Corporate Governance in Japan

Why did 94 per cent of all publicly traded Japanese companies (1766 out of a total of 1884) hold AGMs on exactly the same day in June 1996? Furthermore, the average length of these AGMs was 26 minutes.

The fear of sokaiya

A reasonable explanation to this awkward expression of efficiency may have been that in 86 per cent of all AGMs not a single question was asked by participating shareholders and their representatives. Holding AGMs on the same day is simply a defence against the so-called sokaiya. Many large Japanese companies are the targets of real blackmail and sheer extortion by sokaiya. Unless the targeted company pays a fair amount of money the sokaiya threaten to not only distribute the AGMs but also to disclose corporate misdeeds. However, this phenomenon not only relates to the sokaiya, who are usually affiliated to gangster syndicates, exploiting isolated misdeeds by management of some companies. This appalling traffic is systemic and thereby a symptom of severe shortcomings and dysfunctions of the Japanese corporate governance system and corporate management structures.

From zaibatsus to institutional ownership

Japanese corporate governance system seems to be extremely averse to change, it shuns alternative solutions aimed at the root causes of what is seen at the surface. After World War II, SCAP – the Supreme Command of the Allied Powers – set out to establish a constitutional democracy and imposed institutions aiming at an open society and free markets and competition. Applying the American trust-busting experience, one important focus of SCAP reforms was the large and family controlled conglomerates – called zaibatsus – were broken up.

The family controlled holding companies at the top of each zaibatsu were dissolved and ownership of the individual companies was distributed among the general public. As a consequence private ownership of the large corporations was well spread and accounted for some 70 per cent of the listed companies at the end of the 1940s. However, a decline of this share soon started; by 1970 it was down to some 30 per cent and today it is already below 20 per cent. Private ownership has been replaced by institutional owners; banks and other financial institutions as well as business corporations. Foreign ownership is still quite limited accounting for some 13 percent (1997).

Keiretsus and City banks

After SCAP (1952) the zaibatsus were reborn, now renamed gurupu (group) or more common keiretsu in most cases recognized by their old zaibatsu names: Mitsubishi, Mitsui, Sumitomo etc. The old holding companies were wound up but the reborn versions were organized around a trading company, several manufacturing companies and – most important – a bank. These banks, the so-called City banks or main banks came to play a crucial role in the economic policy of Japan.

The financing of the expansion of the ownership of the operating companies and keiretsus was done through the City banks. Starting in the early 1950s, the restructuring of ownership of the operating companies was financed by these banks – directly or indirectly. The general public had rather limited financial capacity to take part in new issues of shares. And even if they had the financial means, in many cases, they were not invited to take part. Instead, the banks became direct owners but also financed cross-ownership between operating companies. Furthermore, equity financing – once a stable, mutual ownership had been established – became less and less important. By the end of the 1980s, before the financial bubble burst, bank financing accounted for some 80 per cent of most companies.

The role of government

To make this financing model viable, the government came to play an all important role – directly as well as indirectly. The City banks could refinance themselves – at very low interest rates. This eventually led the Bank of Japan attaining a unique global position by being the only net lender of all central banks in the developed world. Indirectly, the government has been equally important for this financial model by providing full deposit guarantees to all banks. This system of government guarantees is referred as the convoy system. All are protected, no single bank will be left to go under because of poor judgement of risk or mismanagement. Since the Japanese in general are big savers and their favourite assets are bank deposits, these guarantees have been further fuelling the credit expansion of the banks.

The current industrial structure of Japan is, to a large extent, a result of the economic policy where controlled competition has been a key element. By allocating specialization focus for the various manufacturing companies and by providing cheap financing, the export companies could develop their export market competitiveness through economies of scale and competitive pricing. The domestic market has effectively been protected from external competition. The leading operating countries of the keiretsus constitute a prioritized echelon of resources in the dual structure of the Japanese economy. Business cycle variations and other economic disturbances are absorbed by several layers of suppliers and medium sized, family owned companies providing flexibility to the overall quite rigid structure.

Another typical feature of this keiretsu centered manufacturing focus is that the distribution – wholesaling as well as retailing – is organized in vertical structures tied to each keiretsu. This has been a very effective means in controlling foreign as well as domestic competition. The Japanese financial sector is also very much the design of state bureaucrats. A key feature has been compartmentalization where a few licensed actors have been allowed in each field – banks for traditional banking, security houses to deal in securities etc.

Life-time full employment as a main goal

The Japanese culture is collectivist rather than individualistic. Full employment seems to be the primary overriding goal for economic policy. Furthermore, appearance is often more important than actual content. Finally, risk aversion is generally strong making Japanese less entrepreneurial than desired when renewal is required. Thus, overall social change is hard to achieve.

Although the Japanese Company Act states that companies are controlled by their owners, the fact of matter is that the Japanese corporate governance system is very different to the Anglo-American concept. Institutional owners, who are mutually dependent through cross-holdings and inter-business transactions, dominate. Bottom-line orientation is weak. It is rather a matter of absolute size and market share as first hand goals. Employees constitute an important stakeholder body, which is evident through the lifetime employment institution. Thus, absolute growth to support lifetime employment has been prioritized before profitability. Bank financing has been a major source of funds. Since interest rates have been kept low, this has further weakened the profitability motive. The main bank exercised some kind of corporate governance in relation to its keiretsu companies. Links between the main bank and the company have also been strengthened an arrangement whereby following retirement, senior bank officials made a second career with the company.

Homogenous boards with respect of seniority

Japan applies the unitary board concept – but in its own way. The traditional board of large companies as can be characterized as homogenous: all men, all over 50 yeas of age, and all internally recruited. In addition, a common feature is that the board is big, often consisting of some 50 directors. The board is recruited among loyal and senior officers of the company and is regarded as a reward for services rendered. The strongman of the board is the president of the company who is also the main decision-maker when it comes to board recruitment. Even the chairman is perceived as being below the president. The recruitment of a new chairman is often a matter of the president, because of age, finding it appropriate to step down in his active presidential role to continue in the more laid-back role as chairman. It is obvious that a board of that size and composition can neither function as a decision-making body, nor as a strong corporate governance agent vis-à-vis executive management. Thus, the function of the board, as well as that of the AGM, tends to be merely ceremonial.

Source: Rolf H. Carlsson: Ownership and Value Creation - Strategic Corporate Governance in the New Economy

Further reading:

Academic Articles by Google Scholar

The Corporate Governance Model of Japan

Corporate Governance Principles - A Japanese view

The Financial System and Corporate Governance in Japan

Japan Corporate Governance Research Institute

The Economist: Corporate Governance in Japan - Bring it on!

