THE GOVERNANCE OF HUMAN CAPITAL: LESSONS FROM EMERGING INDUSTRIES

(‘Organizzazione e governance del capitale umano: lezioni dalla nuova economia’)

Anna Grandori

Alessandro Usai

Luca Solari

Silvia Bagdadli

CRORAIstituto di Economia Aziendale

Università Bocconiviale Isonzo 2320135 Milano

ItalyPh.+39.02.5836 2633/2637

Fax +39.02.5836 2634e-mail: crora@uni-bocconi.it

This paper is concerned with the governance of human capital as distinct from the

governance of the employment relation. Most traditions of analysis in the area of the

organization of work – in economics and sociology alike – have been concerned with

how the provision of work can be coordinated with the provision of the services

rendered by other types of resources – technical, financial, physical. However, while for

technical and financial resources, the difference between a relation of resource

investment and a relation of service provision is usually clear, the distinction has been

quite blurred as far as human relations are concerned.

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In general three units of analysis can and should be distinguished : the level of services

rendered by the use of resources, the level of the ‘bundles of resources’ from which they

stem, the level of actors - physical or juridical persons – possessing the resources

and/or delivering the service (Penrose 1959, Grandori 2001). They should not be

collapsed into one another, in principle, as different combinations between actors,

resource ownership and acting (service delivering) can be envisaged.

Management literature talks indifferently of ‘human resource management’ and of

‘labor relations’, and seldom distinguishes between the level of ‘human resources’

(knowledge and competence ) and the level of the actors possessing them. ‘Human

resources’ are often considered as a synonym of ‘people’, thereby neglecting the issue

of people’s strategies about the allocation and use of their resources.

Sociological analyses have been overly concerned with labor as a service (strange to

say, given that Marx – often quoted in that literature – was one of the first to notice that

there is a difference between selling labor and selling ‘labor-power’; or perhaps

understandably because that tradition of thought also takes for granted that ‘capital’ and

the ‘means of production’ are separated from work).

Organizational economic analysis is concerned with ownership of assets, and does

distinguish between labor transactions involving or not involving investments in

specific assets (Williamson 1979). However, both TCE and agency theory remain

focused on the governance of ‘transactions’ – exchange of labor services across

technologically separable interfaces – and do not examine fully the governance of

human capital investments in technologically unseparable combinations among

themselves and/or with other assets. In addition, their analyses are conducted under

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quite restrictive assumptions on the configurations that human capital providers’

preferences may assume - randomly distributed in Williamson’s analysis (1981); risk-

averse and effort averse in agency theory (Levinthal 1988) .

Overall, the governance of labor relations when the relation is an exchange of services

is therefore well analyzed. It gave rise to typologies of ‘contracts’ effective for the

purpose: ‘market-like’, ‘hierarchical’, ‘obligational’ and ‘relational’ (Williamson 1979,

1981) (Figure 1). They differ by time horizon and by the mix of governance

mechanisms employed: respectively, the matters regulated by the contract, include only

prices and service specification, or also and mainly supervision, rules and procedures,

norms of reciprocity and fair conduct. These governance arrangements can be fairly

well predicted by features of the labor transaction, such as task interdependence and the

observability of performances, even without hypothesizing any specific investment of

human assets.1

Interdependence

- +

+ market-like contracts obligational

contracts

Difficulty in performanceevaluation - hierarchical contracts relational

contracts

Figure 1. The governance of labor transactions: a typology of exchange contracts

Source: Adapted from Williamson (1981)

A further array of contracts, however could be prospected for labor relations

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characterized by specific human capital investments rather than just by service transfers

– which are analysed in less detail. In this case the situation would be similar to that of

an investor of specific technical capital. The relevant questions for an investor are:

(Shleifer, Vishny 1996): what governance arrangements can induce to invest? What the

guarantee are that the investment will be fully compensated? What the prospects are to

be able to collect the capital back, how much accrued, at what time? The relevant

governance mechanisms for solving those problems typically include ‘property rights’

and not only the organizational rights mainly considered in labor exchange contracts

(rights of action, information, communication, decision and control). Property rights, in

the broad sense currently admitted also in organizational economics, include the

ownership of assets, the rights to residual rewards from their use, residual decision and

control rights on how the assets are used, the right to sell the asset or the services

deriving from it ( Fama , Jensen 1983a,1983b). Contracts including a specification of

how those rights are allocated can be defined ‘associational’ contracts, as distinguished

from ‘exchange’ contracts, as the formers establish a continued association among

dedicated assets, expose them solidarly to risk, and entitle the providers of those assets

to sharing the residual economic results of the activity (Galgano I.II.III 1974)2.

A typology of associational contracts. A first general hypothesis, therefore, is that

human capital investments are to be regulated by associational contracts (Becker 2000,

Hart and Moore 1986, Aghion and Tirole 1994).

More refined hypotheses should however be advanced in order to describe and explain

the variety of associational contracts actually employed3. They involve differences in

the extent to which different property rights are shared by human capital providers. The

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following governance mechanisms can be usefully distinguished to capture those

differences:

- ownership of firm assets, in the form of own capital or shareholding;

- rights on residual rewards, in the form of pay for performance or of stock options;

- non residual, risk-free rent sharing provisions, in the form of above average base

income;

- decision and control rights on how the ‘professionally conducted organized

economic activity for the production or exchange of goods or services’ constituting

the firm should in fact be conducted;

- residual decision and control rights on rewards allocation and on human capital

mobility;

- ‘beautiful exit’ rights (golden parachutes, time horizon of stock option rights).

