The foundations of the “public organisation”: governance failure and the problem of external effects

Abstract

The article constructs a model of firm governance that considers the wider effects of economic activity, thus bridging the organisational level and the macro level. The theoretical framework builds on Hansmann’s ownership model and introduces an alternative. The “total cost model” advanced directs attention to concerns that are not entirely addressed by standard transaction cost theory and suggests that, when the external costs are high, a firm may need to extend the governance function to multiple patrons and absorb some external costs in pursuit of multiple public goals. Who should be included in the strategic control function will depend on the anticipated effects in terms of the external costs and the costs of organising. The article argues that this set-up helps to explain the “public organisation”, defined as a private organisation with public interest objectives, and further claims that this model helps to justify the recent emergence of multi-stakeholder social enterprises.