July 5, 2024
For my seminar course in organizations this fall, we will once again read Henry Hansmann’s “Ownership of the Firm,” which is a distillation of his classic book, The Ownership of Enterprise. Hansmann’s work provides us with a ledger. There are both costs and benefits to owning enterprise, and ownership eventually flows into the hands of those who can exercise it with the greatest net benefit.
Another paper that my students enjoys expands Hansmann’s ledger. In their paper, “Asset Ownership and Incentives in Early Shareholder Capitalism: Liverpool Shipping in the Eighteenth Century,” Brian Silverman and Paul Ingram examine another benefit of ownership. In some cases, an owner’s best means of changing a manager’s incentives is to offer partial ownership.
Their abstract explains:
“We explore captain-ownership and vessel performance in eighteenth-century
transatlantic shipping. Although contingent compensation often aligned incentives between
captains and shipowners, one difficult-to-contract hazard was threat of capture during wartime.
We exploit variation across time and routes to study the relationship between capture threat and
captain-ownership. Vessels were more likely to have captain-owners when undertaking wartime
voyages on routes susceptible to privateers. Captain-owned vessels were less readily captured
than those with nonowner captains, but more likely to forgo voyage profits to preserve the vessel's safety. These results are consistent with multitask agency, where residual claims to asset value rather than control rights influence captain behavior. This article is among the first to empirically isolate mechanisms distinguishing among major strands of organizational economics regarding asset ownership and performance.”
In other words, it’s impossible for landlubber owners to incentivize captain-managers to resist surrender to pirates. You might think owners could offer performance-based compensation packages to elicit the desired actions, but captain behavior is impossible to monitor and verify from afar. Hence, partial ownership—which, to my recollection, Hansmann does not consider in-depth—emerges as a solution.
Here, “ownership”—a notoriously difficult concept to pin down—”provides the captain with residual claims to a share of the asset value, [but] does not provide residual control rights,” (pg. 855). Among other lessons here, it seems clear that the “new property rights economics” of Oliver Hart does not provide a comprehensive account of organization. The paper also generates new implications for thinking about traditional, contemporary firms, including interesting questions about self or owner provision of assets. The managerial summary:
“Organizations face an enduring challenge: Owners hire an executive to act on their behalf, but it is difficult to ensure that the executive indeed acts in their interests. In this study, we exploit a useful historical context—eighteenth-century transatlantic shipping from Liverpool—to explore the cause and effect of a captain's becoming part-owner of his vessel. Captains became part-owners for voyages likely to encounter enemy privateers. Captain-owners were less likely to be captured, but were more willing to forgo cargo profits to preserve the vessel's safety. Our results provide a useful analogy to modern firm owners who must determine whether to award equity to executives, and to managers who must determine whether to provide assets to employees or rely on employee self-provision of assets (e.g., tools for tradespeople).”
Highly recommended reading, and works well for advanced undergraduates.