Not All Equity Owners Will Act Like Owners: 3 Pathways To Create Psychological Ownership

Not All Equity Owners Will Act Like Owners: 3 Pathways To Create Psychological Ownership

When financial advisors help clients with issues related to ‘ownership’, most often it is in the context of the portion of company shares that the client may own, which gives them certain financial and voting rights. But the concept of ownership is not limited to its physical and legal aspects; there is also a psychological dimension as well. For example, individuals often enjoy the sense of ownership of things such as an organization, idea, brand, or object when certain conditions are in place, and even define their identities in relation to those things that they own. The phenomenon of psychological ownership gives rise to ideas about empowering employees to feel and act like owners – because when someone feels like they actually own a part of the business, they become more vested in taking care of the business and ensuring its success.

In order to develop psychological ownership among employees, Finnish management scientist Antti Talonen proposed a three-path framework that can be applied directly to an advisory firm. Under this framework, employees are more likely to feel like owners, particularly over the part of the business they control (e.g., an advisor might feel a sense of ownership for work on their particular clients) if one of three ‘pathways’ to psychological ownership applies to them: 1) they have controlled some part of the business for an extended period; 2) they have generated an intimate knowledge of the business; or 3) they have invested their personal resources or effort into the business. At the same time, the absence of these attributes can lead to a reduced sense of psychological ownership, even among those who might have legal ownership in the firm.

Accordingly, when it comes to advisory firm owners, creating a sense of psychological ownership can arise from having a sense of at least some level of control over the firm, being intimately familiar with and involved in the firm’s operations, or investing significant amounts of energy, time, and effort to the firm. Team members who meet at least one of these preconditions are likely to feel (and behave!) like owners, whether or not they have legal ownership in the firm as well.

While it might be tempting for firms to err on the side of inclusivity and broaden legal ownership in the firm, there are costs involved in doing so. For example, not only can extending ownership to employees increase the legal, administrative, and tax burdens for both the firm and its owners, but it can also raise the risk to employee morale, as high-performing employees may be disheartened if they feel they are being treated the same as those with poor performance. Accordingly, it is important to consider offering actual ownership to those with a strong sense of psychological ownership in the firm, as those employees are likely to be the top performers who deserve ownership the most.

Ultimately, the key point for advisors is that the concept of ownership is multifaceted and goes beyond legal ownership in a firm. Developing a sense of psychological ownership among employees can make them feel more vested in taking care of the business and ensuring its success, even in the absence of legal ownership of shares in the business. And given the costs of expanding legal ownership of a firm, firms that are contemplating doing so might first ensure that the prospective new shareholders demonstrate not just good performance, but also psychological ownership in the firm, that will make them valuable owners in the future!

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