Organizational Governance Adaptation Research Paper At the top of the paper provide the reference to your Journal Article. Use a scholarly source as described above. Utilizing a non-scholarly/non-peer-reviewed source will result in significant point deduction.
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Note: Give make 250 words document about the important finding in the article Q Academy of Management Review
2019, Vol. 44, No. 1, 6–27.
ORGANIZATIONAL GOVERNANCE ADAPTATION: WHO IS IN,
WHO IS OUT, AND WHO GETS WHAT
PETER G. KLEIN
Baylor University and Norwegian School of Economics
JOSEPH T. MAHONEY
University of Illinois at Urbana-Champaign
ANITA M. MCGAHAN
University of Toronto
CHRISTOS N. PITELIS
Abu Dhabi University and Brunel University London
Governance gives life to an organization by establishing the rules that shape organizational action. Structures of governance rest on stakeholder engagement, particularly
on how stakeholders assess the prospects for earning a return by committing their
specialized resources to the organization. Once formalized, governance structures and
processes can resist change. Yet, under special circumstances, some stakeholders that
are a party to an organization may seek to adapt governance in response to changes in
the external environment that surrounds the organization. Adaptation often requires
renegotiation: who has claims on the organization and who gets what? In this article we
analyze the relationship between the institutional change that drives adaptation and
the outcome of renegotiation. We draw on institutional economics and organization
theory to identify four pathways of governance adaptation: continuity, architectural
change, enfranchisement change, and redistribution. We call for further theoretical and
empirical research on governance adaptation and its implications for organizational
value creation and capture.
(Blair & Stout, 1999; Klein, Mahoney, McGahan, &
Pitelis, 2013). For example, the rules on how a CEO
is selected, what the length of the CEO’s term is,
how key decisions are made, and how compensation is determined are difficult to change, even by
the top management team, without consultation,
due process, and negotiation (Cyert & March, 1963;
Pfeffer & Salancik, 1978).
When do changes in the external environment
(EE) compel adaptation in an organization’s governance structure? To make this question tractable, we focus in this article on changes originating
in the institutional environment (IE). While the EE
generally includes technology, demand, and institutional shocks that affect the firm’s behavior
and performance, the IE refers to the specific formal and informal legal, political, and social
structures and processes in the EE that frame
organizational governance structures (Mahoney,
2005; North, 1990; Williamson, 2000). We are particularly interested in how firms respond to unanticipated change in the IE.
Forming an organization requires establishing
rules about who will be in charge, how leadership
turnover will occur, who will be involved in critical
decisions, how gains will be distributed, and who
will bear the risk of failure. These rules, which
make up the organization’s governance structure,
give life and continuity to the organization as an
entity separate from its members and from other
persons and entities. To foster cooperation, governance structures include safeguards to protect
the interests and investments of key stakeholders
We thank former associate editor Don Lange and three exceptionally helpful reviewers for their questions, criticisms,
and suggestions and Lyda Bigelow, Gary Libecap, and Anne
Parmigiani for feedback. We are also grateful to conference
and workshop participants at the Allied Social Sciences Association, Atlanta Competitive Advantage Conference, Academy of Management annual meeting, Strategic Management
Society, International Society for New Institutional Economics,
London Business School, New York University’s GovLab,
Oklahoma State University, and the University of Toronto for
useful comments. Author names are listed in alphabetical
Copyright of the Academy of Management, all rights reserved. Contents may not be copied, emailed, posted to a listserv, or otherwise transmitted without the copyright holder’s
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Klein, Mahoney, McGahan, and Pitelis
For example, De Beers, the South African mining company, operated historically under governance rules designed under and aligned with
apartheid. The IE changed in the early 1990s with
the end of apartheid and the election into power
of Nelson Mandela’s African National Congress
(Rantete, 1998). Subsequently, new regulations
were implemented mandating that corporations
enfranchise blacks in ownership, leadership, and
operational decisions. De Beers responded first
by adapting its strategy and operations to the new
IE, appointing a black managing director in late
2005, and offering equity to black investors (Reed,
2005). This led to newly enfranchised stakeholders with different control and ownership
rights—a change in the firm’s governance structure. Adaptation was successful, in part, because
the new and old enfranchised stakeholders
appeared to share the overriding objective of rebuilding the South African economy and society.
