1. Strategy Organization (2012), 10(3): 304-315
Who is in charge? A property rights perspective on stakeholder governance
Peter G. Klein
Joseph T. Mahoney
Anita M. McGahan
Christos N. Pitelis
Strategy Organization (2012), 10(3):
Presented by Julie Ao, Fall 2017

2. Summary
The article compares the shareholder view of the firm and the stakeholder view of the firm
Stakeholder theory has been proposed as an alternative to shareholder theory
Following Zingales (2000), the article describe a new version of the Carnegie School stakeholder model, reconstructed from modern property rights theory, and the model advances various shareholder-stakeholder debates

3. Shareholder View
Shareholders: Own part of the company through stock ownership
Canonical shareholder model:
Deriving from agency theories (Alchian and Demsetz, 1972; Jensen and Meckling, 1976)
Viewing the firm as a nexus of contracts
No residual rights of control, because contracts are complete
Only equity holders have claims to the firm’s residual income
Firm’s goal is to maximize shareholder wealth (assuming NPVs for all stakeholders are zero)
Critiques:
Challenged by transaction cost and incomplete contracting theories of firm boundaries and organization
Lead to misunderstandings regarding the firm’s contractual obligations

4. Stakeholder View
Stakeholders: Groups of people who are interested in the performance of a company other than just stock appreciation
Employees; Customers; Suppliers; etc.
Stakeholder theories:
Deriving from scholars outside economics and law (Clarkson, 1995; Freeman, 1984)
Emerging based on the idea that a firm’s transactions with buyers and suppliers often involve co-specialized investments, which should be encouraged and protected.
The firm’s residual income is shaped not only by the firm’s specific investments, but by those of its transactional partners and by the division of created value among claimants.
Critiques:
The set of potential stakeholders is too large
The co-created value is too difficult to measure

5. Property Rights: Alternative Views
Property rights: Any sanctioned behavioral relations among decision makers in the use of potentially valuable resources; such sanctioned behaviors allow people the right to use resources within prescribed limits
Resources as the bundle of rights
Each stakeholder has certain property rights
Classical property rights theory:
Define ownership as residual rights to income (residual claimancy; Alchian and Demsetz, 1972)
Residual control claims → ex-ante contractual problems
Modern property rights theory:
Defines ownership with residual control rights in the deployment of property such as specialized assets (Grossman and Hart, 1986; McGahan, 1997)
Residual control rights are relevant only when contracts are incomplete
Residual control rights → ex-post contractual problems
Firm as a nexus of both explicit and implicit contracts

6. Two Property Rights Models
The GHM model (Grossman and Hart, 1986; Hart and Moore, 1990):
The approach holds that residual control rights should be assigned to the parties whose relationship-specific investments have the largest marginal impact on joint value creation
Explores not the rights of stakeholders, but the various means that stakeholders employ to protect themselves against economic holdup, given transaction costs, inertia, and legal and political constraints
Blair and Stout (1999) model:
The approach emphasizes not only asset specificity, but also technical non-separabilities in team production
Rajan and Zingales (1998) proposes to use property rights mechanism of restricted access to critical assets, instead of ownership, to promote firm-specific investment
The stakeholder theory uses the idea of third-party ownership to develop a team production approach to the public corporation

7. Conclusion
Suggest the field of strategic organization to leverage property rights theory, as well as recent advances on value capture, value co-creation, and sustainable advantage.
The presence of incomplete and implicit contracts makes it impossible to identify precisely the entire economic value created by the firm.
No longer clear whether decision rights should reside exclusively with shareholders
Under conditions of uncertainty, limits to rationality, and change, and recognizing the link between value co-creation and value capture, seeking stakeholder value rather than shareholder value for achieving sustained value for the firm

8. Discussion
Comparing Property Rights Theory with Agency Theory and Transaction Costs Theory (Kim and Mahoney, 2005)