Reuters: Corporate Governance holds Japan back

Strategies in Swiss SMEs

As far as I know, Switzerland was the first country in the world, which created a corporate governance recommendations for SMEs. Typically corporate governance has been the topic of big publicly listed corporations. However, there is a clear need for sharing best practices as well among SMEs. Best Practice in SME - Recommendations for the Direction and Control of Small and Medium-sized Enterprises is a tiny brochure with simple and practical recommendations. This is how it handles strategies in SMEs. I'm delighted to see that here the difference between an ownership strategy and a corporate strategy is well understood.

Ownership interests within the SME

The shareholders of the SME should lay down a comprehensive ownership strategy which reflects the ownership interests and is to be periodically reviewed and revised as required.

The ownership strategy should comprise in particular of the following aspects:

• Corporate vision
• Independence
• Focus on results
• Awareness of responsibility towards customers, owners, employees and society
• Management structure
• Innovation orientation
• Growth
• Financing
• Risk policy
• Dividend policy
• Shareholders' agreement
• Treatment of minority shareholders
• Succession planning

Shareholders should have no entitlement to instruct the Board of Directors and the Executive Management and should only possess statutorily restricted rights to information and inspection.

Corporate strategy in the SME

The Board of Directors and the Executive Management are to formulate a corporate strategy on the basis of the strategy laid down by the owners of the company. This corporate strategy should be periodically reviewed and revised as required. The development and implementation of such strategy is to be clearly embedded within appropriate procedures and comprises the following six main stages:

• Situational analysis: competitive position, capabilities and core competencies, summarised in strengths and weaknesses
• Outlook: analysis of future trends as well as developments in the market and with competitors, the deducing of alternative scenarios, summarised in opportunities and threats
• Strategy: vision (derived from the ownership strategy), strategic direction of impact regarding products/services, target markets (market segments and regions), depth of added value and innovation, as well as financing
• Resolution: approval of strategy documentation by the Board of Directors
• Measures: the setting-up of the organisation, programmed measures and budgets
• Controls: periodic (e.g. quarterly or half yearly) verification of corporate objectives.

The Board of Directors should suggest changes in the ownership strategy to the shareholders if, on the basis of the given ownership strategy, no success-promising corporate strategy can be developed.

Source:

Best Practice in SME. Recommendations for the Director and Control of Small and Medium-sized Enterprises. University of St. Gallen. IFPM Center for Corporate Governance.

Corporate Ownership, Capital Structure and Investment: a Theory and Empirical Evidence

Lately I have read dissertations on ownership in order to get theoretical material for my own dissertation. Luckily I noticed that some Finns have taken this path already before me and have made their contribution to the theory of ownership. Mika Ihamuotila's dissertation titled Corporate Ownership, Capital Structure and Investment: a Theory and Empirical Evidence is one of these early studies in this field. It is an article collection of three articles. Here is a brief summary of my notes.

Mika Ihamuotila (Picture: Talouselämä)

As you might know Dr Ihamuotila didn't end up having an academic career, instead he has made a remarkable job in investment banking and is at the moment the CEO and major owner of Marimekko, a publicly listed fashion company, which he bought from Kirsti Paakkanen. Definately, Ihamuotila has taken his theories into action by being the largest shareholder of Marimekko. I highly respect his merits both in academia and business.

Corporate Ownership, Capital Structure and Investment: a Theory and Empirical Evidence

The study on corporate ownership has been centered around the belief that the separation of ownership from control decreases the value of the firm. Management’s objectives are assumed to be partially contrary to those of the shareholders, and monitoring by large shareholders is believed to diminish this problem. However, in the light of empirical evidence, firms with a concentrated ownership structure are no more profitable than firms that have only small, atomistic shareholders. (p. 8)

Mainly due to the developments in the agency theory the discussion has shifted from the value of the firm to firm-risk and capital structure. The agency theory has turned out to be well applicable to the relationship between management and shareholders and between shareholders and debtholders, and perhaps the most relevant difference between preferences of these parties arises from the different attitudes towards risk and leverage. However, empirical evidence is puzzling in this field. From the standpoint of risk exposure it may be suggested that firms that have a large shareholder are less risky than firms with a dispersed ownership structure: A large equity stake in a firm usually prevents diversification, and thus it may be argued that a large shareholder may require safer projects than what is preferred by well-diversified, atomistic shareholders. Empirical evidence is opposite to this view: ownership concentration is positively related to firm-risk. The current interpretation to this relation is that returns to monitoring are greatest in a volatile industry, because managerial performance is difficult to monitor a volatile environment. Hence, ownership is the more concentrated the more risky the firm. However, this interpretation raises many questions. First, we do not know whether firms in volatile environment are closely monitored or is monitored firms volatile in each environment. In other words, we are unable to say whether firm risk is a cause or a consequence of ownership concentration. Second, we do not know why shareholders would monitor risky firms, since empirical evidence suggest that monitoring does not increase the value of the firm. (p. 9)

Another confusing area in the literature is the relationship between corporate ownership and leverage. Agency theories and theories that are based to asymmetrically distributed information have been relatively successful in explaining the firm’s capital structure decisions. Intuitive extensions of these models suggest that ownership concentration is negatively related to the debt level of the firm. For example, if debt is argued to discipline management, then shareholder monitoring should be seen as a substitute for debt. On the other hand, if debt is argued to serve as a signal to the capital market, then firms with a concentrated ownership structure needs less debt for this purpose, since large shareholders are better informed than the markets on average. However, empirical evidence suggests the opposite: Ownership concentration is positively related to the debt level of the firm. (p. 9)

The common feature in the theoretical and empirical literature is that large shareholders are considered homogenous. This is clearly not a realistic view, since large shareholders not only monitor management but also control firms according to their own preferences, and these preferences seem to vary much. One reason for the fact that ownership concentration has not been able to explain the firm behavior is that ownership concentration only enables to excert control, but the result of this control depends on the preferences of the large shareholders. For example, ownership concentration may increase profitability if the large shareholders are of a particular type, but in another case, ownership concentration can be of the harm for the value of the firm. (p. 10)

Many family-held firms appear to avoid debt, and the business press often concludes that this is due to the dominant shareholders’ aversion to control shift that may be followed by a financial distress. However, some Scandinavian firms that are monitored by control-oriented families that hold stakes in many firms are known to bear a high leverage. This suggests that if control benefits are received in many firms, the threat of a financial distress brought by debt may be low. (p.11)

Investors face a tradeoff between control and diversification, and a high initial wealth enables an investor to simultaneously control firms and receive benefits from partial diversification. The issuance of debt allows further diversification, but it also brings a higher probability to lose control benefits in case of financial distress. (p. 12)

Ownership concentration is found where there is a high level of debt. If there are no large shareholders, managers will not choose a high level of debt, because they are averse to the control shift in case of a poor firm performance and they are unable to diversify their human capital. If the firm is controlled by a shareholder the choice of the capital structure depends on the shareholder’s diversification and valuation of control. (.14)