In the face of radical legal and social change,
De Beers adapted to ensure the organization’s
survival as South Africa was transformed.
In other cases firms take different paths in response to changes in the IE. As explained by
Chandler (1962), many firms during the 1920s either failed or were slow to respond to advances in
telecommunications and railroads that enabled
greater levels of diversification and decentralization. The pioneering firms that adopted the
new multidivisional or “M-form” structure—most
notably, General Motors (GM), DuPont, Standard
Oil, and Sears—had access to strategies that led
them to become the largest and most successful
companies of their era.
Modern examples of change in the IE include
the adoption of international climate-change
agreements, the implementation of patent laws,
and new international and domestic public policy
regimes. In some cases government and private
actors attempt to influence organizations directly
(e.g., to include black citizens in the governance of
organizations in postapartheid South Africa). In
other cases the effects are indirect (e.g., when
cancellation of a pending international trade
agreement allows a firm to make decisions without considering foreign actors). When these IE
changes are substantial, they compel change not
only in firm’s strategies and processes but also in
the governance structure that surrounds those
strategies and processes.
Quoting Chester Barnard (1938), Williamson
described adaptation as “the central problem of
organization” (1996: 299). Markets adapt continuously, with adjustments coordinated by the price
system within a given institutional framework
(Hayek, 1945). In an organization, however, adaptation is more difficult since it requires a degree
of central coordination and control (Barnard, 1938;
Williamson, 1996).1 The problem becomes more
complex when required adaptation challenges
the authority of the organization’s core stakeholder groups. This situation of adaptation in
governance raises specific challenges about how
enfranchised stakeholders protect and pursue
their interests and what pathways to change
become available, given the interplay between
different stakeholder groups.
Scholarship in management, corporate finance,
and contract economics has substantially
addressed the nature and effects of governance
(Foss & Mankhe, 2002; Hendry & Kiel, 2004;
Williamson, 1996), but researchers have not dealt
as fully with issues of governance change. A key
fact about governance is that governance arrangements typically include procedures about
how the firm’s assets will be liquated in cases of
financial distress and how the residual value will
be distributed to shareholders. However, comprehensive organizational failure is a dramatic
and costly event that stakeholders seek to avoid
except in exceptional circumstances. A more effective, efficient, and valuable alternative is to
change the governance structure of an organization in response to a change in the IE. Under
external pressure, key stakeholders may renegotiate the firm’s governance arrangements to support the organization’s survival, even if this leaves
them worse off than before. For instance, a firm’s
founders may agree to the subordination of their
original ownership shares in exchange for investment capital that keeps the firm going (Rajan,
2012). Unions may agree to renegotiate binding
wage agreements or benefit packages. In each
instance a stakeholder group accepts a worse
deal as superior to no deal, and liquidation is
averted. The threat to the firm’s survival leads
to renegotiation, rather than to the distribution
of residual value to shareholders.
The value of adopting the firm’s governance
structure is particularly high when the external
stress comes from unanticipated changes to the
Williamson (1991a) referred to these as “autonomous” and
“cooperative” adaptation, respectively (see also Williamson,
Academy of Management Review
IE. While the role of the EE has been recognized
as fundamental to strategic management since
Porter (1980), interest in change in the IE has recently intensified (Henisz, 2000; North, 1990). This
interest is motivated, in part, by a recognition that
failure to adapt to IE changes may threaten the
ongoing existence of the organization. We do not
seek to explain all aspects of governance but,
rather, focus specifically on the process of adaptation itself. Similarly, we are not investigating
all elements of organizational change but those
specific changes instead that an organization’s
governing stakeholders negotiate, accept, and
act on in the face of threats to the entire organization’s existence.
