ORGANIZATIONAL STATUS AND PERFORMANCE: A CONCEPTUAL FRAMEWORK FOR TESTING PUBLIC CHOICE THEORIES

ORGANIZATIONAL STATUS AND PERFORMANCE: A CONCEPTUAL FRAMEWORK FOR TESTING PUBLIC CHOICE THEORIES

ANDREW DUNSIRE, KEITH HARTLEY, DAVID PARKER AND BASIL DIMITRIOU

Popular belief is that ownership change (from public to private) brings about improved performance. But (i) ownership displays a spectrum, not an either/or; (ii) degree of competition is conceptually and often actually independent of ownership; and (iii) so is change-of-ownership’s assumed instruments for improving performance, change in managerial incentive structures and reporting structures. The article surveys the relevant theories, popular and scholarly, and develops models for testing the relationships between status change (ownership) and performance (indices of productivity, profitability etc.), and between status change and internal organizational change (indices of reorganization and of linkage), in a small number of British organizations which underwent change in recent decades. Preliminary results of one or two analyses illustrate the methods and the possibilities.

I INTRODUCTION The Conservatives’ 1987 election manifesto made a number of assertions about the relationship between what we are calling ’organization status’ and performance. Reference was made to productivity and profitability ’soaring’ in the newly- privatized companies, and an explanation for the improvement was provided. It was claimed that privatization had succeeded because

the overwhelming majority of employees have become shareholders in the newly privatised companies. They want their companies to succeed. Their companies have been released from the detailed controls of Whitehall and given more freedom to manage their own affairs. And they have been exposed to the full commercial discipline of the customer. Even former monopolies now face increased competition (The Conservative Party 1987, p. 36).

Andrew Dunsire, Keith Hartley and Basil Dimitriou are at the University of York; David Parker is at Leeds Polytechnic. This is a revised version of a paper presented to the Public Administration Committee/Economic and Social Research Council Conference at York in September 1987. The research was funded by the ESRC as part of its Management in Government Initiative. (Project number E 092j006). The authors are grateful for comments from Professor C. Hood, Bob Lava , participants in the PAC Conference at York, colleagues and the referees: the usual disclaimers apply. Later papers will report more empirical results.

Public Administration Vol. 66 Winter 1988 (363-388) 0 1988 Royal Institute of Public Administration ISSN 0033-3298 $3.00

364 DUNSIRE, HARTLEY, PARKER AND DIMITRIOU

The Conservative manifesto also reported that nationalized industries were now far more efficient than before, in terms of productivity and profitability - which by contrast suggests that performance can improve without a change in ownership.

This paper examines the claims made for privatization and other changes in ownership or legal status, in terms of increased productivity or profitability or other measures of performance. Also, and perhaps more importantly, it considers the mechanisms of such improvements (assuming they are found) put forward by some current schools of economic theory, as well as by politicians.

The paper begins by surveying the theoretical background and developing a model of 'status change' which sees 'ownership' (or the difference between 'public' and 'private') as a continuum rather than as dichotomy, and which also dif- ferentiates between degrees of competition enabling a 'mapping' of different organizations. There follows a discussion of the implicit (sometimes explicit) theory of the causal mechanisms which are held to link status change to performance change (which are summed up as a change in incentive structures). A model of institutional analysis is developed by means of which observed changes in actual companies (both 'internally' and in reIation to their environments) can be mapped. This is a potentially challenging area for inter-disciplinary work, especially since many economists have traditionally regarded internal organization as a 'black box'. Finally, there is a discussion of the indicators which might be used to measure organizational performance and some of the problems of empirical work in this field. By way of illustration, some preliminary and tentative empirical results are presented. Throughout the paper, the aim is to develop a conceptual framework derived from existing theory, stressing its limitations, and showing how the central hypothesis developed might be tested. Later papers will report more detailed empirical results.

II PROPERTY RIGHTS AND PUBLIC CHOICE The theoretical background The theoretical linking of organizational form and performance has not been exclusively by economists. The 'contingency theory' school of organizational analysis, for example, holds that the extent to which an organization achieves 'goodness of fit' between situational circumstances and structural characteristics determines its performance (Pugh and Hickson 1976; Rainey, Backoff and Levine 1976). But the most striking recent developments (or rediscoveries: Parker 1987) have been in economics, where attention has focused upon differences in incentives between public and private organizations, arising from differences in the ability of owners to monitor managers, a problem which arises when the objectives of principals and agents diverge. A good example of this approach is the property rights and public choice literature.

Drawing upon seminal work by Coase (1937), in the property rights literature an organization is perceived to be a 'team' of factor suppliers with contracts established and monitored by management (Alchian and Demsetz 1972; Williamson 1975). Where management prevents 'slacking' in the team the result is high productivity and low costs. But to perform this task well management needs an incentive.

ORGANIZATIONAL STATUS AND PERFORMANCE 365

The central argument is that private sector organizations in which nghts to profits are clearly defined will perform better than those in the public sector where rights are diffused and uncertain (Alchian 1965; Furubotn and Pejovich 1974; De Alessi 1980).

Public choice theory supports this approach by arguing that politicians and state bureaucrats pursue their own satisfaction rather than the ‘public interest’ (Downs 1967; Niskanen 1971; Tullock 1965; Buchanan 1978). Policies are arranged to maximize votes and departmental budgets are expanded so that bureaucrats benefit from better jobs and higher salaries. Bureaucrats also tend to have more information than taxpayers about the consequences of budgetary changes (Kristensen 1980) and this inhibits public monitoring of spending, providing fertile ground for public sector trades unions to inflate wages and protect over-manning. Even if the public choice literature caricatures government, the bargaining process between demanders and suppliers of public goods clearly throws up a number of problems. The property nghts and public choice literature imFlies that through the absence of the profit motive (Tullock 1976), government departments will tend to pursue goals such as budget maximization, risk aversion, over-manning and non-optimal pricing and investment.

The failure of the ballot box to match the market in representing public wants, and instances of blurred accountability in government, are welldocumented. However, it is possible that the public choice literature exaggerates the extent and consequences of self-seeking in the public sector. That politicians and bureaucrats do indeed pursue the public interest cannot be entirely discounted (Fiorina and Noll1978). Also, like their private sector counterparts, government employees may find satisfaction ’in a job well done’ (Posner 1984). Given that senior management in the public and private sectors are drawn from the same social and cultural backgrounds, it would be surprising if they did not hold similar values. Like the property nghts literature, public choice theory is strong on a priori reasoning but short on empiricism. Studies undertaken into public versus private efficiency in a number of countries suggest that market competition is more important than ownership in determining performance (Caves and Christensen 1980; Millward and Parker 1983; Parker 1985; Kay and Thompson 1986).

