Exit, Voice, and Liability: Legal Dimensions of Organizational Structure
Abstract: In every society, the law provides for a variety of standard organizational forms. In developed market economies, for example, these forms include, among many others, marriage, partnership, the business corporation, and the municipal corporation. In this essay, we define basic structural dimensions in which these various forms differ, identify patterns of correspondences among those dimensions across forms over time, and explore the economic considerations that produce those patterns. We focus on five dimensions in particular: owner control; owner withdrawal rights; owner liability for organizational debts; fiduciary duties of managers and owners; and transferability of ownership interests. Albert Hirschman famously alerted organization theorists to important tradeoffs between exit and voice. If, however, we examine the role of exit and voice as exercised by owners of organizations – which we can roughly identify with rights of withdrawal and rights of control -- they do not generally appear as alternative means of organizational discipline but tend to be complements instead. Other important mechanisms for owner influence in organizations interact more complexly with the withdrawal and control rights of owners. We seek to explain these patterns of interaction over time as the joint product of evolving transactional technology and the need to cope simultaneously with competing agency problems among an organization’s beneficiaries, managers, and creditors.