What sustains institutions?
Rational-economic approaches to understanding organisations such as the resource-based view of the firm assume managers’ and thus firms’ decisions to be dominated by questions of economic efficiency: how to generate the maximum (risk-adjusted) return on investment.
In contrast to the rational-economic approach, institutional theory (DiMaggio and Powell, 1991, p. 32) acknowledges that while managers may seek economically optimal solutions, they are also strongly influenced by what is seen to be legitimate within their society and relevant social subgroups such as industry. Organisations, thus, come to adopt similar practices through two different processes: in response to facing similar competitive pressures and in response to facing similar social pressures.
In the rational-economic view firms come to behave in similar ways because managers in similar competitive environments make similar rational economic choices. Much management literature prioritises this, as if the only major pressure facing organisations were in the market.
In contrast, institutional perspectives suggest that similarity is the result of organisations being subject to similar social pressures to behave in socially legitimate ways. Thus particular approaches to doing business, and to management, become institutionalised. That is, they become taken-for-granted social facts which are underpinned by multiple social pressures. What then are these social pressures which underpin the stability of institutions? Scott (2001, p. 51) describes institutions as resting on three principal pillars: regulative, normative and cognitive-cultural.
The regulative component of an institutional environment reflects laws, rules and other coercive pressures in the environment that promote particular behaviours and suppress others. For example: legislation governing the employment contract, or stock market rules.
The cognitive-cultural component reflects shared cognitive schemas and frameworks, or mindsets. For example, cognitive schemas concerning the role and appropriate education of a manager differ significantly between France, Germany and the UK. In France management is highly professionalised, in the sense that to become a senior manager (cadre) it is important to have been educated at one of a small number of grandes écoles. In the UK, educational backgrounds of managers are much more diverse, but in common with France, management skills are understood to be transferable among industries or even between public and private sector. By contrast in Germany (with a different educational system from either), management is not really understood to be a profession or discipline in its own right. Rather the focus is on sector specific skills and it would be unusual to see a senior manager move from one industry to another.
The normative component reflects shared values and beliefs about human nature. This is the moral dimension to institutions. Examples include different beliefs about the relative importance of the group and the individual in different societies and different beliefs concerning the basis for fair or moral action (e.g. strength of personal relationship and reciprocity versus universally applied rules). There is of course some overlap here with ideas of national culture. However relevant norms may be much more local, for example professional norms (e.g. of accountants) or industry-based norms such as expectations about reciprocity and trust in business networks.
Different writers define institutions in different ways, but for the purposes of this course we will draw on Scott’s (2001, p. 48) influential account:
- Institutions are social structures that have attained a high degree of resilience.
- Institutions are composed of regulative, normative and cultural-cognitive elements that together with associated activities and resources, provide stability and meaning to social life.
- Institutions are transmitted by various kinds of carriers, including symbolic systems, relational systems, routines and artefacts.
- Institutions operate at multiple levels from the world system to localised interpersonal relationships.
- Institutions by definition connote stability but are subject to both incremental and discontinuous change processes.