The Structure of Ownership and the Theory of the Firm

Abstract

THE separation of ownership and control in the modern corporation, an issue brought to the fore so effectively by Berle and Means fifty years ago, retains a central position in recent writings about the economic theory of the firm. The problem is stated succinctly by Berle and Means: The separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge, and where many of the checks which formerly operated to limit the use of power disappear .... In creating these new relationships, the quasi-public corporation may fairly be said to work a revolution. It ... has divided ownership into nominal ownership and the power formerly joined to it. Thereby the corporation has changed the nature of profit-seeking enterprise.1 The holder of corporate stock experiences a loss of control over his resources because ownership is so broadly dispersed across large numbers of shareholders that the typical shareholder cannot exercise real power to oversee managerial performance in modern corporations. Management exercises more freedom in the use of the firm's resources than would exist if the firm were managed by its owner(s), or at least, if ownership interests were more concentrated. Because management and ownership interests do not naturally coincide when not housed in the same person, Berle and Means perceive a conflict of interest, which, with ownership dispersed, is resolved in management's favor. To Berle and Means, this signifies a serious impairment of the social function of private property. Profit maximization constrained and guided by competition is the link between private ownership and efficient resource utilization, a link presumably broken by a structure of ownership * This study benefited from suggestions made by Professors Ken Lehn and Barry Weing-ast. Financial support was provided by a Sloan Foundation grant to UCLA.