CAIRN-INT.INFO : International Edition

1 – Introduction

1Since the seminal work of Coase [1937], the question of the nature of the firm has fueled academic debates well beyond the field of economics. However, it remains difficult to sketch the form of any consensus on this issue. Discussions on the subject have been intense, divisive, and sometimes heated between economists, lawyers, and sociologists in time. Nonetheless, the question has not been adequately investigated, and it thus presents a conceptual opportunity for scholars to investigate the fertile complementarity between the private and public normative orderings of capitalist firms, notably regarding the history of organizational thought. By normative order, we mean a regulatory standard regarding industrial relations applicable for a given time to real entities—here, firms. Therefore, private normativity refers to the internal ordering of a firm, while public normativity refers to positive legal structure that is external to a firm. The analysis of normative complementarities should be encouraged from a conceptual and historical perspective to better define the nature of the firm.

2Recent developments in organizational economics that relax classical assumptions (e.g., the substantive rationality of economic agents or the assumption of behavioral opportunism) and/or incorporate relational dynamics in their analyses [see the organizational economics textbook by Gibbons and Roberts [2013] are encouraging, but extant research rarely studies the entanglement of the two forms of normativity [for a review of the role of economic normative orderings on industrial relations, see Bargain [2015]). Similarly, the advances in experimental economics in the industrial relations field has achieved real scientific progress [Fehr and Fischbacher Gächter, 2002; Fehr, Bartling and Schmidt, 2013]. Nevertheless, these works have not really helped elucidate the nature of normativity in firms, and its role in regulating modern industrial relations. Hence, we think that the research question on the nature of normative orderings in firms deserves to be investigated from an analysis of the organizational thought of industrial pluralism, which is often based on an institutionalist perspective of the political economy.

3To question normativity the firm must be considered within the context of a political “economicity,” in which the arrangement and organization of industrial relations form multidimensional power relations that structure the collective action and therefore the “productive efficiency” of the firm (see Chassagnon, 2014). As an anthropologist, Smith [2007, 1974] suggests in a historical perspective that firms are the basic units of social structures and political action. Regarding policy and referring to the self-regulatory function of firms’ current businesses that create these spaces of power, Smith [2007, 1974] explains that firms implement authoritarian internal modes [i.e., sets of exclusive rights (universitas juris) that provide a normative structure]. The question of the nature of the normative orderings of the firm is thus central to understanding the conditions for the emergence of a new productive compromise between stakeholders and, notably, between capital and labor [see Commons, 1924].

4Although private regulatory mechanisms are embedded in an external public order, firms develop private self-regulatory mechanisms that guide the members of the organization and link them together in their production activities, despite formal contractual arrangements. Regarding the question of the nature of the firm, it appears that the internal organization of this fundamental institution of market economies is characterized by heterogeneous normative orderings. Nevertheless, the firm is more than a legal concept [see Phillips, 1994; Gindis, 2009; 2016; Chassagnon, 2012; 2014]—although it is influenced by and influences the law. Ultimately, for mainstream economics, the firm is often perceived as only the sum of the contracts that serve as support in positive law. Schematically, corporate law recognizes the corporation as fiction [Joo, 2002], to the extent that it exists only when legislators recognize it as an economic ordering [Gordon, 1997]. However, this does not mean that the firm cannot be a normative order. Instead, the firm is a private arena of power relations that must serve its general interest. Firms are private entities, but they explicitly contribute to public general interest (i.e., they are private entities that serve society and its development and they concern the most active people, they are at the heart of their living conditions and physiological recovery, they contribute greatly to gross domestic product, and they have an enormous impact on the ecological protection).

5In this sense, the firm is a political and economic order, which clearly concerns the social and legal nature of this relational productive entity. Therefore, several questions arise from the economic thought of industrial pluralism: Where then can the firm be located in relation to an internal social ordering and a state public order? Accordingly, how can the private nature of the firm, which governs its internal industrial relations, be characterized? By extension, what kind of normative regulation can be implemented in the capitalist firm?

6This article is organized into three sections based on the economic analysis of industrial pluralism in firms. The first section aims to demonstrate that the firm as a private economic entity conceals “legal no-go” areas based on social norms and other informal arrangements. In the second section, the central and longest part of the paper, we focus on the increasing influence of dynamic relational contracts and power relationships in the regulation of employment relationships, which—in the spirit of Williamson [1985]—are the heart of the capitalist firm. Within this perspective, we rely on the development of a double control and regulation logic and the entanglement of private and public orderings. Thus, the union of the two normative orderings leads us to understand the relations of power in the firm through a triple perspective: authority, de jure power, and de facto power. Research perspectives related to the governance of modern firms as political entities are proposed in a third section that pursues the modern economic view of industrial pluralism.

2 – Social norms, informal regulation, and internal private ordering: the building blocks of a theoretical field in the thought of industrial pluralism

7One of the most faithful representatives of the law and economics perspective is undoubtedly Manne [1967], for whom legal formalism—especially contract law—is at the heart of economic efficiency. However, parallel to this specific point of view, we have seen certain positions advocating the recognition of legal pluralism in the history of organizational economics, for which we would consider the social nature of contracts and other institutional arrangements. The public legal ordering coexists with a private internal ordering marked by social norms and various types of rules regarding organizational loyalty.