Managerial theories suggest that owner controlled firms should be more profitable than management controlled firms, because management has less freedom to pursue its own objectives if it is monitored by shareholders. This claim inspired a vast range of empirical work, that does not support the theories: no relation between the ownership structure and the performance of the firm is found. (p. 21)

The literature has so far been unable to explain why close monitoring that is related to a high return variances does not induce higher returns. This raises the question of why do some investors bother to monitor, because monitoring as such can be costly. In addition, a monitoring position usually requires a large relative stake of shares, which leads to an imperfectly diversified portfolio, which in turn should be compensated to the monitor. One reason for this could be that large shareholders receive private benefits from control. The literature suggests that the private benefits can be derived from perquisites, dilution of funds for private benefit, synergies with other assets held by the shareholder, or direct valuation of control. Empirical evidence supports the existence of these benefits, since shares with superior voting rights are systematically valued more highly than other shares. The literature appears unable to explain why investors hold large stakes in firms in the absence of private benefits derived from control. Most theories are based on the assumption that there are returns to monitoring, but empirical evidence can give only weak support to this assumption. (p. 33)

Modigliani and Miller show that in a perfect competitive capital market the value of the firm is not related to the firm’s capital structure. Counter to Modigliani and Miller, Jensen and Meckling propose that an optimal capital structure exists. It is the one that minimizes all agency costs, and some of which arise from the conflicts of interests between different providers of capital. Jensen and Meckling recognize debt not only as a solution to managerial agency problems but also as a source of agency problems between shareholders and debtholders. (p. 34)

1. A Theory of the Impact of Ownership Characteristics on the Capital Structure and Investments of Firms

If shareholder does not value control highly, she will diversify. (p. 61)

Demsetz and Lehn (1985) argue that if the firm operates in a stable industry, managerial performance can be monitored at low cost. Hence, the returns to shareholders from monitoring management should be greater the more volatile the firm’s environment. Indeed, Desetz and Lehn (1985), Bergström and Rydqvist (1990) and Prowse (1992) find a positive relation between firm risk and ownership concentration. (p. 63)

Control benefits can serve as a substitute for a higher expected return. (p. 80)

Investors can choose among many alternative strategies. They may:

• Control their initial endowment and not invest in the project
• Invest in the project and finance it by:

a. Issuing debt

b. Issuing outside equity

c. Using their initial wealth

d. Any combination of the above

• Invest in the capital market
• Any combination of the above

The conclusions of the first paper

1) Ownership concentration and shareholder diversification increase the firm risk and debt level.

2) Wealthy investors are likely to exert control even if they value control only marginally.

3) Whether a large shareholder is valuable for the firm or not depends on diversification and control-orientation by the shareholder: Ownership concentration increases profitability or Tobin’s q if the large shareholders has diversified well and/or does not value control very highly.

4) Firms that are controlled by less wealthy investors value control highly (=family held firms) behave in the following way: They prefer equity over debt, they have stable earnings, they invest less than the average, and their investment is more sensitive to internal revenue than that of other firms.

5) Firms that are controlled by a shareholder that does not value control highly and/or that is well diversified issue debt on less favorable terms than other firms. By contrast, they issue equity on more favorable terms.

2. The Effect of Ownership Concentration and Shareholder Diversification on Firm Risk and Capital Structure: Evidence from Finland

There are four types of firms:

MN: Firms monitored by a nondiversified principal shareholder

MD: Firms monitored by a diversified principal shareholder

N: Firms not monitored and the principal shareholder has not diversified

D: Firms not monitored and the principal shareholder has diversified

Firms by Ownership Characteristics by Ihamuotila

If there are no other managerial agency problems than managers’ aversion to risk and debt, there is no reason for risk averse shareholders to hold a large, nondiversified stake in a firm. This is because only monitoring by well-diversified shareholders leads to an increase in firm value. However, in reality, we also observe poorly diversified investors monitoring firms. (p. 111)

We assume that ownership has an influence on firm risk. (p. 113)

Conclusions of the second paper

The most fruitful theoretical developments within agency theory center around the apparent real-life differences in risk preferences between different parties. This in the essence of conflicting interests of creditors and shareholders, and it is prevalent in e.g. contracting between managers and shareholders – whether the agents wish to maximize their wealth or reputation. (p. 138)

Managers appear more averse to high levels of debt and risk than large shareholders on average. The paper provides a new view on the role of large shareholders as monitors by using variable that measures the diversification of the largest shareholder. The paper finds that shareholder diversification increases corporate leverage and riskiness, and that this impact is more significant the more control the shareholders have over the firm. If the largest shareholder holds a large nondiversified stake in a firm, the interest of the managers and the shareholders coincide over the capital structure choice. The preference of a large shareholder decreases variance of accounting returns if the shareholder holds poorly diversified portfolio. Similarly, monitoring by shareholders increases leverage only if the largest shareholder has diversified well. The evidence suggest further that ownership is a cause rather than a consequence of risk. The results raise doubts about the relevance of examining the impact of equity concentration without distinguishing between the preferences of the shareholders.

Based on this study, one would expect that firms that are monitored by a well-diversified large shareholder exhibit the highest earnings expectations, are the most profitable firms, are the least diversified, and offer contracts with highest risk incentives to the management. An increase in shareholder diversification or monitoring is related to a significant increase in the collateral sensitivity of differences in risk incentives, but it also suggests that “safe” ownership can serve as a substitute for credit-monitoring or collateral requirements.

3. Ownership Concentration, Shareholder Diversification and Asset Structure: When are Creditors Worried?

There is general agreement in the literature on some regularities between ownership of equity and corporate investment. Even though we know a great deal about the interaction of investment and finance, we understand very little about how providers of finance really anticipate the differing investment incentives of firms that differ in the way ownership of equity is organized. (p. 146)

This paper argues that since ownership characteristics of firms are adequate for explaining differences in firm riskiness, differences in the cost of debt capital can be explained by ownership of equity. (p. 146)

Hypothesis 1: An increase in concentration of equity ownership increases the agency costs of debt.

Hypothesis 2: An increase in diversification by monitoring shareholder increases the agency costs of debt.

Conclusions

Creditors use ownership information when evaluating the risk in borrowing to different firms. This has real implications as regards as the optimal ownership of a particular asset structure. Three empirical contributions with Finnish data are provided:

1) Debt financing of firms that have large investors is more sensitive to collateral than that of firms with a dispersed ownership structure.

2) Debt financing of firms with a poorly diversified largest shareholder is independent from collateral, which is not the case if the largest investors has diversified well. These results may reflect that creditors regard shareholders riskier on average than managers and well-diversified investors riskier than poorly diversified investors.

