Inside the Black Box: Corporate Laws and Theories
| Author | Alice Belcher |
| DOI | 10.1177/09646639030123004 |
| Published date | 01 September 2003 |
| Date | 01 September 2003 |
| Subject Matter | Journal Article |
CORPORATE LAWS AND
THEORIES
ALICE BELCHER
Dundee University, UK
ABSTRACT
This article argues, first, that new theoretical ways of thinking about companies are
coming to the fore and, second, that these new ways of thinking are finding their way
into some aspects of company law and regulation. Snider’s device of tracking the
emergence of new ideas as ‘journey from academic journal to economic policy to law’
is employed in support of the article’s main argument. In particular, it is submitted
that the idea of the firm as a ‘nexus of contracts’ is being replaced by the idea of the
firm as a ‘behavioural entity’. While management and economics theorists have gone
‘inside the black box’ in order to ask different questions and produce better theories,
the law has arrived there via a much more pragmatic route. However, recent develop-
ments in two areas of company law and regulation, corporate criminal responsibility
in the UK and Australia and corporate governance in the UK, can be seen in terms
of a move away from a focus on the individual decision maker and towards the
concept of corporate culture.
Economists have long treated technological phenomena as events transpiring
inside a black box. (Rosenberg, 1982: vii)
Firms are treated as black boxes. (Wiggins, 1991: 603)
INTRODUCTION
THISARTICLEargues, first, that that new theoretical ways of thinking
about companies are coming to the fore and, second, that these new
ways of thinking are finding their way into some aspects of company
law and regulation. Although the links between theory and practice or policy
in the area of company law are neither strong nor straightforward, they are
SOCIAL & LEGAL STUDIES 0964 6639 (200309) 12:3 Copyright © 2003
SAGE Publications, London, Thousand Oaks, CA and New Delhi,
www.sagepublications.com
Vol. 12(3), 359–376; 034851
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SOCIAL & LEGAL STUDIES 12(3)
worthy of consideration. This is especially so when a shift in ideas can be
detected which may signal changes in practice further down the line. Snider’s
device of tracking the emergence of new ideas as ‘journey from academic
journal to economic policy to law’ (Snider, 2000: 180) is employed in support
of the article’s main argument. It is submitted that new ways of thinking
about companies have been manifested in two areas of company law and
regulation: corporate criminal responsibility and corporate governance.
Developments in both these areas signal a willingness to ask questions about
a company’s conduct or behaviour and so look beyond individual decision
making. Corporate law has, in this respect, gone ‘inside the black box’ that
is the company.
Corporate legal theory has drawn extensively on theories provided by
economists under the general heading of ‘the theory of the firm’. This article
approaches the vast body of economic literature in this area through the
concept of the ‘black box’ and ways of looking inside it. It then identifies
shifts in thinking about companies. In particular it is submitted that the idea
of the firm as a ‘nexus of contracts’ is being replaced by the idea of the firm
as a ‘behavioural entity’. The article then demonstrates how the idea of the
company as a ‘behavioural entity’ can be seen in recent developments in the
areas of corporate criminal responsibility and corporate governance.
WAYS OF GOING INSIDE THE BLACK BOX
For the purposes of the analysis that follows, the idea of going ‘inside the
black box’ has been borrowed from the title of a book by Rosenberg. Others
who have used the idea of the black box include Whincoup (1999: 20), Coriat
and Dosi (1998: 113), Wiggins (1991: 603) and Archibald introducing his
edited collection of papers on the theory of the firm in 1971 (Archibald, 1971:
10). Theoretical black boxes come in various forms. First, as theorists we can
think we know what is in our black box, and theorize on that basis about
both the box and its interaction with the world outside. Second, we can
acknowledge that we are unable to explain fully the contents of our black
box, but take the position that our lack of knowledge about its contents does
not affect our ability to theorize about the box and its interaction with the
world outside. Third, we can realize that the contents of our black box are
important, that we do not (fully) understand the contents of the box and that
we need to go ‘inside the black box’ in order (ultimately) to improve theories
about the box and its interaction with the world outside. Research on the
theory of the firm has engaged with black boxes of the first two types and
embarked on various sorts of research of the third type. The main issue
explored in this article is how to look inside the black box that is the firm.
