Katarina Sikavica Abstract -...
Transcript of Katarina Sikavica Abstract -...
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TOWARDS A BEHAVIORAL THEORY OF CORPORATE OW�ERSHIP A�D SHAREHOLDER
ACTIVISM
Katarina Sikavica
Munich School of Management
Munich, Germany
Amy Hillman
Arizona State University
Phoenix, AZ, USA
Abstract
Shareholder activism is traditionally rooted in agency theory and based on financial
incentives. We argue that economic approaches to corporate ownership provide only a partial
explanation for shareholder activism and a more cognitive approach is necessary for a more
complete understanding. We propose that shareholders holding varying levels of legal and
psychological ownership develop disparate relationships with the organization, place
emphasis on different objectives and, thus, use different forms of activism (exit, voice,
loyalty).
Keywords: shareholder activism, psychological ownership, shareholder identity and
identification, property rights.
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Shareholders exert influence on organizational decisions as distinct as diversification
(e.g. Goranova, Alessandri, Brandes, & Dharwadkar, 2007; Ramaswamy, Li, & Veliyath,
2002), R&D-expenses (e.g. Lee & O’Neill, 2003), innovation (e.g. Hoskisson, Hitt, Johnson,
& Grossman, 2002), corporate social performance (e.g. Johnson & Greening, 1999) and
corporate governance (e.g. Singh & Harianto, 1989; Werner, Tosi, & Gomez-Mejia, 2005).
Moreover, shareholder activism takes many forms; in order to enforce their interests
shareholders can file proxy proposals and vote at the annual meeting (e.g.Black, 1998;
Karpoff, 2001), engage in private negotiations with management (e.g.Strickland, Wiles, &
Zenner, 1996; Wahal, 1996) and target the company via public media (e.g.Farrell & Whidbee,
2002; Wu, 2004). There is even evidence of concerted collective action by coalitions of
shareholders (cf. Black & Coffee, 1994).
Following Gillan and Starks (1998:11) we define shareholder activism as a continuum
of responses to corporate performance. When dissatisfied with company performance,
shareholders can opt for “exit, “voice” or “loyalty”(Hirschman, 1970). We use the term
“activism” to refer not only to shareholder “voice” interventions but also to exit and loyalty.
“Exit” occurs when a shareholder sells their shares in the organization; shareholders “voice”
dissatisfaction through legal intervention mechanisms such as proxy filings and/or any other
formal intervention instrument at their disposal, engaging in private negotiations with
management and directors or targeting companies publicly through the media. Finally,
shareholders who are dissatisfied with the organizations may also opt for “loyalty” or do
nothing which Hirschman (1970) argues is calculated behavior which occurs when an
individual feels attached to the organization.
Extant approaches to corporate ownership based on agency theory (Fama & Jensen,
1983; Jensen & Meckling, 1976) assume shareholder activism to be a matter of financial
incentives and cost/benefit calculus. However, empirical findings are mixed with no
conclusive evidence regarding the association between shareholder activism and shareholder
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wealth (Daily, Dalton, & Rajagopalan, 2003; Del Guercio & Hawkins, 1999; Gillan et al.,
1998; Karpoff, Malatesta, & Walking, 1996). Most notably, there is indication that some
forms of shareholder activism may negatively affect stock price. Research suggests that
public announcements of shareholder interventions may be interpreted negatively by the
market, therefore, publicity surrounding shareholders’ interventions may result in decreasing
stock returns (Karpoff, 2001). As a result, the commonly assumed financial incentives owning
shares provides appear not to be the sole driver of shareholder activism nor are they a good
proxy for shareholder behavior. These inconsistencies regarding shareholder activism prompt
the following questions: Why do shareholders opt for activism despite the fact that there are
no guaranteed financial benefits? And, given that some shareholder interventions may
negatively impact stock price, are there other tactics shareholders may choose?
Karpoff (2001) considers the motivation behind shareholder activism as the number
one issue in corporate ownership. Daily and colleagues (2003) urge scholars to recognize
differences between categories of shareholders and to expand the theoretical foundations of
shareholder activism beyond agency theory. Resolving the issue of what motivates
shareholder activism and moving beyond the conception of ownership as a “purely economic
variable” (Fiss & Zajac, 2004) can improve our understanding of the conditions under which
shareholders are valuable external governance mechanisms (Walsh & Seward, 1990). In line
with Daily and colleagues’ (2003) proposal, several recent studies make important steps
towards improving our understanding of shareholder motivation by discriminating between
categories of shareholders (e.g. David, Hitt, & Gimeno, 2001; Hoskisson et al., 2002; Kang &
Sorensen, 1999; Ramaswamy et al., 2002). However, while these studies recognize
shareholder differ, they adopt an agency view grounded solely in economic conceptions of
ownership as the basis for shareholder action, leaving open the inclusion of cognitive and
emotional approaches to corporate ownership.
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We argue that in order to understand shareholder activism more completely we need to
consider shareholders’ psychological ownership as a complement to financial incentives. We
draw on property rights, financial market and social identity theories to develop propositions
regarding how legal and psychological ownership interact to affect shareholder activism. Our
model suggests shareholders with varying levels and mixes of legal and psychological
ownership represent different relationships with the organizations and, therefore, opt for
different activism tactics.
Our study makes number of contributions: First, we integrate theories of legal
ownership and activism with the concept of psychological ownership to clarify theoretical and
empirical inconsistencies in previous research and to develop a more complete picture of
shareholders’ motivation. Second, based on our juxtaposition of levels of legal and
psychological ownership we provide a novel classification system of shareholder identities
that goes beyond types of legal shareholders. In doing so we hope our theoretical model paves
the way toward a behavioral theory of ownership.