Market structure is important, since a firm in a highly competitive product market is unable to sell goods and services above the prices set by competitors and survive. Thus, the scope for non-profit behaviour declines the more competitive is the product market. More problematical is the role of the capital market in determining performance. In the property rights literature, the private capital market imposes pressures to be efficient. However, to evaluate this argument we need to differentiate between firms where ownership is readily transferable from those where it is not. Although broad distinctions are drawn between the private and public sectors in the property rights and public choice literature, such a simple classification of organizational form runs the risk of overlooking significant differences between organizations in the two sectors. Highlighting differences is an important step in classifying organizations for performance testing.


Organizations in the private and public sectors The private sector can be divided into owner-managed firms, public limited companies and 'hybrid organizations. Included in the owner-managed category are sole traders, partnerships and private or family-owned companies. In all of these cases there is a direct relationship between the performance of the firm and the return to the owner-managers. Performance is capitalized in profit and, therefore, from a property rights perspective there appears to be an incentive for firms to be managed efficiently.

In public joint stock companies, which are the main alternative to state ownership, management is undertaken by directors as agents for shareholders who own the capital of the company. Whereas shareholders are interested in maximum profits to produce a high share price (capital gain) and high income (dividends), there is a rich literature in economics concerned with managerial discretionary behaviour where ownership and control are divorced (Manis 1964; Williamson 1964). Although directors may own some shares and benefit from profit sharing schemes and stock options, it is not uncommon for directors to earn the bulk of their incomes from salaries. Property rights theorists contend, however, that the private capital market limits managerial non-profit behaviour because when performance is dis- appointing shareholders will sell their shares, making the company vulnerable to takeover by new management. This is the argument, despite suggestions that the private capital market suffers from transaction costs, free rider problems and information imperfections (Grossman and Hart 1980; Stiglitz 1985). In a recent study of the capital market, no evidence was found of a simple relationship with managerial behaviour (Lawriwsky 1984); a finding supported by a number of other studies (Millward and Parker 1983, p. 216).

Turning to the public sector, a number of main organizational forms are iden- tifiable - central government and local authority departments, trading funds, and other agencies, including quasi-non-governmental organizations ('quangos') and public corporations.

Government in the UK is organized so that a minister is responsible through the political process to the public and taxpayers for the performance of a department. Again there is an agent-principal relationship. Under the guidance of the minister the employees of government departments should act as public agents in a disinterested fashion, and be efficient. But since civil servants are not especially recruited or trained for business life and because government departments cannot be at 'arm's length from the political process, other public sector organizations have been devised to manage some kinds of public asset. Also, values of public service, accountability and life time tenure in the civil service may not be conducive to entrepreneurial activity.

The position is similar in local government, where the use of agencies is also not uncommon. Local authorities are closer to their electors and more prone to population movements in response to local public expenditures and taxation, and hence they might be expected to be more responsive and accountable than central government departments. But in the UK such efficiency incentives are offset by central government grants in aid and the incidence of local taxation. Also, local


government areas may be smaller than the optimal scale of service provision in terms of production efficiency and demand articulation (Bish and Warren 1972). By contrast, as central government has a larger jurisdiction, it has more scope to introduce organizations of optimal size. Therefore, it is not dear whether transferring services between central and local government departments will affect efficiency. The position adopted here is to treat them as broadly equivalent.

A search for optimal size for service provision is but one amongst a number oi reasons why there has been a mushrooming of government agencies and ‘quangos’ in the post-war period in the UK and elsewhere. A view prevails that transferring functions to ’nondepartmental’ agencies increases managerial independence and hence efficiency. For example, in the UK a small number of tradmg funds have been created to replace departmental management, notably the HMSO and the Royal Mint. By having financial independence, trading funds are expected to operate more commercially than budget-financed government departments. This also applies to ’quangos‘, which move expenditures ’off-budget’ and achieve some independence of Parliament and government. In the sense that these agencies have independence, their managers have scope for discretionary behaviour, and since they have no rights to profit, efficiency incentives may be weakened (Holland and Fallon 1978). On the other hand, independence from the political process may, as intended, reduce inefficiencies arising from political accountability. In the UK employees do not need to be civil servants which makes for easier recruitment and dismissal of staff. Also, they are freer to tap non-governmental sources of finance, they may be more flexible in meeting changing demands, and outside the political process they can be run according to commercial criteria.

Public corporations, including the nationalized industries, were established in the UK to operate at even more ’arm’s length from government. This form of constitutional relationship was intended by its chief architect in the 194Os, the Labour Minister Herbert Morrison, to combine efficient management with accountability. A public corporation like a joint stock company in the private sector upon which it was modelled, is a corporate body which can sue and be sued and hold property in its own right, and its employees are not civil servants. But unlike a joint stock company, it cannot raise capital by issuing equity to the public, and almost all external financing is in the form of loan stock. Political control comes through the appointment of members of corporation boards; through powers to dismiss members; and through powers to issue ‘directives’. Although this status may promote commercial operation, as with other public sector bodies, management in public corporations cannot appropriate profits and managerial incomes are not linked to profit. From a property right perspective this encourages non- profit behaviour and inefficiency.

In addition to the types of organization identified above, there are also a number of ‘hybrids’ which seem to straddle the public and private divide, though they have legal form in the private sector. Examples are Company Act companies with appreciable state shareholdmgs (such as, at times in the UK, BP and Short Brothers); firms highly dependent upon state contracts (such as in aerospace and defence work); not-for-profit organizations (such as mutual companies, trusts, clubs,


charities and churches); and co-operatives. In all of these cases association with the state, the lack of a profit goal, or diffused rights to residual income, dulls efficiency incentives from a property rights perspective (Clarkson 1972; De Alessi 1980; Hartley 1987). This blurring of the public-private divide suggests caution is needed when categorizing organizations for performance testing. In spite of their formal status, some private sector organizations may have less effective independence from government than some public enterprises (Barker 1982, p. 33). It has been argued that corporations may become so dependent upon public contracts that they take on attributes of government agencies, though this hypothesis appears not to have been directly tested (Weidenbaum 1969). Where studies have occurred, as in defence markets and on the impact of state regulation on the efficiency of US public utilities, the suggestion that state involvement reduces efficiency is generally confirmed. It is therefore unclear whether transfer from, say, public corporations to private sector regulated company will necessarily raise efficiency or raise it appreciably. This is an important conclusion at a time when the UK government is substituting private regulated companies for monopoly state enterprises.

