Bernstein Discusses the Theory of the Firm in Reputation Magazine

Conference Report: Theory of the Firm

At the Oxford University Centre for Corporate Reputation's Theory of the Firm conference, eminent academics and senior practitioners examined the ramifications of the outsourcing revolution, and the implications for contracting and relationships between firms. Contributions from the banking, automotive, retail and IT sectors made clear that cultures and concern for reputation sit at the heart of these relationships. Below, four of the participating academics, Alan Morrison, Gillian Hadfield, Oliver Hart and Lisa Bernstein, discuss the ‘scaffolding’ of an evolving business environment. 

Conference Report: Theory of the Firm

Alan: I’m going to start by asking everybody what they think was most useful and valuable about the conference. 

Gillian: I was very interested in hearing from the people talking about global supply chains and the comparison between the rule of law and the rule of values, and the ways in which cultures and values helped to coordinate the willingness to move forward in an uncertain, complex environment. 

Oliver: For an economist like me, the question of what can be outsourced or what can’t be–or shouldn’t be–remains an extremely complicated question. Hearing the way practitioners talk about it helps me to think about how perhaps the theory should be modified. Relationships are clearly very important. You can get great things through outsourcing if you have good relationships, if you take advantage of reputation. 

When I was listening to that I was wondering: why isn’t everything out-sourced? You know, it seems as if there are some core functions of the firm, the basic essence of what a firm is which you don’t want to outsource, that it would be dangerous to do; but perhaps almost everything else can be. Then again we heard in the session on IT that actually there, somehow, the relationships and the reputation don’t seem to work so well.

In the last few years I have been focusing on the idea of contractors’ reference points, where the idea is that the contract is almost a communication device where the parties sit down and get themselves onto the same page so that they know what’s expected of them in the future. It’s not really about people’s rights and obligations to go to court if things go wrong. It was very interesting to hear that several of the practitioners seemed to think of contracts in the same way. 

Alan: I was very struck by the fact that most of the people we spoke to wouldn’t–unless it was an absolute last resort–dream of resorting to litigation, because of concern for both reputation and ambiguity-related problems. 

Lisa: As lawyers we’re trained to think that everybody on the opposite side is going to act opportunistically and strategically at every turn, and that we’re supposed to constrain them through contracts. For me the most interesting thing that emerged from the conference, although not necessarily the most unexpected, was the view that what contracts actually do is coordinate expectations. They are a blueprint for how the relationship should go forward, and of how you work out problems. So I think the emphasis on contracts as governance devices as opposed to pure opportunism-preventing devices, is something important that found deep support in the comments of our participants from the business world.

Alan: Gillian mentioned the importance of values, and one of our academic speakers, Steven Tadelis, talks a lot about culture. Do you think we’ve seen good case study examples of cultural values at work and how can we think about those in a more formal way? 

Lisa: I think you see the importance of culture when you see the difficulties involved in certain mergers, where workforces from different companies don’t integrate very well at all. Some commentators have attributed this to a clash of firm cultures. 

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