham, UK and Northampton, MA: Edward Elgar Publishing.

35.

Mintzberg

(1993). Structure in five. Designing effective organizations. Englewood Cliffs, NJ: Prentice Hall.

36.

Ortmann

, & Schlesinger

(2003). Trust, repute and the role of non-profit enterprise. In Anheier

& Ben-Ner

(Eds.), The study of the nonprofit enterprise. Theories and approaches (pp. 77–114). New York, NY: Kluwer Academic/Plenum Publishers.

37.

Ouchi

W. G.

(1980). Markets, bureaucracies, and clans. Administrative Science Quarterly, 25(1), 129–141. Retrieved from http://doi.org/10.2307/2392231

38.

Pache

A.-C.

, & Santos

F. M.

(2012). Inside the hybrid organization: Selective coupling as a response to competing institutional logics. Academy of Management Journal, 56(4), 972–1001. Retrieved from http://doi.org/10.5465/amj.2011.0405

39.

Porter

M. E.

, & Kramer

M. R.

(2011). Creating shared value. Harvard Business Review, 89(1–2), 2–17.

40.

Quine

W. V.

(1951). Two dogmas of empiricism. The Philosophical Review, 60(1), 20–43.

41.

Smith

W. K.

, & Lewis

M. W.

(2011). Toward a theory of paradox: A dynamic equilibrium model of organizing. Academy of Management Review, 36(2), 381–403.

42.

Solomon

S. D.

(2012, March 20). The case against staggered boards. The New York Times. Retrieved from https://dealbook.nytimes.com/2012/03/20/the-case-against-staggered-boards/?_r=0

43.

Stewart

J. B.

(2015, September 24). Problems at Volkswagen start in the boardroom. The New York Times. Retrieved from https://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html

44.

Thomson

J. D.

(2003). Organizations in action. Social science bases of administrative theory. New Brunswick, NJ: Transaction Publishers.

45.

Valentinov

(2008). The transaction cost theory of the non-profit firm: Beyond opportunism. Nonprofit and Voluntary Sector Quarterly, 37(1), 5–18.

46.

Valentinov

(2015). Value devolution in social enterprises: Institutional economics and systems theory perspectives. Administration & Society, 1–8. Retrieved from http://doi.org/10.1177/0095399715593316

47.

Westphal

J. D.

, & Zajac

E. J.

(2001). Decoupling policy from practice: The case of stock repurchase programs. Administrative Science Quarterly, 46(2), 202. Retrieved from http://doi.org/10.2307/2667086

48.

Williamson

O. E.

(1979). Transaction-cost economics: The governance of contractual relations. Journal of Law and Economics, 22(2), 233–261.

49.

Williamson

O. E.

(1984a). Corporate governance. The Yale Law Journal, 93(7), 1197–1230. Retrieved from http://doi.org/10.2307/796256

50.

Williamson

O. E.

(1984b). The economics of governance: Framework and implications. Journal of Institutional and Theoretical Economics, 140(1), 195–223.

51.

Williamson

O. E.

(1988). The logic of economic organization. Journal of Law, Economics, & Organization, 4(1), 65–93.

52.

Williamson

O. E.

(1991). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36(2), 269–296. Retrieved from http://doi.org/10.2307/2393356

53.

Williamson

O. E.

(1993). Transaction cost economics and organization theory. Industrial and Corporate Change, 2(1), 107–156. Retrieved from http://doi.org/10.1093/icc/2.1.107

54.

Williamson

O. E.

(1995). Legal implications of imperfect information in consumer markets: Comment. Journal of Institutional and Theoretical, Economics (JITE)/Zeitschrift Für Die Gesamte Staatswissenschaft, 151(1), 49–51.

55.

Williamson

O. E.

(2008). Outsourcing: Transaction cost economics and supply chain management. The Journal of Supply Chain Management, 44(2), 5–16. Retrieved from http://doi.org/10.1111/j.1745-493X.2008.00051.x

56.

Williamson

O. E.

, & Bercovitz

(1996). The modern corporation as an efficiency instrument: The comparative contracting perspective. In Kaysen

(Ed.), The American corporation today (pp. 327–359). Oxford, UK: Oxford University Press.

57.

Yglesias

(2014, January). The prophet of no profit. How Jeff Bezos won the faith of wall street. Slate. Retrieved from http://www.slate.com/articles/business/moneybox/2014/01/amazon_earnings_how_jeff_bezos_gets_investors_to_believe_in_him.html

58.

Yunus

, & Weber

(2010). Building social business. The new kind of capitalism that serves humanity’s most pressing needs. New York, NY: Public Affairs.