Human capital and control of the new corporation The primary aim Section 4: Alternatives to the standard approach that do not take the allocation of ownership rights to external investors for given. This lecture: For the New Enterprise, discuss how employees personifying human capital are motivated to stay in the firm by changes in the allocation of ownership rights

Criticisms of the shareholder value perspective Legal systems unable to handle management problems: shareholders should accept the loss of control in exchange for greater liquidity Concerns about efficient and competitive business enterprise Interests of non-investing parties should be better represented The nature of the firm has changed

Various arrangements of corporate control Ownership: Cash- flow rights Ownership: Control rights“ Modern CorporationShareholders PartnershipEmployeesEmployees “ New Enterprise (integration problem) Depend on type of complementarity German Codetermination ShareholderEmployees Venture CapitalDepend on contract between capitalist and entrepreneur University ResearchResearchersUniversity

Conclusion emerging from ”Salomon Brothers” and ”Saatchi & Saatchi” For economies with a high share of human capital, shareholder control becomes defect: In a society free from slavery individuals cannot transfer the control rights to their human capital to someone else for a significant period of time through a contract. New task for the management: Protect the firms integrity by taking care of the employees, who personify the human capital, and motivate them not to leave the firm (“integration problem”)

The shareholder value model suitable? It is associated with: Vertically integrated firms (“modern firms”) (GM) Through their size, they have a dominant position on the markets where they operate These firms became vertically integrated as few firms accepted to be suppliers (afraid of becoming controlled by a monopolist) All critical resources are kept inside the legal boundaries of the corporation (no risk that critical assets disappear out of the control of the owners)

Favourable Conditions for shareholder control: Limited opportunities for specialized, qualified workers to find alternative jobs and difficulties for competitors to imitate the physical assets of these firms The legal claims over physical assets become the most important source of power and it can be used in the interests of the shareholders.

When human capital becomes a vital resource in production: Links - complementarities - have to be built between the person or a unit that the firm seeks to have power over and the firm Complementarities exist when the unit and the firm can together create more value than they can going their own separate ways Complementarities economically link and control assets that cannot be owned.

Methods for the building of complementarities: Organize the work in a way, where the asset specificity is increased (an intangible asset has no or a small value when applied outside a specific company) An employee can be trained in serving a machine that is constructed especially for a certain plant or firm Giving key workers access to critical resources of a firm (important customers and clients) which after a while develop into solid client relations. Partial employee ownership: stock options