The Modern Corporation and Private Property
Encyclopedia
The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means
published in 1932. It explores the evolution of big business through a legal and economic lens, and argues that in the modern world those who legally have ownership over companies have been separated from their control. The second, revised edition was released in 1967. It serves as a foundational text in corporate governance
, corporate law
(company law), and institutional economics
.
Berle and Means argued that the structure of corporate law
in the United States
in the 1930s enforced the separation of ownership
and control
because the corporate person formally owns a corporate entity even while shareholders own shares in the corporate entity and elect corporate directors who control the company's activities. Compared to the traditional notion of property, say over one's laptop or bicycle, the functioning of modern company law “has destroyed the unity that we commonly call property
”. This occurred for a number of reasons, foremost being the dispersal of shareholding ownership in big corporations: the typical shareholder is uninterested in the day to day affairs of the company, yet thousands of people like him or her make up the majority of owners throughout the economy. The result is that those who are directly interested in day to day affairs, the management
and the directors
, have the ability to manage the resources of companies to their own advantage without effective shareholder scrutiny.
Berle and Means researched the consequences of ownership and control being separate. As businesses grow and shareholders increase in number, any shareholdings that directors have will be a proportionally smaller capital stake. Directors' income will derive mostly from return on their labor as directors, not from their capital investment. If their motivation is purely pecuniary
The implications of their work were clear. Berle and Means advocated embedded voting rights for all shareholders, greater transparency, and accountability. However, with the release of the revised edition, Berle and Means also pointed to the disparity that existed between those who did have shareholdings and those who did not.
Murray Weidenbaum and Mark Jensen have added their introduction to more recent editions of the text. It casts a thoroughly skeptical perspective on the book, since the two came from very different academic perspectives, generally more orthodox and conservative in their outlook politically.
Property, Production and Revolution - A Preface to the Revised Edition by Adolf A. Berle
For the 1967 Revised Edition, Berle added a new Preface, updating the picture and bringing in new arguments and observations. He summed up the whole point of the book at the same time, making it a valuable adjunct to the text. "Why have stockholders?" he asked.
The position of stockholders' profit, said Berle,
Implications of the Corporate Revolution in Economic Theory by Gardiner C. Means
Preface (1932)
Tables and charts
, the very institution of private property has been fundamentally altered.
Berle and Means continue by emphasizing how increasing dispersion of stock ownership under a shareholder public is necessary for those in control to enforce their position. Even if they have minority shareholding, the public so widespread is not in a position to be organized to hold those who handle their investments to account. The divergence of interest between owners and controllers,
Shareholders, it is stated
A number of consequences result, the fifth being that,
While land
could be enjoyed whatever its market value, Berle and Means point out that shares
cannot. The fact that so much wealth is in shares means we are tied to the market in a way we never have been before.
Berle and Means note the development of Voting trust
s, which initially met bitter opposition, being declared illegal by courts. This was the practice whereby voting powers were transferred from the stockholder to a trustee for a fixed period. State legislatures were needed to authorize their use, after Delaware
allowed them but other courts struck them down.
Berle and Means also deployed, uniquely, the concept of a shareholder's "rational apathy".
for stockholders.
In the United States, particularly at the time Berle and Means were writing they noted two things which particularly compromised shareholder's power: vote by proxy and restrictions on removing directors. So far as for what objectives the company pursues they say,
's oft cited disdain for joint stock companies, the idea that "negligence and profusion" would always prevail. They again emphasise the distinction between active and passive property.
Appendixes
Statistical Appendix to Revised Edition by Gardiner C. Means
Table of Cases
Table of Companies
Gardiner Means
Gardiner C. Means was an American economist. He worked at Harvard University where he met Adolf Berle. Together they wrote the seminal work of corporate governance, The Modern Corporation and Private Property. Means followed the institutionalist tradition of economists...
published in 1932. It explores the evolution of big business through a legal and economic lens, and argues that in the modern world those who legally have ownership over companies have been separated from their control. The second, revised edition was released in 1967. It serves as a foundational text in corporate governance
Corporate governance
Corporate governance is a number of processes, customs, policies, laws, and institutions which have impact on the way a company is controlled...
, corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
(company law), and institutional economics
Institutional economics
Institutional economics focuses on understanding the role of the evolutionary process and the role of institutions in shaping economic behaviour. Its original focus lay in Thorstein Veblen's instinct-oriented dichotomy between technology on the one side and the "ceremonial" sphere of society on the...
.