Mapping organizations for performance testing The variety of organizations in the public and private sectors raises questions about the value and applicability of broad public versus private comparisons. The thrust of property nghts and public choice literature is that publicly owned enterprises are less efficient than private enterprises. However, this literature has little to say about performance differences between organizations within the public and private sectors; though it can be deduced from the literature that when rights to profits become more attenuated efficiency will decline. Similarly, the more discretion that management has not to earn profit the less efficient the organization is likely to be. This leads to some uncertainty about whether, for instance, quangos and other government agencies, where management has more independence from principals, perform better or worse than government departments undertalung the same tasks. In so far as the purpose of creating such agencies is to improve commercial operation, the implication is that on balance performance rises. Less contentious is the argument that the more competitive the product market in which an organization operates the greater the pressures to be efficient. In practice, government departments and certain agencies hold monopoly rights over the provision of goods and services, which we would expect to reduce allocative and productive efficiency. Suggestion that government departments and agencies should compete to raise efficiency has met with only a limited response in the UK, where policy has concentrated instead upon privatization. Of course, some public sector activities have always operated in competitive markets (such as the British Steel Corporation).

The property rights and public choice approach suggests a relationship between market structure and status as shown in Figure 1 where organizations are con- strained by the nature of their product and capital markets. This should be regarded as a taxonomy which identifies the major variables in developing a testable model relating enterprise performance to organizational status. The relative positions of


various private and public organizations are shown along the horizontal or west- east axis, AB. The furthest west is the most 'political' body, the government department. It is directly under the control of government ministers who are accountable for its actions to Parliament. In the far east is the sole trader with unattenuated nghts to profits. Between these two are other public and private sector organizations positioned according to their likely relative performance given the nature of their capital markets. The position of 'hybrids' is especially tentative being a particularly heterogeneous set of organizations. Indeed, uncertainty about the hybrids and the intermediate cases compared with the polar extremes, illustrates the limitations of the mapping and its interpretation as a continuum.

The north-south axis, XY, represents product market competition which becomes more intensive as we move south, suggesting higher efficiency. An organization's position within the ABXY space can now be plotted and hypotheses regarding performance changes established. For example, a private sector natural monopoly will be positioned in the northeast with capital market incentives to be efficient but with no product market competition. A monopolistic public enterprise by com- parison will lie in the north-west, suggesting the existence of neither capital nor product market pressures to be efficient. The southeast and south-west quadrants contain competitive private enterprises and competitive public enterprises, respec- tively. The former is likely to be more efficient in terms of the property rights and public choice literature since, unlike the competitive public enterprise, there is a capital market constraint.

FIGURE 1 Movements at date of status change

PRODUCT MARKET

P r l v a t e


In terms of Figure 1, the central hypothesis drawn from the property rights and public choice theories is that the performance of an organization i‘mproves’ as its status is changed on a ‘west’ to ‘east’ spectrum (from state to private), ranging from government department, through agencies such as trading funds and public corporations, to public joint stock companies, and ultimately owner-managed firms. The representation suggests that organizational changes which involve movements north to south or west to east are likely to produce improvements, with movements south to north or east to west leading to lower efficiency. A change involving a movement between northeast and south-west is more ambiguous, since product market and capital market changes conflict in hypothesizing about efficiency gains.

To further illustrate our mapping, the positions of a number of organizations which have changed status in recent years are shown in Figure 1 - Rolls Royce, the National Freight Consortium (NFC), the Post Office, British Aerospace (BAe), and the Royal Ordnance Factories (ROF) - before and after changes in organizational status. In all cases, with the exception of Rolls Royce, improved performance is the prediction, and more so for BAe and Mc, which benefited from a long move’ across the public-private boundary. In the case of the Post Office and ROF the expected improvement is the most tentative, given uncertainty about the effects of more operational independence within the public sector.

I11 INSTITUTIONAL CHANGE AND PERFORMANCE There is general agreement among public choice and related theories that the reason why private organizations are more efficient than public organizations is that managers in public organizations lack the incentive to strive for efficiency. Formally, the theories are indifferent to the internal structures of either kind of organization in explaining organizational performance, leaving the welght of explanation to be camed by effects upon the motivations of managers. Some economists, though not squarely in the public choice tradition, do offer theories entailing assertions about internal relationships (Chandler 1962, 1977; Williamson 1975; Jackson 1982). But structura: implications accompany any theory linking efficiency and incentives. For instance, incentives imply a communication system, or reporting structure, to convey the targets of the principal to the agent and the scores of the agent to the principal. Reporting structures are assumed to exist in both ‘bureaucracies’ and ’firms’ (to use the conventional terms differentiating the polar types of organization with which so much of this literature is concerned); what matters is what flows through these channels. Agency-principal theory considers that in ‘firms’ it is much easier to establish an employment contract which limits managers’ discretion to act in self-seekmg ways than it is in ‘bureaucracies’; it is this ’contract’ which speclhes what is to be reported up. Whether the contention is justified is not the point here: ‘bureaucratic’ actors also have ’contracts’, but what they report up is different.

Incentives, used in this manner, also imply either that the principal has only one unambiguous target (profitability is all), or that there is a mechanism for resolving conflicts. Principals (meetings of shareholders, boards of directors, Parliaments) either are always single-minded, or else someone is boss, or the


majority rules. Where the point is discussed, it is usually held that shifting and conflicting objectives is the characteristic of ’politics’ rather than of ‘business’; but that means the theory depends either upon there being no such thing as the politics of the boardroom or of the firm, or upon firms’ having internal hierarchies or committee structures to maintain single-mindhess. It also implies either that decidmg which path to take towards the pMcipal’s target is a problem each manager can solve for himself, or that some mechanism exists for avoiding suboptimality in such decisions. These points would probably not be disputed by the theorjsts; but they lead to the question whether one such problem-solving and co-ordinating structure is better than another, leading to more ’efficiency’ - a question classical management theorists thought they had answered (Mooney and Reiley 1939), the question the contingency theorists tackled (such as Lawrence and Lorsch 1967; Pugh and Hickson 1976) and were found wanting (Clegg and Dunkerley 1977).

Again, a ’production function’ or set of activities is assumed to exist in both ’firms’ and ‘bureaucracies’, turning out goods or services according to the ‘charter‘ of the organization (its ruison d’gtre and system of rules and prescriptions), and according to the demand for the goods or services. The difference between ‘firms’ and ‘bureaucracies’, in public choice theory, is that the ’firm’ is much more sensitive to the ‘demand’ than to the prescriptions, while the ‘bureau’ is the reverse - relatively insensitive to the costs of over-production or production of ’irrelevant’ goods, while over-sensitive to quality control and the correctness of the procedures of production. This implies that ’firms‘ have large marketsensing functions or sets of activities which dominate over production management, while in ’bureaus’ production management is dominant.

