Cognition and Governance: Why Incentives Have to Take the Back Seat

Abstract

Can we get by with “thin” notions of cognition and motivation as microfoundations for a theory of governance inside firms? This question is considered crucial for the development of the field and the answer given in this chapter is: no, we can not. The paper takes Williamson’s elaboration of an interest alignment approach with private orderings as one of the two prototypes of organizational governance. The underlying notions of cognition (as information impactedness) and motivation (as guile) are shown to be too thin to deal with the problems that arise in the kind of governance that gives pride of place to interest alignment, let alone to come up with solutions for alternative forms of governance. The paper presents microfoundations that are much thicker with regard to cognitions and motivation by focusing on overarching goals and by being informed by the state of the art in cognitive (social) psychology and sociology, neuroscience and evolutionary theory. It is shown that on the basis of such microfoundations, it is possible to pinpoint the shortcomings of the interest alignment approach (cum private orderings) and to formulate an alternative prototype of governance structures that is based on goal integration rather than interest alignment. A central feature deriving from the microfoundations that helped construct this prototype is that it is essential to base governance on the collaborative nature of organizations and on the precariousness of the collective orientation of their members.

Keywords: microfoundations, governance structures, firms, interest alignment, goal integration, goal-framing, joint production

JEL Classification: D21, D23, L2