Governance in Organizations: A Cognitive Perspective

Governance in organizations according to traditionalagency theory is based on the premise that managersand employees do not have identical goals. As aconsequence, employees need to be monitored andcontrolled. If legal contracts are not sufficient forproper control, incentive contracts should be used. This paper argues that incentive contracts are notsufficient to solve governance issues in organizationsdue to problems in measurability and enforceability ofpresumed contract violations. Such problems arecomplicated by asymmetries in power, perspectives andaspirations between managers and employees. Acognitive argument is advanced suggesting that timeconstraints and bounded rationality render the idea ofmonitoring relatively ineffective. Governance ideasthat focus on communication flow and informationsharing are described. The role that other cognitiveelements such as memory play in a more comprehensiveand interdisciplinary framework for understandinggovernance relations is discussed. Copyright Kluwer Academic Publishers 2000