Governing the human capitalists : ownership and authority in the advertising and airline industries

Abstract

Theorists suggest the rising value of human capital will mean greater participation by employees in the ownership and governance of firms. This thesis explores aspects of these claims by analyzing the competitive effects of the allocation of ownership and authority in ad agencies and airlines. Essays 1 and 2 analyze the organizational history of the advertising industry to reconcile the stylized, theoretical views of professional service firms (PSFs) as unstable, small, private partnerships with the empirical reality of large public corporations in several professional service industries. Essay 1 uses a panel of advertising agencies and creativity awards from 1960-1980 to assess whether public ownership reduced PSF competitiveness, particularly whether it diluted employee incentives. Finding no difference in the survival, growth, and award rates of public and private ad agencies, this paper challenges the notion that allocating ownership exclusively to employees provides advantage in the PSF environment. Essay 2 draws on interviews and historical research to develop hypotheses about the structure and evolution of the industry. It proposes that agency size affects the ability to service large projects, hence the size distribution of agencies stems from heterogeneity in the units of demand. It also proposes that the industry's holding companies add value through financial intermediation. Together these essays suggest that the large public corporation is a feasible and perhaps advantaged governance form even in environments based predominantly on human capital.

(cont.) They challenge several assumptions underlying the stylized view of PSFs, and offer the speculation that the rarity of public PSFs stems from institutional barriers, not economic disadvantages. Essay 3 stems from separate research on airline labor relations and analyzes the turnaround of Continental Airlines. A case study reveals Continental's improved employee relations stem from a fundamental change in its authority system, from a traditional hierarchy to a high-involvement system. The case also discusses likely facilitators of this transformation of Continental's authority system. Taken together the essays offer a broad conjecture for future research: that allocation of authority inside the firm may be a more important factor in employee incentives than allocation of ownership to employees.