Supposing that specific investment of human assets are made, we should hypothesize

that a non contingent feature of the governance package is that relevant decision and

control rights on activities are allocated to those principals/agents. They would care a lot

about what particular activities the firm will undertake, as their own capital will go

together. They would not be 'quasi-indifferent' on the nature of tasks, as it was

hypothesized to occur in a classic ‘employment relations’ (Simon 1955), as one reason

to make a human specific investment (and actually to explain why such risky

undiversified investments are made at all) may well be the interest in performing

particular tasks. The effective combinations of those mechanisms are predictable on the

basis of some additional variables, that qualify the types of specific human capital

investments made. Relevant candidate variables are the measurability of performance

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and the riskyness of activities.

Current conceptualizations about corporate governance structures, and the relations

between financial capital providers and human capital providers have focused on the

motivational problem of providing ‘powerful incentives’ to those in charge of ‘control’,

in order to orient the latter’s (unobservable) behaviors in the interests of the former

actors. This frame neglect the risk problem as well as the problem that the latter actors

make specific investments in the firm as well; to the extent they do so, they are in a

position of ‘principals’ as well.

The riskier an activity is, the more results are influenced by exogenous variance, the less

intense the optimal incentive is, ceteris paribus (Milgrom, Roberts 1992). Hence we

should hypothesize that the incidence of pay for performance, should not be extremely

high in the governance of human capital investments in risky activities. Unmeasurability

of outcomes is also an impediment to pay for performance. We refer in particular to

unmeasurability due to the intrinsic complexity of activities (uncertain categories of

consequences, long term effects, poor quantifyability) rather than just to team

production effects, which could be managed by group contingent rewards. By contrast,

individual and group pay for performance should be diffused wherever activities stay in

known causal relations with measurable outcomes.

What mechanisms can substitute for high powered incentives at the individual and

group level, in conditions of low measurability of partial outcomes? There, shared

property rights over firm assets and activities, globally intended, are in order (Fama,

Jensen 1983a, 1983b). Figure 3 hypothesizes that ownership will not be separated from

control in condition of limited risk and highly complex, non measurable outcomes;

while financial investments will be more separated from human capital investments in

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highly risky ventures, where otherwise, human capital providers, which can not

diversify easily their human investments, would bear excessive risk. Then, the

governance of human capital investment relations in highly risky activities, should be

characterized by more diversified investors (internal and external), a higher incidence of

‘premium’ base income and of ‘golden parachutes’, a higher incidence of stock options

(a relative low risk and collective form of contingent reward) or analogous ‘bonuses’

linked to positive variance in firm’s results in non listed firms.

A typology of human capital ‘markets’. A second array of hypotheses on the governance

of human capital investment relations, concerns the modes and channels through which

these managerial resources are attracted, evaluated and selected, in emerging industries.

Level of Risk and innovativeness

- +- Ind/group

Pay for performance,gain/profit sharing

Diversified investors,bonuses/stock options,premium base income

Difficulty in evaluating performance

+ Managerial shareholding/ownership, professional partnerships,Mgt Buy Outs

Figure 2. The governance of specific human capital investments: A typology of associational contracts

How is managerial Human Capital "traded" in the labor market? What are the

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mechanisms governing the exchange of managerial Human Capital across

organizational boundaries, in emerging industries?

In the last decades it appeared clear how the internal and external labor market partition

was unable to explain important phenomena. As it happened with regard to other

important economic phenomena, the internal/external labor markets divide seems to be

insufficient to explain Human Capital mobility. Granovetter (1974, p. 26) already noted

how "several factors mitigate against perfect labor markets. Inertia as well as social and

institutional pressures ... (but) the factor most relevant to the present discussion is

imperfect information". Years later, Roth and Xing added that "markets may require a

good deal of organization. This runs counter to the view implicit in much of the

economic literature, which is that markets are largely self-organizing" (1994: 2). It is

difficult for managers to possess complete information about job opportunities, job

characteristics, job attractiveness and on the other hand it is often difficult for

companies to get access and subsequently assess the real value of the managerial

Human Capital in the labor market. According to the economic view candidates and

employers try to overcome the limitation of information adopting active "search"

behaviors, maximization of utility by rational actors using marginal principles pervades

these models. Perhaps however the way job-search theory has most adversely affected

research has been in deflecting attention from the large number of jobs that, by almost

any definition, are not found by search4 (Granovetter, 1995: 142). In the last decades

however, starting from the founding work of Granovetter (1974), scholars, mainly

coming from sociology, have started to study the social side of labor markets and

transactions, looking at the hidden governance structures laying beyond the "market"

idealtype. Granovetter (1974) found that 55,7% of workers interviewed found their job

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through personal contacts, others (Corcoran, Datcher and Duncan, 1980:12), following

5.000 American families through a panel design, found that 52% of white men and

47,1% of white women found their jobs through friends and relatives. These evidences

have been confirmed in the following years by studies on workers of manufacturing

plants (51,4% of jobs found through personal contacts; Marsden and Campbell, 1990:

68) and on young American people employment (at least 40% of 17-25 year-old

workers found jobs through personal contacts; Staiger, 1990: 7). The "social

governance" of job markets has been confirmed outside the US. In Britain during the

1970's and 1980's between 30 and 40% of respondents to a national survey found jobs

through friends and relatives (Fevre, 1989). Watanabe's (1987) study of 2003 male

workers in the Tokyo metropolitan area, shows that of those who change jobs, 54,6%

do so through personal contacts. Boxman, DeGraaf and Flap (1991), in their survey of

1.359 Dutch top managers, found that 61% had found their job through contacts. Finally

in a recent survey conducted among alumni of an important Italian University of

Business studies, it emerged that "only" 23,3% of the respondents declared to have

found their current job through personal contacts5 (Santoro, 2000), however, the

percentage was higher for respondents in the highest age and income categories.

