The separation between ownership and control in companies: a key to success?

In 1932, Adolphe Berle and Gardiner Means published a book that would have a huge impact in the vision of corporate ownership. In ‘The Modern Corporation and Private Property’, it has been argued that US modern public corporations are subject to a separation between ownership and control. Accordingly, shareholders have only a passive role in the direction of the corporation due to their very little influence in the decision-making. Therefore, control is left to the managers giving them the free charge of running the corporation.

In Berle and Means’ view, the separation of ownership and control can be explained by two main factors. Accordingly, the higher and higher rise of public corporations and dispersed ownership has contributed to the fact that no one shareholder has enough shares to be able to control the company. Further, shareholders have only few opportunities in the case of a board’s election. He can refrain from voting, he can attend the annual meeting and vote his stock, or he can sign a proxy transferring his voting power to certain individuals selected by the management of the corporation, the proxy committee. As a matter of fact, Berle and Means have outstandingly demonstrated the large passivity characterising the role of shareholders in modern corporations.

While some authors claim the necessity of having checks and balance on managers’ acts, others state that it is incorrect to consider negatively the shareholders’ passivity. According to the Berle and Means’ thesis, some authors claimed the positive effects of the separation between ownership and control in accordance with efficient corporate governance. Indeed, they argue that the separation is natural and inevitable, because the process of the public modern company itself causes it. Moreover, the separation of ownership and control is well justified by the fact that managers are professionals more trained and qualified than shareholders for such a role.

Additionally, it is doubtful to believe that shareholders will act at any time for the best interests of the company. In this view, it has been argued that shareholders can frequently be motived by suspicious incentives, which may be detrimental for the corporation. Indeed, “investors may prefer liquidity to control, especially when stock markets provide them with an easy way of flowing in and out of a given company”

[1]. Furthermore, as soon as the management acts without checks, this will lead to the suppression of the majority abuse towards minority shareholders. An absence of shareholder control leads to the fact that managers are in better place to eliminate any kind of oppression and make greater balance between the different stakeholders.

In addition, in case of mismanagement, opponents of shareholder control argue that the market will control mismanagement effectively, since market forces prevent and limit managerial abuse of misuses of power. Moreover, maladministration from managers would be harmful to their own self-interests “as it will lead eventually to the bankruptcy of the firm and to managers’ future employment prospects becoming spoiled, as a result of competition from better managed rivals”[2].

Considering the above-mentioned reasons, shareholders’ passivity is not only inevitable, but also a necessary way for the whole bien-être of the company. Based on the Berle and Means’ theory, proponents argue that the most efficient corporate governance cannot run in a system in which shareholders control management.

[1] Y. Zhao, ‘Nomination and election of independent directors: from Anglo-Saxon style to Chinese practice’ (2011) 32(3) Comp Law 89,91

[2] A. Rahmani, ‘Shareholder control and its nemesis’ (2012) 23(1) ICCLR 12,18