As we explain below, several important recent
examples of organizational restructuring and evolution are best understood as governance adaptation in response to changes in the IE. We discuss
architectural change at De Beers, Dollar General,
and Enron; enfranchisement change in the pharmaceutical industry; redistribution by companies
faced with environmental disaster; and continuity
at JPMorgan Chase after the 2007-2008 financial
crisis. These examples illustrate that firms do not
respond to IE changes in the same way.
To understand the pathways of governance
adaptation, we integrate insights from organization theory (Scott, 2008) with those from institutional economics (Williamson, 1993). Like
Scott, we view organizations as “coalitions of
shifting interest groups that develop goals by
negotiation; the structure of the coalition, its activities, and its outcomes are strongly influenced
by environmental factors” (1987: 23; see also Scott,
2008). Our analysis deals with cases in which
some agents can resist legitimate demands for
adaptation following environmental change but
where the ability to resist is limited. For instance,
a CEO may not be able to control the process by
fiat because the CEO’s decision is outside the
“zone of acceptance” (Barnard, 1938; Simon, 1947).
The situations that we seek to analyze may put
the CEO’s role in jeopardy. Adaptation involves
a complex negotiation or renegotiation among
different enfranchised actors and groups about
the governance authority and rewards.
In this conceptualization, organizations are open
systems in which the relevant actors, such as the
CEO, board members, employees, shareholders,
and managers, compare the benefits and costs
of the organization’s existing governance structure
to available alternatives. Adaptive responses to
environmental change involve renegotiation among
the key enfranchised actors, who try to maintain or
improve on their prior interests and positions. However, achieving this outcome is almost never possible for all enfranchised actors. Negotiations may
also proceed by threatening stakeholders who seek
to avoid adaptation with future expulsion or reduction in status. Changing the governance structure of organizations requires the collective action
of essential stakeholders to find a negotiated
arrangement that each sees as superior to
Our framework begins with the institutional economics literature on collective action
(Libecap, 1989; Olson, 1965; Ostrom, 1990). This
literature considers how organizations emerge to
coordinate the contributions of essential stakeholders (Alchian & Demsetz, 1972; Grossman &
Hart, 1986). The canonical problem in this tradition
is how the essential parties to value creation
achieve agreement on the terms by which they
will be governed organizationally. From organization contingency theory (Galbraith, 1973;
Lawrence & Lorsch, 1967; Scott, 1987), we hold that
resilient organizations are those that better adapt
to their environment. Our focus is on how organizational actors impede or facilitate adaptation
following institutional change. In doing so we
address these fundamental questions: Who is in,
who is out, and who gets what under an adapted
Our main contribution is the identification of
four broad pathways of governance adaptation:
continuity, architectural change, enfranchisement
change, and redistribution. Before discussing
these four pathways, we first define terms and
establish the key ideas on which our argument
rests. We then turn to conceptual background. Finally, we develop a series of theoretical claims
linking these constructs.
The stakeholders in an organization’s governance structure are those actors who control resources and capabilities that are essential to the
organization’s function and performance. As we
explain below, governance adaptation may take
place when a change in the IE threatens the core
organizational rules on who within the organization makes decisions and who gets what. In other
words, a shock to the IE compels governance
adaptation when it changes the relevance of
Klein, Mahoney, McGahan, and Pitelis
stakeholder resources and capabilities. Of
course, many changes to personnel and practices
do not constitute governance adaptation. An organization’s employees, for example, may choose
to exit if an authoritarian CEO declares terms that
substantially exceed employees’ zone of acceptance (Simon, 1947), but this is not governance
adaptation unless the departures prevent the organization from functioning. Adapting organizational governance structures is difficult because
some stakeholders may not want change even
when a major institutional or social event—for
example, the overthrow of apartheid in South
Africa, the threat of climate change, or the rise of
social media—requires change and motivates
other internal actors to pursue such change.
