You're a corporate shareholder unhappy with the direction management is taking. Do you a) take the "Wall Street walk" and sell, b) raise hell at the next annual meeting, or c) just hold onto your shares and hope for the best?

You're a United Airlines Premier Platinum member with hundreds of thousands of unused miles, and you've decided you can't take the airline's post-merger disorganization and shoddy service any longer. Do you a) start flying another airline — putting you back at square one with zero miles and zero status — b) start leaving regular voice mail messages on United CEO Jeff Smisek's home phone, or c) sit back in the first-class seat you've just been upgraded to after a tense wait in the terminal and try to take a nap?

You're a Republican intellectual — David Frum, say — dismayed by the direction your party has taken over past few years. Do you a) switch over to the Democrats, b) raise hell in the media, or c) try to stay welcome in the party's corridors of power in order to quietly exercise your influence?

In each example above, you're choosing among the options of exit, voice, and loyalty — or some combination of two of the three (it's difficult to combine all three, although a parent who yanks her kid out of public school but still shows up at school board meetings and gives a little money to the PTA would presumably count). The terminology comes from Albert O. Hirschman's 1970 classic Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States. As Hirschman's death on Tuesday made clear, the book has a substantial fan club among social scientists.

But it does seem more of a cult following than a universal one. I only first heard of the book (or at least heard of it and remembered it) in a conversation with Roger Lowenstein a few months ago. I was talking about some writing I'd been doing on corporate governance and the role of shareholders; Roger immediately brought up Exit, Voice, and Loyalty. So I checked a copy out of Widener Library and started reading. This morning I finally finished it (it's a short book, and much of it is fascinating, but I would definitely not call it a page-turner).

Hirschman arrived at his basic idea when, in a book on international development (a field that Paul Krugman dubbed him the "tragic hero" of), he had tried to explain "why the Nigerian railways had performed so poorly in the face of competition from trucks." The reason he came up with: "the most aroused and potentially most vocal customers" — commercial enterprises needing to ship cargo — had quickly abandoned the railroads for trucks. And because the railways were government-owned and subsidized, the management didn't care all too much about the subsequent loss of revenue.

A similarly poor result, Hirschman wrote, might apply to public schools in a U.S. community where the most "quality-education-conscious" parents pulled their children out and put them in private schools. Their exit might goad school administrators into action, but the loss of their voice would likely have a much greater negative impact.

The point here was that competition, commonly presumed by economists to cure all ills, could under certain circumstances make things worse. These were admittedly special circumstances, and Hirschman wasn't trying to argue that competition and exit were pointless. He was just making the point that while exit had been the main thing economists paid attention to — not to mention the culturally preferred option in the U.S., a nation populated mostly by people who voluntarily exited other countries (and their descendants) — the role of voice was crucial in understanding how organizations actually worked.

A fashionable political science theory of the 1950s and 1960s held that, in a two-party system, vote-maximizing parties would inexorably move toward the political center. That this did not even remotely describe the Republicans' choice of self-proclaimed extremist Barry Goldwater as presidential nominee in 1964, Hirschman argued, had to do with the voice exercised by energized conservatives within the party.

Theirs turned out to be a prescient voice. Goldwater was trounced by Lyndon Johnson, but within a few years a new Republican majority was being built around his conservative base. Whether the internal exercise of voice that has pushed the GOP even further rightward over the past two decades and especially the past two years will bring similarly bountiful effects seems doubtful, but who knows. What matters is that voice matters. And when voice is absent, there can be problems. Back to Hirschman:

When the management of a corporation deteriorates, the first reaction of the best-informed stockholders is to look around for the stock of better-managed companies. In thus orienting themselves toward exit, rather than toward voice, investors are said to follow the Wall Street rule that "if you do not like the management you should sell your stock." According to a well-known manual this rule "results in perpetuating bad management and bad policies." Naturally, it is not so much the Wall Street rule that is at fault as the ready availability of alternative investment opportunities in the stock market which makes any resort to voice rather than exit unthinkable for any but the most committed stockholder.

Over the past couple of decades, one answer to this problem has been to make managers more sensitive to shareholder exit by tying their compensation more closely to stock prices. Another has been to strengthen the voice of shareholders by giving them more things to vote on. But I've never seen the discussion framed in terms of exit and voice (well, I have now after Googling it, but it seems like a pretty modest literature). Instead, the standard model used in analyzing corporate governance is that of principals (shareholders) trying to get their agents (managers) to do the right thing. If exit and voice were considered, we'd probably think more about the role that the voice of employees (who often have far more at stake than a shareholder with thousands of other investments) could play in stemming corporate decline.

Not that we'd get much more definitive guidance that that. As Hirschman concludes, his approach "does not come out with a firm prescription for some optimal mix of exit or voice, nor does it wish to accredit the notion that each institution requires its own mix that could be gradually approached by trial and error." In other words, figure it out for yourself.

It's this open-ended aspect of Hirschman's analysis that probably explains why, although it has many fans, it doesn't seem to have generated its own school of thought (tell me if I'm wrong about that, Hirschmanites). It's a book that makes you see the world in new ways, but doesn't give you new marching orders. To me, that constitutes much of its appeal. And with a massive new biography of Hirschman coming out this spring, maybe we're due for a think-for-ourselves Hirschman revival.

(By the way, the next thing on my Hirschman reading list, as recommended to me earlier this year by HBS professor Rebecca Henderson, is The Passions and the Interests: Political Arguments for Capitalism Before Its Triumph. Book report to come.)

This blog first appeared on Harvard Business Review on 12/12/2012.

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