8In addition to states, firms are the most influential economic actors in the capitalist system. In industrial regulatory projects, firms are observed to be unavoidable—even if they do not exist as such in the (positive) constituent structure of globalized societies (see supra). Nevertheless, this “contractual incompleteness” does not prevent firms from working, for being responsible for the fate of thousands of people, and for bolstering the growth of host countries (when the firm acts beyond national boundaries and beyond state powers). As soon as it is viewed as an end in itself, the firm becomes an organized institution [see Chassagnon 2014; Hodgson, 2015] that develops its own values and its own rules that are affiliated with a law not recognized as such by the (positive) right of the “state”.

9The law is not an epiphenomenon; instead, the law constitutes a reality that escapes the firm, which does not mean that the law does not make sense for the firm but that it makes sense to other (non-legal) institutional realities of the firm, such as its informal dynamics. Such a remark applies to most societal relations, but is particularly significant and explicit with respect to the firm, because the firm is primarily a dynamic entity, constantly changing, and continually adapting to changing environments. Thus, the firm must continually implement new policies and new organizational standards. Any productive activity is based on institutional arrangements [Aoki, 2007], and all institutional arrangements require a social substrate. The institutions of modern societies are the result of social interactions that are embedded in formal constitutive rules (see the historical point of view of North, Wallis and Weingast [2009]).

10Social institutions must accept the rules imposed by the state power, which differ in the constraints that they create based on the preferred modes of regulation in different countries. However, these institutions can also develop, influence, and interpret these rules privately, as long as they do not come in conflict with the law, customs, and other manners of society. Thus, the very private nature of firms explicitly refers to the internal organization of the firm. This central argument is at the heart of the theoretical heuristic proposed in transaction cost economics by the 2019 Nobel Prize Laureate, Williamson whose work on industrial pluralism in firm governance has had a central role in the history of organizational thought.

11Williamson [1985, 2002] clearly recognizes the existence of an enforceable legal system and a private, internal nature of firms, which corresponds to the personal rights of firms. Specifically, the internal governance structure of the firm is influenced not only by the institutional environment that sets the rules of the game but also by the parallel development of rules and procedures that are specific to the firm that allow it to regulate its own organizational behavior and function in its own environment. The private ordering is specific to and defined by the firm itself.

12Governance of private firms is a property of the contractual relationship networks that could be established in part by law regarding the conduct of economic activities. Positive and state rules are based on external influences regarding the internal organization of firms, and they are based on their hierarchical position with respect to the ultimate regulatory standards. On the contrary, the private nature that governs the internal social organization of the firm results in a political balance among different members. Nevertheless, firms generate internal rules that may face threats of sanctions by the very members of the organization itself. The private internal ordering of the firm is based on intrinsic organizational standards and complements positive law. In an industrial pluralism perspective, transaction cost theorists consider that firms spontaneously create their own law allowing them to regulate themselves, not only internally [Williamson, 2002] but also vis-à-vis external suppliers (see Héritier, Mueller-Debus and Thauer [2009] on an extension of the Williamson’s heuristic).

13On different occasions, Williamson focused on this crucial idea that his organizational approach perpetuates an old school of thought that makes industrial pluralism the heart of the firm’s analysis. He based his works on major managerial authors who have a great influence in the history of organizational thinking. Thus, in his 1938 book, Barnard emphasized the entanglement of the formal rational aspects resulting from law and the informal rational aspects stemming from the internal organization of firms. In other words, private normativity in firms exists because public normativity enables and even establishes it. It is the cornerstone of legal industrial pluralism. In a law and economics perspective major law authors, namely Shulman [1955], Cox [1958] and Summers [1969] have defended the thesis of the superiority of the legal model of industrial pluralism and notably the process of collective negotiation between employers and unions—compared with the model of legal centralism. In his 1985 book, Williamson uses several arguments developed by American labor lawyers representing the legal industrial pluralism who consider the firm as ‘island of self-rules’ [see Stone, 1992]. More specifically, according to Williamson [1991, 2002], the firm is a private normative ordering considered as both a hierarchical governance [1] structure and a private contractual arrangement. This approach to the firm as a private ordering is opposed to another legal tradition, namely, legal centralism. In summary, the model of legal industrial pluralism is considered a good system of labor relationship insofar as it is a ‘proposed’ model and not an ‘imposed’ model that establishes the autonomy of the firm, which is in accordance with the contractual tradition of the United States and the private nature of business institutional arrangements.

14More broadly, Williamson’s theory of the private nature recounts the complementarity between legal enforceability and private self-enforceability, which together draw upon the mechanisms of ordering (order-preserving mechanism), allowing firms to adapt to changes in their institutional environments [Williamson, 2002]. In this sense, the private nature of the firm avoids ex post opportunistic behavior by promoting relational contracts that correspond to their internal governance structure and the organizational design of their contractual relations [Furubotn and Richter, 2005; Richter, 2008]. Williamson [1985] considers that “sovereignty” in a firm—defined as the authority (the order) to resolve disputes between parties—is based on two principles (1) the authority of the courts that connect legal centralism and (2) the private nature of firms related to legal industrial pluralism. According to Williamson, the second refers to litigation settlements by the parties themselves (internally) without resorting to a third party, while the first, to quote Galanter, refers to an external control of the firm that provides remedies prescribed in the spirit of authoritarian learning and exercised by experts who officiate under the auspices of the state [Galanter, 1981].

