Ownership and Control

Who controls corporations? In whose interests do they act and with what consequences for the strategies of firms, their economic performance, and the wealth of nations and groups and classes within and across nations? What has been called the ownership and control debate stretches across all these areas and is therefore central to many key issues in the study of organizations. Key to this debate is the idea of a historical transition in the nature of firms. Before this transition took place, it is argued, firms were owned by the same person or family that managed them. In this sense, there could be no structural differentiation between ownership and control as they both lay in the same hands. However, as firms grow in size and complexity, family control tends to weaken. Outside capital is sought in order to fund growth or allow the family to exit business responsibilities. Shares are sold to a variety of investors, ranging from individuals to big institutions. The firm is no longer controlled in its day-to-day operations by owners but by professional managers.

The earliest discussion of the ownership and control debate, in the work of Berle and Means from 1932, argued that this trend meant that corporations were more in the hands of managers than owners. Berle and Means saw this as a beneficial move as managers were more likely to act in the interests of all the stakeholders in society, not just owners. Although later authors, such as the Marxist James Burnham in his 1962 work, attacked the naïveté of Berle and Means, arguing that managers constituted a class in themselves and would use their power to expropriate surpluses (an argument also made by Nichols in 1968), the idea of a new age of managerial dominance in which the goals of owners would become secondary was common in the 1950s and 1960s. Since the 1980s, however, this argument has been attacked. The main reason for this attack has been a reassertion of the rights of ownership. Firms have been subjected to pressure to deliver shareholder value above all other considerations. Failure to do so results in falling share prices and the firm being laid open to takeover. This is linked to the reemergence of liberal market ideas, which stress that it is through these market mechanisms that economic efficiency arises. The pendulum has swung back toward owners now having the dominant control power and managers having little autonomy. The main difference from the situation that Berle and Means described is that now the rights of ownership are vested in institutional investors, the funds for which derive predominantly from the savings of the broader population. In current parlance, the relationship between owners and managers is referred to as the agency problem. The principals (owner shareholders) employ agents (managers) to run the firm and exercise day-to-day control. How do the principals ensure that the agents act in the principals' interests?