In short, it seems that not only Social Capital may be crucial in the creation of Human

Capital (Coleman, 1988) but that it could be even more important as a governance

mechanism in the transfer and exchange of it.

One limitation of large part of the mentioned research has been a lack of interest in

discriminating between effective and efficient forms of social networks and ‘clanistic’

and ‘oversocialized’ ones. To the purposes of understanding how human capital

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investments are regulated in emerging and innovative industries, for example, it would

be crucial to distinguish between effective forms of professional network – responding

to the difficulties in assessing human resource potential – and ‘socially over-embedded’

networks generating ‘local search biases’, thereby reducing innovation potential.

Building on research focusing on high level work and innovative industries, as well as

on relevant theory, we are therefore going to construct a typology of effective forms of

network governance that takes into account some relevant contingencies, which

parallels what has been done for contractual forms.

For what it concerns managerial networks, it has been showed that managers have larger

networks than non-managers, that managers' social networks (core discussion networks)

tend to include a greater number of professional contacts, and that managers interacting

with co-workers tend to have higher job rewards (Carroll and Teo, 1996). It has also

been argued that managers with well established networks have better career potential

(Jackall, 1988; Krackhardt, 1990). Finally it seems that managers, because of the long

hours they spend under stress at the workplace, tend to achieve higher intimacy with co-

workers, transforming apparently professional ties into especially "close relationships"

(Carroll and Teo, 1996). Most of the research however has been conducted within

organizational boundaries and not so much is known about the role and the

characteristics played by managers' social networks when managers change jobs.

Similarly, with regard to emerging industries, not so much is known about the

characteristics of job markets and about the governance of Human Capital transactions.

Windolf (1986), based on a study of English and German firms, relates recruitment

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strategies of firms to their particular industry niches, saying that most likely to recruit

through networks are firms that are mainly trying to maintain the status-quo, while

"innovative" firms that want to attract as many innovators as possible will try to go

beyond networks in order to get in touch with a wider group of candidates. However,

the author found little empirical evidence for his propositions.

While Human Capital market in emerging industries has received little attention, the

governance solution for the transfer of other kind of resources, mainly financial, have

been studied more carefully. Recently Shane and Cable (2000) showed how financing

processes of new ventures are significantly governed through social networks. The

existence of direct and indirect social ties between investors and new entrepreneurs

increase the likelihood that a new venture will receive the funding required. This

evidence would be explained by the capacity of social ties to give access to private

information about the quality of other people's talents and their tendency to behave in an

opportunistic manner (Shane and Cable, 2000; Aldrich and Zimmer, 1986; Gulati and

Gargiulo, 2000; Uzzi, 1996). In other terms, direct and indirect social ties would limit

the information asymmetry, existing between the investor and the entrepreneur, deriving

from the absence of certain and objective criteria in evaluating new ventures.

So which governance mechanism should we expect to regulate Human Capital

investments in innovative activities? Governance mechanisms should respond to two

(often contrasting) forces.

1. Networks can be used to overcome information asymmetries (Burt, 1992; Fernandez

and Weinberg, 1997), therefore we expect that a more intensive use of personal

contacts when the conditions are more innovative will occur and will be efficient.

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2. The adoption of market brokers who look outside of the existing managers' social

networks, scanning the market and providing more diverse and innovative Human

Capital should be a precious complementary mechanisms for sustaining innovativeness

and reduce opportunity costs. The following table illustrates a typology of governance

mechanisms for the exchange of Human Capital according to two dimensions: the

innovativeness of the activity and the level of competence required in the candidate.

The innovativeness of the activity pushes the organization away from adopting the

market for two reasons. If the activity is new it is likely that a specific Human Capital

market is not yet formed and institutionalized. Secondly, if the activity is new and

inherently more risky, the choice of the candidate will be heavily driven by delicate

judgments of confidence in competence and reliability. For those reasons, we expect

that personal networks play a prominent role in governing the acquisition of Human

Capital for innovative activities, while for more traditional activities the use of market

and quasi-market solutions will be higher. But we can distinguish further between types

of networks as the level of difficulty in evaluating human capital investments ex-ante

varies; even if a firm is a start up in a very new activity, some competence profiles may

be used also in other setting and not intrinsically complex to evaluate, for example

because they belong to clearly institutionalized and certified specializations. In sum,

let’s identify at least that the four types of govenance arrangements reported in Figure 3,

and to hypothesize that they are superior in governing the access of human capital

assets into new ventures in the indicated circumstances.