Berle and Means argued that the structure of corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
in the 1930s enforced the separation of ownership
Ownership
Ownership is the state or fact of exclusive rights and control over property, which may be an object, land/real estate or intellectual property. Ownership involves multiple rights, collectively referred to as title, which may be separated and held by different parties. The concept of ownership has...
and control
Control (management)
Controlling is one of the managerial functions like planning, organizing, staffing and directing. It is an important function because it helps to check the errors and to take the corrective action so that deviation from standards are minimized and stated goals of the organization are achieved in...
because the corporate person formally owns a corporate entity even while shareholders own shares in the corporate entity and elect corporate directors who control the company's activities. Compared to the traditional notion of property, say over one's laptop or bicycle, the functioning of modern company law “has destroyed the unity that we commonly call property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
”. This occurred for a number of reasons, foremost being the dispersal of shareholding ownership in big corporations: the typical shareholder is uninterested in the day to day affairs of the company, yet thousands of people like him or her make up the majority of owners throughout the economy. The result is that those who are directly interested in day to day affairs, the management
Management
Management in all business and organizational activities is the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively...
and the directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
, have the ability to manage the resources of companies to their own advantage without effective shareholder scrutiny.
“The property owner who invests in a modern corporation so far surrenders his wealthWealthWealth is the abundance of valuable resources or material possessions. The word wealth is derived from the old English wela, which is from an Indo-European word stem...
to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capitalCapital (economics)In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
... [Such owners] have surrendered the right that the corporation should be operated in their sole interest...”
Berle and Means researched the consequences of ownership and control being separate. As businesses grow and shareholders increase in number, any shareholdings that directors have will be a proportionally smaller capital stake. Directors' income will derive mostly from return on their labor as directors, not from their capital investment. If their motivation is purely pecuniary
“the owners most emphatically will not be served by a profitProfit (accounting)In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
seeking controlling group”.
The implications of their work were clear. Berle and Means advocated embedded voting rights for all shareholders, greater transparency, and accountability. However, with the release of the revised edition, Berle and Means also pointed to the disparity that existed between those who did have shareholdings and those who did not.
Introductory
Introduction by Murray Weidenbaum and Mark JensenMurray Weidenbaum and Mark Jensen have added their introduction to more recent editions of the text. It casts a thoroughly skeptical perspective on the book, since the two came from very different academic perspectives, generally more orthodox and conservative in their outlook politically.
Property, Production and Revolution - A Preface to the Revised Edition by Adolf A. Berle
For the 1967 Revised Edition, Berle added a new Preface, updating the picture and bringing in new arguments and observations. He summed up the whole point of the book at the same time, making it a valuable adjunct to the text. "Why have stockholders?" he asked.
"What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, neither do they spin, to earn that reward. They are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.”
The position of stockholders' profit, said Berle,
“can be founded only upon social grounds. There is... a value attached to individual life, individual development, individual solution of personal problems, individual choice of consumption and activity. Wealth unquestionably does add to an individual’s capacity and range in pursuit of happiness and self-development. There is certainly advantage to the community when men take care of themselves. But that justification turns on the distribution as well as the existence of wealth. Its force exists only in direct ratio to the number of individuals who hold such wealth. Justification for the stockholder’s existence thus depends on increasing distribution within the American population. Ideally the stockholder’s position will be impregnable only when every American family has its fragment of that position and of the wealth by which the opportunity to develop individuality becomes fully actualized.”
Implications of the Corporate Revolution in Economic Theory by Gardiner C. Means
Preface (1932)
Tables and charts
Book I, Property in Flux
Book I is entitled, "Property in Flux: Separation of the attributes of ownership under the corporate system" and provides a general picture of the shifting economic power structure that Berle and Means observed.I Property in transition
This first chapter explores the basic thesis of Berle and Means, that with the emergence of the corporationCorporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, the very institution of private property has been fundamentally altered.
“In its new aspect the corporation is a means whereby the wealth of innumerable individuals has been concentrated into huge aggregates and whereby control over this wealth has been surrendered to a unified direction. The power attendant upon such concentration has brought forth princes of industry, whose position in the community is yet to be defined. The surrender of control over their wealth by investors has effectively broken the old property relationships and has raise the problem of defining these relationship anew. The direction of industry by persons other than those who have ventured their wealth has raised the question of the motive force back of such direction and the effective distribution of the returns from business enterprise.”
“Such an organization of economic activity rests upon two developments, each of which has made possible an extension of the area under unified control. The factory systemFactory systemThe factory system was a method of manufacturing first adopted in England at the beginning of the Industrial Revolution in the 1750s and later spread abroad. Fundamentally, each worker created a separate part of the total assembly of a product, thus increasing the efficiency of factories. Workers,...
