What is the right form of ownership of a company? This is the question raised by Stan Kroenke’s proposal to buy all the remaining shares in Arsenal – a move described by the Arsenal Supporters Trust as “dreadful”.
Viewed through the lens of some conventional economics, the AST’s objections seem misplaced because there are big pitfalls with dispersed ownership which can be solved by concentrating ownership into fewer hands.
One of these is a lack of incentives. If a firm has many shareholders, it accounts for only a small fraction of the wealth of each owner. No owner therefore has a strong incentive to go to the bother of improving the management. There’s a problem of collective action: the costs of doing so are borne by a few active shareholders, whilst the benefits accrue to all owners.
Another is asymmetric information. Outside shareholders often just don’t know enough. They didn’t stop RBS collapsing, for example, because they didn’t realize just how terrible the business was.
Kroenke’s plan fits this pattern. So the AST is wrong to object, isn’t it?
No, no, no. The standard objections to dispersed ownership don’t apply in this case. Arsenal’s individual shareholders don’t lack incentives; they have a passionate desire to see the team succeed far beyond their financial interest. Maybe more so than Mr Kroenke who – it is feared – might use Arsenal as a cash cow to finance his other “franchises”. Nor is there much asymmetric information: Arsenal’s shareholders get regular (and painful) updates on the team’s performance every few days. That cannot be said of most listed companies.
In fact, there’s a third difference – externalities. For many companies, outsiders don’t care whether they succeed or not: when Phones4U went bust, people simply switched to Carphone Warehouse for surly service from spotty youths. That was no big deal. With Arsenal it is otherwise. Right-thinking people who don’t own shares care deeply about their fortunes*.
Of course, the issue here is much wider than the matter of who should own Arsenal. It applies to all companies. There are four issues here:
- Who has skin in the game? More skin should mean more ownership, as it gives you sharper incentives to maximize the value of the asset. This is why there’s a stronger case for fans to own clubs than players: players can and do agitate for transfers out of failing clubs, whereas fans are much more emotionally invested. In the same spirit, it is often workers or sub-contractors who bear the most risk of a company collapsing.
- Who knows the company best? These should own the business as they know best how to maximize its efficiency. It made sense for Richard Arkwright to own a factory because he knew the production process best – he’d invented much of it – whilst many of his employees were illiterate. Conversely, human capital-intensive businesses such as law firms are often owned by their employees and rarely by outside shareholders. I suspect this is sometimes a case for transferring ownership from outside shareholders to workers.
- How important is the company? Xavier Gabaix has shown that some firms are so important that their failures have macroeconomic implications. And Daron Acemoglu and colleagues show that networks (pdf) matter; firms that are the hub of networks can drag others down with them, whereas others aren’t so important. The failure of RBS, for example, mattered much more than that of Carillion. For some firms, it’s a matter of public indifference who owns them. For others, it does matter. The question of who should own banks is an important policy question. That of who should own fishmongers, not so much.
- Does the market for corporate control work? If it does, then ownership will flow to the people best able to maximize the value of the asset and policy-makers need not worry. Personally, though, I suspect this isn’t the case. Takeovers sometimes fail horribly, in part because they are motivated (pdf) by some cognitive biases. And in other cases, credit constraints or problems of collective action might prevent more widespread worker or consumer ownership.
Of course, the best form of ownership will vary from business to business. There is, however, no assurance that the market will ensure that businesses do get the best owners. Which means that in at least some cases, the question of who should own an asset is a legitimate political question.
You might object to this that efficiency isn't the only ideal and that traditional property rights matter too. Maybe. But as I said yesterday, some bearded guy might have been right to point out that the two might conflict.
* Of course, fans of Sp*rs of Chelsea want to see them fail, but these by definition are not right-thinking people.