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Innovativeness of activities

- +- Open

institutionalizedmarkets

Quasi-internalProfessional Networks

Complexity of human assets

+ Brokered markets Quasi-External Professional networks

Figure 3. A typology of human capital mobility governance forms

-Open market is good for exchanging Human Capital characterized by well-defined,

non-differentiated, hence often specialized and non firm-specific, competences. As said,

we do not expect that ‘open’ markets of human capital are close to ‘perfect’ markets.

They are likely to be highly institutionalized markets, relying on quality certifications

released by the institutions which contributed to generate or evaluate that capital

(educational institutions, professional associations) (Karpik 1989).

-When the competences sought for are not complex to evaluate but the activity is new

and risky, a more effective mechanism will be cooptation based on past experience of

common work , through professional relations which has become dense social

relationships ( former co-workers and business partners) and thus provide rich partner-

specific knowledge.

- When the complexity of competences is high but the activity is not highly

innovative , we could expect a higher use of human capital market brokered by

professional services (e.g. head hunter firms). The brokerage of professional services

specialized in scanning the market and putting demand and offer in contact should be

particularly useful for those relatively rare and sophisticated competences, and

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professional services also have superior capacities to assess them.

-Finally, when both innovativeness of activities and competences complexity are high,

we would expect quasi-external professional networks to be a superior governance

mechanism. Those networks should consist of ‘weaker ties’ (Granovetter 1995) with

respect to quasi-internal social network, and should be richer of ‘structural holes’ (Burt

1992) and indirect ties in order to sustain both efficiency of serch and the variety of

alternatives.

Empirical evidence from Italian New Market firms.

The analysis of data collected in a recent empirical study we conducted in Italy provides

the ground for a preliminary test of our hypotheses on governance mechanisms of the

Human Capital investments.

Within the scope of a broader study, we were able to collect data on 164 top managers

in 92 companies listed ( or who submitted request for listing by November 2000) on the

Italian New Market. This sampling criterion selects firms that are relatively successful

and solid, which went through various rounds of financing and through an IPO. We had

a return rate of 63% (58 companies). In each companies we had responses from the

CEO and the first level managers, within a maximum of 5 managers for each

companies. 164 is the total number of managers who participated into the research.

Among the 164 managers who responded to our survey, 149 had previous work

experiences and we collected data on their complete professional records. Data collected

allow us to identify industry, functional area, organizational rank, length of stay, referral

system which lead them to New Market positions, and several other biographical and

professional information on current jobs and on changes with respect to previous

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positions in non-New Market firms.

1. Access structures

To explore how the potential investors of human capital encounter opportunities to

invest, and how these matches are evaluated, selected and retained, we enquired into the

how the Italian New Economy managers got in contact with their new work and

investment opportunities. While expecting networks to play a prominent role, we also

wished to discriminate among professional networks – based on past tests of the validity

and reliability of the counterpart’s competence – and social networks of a clanistic and

oversocialized variety.

The term ‘social networks’ is here limited to designate ties are based on kinship,

common studies, friendship deriving from social activities and friendship deriving from

common geographical location (i.e. neighbors). We hypothesized that in innovative

activities the ‘weakness of strong ties’of the latter type (Grabher 1983) should have

been sensible, and should result in little influence of those networks in the access to the

successful new companies considered. In other terms, the type of trust sustaining

effective access network in innovative activities is supposed to based on competence

reliability and validity assessments, rather than on interpersonal loyalty and excessively

long-lasting ties. In addition, due to the novelty of context, functional and industry

experience, here used as control variables 6 may represent a weak certification

mechanism in a context where new competencies are needed not necessarily codified,

and specific industry knowledge is still to be created. For all these reasons, we predict

that pure friendship and kinship relations, which have previously shown to be relevant

especially for non-managerial careers within traditional industries (Corcoran, Datcher

and Duncan, 1980; Marsden and Campbell, 1990), won’t show relevant impact on

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managers’ access to the more solid firms of the New Economy.

Professional networks are in turn differentiated into quasi-internal networks (ex-co-

workers who move as a group into a new activity), quasi-external ( ex-business partners

– e.g.clients, suppliers, consultants - not belonging to the same internal labor market

beforehand), brokered networks (mediated by personnel search firms, venture

capitalists or other broker) and quasi-markets (open calls/offers, direct or through

institutions but not ‘ad personam’).

Our results generally support these hypotheses. In the question proposing a list of 8

possible channels of access, 56.9% of our subjects tickled the single channel represented

by all types of networks, while 7.8% used brokers , and 21.6% exchanged

offers/proposals directly.

For understanding the differences among the types of network used, we first applied an

event-history analysis (see Appendix 1 for details). Using this technique, we are able to

ascertain the impact that the use of different types of networks on the hazard rate that an

event of job holding terminates in an entry in a firm listed in the New Market.

The variables considered in the present empirical analysis are described in Table 1.

