Governance in organizations: A cognitive perspective

Governance in organizations according to traditional agency theory is based on the premise that managers and employees do not have identical goals. As a consequence, employees need to be monitored and controlled. If legal contracts are not sufficient for proper control, incentive contracts should be used. This paper argues that incentive contracts are not sufficient to solve governance issues in organizations due to problems in measurability and enforceability of presumed contract violations. Such problems are complicated by asymmetries in power, perspectives and aspirations between managers and employees. Acognitive argument is advanced suggesting that time constraints and bounded rationality render the idea of monitoring relatively ineffective. Governance ideas that focus on communication flow and information sharing are described. The role that other cognitive elements such as memory play in a more comprehensive and interdisciplinary framework for understanding governance relations is discussed.