3) Large investors that monitor intangible assets hold more firm-specific risk than those that monitor tangible assets. This finding may be justified by the claim that firm-specific risk of large investors can serve as a substitute for collateral. Hence, firms with poorly diversified shareholders may be able to raise inexpensive debt to finance investment in intangible assets that do not create collateral.

This analysis suggests that it may not be primarily the actions of managers or poorly diversified shareholders that give rise to agency costs of debt. If those who control the firm have much of their interests tied to the firm, there is less likely to be severe conflicts of interest between creditors and the firm. The results encourage closer study of the relationship between corporate control characteristics and debt contracts. Similarly, it would be interesting to apply the analysis in the examination of outside equity. Following the above logic, the holders of dispersed outside equity could afford to compensate (in line with Shleifer and Vishny 1986) the costly monitoring of well-diversified investor but not necessarily that of a poorly diversified investor. These considerations imply that pricing of securities and the reaction of stock price to issuance of different securities depend on the ownership structure and the type of the monitor.

Finally, the value collateral and observability of the use of assets depends on corporate control characteristics. It might prove worthwhile to treat corporate assets structure and ownership structure as being interrelated when examining their role in the financial decisions of a firm. A particular ownership structure may function as a substitute for financial intermediation. (p. 175)

Total conclusions

The dissertation builds a theoretical model in which investors differ in their initial wealth and the extent to which they derive benefits from controlling a firm. Since all investors are risk averse they prefer the benefits of a diversified portfolio unless they value control highly. However, wealthy investors are able to combine partial diversification and control benefits by controlling several firms. In the model, ownership structure determines control over the firm and diversification and control-orientation of the controlling shareholders determine their preferences over the firm’s investment and financing. The model provides several new implications that are widely consistent with anecdotal evidence and that may enlighten related puzzling empirical work. For example, it suggests that ownership structure is not necessarily sufficient to explain the riskiness of the capital structure of the firm. However, a particular combination of shareholder diversification and valuation of control by large shareholders may determine the firm’s willingness to bear a particular level of risk and debt. This, on the other hand, determines the value of the controlling shareholder to the firm.

The empirical tests of Finnish data give strong support to the theoretical model. For example, the more the largest shareholder has diversified the more risky and the more highly leveraged the firm. In addition, ownership structure may be rather the cause than a consequence of firm risk, which is opposite to Demsetz and Lehn (1986). Furthermore, creditors require the higher level of collateral for a given amount of debt the more the shareholders have control over the firm and the more the largest shareholders has diversified. This may reflect an anticipation of shareholders incentives to substitute assets.

Only a large stake in a firm brings control, and due to limited wealth, a large stake is connected to a nondiversified portfolio and thus to ineffective monitoring. However, control and sufficient diversification can be combined. Examples of this are venture capital funds and some wealthy European family-controlled industrial groups. There is also clear evidence on that U.S. pension funds and other institutional investors are concentrating their stock portfolios in order to monitor management.

Why do investors pay for the votes in a firm and why are so many investors willing to hold a nondiversified stake in a firm – despite monitoring does not seem to increase the value of the firm? The empirical results appear puzzling if all investors need to be compensated monetarily for monitoring. If investors value control per se then it has to have implications on firm-risk and financial decisions. One way to estimate the valuation of control by large shareholder is to look at the fraction of votes per fraction of equity held by the shareholder.

The results also suggest to go deeper in the empirical research on the relationship between ownership structure and profitability or Tobin q. If it is so that management is overly averse to risk and debt and that particular combinations of shareholder diversification and valuation of control increase the level of risk and debt in a firm then these combinations ought to increase the value of the firm. Similarily the results suggest that these characteristics in the monitoring shareholder have an effect on how e.g. debtholders evaluate their claims in the firm. For example, if particular shareholder characteristics serve as a substitute for financial intermediations this should be taken into account in the literature. (p. 182)

Source

Mika Ihamuotila (1994): Corporate Ownership, Capital Structure and Investment: a Theory and Empirical Evidence. Helsinki School of Economics and Business Administration. Acta Universitatis Oeconomicae Helsingiensis.

Ownership, Control and the Firm

One highly important book for my dissertation is Harold Demsetz's (1988) Ownership, Control and the Firm. The Organization of Economic Activity Volume I. Here are the notes I made of this book for my later use. Presented like this, I fully admit that my notes are not much worth for an outsider reader. Anyway, I will summarize and open up some key points in Finnish later on this blog.

First of all, Demsetz creates a framework for the economics of ownership:

A. Ownership as an exogenous phenomenon

1. The identity of owners (or the assignment of rights)

2. The truncation of ownership rights

3. Normative and ethical dimensions of ownership

B. Ownership as an endogenous phenomenon

1. Allocation by individual action

2. Allocation by cooperative action

(a) Management of the business firm (the corporation)

(b) The distribution of wealth and efficient control

Other remarks I wanted to point out:

• A general peculiarity of recent literature is that its focus often is not on ownership itself. For example Coase's paper The Problem of Social Cost (1960) is about externalities, not ownership.
• The essence of effective regulation is to truncate the bundle of rights that defines ownership.
• In the zero-transaction-cost, zero-income-effects model, the same mix of output, a mix that is efficient, results from the negotiated solution no matter who owns the relevant entitlement (p. 14).
• One may conclude from Coase's reasoning that the identity of owners has no impact on resource allocation in a competitive setting in the absence of transaction costs if the affected parties play no significant role in the overall patterns of demand for goods. With positive transaction costs or with affected parties significantly impacting the pattern of demand for goods, the identity of owners affect the mix of output that is efficient, but does not alter the conclusion that each resulting mix of output is efficient when judged by the demands emanating from the wealth distribution associated with a particular specification of ownership. (p. 16)

