Nordqvist - The Relationship between Ownership and Management

I shall continue with Nordqvist's PhD. This time about the relationship between ownership and management.

The Relationship between Ownership and Management

It is fair to say that the discussion about organizational and strategic consequences of the separation of ownership and management still dominates most management oriented studies of ownership (for its most famous formulations see, for instance, Smith, 1776/1979; Berle and Mean, 1932; Weber, 1921/1968, Chandler, 1977, 1990)7. Collin (1995) points out that the rights of the shareholders in this literature are limited to (a) a substantial part of the profits, (b) the right to hire and fire top management, (c) the right to make certain strategic decisions, and (d) the right to sell these various rights.

Much of the debate around the separation of ownership and management has been about the loss of these rights. However, increasing evidence that the separation of ownership and management is not as common as previously assumed. La Porta et al. (1999), for instance, find that except in economies with very good shareholder protection (especially the USA and UK), relatively few large firms are widely held. This means that those who control ownership still have significant influence over the firm’s development. This leads Davis and Useem (2002:241) to talk about the “uncommon problem of the separation of ownership and control”. Glete (1987), Ullenhag (1993) and Tson Söderström (2003) find similar patterns for Sweden.

In relation to this, Glete (1987) argues that the three most elementary functions of the ownership of a firm are to appoint the top management, decide on strategic issues, and act directly if the firm enters a crisis. This means that especially the responsibility side of ownership often includes a long-term commitment to the firm and that this is still visible in many firms. This is somewhat different from the picture of ownership where firms have fractioned ownership and management is clearly separated from the ownership, and shareholders often change investments and never enter into a long-term relation with the firm that they own a part in (i.e. the traditional view of the separation of ownership and management).

Monks and Minow (2004) argue that the difference between concentrated and fractioned ownership has changed the notion of ownership itself. The owners of firms with many shareholders do not feel the rights (or power) and the responsibilities of owners in firms with only a few shareholders and concentrated ownership. For numerical, legal, functional, and personal reasons the notion of ownership in firms with fractioned shareholders has thus changed. The ownership structure of a firm is also related to how ownership is divided between different types of owners (e.g. institutions, individuals, families, if they are active or passive, what purpose they have what methods they use, etc.).

Type and identity of ownership is important when looking into the role of ownership (Glete, 1987; Thomson and Pedersen, 2000) and common in studies on the impact of ownership on different organizational outcomes. Apart from type of owners, Hedlund et al. (1985) add their behavior. Using Hirschman’s (1970) concepts of voice and exit, they point out that owners, at least on the stock exchange, can choose to exit the firm and sell their ownership or to voice and influence the way the firm is developing. In short, the exit strategy is easier to adopt. To use the voice strategy, Hedlund et al. (1985) argue that special competence is needed since this strategy entails active ownership. However, little attention has been paid to the real meaning of such ownership competence (Nyberg, 2002).

In a general sense, the concept of ‘ownership strategy’ coined by the authors refers to the particular owners’ purpose and future intention with their ownership (Hedlund et al. 1985). Both Glete (1987) and Hedlund et al. (1985) are mainly interested in ownership on the Swedish stock exchange and they underline the dynamic nature of ownership, i.e. that the structure and behavior of owners may shift over time. Glete (1987) shows how the large owners in Sweden over the last century became more of financial investors and managers than involved in the business operations of the firms they owned and Hedlund et al. (1985) reveal that institutional owners were increasingly important during the 1980s on the stock exchange. This trend continued into the 1990s and early 2000s (Tson Söderström et al., 2003) and is often said to lead to a focus on short-term profits rather than long-term orientation of firms.

Most literature on the role of ownership in strategic development is focused on publicly listed firms. Davis and Useem (2002), for instance, argue that the most common way for shareholders to influence their corporations is via reaction to takeovers, shareholders’ activism and financial analysts. Here, the formal means of shareholder voice is through proxy voting at the annual meeting, which in essence means to react on proposals from the board. They further suggest that financial analysts are more likely to give strategic and governance advice to senior managers of publicly traded firms than to the actual shareholders. However, it is likely that the role of ownership in the strategic development of family firms is somewhat different.

Source: Mattias Nordqvist (2005) - Undestanding the role of ownership in strategizing