Equity_and_Management

In 1932, Berle and Means wrote “The Modern Corporation and Private Property” which warned of the phenomenon of growing corporate power and a rising managerial class taking over control of these corporations. The phenomenon caught the attention of sociologists during that time resulting in debates as to form and occurrence and again in the 1960’s (Mizruchi, M., 2004). Various economic and political theories developed from observations of what seem to be a universal trend separating corporate ownership from control by professional managers. Leslie Hannah (2007) reviewed the findings of Berle and Means and sought to make clarifications in his article “The Divorce of Ownership from Control from 1900 onwards: Re-calibrating Imagined Global Trends.” Hannah reviewed the corporate equity structures of significant corporations in the early 1930’s in the United States, England, France and Germany. He noted similarities and differences in equity structure in the 1900s and found that owners were holding on to substantial shares and consequently maintain control of their corporation. Equity structure regulations of various countries allowed owners to retain significant stocks with voting rights holdings. There were exceptions, especially when governments step in to nationalize industries, as in the case of the railways. Exceptions also arose when regulations on equity ownership allowed very wide dispersal of stock ownership, but this was the exception rather than the rule. Hannah concluded the trend identified by Berle and Means was not the rule. There are many corporations today, particularly in the manufacturing and mining industries, still run by controlling interests from same families that ran said corporations in the early 1900s. Hannah argues that there has been no “decisive transition” towards the separation of ownership and control but there has been a significant shift towards this trend in different industries in different countries. The University of Technology Sydney Centre for Corporate Governance (2008) defines corporate governance as the system by which the corporate structure, rules and procedures are “directed and controlled.” The controlling interest in the organization implements corporate governance. When control of the corporation is separate from its ownership, how does the latter get to know if management is protecting owners’ primary interest – maximizing share value. Paul Johnson (2008) defines the principal-agent problem as the task of structuring incentives so that management, under a contractual obligation, uses corporate resources in the interest of the corporation over personal interests. Through time, the majority stockholders have devised ways to maintain their control over the corporation at the same time allowing development of managerial capability and expertise. Ross, Westerfield and Jaffe (2005, p. 15) listed several control devices: 1) Shareholders vote and determine the membership of the Board of Directors. 2) Compensation and stock option plans serve as incentives for management to follow the objectives of the stockholders. 3) Headhunters make the competition in the managerial labor market very stiff. 4) Poor management can led to low stock prices and make the company a target of a takeover leading to loss of jobs for managers ad employees of the company. The separation of ownership and control is also significant due to the renewed interest in ethics and corporate social responsibility. Mc Shane and Von Glinow (2005, p. 17) said Enron and Worldcom are monumental examples of bankruptcies in the United States resulting from unethical practices of corporate executives. Furthermore, they said that customers and companies prefer to work with companies perceived as “socially responsible companies.” McShane and Von Glinow (2005, p. 18) also cited a study of 1,000 chief executive officers around the world who expressed the opinion corporate social responsibility is important in achieving profitability for their respective organizations. Stockholders’ concern for wealth maximization as well as current pressures on corporations to practice ethical standards and corporate social responsibilities bring us back to the work of Berle and Means. They cited the phenomenon of control separating from ownership as a subject of historical and sociological consequence. Today, their warnings also serve as reminders of how managers can control the corporation and serve their own interests instead of that of the shareholders. However, Hannah did not conclude on the separation of ownership and control. He stated that “metaphors of divorce, which imply a decisive transition to a preferred state, also seem rather inappropriate …” Instead, Hannah recommended that further studies on this subject matter. References HANNAH, L., April 2007. The divorce of ownership from control from 1900 onwards: Re-calibrating imagined global trends. Business History, Vol 49, No 4, July 2007, 404-438. Retrieved March 1, 2008, from http://www.e.u-tokyo.ac.jp/cirje/research/03research02dp.html JOHNSON, PAUL, 2005. A glossary of political economy terms. Department of Political Science, Auburn University, Auburn, AL. Retrieved March 1, 2008, from http://www.auburn.edu/~johnspm/gloss/agency_problem MCSHANE, S.L., VON GLINOW, M.A. 2005. Organizational behavior: Emerging realities for the workplace revolution, 3rd ed. New York: McGraw-Hill Education (Asia). MIZRUCHI, M. S., 2004. Berle and Means revisited: the governance and power of large U.S. corporations, University of Michigan, April 2004. Retrieved on March 1, 2008, from www-personal.umich.edu/~mizruchi/tsweb.pdf ROSS, S., WESTERFIELD, R. & JAFFE, J. 2005. Corporate finance, 7th ed., New York: McGraw-Hill. THE UNIVERSITY OF TECHNOLOGY SYDNEY’S CENTRE FOR CORPORATE GOVERNANCE (2008), The significance of corporate governance. Retrieved March 1, 2008, from http://www.ccg.uts.edu.au/corporate_governance.htm