We first elaborate on the economic conception of ownership most previous research
relies on and then juxtapose this economic conception of ownership with psychological
ownership to show how they complement each other. We then derive propositions related to
individual shareholder’s behavior dependent on his/her level and mix of legal and
psychological ownership before discussing implications of our theory and concluding our
arguments.
Extant Conceptions of Ownership and Shareholder Activism
To date, investigations of shareholder influence explicitly or implicitly rely upon an
economic conception of ownership grounded in agency theory. According to agency theory
shareholders’ primary role in corporations is the provision of capital and the bearing of
financial risk (Fama, 1980; Fama et al., 1983; Jensen et al., 1976). Since shareholders can
diversify risk by investing in a portfolio of companies, dispersed shareholdings are viewed as
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an efficient form of ownership (Jensen et al., 1976). Because shareholders’ behavior is driven
by financial incentives this implies a rather ephemeral relation with the company. If
performance declines, shareholders’ exit by selling shares. Costly voice or loyalty are not a
likely outcomes because unless a shareholder has enough shares to bear the costs of such
actions, they will sell or free-ride off others’ activism (Admati, Pfleiderer, & Zechner, 1994).
Large blockholders, therefore, are considered the most likely to engage in activism because
they have a greater financial incentive to do so and cannot easily sell their shares without
negatively impacting the firms’ market value (Shleifer & Vishny, 1986).
Based on this agency reasoning, the level of shareholdings is commonly used as a
proxy for shareholder incentives and their potential impact on corporations. The effect of
shareholders on corporate strategy and governance is assumed to be direct and the
operationalization of “ownership” is usually either a measure of ownership concentration or a
dummy for the existence of a large blockholder. Empirically, this approach has yielded
numerous positive results of shareholder influence. Concentrated ownership is related to
corporate restructuring (Bethel & Liebeskind, 1993), R&D-spending (Baysinger, Kosnik, &
Turk, 1991; Hill & Snell, 1989) and executive compensation (Tosi & Gomez-Mejia, 1989).
However, despite these results, there remains controversy regarding these effects. The studies
by Lane, Cannella and Lubatkin (1998), Amihud and Lev (1999) and Denis, Denis and Sarin
(1999) in the area of ownership concentration and diversification are examples of conflicting
results (see Lane, Cannella, & Lubatkin, 1999 for a summary). The authors attribute these
differences to disagreement over the interpretation of results and methodological flaws,
however it seems plausible to question the economic conceptions of ownership traditionally
employed in the literature.
Tsang (2006) argues that economic approaches to organizations rely on empirically
unverified behavioral assumptions and that these “reduced models” run the risk of being
unrealistic and ultimately resulting in underspecified models and potentially spurious results.
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Moreover, many scholars agree that shareholders do not have the same preferences, goals,
power or influence (e.g. Barcley & Holderness, 1991; Brickley, Lease, & Smith, 1988;
Changanti & Damanpour, 1991; Kang et al., 1999; Pound, 1988). Kang and Sorensen (Kang
et al., 1999), for example, reject the notion that financial incentives are the sole determinant of
shareholder activism and contend that owner types differ in their propensity to “capture their
property rights”. Yet while these studies discriminate between owner types they tend to
categorize owners using conventional categories of legal ownership (e.g. institutions, families,
individuals, companies).
We contend that the notion of ownership merits closer attention. Economic
conceptions of ownership borrowed from legal approaches and the property rights literature
provide only a partial explanation of shareholder behavior. We argue that shareholder
behavior is driven by both legal ownership and “psychological ownership.” While legal
ownership equips shareholders’ with legal powers and financial incentives, psychological
ownership determines shareholders’ motivation to act as owners of the company.
Property Rights and Psychological Ownership Juxtaposed
Legal ownership as conceived in the theory of property rights (Demsetz, 1967;
Furubotn & Pejovich, 1972, 1974) can be viewed as the natural complement to what social
psychologists have termed “psychological ownership” (Pierce, Kostova, & Dirks, 2001;
Pierce, Kostova, & Dirks, 2003b). Legal and psychological ownership differ with respect to
five tenets: the relationships described, the values attributed, the functions fulfilled, the
motivation evoked, and the rationale of emergence. Figure 1 compares the two.
*** Insert Figure 1 about here ***
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Legal Ownership and Property Rights
The commonly accepted conception of ownership in both agency theory and implicit
in owner typology approaches to shareholder activism is property rights (Demsetz, 1967;
Furubotn et al., 1972, 1974). Jensen and Meckling’s seminal article (1976:307) focuses on
“the behavioral implications of the property rights specified in the contracts between
managers and owners of the firm”. That is, ownership is nothing more than another
contractual relationship between two parties within the nexus of contracts that constitute the
organization (Fama, 1980; Jensen et al., 1976). Legally, ownership is viewed as a bundle of
rights specified in a contract that defines the relation between individuals with respect to a
material or immaterial object or “ownable” (Grunebaum, 1987)1. Ricketts (2002:114) states
that “ownership is not well defined” and that “assets seem not to have owners”. Instead,
“rights to use assets and to claim income flows are simply divided up between cooperating
groups of people in ways which facilitate mutual gain”. Thus, ownership in this view has very
little to do with the characteristics of the “ownable” but, rather, its essence lies in the
contractual relation between people. As Furubotn and Pejovich (1972:1139, emphasis added)
put it: “A central point noted is that property rights do not refer to relations between men and
things but, rather, to the sanctioned behavioral relations among men that arise from the
existence of things and pertain to their use. Property rights assignments specify the norms of
behavior with respect to things that each and every person must observe in interaction with
other persons or bear the costs of non-observerance.” It follows from this definition of
ownership that the value of an object depends on the bundle of property rights exchanged in
the transaction (Furubotn et al., 1972). This means that that the level of rights in the
“ownable” determines the value of that “ownable”.