15Moreover, the coexistence of different normative orderings is not devoid of economic efficiency considerations; the legal orderings and the “let live” private nature of firms’ internal organization are also reasons for cost savings [Williamson, 1985]. The entanglement of normative orderings serves firms’ growth in the long term, where private normativity is also sometimes termed economic normativity (and even “economizing” in Williamson). The firm as a collective entity based on specific organizational and institutional arrangements between persons is the archetype of legal industrial pluralism [2]. In other words, the collectively organized firm is in line with the system referred to as legal industrial pluralism, according to which the collective aspect of labor relations and laws must overshadow the individual aspects (see the work of Stone [1992], which completes the Williamson’s point of view).

16In a firm, regulatory principles are enriched by the full private ordering, which can prevent the firm from bearing additional transaction costs. Social norms emerge to govern and sustain productive activities as part of the long-term cooperation of the members of a firm. People interact with one another, share knowledge with one another, and respond to private initiatives, which ultimately allows them to avoid resorting to a third party to govern the conditions of production. Many lawyers—and also organizational economists close to Williamsonian thought within the field of law and economics [see, for example, Posner, 1997; Hart, 2001]—have highlighted the influence of social norms in firms’ governance mechanisms. In this regard, Rock and Wachter [2001] suggest that firms, in a context in which governance mainly imposes “rules and not legally enforceable standards,” would replace the positive legal system of contractual relations with such standards. In a 1999 article, Eisenberg deplores the absence of consideration of the emergence of social norms in the industrial process and particularly in corporate law. Specifically, he examines the interrelation between social norms and law and shows that non-compulsory social norms [3] accepted as part of individual belief systems are important to understanding the logic that underpins how firms operate.

17Members of a firm choose to be governed by their social norms rather than by law in their everyday relationships. In this sense, as Eisenberg asserts, social norms have a dual nature: they are rules and regularities. In firms, social norms, whether they are considered mandatory or not, are internalized privately. Moreover, we suggest that social norms result from specific properties of the group and not from a cost–benefit calculation that would reveal the “calculative” nature of individuals that mainstream economists largely rely on. These contributions are particularly notable because they demonstrate that within firms, inherent fiduciary duties apply to the firm as a whole and do not rely on formal rules. Eisenberg [1999] also asserts that in firms, a duty of loyalty emerges, which is encouraged by legal rules and social norms, and that this duty contributes to firms’ productive efficiency. Legal rules provide formal support that gives meaning to social norms, which reinforces the thought of old and new institutional theory regarding the intricacies of formal and informal rules within firms [see notably, Commons, 1924; North, 1990].

18Firms have a private legal system that does not emerge spontaneously as a natural ordering but instead occurs based on existing institutional structures. Beyond a firm’s official rules, it is essential to recognize in an industrial pluralism perspective the existence of a normative ordering to effectively analyze private firms and to not be confined to blindness by strict adherence to “legal centralism.” Law provides a normative ordering that is hierarchically unified, systematic, and exclusive and leaves no room for adaptation [Griffiths, 1986]. The reality, however, shows that other normative rules that guide human behavior in organizations are also operative. Examples in the literature have asserted that such “multiple systems of legal obligation” [Hooker, 1975, p. 2] break with the notion of systematic law.

19The notion of legal pluralism has developed impressively since the work of Galanter [1981] which was later often used by Williamson. For Moore [2014, p. 18], legal pluralism “lumps together official forms of law with clusters of unofficial rules.” The “new” legal pluralism [see Merry, 1986] emphasizes the coexistence of different systems of rules and various normative regulation processes. Nevertheless, legal pluralism is not a simplistic ideological approval of non-state laws. Encouraging the debate between positivists and representatives of the “natural” approach to law, legal pluralism theorists consider that there is no monopoly of the state regarding rights; instead, the law results from various normative orderings, such as the private nature of the firm.

20As Galanter [1981, p. 34] writes, “courts comprise only one hemisphere of the world of regulating and disputing. To understand them, we must learn how they interact with other normative orderings that pervade social life.” For him, individuals are guided by motivations, beliefs, and standards that can be legal—in the positive sense—and/or not legal.

21The private nature of firms subjects them to regulations that are not binding in positive law. However, many criticisms have been made regarding this logic of legal pluralism [see Aviram, 2004]. A question arises regarding the status of this private order: Is there a zone of lawlessness or limited extension of law? In essence, if we consider that the rights are from the legislator and therefore from state bodies, the ordering of private spaces constitutes “no law.” For example, Hodgson [2009] asserts that all societies contain a plural system of normative rules, but that does not mean there are plural systems of law. The private governance (normative rules) of a firm is not the law; instead, it is based on an institutional substrate that includes certain rights. Governance of a firm thus reflects a type of middle ground between private and public normativity.

