Governance

Governance arrangements determine how an activity or entity is owned, controlled, monitored and maintained for the long run. At the most general level, 'governance' can be accomplished by boards (in-house monitoring) or by arm's-length contractual arrangements. The former are exposed to bureaucratic inefficiencies, the latter to (market) recontracting hazards (Williamson, O.E. Markets and hierarchies. New York: Free Press, 1975; Williamson, O.E. The economic institutions of capitalism. New York: Free Press, 1985). Intermediate forms of governance, such as joint ventures typically occur in longer-term settings. Networks of firms such as R&D consortia and platform-based ecosystems also require some type of governance. Corporations have internal governance systems, usually a board of directors that seeks to monitor management. Regulations generally favour a goal of limiting managerial discretion over ensuring that management is pursuing a strategy consistent with the long-term profitability of the firm. The reason is that the latter is very hard to do, as business judgement is quite hard to assess and evaluate until results are evident.