Finally, Williamson (1975) points out that large ’firms’ themselves adopt radically different forms of internal structure (U-form and M-form types), turning on the degree of decentralization of ’market-sensing‘ activities. Now it is obviously somewhat unrealistic to contrast the ‘employment contracts’ of a single assumed free-standing ‘bureau’ with those of a ‘firm’ operating in an arena comprising a plurality of interacting (and contesting or competing) ’firms’, as much of the literature we are considering does. There are two ways to remedy this situation. The first is to see the ‘bureau‘ as also operating in an arena of interacting (and competing) bureaus, as does the ‘bureaucratic politics‘ literature (Allison 197l; Peters 1978) - and as Niskanen recommends (1971). The second way out is to cut free from the fixed association between ‘bureau’ and public sector or ’politics’, ’firm’ and private sector or ‘market’, and see organizations as all more or less production- led, more or less demand-led, more or less centralized, and so on - as Williamson in effect suggests - whether operating in the public sector or the private sector or somewhere in between. It is a model to express this ’second way out’ that we now develop.

Measuring the institutional dimension A systems-thinlung basis is adopted. That is, at any one level, a unit of organization is seen as having sub-units and as being a subsystem of some higher level. For example, a holding company or multinational may behave towards its component


companies much as does a government towards its bureaus; and each component company or bureau may have a similar, or a different, relationship towards its own divisions or subsidiaries. Relationships are manifested in communication channels, which can be either specialized to carry a small number of standard messages, or 'broad band, capable of carrying a great variety of information. The first sort of empirical data we are looking for concerns these channels and their information flow - the nature of the 'reporting structure', the frequency and volume of use of channels (as in a communigram), and the kinds of message passed.

The hypothesis inferred from the public choice literature is that on change of status from west to east the characteristics of information flow change from those associated with 'control' to those typical of 'incentives', especially those monitoring individual performance (such as bonus schemes, personal contracts); and that further, this change of characteristics spreads 'outwards' from the centre to the periphery of the organization, 'narrow-band channels being replaced by 'broad- band channels and possibly the institution of a central data base with wide access.

Relationships, or links, are between units, or organizational substructures, each of which is conceived of as carrying out tasks or functions or sets of activities. The analysis of 'activities' builds upon the conventional three-fold distribution into production, marketing and Research and Development (R&D) (6. Woodward 1965) and identifies five categories:

(i) production - transforming inputs into outputs by means of processes;

(ii) marketing - eliciting users' (customers, clients) preferences about products, proffering of products to users, arranging for distribution;

(iii) control and co-ordination - the representation of the principal's interests to the organization as an agency, the formulation of policies and rules for the direction of the agency, monitoring of operations and correction of errors;

(iv) common services - the provision of information, advice and resources (such as finance, personnel, property, transport) by central services to the organization as a whole;

(v) planning - preparation of strategic policy in key areas of the organization: R&D for production operations; surveys and advertising for marketing operations; corporate financial, manpower etc., plans for control and co-ordination; and corporate image.

As in Woodward (1965) these activities are conceived as each waning or waxing in relative strategic significance to the organization in changing circumstances, so that, for example, it is 'production-led' at one time, but primacy passes to marketing or planning at another. Here the hypothesis derived from popular public choice literature is that a west-east shift in status (from public towards private) implies a change from the primacy of production to the primacy of marketing.

In the analysis of 'units' in an organization the main concern is with the highest levels, and so with relationships between boards of directors (or their equivalent),


the departments or sections at organizational headquarters, and the major operating divisions. Data can be collected concerning the number and boundaries of units, the locus of the five categories of activities, and changes over the time period surveyed. The expectation from public choice theory is that with west-east shift in status, activities originally carried out by ’HQ’ or ‘centre’ (’top’ in the hierarchical imagery) are progressively distributed to the periphery of the original organization, whereupon new ‘centres’ are formed capable of their own independent responses to their environments. The degree of this decentralization may be d o r m throughout the organization or may vary from subsidiary to subsidiary. Some units thus ‘budded off‘ may leave the organization altogether, be sold to another conglomerate or bought out by their own managements.

Data for the empirical analysis can be drawn from available literature (company reports, company archival material where access can be obtained, and published books and articles), and from interviews with key personnel. Information about units is probably easiest to obtain. It can focus on changes in the numbers and titles of directors, and with continuity - whether or not the same individuals persist on the board (see Section IV). Similar information mlght be collected about departments of central headquarters (numbers, names, dates of changes) and about major operating divisions (the first tier of decomposition).

Activities are seen as a distinct dimension, though of course many units will be specialized for one of the five types of activity (as listed above). Empirical work can record where (in the board, in HQ departments, and in the major operating divisions) the various activities are located, and we mght be loolung for an increase or decrease in specialization, and for evidence of a shift in primacy as shown, for example, by change in numbers employed in the several activities in the various units.

Recording of links (the communications net and transactions across it, channels and their messages, reporting structures and control mechanisms) is the most difficult to do, and yet promises some of the most sensitive indices of the character of organizational change. The first requirement is to establish the network - who communicates with whom, the origin and destination of each channel, and whether one-way or two-way. Much of the network can of course be inferred from published information about the structure of units; and the most interesting features will be what parts of the complete or theoretical net appear to be absent.

The most visible of these links have their origin in the ’principals’ of the organization and their destination in the ’agency’ as a whole - transmitting messages which constifUte the organization; its charter, appointments of board members and senior managers, their contracts (narrowly or broadly construed) and remuneration, the creation, merger or dissolution of organizational units. They are visible because in most cases their publication is either required by law or is habitual. Often such links can be inferred from available data.

To ease understanding of what to look for when speaking to respondents about links’ two other functions of messages can be identified: control and news. Con- trol messages convey policy guidelines and limits to discretion, or specific directives; and in the opposite direction, proposals for approval and what is usually called


'management information' - data specifically designed for monitoring adherence to directives, or for performance monitoring. 'Reporting structures' are control links. News' messages are seen as conveying what is often just called 'information' (without a monitoring undertone), or 'descriptive' information (without a 'presaip tive' connotation). By using these terms (constitutive, control, and news messages), a distinction can be made which is never altogether hard and fast, but which can be important in analysing the uses to which channels are put, and changes in those

A third dimension of linkage analysis is to characterize messages by orientation - whether they are input-, proc&s- or output-oriented. Input-oriented messages are concerned with supply, stocks and flows of resources - money, materials, equipment, personnel, land and plans, etc. Process-oriented messages are concerned with not so much what is done as how it is done, whether regulations and guidelines are adhered to, laid-down procedures followed, and so on. Output-oriented messages concern information about production, marketing, delivery, customers, and environmental feedback generally. Accurate and itemized data about this will be difficult to find but one source from which to infer much of it is the (blank) printed forms on which periodic returns are made from operating divisions to headquarters departments, changes in these forms over the period studied, the appearance and disappearance of specific items or columns, and the like.