3 – A double normative regulation: legal constraints, relational contracts, and power

22Legal relations are not confined to spontaneous developments resulting from the linking of a person and an object; nevertheless, they are largely dependent on customs and private standards that regulate and resolve contractual disputes. This notion of institutional entanglement is mostly observed among sociologists studying law and organizational arrangements. Formal rules can be effective without being enforceable, in that they facilitate the effectiveness of informal sanctions. The main consequence of this type of embedding of internal control mechanisms is the coexistence of public policy and private ordering, which are linked in an interdependent relationship. The coexistence and coevolution of several orderings is likely to explain the plurality of power relationships in the firm.

3.1 – The plural nature of the employment relationship as a seminal contribution in the history of organizational thought

23Within the firm, the employment contract—which follows from a right—is the main element of “central” control as was clearly shown by the founders of the theory of the firm Knight [1921] and Coase [1937] (for an analysis of the history of economic thought on this, see Chassagnon and Vivel [2013]). However, beyond the contractual rules of the external working relationship, internal control devices do not affect positive rules; however, such rules are typically not naturally developed. Firms have real independence from their legal environment. However, firms require multiple avenues of legal support to exist, and first and foremost is employment contract.

24Employment contracts contain devices—particularly in terms of legal protections—that distinguish them from simple merchant contracts with independent contractors [Collins, 1992]. By means of employment contracts, firms transform egalitarian political relationships into strictly inegalitarian economic relationships with subordinates and governing relationships grounded in labor law. Moreover, employment contracts implement employment relationships governed by private collective rules specific to the firm, which places employees in situations of “mutual control” and avoids contractual disputes [Williamson, Wachter and Harris, 1975] over non-law matters (which are not covered by the contracts and clauses), which cannot be the responsibility of a court. Notably, unions are strictly private groups with an independence vis-à-vis public ordering and important in protecting the interests of a specific profession.

25Employment relationships are guided by self-enforcing standards—framed by unions rebalancing the power between capital and labor—to ensure sustainability. The law provides employers with real “discretion” in conducting their business and in their internal organization [Wachter, 2004]. Internal administrative procedures reflect a structural equilibrium of political decisions and power relations regarding different human components of firms.

26In summary, positive law establishes rules—through the state—that remain external to the firm and from which the firm will develop its private standards. Thus, although there is no legal recognition of the existence of firms as such in positive law, the private ordering of the firm is implicitly accepted by law as autonomous. Without recognizing them as such, the state accepts the existence of firms as entities constructed as legal and autonomous political orderings (e.g., unlike the Mafia or drug cartels).

27Legal industrial pluralism is thus understood in firms as systems regulating employment relationships. Private ordering results in organizations based on a set of customs, common standards and perspectives that supersede the explicit contractual and thus allow cooperation that cannot be prescribed by formal guidelines [Posner, 2010]. Notably, such a system nonetheless works very well in Anglo-American countries because these legal models are historically based on a contractual liberal tradition that grants legitimacy to the “spontaneous” and (often short-term) private agreements that supersede rules imposed by the State [Stiglitz, 2016].

28More generally, although their legal systems differ—and this is important—different legal principles influence one another through the prism of an employment contract, which is a common feature in all capitalist countries and in all developed and integrated global market economies. The employment relationship is conceptualized as a right to the pursuit of a successive contract, that is, a relational contract (we already observe this idea in the seminal 1937 paper of Coase). Because the employment agreement contains no temporal restrictions, creates an employee commitment, and provides the employer with real flexibility in terms of adaptation, the contract is relational.

29Additionally, the entanglement of extrinsic motivations (satisfaction resulting from the reward linked to an activity) and intrinsic motivations (activity-related satisfaction itself) guides individual intentionality, promotes collective cohesion, and conditions employee efficiency [Deci and Ryan, 1985; Bénabou and Tirole, 2003]. Therefore, the sharing of a common purpose [Barnard, 1938] is a necessary condition for the emergence and distribution of power through relational contracting; the sharing of a common goal is also the meeting point of the various motivations of the individual. Notably, only the employment relationship allows individuals to share the collective objectives of a firm. In this sense, the employment relationship splits into a formal slope and an informal slope. The formal slope is to discriminate against any attitude contrary to the pursuit of collective production objectives (a formal and external type of power). The informal slope is to produce the coincidence between personal cohesion and collective cohesion, that is, the legitimate acceptance of these same objectives (an informal and internal type of power)—in a perspective similar to the seminal work of Knight [1921].

3.2 – Dynamic relational contracting and informal logics in the modern firm: a new conceptual breakthrough in the history of organizational thought

30The modern history of organizational thought was characterized by the strong development of the literature on relational contracts. Relational contracts refer to real governance mechanisms in long-term relationships, which are expected not only to reproduce but also to change over time based on unpredictable contingencies of the ex-ante contract. Relational contracts occur when the contracting parties behave cooperatively and do not use external circumstances to opportunistically exploit the relationship (employment). In this sense, relational contracts encourage employees to comply with the objectives of the firm, including whether they are outside the ex-ante defined contractual framework. Relational contracts have the characteristics of informal agreements reproduced by the value of future relations [Baker, Gibbons and Murphy, 2002], and the execution is carried out ex ante in terms of the behavior of the involved actors. Relational contracts promote fairness and reciprocity in labor relations, because these contracts provide specific incentives that complement formal contracts [Goldberg, 1976; Williamson, 1985; Hviid, 2000; Baker, Gibbons and Murphy; 2002; Chassang, 2010]. [4] Thus Gibbons [2000, p. 37] writes, “the exercise of non-contractible rights must be coordinated by relational contracts. In short, the firm must have managers. We therefore reach a conclusion that is either obvious or powerful: understanding the role of managers, who conceive, communicate, and implement the relational contracts that underpin informal organizational processes, is essential to understanding firms.”

