Separation of Ownership and Control

Background

The term “separation of ownership and control” refers to the division between the individuals or entities that own the shares of a corporation (shareholders) and those who are appointed to manage the corporation’s operations (managers).

Historical Context

This phenomenon became increasingly evident with the rise of large corporations in the late 19th and early 20th centuries. The growing complexity and scale of business operations necessitated a division, where ownership could be widespread amongst many shareholders, while a distinct cadre of professional managers took on the responsibility of operating the company.

Definitions and Concepts

Separation of ownership and control highlights the principal-agent problem, where the principals (shareholders) must trust agents (managers) to act in the shareholders’ best interests, often leading to potential conflicts of interest and agency costs.

Major Analytical Frameworks

Classical Economics

Overview: Advocates limited government intervention and stressed the importance of free markets. The separation of ownership and control was not a significant concern in this period because businesses were typically owner-operated.

Neoclassical Economics

Overview: Emphasizes the formalization of economic models with a focus on equilibrium.
Relevance: It sheds light on how incentive structures can align managers’ actions with shareholders’ expectations to optimize organizational performance.

Keynesian Economics

Overview: Argues for increased government intervention and regulation.
Relevance: Views managerial behavior in terms of broader economic cycles, affecting investment and the behavior of firms.

Marxian Economics

Overview: Focuses on class struggle and the dynamics of capitalism.
Relevance: Considers the separation as a consequence of capital concentration, underlining issues of exploitation and unequal power dynamics.

Institutional Economics

Overview: Examines the role of institutions in shaping economic behavior.
Relevance: Analyzes how legal frameworks and governance structures influence the separation of ownership and control.

Behavioral Economics

Overview: Explores the psychological factors impacting economic decisions.
Relevance: Investigates how cognitive biases and heuristics affect the decisions of managers versus shareholders.

Post-Keynesian Economics

Overview: Emphasizes real-world and institutional factors affecting the economy.
Relevance: Critically evaluates the practical impact of the separation on corporate behavior and economic stability.

Austrian Economics

Overview: Advocates for individual choice and market processes without government interference.
Relevance: Discusses the entrepreneurial role and the potential impact of bureaucratic management on business efficiency.

Development Economics

Overview: Focuses on improving conditions in developing countries.
Relevance: Considers how corporate governance practices can influence investment and economic growth in developing regions.

Monetarism

Overview: Emphasizes the role of governments in controlling the amount of money in circulation.
Relevance: Regards firm behavior, including the separation of ownership and control, in the context of monetary policy and financial stability.

Comparative Analysis

Different economic traditions provide diverse perspectives on the implications of the separation of ownership and control, whether it’s the internal efficiencies questioned by Neoclassical Economics, the systemic outcomes scrutinized by Marxian economists, or the institutional mechanisms highlighted by Institutional Economics.

Case Studies

Enron Scandal: A stark example of the failure of corporate governance where managerial malfeasance led to significant shareholder loss.
Apple Inc.: Presents a complicated but successful navigation of management and shareholder interests.
Volkswagen Emissions Scandal: Explores the repercussions of a failure in oversight and control within large corporations.

Suggested Books for Further Studies

Agency Theory: An Assessment and Review by Jensen & Meckling
The Modern Corporation and Private Property by Adolf Berle and Gardiner Means
Corporate Governance by Robert A.G. Monks and Nell Minow

Agency Costs: The costs associated from resolving conflicts between shareholders and managers.
Corporate Governance: The system of rules, practices, and processes by which a company is directed and controlled.
Principal-Agent Problem: The problem of directors (agents) self-interestedly, rather than acting for the benefit of those they are supposed to represent (principals).