GBBO and the nature of the firm

For those not in the know GBBO stands for the Great British Bake Off which is a very popular (not at all sure why) television programme in the UK which until recently as on the BBC but has now been bought by Channel 4.

What has this to do with the theory of the firm? Chris Dillow at the Stumbling and Mumbling blog writes,

As you all know, Mary, Mel and Sue [3 of the 4 presenters of the show] will not be joining the show when it moves channel, which has prompted everyone to claim that Channel 4 have spent £75m on a tent and a fat scouser – something they could have got in Millets Liverpool’s branch for rather less.

This highlights a general fact – that firms are often not merely collections of physical assets, intellectual property and explicit contracts. Their value often lies in key employees, and if these leave they can take a lot of corporate value with them. If viewers boycott the new GBBO because there’s no Bezza, then the GBBO is indeed not as valuable as Channel 4 thought.

While it it clearly true that many firm have employees who are of great value to them its not clear that this fact changes the theory of the firm. Even when workers/managers are of value to a firm non-human assets (physical assets, intellectual property rights, location etc) still play a role.

One of the problem with developing a theory of the firm for firms based on human capital is that human capital can not be owned by the firm. Employees can always walkout the door in a way that non-human capital can not. This means that human capital firms can be very unstable with workers leaving anytime they want. Hart (1995: 56-7) goes so far as to argue that, at least some, nonhuman assets are essential to a theory of the firm. To see why this may be so consider a situation where 'firm' 1 acquires 'firm' 2, which consists entirely of human-capital. The question Hart raises is, What is to stop firm 2's workers from quitting? Without any physical assets - e.g. buildings - firms 2's workers would not even have to relocate themselves physically. If these workers were linked by telephones or computers, which they themselves own, they could simply announce one day that they had decided to become a new firm. For the acquisition of firm 2 by firm 1 to make economic sense there has to be a source of value in firm 2 over and above the human-capital of the workers. It makes little sense to buy a 'firm' if that 'firm' can just get up and walk away. Hart argues there must be some 'glue' (non-human assets) holding firm 2's workers in place. A firm which is made up of only human capital would be flimsy and unstable, subject to the possibility of break-up or dissolution.

For GBBO while presenters are important there is also the need for non-human capital - cameras, sound equipment, editing equipment, ovens etc - which are not owned by the presenters. These non-human assets can keep the firm together.

Whether these are enough to keep GBBO together, or will it go the way of Top Gear after its three presenters left, only time will tell. But if human capital is super important to the show, as it seems to have been for Top Gear, and it fails then this would just make Hart's point, human capital only (or largely human capital) firms are unstable.

Ref.:

• Hart, Oliver D. (1995). Firms, Contracts, and Financial Structure, Oxford: Oxford University Press.