31From this perspective, relational contracting is observed to be similar to the idea of long-term contracts as reference points for individuals. According to Hart and Moore [2008, p. 3], “a party is happy to provide consummate performance if he feels that he is getting what he is entitled to, but will withhold some part of consummate performance if he is shortchanged—we refer to this as shading. An important assumption we will make is that a party’s sense of entitlement is determined by the contract he has written. This is the sense in which a contract is a reference point.” [5]

32Economists have primarily considered the firm to be a set of formal contracts supported by positive law under cover of the will and freedom of the contracting parties. However, because legal systems are imperfect, relational contracts complementary devices [Johnson, McMillan and Woodruff, 2002]. The major conclusion that emanates from the concept of relational contracting is that the boundary between public and private normative orderings blurs, on the one hand, and loses its meaning, on the other. On this point, it is important to note that in the 1970s, social science scholars had already proposed influential contributions that enriched organizational thinking. According to Goldberg [1976], the line between public rules and private rules is blurred, so that to achieve desirable results, the firm builds a set of barriers, which establish mixture complex private and public courts. This nesting is understood to indicate that the firm is reliant upon a particular socio-legal logic [MacNeil, 1974; 1978; 2000].

33The theory of relational contracts emanating from the US economic and legal doctrines that both support and are derived from the work of Macaulay [1963], a sociologist of law, who demonstrates that managers do not always resort to the legal system to plan and coordinate their exchange relations. Rather, this theory notes that contracts are not a panacea because firms establish informal sanctions and are able to generate organizational commitment through social norms. This idea is later developed by the “lawyer-sociologist”, MacNeil who opposes the law and economics approach of Manne [1967] and Posner [1979] for whom the principles of law should promote economic efficiency [MacNeil, 1980a]. Instead, the social philosophy of MacNeil relies on a relational theory of business [see Campbell, 2001]. Relational contracts do not appear in the civil code or judicial Anglo-American law; indeed, they construct a legal and economic reality that is not codified. They oppose discrete contracts, and these instant transactions do not involve standards and other social relations but are instead simply a return for a promise against a thing promised. Discrete contracts are impersonal and free of any unforeseen consequence; they cannot affect the future that should be provided in this contract (presentation). These arguments have counted in the evolution of the multidisciplinary analysis of industrial relations.

34In this historical point of view, relational contracts have no relation with classical contracts; the identity of partners is important, and they are created to be renewed and reduce transaction costs. Intra-firm relationships fulfil this logic in that they are not confined to a specific contract and are limited in time. Similarly, these relations are based on sharing a common identity and social values. Relational contracts contain intrinsic value for the firm beyond those legal standards produced by contract law. These contracts can be reviewed and changed in the relationship, because what is of import is not so much the degree of compliance with a predefined contractual obligation as the sustainability of a socio-economic exchange relationship. In this sense, the relational contract is a permanent contract in an industrial pluralism point of view; and in a permanent contract, we cannot ex ante predict completion. The relational contract—based on its flexible nature—is a legal response to the procedural rationality of economic decision-makers. In rejecting legal formalism in favor of flexible and scalable contracting, MacNeil incorporates agents of cognitive limitations. The main rule that contains the relational contract is observed to be concerned with mutual cooperation, well before the rules produce results. Members of the firm derive mutual benefits from renewing their exchange relations.

35According to MacNeil, relational contracts are contracts, as their name suggests. Relational contracts have a similar normative value to traditional contracts but are less rigid and formalized. When partners wish to revise or extend the terms of contractualized relations, they maintain and strengthen the contracts in place. MacNeil has always considered this dual and plural nature of contracts. Relational contracts—designated by the term “ongoing relational contracts” [MacNeil, 2000]—are based very clearly on the logic of the private nature of the firm. Here, intrinsic values and flexibility measures in traditional contracts are used in the public regulation of the firm environment [Campbell and Harris, 1993]. Intrinsic values and flexibility measures are used in the regulation of the firm environment [Campbell and Harris, 1993]. A social relationship is based on the contract, and its uniqueness determines the type of contract used. The relational specificity of the firm determines its use of employment relationship, which differentiates relational contracts from traditional market contracts.