The same approach to ownership is adopted with respect to shareholders, an example
is Fama who argues “ownership of capital should not be confused with ownership of the firm”
1 We use the terms “object” and “ownable” interchangeably to refer to both material and immaterial objects.
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and that “in the nexus of contracts perspective, ownership of the firm is an irrelevant concept”
(1980:290). As Kang and Sorensen (1999:131) observe, the focus on contracts between
individuals avoids difficulties associated with reification of the organization “where the
corporation is thought of as a single entity and the legal rights arising from corporate assets
are though of as indivisible”. Our concern is that in defining ownership in this way, property
rights theory can mask owners’ psychological dispositions towards the “ownable”.
From a property rights point of view, shareholders as “owners” of public corporation
hold only a small and well-defined subset of rights in that organization. Among these are the
right to dividend payments, the right to vote upon the election of directors and certain major
corporate changes, and the right to information such as accounting outcomes reported publicly
(Clark, 1986; Kang et al., 1999:126 ff.). Thus, the property rights view falls short of providing
an answer to why, if not for purely financial reasons, shareholder activism occurs or what
form it takes. We propose that the inclusion of psychological ownership results in a more
complete and accurate picture of shareholder behavior.
Psychological Ownership
But what exactly is psychological ownership? The theory of psychological ownership
(Pierce et al., 2001; Pierce et al., 2003b) suggests that ownership can be more than just a
contractual relationship between individuals. In this view ownership has not only a legal but
also a psychological dimension. As Etzioni (1991:466) argues: ownership can (but does not
have to) be both at the same time; it is a “dual creation, part attitude, part object, part in the
‘mind’, part real”. According to Pierce and colleagues (2003a:84), psychological ownership
can be understood as a “cognitive-affective state that characterizes the human condition”.
Most importantly, psychological ownership, sometimes referred to as “possession”, is not a
priori visible from the outside because for psychological ownership to occur there need not be
any observable signs. In addition, psychological ownership is not recognized by the legal
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system and therefore lacks powers codified in a set of formal rights. Instead, psychological
ownership manifests itself in feelings of possessiveness, as the subjective perception that the
object is “my”, “mine” or “ours” (Pierce et al., 2001; Pierce et al., 2003b).
As opposed to legal ownership, psychological ownership refers to the relationship
between people and things, between the owner and his “ownable”, rather than to the
relationship between two contracting parties. As a result, from the psychological point of view
the value of an object lies in the characteristics of the object and the psychological functions it
fulfills for its owner rather than in the number of rights the owner holds in that object.
Scholars argue that psychological ownership has a cognitive-utilitarian (James, 1950;
Litwinski, 1947; Rudmin, 1990) and an affective-symbolic core (Belk, 1991; Dittmar, 1991,
1992; Furby, 1978). While the former refers to the instrumental functions of the objects, the
later stands for hedonistic purposes and the pleasure of possessing that object. These functions
are strongly intertwined and more often than not occur jointly.
Litwinski (1942; 1947) emphasizes that unlike the notion of property rights in an
object, possessions are not a random and coincidental act but are acquired and maintained by
the owner in order to serve future anticipated problems. Thus, psychological ownership
differs from legal ownership in that it focuses on the reasons for acquiring and maintaining
rather than the mode of exchange of objects. Psychological ownership implies planning and at
least an initial intention to conserve the object for some amount of time while legal ownership
is rather concerned with the exchange and distribution of property rights in the object (Belk,
1991). Moreover, possessions are acquired and maintained because they enhance individuals’
feelings of efficacy (Pierce et al., 2001; Pierce et al., 2003b). Furby (1978), for example, finds
individuals feel they can impact their environment through possessions. Similarly, Beggan
(1991) finds people often use possessions to compensate for control motivations they are
unable to satisfy through mastering an ability.
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At its affective-symbolic core, psychological ownership serves hedonistic purposes.
Belk (1991) argues that some possessions become “special”, loaded with symbolic meaning
that transcends the utilitarian needs of the possessor. According to the author, in such
instances economically rational behavior is not a likely outcome. Rather, in these
circumstances individuals display a set of behavior that witness “economic irrationality” such
as being unwilling to sell the object for market value, acquiring the object with little regard
for price, and difficulty discarding the object. Furthermore, psychological ownership affects
the evaluation of an object. Several experiments show that individuals assess an object more
favorably and find it more attractive if they have feelings of possession towards it (Heider,
1958; Nuttin, 1987). Among the negative effects of psychological ownership are resistance to
organizational change, unwillingness to share property and responsibility and feelings of
being overwhelmed by the burden of responsibility (Pierce et al., 2001). Such behavior occurs
when possessions become extensions of the self by means of mastery, creation, or knowledge
of the object. As opposed to legal ownership that predominantly satisfies extrinsic motivation,
objects are viewed not as means to ends but rather an end in their own to satisfy its owners’
intrinsic needs and motivations. In the same vein, several authors propose that possessions
serve as instrumental expressions of the self and that there is a close connection between the
possession, the self, and a person’s identity (see Pierce et al., 2003b:89). In other words,
psychological ownership is accompanied feelings of being psychologically tied to an object
such that this object is viewed to be a part of the self (Furby, 1978) and a symbolic mediator
between self and other (Dittmar, 1992).
