The Economics Book

168

MANAGERS GO FOR

PERKS, NOT THEIR

COMPANY’S PROFITS

CORPORATE GOVERNANCE

M

ost people assume that

the basic principle of a

free market economy

is that companies are run by

management in the best interests

of the shareholders. According to

the US economists Adolf Berle and

Gardiner Means, this view is

entirely wrong. Their 1932 book,

The Modern Corporation and

Private Property, shined a light on

corporate governance and showed

how the balance of power had

swung from the owners of a

company toward the management.

Berle and Means claimed that the

dominance of management began

during the Industrial Revolution

with the emergence of the factory

system. An increasing number of

workers came together under one

roof, where they handed their labor

over to management in exchange

for a wage. Modern corporations

bring together the wealth of

innumerable individuals (the

shareholders). They hand control of

it to a small management group,

this time in return for a dividend.

Both result in a powerful

management answerable to no one.

Apathetic shareholders

Berle and Means identified modern

shareholders as passive owners.

These owners surrender their

wealth to the governance of the

company and no longer make

decisions about how to “look after”

their investments—they have

passed that responsibility, and that

power, to management. The apathy

of small-time shareholders results

in them either merely maintaining

the status quo or failing to exercise

their voting options. This may be

beyond their grasp in any case—

if they really wished to change

things, they would have to hold a

IN CONTEXT

FOCUS

Markets and firms

KEY THINKERS

Adolf Berle (1895 –1971)

Gardiner Means (1896–1988)

BEFORE

1602 The Dutch East India

Company is the first joint-stock

company to issue shares and

begins trading on the

Amsterdam Stock Exchange.

1929 The Dow Jones loses

50 percent of its value in one

day, Black Thursday, kick-

starting the Great Depression.

AFTER

1983 US economists Eugene

Fama and Michael Jensen

publish The Separation of

Ownership and Control,

viewing the company as a

series of contracts.

2002 The Sarbanes-Oxley

Act becomes law in the US,

laying down stricter standards

for US boardrooms.

The failure of corporate governance

became a big issue in 2008 when many

felt that the pay of top executives rose

out of proportion to their company’s

results and falling share prices.