, the basis of the industrial revolutionIndustrial RevolutionThe Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
, brought an increasingly large number of workers directly under a single management. Then, the modern corporation, equally revolutionary in its effect, placed the wealth of innumerable individuals under the same central control. By each of these changes the power of those in control was immensely enlarged and the status of those involved, worker or property owner, was radically changed. The independent worker who entered the factory became a wage laborer surrendering the direction of his labor to his industrial master. The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital.”
Berle and Means continue by emphasizing how increasing dispersion of stock ownership under a shareholder public is necessary for those in control to enforce their position. Even if they have minority shareholding, the public so widespread is not in a position to be organized to hold those who handle their investments to account. The divergence of interest between owners and controllers,
“has destroyed the unity that we commonly call property - has divided ownership into nominal ownership and the power formerly joined to it. Thereby the corporation has changed the nature of profit-seeking enterprise.”
“Private enterprise, on the other hand, has assumed an owner of the instruments of production with complete property rights over those instruments... Whereas the organization of feudal economic life rested upon an elaborate system of binding customs, the organization under the system of private enterprise has rested upon the self interest of the property owner - a self interest held in check only by competitionCompetition (economics)Competition in economics is a term that encompasses the notion of individuals and firms striving for a greater share of a market to sell or buy goods and services...
and the conditions of supply and demandSupply and demandSupply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
... Such self interest has long been regarded as the best guarantee of economic efficiency. It has been assumed that, if the individual is protected in the right both to use his own property as he sees fit and to receive the full fruits of its use, his desire for personal gain, for profits, can be relied upon as an effective incentive to his efficient use of any industrial property he may possess.”
Shareholders, it is stated
“cannot be motivated by those profits to a more efficient use of the property, since they have surrendered all disposition of it to those in control of the enterprise.”
III The concentration of economic power
This part proceeds to emphasize the ubiquity of corporations in production in the modern economy.
“These great companies form the very framework of American industry. The individual must come in contact with them almost constantly. He may own an interest in one or more of them, he may be employed by one of them, but above all he is continually accepting their service.”
“In conclusion, then, the huge corporation, the corporation with $90m of assets or more, has come to dominate most major industries if not all industryIndustryIndustry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...
in the United States.”
A number of consequences result, the fifth being that,
“The economic power in the hands of the few persons who control a giant corporation is a tremendous force which can harm or benefit a multitude of individuals, affect whole districts, shift the currents of trade, bring ruin to one community and prosperity to another. The organizations which they control have passed far beyond the realm of private enterprise - they have become more nearly social institutions.”
IV The dispersion of stock ownership
In this Chapter, Berle and Means present considerable statistical evidence of the growing dispersion of stock ownership around the economy. They draw a distinction between "passive" property, or that which merely sits idle or is consumed, and "productive" property, which is actually employed to create more wealth. They say,
“over the enterprise and over the physical property - the instruments of production - in which he has an interest, the owner has little control. At the same time he bears no responsibility with respect to the enterprise or its physical property. It has often been said that the owner of a horse is responsible. If the horse lives he must feed it. If the horse dies he must bury it. No such responsibility attaches to a share of stockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
. The owner is practically powerless through his own efforts to affect the underlying property... Physical property capable of being shaped by its owner could bring to him direct satisfaction apart from the income it yielded in more concrete form. It represented an extension of his own personality. With the corporate revolution, this quality has been lost to the property owner much as it has been lost to the worker through the industrial revolution.”
While land
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
could be enjoyed whatever its market value, Berle and Means point out that shares
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
cannot. The fact that so much wealth is in shares means we are tied to the market in a way we never have been before.
V The evolution of control
This chapter traces the power that shareholders have to control managers. The most important instrument is the vote, and they note,“In contrast to non-voting preferred, the use of non-voting common stock has met with considerable disfavor. Both the New York Stock ExchangeNew York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
and the New York Curb have refused to list new issues of non-voting common stockCommon stockCommon stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
; for practical purposes, this would seem to have eliminated the use of this device on any large scale in the immediate future.”
Berle and Means note the development of Voting trust
Voting trust
A voting trust is a trust whereby the shares in a company of one or more shareholders and the voting rights attached thereto are legally transferred to a trustee, usually for a specified period of time . In some voting trusts, the trustee may also be granted additional powers...
s, which initially met bitter opposition, being declared illegal by courts. This was the practice whereby voting powers were transferred from the stockholder to a trustee for a fixed period. State legislatures were needed to authorize their use, after Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
allowed them but other courts struck them down.
Berle and Means also deployed, uniquely, the concept of a shareholder's "rational apathy".
"the normal apathy of the small stockholder is such that he will either fail to return his proxy vote, or will sign on the dotted line, returning his proxy to the [management] of the corporation."
