Lars Östman towards a general theory of financial control

Principal relationships between vertical line and horizontal line 

 

For some organisations, there is a basic and direct relationship between the horizontal line 

and the vertical line. Principals of the vertical chain want horizontal activities pursued 

because it is just this kind of activities that satisfies an interest or a need for a special group 

of people or for themselves. Government regards health care, taxation or certain cultural 

events as important, so financial resources are allocated to these fields. Real-estate owners 

want improved protection against fire, so they found a mutual insurance company. Wine 

peasants are associated within a producers´ cooperative. People interested in local ice-

hockey involve themselves in a non-profit-making club. Or they enjoy financial business life 

and want to be a part of it. These are function-driven organisations. For them, there is a 

coupling between the vertical engagement and the horizontal content in the specific case. 

Often, the particular connection between principals and functions means a long-term 

duration of relations between organisation and principals – a principal may not even find a 

substitute in any other organisation. At least, it is not a part of continuous choices issue by 

issue. Organisations of this kind may or may not face competition. Legal forms may vary. 

For other organisations, relationships between the vertical line and the horizontal line are 

different. These are pay-driven organisations. Principals of the vertical chain may satisfy 

their interests through payments from horizontal activities, their ultimate aim is not to satisfy 

a certain function for particular beneficiaries and they are willing to consider various options 

in terms of activities and output. In pure cases, there is no coupling between principals of the 

vertical chain and beneficiaries to utilize the specific horizontal process, beyond the transfer 

of money. This does not mean that material, experiential and operational functions are 

unimportant but specific functions for specific groups are not the ultimate and primary 

concerns of a certain organisation. Often horizontal independence is high. Relations to 

sellers or buyers are not special and do not give any particular advantages or disadvantages 

in operations, nor any special support or binding obstacles. In this sense, these organisations 

are commercial units – transactions are at arm´s length. Thus normally, they meet some 

competition, and often severe competition. 

The output of pay-driven units is expected to be of value to a buyer, who is therefore 

willing to pay. A surplus or a deficit appears, and principals in the vertical line make 

dispositions in accordance with legal rules. Their financial flows and purchasing power arise 

either continuously from current operations or through exchange values for shares and 

organisational parts. They may be financially independent in the sense that they have no 

particular relations to financial sources: these relations are commercial too. Neither 

principals in the vertical line nor buyers of output have any strongly durable commitments. 

Major owners may stay for a long time. Alternatively, owners participate as market actors 

with shares on or outside the stock exchanges. Principals in the vertical line may change. 

The time horizon of an owner position may have any length, even an extremely short one. 

They exercise some influence through their holding. More or less intensely they carry out 

transactions with their shares.  

The distinction between function-driven and pay-driven organisations is helpful, not least 

for complicated patterns, even if particular organisations sometimes may be difficult to 

classify. This is a matter of a certain organisation´s relations to functions, not a matter of 

legal form. 

  

 

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