Who “Owns” the Modern Corporation?

…and why does it matter?

Do you remember that song they played on the radio when you and your partner first kissed? I bet you referred to it – and  probably still do – as “your song”.

Do you recall when you first spoke up in a meeting to present and convince the participants of  “your project”? I’m sure you poured all your energy into its realization and are still proud of how well it turned out.

I_love_my_companyDo you ever refer to the organization you work for as “your company”? I’m convinced that if you do, you’d find it hard to imagine leaving even though things don’t always look bright and even though every now and then other opportunities come along the way.

But how come we refer to songs, projects, and companies as something that is “ours” – as something that we own? What does it mean to own an object anyway? Formally, ownership is a bundle of rights that defines what you may and may not do with your “ownable”. So for example, as an owner of a house you may do anything related to its interior while – at the same time – you may face restrictions in terms of what you are allowed to do with its exterior (e.g. paint, light, style). In fact, houses oftentimes must fit in into their surroundings so it would be illegal to build anything but a châlet in the Swiss alps.

But then again, you don’t own the song you heard when you first kissed your partner in any legal sense. And chances are rather low that you established a trademark or copy rights for the project  you called “yours” on that meeting. Finally, few of us own the organization we work for and even less so if we work for a corporation. A corporation is a legal person and because it’s illegal to own people nobody owns a corporation – at least not in a legal sense.

Given that we do think of songs, projects, organizations and sometimes even other people (“my team”) as something that is “ours”, there must be more to ownership than only property rights. In fact, objects material and immaterial alike are often owned psychologically.

Psychological Ownership

But what does it mean to own something psychologically? And, perhaps more importantly, why should we care? Psychological ownership refers to cognitions and emotions associated with “my” or “mine”. This means that we know what belongs to us (and, for that matter, what belongs to others) and that we feel association and attachment toward these objects. Psychological ownership also implies a sense of control, mastery or achievement. For example, when we deliver a speech and feel we have the audience in our pocket, looking back we often say (and feel) that we “owned” the audience.

Cognitions and emotions – in general – are important because they drive behavior. The same holds true for feelings and thoughts associated with ownership: When we own something psychologically we tend to make different decisions about an object than if we lacked any cognitive and emotional sense of ownership for it. That is to say, we have a pronounced tendency to value objects we own more than similar objects we don’t own – even if we have  no formal ownership over these objects. This increased valuation impacts our inclination to give up (sell, trade, relinquish, abandon) possessions.

Researchers refer to this cognitive bias as the endowment effect: When people are asked to trade objects they feel psychological ownership toward they demand a higher price for selling these objects than they ask for acquiring similar but not-owned objects. One psychological mechanism put forward to explain this behavior is loss aversion: Because losses loom larger than gains people have a strong tendency to prefer avoiding losses to acquiring gains. Another mechanisms discussed is self-enhancement: Object we feel ownership toward become part of our extended self. Because we are inclined to have a positive bias towards ourselves, we are inclined to overvalue objects associated with our self.

So What?

Through loss aversion and self-enhancement psychological ownership powerfully impacts our behavior and may lead to systematically biased decision-making. So for example, we might be willing to spend more than the market price for a record with “our song” on it. Similarly, we might engage in escalation of commitment and exhibit a stong reluctance to give up “our project” despite more and more sunk (and prospective) costs. Finally, while psychological ownership induces commitment and loyalty to “our company” it may also lead to territorial behavior and resistance to change.

Whether we refer to objects as “ours”, i.e. whether we own them psychologically, therefore, has both positive and negative implications for our behavior regardless of whether we have legal ownership over these objects. Managing psychological ownership in and of organizations them becomes paramount for instigating desired behaviors. While there are a plethora of objects – material and immaterial – organizational members may develop psychological ownership toward, I am primarily interested in the implications of individuals’ psychological ownership for “their” organizations. Property rights and legal ownership set aside, I am interested in understanding psychological ownership in the context of corporate governance: Starting with the very traditional tryptych of management, capital and labor I am interested in understanding what ownership of the firms means for managers, shareholders, and employees and how this impacts the alignment of interests and division of labor in publicly listed corporations.