SEPARATION OF OWNERSHIP AND CONTROL
Eugene F. Fama
University of Chicago
and
Michael C. Jensen
Harvard Business School
mjensen@hbs.edu
Abstract
This paper analyzes the survival of organizations in which decision agents do
not bear a major share of the wealth effects of their decisions. This is what the
literature on large corporations calls separation of ownership and control.
Such separation of decision and risk bearing functions is also common to
organizations like large professional partnerships, financial mutuals and
nonprofits. We contend that separation of decision and risk bearing functions
survives in these organizations in part because of the benefits of specialization
of management and risk bearing but also because of an effective common
approach to controlling the implied agency problems. In particular, the contract
structures of all these organizations separate the ratification and monitoring of
decisions from the initiation and implementation of the decisions.
' E. F. Fama and M. C. Jensen, 1983
Journal of Law and Economics, Vol. XXVI, June 1983.
also published in
Foundations of Organizational Strategy, Michael C. Jensen, Harvard University Press, 1998.
This document is available on the
Social Science Research Network (SSRN) Electronic Library at:
http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=94034

SEPARATION OF OWNERSHIP AND CONTROL
*
Eugene F. Fama and Michael C. Jensen
Journal of Law and Economics, Vol. XXVI, June 1983,
and
Foundations of Organizational Strategy, Michael C. Jensen, Harvard University Press, 1998.
I. Introduction
Absent fiat, the form of organization that survives in an activity is the one that
delivers the product demanded by customers at the lowest price while covering costs.
1
Our goal is to explain the survival of organizations characterized by separation of
ownership and control a problem that has bothered students of corporations from
Adam Smith to Berle and Means and Jensen and Meckling.
2
In more precise language,
we are concerned with the survival of organizations in which important decision agents
do not bear a substantial share of the wealth effects of their decisions.
We argue that the separation of decision and risk-bearing functions observed in
large corporations is common to other organizations such as large professional

*
This paper is a revision of parts of our earlier paper, The Survival of Organizations (September 1980). In
the course of this work we have profited from the comments of R. Antle, R. Benne, F. Black,
F.˚Easterbrook, A. Farber, W. Gavett, P. Hirsch, R. Hogarth, C. Holderness, R. Holthausen, C. Horne,
J.˚Jeuck, R. Leftwich, S. McCormick, D. Mayers, P. Pashigian, M. Scholes, C. Smith, G. Stigler, R. Watts,
T. Whisler, R. Yeaple, J. Zimmerman, and especially A. Alchian, W. Meckling, and C. Plosser. Financial
support for Fama s participation is from the National Science Foundation. Jensen is supported by the
Managerial Economics Research Center of the University of Rochester.
1
Alchian (1950) is an early proponent of the use of natural selection in economic analysis. For a survey of
general issues in the analysis of organization, see Jensen (1983).
2
Smith (1776); Berle and Means (1932); and Jensen and Meckling (1976).