In summary, as the discussion of the differences between legal and psychological
ownership suggests, psychological ownership is a natural complement to legal ownership.
Above and beyond formally specified rights and duties governing the relationship between
people, psychological ownership suggests the value of an object is a subjective assessment of
the characteristics of that object. While legal and psychological ownership may occur jointly,
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psychological ownership is neither directly associated with legal ownership nor does it need
its financial counterpart to occur. In fact, several scholars argue (Etzioni, 1991; Furby, 1978,
1980b; Pierce et al., 2003b) psychological ownership can and does occur in the complete
absence of legal ownership. Furby’s (1978; 1980a; 1980b) cross-cultural and cross-age
studies provide compelling evidence that people do not see legal aspects of their objects to
reign supreme. Rather, the most important characteristics of an object are oftentimes their
instrumental and hedonistic functions.
From an organizational point of view, psychological ownership manifests itself when
the shareholder identifies with being an owner of the company rather than just holding a set of
property rights. It is plausible to assume that some shareholders will perceive the company as
an entity rather than a bundle of assets and therefore develop an attitude or cognitive-affective
state towards the company that goes beyond trading shares. As several scholars emphasize,
ownership is a human need imprinted in individual’s innate genetic structure (for an overview
see: Pierce et al., 2003b).
Legal Ownership and Psychological Ownership as Antecedents of Shareholder Activism
Shareholders are distinct with respect to the level and mix of legal and psychological
ownership they hold. Both dimensions are associated with motives for action and thus may
trigger some form of shareholder activism. We first examine standard or normal conditions in
which the power of shareholders is a direct and positive function of the level of their legal
shareholdings, i.e. when shareholders are independent from management (see Figure 2). We
then center on large shareholders and examine conditions under which power distributions
between management and blockholders are not clear-cut and blockholders are sensitive to
pressures emanating from the management (see Figure 3).
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Shareholder Activism in the Event of Shareholder Independence
One important characteristic that differentiates activism tactics is the degree of their
publicity. For example, while direct negotiations with management are a private form of
activism, shareholder proposals eventually become known to the financial community and
targeting via public media will reach an even larger public (Gillan et al., 1998). The level of
publicity of a tactic, be it exit or voice, will have different effects on the company’s share
price. Empirical evidence suggests the market differentiates between the announcement of
shareholder activism and the outcomes of it. In Karpoff’s (2001) review, he concludes that the
effect of the announcement of shareholder proposals on abnormal stock return, if statistically
significant in the first place, tends to be negative (e.g. Karpoff et al., 1996; Prevost & Rao,
2000) while studies that examine the impact of negotiated shareholder settlements report
positive average effects on shareholder value (e.g. Strickland et al., 1996; Wahal, 1996).
Thus, shareholders who opt for targeting the company publicly risk negatively impacting the
firm’s market value; if their primary interest is financial return they are better off avoiding
publicity.
Shareholders differ with respect to their vulnerability regarding fluctuations of the
share price and the priority they assign to stock performance and short-term returns. A
growing stream of literature suggests shareholders exhibit different preference structures and,
therefore, focus on different company objectives (Fiss et al., 2004; Kang et al., 1999; Palmer,
Friedland, Jennings, & Powers, 1987; Palmer, Jennings, & Zhou, 1993; Pedersen & Thomsen,
1997; Ramaswamy et al., 2002; Thomsen & Pedersen, 2000). We argue that the importance
and priority attached to short-term stock price performance is a result of shareholders’
psychological ownership.
*** Insert Figure 2 about here ***
For large blockholders who develop only low levels of psychological ownership
towards the company (Figure 2, upper right hand quadrant) stock performance concerns are
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particularly important. As mentioned earlier, some scholars maintain that large shareholder
interventions constitute a negative signal regarding the company’s situation (Karpoff, 2001)
but others argue such activism is positive (Kahn & Winton, 1998; Maug, 1998). Recent
investigations into the “trade-off between liquidity and control” (Coffee, 1991) show that
large shareholders are not simply left with the option to intervene because they cannot get rid
of their stakes but that, instead, large shareholders with a primary interest in stock-return may
capitalize on their private information by trying to speculate and beat the market (Maug,
1998). As Kahn and Vinton (1998) argue, when firms operate in markets characterized by
high outcome predictability and low uncertainty, large shareholders can benefit from insider
information with respect to their future action. If the rest of the market believes that the
company is doing badly, buying additional shares prior to changing the firms’ course of action
is a profit-making option. The salient point here, however, is that large blockholders use
private information with respect to the state of the company and their intervention plans in
order to reach their goals. As a result, regardless of whether blockholder activism is perceived
as positive or negative by the market, if blockholders favor short-term-returns (i.e. they have
large financial stakes but low psychological ownership) they are likely to opt for voice tactics
exhibiting low levels of publicity and prefer private negotiations and jawboning management
and directors. This even more so given that jawboning has been found to have a positive
impact on shareholder value (Strickland et al., 1996; Wahal, 1996). Thus:
P1: Shareholders exhibiting high levels of legal ownership and low levels of
psychological ownership will favor private negotiations with management over other
activism tactics.
Shareholders exhibiting both low levels of psychological ownership and low levels of
legal ownership (Figure 2, lower right hand quadrant) will pursue similar objectives as large
blockholders. Given that they primary interest is short-term financial gains they too will opt
for a strategy that generates the largest financial net benefits. However, as opposed to large
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blockholders they care less about the signals their tactics convey to the market because selling
small stakes is not likely to have an impact on the company’s market value. For the same
reason, they are unlikely to invest in expensive voice tactics. As a result, they are most likely
to opt for the exit strategy:
P2: Shareholders exhibiting low levels of legal ownership and low levels of
psychological ownership will favor exit over other activism tactics.