Key Terms and Concepts
Governance structures. Governance structures
are the formal and informal rules and procedures
that control resource accumulation, development,
and allocation; the distribution of the organization’s production; and the resolution of the conflicts of interest associated with group behavior
(Blair & Stout, 1999; Chandler, 1962; Williamson,
1985). General rules arise from commercial codes
and corporate statutes, but owners and creditors
can often specify unique rules via the company
charter, articles of incorporation, and similar
documents (Hansmann, 2006). Less formal rules
arise from custom or emerge as part of the organization’s culture to shape processes and routines. Collectively, governance rules establish
the organization as an entity distinct from the individuals whose activities make up the firm.2
We seek to distinguish between an organization’s governance structure and its activities. An
organization is defined by its governance structure, which we identify as the fundamental rules
about who is in, who is out, and who gets what.
Organizations arise to pursue opportunities that
individuals cannot accomplish independently
(Barnard, 1938; Simon, 1947). For an organization
to be successful, the benefits of joint production
must exceed the costs arising from hazards such as
free-riding (actors who do not pull their weight in
the expectation that others will do so) and opportunism (Alchian & Demsetz, 1972; Williamson,
1985). Governance structures attempt to mitigate
In corporate law this separation is called “asset partitioning” (Hansmann & Kraakman, 2000).
these hazards by designating certain stakeholders
as legitimate holders of decision rights, which we
call “enfranchisement,” and by specifying how the
value created by joint production will be distributed.3 This specification, which we discuss in detail below, is important because expectations
about claimancy induce stakeholders with critical
resources and capabilities to become enfranchised. Stakeholder enfranchisement and claimancy are at the foundation of governance structure.
Once governance structure is established, the
regular governance activities of the organization are
enabled. Governance activities include events such
as meetings of the boards of directors and operations
such as the implementation of decision-making protocols and compensation programs. Organizational
governance is distinct from organizational strategy,
culture, routines, capabilities, and innovation, which
take place within the framework established by the
organization’s governance structure. Governance is
often described as the “rules of the game,” within
which the game is played. Put differently, governance
operates at a higher level of analysis than strategy,
organization, and the like (Williamson, 2000).
Enfranchised stakeholders. Enfranchised stakeholders are organizational actors with the de facto
ability to influence decision making and, hence,
organizational governance. These stakeholders
achieve their status as enfranchised because
they contribute resources and capabilities that
are central to the organization’s value creation.
In an earlier article, following Blair and Stout
(1999), we (Klein, Mahoney, McGahan, & Pitelis,
2010) identified enfranchised stakeholders as
those that coinvest specialized assets, capabilities, and resources through the organization to
create value through joint production (see also
Hoskisson, Gambeta, Green, & Li, 2018). In corporations such stakeholders normally include
the main suppliers, employees, managers, and
the CEO. Customers and the community can also
“Governance is the means by which to infuse order, thereby
mitigating conflict and realizing mutual gain” (Williamson,
2005: 3; see also Commons, 1931). In this article changes in the
IE lead to new conflicts among stakeholders, and governance
adaptation via enfranchisement and/or claimancy rights infuses a new order to realize mutual gain among stakeholders,
thereby creating economic value. Below we argue that the
enfranchisement of stakeholder groups rests on the conferring of decision rights, which may be both specified and
residual. Some stakeholder groups may be only weakly
enfranchised—that is, by holding only minor, specified decision rights.
Academy of Management Review
affect decision making through their choices and actions. Enfranchisement describes who is in and who is
out of the organization’s internal decision-making
process and, hence, is a foundational element of
The means of stakeholder enfranchisement may
vary. In some instances it may even be legislated by
the IE. For example, under Anglo-American corporate law, equity owners of companies are guaranteed enfranchisement via the right to vote for board
members and to ratify some executive decisions.
Under German law, organized labor is guaranteed
board representation and is therefore an enfranchised stakeholder group in every public company.
In Norway a certain percentage of board seats is
reserved for women. In all three countries the
stakeholder groups of equity owners, labor, and
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