Resource Dependence Theory (RDT) (Pfeffer & Salancik, 1978) aims to explain, why organizations differ in their behavior and structures. A core element of organizational structure is Corporate Governance (CG): the system by which corporations are directed and controlled. It covers the distribution of rights and responsibilities among different stakeholders. Most important are decision-making rights, in particular for setting the goals of the corporation and the means of attaining those goals (OECD, 2015).1
RDT is a political theory of organizations. Business corporations are understood as coalitions of groups and individuals, characterized by bounded rationality (Simon, 1957), with different, often conflicting interests and ideas about goals and means. The actors use their power to enforce their interests. The power of an actor depends on the extent to which it controls critical resources – resources that are important for the survival of the corporation and that cannot be procured from other sources or substituted.
Based on these basic assumptions, RDT can explain why corporations differ in their form of CG. A central question is the participation in decisions of the dominant coalition. Which stakeholders have the right to decide on the fundamental goals and means of the enterprise? And how far do their rights extend? (“Who Governs?” Pfeffer, 1978, p. 1). RDT claims that the form of governance that will emerge will be that which best suits the interests of the most powerful resource controllers and thus the dominant coalition. The extent to which stakeholders, especially employees and consumers, participate in decision-making depends on their relative power. In capitalist economies, shareholders and their agents (the top managers), form the most powerful group of stakeholders.
Labour’s importance to a firm is dependent upon the ability of employees to organize themselves in order to pool their supply of labour and accumulate power. The more likely that employees organize the more likely they will be represented on the board of directors or similar bodies and be able to participate in important decisions. The same applies to consumers. If consumers have a lot of purchasing power, that is, if they organize themselves into consumer organizations for example, then it is more likely that their interests will be taken into account by the respective corporation. Such stakeholder groups as these are likely to be particularly successful if they succeed in forming a coalition with the state, which enforces their participation in decision-making bodies through legislation.
RDT therefore predicts different forms of corporate governance depending on the distribution of power. Interestingly, the “Principles of CG” of the OEDC (2015) assume that only those forms of CG serving the interest of the shareholders are efficient and desirable. This can also be explained: RDT suggests that the recommendations of the OECD are strongly influenced by powerful shareholder interests.
References
OECD (2015). G20/OECD principles of corporate governance. Paris: OECD.
Pfeffer, J., & Salancik, G. R. (1978). The External Control of Organizations: A Resource Dependence Perspective. New York: Harper & Row
Pfeffer, J. (1978). Organizational design. Arlington Heights, Ill.: Harlan Davidson.
Simon, H. A. (1957). Models of Man. New York: John Wiley & Sons Inc.
- I wrote this short article in 2021. It was to be published in a handbook with short contributions on theoretical perspectives on corporate governance. Unfortunately, the handbook was never published, and I never heard back from the editors, even after several requests. [↩]