Can Private Learn from Public Governance?

Abstract

Corporate governance is importantly based on agency theory and relies on extrinsic incentives to align the interests of managers, employees and shareholders. This article argues that in view of recent corporate scandals, private governance can learn from public governance: (1) Goaloriented intrinsic motivation of agents should be supported by fixed incomes and an extensive selection process of employees; (2) Extrinsic, but non-monetary incentives (e.g. conferring orders and titles) can be used; (3) The power of actors should be restricted by a clear division of power, appropriate rules of succession and institutionalised competition for positions in firms.

Incentives and their dynamics in public sector performance management systems

“…Although recognition-based incentives might have quite different motivational mechanisms than monetary compensation, research suggests they may produce comparable, or in some cases superior, results. Recognition may bolster an agent's intrinsic motivation or engender less negative reactions among coworkers than pecuniary awards (Frey & Benz, 2005). In Heinrich's (2007) study of performance bonus awards in the Workforce Investment Act (WIA), she observed that performance bonuses paid to states tended to be low powered, in terms of both the proportion of performance-contingent funds to total program funding and the lack of relationship between WIA program employees' performance and how bonus funds were expended by the states.…”

The organisation of services of general interest in Finland

“…For example, the intrinsic motivation can be crowded out by extrinsic rewards and punishments in a public-sector organisation, for example if employees become alienated by managerialism and sticks and carrots (as inspired by the New Public Management). It has even been argued that the private sector should learn from traditional public-sector organisations to rely on intrinsic motivation, to implement career paths that discourage opportunism, and to apply nonpecuniary rewards (Frey and Benz, 2005).…”

Auditors and Corporate Governance: Evidence from the Public Sector

“…Frey and Benz () and Benz and Frey () go beyond the pure resemblance and suggest that due to the existing similarities, corporate governance might learn from the rich literature on public governance. Agency theory is an important theoretical approach in both corporate and public sector economics and there are many institutional similarities.…”

“…Thus, controlling the agents requires overcoming the free-rider problem, acquiring information, and orchestrating possible countermeasures, such as coordinated voting against decisions taken by the agents, etc. Frey and Benz (2005) and Benz and Frey (2007) go beyond the pure resemblance and suggest that due to the existing similarities, corporate governance might learn from the rich literature on public governance. Agency theory is an important theoretical approach in both corporate and public sector economics and there are many institutional similarities.…”

“…One of the most far‐reaching proposition is to let shareholders directly choose the auditor in regular competitive elections at the general assembly (e.g., Schelker and Eichenberger , Frey and Benz , Bebchuk , Benz and Frey , and for experimental evidence e.g., Mayhew and Pike ).…”