The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means published in 1932 regarding the foundations of United States corporate law. 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.[1]' The Modern Corporation and Private Property, first brought forward issues associated with the widely dispersed ownership of publicly traded companies.[1]' Berle and Means showed that the means of production in the US economy were highly concentrated in the hands of the largest 200 corporations, and within the large corporations, managers controlled firms despite shareholders' formal ownership.[1] Compared to the notion of personal private property, say as 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.
"“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... [Such owners] have surrendered the right that the corporation should be operated in their sole interest...” [2]“the owners most emphatically will not be served by a profit seeking controlling group”.[3]"
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
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.
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.”[5]
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.”
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 corporation, 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 raised 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.”[6]
“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 system, the basis of the industrial revolution, brought an increasingly large number of workers directly under a single management.
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 liability 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.”[19]
In the United States, particularly at the time Berle and Means were writing[20] they noted two things which particularly compromised shareholder's power: vote by proxy and restrictions on removing directors.
Book III, Property in the Stock Markets
Book III's full title is "Property in the Stock Markets: Security exchanges as appraisers and liquidators".
I The function of the public market
II Flotation and bankers' disclosure
III Disclosure by the corporation to the market
IV Management in the market
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.”
See also
- History of economic thought
External links
References
- Scott Hirst, Lucian Bebchuk, Alma Cohen. The Agency Problems of Institutional Investors Journal of Economic Perspectives, 2017-07-01^
- at 355 of the 1932 edition^
- 114^
- This was an article published separately and earlier as AA Berle, 'Property, Production and Revolution' (1965) 65 Columbia Law Review 1