Other characterizations of links which can be studied are more familiar: frequency and volume of use of channels (such as output-oriented messages on a particular channel once-aday, on another once-a-year; one type of message a twenty-page report over one channel, a one-word signal over another; etc.). Finally, the medium of messages can be considered, whether voice, print, or electronic.

In undertaking empirical work, it is recognized that it may not be possible to secure reliable and valid data directly for all the organizations surveyed on all of these dimensions and categories of linkage. However, as already mentioned, some information is contained in, or can be reasonably inferred from, annual reports to Parliament or to shareholders and the like. Financial statements and accounts, manpower counts and some performance indices are publicly available. In some cases such published information will represent only the tip of the iceberg of actual reporting structures and their messages; in other cases, we suspect, there is no iceberg and what we see is what management received. Information from official reports and management surveys, from sources such as Monopolies Commission reports, may furnish some data on lmkages; so may interviews with key personnel. But impressions formed by interpolation from scattered data will probably be a significant element in the data interpretation.

U S .

The aggregate approach Measuring changes in these elements of internal organization (units, activities, links) allows us to test specific hypotheses derived from public choice theories. For example, a west-to-east change in status, which would imply a shift in primacy from production to marketing, should be reflected in the relative enhancement of marketing units and activities.


The major hypotheses (exploring the relations between status change and organizational change, and between each and performance) can thus be tested against change in each specific element of internal organization in turn. However, it is also recognized that these specific elements are potentially interdependent, in two possible ways. Senior management (and/or principals) may wish to transform several elements of internal organization at once, in a deliberate shake-up; and, environmental change may stimulate incremental adaptations of specific elements, which over time may cumulate into an observable shift in holistic pattern. In either case, an 'aggregate' type of model is needed to portray these shifts.

Such an 'aggregate' model may be either independently deduced from theoretical considerations (as in the next section), or induced from the cumulation of changes in speafic elements of internal organization. If we use each method in turn, and the results converge, to the extent that they do, each method supports the other. A composite model can then be used as the 'internal structure' variable to be matched against changes in organizational status and performance, in testing the major hypotheses. The next section then, begins from a completely different angle, and employs such an aggregate or holistic approach to propose a spectrum of ideal-types.

A modes of agency model Agent/principal theory postulates a 'contract' between the principal, whoever and whatever kind of creature he may be, and his agent, either an organization considered as a single actor, or the head of such an organization Seen as a collectivity of actors. The principal is whoever or whatever the agent is responsible to. What forms might this 'contract' take? What modes might 'agency' take up? We posit (based on the foregoing theoretical justification) a continuum from environmentally non-responsive to responsive, from rules to reactions, as follows:

dirigiste polyvalent mixed responsive

REACTIONS

At the dirigiste pole, the agent attempts to meet the principal's wishes (or 'property rights') by achieving total predictability of task performance; by creating a stable internal environment in which there are norms for everything and internal processes are continuously monitored to ensure conformity to rules. Outputs of the production process are not monitored as such; they are what they are, given the closely-controlled processes. Inputs are not regulated as such; they are what they are, given the requirements of the closely-controlled processes. Outcomes are relatively ignored. Authority resides in rank or position (nearness to the principal) rather than in specialisms or skills. This form of agency resembles Burns and Stalker's (1961) 'mechanistic' mode of management, and has many features in common with conventional appreciations of 'hierarchy' or 'bureaucracy'. It can be successful in a non-volatile, non-hostile environment, where the principal's objectives are single or non-conflicting and unchanging - in some types of manufacturing or professional services as well as of government services.

I I I I RULES


The next major position or clustering of probabilities along the continuum is a mode of agency where predictability of output is desirable but where the principal’s objectives are many and mutually conflicting, and may change in emphasis over time. Thus the principal may wish production to be achieved at minimum input cost but at maximum quality standards at the same time, at maximum speed, with total legality, with maximum job satisfaction, and so on. Conflict of two objectives puts the chooser in dilemma; simultaneous conflict of several objectives puts the chooser in polylemrna (Dunsire 1986). The aim is optimization, and the agent attempts to achieve this while coping with the periodic shift in the pincipal’s emphasis by constructing an ’adaptive internal environment’, monitoring output and correcting variations from desired output by temporarily altering the relative strength of the several procedural requirements - the weight to be attached ’today’ or ‘this month to particular objectives (each conceived of as the province of a procedural maximizer - accountants, quality controllers, time and motion men, legal branch, shop stewards, and so on). The manager (and it is not only the head who is in this position) combines the resources available to him under the differing ’price’ constraints according to the ‘exchange rate’ currently in force, so as to produce the desired output.

This mode of agency is still production-sensitive but can be said to be output- driven rather than proceduredriven as in the h s t e mode. Inputs are not regulated as such; they are what they are, given the requirements of the closely-controlled outputs. Processes are rule-bound but rule-following is selectively monitored, and task performance is a resultant of the polylemma constraints rather than prescribed. OutcBmes are not considered. Rank and position confer authority, but specialist knowledge and skills also do so; at certain levels the operative employment contract, while in the form of payment for time, is almost professional in spirit. This form of agency is the paradigm of the Weberian bureaucracy, or blend of hierarchy and specialization, operating in a ’political‘ environment, where immediate goals are both unstable and conflicting but longer-term goals (or perhaps the goals of a ’higher principal’) require smoothing of such oscillations and damping of such conflicts. But it is also an appropriate response in labour-strife-torn manufacturing firms or during periods of prolonged board-room conflicts, take-over threats and the like. This is called the polyvalent mode.

The third station on the continuum is occupied by a mode of agency in which responsiveness to changes in the environment begins to be as significant as the following of internal rules or optimizing between different corporate procedural maximizers, in the attempt to meet the requirements of the principal. Choosers react to exogenous stimuli as well as to endogenous, and some of the latter (though possibly still ‘in the rule-book as it were) carry correspondingly less weight in the optimizing process. The internal decision environment may be stable and turbulent by turns, either through changes in the stringency of the principal’s requirements, or because of the presence or absence of changes and challenges in the external environment, or of course both at once. Such a mode of agency can be said to be driven both by output and by outcome, or by one or the other by turns. Inputs are not significant for themselves, but may become salient as a factor in operating


costs, in money, time and other values (input-output ratio), which may in turn affect outcomes. Processes wane in significance to the extent that outcomes wax.

