How can a dev company run without an physical office?

[Tybobobo]

I am trying to wrap my brain (what I have left of it; final year of college exams are straining...) around the concept of running a dev company (such as Frictional games) without an office.

I understand Skype to be the most important tool in communicating (written in one of the dev blogs a year or two ago), but I am having trouble figuring out how a company can make it work - other than just throwing trust blindly into new recruits.

I have recently been working with a few individuals on a few different (albeit school related) projects, and notice ups and downs in communication and work methodology- and I am always looking into improving it - allowing better teamwork and communication!
Thus I am looking into Frictional Games as an outstanding example of online collaboration in a real "work" environment. While examples does not have to come directly from FG, any advice dealing with this would be very helpful.

A few questions on the top of my head are;
How would you recruit new employees? How do you know if they actually "showing up" for work, and working? Would it result into trust issues by only having to work online? What would you require of every dev on working days? Surely a chain leash and webcam pointed at them at all times would not be required, haha


Any thoughts?