• The important paper by Averch and Johnson (1962) argues persuasively that owners seek to maximize utility through increased investment in enlarging firm size when regulators bar higher rates of return on capital. (p. 18)
• The general conclusion is that constraining the ability of persons to exercise specific rights of ownership causes them to rely in greater degree of substitute margins of adjustment in their attempt to maximize utility. (p. 18)
• It is impossible to describe the complete set of rights that are potentially ownable, and to discuss these as being owned privately or by the state. (p. 19)
• A positive theory of ownership requires a systematic treatment of these determinants of the structure of ownership rights. In the Coasian world of fully developed rights and zero transaction costs, the identity of owners has no resource allocation consequences; in the world of changing and evolving rights, in which information and transaction costs cannot be zero, the identity of owners, the content of the bundle of ownership rights, and the structure of ownership all have consequences. This is why some bundles of rights are more appropriate to one set of underlying conditions than to another. (p. 20)
• Two different context arise in the literature that treats ownership endogenously. The first bears on what may be called allocation by individual action. It emphasizes a context in which decisions by owners are assumed to be fully carried out, as if no other individuals need cooperate in executing these decisions. Although agency problem cannot be dismissed completely here, no attempt is made to deal with them explicitly in this literature. The owner of a herd of cattle decides on the size of the herd, and, it is assumed, this decision actually brings the desired herd into being. The second context explicitly considers how ownership bears on the probability that a team of individuals actually executes the desired allocation of resources. Cooperative action is required to implement owner decisions, and agency problems occupy center-stage. (p. 20)
• One useful way to consider of two components of the bundle of rights: exclusivity and alienability. Exclusivity refers to the right to determine who may use a scarce resource in a particular way. The notion of exclusivity, of course, derives from the right ti insist that no one other than the "owner" use the resource, but this notion is extended here to include the right of the owner to determine who else may use a resource. Alienability refers to the right to reassign ownership to someone else. It includes the right to offer for sale at any price. (p.21)
• Whereas full communal ownership rewards the ability to occupy or to use a resource before others do, the quasi-communal/private arrangement, exemplified by rent control, rewards desired personal characteristics. In comparison to full and quasi-communal ownership, full private ownership gives greater emphasis to willingness and ability to pay. (p. 22)
• Ownership is more productive in some circumstances than in others. Little benefit is obtained from enforcing private ownership of resources that are not scarce, and there may be a cost for doing so. Such resources need not be husbanded because they are ample enough in supply to satisfy all potentially competing uses. Legal ownership of the right to use sunshine or to use the open seas as a roadway for international commerce serve little allocative function under normal conditions. Private or state ownership could create potential monopoly problems, and attendant policing costs, only if enforcement of entitlements were possible. Communal rights serve the productive function of barring such monopolies, but communal rights become increasingly counterproductive as conditions of "natural" scarcity become more prevalent. (p. 23)
• More relevant to the practical problem of resource allocation, the productivity of full ownership increases as the number of alternative uses to which scarce resources can be put increases. Private ownership of resources held in "liquid" condition is more productive than private ownership of an already-in-place sewer system constructed to carry waste liquid away. Private ownership may improve on the operation and maintenance of such system, but it no longer can improve easily on the uses to which the resources embodied in the sewer system can be put. The longer-run the perspective taken, the more productive is full private ownership, precisely because the long-run view is that in which maximum resource fungibility exists. In addition, the more certain are the values to be obtained from alternative deployment of resources, the less useful are the opinions and risk-taking preferences of private entrepreneurs, and the easier it is to substitute state ownership for private ownership without incurring as great a penalty. (p. 23)
• The full private ownership increases in productivity as does the scarcity value of a resource, the ease with which is use can be monitored, the competitiveness of its production, the variety of the uses to which it can be put, the uncertainty of its values in these uses, and the longer the perspective taken. (p. 24)
• The larger the size of a society, the more likely it is that underlying conditions favor private ownership. (p. 24)
• As societies grow in size, so must their dependency on private ownership. Effective decentralization cannot be achieved without de facto movement toward private ownership because privatization means that controllers of resources (their "owners") bear more of the consequences of their actions than do controllers (the bureaucracy) when "the state" is owner. It is precisely this "bearing of consequences" that is prerequisite to an effective incentive system once bureaucratic costs undermine the effectiveness of non-market incentives. Hence, the larger a society becomes, the more it will institute private ownership arrangements (or the more it will isolate itself from international competition and social interaction). The shift from individual to family, from family to clan, from clan to small nation, and from small nation to large nation requires ever greater reliance on private ownership. (p. 24)
• Only World War II, a period of imposed isolation, and propagandized ideological preference have slowed Russia's movement toward capitalistic institutions, a move that began prior to the Russian revolution and will inevitably continue. Similarly, China cannot long retain the degree of centralized control that has existed since World War II. These may be interpreted as violent reorganizations of ownership rights, constituting huge redistributions in wealth, in which the state takes entitlements away from previous private owners. Once this forced taking of entitlements has been accomplished, once the old distribution of wealth has been altered, it becomes imperative for the state to relinquish control again to private individuals through some more preferred redistribution of wealth. If a large society is to succeed in raising living standards, the state cannot persist in owning the wealth of a nation. Effective, well directed control of resources cannot be obtained through bureaucratic incentives in a large society. Self-interest must be harnessed to the task. The economics of control requires decentralization, and effective decentralization requires considerable privatization if self-interest is to be marshaled in wealth-enhancing ways. (p. 24-25)
• The problem of control persists in capitalistic societies, mainly for three reasons. First, it persists because the desires of owners must be translated into cooperative action by employees (the agency problem). Second, it persists because the optimum-size firm sometimes requires a commitment of equity capital, to establish effective control, that exceeds the capabilities of a single individual private owner (the diffuse ownership problem). Third, it persists because private interests sometimes diverge from social interests (the monopoly and externality problems). (p. 25)
• Standard price theory implicitly assumes that a single person owns and manages the theoretical firm, costlessly combining inputs to maximize profits. The structure of ownership varies, of course, and it is important in understanding the organization of economic activity to understand how and why it varies. The analysis of this problem has generated derivative papers on three topics: insider trading, the distribution of wealth, and the amenity potential of a firm's output.
• Effective control of enterprise and the distribution of wealth are not independent when large size is efficient. If we are to have effective control, we cannot have wealth equality. If we have wealth equality, we cannot have effective control of enterprise. The linkage between wealth distribution and effective control derives from the need to concentrate the ownership of enterprise in the hands of a few owners if control is to be effective. If large-scale enterprise is efficient, an equal distribution of wealth undermines our ability to concentrate ownership in this fashion. The control function of ownership thus provides a logical linkage to macro questions that are usually discussed without reference to the efficiency of enterprise.
