Creating Risk Capital. Ian Whalley
especially following the collapse of communism in Russia and its former satellites. Nonetheless the public sector remains central: for example in Europe, besides the major organisations already noted such as Britain’s NHS and the BBC, there remain substantial government stakes in important companies, especially in France and Italy. Also, in both Europe and the USA, there are many utilities which are owned and controlled by municipalities. And notably, the public sector took full or partial ownership of key financial institutions during the banking crisis of 2007-2009 and its aftermath.
Other forms
While dominant, investor ownership is far from universal, even for large-scale enterprise. The Yale Law School Professor Henry Hansmann demonstrated this as long ago as 1996 in his comprehensive account of various other forms of ownership adopted in major countries. [4] He examined a wide range of enterprises including employee-owned firms, co-operatives and mutual firms, clubs and non-profit enterprises. He found that Europe has many such firms, some of them large like Britain’s John Lewis Partnership, Spain’s Mondragon, [5] and the major farming co-operatives in France, Germany, the Netherlands, Denmark and Sweden. [6]
In the USA, “the world’s great exemplar of corporate capitalism”, [7] and a country which is hardly viewed as a particularly collectivist society, [8] Hansmann found that other ownership forms play a major role in mainstream industries. Co-operatives flourish and employee ownership is common in service sector firms in medicine and among lawyers, consultants, investment bankers and the like. These are “prosperous professionals largely in the service of corporate capital”. [9] There are, moreover, organisations like mutual insurance companies and farmer-owned producer co-operatives, some of which are very large indeed.
Factors that determine the form of ownership
Henry Hansmann found that a number of different factors influence the choice of ownership form. One consideration is capital, and another is risk, both of which might be seen as favouring ownership by investors. Another factor is regulation, which by protecting the public against abuse, has helped investor-owned enterprise to compete with and even ultimately displace many co-operative, mutual and non-profit firms, for example in the banking and life insurance industries. [10] Culture and ideology may also play a part, and some individuals who may dislike adversarial relationships in particular situations may find benefit in dealing with a firm they own, such as a consumer co-operative, or with a non-profit firm.
None of these factors, however, appears decisive. Nor does the factor which has received so much attention in the literature on organisations – namely the monitoring of management. It is efficiency which seems to be the critical factor in determining ownership form.
The key question is the degree of common interest among a particular constituency of the firm, such as investors, employees or customers. If the common interest is sufficient, the members of that constituency can become efficient owners of the firm. Thus investors of capital, for example, typically have a strong common interest in the firm and are therefore often “natural owners by default”. [11] If, however, there are significant conflicting interests within a constituency, its members are unlikely to be efficient owners. Thus, for example, conflicting interests among employees are not uncommon, and if they become owners, such conflicts can lead to costly disagreements.
On Hansmann’s analysis, a wide range of ownership forms seems healthy in a modern economy. He concluded that no one form of ownership is inherently superior to another, but that in any particular type of enterprise, at any one time and place, a particular form of ownership may work better and more economically than others. Thus the reason for the widespread adoption of investor ownership in large-scale enterprise is that it is the ownership form which most often, but by no means always, proves most efficient in Western economies in the late twentieth and early twenty-first centuries.
The models of enterprise governance
As enterprises grow, they affect more and more people in different ways, so the way in which they are run, or governed, becomes increasingly important. There are, however, many lessons to be learned from looking at small businesses, before they grow to become large enterprises.
Small-scale enterprise
The proprietorship and family form of ownership, prevalent in small-scale enterprises, profoundly influences the way they are run and is widely seen as beneficial. The proprietor can bring to bear the anxious vigilance of a true owner-manager, sensitive to the needs of his workforce, customers and suppliers, and of the community he serves, and seeking to ensure that his creation endures to the benefit of future generations.
Ownership held by suitable proprietors, with a keen sense of the responsibilities which it involves, is often perceived more favourably in terms of governance than ownership by investors, some of whom are seen as ‘punters’ with little appetite for such responsibilities. [12] Proprietorship and family ownership are, moreover, widely seen as one of the strengths of continental European economies in countries like Italy, France and especially Germany, where they have played a key role in the growth of the well-known Mittelstand tier of successful and enduring enterprises, a major contributor to the ‘economic miracle’ in Germany after World War II.
This view has not always prevailed, however, as in the long-running debate on the relative decline of Britain in the latter half of the nineteenth century, compared with the USA and Germany. In Germany, while many family firms declined, large-scale enterprise prospered under industrialists like Siemens, Krupp and Rathenau. In Britain in the same period and beyond, there was less growth of large-scale industry, while small-scale family firms predominated but fell behind.
As an enterprise grows and requires more resources than it can generate itself, a natural progression is for the proprietor to enter into partnership with others, or to form a company with other shareholders. At this point he crosses the Rubicon, because ownership and control will henceforth be shared, and as the enterprise grows larger, it may move away from its proprietorial, family culture towards one which is more corporate and managerial. While many large firms remain under family control, the more ownership is shared, the more that crucial sense of proprietor involvement and responsibility may diminish, leading ultimately to the passive role often played by shareholders of public companies.
Large-scale enterprise
For large-scale enterprises, there has been a progression of models of corporate law and governance which have developed over time. Henry Hansmann and Harvard Law School Professor Reinier Kraakman identified the principal ones in 2001. [13]
The managerialist model
Under the managerialist model, which was in vogue, especially in the USA, from the 1930s through the 1960s, enlightened corporate managers were viewed as serving the general public interest and were given the discretion to do so.
The labour-oriented model
The labour-oriented model, based on employee participation, has a long and conspicuous history in Germany in particular, dating back to the Weimar Republic, as a means of moderating the adversarial relations which may develop when bargaining with unions.
The state-oriented model
The state-oriented model is based on a direct role for government in the affairs of large concerns in the public interest. Widely supported before World War II, its further adoption was inspired by the postwar interventionist policies of the Japanese and French governments through indicative planning with their large firms. Such policies prevailed during the astonishing resurgence of Japan and les trente glorieuses, the thirty glorious years in which France enjoyed its own revival.
The stakeholder model
The