Formal Organizational Power and Innovation: From a Principal-Agent to an Institutionalist View

Most analyses of the relationship between the internal distribution of formal organizational power, generally manifested in ownership and governance rights, and innovation efforts apply a principal-agent framework. The key implication of this framework is that firms with distributed formal power are more likely to engage in labor-intensive innovation because external capital providers are unwilling to entrust their investments to a worker controlled firm. In this paper, we critique the principal-agent framework and propose an alternative institutionalist approach, where the type of innovation pursued by firms with distributed formal power is contingent on the norms advanced by the innovation and the alignment of external stakeholders with those norms. After presenting this alternative framework, we illustrate its application with positive and negative cases of capital and labor-intensive innovation at the MONDRAGON cooperatives, a network of worker cooperatives in the Basque region of Spain. We conclude with a set of propositions to guide future research.