Skin in the Game
When it comes to generating value, competent owners make all the difference
By Ashley Rabinovitch
Imagine a hot dog stand on a bustling city corner. The owner faces stiff competition from a handful of competing stands in a few-block radius. The long-term success of her business depends almost entirely on her ability to source the right amount of ingredients and fulfill orders quickly and courteously at the right price.
On the other end of the spectrum, consider a large corporation with thousands of employees. C-suite executives appear to run the show. When a company's fortunes rise and fall, the executives are the ones quoted in news releases. The company's actual owners become an afterthought in the public mind, a shadowy legal entity without any discernible impact on performance.
An overlooked part of the equation
In a recent research study, "Ownership Competence," published in Strategic Management Journal, Professor of Entrepreneurship and Corporate Innovation Peter Klein challenges the perceived disconnect between ownership and value creation with a brand-new term in strategic management literature: "ownership competence." Traditionally, strategic management researchers attribute value creation to managerial skill or competence.
"When we focus entirely on managers, we fail to recognize the strategic role of ownership in shaping access to resources," Klein said. "Owners and potential owners are not a homogeneous group. They have different ideas about how to create value, which will ultimately yield different outcomes."
As the W. W. Caruth Professor of Entrepreneurship and Chair of the Department of Entrepreneurship and Corporate Innovation, Klein can point to countless real-world examples of ownership competence—and incompetence—in action. There is a reason that some entrepreneurs have achieved meteoric success, while others fall by the wayside.
"People like Bill Gates turn out to be better at putting their resources at risk and taking bold action," Klein said. "To make a venture succeed, they have to have skin in the game. They have to put assets on the table in an environment of uncertainty."
Klein's study, entitled "Ownership Competence," breaks down the term into three primary facets: knowing what to own, how to own, and when to own. Ultimately, Klein argues, the influence of these types of ownership competence on value creation depends on several contextual factors:
- Ownership concentration—Companies with competent owners see a significant benefit in concentrated ownership compared to those with less competent owners.
- Life cycle of a business—Competence has a greater influence on value creation at the turbulent early stages of a business.
- Environmental uncertainty—In the face of high uncertainty, ownership competence plays a greater role in determining company success.
- Market efficiency—The more inefficient the market, the more ownership competence creates value.
In future research, Klein aims to develop metrics to gauge ownership competence and compare the relative importance of the three facets of ownership competence.
Real-world implications for the concept of ownership competence abound, especially in crises like the COVID-19 pandemic.
"With companies that produce vaccines and personal protective equipment, it is critically important to have high levels of ownership competence," Klein said.
Ownership competence allows companies to navigate uncertainty and provide the right products and services to address market demand.
In the classroom, Klein uses the concept of ownership competence to help prepare students for the realities of entrepreneurship.
"Many students come in with a romanticized vision of running a business," he said. "I am constantly driving home the point that an owner isn't just someone who handles the paperwork. Stewarding a business is a tremendous responsibility. It is only when the owner is equipped to take on that responsibility that a company really takes off."