Shareholders who develop psychological ownership and hold legal ownership differ
with respect to their identification as owners of the company. We maintain that the social
identity as a company owner and the level of identification with owners affects shareholders’
goal priority and, as a result, on their choice of activism tactics. As several authors contend,
psychological ownership occurs when the object becomes strongly associated with self and
identity (Pierce et al., 2003b). Self and the self-concept, an individual’s cognitive structure
and the way in which individuals envisage and perceive “what makes me me and you you”
(Owens, 2003) influence the individual’s cognitions, emotions and behavior. For example,
self and the self-concept are found to have a positive impact on task-performance (Parker,
2001) and a negative impact on intergroup discrimination as well as out-group derogation
(Tarrant, North, & Hargreaves, 2001). This means that psychological ownership and the
integration of the organization into the self-concept has important consequences for
shareholder behavior and the choice of activism tactics.
An individual’s role and social identities are a critical part of his conception of self.
As such they influence individuals’ motivation and behavior. Role identities incorporate a
person’s position in a network of role relationships (Stryker, 1968; Stryker, 1980; Stryker,
1987) and are individuals’ unique internalized identifiers (McCall & Simmons, 1966). This
means that an individual’s role identity is associated with a set of expected behaviors that
come along with that particular role (e.g. father, brother, boss). Social identities, on the other
hand, are derived from groups and categories to which individuals belong (Ashfort & Mael,
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1989; Tajfel, 1974, 1978; Tajfel & Turner, 1979). According to self-categorization theory
individuals are viewed to separate groups into self-like and self-unlike members and into us
vs. them (Hogg & Terry, 2000; Turner, 1985; Turner, Hogg, Oakes, Reicher, & Wetherell,
1987). In line with social interactionism (Mead, 1934), identity theorists posit that human
behavior and interaction is shaped by actors’ self-concept and that identity is closely related to
motivation.
The identity-based conception of motivation differs substantially from the economic
notion of incentives. In general terms, economists conceive of incentives as a reason for
preferring one choice to its alternatives. Alternatives are evaluated in terms of a cost-benefit
analysis, the best choice being the one that results in the largest net benefits. This is consistent
with the idea of shareholder activism driven and determined by the level of financial
shareholdings. However, when there is a high level of psychological ownership and thus a
shareholder perceives the organization to be part of the self, the shareholder develops an
identity that incorporates the organization. In a situation that calls for action, such as is the
case in the event of performance declines or financial distress, an individual with high
psychological ownership is likely to exhibit behaviors in line with his role as owner with an
interest in the organization’s well-being and long-term survival rather than purely short-term
financial gains. As Pierce and Rogers (2004) argue, the motivational rationale of
psychological ownership lies in the link between the well-being of the target – here the
organization – and the self. An increase in the organization’s well-being results in a positive
image; a decrease in the organization’s performance results in a negative image and the
diminution of the self. Several empirical studies provide evidence regarding the relationship
between individuals’ psychological ownership and investments into the viability and well-
being of the “ownable”. For example, prior research finds psychological ownership to
effectively explain volitional behavior (Van Dyne & Pierce, 2004a; Vandevalle, Van Dyne, &
Kostova, 1995), to increase protection and defense of the possessed object (Beaglehole,
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1932), and to enhance personal sacrifice, the assumption of risk and the experience of
responsibility and stewardship by the owner (Van Dyne & Pierce, 2004b).
There are also a number of anecdotal examples of behavior by corporate owners
suggestive of psychological ownership. Family owners are perhaps the most obvious
examples of individuals who develop psychological ownership yet Ward (2005) maintains
that even family owners can choose to be “operating owners; governing owners; investing
owners; or passive owners”. He illustrates with several examples such as the German
company Haniel where several hundred family shareholders all assume a passive role; the
Indian Murugappa group where five governing owners are actively involved in both
management and governance of the company; and the Swiss company Roche along with the
Peruvian Belmont where family owners rally around a social purpose (Ward, 2005). Beyond
family owners, there is anecdotal evidence even traditional legal owners can develop
psychological ownership. For example, Steele (2005) observes “there is a growing difference
in the investment community between long-term and short-term investors. The former are
viewed as “renters of stock”, whereas the later are increasingly viewed, and are beginning to
act, as “owners” of the companies in which they invest” (Steele, 2005). David J. Winters,
CEO of the mutual fund Wintergeen Advisers states: “We don’t treat our stocks like rental
cars. You’ve got to think and act like an owner, getting the company to think better” (Farzad,
2007). Similarly, even a small shareholder may buy shares in a company because s/he loves
their product and can thus fulfill a connection to that firm as an owner. We therefore,
maintain that all shareholders have the potential to develop psychological ownership for the
companies they invest in.
The argument that shareholders with psychological ownership behave differently than
those who simply hold shares echoes the antagonism between the logic of appropriateness and
logic of consequences put forward by March and Olson. They (March, 1994; March & Olson,
1995; 2004) argue that pursuing net benefits is but one logic of rationality – the rationality of
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consequences – and that individuals also use the “logic of appropriateness”. Underlying the
logic of appropriateness is an identity-based conception of motivation. Action is viewed to be
rule-guided and rules are followed because they are deemed natural, rightful, expected and
legitimate (March, 1994). According to March and Olsen (2004:4), most of the time
individuals take reasoned action by trying to answer three elementary questions: “What kind
of situation is this? What kind of person am I? What does a person such as I do in a situation
like this?” As a result, a shareholder who identifies with being an owner of the company is
likely to behave differently than a shareholder who lacks these characteristics.