• Most of the legal infringements on the operations of free markets can be expected to worsen the well-being of those being discriminated against. (p. 90)
• An owner of property rights possesses the consent of fellow men to allow him to act in particular ways. An owners expects the community to prevent others from interfering with his actions, provided that these actions are not prohibited in the specifications of his rights. Property rights convey the right to benefit of harm oneself or others. (p. 104)
• A primary function of property rights is that of guiding incentives to achieve a greater internationalization of externalities. (p. 105)
• All that is needed for internationalization is ownership which includes the right of sale. It is the prohibition of a property right adjustment, the prohibition of the establishment of an ownership title that can thenceforth be exchanged, that precludes the internationalization of external costs and benefits. (p. 106)
• The output mix that results when the exchange of property rights is allowed is efficient and the mix is independent of who is assigned ownership. (p. 106)
• The emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities. (p. 107)
• Leacock clearly established the fact that a close relationship existed, both historically and geographically, between the development of private rights in land and the development of the commercial fur trade. (p. 108)
• Forms of ownership: 1) Communal ownership 2) Private ownership and 3) State ownership. (p. 110)
• Communal ownership means a right which can be exercised by all members of the community. Frequently the rights to till and to hunt the land have been communally owned. Communal ownership means that the community denies to the state or to individual citizens the right to interfere with any person's exercise of communally ownerd rights.
• Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner's private rights.
• State ownership implies that the state may exclude anyone from the use of a right as long as the state follows accepted political procedures for determining who may not use state-owned property. (p. 110)
• If a single person owns land, he will attempt to maximize its present value by taking into account alternative future streams of benefits and costs and selecting that one which he believes will maximize the present value of his privately owned land rights. We all know that this means that he will attempt to take into account the supply and demand conditions that he thinks will exist after his death. It is very difficult to see how the existing communal owners can reach an agreement that takes account of these costs. (p.111)
• An owner of a private right to use land acts as a broker whose wealth depends on how well he takes into account the competing claims of the present and the future. (p.111)
• The concentration of benefits and costs on owners create incentives to utilize resources more efficiently. (p. 112)
• The interplay of scale economics, negotiation costs, externalities, and the modification of property rights can be seen in the most notable "exception" to the assertion that ownership tends to be an individual affair: the publicly held corporation. I assume that significant economies of scale in the operation of large corporations is a fact and, also, that large requirements for equity capital can be satisfied more cheaply by acquiring the capital from many purchasers of equity shares. While economies of scale in operating these enterprises exist, economies of scale in provision of capital do not. Hence, it becomes desirable for many "owners" to form a joint-stock company. (p. 113)
• But if all owners participate in each decision that needs to be made by such a company, the scale of economics of operating the company will be overcome quick by high negotiating costs. Hence a delegation of authority for most decisions takes place and, for most of these, a small management group becomes the de facto owners. Effective ownership, that is effective control of property, is thus legally concentrated in management's hands. This is the first legal modification, and it takes place in recognition of the high negotiating costs that would otherwise obtain. (p.114)
• The structure of ownership, however, creates some externality difficulties under the law of partnership. If the corporation should fail, partnership law commits each shareholder to meet the debts of the corporation up to the limits of his financial ability. Thus managerial de facto ownership can have considerable external effects on shareholders. Should property rights remain unmodified, this externality would make it exceedingly difficult for entrepreneurs to acquire equity capital from wealthy individuals. A second legal modification, limited liability, has taken place to reduce the effect of this externality. De facto management ownership and limited liability combine to minimize the overall cost of operating large enterprises. Shareholders are essentially lenders of equity capital and not owners, although they do participate in such infrequent decisions as those involving mergers. What shareholders really owe are their shares and not the corporation. Ownership in the sense of control again becomes a largely individual affair. The shareholders own their shares, and the president of the corporation and possibly a few other top executives control the corporation. (p. 114)
• The mark of a capitalistic society is that resources are owned and allocated by such non-governmental organizations as firms, households, and markets. Resource owners increase productivity through cooperative specialization, and this leads to the demand for economic organizations that facilitate cooperation. (p. 119)
• It is an entire bundle of rights, (1) to be residual claimant; (2) to observe input behavior; (3) to be the central party common to all contracts with inputs; (4) to alter the membership of the team; and (5) to sell these rights, that defines the ownership (or the employer) of the classical (capitalist, free-enterprise) firm. The coalescing of these rights has arisen, because it resolves the shirking-information problem of team production better than does the non-centralized contractual arrangement. The relationship of each team member to the owner of the firm (i.e. the party common to all input contracts and the residual claimant) is simply a "quid pro quo" contract. Each makes a purchase and sale. (p. 125)
• Two necessary conditions exists for the emergence of the firm on the prior assumption that more than pecuniary wealth enters utility functions. (1) It is possible to increase productivity through team-oriented production, a production technique for which it is costly measure the marginal outputs of the cooperating inputs. This makes it more difficult to restrict shirking through simple market exchange between cooperating inputs. (2) It is economical to estimate marginal productivity by observing or specifiying input behavior. The simultaneous occurrence of both these preconditions leads to the contractual organizations of inputs, known as the classical capitalist firms, with (a) joint input production, (b) several input owners, (c) one party who is common to all the contracts of the joint inputs, (d) who has rights to renegotiate any input's contract independently of contracts with other input owners, (e) who holds the residual claim, and (f) who has the right to sell his central contractual residual status. (p. 126)
• An implicit "auxiliary" assumption is that the cost of team production is increased if the residual claim is not held entirely by the central monitor. That is if profit-sharing had to be relied upon for al team members, losses from the resulting increase in central monitor shirking would exceed the output gains from the increased incentives of other team members not to shirk. If the optimal team size is only two owners of inputs, then an equal division of profits and losses between them will leave each with stronger incentives to reduce shirking than if the optimal team size is large, for in the latter case only a smaller percentage of the losses occasioned by the shirker will be borne by him. Incentive to shirk are positively related to the optimal size of the team under an equal profit-sharing scheme. (p. 129)
• If every stockowner participated in each decision in a corporation, not only would large bureaucratic costs be incurred, but many would shirk the task of becoming well informed on the issue to be decided, since the losses associated with unexpectedly bad decisions would be borne in large part by the many other corporate shareholders. More effective control of corporate activity is achieved for most purposes by transferring decision authority to a smaller group, whose main function is to negotiate with and manage the other inputs of the team. The corporate stockholders retain the authority to revise the membership of the management group and the authority over major decisions that affect the structure of the corporation or its dissolution. (p. 131)
• Without capitalization of future benefits, there would be less incentive to incur the costs required to exert informed decisive influence on the corporation's policies and managing personnel. Temporarily, the structure of ownership is reformed, moving away from diffused ownership into decisive power blocs, and this is a transient resurgence of the classical firm with power again concentrated in those who have title to the residual. (p. 132)