36For MacNeil [1980b], a contract is no more and no less than relations between the parties regarding an exchange process projected into the future. In so defining contracts, he emphasizes—and this is historically considered by Goldberg [1976] and Williamson [1985]—the relational constitution of intra-firm contracts based on, he says, “cooperative social behavior” grounded in solidarity and reciprocity. These relational contracts are the basis of organizational design that coordinates complex production activities by promoting, through social norms intrinsic to the firm, cooperation among its productive agents. Of course, such reasoning cannot overcome the formal authoritative relations that arise from the employment contract and that guide the actions and behaviors of economic agents. In this sense, this authority of positive law—labor law understood through the legal principle of subordination—frames and conditions the acceptance of social norms. The employment relationship, in this sense, is thus a pillar on which the entity of the “firm” is built. Moreover, the relational contract becomes the de facto executory contract in our private normative sense.

37The topic of private nature takes on increasingly more importance in the economic and legal doctrine. This increasing importance is because of the increasing complexity of the institutional environment of multinational firms in their business activities, because they are managing different jurisdictions and attempting to meet many “empty” legal contexts. In legal industrial pluralism, we must observe the notion of a normative and cognitive device that allows decision-making bodies to act in a procedurally complex and uncertain environment, something that law does not allow regarding contract standards.

38Emphasizing the social embeddedness of contracts and the importance of social interaction in the process of cooperation, the legal literature proposes a “procedural analysis” of contracts as social relations in their own right [see Teubner, 2000]. Firms’ competitiveness and efficiency regarding productivity are conditioned by their internal organization and their members’ willingness to cooperate, and the influence of these two normative orderings (one internal and one external to the firm) is at the heart of their organizational design. There are strong interactions between “economic and legal normativity.”

3.3 – Private and public orderings: formal and informal powers in modern organizational economics

39The analysis of the interactions between the public and private orderings of the firm, which are also based on dynamic relational contracts, lead us to identify two main sources of power in the firm: formal sources derived from (positive) law and more informal sources resulting from the logic of private ordering. Again, the employment relationship is at the heart of the entanglement of these different forms of power. The employment contract allows the existence of employer–employee subordination through public ordering; organizations as cooperative systems composed of individuals who form a whole from a rational system of coordination that generates an authority as Barnard [1938] has been well demonstrated in the history of organizational thought. Finally, authority in the firm is the “legal guarantor” of employee contractual obligations and contractual cooperation. Law legitimizes, through employment contracts, the power of an employer to become an authority [Simon, 1951; Williamson, 1975]. The employer draws his authority contractually from the acceptance by subordinates of the legitimacy of the employer’s decisions. Subordination is a latent decision in the allocation of tasks. Within this contractual area of obedience, there is authority.

40Authority refers to a mutual arrangement that stops when the contract expires. Outside this instituted area of obedience, there is power. Power occurs when authority vanishes. Power emerges in situations of confrontation that are the result of insubordination in the Foucauldian philosophy [Foucault, 1982]. The root of the employment contract is not power, but authority, which is hallmarked by “unquestioning recognition by those who are asked to obey; neither coercion nor persuasion is needed” [Arendt, 1969, p. 45]. Consequently, authority, which is the institutionalization of power and a distinct moment in the power process, coexists with other (non-instituted) powers in the modern firm.

41Chassagnon [2011, p. 39] defines power in a whole system as “an individual or collective entity’s ability (that will be exerted or not) to structure and restrain choices and actions of another individual or collective entity by some particular mechanism intrinsic to the given social relationship that may be formal as well as informal.” He proposes, from the perspectives of institutional and organizational analyses, a typology that considers the two (de jure and de facto) sources of power different from authority that we can explain through the context of our private/public ordering framework.

42The first source of power, de jure, comes from the legal system of private property that confers the right to exclude (discharge). It is because entity A can deprive entity B of its work, which B has valuable competences such that A has de jure power over B [Grossman and Hart, 1986]. Ownership is a formal resource. This argument is close to the Marxian theory. Most of the time, only the employer or top managers have this resource because shareholders delegate the right of exclusion to them.

43The second power, de facto, does not strictly result from contractual and legal public mechanisms but results from internal private ordering: access to the critical resources [Rajan and Zingales, 1998]. It is because B is involved in an employment contract and invests in human capital that B has access to the key resources of the collective entity controlled by A; therefore, B has de facto power over A. Thus, if the law is, through contract and ownership, a formal source of authority and power and the core resource of the employer, access to critical resources is the informal source of the employee’s power. The vehicle of power is the specialization of human capital at the heart of resource interdependence. The employees who are specialized obtain control over a new critical resource: themselves. This new critical resource provides them with part of the power. De facto power is in the hands of the employer, the corporate executives, and the employees because each participates in the intra-firm knowledge-creating process. The analysis of de facto powers reconsiders the creation of production value and reconsiders human capital and the employees’ skills (i.e., the “labor factor”) faced with the hegemony of capital.

44The exploitation of de facto power is a salient property of private ordering that has been developed in cognitive capitalism. The starting point is that employees do not have resources other than their specific human capital in capitalist firms; thus, they must be indispensable, productive, and effective to obtain part of the power. Granting employees access to the critical resources of the collective entity through private ordering is economically efficient. The main conclusion of the “triptych” presented in this paper is that the more a firm is based on strong human capital, the greater the de facto power compared with the de jure power, and the more total power and rent are redistributed between the different individual entities. Consequently, the more an organization is based on strong human capital, the less power the employer and his executive team have over the employees—so long as the relational resources are inalienable.