Table 1. Variables in the event-history model of access

Variable Description

Functional specialismDummy variable, coded 1 for respondents who had 75% or more job experiences within the same functional area and 0 otherwise

Industry specialismDummy variable, coded 1 for respondents who had 75% or more job experiences within the same industry and 0 otherwise

Access through networks Dummy variable, coded 1 for respondents which used networks and 0 otherwise

Professional networkDummy variable, coded 1 for respondents who used professional networks and 0 otherwise

Social networkDummy variable, coded 1 for respondents who used social networks and 0 otherwise

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Table 2. Event-history model of access (Weibull specification)

Table 2 presents the results of our analyses which give support to our hypotheses

on the adoption of network as governance mechanisms in the case of innovativeness of

activities and competences complexity. While Model 1 and 2 control for background

factors (industry and functional background), model 3 and 4 consider networks as

referral systems. The distinction between professional and social networks allow us to

see that strictly “social” networks (i.e. networks of friendship or family ties) are even

negatively linked to mobility into New Market positions; whereas the use of

professional networks (i.e. networks of colleagues, managers, business partners, etc.) is

strongly and positively linked to the ‘termination’ of the career events into a New

Market positions.

Consistent with our theoretical argumentation, instead, professional networks emerge as

the prominent governance mechanism regulating and sustaining the access of human

capital investors into New Market firms in Italy (Tabel 3).

Model 1 Model 2 Model 3 Model 4Functional specialism - 0.0023** -0.0016** -0.0016** -0.0009

(0.0009) (0.0007) (0.0007) (0.0.3094)Industry specialism 2.5077*** 2.4036*** 1.6264***

(0.3632) (0.3664) (0.3094)Access through networks -0.0012

(0.0009)Professional network 0.8188***

(0.1365)Social network -0.8206***

(0.1365)Sigma 2.9925*** 2.5354*** 2.5122*** 2.0509***

(0.1488) (0.1324) (0.1309) (0.0994)Log likelihood -717.3831 -691.7143 -690.3920 -658.3380D.F. 148 147 146 145Number of spells 455 455 455 455

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Table 3 - Access channel to the NE

Frequency Percent Valid Percent Cumulative Percent Valid Network 87 53.0 56.9 56.9 Direct contact 33 20.1 21.6 78.4 Agencies & headhunters 12 7.3 7.8 86.3 New business 9 5.5 5.9 92.2 Other 7 4.3 4.6 96.7 Schools and university

placement2 1.2 1.3 98.0

Announcements 2 1.2 1.3 99.3 Internet 1 .6 .7 100.0 Total 153 93.3 100.0 Missing System 11 6.7 Total 164 100.0

To better explore the nature and relevance of professional networks, we distinguished

among ‘quasi-internal’ and ‘quasi-external’ networks and related them to a

classification of our sample into ‘figures’ which are good proxies of the complexity and

difficulty of evaluation of human asset investments:

-the ‘founders’ and the ‘investors’ are the top managers who invested own capital in the

firm; the former are present since the start-up phase, while the latter joined later, ad are

the groups with the lower index of specialism;

-the ‘first-vawe’and ‘second wave’ managers are the top managers who have not

invested own capital in the firm; the former are present since the start-up phase and are

the groups with the highest index of specialism;

-the ‘non-dirigenti’are managers who, in spite of reporting directly to the CEO, do not

have a contract of ‘dirigente’ (the most important juridical distinction between labor

contracts in Italy is between the ‘inquadramento unico’ of white and blue collar workers

in 8 levels of qualification; and the ‘dirigenti’) and are the yougest group.

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Table 4 - Managerial types and access through network

Total non network network Founders 15 20 35 42.9% 57.1% 100.0% Investors 6 15 21 28.6% 71.4% 100.0% First wave managers 7 11 18 38.9% 61.1% 100.0% Second wave managers 13 26 39 33.3% 66.7% 100.0% Managers non-dirigenti 19 10 29 65.5% 34.5% 100.0% altri 3 6 9 33.3% 66.7% 100.0% 63 88 151 41.7% 58.3% 100.0%

As shown in Table 4, the network channel is more strongly used by the Investors,

slowly decrease for First and Second wave managers, and is much more rarely used by

the non-dirigenti. This distribution is what was expected on the basis of our hypotheses:

the rate of use of network is directly and positively related to the complexity and level

1 This is the main difference between the typology advanced in Figure 2 and Williamson’s earlier elaborations on the matter. We are going to separate the conditions where those investments occur, in order to develop a more fine grained portfolio of governance arrangements. Implicitly, the criticism to Williamson is that neither asset specificity nor opportunism are necessary to explain the basic differences between exchange contracts governing employment relations; and that he neglected the possibility of associational contracts all together where those specific investments are made. 2 Civil law systems seem to be richer, and more tightly linked to economic and organizational differences, in those respects than Common Law ones. For example the Italian law does distinguish between ‘contratti di scambio’ and ‘contratti di associazione’; as well as it distinguishes, and treat differently, ‘enterpreneurial firms’ (where there are owner-managers investing their ‘organizing and directive capabilities’ and bearing the risk of the chosen and combinations of resources) from other types of firm (capitalistic and collective). 3 Williamson ‘s typology of the governance mechanisms for ‘human assets’ and employment relations was firstly extended to include associational contracts in Grandori (2001) and it is here further refined to distinguish human asset investment relations from labor service exchange relations. 4 Many studies showed how not searching is the most common method of "job search", with percentages ranging from 51% (Hanson and Pratt, 1992) of people not having searched for their actual job, up to 63,8% for managers and to 60,2% for jobs in the highest income category (Watanabe, 1989). 5 Those findings are consistent with the idea that "because new entrants have not yet worked, they do not have a highly developed contact network that could relay detailed information about their skills and personality to prospective employers" (Granovetter, 1995: 166).6 A specific analysis of the industry and functional boundaries of these careers is conducted in Bagdadli et al, 2001.