• In assessing the significance of stockholders' power, it is not the usual diffusion of voting power that is significant, but instead the frequency with which voting congeals into decisive changes. (p. 132)
• Resources whose user cost is harder to detect when used by someone else tend to be owner-used. Absentee ownership, in the lay language, will be less likely. Assume momentarily that labor service cannot be performed in the absence of its owner. The labor owner can more cheaply monitor any abuse of himself than if somehow labor-services could be provided without the labor owner observing its mode of use or knowing what was happening. Also, his incentive to abuse himself is increased if he does not own himself. (p. 135)
• Instead of thinking of shareholders as joint owners, we can think of them as investors, like bondholders, except that the stockholders are more optimistic than bondholders about the enterprise prospects... In sum, is it the case that the stockholder-investor relationship is one emanating from the division of ownership among several people, or is it that the collection of investment funds from people of varying anticipations is the underlying factor? (p. 139)
• Henry Manne made it clear that is is hard to understand why an investor who wishes to back and "share" in the consequences of some new business should necessarily have to acquire voting power in order to invest in the venture. In fact, we invest in some ventures in the hope that no other stockholders will be so "foolish" as to try to toss out the incumbent management. We want him to have the power to stay in office, and for the prospect of sharing in his fortunes we buy nonvoting common stock. Our willingness to invest is enhanced by the knowledge that we outside investors will be "milked" beyond our initial discounted anticipations. (p. 141)
• If all the contestant teams were owned by one owner , overinvestments in sports would be avoided, much as ownership of common fisheries or underground oil or water reserce would prevent overinvestments. (p. 141)
• Professional athletes having sold their source of service to the team owners then enter into sports activity, are owned by team owners. Here the team owners must monitor the athletes' physical condition and behavior to protect the team owners' wealth. The athlete has less incentive to protect or enhance his athletic prowess since capital value changes have less impact on his own wealth and more on the team owners'. (p. 142)
• From the birth of modern economics in 1776 to 1970, only two works seem to have been written about the theory of the firm that have altered the perspectives of the profession; Knight's Risk, Uncertainty, and Profit (1921) and Coase's The Nature of The Firm" (1937). (p. 144)
• Our understanding of firms can be improved by recognizing that management is a scarce resource employed in a world in which knowledge is incomplete and costly to obtain. (p. 147)
• Owners and management make commitments to each other in order to solicit many years of devoted service; human capital specificity arises as a result of long tenure. Conditions change, requiring these commitments to be broken if the firm is to survive. Unlike the claim made by the literature on opportunism, owners or top management do not rush out to break these commitments. Behavior that is opportunistic toward employees is facilitated through mergers, possibly vertical ones, by bringing in new owners and management who are personally free of these past commitments. (p. 155)
• Vertical separation of ownership becomes more practical the more dedicated in use are the assets used in vertically related activities. (p. 169)
• Vertically integrating assets that already exist and are separately owned allows no escape from the distributional consequences of opportunism because the price at which such assets are merged surely reflects how the owners' assets are locked in. In this case, integration would be motivated more by the desire to avoid risk than by the possibility of avoiding the expected distributional consequences of opportunism. This suggests that a desire to avoid the distributional consequences of opportunism leads to the use of "original" vertical integration - vertical integration set in place by a sole owner of the assets rather than through merger. (p. 170)
• The possibility of relying on outside contractors (vertical separation) to circumvent the ability of unions to tie up assets in the event of labor disputes has not escaped the attention of private and state owners of firms. It even merits its own name - "out-sourcing". (p.171)
• Stigler's theory of vertical integration proposes a negative relationship between vertical integration and the size of a particular market as it grows (or as it exists in different locations). As the market matures, vertical integration is displaced by increasing specialization; if the size of the industry begins to diminish, a reverse process of vertical integration sets in. (p. 177)
• Thorstein Veblen saw the alleged separation of ownership and control as a transfer of control from capitalist to engineers. He believed capitalists were mainly interested in creating scarcity through monopolization, while engineers were mainly interested in technical efficiency and output growth. (p. 188)
• We have two opposing forces at work. The "pure" effect of specialized ownership is to reduce on-the-job consumption below levels that would obtain if owners were also managers. The opposing force is the increase in monitoring cost associated with organization structures most likely to create specialized ownership interests. The shareholder of a large publicly held corporation derives no direct utility from on-the-job consumption of management, so his interests are fixed on the bottom line of the profit and loss statement. The more broadly based is the ownership of the firm, the greater is the cost of monitoring management. (p 193)
• The division of property rights allows persons the option of combining "ownership" and control in any mixture that they wish, given the budget constraints they face. Investment funds and control, therefore, become available at lower costs to society than would be possible were fractional ownership barred. The advent of the modern corporation, organized exchanges, and corporation law have reduced the cost of specializing one's interest as between the different tasks of owning and managing. (p.194)
• The viability of a business organization depends on how well three conditions are satisfied: 1) The tasks of fixed-wage workers must be easy to monitor. 2) The funds that the owner-president is able and willing to commit to the equity of the firm must be sufficient to maintain an effective scale of operations. 3) The owner's taste for managing and his ability to lead the firm must be appropriate to the situation in which the firm finds itself. (p. 196)
• The larger is the competitively viable size, ceteris paribus, the larger is the firm's capital resources and, generally, the greater is the market value of a given fraction of ownership. The higher price of a given fraction of the firm should, in itself, reduce the degree to which ownership is concentrated. (p. 203)
• Larger firms realize a lower overall cost with a more diffuse ownership structure than do small firms. The choice by owners of a diffuse ownership structure, therefore, is consistent with stockholder wealth (or utility-)maximizing behavior. (p.205)
• Control potential is the wealth gain achievable through more effective monitoring of managerial performance by a firm's owners. (p. 205).
• Two industries are likely to call forth tight control in order to indulge personal preferences. These are professional sport clubs and mass media firms. Winning the World Series or believing that one is systematically influencing public opinion plausibly provides utility to some owners even if profit is reduced from levels otherwise achievable. These consumption goals arise from the particular tastes of owners, so their achievement requires owners to be in a position to influence managerial decisions. Hence, ownership should be more concentrated in firms for which this type of amenity potential is greater. (p. 208)
• Overutilization of scarce resources arises because the use of the resource, usually owned by the government, is underpriced. Asking a zero price for the use of our lakes and streams has been a basic source of water pollution. Asking too low a price to remove timber from state forests has resulted in overcutting. The fact that freeways are free during rush hours results in bumper-to-bumper traffic. The failure to charge higher landing fees during the late afternoon hours results in congestion over major airfields. (p. 256)
• For abolitionists, freedom meant the release of slaves from restrictions imposed by owners. Socialists interpret being free as the absence of restrictions stemming from poverty, while Hayek interprets being free as the absence the restrictions stemming from private and public coercion. (p. 281)

