Divorce between Ownership and Control
The concept of "Divorce between Ownership and Control" refers to the separation of ownership and decision-making control in a business. This occurs when shareholders (owners) delegate decision-making authority to professional managers. This separation can lead to agency problems, where managers may not always act in the best interests of the shareholders.
4 Key excerpts on "Divorce between Ownership and Control"
eBook - ePubHostile Business and the Sovereign State
Privatized Governance, State Security and International Law
- Michael J. Strauss(Author)
- 2018(Publication Date)
- Routledge(Publisher)
...Numerous business scholars continue to view as valid the argument made in the 1930s by Adolf A. Berle Jr. and Gardiner C. Means: The stockholder is (…) left as a matter of law with little more than the loose expectation that a group of men, under a nominal duty to run the enterprise for his benefit and that of others like him, will actually observe this obligation. (…) We have reached a condition in which the individual interest of the shareholder is definitely made subservient to the will of a controlling group of managers even though the capital of the enterprise is made up out of the aggregated contribution of perhaps many thousands of individuals. 6 The notion that control of a share-issuing company can be separated from its ownership was perhaps most famously elaborated by Karl Marx in discussing the relationship between the owners of a company’s shares and the operation of the company itself 7 – the capital being “another’s property” that is alienated from “the individuals actually at work in production, from the manager down to the last day laborer.” 8 In today’s world, there is little doubt that the separation of ownership and managerial control is a frequent occurrence in business, although it is impossible to measure in a generalized way because of the number of variables that affect it, including within companies themselves. At the level of states, Alessio M. Pacces notes that corporate laws in some nations give boards of directors sufficient power “to make managerial control of publicly held corporations viable,” while in other countries this is not the case and governance is necessarily retained by the shareholders...
eBook - ePubRethinking Corporate Governance
The Law and Economics of Control Powers
- Alessio Pacces(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...Corporate law is a source of entitlements to firm control independent of corporate ownership, affecting the distribution of powers between the corporate controller and non-controlling owners. Once shareholders have been protected from expropriation of their investment, distribution of corporate powers determines the degree of separation of ownership and control that can be afforded by entrepreneurs concerned with their control rents. The prediction is partly novel: although the importance of distribution of legal powers for separation of ownership and control has been highlighted by the literature, no connection with the role of control rents in corporate governance has yet been made. 32 3.7.2.1 Theoretical Background Low diversionary PBC are a necessary, but not sufficient, condition for separation of ownership and control. Idiosyncratic PBC must also be considered. Their protection is necessary to motivate the undertaking of highly uncertain business requiring unobservable and unverifiable firm-specific investments. Having these investments combined with separation of ownership and control requires that entitlements to control rents be available to a corporate controller who is not also the corporate owner. These entitlements need to be stable over time (for otherwise control rents risk being eventually expropriated by the owners taking over), and thus must be legal in character. They determine a range of alternative distributions of legal powers between the corporate controller and the corporate owners. Legal devices aimed at empowering corporate controllers, freeing them from non-controlling shareholders’ interference, basically comes in two forms: (a) separation of voting rights from ownership claims; and (b) separation of control rights from voting rights (Becht and Mayer 2001)...
eBook - ePubCorporate Level Strategy
Theory and Applications
- Olivier Furrer(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...The continental European approach instead is based on ownership by large investors but participation by other stakeholders, which matches significant control rights with significant cash flow rights. Shleifer and Vishny (1997) argue that a good corporate governance system should combine both approaches, with both ownership concentration and legal protection of the rights of all stakeholders. Corporations in the U.S., Germany, and Japan rely on somewhat different combinations of legal protections and concentrated ownership, but they generally possess at least some elements of both; in stark contrast, countries with weak governance systems usually lack at least one of these two elements (Shleifer & Vishny, 1997). Diversified firms in particular commonly use three internal and one external governance mechanism: (1) ownership concentration, as represented by the types of shareholders and their different incentives to monitor managers, (2) the board of directors, and (3) executive compensation, as well as (4) the market for corporate control, as we discussed in Chapter 2. Internal governance Ownership concentration The relative amount of stock owned by individual shareholders and institutional investors determines the ownership concentration (Hitt et al., 2004). In general, diffuse ownership, characterized by a large number of shareholders, each of which owns a few shares, produces weak monitoring of managers’ decisions, because these diffuse shareholders cannot effectively coordinate their actions. Without sufficient monitoring, managers might pursue strategic decisions that harm shareholder value, such as over-diversification. Empirical evidence confirms that ownership concentration is associated with lower levels of firm product diversification (Chen & Ho, 2000 ; Hoskisson et al., 1994)...
eBook - ePubThe Changing Face of Corporate Ownership
Do Institutional Owners Affect Firm Performance
- Michael J. Rubach(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...CHAPTER 2 Institutional Ownership and Corporate Governance AT&T’s payment of a $5.2 million bonus to its CEO in a year the company barely breaks even is publicly criticized; the composition and structure of the boards of directors of Disney and Archer-Daniels-Midland are under attack; and K-Mart’s and Woolworth’s business strategies are questioned following poor earnings performances. In each of these instances, the attacks and pressures to change are coming from a source not previously perceived as a participant in corporate strategy and policy matters: the institutional owner. Fundamentally, where and how an organization operates and how its performance is measured are responsive to the will of its owners. The increasing presence of institutional owners is altering the ownership structure of firms, which may alter corporate strategies and policies. As ownership changes, how, where, and why firms compete may also change. 11 Corporate governance investigates the internal functioning of business corporations and how corporate strategies are determined. The central issues of corporate governance involve who controls the corporation, who makes the critical strategic decisions, who is responsible for those decisions, and who has claims against the revenues and assets of the firm. 12 An organization’s ownership structure, a major element of its corporate governance, often determines whether the firm is successful. Berle and Means were the foremost, if not the first, commentators to identify the corporate governance paradigm that recognizes a separation of ownership from control. 13 The Berle-Means paradigm is often referred to as “managerialism” and the period of its ascendancy is dubbed the “managerial era.” 14 In this paradigm, shareholders, although the owners of the corporation, typically do not control policy making or strategic decision making within the corporation. The management team is recognized as the group which controls corporate decision making...
