An important feature of a fi rm is that it is a legal entity and can, just like a physical person, enter into binding agreements (contracts) with other physical and legal persons (see Ståhl, 1976). From this perspective the fi rm can be seen as a ‘nexus of contracts’ that coordinates fi nancial investors, suppliers of intermediate goods, services and labor, and customers in the production of goods and services. Figure 4.2 shows the fi rm from such a contractual perspective.
The production factors human capital (H) and physical capital (K) can serve as a starting point in a description of this contractual view of the fi rm. These are the independent variables commonly used in production functions such as Cobb–Douglas and CES. The fi rm can choose either to own or to rent its physical capital. Ownership implies property rights
Increased productivity by division of labour (specialization) Mutual dependence Coordination required Institutional solutions
with an exclusive right to use physical capital and the return from its use. Furthermore, private property right is associated with an exclusive right to transfer the property right through an agreement (contract) to another person. A rental agreement implies a much more limited scope for deci- sions about the use of the physical asset. In the maritime sector the most important physical capital is the vessel. Both ownership and rental agree- ments and combinations of these two alternatives are common amongst ship-owners.
For labor there is a choice between an employment contract and hiring of a consultant. An employment contract is much more open than a contract with a consultant with regard to use of labor. The employment contract makes it possible to use a hierarchical type of decision making regarding the use of human capital, and thereby provides an opportunity to replace the price mechanism of the market with administrative decisions about resources allocation (see, for example, Coase, 1937; Masten, 1988). One could say that the invisible hand of the market is replaced by the visible hand of an organization.
In the shipping industry a wide range of contracts with labor can be found. A phenomenon of special interest that will be discussed in more detail below is the so-called third-party ship management, where the owners of physical capital, the vessel, hire parts of or all labor and management services from another company. (See Section 4.1 for further discussion.)
A fi rm’s fi nancial contractual relations have governance implications.
= Guaranteed contracts = Residual contract
The firm as a production unit and a nexus of contracts Shareholders Creditors Users/ customers Suppliers of raw
material and goods
Suppliers of human capital services
Suppliers of physical capital services
A contractual perspective of the fi rm 67 The shareholders are considered the owners of the fi rm. Their contrac-
tual relation with the fi rm is characterized by a claim on the residual that remains when all other contractual obligations of the fi rm have been met. (They are residual claimants.) The return on their investment is therefore directly related to how well the fi rm is managed. This dependency makes it important to have a mechanism through which shareholders can control how the corporation acts as a legal person. In most cases it is the board of directors and the CEO who, on behalf of the fi rm, enter into binding contracts with, for example, suppliers, employees and customers. It is thus logical (understandable) that the shareholders directly or indirectly choose who will have these positions.3
On the fi nancial side of the fi rm there are also lenders (investors) with fi xed claims contracts (banks and bondholders). In contrast to the share- holders they have specifi ed claims on the fi rm in terms of mortgage plans, maturity and interest claims. If the fi rm cannot meet these fi xed claims it can be forced into liquidation/bankruptcy. The remuneration that lenders and also suppliers can get is then dependent on the value of assets to enti- ties other than the bankrupted (liquidating) corporation. Fungible assets with a well-functioning second-hand market are valuable to others and can therefore serve as collaterals for loans. Consequently fi rms that have such assets can to a larger extent than other fi rms use loans as a source of fi nance (see Williamson, 1988).
In the maritime sector the vessel is in most cases a fungible asset. There are well-functioning second-hand markets for vessels. The number of alternative carriers and customers for carrier services is for some types of vessels large enough to make the second-hand market competitive (Stopford, 1997).
Finally, we turn our attention to the fi rm’s contractual relation with suppliers and customers (contracts to be found on the input and output sides of the fi rm in Figure 4.2). Value added chains, vertical integration and supplier-specifi c/customer-specifi c specialization are important concepts here.4 A value added chain shows the diff erent stages in the processing of
a raw material to fi nal consumer product; for example, from axe to loaf, from stone to house, from iron ore to car. In a value added chain there are several technologically separate stages. Between all these stages it is pos- sible to envisage transport by ship that brings the output of one stage to a succeeding stage. Just as a number of diff erent contractual relations can be found by the supplier and user in a value added chain, an equally rich fl ora of contracts is found for the shipping of raw materials, intermediate goods and consumer goods.
If the automotive industry is taken as an example, shipping can enter into the value added chain in diff erent stages of the processing of raw material
such as iron ore and steel in the manufacturing of a car for sale to a fi nal customer. Raw material such as iron ore might have to be transported by a dry bulk carrier to a steel mill. Diff erent automotive parts made of steel might have to be transported over the sea in containers to the car manu- facturer. The ready-made cars in turn have (if exported) to be shipped in specially designed vessels to other countries.