Ownership of wealth without the appropriate means of control and control of wealth without noticeable ownership seems to be the most rational result of corporate development1. It is apparent that control is something apart not only from ownership but from management as well. This is a well known characteristic of the corporate system. This system recognizes five different types of control2, even though there is no dividing line that separates these different types.
Berle and Means center of attention was primarily on the management control. This is the type of control which ownership is so widely distributed where it is almost impossible for an individual or a small group of individuals who has even a small interest to control the affairs of the company3. In their classical work, “The Modern Corporation and Private Property”4 Adolf Berle and Gardiner Means sought to combine legal and economic views in order to explain the progress of the modern corporation.
They observed that during the 1920’s the structure of ownership in large corporation is significantly changed from the traditional arrangement of owners managing their own companies to one which shareholders had become so numerous and dispersed that they were no longer willing or able to manage the corporations they owed5. There are three general corporate governance models based on ownership, the separation of company ownership and control because shareholding is widely dispersed, a dominant owner who exercises control and appoints management; and where a large shareholder has veto power over major management decisions.
Shareholder control may be achieved through majority ownership, or indirectly through the pyramiding of share ownership through affiliated companies that are part of the business group6. Furthermore, corporations experienced an evolution of control where a group of shareowners, while not having a majority of control nonetheless exhibited working control and had sufficient power to influence the directors and management. Basically, it was assumed that the power is shared.
Power, however, is no longer under absolute control by the owners. Management came to be granted greater responsibility by absentee owners who were becoming more and more divorced from the production process, but not completely so. Veblen the writer of “Absentee Ownership” explained that though the absentee owner was an outsider and lacked the technical skills, he still had a deciding vote on what goes on inside7. He actually wanted to emphasize that absentee ownership and absentee management does not work.
Accordingly, the shareholders right to elect the board of directors can give them actual control. Indeed, Berle and Means found that relatively small block of stock could give their owners effective control of the enterprise. They also identified such firms as minority controlled corporations. These firms exhibit a partial separation of ownership and control. The dominant shareholder controls the firm, despite owning less than 50% of the outstanding voting shares, leaving the other minority shareholders without significant control power.
Where no such control block exists, Berle and Means found that control passes from the company’s shareholders to its managers. Although shareholders of such firms retain the right to elect directors, management controls the election process, and thus the company8. In describing the corporate system as involving the divorce of ownership or risk taking from control, Berle and Means saw managers as enjoying many of the fruits of private enterprises, without themselves providing much capital or undertaking proportionate risks.
Instead, they were organizers and administrators. Furthermore, it was well established that for large amounts of capital outside sources were needed. This led to the need for professional managers, who because of the dispersed nature of ownership exercised effective operating control over companies. From this point of view, Berle and Means focus on owners and managers might be regarded as a symbolic device designed to center attention on the problem of concentrated economic power with the absence of some countervailing power9.
Hence, separation of ownership and control occurred because share ownership was dispersed amongst many shareholders, no one of whom owned enough shares to materially affect the corporation’s management. Berle and Means believed that dispersed ownership was now part of the corporate system. 10 The publication of their work brought important changes11, which as a result gave great advantages to companies large enough to achieve economies of scale, which in turn gave rise to giant industrial corporations12.
These firms required enormous amounts of capital, far exceeding the resources of any single individual or family. Therefore, only the aggregate of several small investments accomplished by selling shares to investors and could finance these industrial giants. Their main separation of ownership from control thesis suggested that in big corporations the risk baring role of ownership and the managerial role of control were separate functions performed by different parties.
They also asserted that since the law treated the shareholders as a company’s owners13, investors in public corporations usually did no act in the manner, which one would expect, from an owner. Instead, they have found it more convenient to leave the management of the corporation and all the matters of importance to the corporate executives. This is very rational since investors in a public limited company are expected to be really apathetic about managerial issues and to leave it to corporate executives to run the company14.
It is really obvious that in such situations, corporate executives are deemed to have more knowledge and experience and therefore, are better qualified to make managerial decisions than the shareholders. This shift in ownership had transferred power away from owners and into the hands of professional, self perpetuating managements who would be answerable mainly to themselves15. Thus, as a result of the processes of stock dispersion the evolution of control inevitably shifted to management16.