Such a mode might be found in a firm moving from a fairly centralized management style to one where operating divisions were given increased scope to design, produce and market their own products - but within limits intended to avoid competition with other divisions, or with trading partners and the like. It could also be appropriate in a government department where, for example, one bureau was coming under trading fund rules. Less obviously, it corresponds to the mode in a military unit engaged in war operations against an enemy, or in a govem- ment research unit tackling a major scientific research project (against ‘nature’). Authority shifts with the source of turbulence; market-oriented, client-centred or environment-sensitive skills dominate when the external environment is particularly threatening; administrative, coordinatory, effiaency-improving, and technical skills take over when consolidation and restoration are possible in a more settled environment. Where the internal environment in such an organization is turbulent, one can predict much conflict between those actors whose skills and aptitudes fit them for external environment responsiveness, and those whose qualities fit them better for devising ways to meet principals’ regular or specific requirements (a version of a classic clash of bureaucratic orientations - Blau 1955). This mode of agency is called mixed or ‘directed response’.

The polar mode at this end is almost wholly outcomedriven and the interests of the principal are taken to be best served when the agent is governed by the demands of the environment in determining what outputs to engineer by what processes with what inputs. The principal may lay down minimal constraints to influence responsiveness but it will be understood that even these must give way to the prime consideration - survival of the agent in a hostile environment. The emphasis is on flexibility, and on ’results’, rather than on correctness of procedure (although the law, trade union pressures, and possible external ‘cause group’ pressures, may nevertheless constrain processes of production, marketing and so on). Authority of position is not absent, but is circumscribed because it is seen as evidence of past success in responsiveness. In a favourable environment, wise and prudent responsiveness may lead to the ’extension’ of survival, i.e. growth. This mode is the one adopted by the ideal-type firm in a market, competing with rival firms for customers or share of market, or for raw materials, skilled staff, and other inputs - whether ’ownership’ is formally private or public, although there are perhaps few ’pure’ examples in non-market operations. This mode can be named the responsive mode.

One of the main tasks of the agent in a competitive market situation is to maintain continuity of supply for production. As Williamson (1975) points out, the costs of these transactions may be reduced by internalizing them within the organization, converting them into institutional agreements instead of formal contracts. Where, however, internalization or in-house supply does not reduce costs but increases them, then the transactions should be externalized into the market and the benefit of competitive pricing reaped - producing economies which can be passed on in lower product prices with hope of generating higher demand for the goods or

378 DUNSIRE, HA1 LEY, PARKER AND DIMITRIOU

services produced. Such transactions may set up corresponding 'structures' in the firms thus linked, via cc itracting-out specifications, or quality-control requirements in tied suppliers and the like. Thus the apparently 'responsive' mode in two firms each operating wholly in the market can take on some of the colouring of a 'mixed mode in one of them - the directives coming, however, not from that agent's own principal but from the network of contracts and vertical arrangements that permeate such a market.

There is an 'off-spectrum' mode which cannot really be called one of 'agency' at all, which transcends responsiveness to the environment and instead goes looking for a new one. The 'entrepreneur' (narrowlydehed) adopts a high risk/h& w a r d strategy, innovating, inventing, initiating, finding yet undiscovered niches, stimulating quite new demands. If it comes off, the world is decisively altered, and new expectations generated which other principals and their agents may then move in on, the innovator having moved on to fresh fields.

Where the entrepreneur is a collectivity or organization, it takes the form of a relatively-unstructured team, unroutinized, often hardly specialized - everyone 'mucking in', taking on whatever task is seen to need doing, without plan or rules; nothing depending upon 'authority' or formal rank or position, everything depending v - upon - possession of requisite knowledge and skills. This 'structure' is a recipe for disaster according to the classic management textbooks, but enables extreme flexibility of mobilization to exploit a new opportunity. The type is represented by Burns and Stalker's 'organic' form of management. It is not found only in manufacturing industry, however: the history of government services has many examples of pioneering civil servants who did the equivalent of creating new products and markets (Chadwick in environmental health, Sadler in education). It is a commonplace of administrative reform that if you wish a completely new policy to succeed, you should create a new department to administer it (in order to eliminate the 'crust of practice' which will soon assimilate it to old policy).

The approach of this paper is summarized in Figure 2 which shows the relationship between modes of agency and product and capital markets. Two organizations which changed status in the last two decades are included to illustrate the method. The next task is to operationalize the model by considering some possible indicators of changes in internal structure and of performance, and by presenting some initial empirical results.

IV CHANGES IN INTERNAL STRUCTURE In examining possible relations between status shift and internal structure, there are few empirical studies on which to buiid. This section illustrates our approach by focusing on changes in the boardroom itself, its size and changes of personnel.

Popular 'public choice' theory would suggest that a status shift from the public into the private sector (west to east) would be accompanied by a significant board shakeup: some departures, some new appointments, some existing directors switching jobs. More changes of this kind might be expected on a full privatization than when an organization merely shifted within the public sector. Furthermore,


FIGURE 2 Movements in Modes of Agency

Rules

PRODUCT MARK=

Perfect Competition

A GovI Q.G.A. Public Hybrid P.L.C Owner B Reactions Depl Corp Manager

P r i v a t e Publ ic

CAPITAL MARKET

380 DLJNSIRE, HARTLEY, PARKER AND DIMITRIOU

given that privatization exposes an organization to the supposedly more turbulent environment of the market, the frequency of board changes mght be expected to remain higher than it used to be in the public sector.

