Are good managers required for a separation of ownership and control?

Abstract

For diffuse ownership to become the norm in large business enterprises, investors need to be sufficiently confident to buy shares. Will investors follow through if serious doubts exist concerning the competence of those managing companies? This paper addresses this question, primarily by examining historical events in Britain. In the UK, ownership separated from control in large business enterprises at some point between the 1950s and the 1980s, a period during which the country's corporate executives were allegedly amateurish and complacent. The paper acknowledges that the managerial capabilities of British companies improved as the twentieth century drew to a close. Nevertheless, legitimate doubts would have existed about the quality of management as share ownership patterns were reconfigured. The paper explains what occurred in the UK by focusing on financial intermediaries such as pension funds and insurance companies. In the decades immediately following World War II, a 'wall of money', a 'cult of the equity' and a 'trapped capital' effect caused by exchange controls fostered institutional demand for shares that outweighed whatever doubts might have existed about the quality of management. Correspondingly, there was a suitable platform for diffuse share ownership to become the norm in the UK's largest companies. © ICC Association 2004; all rights reserved.