Enterprise Theory of Business Organizations

Business Organizations

While developing a sound understanding of organizational structure and culture is essential to making sense of choice-making mechanics in a very broadly conceived organizational setting, decision-making in for-profit business firms is also subject to a number of unique influences. As economic entities, business firms have customers, owners, quite commonly non-owner managers, and employees – in addition, being participants in the economic value creation process, business firms tend to participate in capital markets and are subject to at least some regulatory oversight. Consequently, the traditional view of business firms depicts those organizations as distinct economic entities aiming to fulfil the needs of their customers but operated for the benefit of their owners, subject to constituent interests of other stakeholders.

However, that once-dominant view of business organization is giving way to the enterprise perspective, which sees business firms as social institutions operated for the benefit of multiple stakeholders, including shareholders, employees, customers, creditors, regulators, and the public at large. Thus, whereas within the context of the traditional view of business firms organizational choice-making was seen as being shaped by a combination of customers’ needs and owners’ objectives, the emerging enterprise perspective paints a considerably more complex picture, with numerous stakeholder groups exerting some degree of direct or indirect influence on organizational choices. Moreover, implicit in the distinctiveness of individual stakeholder groups are differences in organizational interaction modes and motivations: For instance, in spite of being its legal owners shareholders tend to have infrequent, if any, direct contact with the business organization in which they hold stock, and their expectations rarely extend beyond opportunistic arbitrage. On the other hand, employees usually have constant direct interactions with the organization and their expectations tend to emphasize continuity and conditions of employment; still other stakeholder groups, such as customers or creditors have periodic interactions with the company and their expectations tend to reflect the fulfillment of implicit or explicit commitments.

In a more general sense, enterprise theory suggests that business organizations can be viewed as networks of distinct constituents. The theory further implies that firms strive to promote an efficient and effective functioning of their stakeholder ecosystems through instituting formal systems of rules, practices, and processes, to serve as bases of organizational decision-making. Broadly known as corporate governance, those rules aim to ensure accountability and fairness in organizations’ relationships with individual stakeholder groups. Naturally, the degree to which firms meet those goals can be questioned by different stakeholder groups leading to corrective or remediative actions,3 which can target firms as distinct legal entities, or firms’ directors and officers as organizational decision-makers, or both. In general, those actions are reactive, as they reflect stakeholder evaluations of a priori management actions in the context of obligations imposed by formal and informal rules comprising corporate governance. Thus, to be fully understood, business-related decision-making needs to be examined within the context of organizational stakeholder ecosystems.