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of human capital investments.

But what kind of network are used by the different groups? In order to answer to this

question we investigated the kind of relations used as network contacts. Both the

relation existing between the candidate and the network contact and the relationship

existing between the company hiring and the network contact have been tracked. The

following table illustrates the "access governance forms" used by the different kind of

managers. The access governance forms have been defined and aggregated as follows.

"Open market access" consists in any access through direct contact (CV sending and

alike), Internet applications, response to journal announcements. "Brokered market" is

any access mediated through professional brokers (Headhunters, labor agencies,

University placement). "Quasi-internal professional network" is defined by accesses

through ex-colleagues (ex-boss; ex-employee; ex-peer). It is called quasi-internal

because the network used to have access to the new jobs consists of ex-internal labor

markets. "Quasi-external professional networks" are defined as accesses obtained

through previous business contacts. They are called quasi-external because, with regard

to the candidate, those contacts were external to the company the candidate worked for.

Finally, we have the access through "pure social networks" which coincide with the

more traditional definition of social relationships, accesses through friends, relatives,

neighbors, ex-school-mates. "Other" are the accesses through contacts not matching any

of the previous categories.

Table 5 - Managerial types and access governance forms (including the "access network" typology based on the relationship between the manager and the network contact)

Open market

Brokered market

Quasi internal professional

Quasi external professional

Pure social

Othercontact

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network network networksFounders 0.24 0.00 0.28 0.31 0.10 0.07Investors 0.11 0.06 0.33 0.17 0.33 0.00First wave managers 0.29 0.06 0.41 0.24 0.00 0.00Second wave managers

0.18 0.13 0.20 0.20 0.25 0.05

Managers "non-dirigenti"

0.48 0.15 0.15 0.04 0.11 0.07

Others 0.11 0.22 0.11 0.22 0.22 0.11N. 35 13 34 27 24 7

0.25 0.09 0.24 0.19 0.17 0.05Note: The table entries are percentages of access, calculated for each managerial type.

This analysis shows again how the "non-dirigenti" are the only group for which Open

market constitute a relatively highly used access channel, coherently with the lower

complexity and uncertainty of their roles into the companies. For the other managerial

types, networks are the dominant form. In the very first phases of hiring, when the

difficulty of evaluating human capital investments is highest, quasi-internal networks

play a very significant role (see the percentages of first wave managers contacted

through ex-colleagues). This evidence seems to constitute a true evolution of the well

known Internal labor market phenomenon. In other terms, Internal labor markets (ILM)

do not disappear when we consider career movements across organizational boundaries.

ILM are just not visible anymore unless we take into consideration network effects and

in particular we analyzed the nature and content of the network contacts. If we do so we

see that, especially in complex and emerging industries, ILM still work through

networks of ex-colleagues. The reputation, position, status, experience accumulated into

previous jobs is not wasted but it is used by networks as a selection criterion across

organizational boundaries as it would happen within the organization. Given the higher

job mobility characterizing all industries and emerging industries in particular the

importance of ILM through networks is likely to increase and would need further

investigations.

21

Quasi-external networks constitute a second important kind of network access. It seems

reasonable to hypothesize that quasi-external relationships are "weaker" but also richer

in structural holes and non-redundant information with respect to quasi-internal

networks. Founders seem to have used a lot this kind of access mechanism.

Table 6 - Managerial types and access governance forms (including the "access network" typology based on the relationship between the network contact and the company in which the manager will eventually get the job)

Open market

Brokered market

Quasi-internal network

Quasi-external professional network

Pure social network

Other contact

Founders 0.27 0.00 0.35 0.27 0.08 0.04Investors 0.12 0.06 0.35 0.29 0.06 0.12First wave managers 0.31 0.06 0.13 0.25 0.13 0.13Second wave managers

0.18 0.13 0.46 0.15 0.08 0.00

Managers "non-dirigenti"

0.48 0.15 0.22 0.11 0.00 0.04

Others 0.11 0.22 0.67 0.17 0.00 0.17N. 35 13 45 26 8 7

0.26 0.10 0.34 0.19 0.06 0.05

This second analysis tells us that the company hiring relates heavily on internal

employees in order to select new candidates. The analysis illustrates how in almost all

managerial categories the manager's network contact was someone working for the new

market company in which the candidate will eventually get the job. Once again ILM

seems to play an important role in influencing careers across organizational boundaries.

In this second case however are the actual companies that exploited their internal

resources in order to have access to external managerial candidates. Not only old ILM

help managers in finding companies but also actual ILM help companies finding new

managers. In order to differentiate our inter-organizational ILM from the traditional

ones, we will call our type Internal Labor Networks (ILN), as opposed to business

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contacts which may well represent "External labor networks".

The following table is apparently very similar to the previous one, however it

summarizes a different aspect of access networks. The first two categories are the same

as before (Open market and Brokered market), but we have different information

regarding the access network. While the first table shows which kind of relationship

existed between the candidate and the network contact (the person which signaled the

job opportunity to the manager), this second table illustrates which kind of relation

existed between the manager's network contact and the New Market company in which

the manager eventually got the job. In this second analysis tough, we have an access

through "Quasi-internal networks" when the manager's network contact was an

employee of the New Market company in which the manager eventually got the job. We

have a "Quasi-external professional network" when the manager's network contact had a

professional relationship (client, supplier, consultant, capital provider) with the New

Market company of destination. We have a "pure social network" access when the

manager's network contact had a social relationship (friendship, kinship, ...) with

someone inside the New Market company in which the manager eventually got the job.