In our analysis of internal change we have collected a dataset on directoral change covering 15 to 25 years of each agency’s development. Here we present only a subset, looking at the year of status change and three years either side, in order to examine these expectations of public choice theory in particular. For each of five organizations (the Post Office, Royal Ordnance Factories, National Freght Consortium, British Aerospace, and Rolls Royce) a distinction is made between moves of personnel into and out of the board (’new blood and ’departures’), switches of portfolio within the board (’reshuffles’), and non-changes (directors remaining in the same post). These categories may then be combined in various ways: ’all changes’ (moves in and out plus reshuffles); ’moves’ (new blood plus departures, an index of innovation); and an index of continuity (non-changes plus reshuiYes). As well as changes in personnel, changes in board structure are recorded: portfolios terminated, portfolios created, change in total size. To allow comparisons across agencies, all values are expressed as percentages. Indices are aggregates of up to 3 variables, each of which is a percentage of total posts in the board of directors (eg. all changes = new appointments + reshuffles and departures): hence values in Figures 3 to 12 may exceed 100. These descriptive statistics are presented in Figures 3 to 12. Figures 3 and 8 (Post

Office) and 4 and 9 (Royal Ordnance), show status shifts within the public sector; Figures 5 and 10 (National Freight Consortium) and 6 and 11 (British Aerospace) show shifts from public to private, and Figures 7 and 12 (Rolls Royce) concern a shift from the private to the public sector.

hoking first at changes in personnel (Figures 3 to 7): it is quite clear, and striking, that the indices of change (’moves’ and ‘all changes’) show higher levels for shifts within the public sector (Figures 3 and 4) than for shifts from public to private (Figures 5 and 6) - contrary to popular public choice expectations. The Post Office has a much lower level of continuity than British Aerospace. There is a more complicated picture in the case of the Royal Ordnance Factories and especially the National Freight Consortium, where a high proportion of changes were reshuffles. And Rolls Royce (moving out of the private sector) shows the highest level of change of all - which included very little reshuffling. It seems not to be true that movement from public sector to private sector, at least as observed in these examples, creates more changes of personnel in the boardroom than does movement within the public sector. These observations are consistent with a hypothesis that movement from government department to public corporation or tradmg fund status can be as sigruficant a change towards ’market’ disciplines as privatization itself.

For the board structure (changes in board size, and proportion of portfolios altered), as shown in Figures 8 to 12, a similar pattern emerges. There were many more alterations of portfolios connnected with the shifts within the public sector than in the privatizations, and the ’nationalization’ shift (Rolls Royce) showed the highest percentage of all.


4-oc--+---Y~l

.L" 1

1 2 3 4 5 6 7

FIGURE 6 Btilislr Aerospnce - type6 of change

SIalus Cliangu

250 1- 1,Nl Movo;

1 2 3 4 5 6 7

FIGURE 7 Rolls Royce - lypm of chanse

~ - 1

FIGURE 9 Royal Ordtwnce Faclnries - changes in h r d sfruclure

slatus Clrmgo

GO .} /-\-I

I F:GURE 10 Nalioitol &eight Conroriiunt - chonga in bwrd structure

Wffi Clvrlpl

Board of directors - changes in structure and personnel


With the same figures, the timing of the changes can be examined. In Figures 3 to 6, the index of ‘moves‘ (into and out of the board) displays twin peaks, separated by a trough positioned close to the year of status change. This suggests higher activity before and after the status change, in anticipation of it and as a consequence of it. Only Figure 7, the Rolls Royce nationalization, displays a slngle peak, precisely with the status shift and the appointment of the minister’s nominees. It is clear too that moving into the private sector is no more permanently turbulent than moving within the public sector. All the indices of continuity climb towards the end of the period.

Board restructuring shows a marked single peak for three of the organizations (ROF, BAe, and RR - one of each type), as if termination and creation of portfolios were a once-for-all activity. The Post Office, on the other hand, has more than one go at it, while National Freight Consortium hardly makes any such alterations.

These findings bear out the expectations of popular public choice theory in some respects and not in others. There is little doubt that shifts in ‘ownership’ status are associated with marked changes in the structure and personnel of the boards of directors of these agencies. Status change matters. However, it is unexpected that the levels of personnel change were markedly higher for agencies shifhng within (or ending up in) the public sector than for agencies shifting from the public to the private sector. And indices of continuity were not permanently reduced on privatization.

It may be concluded from an analysis of this admittedly restricted sample that although popular public choice theory anticipates some of the findings, it leaves other significant phenomena unexplained. It remains to be seen whether the use of the ’modes of agency’ models proposed in Section 111 above can provide a better understanding of these and other changes at the centre of organizations, as they transform from one mode of agency to another in response to influences wider than a shift in their relations to their principals.

V PERFORMANCE INDICATORS AND TESTING There are several empirical studies of ownership and enterprise performance. A study of the British steel industry 1957-75, when the industry was transferred from fair rate of return regulation to public corporation, predicted a downturn in all significant indicators of performance (Rowley & Yarrow 1981). Whilst this prediction was generally supported, critics have suggested that poor performance post- nationalization might not be due to the change in ownership but might reflect other changes. Another study of the UK nationalized industries infers that managers respond to personal incentives, so that they will only pursue efficiency objectives if they are given adequate rewards. This study found that following the 1978 White Paper productivity in most nationalized industries had improved, although recog- nition was given to the role of ’other factors’ such as efficiency audits by the Monopolies Commission, the introduction of competition, privatization and changes in senior management (Molyneaw and Thompson 1987).


Given the central hypothesis about organizational status and performance, questions then arise as to how enterprise performance is to be measured. In principle, a variety of performance indicators are available and it is hypothesized that a west-to-east movement will result in improved performance reflected in:

(a) Profitability m e a s d as a percentage return on capital employed, where capital is defined to include loans, equity and retained profits. However, with this measure, problems can arise from variations in accounting conventions and it has to be remembered that public sector organizations do not have any equity nor may they have profitability objectives. Nor does it follow that profitability is an accurate indicator of efficiency.

(b) Other financial indicators such as the rate of stock turnover and credit control efficiency where an efficient organization will aim to minimize the amount of working capital for any given level of activity.

(c) Productivity measured in relation to labour inputs or all factor inputs (total factor productivity). Output can be measured by volume or physical indicators, or in value terms such as sales or value-added. Once again, the various indicators have their limitations. Volume measures of output might be heterogeneous, leading to difficulties of aggregation, and they do not reveal quality changes. Similarly, gross output measured in value terms reflects expenditure on purchases of materials and equipment rather than the ‘value- added by an enterprise; and for a time-series study with all value of output figures, difficulties arise in selecting the appropriate price deflator (Molyneaux and Thompson 1987, Appendix I).

(d) Employment levels. Here, the hypothesis is that ceferis paribus a west-to-east status change will result in a shakeout of labour (such as job losses due to the elimination of organizational slack). If data were available, this hypothesis might be modified to allow for a distinction between skilled and unskilled labour. In this context, human capital theory predicts greater job losses for unskilled workers and amongst those with general skiIls where firms have not borne substantial training costs. Similarly, a public choice approach might expect public sector organizations to employ excessive numbers of adminis- trators, so that this group will bear the costs of any shake-out.

