Judge Posner's (Reference Posner2010) marvelously clear articulation of the theory of organization economics and his application of that theory to the study of such disparate organizational settings as the publicly held corporation, the US intelligence services, the FBI, and civil and common law judiciaries are yet additional examples, if they were needed, of his lucidity and insightfulness.

Judge Posner's principal contention is that organizations adopt structures, compensation systems, and other practices that are well-suited to – that is, efficient in – achieving their goals. While I agree with that contention, I want to amend it slightly in two ways. First, we need a ‘micro-foundation’ of this contention that explains how individual and group decisionmaking results in organizations adopting efficient structures and practices. And establishing this micro-foundation will be complicated by the voluminous evidence of predictable flaws in individual and group decisionmaking (Korobkin and Ulen, Reference Korobkin and Ulen2000). I believe, for reasons that I will get to, that organizations can overcome the flawed decisionmaking of their members. But I believe that they surmount those hurdles more slowly and less completely than Judge Posner's article suggests. Second, I find the more fascinating subject in organizational economics to be the dynamic path to efficiency rather than the static equilibrium conditions. That organizational structure and practices move toward efficient conditions is almost axiomatic. Far more intriguing to me is a related point – how organizations identify significant environmental changes and adapt to them. Among the issues, here is how an organization distinguishes ephemeral changes, which demand little or no particular structural or procedural response, from deep changes, which demand profound alterations. Focusing on responses to change causes one to look for different internal qualities of an organization than Judge Posner examines and to distinguish favorable external conditions for appropriately responding to change.

Let me draw and then amend an analogy to natural selection. Just as natural species adapt or decline as their environment changes, so, too, do organizations adapt or decline to changing environments. Frequently, they do not recognize the fact that the environment is changing in such a manner as to require the organization to alter its structure or procedures. Indeed, I would hypothesize that great organizations and great leaders have as a defining characteristic, their ability to distinguish those changes that are ephemeral from those that are significant and to adapt appropriately to the significant changes.

The analogy of organizational change to natural selection breaks down at a crucial point: organisms typically have limited means for identifying and responding to change – they can, for instance, migrate, alter food sources, and change behaviors. In the classical evolutionary theory, it is principally through unplanned and unpredictable genetic mutation in reproduction that species respond.Footnote ¹

Humans (and their organizations) are different from natural organisms in that they are, in theory, far more able to detect changes in their environment and have a much wider range of responses. To the extent that humans are creative, as they surely are, they can alter their organizations to better suit a changing environment. So, when average global temperatures fall (as in ice ages) or rise (as they threaten to do over the next decades), human beings will eventually adapt.

This macro-flexibility of human beings as a species does not necessarily translate into micro-flexibility of the organizations that human beings create. Sometimes those organizations fail spectacularly, even to the extent that entire human civilizations collapse (Diamond, Reference Diamond2004). Humans may not perceive signals of change, or they may misinterpret those that they do perceive. Our contemporary economic landscape is littered with the wreckage of organizations, and products, such as General Motors, Chrysler, and numerous financial organizations, that failed to identify a changing environment that necessitated altered structures and procedures (Posner, Reference Posner2009).

To bring my two points together into a single question, ‘How do organizations, staffed by cognitively limited human decisionmakers, identify significant changes in their environment and fashion the organizational responses in structure, reward systems, output, staffing, internal practices, and the like that are most appropriate?’ In sketching an outline of an answer, let me focus on internal and external factors.

First, two vital internal factors for identifying and responding to change are prudent: discernment and flexibility. If the leaders of the organization are prudent and, I suspect, courageous, they will have a clear-eyed view of their environment – particularly of the goals of the organization and of how the organization's structure is suited to achieving those goals, given the current environment. But they will also have a good sense, with which they are either endowed or which they have learned, of the changes that are going on in the external environment, of how those changes might affect the ability of the organization to achieve its goals, and of how best to respond to those changes. These qualities are rare, especially so in light of human frailties in judgment and decisionmaking. To illustrate, we humans are prone to overoptimism about our own abilities and futures. Each of us believes herself to be a better-than-average driver. We are also prone to identifying patterns where none exists. Clearly both of these characteristics are, in many circumstances, valuable. But they may mislead decisionmakers about their abilities to identify and face challenges, and in their evaluation of external data.

Can an organization cultivate prudent discernment? Perhaps so, in at least two ways. First, it can seek to identify leaders with first-rate judgment. I have served on numerous search committees for important academic and community organizational leaders. In each of those instances, I have sought to identify the candidate with the best judgment (on the theory that the organization is going to be dealing with challenges that demand prudence). Although almost all of these searches has resulted in selecting a first-rate leader, I cannot articulate the qualities of prudent discernment and good judgment that the successful candidates had. I am sorry to say that there is simply a certain je ne sais quoi that the best leaders have.Footnote ² This point underscores how difficult it is for organizations to structure themselves efficiently.Footnote ³

The second thing that an organization can do to improve its prospects is to adopt procedures that take account of systematic individual and group biases and mistakes. An example of a procedure that does not seem to help (and that Judge Posner discussed) is to place independent directors on the board of directors of a publicly held corporation. An example of a procedure that might help to improve such crucial organizational decisions those regarding tenure and promotion in a university department is a ‘two meetings’ rule: at the first meeting, the faculty would discuss the candidate's record; at a second, later meeting, the faculty would vote.

A second internal factor that contributes to dynamic organizational success is flexibility. By that I mean that the organization has to have some ‘play in its joints’ – an ability to change the way it is doing things, to alter reward systems, to reassign valued employees, to redesign their output, and so on. Because change is, to quote a famous adage, the only constant, organizations must periodically re-structure and remake themselves. Those organizations that believe that their current configuration will serve them well through whatever the future may bring are organizations unlikely to see the future. An organization cannot become so comfortable with its accommodation to the current environment that it cannot alter itself when the environment changes.

Turning to external factors, there is one that is essential to the prosperity of any organization – competition, either actual or potential.Footnote ⁴ An organization may strive to be a monopolist, but, even if it succeeds, the organization should behave as if it is engaged in a furiously competitive market.

One might reexamine the institutions that Judge Posner examined to see the extent to which they foster the internal and external factors I have just noted. But I would suggest looking at another organization well known to Judge Posner and the other contributors to this volume – the modern US research university. The great public and private research universities (mostly those in the US but a few in other countries) are, I devoutly believe, among the greatest glories of our age. They are creating and disseminating knowledge in a remarkably wide range of disciplines and at a quickening clip. This creation and dissemination of knowledge is their organizational goal, and, following Judge Posner's lead, I would urge a study of how they create structures, procedures, and practices that help them achieve their goal. I would also urge an examination of how the great research universities identify changing environments, such as those involving funding, attracting excellent faculty and students, changing social demands for education, and alterations in the technology of research and teaching. And how do research universities maintain and reward structural and evaluative flexibility so as to respond effectively to change. In addition to all the impediments to organization success that Judge Posner identified, such as agency costs, political interference, and misaligned incentives, universities might be excellent organizations in which to study the impact of flawed human and group decisionmaking and the ability to respond to changing environments. By and large, the modern US research universities seem to me to illustrate all these matters in a rich and instructive manner. And I would argue that they have remained flexible and prudent and successful through radically changing environments for decades, if not centuries.