2. CONTRACTUAL STRUCTURES

With regard to the types of associational contracts, we collected data on the structure of

the compensation system, the allocation of property rights and decision rights. In

particular we collected evidences regarding four characteristics of the incentive schemes

used to govern managerial human capital in the New Market: the diffusion of

managerial ownership, the diffusion of stock options, the amount of variable

compensation on the total compensation of managers, the increase of total compensation

23

obtained in the change between previous jobs and jobs in New Market companies; and

regarding six characteristics related to the allocation of decision rights: the level and

increase in the amount of economic and people responsibility, the incidence of team

work and of technical problem-solving in one’s area of expertise, the degree of decision

autonomy.

The next table gives some descriptive statistics of those variable:

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Table 7 - Descriptive statistics

N Minimum Maximum Mean Std. Deviation Total compensation between NE and OE

147 1.00 6.00 2.9796 1.2133

Managerial ownership in NE 163 .00 1.00 .4110 .4935 Proportion of non-variable compensation in NE

155 .00 100.00 77.8613 21.7759

Proportion of non-variable compensation in OE

139 .00 100.00 86.5755 20.4851

Stock options NE 162 .00 1.00 .5185 .5012 Stock options OE 145 .00 1.00 .1034 .3056 Valid N (listwise) 129

The change in total compensation between previous jobs and jobs in New Market firms

has been measured with a scale ranging from 1 (actual compensation lower than

previous) to 6 (actual compensation more than triple than previous compensation).

Managerial ownership has been measured with a dummy variable measuring if manager

had a direct financial stake into the company. Stock options has also been measured

asking the respondents if they participated into a stock options plan. Finally, the

proportion of fixed income on total compensation was expressed as a percentage, as

well as the incidence of various specified forms of ‘variable’ compensation (pay for

individual performance, pay for group performance, profit/gain sharing policies,

dividends).

Task-related variables were measured by asking their absolute present levels and the

amount of increase with respect to the last non-NE job on five point scales (largely

inferior, inferior, equal, superior, largely superior). Responsibility was measured as

level of economic indicators for which one was responsible and span of control;

teamwork and problem solving intensity in % of time devoted; autonomy was measured

only comparatively with respect to the last non-NE job, with five levels of increase or

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decrease in the possibility to act independently.

A first interesting consideration comes from the simple cross-tab analysis of managerial

ownership and stock options. The following table illustrates how the two dimension of

human capital governance seem to be relatively independent, hence, rather fungible

mechanisms for governing human capital investments. Our managerial population is

sparse along the two dimensions which combined define 4 managerial sub-groups: those

who are "owners" of part of the company and who are also committed to be owners in

the future with the stock options plan (21,6% of respondents); at the opposite, we have

managers absent from the proprietary group and also not participating into any stock

option plan (28,4% of respondents); finally, we have owners not participating to stock

option plans (19,8%) and vice-versa managers with stock options without being

shareholders yet (30,2%, relative majority).

Table 8 - Managerial shareholding and stock-options: two independent dimensions of associational contracts

Stock option Total No Yes Managerial shareholding No Count 46 49 95 % of Total 28.4% 30.2% 58.6% Yes Count 32 35 67 % of Total 19.8% 21.6% 41.4% Total Count 78 84 162 % of Total 48.1% 51.9% 100.0%

It is interesting to see how those subgroups are characterized in terms of other

dimensions of the governance of human capital. For instance how different is the

compensation structure of managers shareholders, stock option owners and other

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managers? The following table illustrate the differences in the mean "fixed"

compensation between those managerial sub-group:

Table 9 - Total compensation between OE an NE

Managerial shareholding NE Stock option NE Mean N Std. Deviation Non shareholders No 84.4783 46 15.4801 Yes 80.2222 45 15.3444 Total 82.3736 91 15.4759 Shareholders No 75.2667 30 30.5196 Yes 68.0735 34 24.0870 Total 71.4453 64 27.3085 Total No 80.8421 76 22.9016 Yes 74.9937 79 20.3697 Total 77.8613 155 21.7759

ANOVA Table

Sum of Squares

df Mean Square

F Sig.

Total compensation between * managerial shareholding

Between Groups (Combined) 4487.412 1 4487.412 10.017 .002

Within Groups 68537.855 153 447.960 Total 73025.268 154

The level of present and future ownership seem to correlate with a higher proportion of

variable compensation. While we have dividends included in the calculation of the

variable part of compensation, however, this figure does not take into account Stock

Options gains. Managers with the highest variable income are managers who are both

shareholders and possessors of stock options (68% of fixed income), on the opposite we

find managers with no equity stake nor stock options, who have the most fixed

compensation package (84,5% of fixed income).

Other interesting evidences come from the comparison of compensation structures

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between managers of Old and New economy. Table 9 shows how the respondents faced

a significant increase in the variable part of their compensation when moving to jobs

into New Market's companies. However, the prevailing forms of variable compensation,

are linked to the

ownership of firm’s financial assets (Stock options , dividends) rather than based on pay

for individual/group performance systems, as predicted.