This extract from an edited volume on the theory of the firm illustrates the
use of a black box of the first type:
Resources are sold or hired to firms; commodities are bought from firms; and
firms are black boxes in between. The black boxes turn out to be production
BELCHER: INSIDE THE BLACK BOX
361
functions, converting inputs to outputs. In neo-classical general-equilibrium
theory, firms are completely described by their production functions. (Archibald,
1971: 10; emphasis in original)
When Archibald made his selection of readings on the theory of the firm in
1971, the main issues being pursued in this branch of economics concerned
interactions between production (occurring in firms) and market structures
(in which firms operate). Archibald had no problem with the contents of his
‘black boxes’ because, in the readings he selected, firms were indeed
‘completely described by their production functions’.
The idea of firms as black boxes of the second type can be seen in the early
empirical studies of investment and growth. In the late 1950s and early 1960s
effort was put into measuring and explaining economic growth, especially
growth in the US economy. Important papers were published by
Abramovitz in 1956, Solow in 1957 and Denison in 1962. Theories in which
growth was produced via capital accumulation (investment) were tested.
However, the proportion of the growth in resource productivity that
remained unexplained by these theories was very high: 87.5 percent in
Solow’s work. Abramovitz called this the ‘measure of our ignorance’.
Others suggested that the ‘unexplained’ growth must be due to techno-
logical change. In these models of economic growth, output is produced by
firms, and firms can be characterized by production functions, but the
production functions (and thus firms) can be changed by technological
advances. Solow, Abramovitz and Denison were working at the macroeco-
nomic level and were not attempting to answer questions about individual
firms or even types of firms. However, the explanation of their results
involves the characterization of firms as black boxes that contain both
production functions and technological change that shifts those production
functions. For the second type of black box, we acknowledge that we are
unable to explain fully the contents of our box. For some time economists
were happy to use the term ‘technological change’ without further expla-
nation. This is the background to Nathan Rosenberg’s book Inside the Black
Box: Technology and Economics published in 1982. Rosenberg’s stated
purpose was ‘. . . to break open and to examine the contents of the black box
into which technological change has been consigned by economists’ (1982:
vii). For Rosenberg the black box is of the third type: the contents of the
black box are important and we need to go ‘inside the black box’ in order
(ultimately) to improve theories about the box and its interaction with the
world outside. For Rosenberg the black box was technological change. Later
writers on the theory of the firm have set themselves the task of going inside
the black box that is the whole organization. For instance, Coriat and Dosi
take ‘a preliminary look into the organizational blackbox’ (Coriat and Dosi,
1998: 113). One of their propositions is that:
Firms are behavioural entities embodying specific and relatively inertial compe-
tencies, decision rules and internal governance structures which, in the longer
term, co-evolve with the environment in which they are embedded. The strength
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of norms, routines, ‘corporate cultures’ resides precisely in their persistence and
reproduction over time. (Coriat and Dosi, 1998: 111–12)
This language contrasts dramatically with Archibald’s assertion that ‘firms
are completely described by their production functions’. The story told
above about the development of theories of the firm is, of course, selective.
However, it demonstrates how the focus of theorists has shifted and how the
posing of different theoretical questions has led to different ways of describ-
ing and theorizing about firms. The earlier questions that economists posed
were about the interaction of firms and market structures. Latterly the inter-
esting questions have been why firms differ and why these differences persist.
The story of the development of theorizing about companies has been told
in this manner in order to provide a, hopefully interesting, shortcut. The
longer route would have taken the reader through such complicated territory
as transaction cost economics, asset specificity and property rights theories.
In the 1980s this journey would have ended in the theory of the firm as a
nexus of contracts. The main argument of this article is that the journey now
ends in a very different place. Table 1 characterizes some of the...
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