Nordqvist - The Concept of Ownership

As I promised before, here are some interesting parts of Mattias Nordqvist's PhD thesis summarized.

The Concept of Ownership

The concept of ownership is complex, involving aspects from various fields and disciplines. Just to give a few examples, the meaning of ownership has been widely treated within subjects like philosophy, law, finance, economics, and psychology.

Private and organizational ownership are concepts deeply rooted in Western cultures and have different connotations depending on the context in which they are discussed. Formally, the meaning of ownership can be tracked by consulting a dictionary. Encyclopedia Britannica’s Merriam-Webster’s dictionary lists two meanings of ownership as a noun, “(a) the state, relation, or fact of being an owner, and (b) a group or organization of owners”. The following words are listed as synonyms: dominion, possession, possessorship, property, proprietary, proprietorship. Looking closer into the verb ‘to own’, the dictionary refers to “to have or hold as property” and “to have power over” and “to have as an attribute, knowledge or skill”. The latter meaning is also close to the word possess. From this one can derive a meaning of the concept of ownership that seems to go beyond the mere factual or legal situation of owning something.

Adam Smith on Ownership

The traditional meaning of ownership has been in focus in most treatises on the role of ownership and property in organizations. Early commentators on this include Adam Smith, Karl Marx and Max Weber. Smith (1776/1979) analyzed the ‘objective’ functions of private property as a utilitarian mode to provide for physical needs, at both individual and societal level. In his view, ownership is not just a measure of wealth, but also an element of personal satisfaction that, however, is guided by an ‘invisible hand’ looking after the interests of the society as a whole. Smith’s notion of the role of ownership and private property is still the overall principle in most Western countries, even if there are some governmental restrictions on ownership in some fields (Monks and Minow, 2004). With regard to firm ownership, Smith was especially worried about the consequences of the joint stock company. He believed negative implications would arise when owners had limited personal responsibility. He predicted that it would be difficult to find managers acting in line with an ownership whose role was to risk their wealth on the premise to earn more of it:

Being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. (Smith, 1776/1979)

Karl Marx on Ownership

The implications of private ownership of the ‘means of production’ for the nature and structure of society on one hand and of the individuals’ well-being on the other are at the center of attention for Karl Marx and his followers as well, but they have a different point of departure and different conclusions than Adam Smith and other theorists in his vein. Marx analyzed how the unequal distribution of private property in the capitalist system eventually led to the domination of one class in society over the other. In essence, he focused on the dialectics between the owners of the ‘means of production’ and those generating the output – the working class. One of Marx’s conclusions was that instead of controlling private property, the workers were controlled by it and this led to their alienation. The capitalists, or the owners, on the other hand, could profit from this situation. Marx’s agenda was political, his perspective the workers and his goal the eventual overthrow of private property (Ritzer, 2000). He was particularly interested in the concentration, or ‘centralization’ to use Marx’s wording, of ownership, where private property and wealth was accumulated in larger units and controlled by a lesser number of instances. This is interesting, since the family firm can be seen as a structure where ownership is concentrated.

Max Weber on Ownership

Max Weber’s (1921/1968) notion of the bureaucratic organization was characterized by a modern, efficient, and rational way of organizing economic activities, thus differing from other versions of organizing on traditional and charismatic grounds. The rational/legal authority of the bureaucratic organization was based on objective rules, norms, and rational decision-making, where managers’ authority was based on technical qualifications and rational values rather than individual characteristics and personal ownership rights. In is eight statements regarding “the fundamental categories of rational/legal authority”, Weber writes:

In the rational type it is a matter of principle that the members of the administrative staff should be completely separated from ownership of the means of production or administration. Officials, employees and workers attached to the administrative staff do not themselves own the non-human means of production and administration. (…) There exists, furthermore, in principle complete separation of the property belonging to the organization, which is controlled within the sphere of office, and the personal property of the official, which is available for his private uses. (Weber, in Pugh, 1997:7)

Thus, for Weber, the domination in the bureaucratic organization is not so much linked to the authority of the owners of the means of production, but rather to the rational/legal type of authority that was assigned to the bureaucracies, which used “formally the most rational known means of exercising authority over human beings” (Weber, 1921/1968:223). As indicated, Weber argued that ownership and management in the bureaucratic organizations would, in principle, be separated and the legal owners of the organizations not those necessarily exercising this authority. This means that typically other administrators or bureaucrats decoupled from the ownership would be in charge. Weber also argued that since individuals are driven by the search for means to reach their own personal goals, there could, in the bureaucratic organization exist “the tendency of officials to treat their official function from what is substantively a utilitarian point of view in the interest of the welfare of those under their authority” (Weber, in Pugh, 1997:15). This is linked to the discussion about the separation of ownership and management.

Monks and Minow on Ownership

The traditional notion of ownership and private property is reflected in most literature on ownership within management and organization theory. Monks and Minow (2004), for instance, write from a North American perspective about the shareholders of a corporation and outline four elements of ownership. They do this, even if they also raise the question if a corporation can be owned in a formal way given its ‘legal personality’. Still, however, the role of owners and ownership in a traditional corporation or other type of firm is within the realm of the shareholders’ function.

Monks and Minow (2004) summarize the elements of ownership as follows. The first element is that the owner (O) has the right to use his or her property (P) as he or she wishes. The second is that O has the right to regulate anyone else’s use of that P and the third that O has the right to transfer rights to that P on whatever terms he or she wishes. There is less agreement about the fourth element, they argue, which refers to O being responsible for making sure that his or her use of P does not damage others. In sum: Ownership is therefore a combination of rights and responsibilities with respect to a specific property. In some cases those rights and responsibilities are more clearly defined than in others.

Much of the complexity that arises from ownership comes from the responsibility side of ownership. (Monks and Minow, 2004:99) This complexity leads the authors to pose the question what it means to own part of something. This is implied in the word shareholder and originates in the notion that in many firms there is not just one owner, but ownership is distributed among several individuals and/or organizations that own, or hold, a share. This is further complicated by the legal fact in many countries that the ownership of shares in a firm is linked to limited risks. In other words, in the conventional notion of ownership of a firm, the firm can be seen as a separate entity, with an existence beyond the life of the owners and/or operator. Thus, ownership of all or part of a firm is not only linked to an individual owner.

Source: Mattias Nordqvist (2005) Understanding the role of ownership in strategizing. p. 33-36.