In addition, if we enquire into the differences in reward structures for the different

managerial types, we can see that the mix of governance mechanisms vary according to

the level of task complexity and difficulty in evaluating their outcomes, as usually

expected. The incidence of pay for performance is positively related to the level of

discretion and responsibility of the role.

On the other side, the result also supports the hypothesis that in the risky activities

considered human capital investors demand a fairly high raises in the fixed component

of reward, that we anticipated as a form of insurance against risk.7

Table 10 - Proportion of fixed compensation

Mean Std. Dev. Proportion of fixed compensation in OE 86.6 20.5 Proportion of fixed compensation in NE 77.9 21.8

It is possible to see how also the proportion of managers having stock options increased

significantly in the transition to the New Market, where companies and activities are

generally characterized by higher uncertainty and performance still difficult to evaluate.

7 Looking for some further data supporting this contention, we did find a regression analysis of firm performance on the level of non systematic stock market risk and the incidence of pay for performance, showing a significant negative relation, in a study by Bloom and Milkovich (1998) on large US firms.

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Table 11 - Stock option New Economy * Stock option Old Economy Crosstabulation

Stock option OE

Total

No Yes Stock option NE No 63 5 68 43.4% 3.4% 46.9% Yes 67 10 77 46.2% 6.9% 53.1% Total 130 15 145 89.7% 10.3% 100.0%

On average managerial jobs in the New economy are characterized, for our sample, by

much higher values of all the considered variables with respect to the last job held in the

old economy: greater levels of economic responsibility (in 41% of the cases was largely

superior, in 35% superior) and , somehow surprisingly, larger number of people to

supervise as well (it increased in 61% of the cases); autonomy and independence in

work increased but to a lesser extent ( largely greater for 13%, greater for 37%), perhaps

also because, for 57% of the managers, the extension of decision rights has been

accompanied by more intense or much more intense teamwork. and increased time

devoted to technical and professional problem solving (64%).

CONCLUSIONS

This research contributes in understanding the new challanges and forms in the

governance of work and human resource relations posed by the raise of a ‘human capital

intensive’ economy. There, with more intensity than in other parts of the economy,

those relations are resource investment relations rather than service exchange relations.

Accordingly we have argued and shown that they are effectively governed by a range of

‘associational contracts’ characterized by a diffusion of property rights rather than of

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‘exchange contracts’. The research has advanced a typology of those associational

governance arrangements, because, as in the case of exchange contracts, they are not all

alike. In particular, associational governance in innovative and risky settings is faced

with contrasting demands and should respond to various trade-offs. This research has

contributed in identifying and providing initial empirical evidence about the following.

- The diffusion of property rights is realized in forms that reward human capital

investments at the time avoiding excessive risk-bearing on thir part. So, we find a

fair amount of differentiation between human capital providers and financial capital

providers, substantive ‘insurance premiums’ incorporated in base fixed income,

prevalence of ‘low risk’ forms of contingent compensation (as stock options) over

more risk transferring ones (straight individual/group pay for performance).

- The diffusion of economic property rights is accompanied by a diffusion of decision

and control organizational rights, but often in the form of shared rights. This may

also have a risk reduction function, and it is expected and confirmed as an effective

arrangement in novel and highly professionalized activities, where group problem

solving is generally likely to generate better solutions. Those results are consistent

with other comparable evidence on ‘science based’ industries (Laursen and Manke

2001), in which it has also been found that the innovativeness of activities calls for

both a more intense use of teaming as a governance mechanisms and for more

‘enterpreneurial’ governance (more variable pay, stock options and incentive

intensity).

- The specificity of human investments, the need for finding novel combinations of

resources to start new ventures, the difficulty of evaluating those combinations of

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assets ex-ante, pose contrasting requirements on the governance of human capital

mobility. These are responded to by hybridizing ‘internal’ and ‘external’ human

capital ‘markets’. The predominant mode of governing human capital access to new

ventures consists of a range of ‘network forms’. Among those, professional

competence-base forms largely dominate over social loyalty-based forms, and

‘quasi-internal’ (former co-workers) and ‘quasi-external’ (former clients and

suppliers) configurations are much more diffused than more market-like brokered or

certified matches, as theoretically expected.

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Appendix 1

In our analysis of job transitions to jobs in the New Market, we adopted an event-history approach

(Barnett, Baron, Stuart, 2000; Carroll, Mosakowski, 1987) where the instantaneous rate of movement into

New Economy is the dependent variable. This approach originated from work by Coleman (1981) and

Tuma and Hannan (1984) and found diffuse adoption in previous work on job mobility.

In previous empirical research rates of job change exhibit duration dependence (Sorenson, Tuma,

1981). Therefore, we chose a parametric description of duration dependence, and employed in our

analysis a Weibull model of time dependence; this model implies that the logarithm of the exit rate is a

linear function of the logarithm of duration.

Hazard rate, i.e. the probability per time unit that a case that has been operating in a non-New Market

organizations to the beginning of the interval will move to a New Market position in that interval, in this

model is defined as:

h(t) = p (t) p-1

The Weibull model implies a monotonic age dependence, where p provides an estimate of age

dependence in hazard rate; that is a liability of aging strictly rising (p>1) or strictly decreasing (p<1).

The effect of external covariates, xi on the hazard function can be incorporated in the formulation of

the model by:

= exp (-’x)

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