It follows from this line of thought that shareholders who feel psychological
ownership for the company and who thus identify with being an owner will opt for different
activism tactics given, firstly, that that for them ownership of the company is an end in itself
and the value of the company derives from its characteristics not only from the prospect of
financial gains. Secondly, shareholders with high levels of psychological ownership will not
only favor organizational viability and long-term survival but will also be motivated to affirm
this openly given their identity as a company’s owner. They are therefore more likely to use
activism tactics characterized by a degree of publicity. Thus, shareholders holding high levels
of psychological and high level of legal ownership (Figure 2, upper left hand quadrant) will
not shy away from costly yet often non-binding legal intervention tactics despite the fact that
these tactics might have a negative impact on short-term financial gains. As some authors
argue, large shareholders who maintain a long term relationship with the company might be
inclined to learn information about management’s efforts and convey this information to the
market (Chidambaran & John, 1998). Large shareholders who exhibit high levels of
psychological ownership are thus likely to use both: private negotiation with management and
legal intervention mechanisms.
The most salient, yet by no means only example of this behavior is family ownership.
As Habbershon, director of the Wharton Enterprising Families Initiative contends, beyond
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purely financial concerns family shareholders are often caretakers of the values, vision and
legacy of a company (author, 2001). Family owners use the powers at their disposal but, as
anecdotal evidence suggests, they seem to avoid the limelight and instead pressure
management by jawboning and formal channels (Abelson, 2000). An example of this is the
Hewlett and Packard families’ formal opposition to the Compaq merger in 2001 which was
dismissed by many Wall Street analysts to be an emotional reaction. Family owners feared
that the merger would, “among other things, put pressure on the stock price, result in massive
layoffs, and increase HP's exposure to the highly competitive, and increasingly commoditized,
personal computer business” (author, 2001:3). The planned layoffs, in particular, were not
believed to to be in line with the “HP way of management”. Given that their legal ownership
equips them with voting power, large shareholders are a salient threat to management and
therefore can successfully jawbone management. On the other hand, their assumed role and
identity as owners that accompanies their strong psychological ownership can induce them to
take advantage of legal intervention tactics despite the risk that the announcement of formal
proposals might result in a negative impact on the company’s share price in the short-term
(Karpoff et al., 1996; Prevost et al., 2000):
P3: Shareholders exhibiting high levels of legal ownership and high levels of
psychological ownership will favor private bargaining and legal intervention over
other activism tactics.
Shareholders with high levels of psychological ownership but few legal shares (Figure
2, lower left-hand quadrant) have significantly less voting power at their disposal than large
blockholders. While they share the same identity motivation as owners of the company and
are likely to prioritize long-term survival of the organization over short-term financial returns,
they are not in the position to engage in negotiations with management. Therefore, they are
likely to resort to other tactics to pressure management. One such instrument is targeting the
media to focus public attention on the firm. The stock market is a logical monitor of
19
managerial performance because stock prices incorporate performance information including
that associated with management’s ability and effort (Holmstrom & Tirole, 1993). Thus,
managers care about public scrutiny, especially when it questions their ability and
effectiveness. High levels of publicity regarding managerial and company performance are
thus a viable threat that can discipline management. Del Guercio and Hawkins (1999) find
pension funds often resort to targeting of companies via public media since their goal is to
increase shareholder influence and effectuate change rather than increasing short-term profit.
In addition, the authors cite CalPERS and CalSTRS CEOs who state that publicity is not only
a powerful but also a very cost-effective tool to motivate change despite the short-term loss of
wealth due to stock price decline following the news of intervention (Karpoff et al., 1996;
Prevost et al., 2000). Monks and Minow (1995) argue that the biggest contribution of pension
fund activism is to create awareness not only among the financial community but also among
the general public. This finding is in line with our motivation as identity argument and the
thought that shareholders with high levels of psychological ownership will hazard the
consequences of stock performance drops associated with bad news and will use any tactic
necessary to assure the company’s long term survival. For example, a recent press release by
Hermes, an institutional pension fund investor, points at the difference between “witch hunts
of whole assets” by private equity and hedge funds and “stewardship elements of ownership
of responsible investment”.2 While Hermes’ active investment agenda clearly includes social
and environmental concerns, the statement seems to go a step further. In line with our model,
Hermes’ press release quotes Mark Goyder, Founder Director of Tomorrow’s Company who
asks: “Do we see ownership as stewardship? If so, that means some obligation to the company
in which one is invested. […] Or are we seeing a divergence between two kinds of owners,
one of whom feels an obligation to the assets she or he owns and the other who sees none?”
This statement suggests some practitioners are starting to distance themselves from
2 http://www.hermes.co.uk/pdf/news_2008/080319_TC_launch_release_FINAL.pdf
20
conceptions of ownership they do not adhere to and is largely at odds with the previously
cited viewpoint by Fama (1980) that ownership of capital is not equal to ownership of the
firms. On the contrary, some shareholders are likely to develop psychological ownership for
the company they invest in even though their stake in the company is not very large. We
argue that these shareholders will adopt different intervention tactics:
P4: Shareholders exhibiting high levels of psychological ownership and low levels of
legal ownership will favor legal intervention and targeting using public media over
other activism tactics.