VI The divergence of interest between ownership and control
On the divergence of interest, Berle and Means' central question is,
“have we any justification for assumption that those in control of a modern corporation will also choose to operate it in the interests of the owners? The answer to this question will depend on the degree to which the self-interest of those in control may run parallel to the interests of ownership and, insofar as they differ, on the checks on the use of power which may be established by political, economic, or social conditions... If we are to assume that the desire for personal profit is the prime force motivating control, we must conclude that the interests of control are different from and often radically opposed to those of ownership; that the owners most emphatically will not be served by a profit-seeking controlling group.”
Book II, Regrouping of Rights
Book II's full title is, "Regrouping of Rights: Relative legal position of ownership and "control“". Its subject is to explore the change in the balance of power between shareholders and the board of directors.I Evolution of the modern corporate structure
Berle and Means begin by setting the context of the company's formation. Originally the company was granted privileges to be a separate legal person and carry on business, to sue and be sued and these rights usually went with the grant of a monopoly. The monopolies were no longer used now. But then came the easy registration of companies and limited liabilityLimited liability
Limited liability is a concept where by a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a company or partnership with limited liability. If a company with limited liability is sued, then the plaintiffs are suing the company, not its...
for stockholders.
“From all this necessarily flowed a limited liability of the associates. Since only the entity was liable for debts, which did not attach to the various individuals, it followed that a stockholder was not normally liable for any of the debts of the enterprise; and he could thus embark a particular amount of capital in the corporate affairs without becoming responsible beyond this amount, for the corporate debts.”
In the United States, particularly at the time Berle and Means were writing they noted two things which particularly compromised shareholder's power: vote by proxy and restrictions on removing directors. So far as for what objectives the company pursues they say,
“The present corporation’s objects and the nature of the business in which (so far as the charter goes) it can engage are commonly limited only by the imagination of its organizing attorneys and their ability to embrace the world within the limits of the English language.”
VIII The resultant position of the stockholder
Berle and Means contrast the position of the owner of shares (passive property) and the owner of a horse (an example of active property). The one with the horse is ‘married’ to his physical property and must take responsibility for it. The stockholder's position is different.
“The liquidity of property thus turns upon the determination of a market price and the mechanism for such price-determining is the open market. Curious as it may seem, the fact appears to be that liquid property, at least under the corporate system, obtains a set of values in exchange, represented by market prices, which are not immediately dependent upon, or at least only obliquely connected with, the underlying values of the properties themselves.”
Book III, Property in the Stock Markets
Book III's full title is "Property in the Stock Markets: Security exchanges as appraisers and liquidators".Book IV, Reorientation of Enterprise
Book IV, entitled "Reorientation of Enterprise: Effects of the corporate system on fundamental economic concepts" is the shortest and aims to reassess some basic concepts in economic theory in light of the emergence of the corporation.I The traditional logic of property
The traditional logic of property is that one will get all the gains and bear the losses associated with ownership. But now, since ownership has been separated from control, this no longer holds true.II The traditional logic of profits
The traditional logic of profits, say Berle and Means, is that one will be motivated by the prospect of profiting from one's property. But again, with the separation of ownership from control, it is possible for managers to profit without working in shareholders' interests.
“Where such a separation is complete one group of individuals, the security holders and in particular the stockholders, performs the function of risk-takers and suppliers of capital, while a separate group exercises control and ultimate management. In such a case, if profits are to be received only by the security holders, as the traditional logic of property would require, how can they perform both of their traditional economic roles? Are no profits to go to those who exercise control and in whose hands the efficient operation of enterprise ultimately rests? ...Furthermore, if all profits are earmarked for the security holder, where is the inducement for those in control to manage the enterprise efficiently? When none of the profits are to be received by them, why should they exert themselves beyond the amount necessary to maintain a reasonably satisfied group of stockholders.”
III The inadequacy of traditional theory
Berle and Means go right back here to Adam SmithAdam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
's oft cited disdain for joint stock companies, the idea that "negligence and profusion" would always prevail. They again emphasise the distinction between active and passive property.
IV The new concept of the corporation
This concluding part brings together the general thesis of the book. They finish by saying,
"The rise of the modern corporation has brought a concentration of economic power which can compete on equal terms with the modern state - economic power versus political power, each strong in its own field. The state seeks in some aspects to regulate the corporation, while the corporation, steadily becoming more powerful, makes every effort to avoid such regulation... The future may see the economic organism, now typified by the corporation, not only on an equal plane with the state, but possibly even superseding it as the dominant form of social organization. The law of corporations, accordingly, might well be considered as a potential constitutional law for the new economic state, while business practice is increasingly assuming the aspect of economic statesmanship.”
Appendixes
Statistical Appendix to Revised Edition by Gardiner C. Means
Table of Cases
Table of Companies