Normally Corporate Governance (CG) focuses on practical issues such as independence, special interests, audit trails, corruption, segregation of duties, directors’ remuneration, sustainability, etc. With the award of this year's Nobel Prize in economics given to Elinor Ostrom, and Oliver Williamson, the discipline of CG is strengthened both at the micro-, macro-and transaction level.

Oliver Williamson is a professor at UC Berkeley and also honorary professor at Copenhagen Business School (CBS). He has a long standing contribution of activities related to the research and development at the CBS. Political scientist Elinor Ostrom is Political Economist at Indiana University and is the first woman to receive the Nobel Prize in economics. Both have contributed constructive and insightful to CBS 'research within the disciplines of financial management and organizational economics.

Elinor Ostrom, and Oliver Williamson deal with the market theory's limits and limitations. They mop up the classical theory that a free marketplace of unregulated private ownership, are all actors that act in self interest. Their theories have been of great importance to competition laws in many countries.

Elinor Ostrom (EO) has conducted extensive studies on the management of common property with groups of joint owners, contractor’s management of governmental and private institutions. She notes that people with a particular interest in the resources they manage, are often better able to regulate resources than publicly appointed government bodies would be. EO has challenged the traditional view of common ownership, for example through associations or local groups, and proved that these often lead to poor management.

Self-organized communities

Oliver Williamson's (OW) work relates to understanding the boundaries of a company's sphere of interest, and why some transactions are handled more efficiently within companies than they would in competition between companies and / or individuals. OW has shown that specialization is good and creates wealth and values. If on the other hand companies are stopped from getting too large, it affects specialization.

Elinor Ostrom believes that with enough competition, with many actors, free markets are efficient, while markets with few players offers other challenges. Her central point is that self-organized communities often organize themselves out of collective action problems without government interference or only by "pure" market solutions. It is in contrast to the new requirements for corporate governance and compliance that are in the pipeline - in light of the financial turmoil we have experienced over the last few years.

The challenge lies in Elinor Ostrom assumptions, that market with adequate (or rather perfect) competition & many players with the full symmetric information. In the real world, however markets often do not fully have that base. In the practical world the theory creates further complications, because all players cannot have or gain access to, or necessarily understand the full, symmetric information that is provided.

In this context, governments, financial supervision, etc., also serve as actors. It's probably worth mentioning that the liberals (in a European context) desire more oversight, want more transparency, more risk and compliance rules for financial institutions. The big challenge is how best to combine Elinor Ostrom thinking to the current situation with demands for more oversight.

Top-down or bottom-up approach

Another important aspect EO stresses is that a bottom-up approach works better than top-down, as several companies have found after several unsuccessful efforts for compliance to SOX requirements. There is good reason to give people ownership in the decision making process and thus responsibility for the formulation and adoption of GRC rules. That way we do not alienate them, which can affect production efficiency.

EO's research also shows that in many cases, it is best to allow users to develop their own rules to regulate the use of common-property. For example, shows her studies of lobster fishing off the coast of Maine in the U.S. that self-imposed rules may often be better and better followed than imposed from the center.

The experiments show that people seem more willing to regulate others' behavior than predicted, and also that the development of effective rules for the regulation is critically dependent on good communication between the actors involved.

In practice, however, checks and balances to ensure that responsibility in relation to all external stakeholders continues to be with the Board of directors.

Regulation of transactions

Oliver Williamson's theory is that, hierarchical organizations are better placed to conduct transactions such as sale of coal to power plants, which are both high in complexity and interdependence underlying the transaction.

The results of his analysis have significant implications for public policy, including the regulation of competition. The perfect market may actually be the most effective way to regulate a specific set of transactions. Williamson's theory extends previous work on the limits and effectiveness to a level where empirical testing of predictions are possible.

Hierarchical organizations and governance structures

Economic transactions take place not only in markets but within enterprises, associations, households and agencies. OW's economic theory has highlighted the advantages and limitations of the market.

Oliver Williamson argues that markets and hierarchical organizations such as companies represent the alternative CG structures that differ in their approach to resolving conflicts of interest. The downside of markets is that they often lead to haggling and disagreements.

Antitrust authorities have also listened to Williamson's logic, and a wide variety of companies now impose restrictions on who can sell their products, and the rules that they need to be in Compliance with.

Research by the Elinor Ostrom, and Oliver Williamson shows that economic analysis can shed light on most forms of social organization through their analysis of economic governance, and the rules that people engaged through the authority of business and economic systems.

Outdated assumptions

There are however several GRC issues in the two Nobel Prize recipients theories that need to be updated. Several of their assumptions about perfect competition, full symmetric information, etc. are considered to be outdated. There are many scientists who have later examined the market behavior and concluded that under less idealized conditions, and problems related when inadequate competition, asymmetric information, etc. occurs. You obtain different results when one moves away from the ideal situation.

Their research has been centered on the optimum, better and more equitable use of various natural resources. This contains some priceless arguments which may be usefully used at the COP15 meeting later this year.

Ostrom's work in particular provides implications for politicians related to the complicated task of knitting a potential tool that processes and contributes to a sound and effective way to regulate CO2 emissions.

Common property against the community

Their work contradicts the traditional theory of economic argument against common property (= the common property leads to excessive / unnecessary high resource consumption because each person in the joint (owner) and requires a personal cost-benefit consideration. This also ignores the negative impact their consumption has the rest of the community.

Elinor and Oliver's point that if everybody do not know everything, self-regulation does not seem to be an extreme strategy to choose. Therefore, the two competent researchers vision of how groups of people, cooperation and respect their work, is anchored in the real world compared to the more abstract mathematical models that are persistent in today’s financial world.

The essay is already too long, but in a later note we could explore the results of their research and update each of their issues and update the GRC assumptions. It is relevant precisely because there is an urgent need for some new GRC rules to avoid future turmoil.