Shareholder Activism under Pressure Sensitivity
So far we have considered the situation under which the level of legal ownership and
property rights is directly and positively related to shareholders’ power. We have pointed out
that large shareholders are equipped not only with informal but also with formal instruments
to pressure management. However, as several authors argue, under certain conditions large
shareholders, i.e. those with high levels of legal ownership (see figure 3) will remain passive
despite their dissatisfaction with the course of action (O'Barr & Conley, 1992) or will have the
power to impact only certain decisions (Changanti et al., 1991; Dye, 1985). Brickley and
colleagues (1988) argue that differences in activism derive from shareholders’ “pressure
sensitivity.” For example, shareholders who are in a business relationship with the company
have less discretion regarding the choice of activism tactics. In these cases, shareholders are
likely to either vote with management or, if they can, sell off their shares. From the point of
view of management, these shareholders are classified as having a lower saliency because
they possess less power, legitimacy and urgency and are thus a smaller threat to management
(Mitchell, Agle, & Wood, 1997). However, in line with our conception of motivation as
identity, we argue that large pressure-sensitive shareholders will differ in their forms of
21
activism depending on the extent to which they exhibit psychological ownership for the
company and, thus, identify as the company’s owners.
*** Insert Figure 3 about here ***
Pressure-sensitive shareholders who have high levels of psychological ownership
assume a double role as: 1) the company’s owners and 2) management’s business partners.
According to identity theory, the self is structured by a hierarchical ordering of identities
which differ in salience (Stryker, 1980) or prominence (McCall & Simmons, 1978) and thus
the likelihood that they will be activated in a given situation. An identity is likely to become
salient when an individual is committed to the role relation associated with that identity
(Stryker, 1980). Thus, if a shareholder strongly identifies as management’s business partner
(pressure-sensitive) then he is likely to meet the expectations associated with that particular
role. On the other hand, if a shareholder strongly identifies with the role of company owner
(psychological ownership), then he is likely to exhibit commitment to the community of
owners and act to satisfy the requirements of this role relation. This line of reasoning bears an
important consequence with respect to the choice of activism tactics by pressure-sensitive
shareholders. Namely, those shareholders that identify with the role of a business partner are
indeed most likely to opt for what Hirschman (1970) terms “loyalty.”
Loyalty was initially conceived of as a passive but constructive tactic where the
individual waits patiently for conditions to improve and thereby giving at least minimal
support to the organization (e.g. Farrell, 1983; Rusbult, Farrell, Rogers, & Iii, 1988). In later
development of the construct, however, loyalty is less a matter of passive support and more of
helpless endurance of a situation the individual is unable to alter. For example, Withey and
Cooper (1989) argue that individuals display behavior associated with loyalty when they feel
trapped in the organization. They investigate exit, voice and loyalty in workplace situations
22
and find that when employees referred to loyalty they did not describe it as a constructive
behavior but rather as making peace and resignation with the situation. In formal terms:
P5a: Pressure-sensitive blockholders with low levels of psychological ownership will
opt for loyalty.
On the other hand, shareholders with high levels of psychological ownership and who
thus identity with the role of owner are more likely to look for ways to pursue their interests
in line with the owner identity. Given their low-power position relative to the management,
they might try to find like-minded shareholders and engage in coalition-building. As political
and resource dependence theories of organization suggest, individuals who find themselves in
situations struggling for the defense of their interests are likely to form coalitions and develop
instruments that will bolster their power vis-à-vis other coalitions (March & Simon, 1958;
Pfeffer, 1978, 1980; Pfeffer & Salancik, 1978). In fact, while in the U.S. coalitions by
shareholders are rather seldom given the restrictions emanating from the Securities and
Exchange Commission (SEC)3 (Black, 1998) there is international evidence that shareholders
engage in coalition building in order to defend their interests. For example, Black and Coffee
(1994) find that British institutional shareholders engage in coordinated efforts and are prone
to target companies jointly. The same evidence is found in Italy where shareholders’
agreements and voting trusts are a rather common occurrence (Gianfrate, 2007). Moreover, in
a recent account of his initial concept, Hirschman argued that voice can be an end in itself and
that in the event of a pursuit of public policies that have public good character a “participation
explosion” can occur that results from a “sudden enormous intensification of the preference
for public actions” (Hirschman, 1980:433). In addition, he claims that “it is in the nature of
the public good or the public happiness that striving for it cannot be neatly separated from
possessing it” (ibid.). In other words: high levels of psychological ownership can turn a cost
of shareholder activism into a benefit. Thus:
3 Shareholders who act together on a voting issue and together own 5% of a company’s shares must file a Form
13D with the SEC and risk a lawsuit if they fail to disclose their activism plans.
23
P5b: Large Pressure-sensitive blockholders with high levels of psychological
ownership will opt for coalition building and investments in collective action.
Finally, in terms of publicity, both coalition building and loyalty can be viewed in the
light of our previous propositions and shareholders’ inclination to openly act as owners of the
organization. While the choice of loyalty (likely to occur with low levels of psychological
ownership) is associated with no publicity at all, for coalition building (likely to occur with
high levels of psychological ownership) publicity is not only taken for granted but may
become an end in itself. Conveying the information of managerial failure and increasing its
public awareness may boost the solidarity between shareholders, enhance collective action
and, thus, prevent a mass selling off of shares and the erosion of the company’s market value.