45In an industrial pluralism context, the internal governance of the modern firm is based ex post on the threefold relationship between formal authority, de jure power and de facto power, which appears as a fertile combination of the different research results obtained in the modern history of organizational thought. Finally, the analysis of the complementarity between public and private orderings in the modern firm allowed us to understand how power could appear as a relevant unit of analysis of industrial relations and normative pluralism; in doing so, the firm assumes the properties of a political entity.

4 – The firm as a political entity

46The firm is a political entity [see Benson, 1975], for three main reasons that complement each other: (1) its internal organization rests, as we have just seen, on plural power relations ; (2) they contribute to wealth (in his recent work, Chassagnon [2018] shows that what he calls the world-firms compete with the big states in terms of annual incomes), social cohesion and health and so to the general interest of civil society (in his collection of essays, Keane [1988] considers that self-organizing institutional entities as manufacturing enterprises contribute to revitalize civil society) and (3) they are social actors whose immense powers have become in the history major countervailing powers with the consent of the state.

47On this last point, the historical analysis of North, Wallis, and Weingast [2009, pp. 159-166, 210-213] is original. They explain that the raison d’être of the firm is based on the third-party enforcement of the state to organize relationships within the firm and between it and other individuals and firms. In other words, they consider the political nature of the firm regarding the fact that the institutions governing the formation of firms require the consent of the state and public decision to give open access to general corporate incorporation. In this perspective, they write: “the state is an organization of organizations and the development of natural states from fragile, through basic, to mature can be described in terms of the interaction between elite organizations within the dominant coalition. Political and economic development result from creating more sophisticated and durable institutions to structure elite relationships within the dominant coalition. Perpetually lived public organizations must coevolve with perpetually lived private organizations” [North, Walls and Weingast, 2009, p. 159].

48The analysis of the entanglement of public policies and private orderings involves questions regarding topics of governance “internal” to the firm. The productive efficiency of firms is closely linked to the effectiveness of the collective compromise between labor and capital. Currently, this compromise is widely considered to be more complex because of a structural crisis exceeding all corporate stakeholders and because of an increased gap, not between labor and capital, but regarding income inequalities (i.e., a steadily increasing of high incomes) and capital inequalities (i.e., a steadily increasing share of dividends for the past 30 years). This favorable trend in capital at the expense of labor [see Piketty, 2014] undermines the renewal of productive social compromise and the efficiency of internal private orderings. Therefore, shareholders must realize their purpose, that is, regarding the assumption of the risk and status of the residual claimant [à la Alchian and Demsetz, 1972]. The current situation in terms of added value distribution makes them sheltered creditors and makes employees (human capital) become largely harmed, whereas the social acceptance of the institutional production structure is born in the effectiveness of the private normativity of the business firm. Evidently, the more employees have to bear the risks of economic activity, the less interest employees have in finding a productive compromise with employers and the less the logic of private ordering, which is often based on a form of individual consent, can develop in the firm.

49Indeed, private ordering is necessarily based on a democratic compromise between labor and capital and therefore a sustainable productive compromise. However, the context of crises has undoubtedly weakened the “industrial contract,” and therefore also undermined the sustainability of private normativity, and more largely, of legal industrial pluralism. In a market economy based on knowledge, details must be provided on the rules for the participation of human resources in the strategy and governance of firms for the purposes of increasing production efficiency and thus the effectiveness of private normativity. As Summers [1982, p. 261] already recalled in the 1980s, the firm should be conceived as an “operating institution combining all factors of production to conduct an on-going business”, employees are “as much members of that enterprise as the shareholders who provide the capital”.

50The firm is a political entity whose nature is to create value for the collective and for society as a whole. However, how can this aspect of the firm as a collective institution serving the public interest (which is at the service of all) be effectively (and economically) re-examined? The intricate public and private orderings raise the question of the institutional evolution of the firm’s internal governance. For example, public policy might provide more representation to employees in decision-making and in the development of the firm’s key strategic directions, allowing them to contribute to private normativity and the logic of internal efficiency (see again the pioneering work of Williamson, 1975). In this view, employees are central social actors in national and international public policies and, more largely, in the political economic development of firm governance [Cioffi, 2010]. In summary, it is urgent that firm employees be recognized with respect to firm governance [Wang and Barney, 2006]. This argument leads to a ‘flattening firm’, which involves revisiting traditional vertical hierarchy. In a 2012 paper, Rajan weakens the role of ownership in the firm and redeems employee power in firm governance.

51Firm participants have interest in full cooperation because it is a strong condition of a firm’s productive efficiency and survival. One of the main weaknesses of the shareholder primacy perspective is that it fails to consider the creation of productive cooperation and, consequently, the value creation called “relational quasi-rent” [see, e.g., Aoki, 1988]. The legal foundation of a corporation (e.g., moral personality) is a constituent institutional instrument of corporate law instituted to promote the firm for the organization of productive activities, that is, the sources of value creation in the firm have yet to be questioned. Gourevitch and Shinn [2005] develop an analysis of corporate governance with respect to power and responsibility from the idea that “corporate governance structures are fundamentally the result of political decisions” [Ibid, p. 3]. They propose approaching political power and corporate control in terms of “degrees of coordination.”