Power of the Market

Need no words. Here is an old collection of videos on which Milton Friedman opens up the power of the market. Highly worth of watching. Here is also link to additional material.

The Pencil

Poverty

Prices

Voluntary Cooperation

Invisible Hand

Balancing Trade

Welfare

Fairness

Choices

Equality

Higher Education

Consumer Protection

Education

Labor

Immigration

Unfair Competition

Minimum Wage

Medicine

Opportunity

How to cure inflation 1

How to cure inflation 2

How to cure inflation 3

Big Government 1

Big Government 2

Individuals vs Government

Social Security

Limited Government

Principles of Adam Smith

Conglomerates & Free Trade

Freedom

Robert LeFevre on Ownership

I have noticed that in addition to all kind of crap, there is also a lot of valuable material in Youtube. It is just up to an individual what kind of staff one wants to search. This time I would like to share some videos I just found interesting. These clips may be a bit old-school, but the content of them is still worth of listening and learning.

Here are some links to Youtube videos in which an American libertarian businessman, radio personality and primary theorist of autarchism Robert LeFevre speaks about ownership. The rights of the material are owned by Mises Institute. You can find more similar material for example from LibertyInOurTime channel. The clips last circa half an hour each so take time while listening.

Property and Ownership

Conflict in Ownership

How To Become Owners

Collective Ownership

Property Classifications

Value: What It Is And How It Works

What Is Wealth?

What Is Money? - Part One

What Is Money? - Part Two

Copyright

Nordqvist - Strategy Processes and Ownership

I promise, this is the final part of Nordqvist's PhD thesis, at least for a time. Here is how he handles strategy processes and ownership. The reason why I quoted so many parts of his PhD thesis is that the topic fits perfectly in my own dissertation and is in the core focus of this blog. I apologize for not summarizing or editing the text and for not adding my own input and ideas, I just thought that this time the original version speaks for itself. For further information, I highly recommend to at least glance through the thesis, which can be found here. One of the best and most interesting thesis I have read so far.

Strategy Processes and Ownership

In the diverse field of strategy, a common trait is the relatively little attention paid to the role of ownership in strategic processes (Goodstein and Boeker, 1991; Thomsen and Pedersen, 2000). Thomsen and Pedersen (2000), for instance, claim that strategy research has paid too little attention to the type of ownership and its connection with objectives and strategies of firms. Goodstein and Boeker (1991), moreover, draw attention to the lack of knowledge of how ownership affects strategic change and suspect that researchers simply assume that ownership interests have little influence on strategic processes.

Rather than being concerned with how and why ownership plays a role in the strategic processes of firms, Ravasi and Zattoni (2004) observe that earlier research on the relation between ownership and strategy “has largely searched for correlations between quantitative measures of ownership distribution and archetypal strategic options.” For instance, Amihud and Lev (1981), Denis et al. (1999), Lane et al. (1999) and Collin and Bengtsson (2000) all investigated how ownership structure is related to the amount of diversification; Bethel and Liebeskind (1993) and Johnson et al. (1993) looked at corporate restructuring and the role of ownership; Baysinger et al. (1991), Graves (1988), and Hill an Snell, (1988) investigated how innovation is linked to the ownership structure of the firm; Palmer et al. (1993) and Meyer and Whittington (2004) studied the relation between ownership and corporate structure, especially the multidivisional form, and Oswald and Jahera Jr. (1991) looked at how ownership is linked to financial performance.

These studies typically describe ownership structure in terms of concentration and size of legal owners or size of management stockholding. However, the identity of the owners and their specific preferences may influence strategic processes as well (Ravasi and Zattoni, 2004; Pedersen and Thomsen, 2000; Hoskisson et al. 2002; Golden and Zajac, 2001). Ravasi and Zattoni (2004) point out that earlier research typically assumes homogenous interests among shareholders, also in firms with several owners. Recent contributions have, however, pointed out how owners may differ in time horizons and incentives, and thus in their attitude to, for instance, innovation (Hoskisson et al., 2002) and internationalization (Tihanyi et al., 2003). But most work done is still on the legal and structural ownership per se in firms and to what extent this is related to the content of strategies (Ravasi and Zattoni, 2004). Most published studies on the relation between ownership structure and strategy also investigate publicly traded companies, thus only paying attention to a fraction of the total number of firms (Turnbull, 1997). Thus, there is some knowledge about whether ownership structure matters for different archetypal strategic choices.

Much less is known, however, about how and why ownership plays a role in micro levels of strategic processes. This is, for instance, evident in reviews of strategy research (e.g. Mintzberg et al., 1998; Hoskisson et al., 1999; Farjoun, 2002). References to ownership, owners, or even their representatives are rare. Despite the lack of studies on how and why ownership matters in the strategic process, there are convincing arguments that this is an important topic worth more attention, both internationally (Porter, 1992; Thomsen and Pedersen, 2000; Daily et al., 2003) and in Sweden (Nyberg, 2002; Tson Söderström, 2003). Nyberg (2002) argues that ownership is typically depicted as a problem rather than a resource in the long-term development of firms, but he also observes a growing interest in the role of ownership in the long-term development of firms in Sweden and other countries.

In an editorial of a special issue of Academy of Management Journal on governance through ownership, Daily et al. (2003) observe that the different objectives of various ownership types need to be accounted for when examining the relationship between ownership and detailed firm processes and outcomes. This is linked to an increasing awareness of the growing complexity of different ownership types in both publicly listed and privately held firms (Daily et al., 2003). In a Swedish context, this is especially so because concentrated ownership both inside and outside the Swedish stock exchange is common (Tson Söderström et al., 2003). This is a characteristic that the Swedish economy shares in common with several other European economies.

A main reason for the lack of attention to the role of ownership in studies of strategy processes can be that most research on strategy has been conducted in American and British contexts (Pettigrew et al., 2002), and is based on corporations assumed to have widely-held ownership separated from management. This is extensively believed to be a characteristic of publicly listed firms in the USA and the UK In the USA, for instance, S&P 500 firms typically dominate strategy research and the role of ownership in these is rarely acknowledged, even if it may be notable (Anderson and Reeb, 2003). Moreover, Miller and Le Breton-Miller (2003) note that when firms with concentrated ownership are the focus of literature on successful firms, authors rarely pay attention to this ownership.

Another reason is the dominant interest that strategy scholars have had for CEOs and top managers as the actors in strategic processes. In many studies it seems to be taken for granted that the actor involved – the strategist – is the dominant CEO, or at most, the CEO in interaction with his team of top managers (Pettigrew, 1992a; Davis and Useem, 2002). Tricker (1996), for instance, points out that most scholars of strategy and organization seem to assume that organizations peak with the CEO, and Davis and Useem (2002:238) note that academic researchers have long been …drawn to the same pinnacle of the pyramid, partly on conceptual premise that the chief executive is the manager who matters, and partly on the pragmatic ground that little is publicly known about anybody except the CEO.

Pettigrew (1992a) wants more attention to what he calls ‘managerial elites’, with no reference to owners, and it is not until recently that board members and their role and contribution to strategy have been investigated in greater depth (e.g. Zahra and Pearce, 1989; McNulty and Pettigrew, 1999; Forbes and Milliken, 1999). The ‘upper-echelon’ perspective (Hambrick and Mason, 1984) triggered a stream of research taking into account the groups of top managers, but the owners remain largely invisible in actor-oriented research on strategic leadership. Perhaps the reason is, as Davis and Useem (2002) suggest, that traditional strategy research has assumed that the impact of owners is either invisible, or “direct and unproblematic”, which they argue is the case in for instance owner-managed firms.

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