Discussion and Conclusion
We raise a question here that has puzzled scholars for several decades: what motivates
corporate shareholders? In an attempt to pave the way for a behavioral theory of ownership,
we argue that the economic conception of ownership as property rights provides only a partial
explanation for shareholder behavior and that in order to understand shareholder motivation
we need to incorporate a more cognitive and emotional approach to corporate ownership. By
combining theories of legal and psychological ownership we propose a model that predicts the
form of activism a shareholder is likely to opt for. Namely, based on a motivation-as-identity
approach to activism we suggest that shareholders who identify with being an owner of the
organization will place less emphasis on short-term returns and shareholder value and will be
more likely to use tactics characterized by a certain degree of publicity that give them an
opportunity to openly act as owners to the members of the financial community and the larger
public. In addition, we argue that pressure-sensitive shareholders who exhibit low levels of
psychological ownership will opt for loyalty while pressure sensitive shareholders with high
24
levels of psychological ownership are more likely to use coalition building with other
shareholders to increase their bargaining power vis-à-vis management.
We hope our model provides not only a finer grained classification system for
corporate shareholders but also greater insight into shareholders’ motivation and behavior.
We argue that in order to assess whether and to what extent shareholders can be considered as
a viable governance mechanism we need to take into account shareholders’ cognitive
dispositions towards ownership of the company as well as the saliency of their roles and
identities. In other words, we call for a genuinely organizational theory of ownership better
suitable to account for the behavior and contributions of shareholders as “organizational
participants” (March et al., 1958; Simon, 1945, 1976).
Our model is pertinent to corporate strategy, governance and the theory of
psychological ownership. Namely, if one is ready to accept that there are important
differences among shareholders with respect to their cognition regarding the organization then
most of the studies that investigate the impact of ownership on various organizational
outcomes relying on ownership concentration or level of shareholdings as surrogates of
ownership need to be reconsidered in the light of a motivation-as-identity approach to
corporate ownership. In addition, due to an increase in internationalization and liquidity of
financial markets we are witnessing a significant increase in shareholder activism
accompanied by the recognition that there are at least two types of shareholders: those who
are more interested in the corporation and those who are more interested in the shares. As
anecdotal evidence suggests, some shareholders are more active while others are more passive
than commonly assumed. For example, some institutional investors such as hedge funds and
private equity firms who invest in listed companies are notorious for their short-term
investment horizon and their reputation for buying an undervalued corporation to “work on
it”, change it, and then sell it.. Moreover, there is a rising public policy concern that sovereign
wealth funds may exercise strategic and political influence on the western banks and
25
companies they invest. Finally, shareholders will also differ in their risk propensity and their
level of concerns over social and environmental issues. As a more recent Financial Times
article put it: “The rub is that how modern investors want the company managed depends on
who they are” (Plender, 2008). With this article we do not mean to advocate neither
shareholder democracy nor responsible investment. Rather, we maintain that organizations are
facing rising and increasingly divergent interests from shareholders and that in order to obtain
a better understanding of these interests we need a behavioral approach to corporate
ownership.
Future research could empirically investigate whether various types of shareholders
are likely to exhibit systematically different levels of psychological ownership. Pierce and
colleagues not only developed a instrument for measuring psychological ownership (Pierce,
Van Dyne, & Cummings, 1992) but also successfully applied it to the field of employee
ownership and participation plans (e.g. Pierce et al., 2004; Vandevalle et al., 1995).
Furthermore, the sparse yet insightful previous research on intercultural differences in
conceptions of ownership (Furby, 1978, 1980a, b) suggests cognitive and emotional
dispositions towards ownership might vary across cultural and institutional settings. Thus,
shareholder identities and, therefore, also the likelihood and mode of their intervention might
differ across nations and institutional systems. If psychological ownership and, thus,
shareholder behavior is, as some have argued a matter of socialization practices (Dittmar,
1992; Etzioni, 1991) then this has important implication for the institutionalization of property
rights systems into, for example, transition economies. Namely, accepting that “ownership” is
not only a legal but also a cognitive and emotional phenomenon means accepting that the
financial market system will not always be readily and frictionless amenable to “export” into
different contexts.
26
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Figure 1: Legal Ownership and Psychological Ownership Juxtaposed
Legal Ownership Psychological Ownership
Relationship Legal relationship between people Psychological relationship between
people and things
Value Value of the ownable is a matter of the
level of rights held in that object
Value of the ownable lies in its
characteristics and the functions it
fulfills for the owner
Motivation Associated with extrinsic motivation Associated with intrinsic motivation
Function Instrumental function Symbolic and instrumental function
Emergence Accrues from financial investments and
the acquisition of property rights
Accrues from social identification with
the role as owner and the group of
corporate owners
33
Figure 2: Shareholder Activism under Standard Power Distributions
+ Psychological Ownership -
strong identification with being an organizational owner and high levels of shareholdings
(P3) salient tactic: private negotiating and legal
interventions
weak identification with being an organizational owner and high levels of
shareholdings
(P1) salient tactic: private negotiations
- Legal Ownership +
strong identification with being an organizational owner and low levels of shareholdings
(P4) salient tactic: legal interventions and public
media
weak identification with being an organizational owner and weak levels of
shareholdings
(P2) salient tactic: exit
34
Figure 3: Shareholder Activism under High and Low Pressure Sensitivity
+ Psychological Ownership -
Pressure
Sensitivity
+
(P5a) salient tactic: coalition building (P5b) salient tactic: loyalty
Legal Ownership +
Pressure
Sensitivity
-
strong identification with being an organizational owner and high
levels of shareholdings
(P3) salient tactic: negotiating and legal interventions
weak identification with being an organizational owner and high
levels of shareholdings
(P1) salient tactic: negotiating
-
strong identification with being an organizational owner and low levels
of shareholdings
(P4) salient tactic: legal interventions and public media
weak identification with being an organizational owner and low levels
of shareholdings
(P2) salient tactic: exit