52Roe [2003] develops a similar perspective from a social conflict perspective, not a political coalition perspective. He explains that “social conflict, often among owners, managers, and employees, leads to political settlements and these settlements can determine the structure of one of these pieces of the firm” [Ibid, p. 5]. Similarly, an important insight resulting from this political perspective is that “the struggle for power inside the firm is settled by the struggle for power outside the firm, in the political system that determines rules” [Gourevitch and Shinn, 2005, p. 57]. Roe [2003] defends the thesis, according to which, beyond law and economics, the firm and its governance are influenced by the “political environment.” It is clear that power within a firm is linked to a considerable degree to external political institutions and coalitions [see the recent work of Zingales, 2017].

53Finally, the organizational analysis of industrial pluralism we propose is conducted specifically at the firm level—that is to say to the internal governance of the modern firm—, but it would also be interesting to learn how it applies to other forms of capitalist institutions, especially as the complexity of our market economies is associated with an increasing number of normative hemispheres. Our reasoning extends beyond a micro-level approach, as we have not really addressed the firm in its current globalized environment and in its external governance, which implies analyzing inter-organizational industrial relationships. In a 1975 paper Benson considers that “the political-economy perspective is integrative in the sense that a number of diverse concerns of interorganizational research are bought together in a general framework. Beyond this, the focus upon resources and power permits a direction connection between the interorganizational field and the realm of societal organization or macrostructure” [Ibid, p. 230]. Interestingly, a close attention should be paid to inter-firm relational contracts (for an empirical definition see Argyres, Bercovitz and Zanarone [2016]).

5 – Conclusion

54This paper leads to the consideration of the firm as an economic and political entity that relies on a combination of public institutional formalism (i.e., a legal personality that is internationally recognized) and private regulation (social norms, conventions, and other informal arrangements). Thus, the firm is a place of expression and development of two complementary normative orderings that are mutually “reinforcing” in terms of their internal control processes. The firm relies on formal and state orderings and internal spontaneous orderings, which support the thesis of normative pluralism. In the firm, there are domestic laws and social norms that are true islands of freedom that are allowed but that not recognized under the law. However, it is misleading to fail to make an ontological distinction between state law and the rules of private governance in firms as the various contributions of the theory of industrial pluralism have shown.

55For there to be rights, there must be normative principles enforceable by state authorities that provide logic to private regulation. The law is monolithic gasoline, unlike social control devices, of which there are many. It is a specious effect to consider that private regulation of firms occurs in a vacuum, beyond morals and the societal environment. In private, there is a public order, and vice versa. In other words, the public legal scope of firms is affected and affects the private regulatory orderings, and vice versa. Similarly, private orderings are not spontaneous creations of the market economy but are based on formal institutional infrastructures that make them effective. However, because such orderings generate informal rules and intrinsic cultural values, firms have become “semi-autonomous” entities [Moore, 1973] subject to the rules of society and made cohesive by bonds of various types. Firms are thus capable of showing their autonomy and imposing self-regulatory processes (e.g., corporate responsibility and sustainable business ethics, which is self-regulation in the firm by means of internal private policies, commitments, practices and charters) that seem conducive to new society issues.


  • [1]
    Governance is defined as the implicit or explicit contractual structure in which transactions work.
  • [2]
    Industrial pluralism is similar to the notion of legal pluralism. Thus, we propose using the term of legal industrial pluralism. In other words, industrial pluralism refers to legal pluralism applied to industrial relations.
  • [3]
    Eisenberg [1999] distinguishes legal rules, organizational rules, and social norms. Legal rules are produced by the state system. Organizational rules are formal rules adopted by private firms. These are close to legal rules, because they are subject to sanctions—sometimes legal—for their breach. By contrast, social norms cannot be affiliated with statutory rules. There are three types of social norms: (1) the regularities in human behavior do not involve a sense of obligation or a sense of conscious engagement; (2) the rules and regularities consciously accepted but not required; and (3) the rules and knowingly accepted practices in which individuals feel—regardless of law and sanctions—an obligation, which is what he calls “mandatory” standards (obligational norms).
  • [4]
    Note that in specific cases relational contracts can substitute for formal contracts [Poppo and Zenger, 2002].
  • [5]
    See the 2010 work of the two 2016 Nobel Prize laureates Hart and Holmström.

The development of the theory of the firm has included only limited insight into the legal and political nature of business enterprises, and the inquiry into the nature of normative orderings has been obscured. By normative ordering, we mean a regulatory standard regarding industrial relations applicable for a given time to real entities—here, firms. This article contributes to bridging this theoretical gap by examining the historical and institutional evolution of firms concerning industrial pluralism and by focusing on the accuracy of the study of the entanglement of private and public normative orderings in firms.

  • history of the organizational thought
  • industrial pluralism
  • modern firm
  • power
  • private and public orderings
  • relational contracting


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Virgile Chassagnon
Univ. Grenoble Alpes, Grenoble INP, CREG, 38000 Grenoble, France, IREPE.
Institute of Engineering Univ. Grenoble Alpes.
Naciba Haned
ESSCA École de management, campus de Lyon, 7 rue Curie, 69006, Lyon, France.
Uploaded on on 04/10/2019
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