(e) Investment and technical progress. Possible measures include annual investment by the enterprise in real terms, expenditure on research and development, and indicators of the speed with which new technologies are introduced and diffused throughout an enterprise (such as word processors and computers).

(f) International competitiveness as reflected in shares of home and overseas markets.

(8) Consumer satisfaction measured by, say, the number of complaints, frequency of repairs or delays in delivery.


The central hypothesis can be tested using both descriptive statistics and econometric techniques. For each organization where data are publicly available time-series statistics can be reported and analysed on some of the above performance indicators. Econometric techniques can also be used to test for the effects of status change. For example, the hypothesis that status change will result in a ’shakeout’ of labour might be tested using a standard employment model in which employment is determined by the level of output, and the capital and technology required for production (Hartley and Corcoran 1975). The possible employment effects of a status change can be measured by including a dummy variable in the equation:

N, = f(Q, t, Nt-1, DVSC)

where N = employment measured by numbers of employees or by labour costs Q = output

t = a time-trend, representing capital and technology DVSC = dummy variable for status change (1,O) used in both intercept and

slope shift forms.

Some tentative and preliminary empirical results for the employment model are shown in Table 1. These are illustrative only and could well be revised in the light of further empirical work. Examples are presented for five organizations. British Aerospace (BAe) was nationalized in 1977 and subsequently privatized in 1981; the National Freight Consortium (NFC) was the result of a management buy-out of a state company in 1982 (previously a public corporation); the Post Office (PO) changed from a government department to a public corporation in 1969; the Royal Ordnance Factories (ROF) changed from a government department to a trading fund in 1974; and Rolls Royce (I@, following its bankruptcy as a privately-owned company, was transferred to the public sector in 1971. Although the employment equations gave relatively good fits (high R’), there were a number where the output and lagged employment variables were not significant, raising some doubts about the applicability of the basic employment model and suggesting the need for further work. Given thew qualifications, we shall focus on the employment effects of a status change (see Figure 1, p. 369).

The results in Table 1 suggest positive, negative or zero employment effects following the status change. For BAe, nationalization (DVSC I) was associated with an unexpected shake-out of labour whilst privatization had no significant employment impact (DVSC 11: equation 1). RR also showed an unexpected negative relationship following a movement from the private to the public sector (equation 5), while the ROF had an unexpected positive relationship with the change from a government department to a trading fund (equation 4). For the NFC, the mangement buy-out had no statistically significant effect on employment (equation 2) and a similar result was obtained for the Post Office (equation 3). Thus, on the basis of these preliminary tests, there was no support for our central hypothesis (Figure 1). A change in organizational status either had no employment effect or led to an unexpected increase or decrease in employment.


TABLE 1 Employment and status change

Major variables Dependent variable: Dummy variable -

Output Employment Time- for status change R7 Employment - in r?revious trend

period I 11

+ - -(**) + 0.86 + 0.99 0.89

4. ROF +(*) +(**I -(**) +(*I 0.86 5. RR +(**) + ( * I -(**) -(**I 0.96

- 1. BAe +(*) 2. NFC +(**) + 3. PO +t**) +(**) +(**) -

Notes (i) Equations were log-linear estimated using ordinary least squares methods. Not all variables are

reported. (ii) The dummy variable for status change takes the values 0 and 1 for before and after the status

change. DVSC I1 for BAe only represents the second change in status from nationalization to privatization.

(iii) BAe = British Aerospace; NFC = National Freight Consortium; Fo = Post Office; ROF = Royal Ordnance Factories; RR = Rolls Royce.

(iv) + = positive relationship; - = negative relationship; * * is sigruficant at 1% level: * is signihcant at 5% level, using &tail tests.

(v) i?' shows explanatory value of the equation and is adjusted for degrees of freedom.

Inevitably, empirical work in this area is fraught with difficulties. There are problems of the counter-factual, the impact of external factors, changes in objectives, anticipation effects, and the role of time, each of which needs to be recognized:

(a) The counter-factual - i.e. what would have happened in the absence of the status change? A complete model of organization performance would recognize the role of competition, internal relationships and other relevant influences, including such external factors as the Thatcher effect' on the UK economy. Pairwise comparisons are a solution to this problem. Comparisons can be made between the performance of the manufacturing companies in our sample (such as British Aerospace and Rolls Royce) with the general performance trends of UK manufacturing industry. Similarly, the sample can be compared with the performance of organizations which have not been subject to a status change - such as a government department which has remained unchanged (if one exists!).

(b) Differences in objectives. The objectives of an organization can change as it moves from public to private ownership, so that we might not be comparing like with like. This also has implications for the interpretation of efficiency. However, since governments rarely provide a clear specification of their objectives, it is only possible to proceed by recognizing this problem in the analysis and evaluation. Care is also required in the standards and criteria which are used for comparative evaluations which can be between actual organizations or between actual institutions and some theoretical ideal.

386 DLJNSIRE, HARTLEY, PARKER AND DIMITRIOU

(c) Anticipation effects. The performance of an organization might improve prior to a status change. This hypothesis can be tested by examjning the performance between the announcement of a status change and its implementation. For example, British Airways is believed to have improved its performance in anticipation of privatization.

(d) Change can take time. Allowance for adjustment costs and delays in improving performance can be made by introducing lags into the dates of status change. For example, allowance has to be made for the possibility that organizational status changed in, say, 1970, but performance did not improve until, say, 1973.

CONCLUSION This paper has focused on the public choice interpretation of current policy debates about organizational status, ownership, performance and efficiency. It has developed an analytical framework and then operationalized it by formulating testable hypotheses whilst recognizing the limitations and difficulties of the approach. Anyone critical of this approach would need to specify and test an alternative methodology.

Nayve or popular public choice theory assumes that a movement from west to east on the public/private spectrum is not only associated with, but entails movement from, dirigiste to unstructured responsive modes of agency - just as it sometimes assumes that west-east movement is virtually the same thing as movement from monopoly to competition. Our analysis suggests that both of such assumed associations (between status change and nature of product market, and between status change and mode of agency) have to be demonstrated. There may well be a closer relationship between the nature of the product market and the mode of agency than between either and status change. Popular public choice theory also postulates that change of ownership (status change west to east) ’improves efficiency’. However, there is an alternative hypothesis that *e in either product market or mode of agency without status change might be associated with ’improved efficiency’, as measured by the available performance indicators. Such hypotheses need testing and this paper has outlined the opportunities for empirical work.

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ORGANIZATIONAL STATUS AND PERFORMANCE: A CONCEPTUAL FRAMEWORK FOR TESTING PUBLIC CHOICE THEORIES

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