Berle and Means Discuss Corporate Control

Adolf A. Berle, Jr., and Gardiner C. Means drew national attention to emerging corporate centralism in the United States with their book The Modern Corporation and Private Property, setting the stage for the development of new ideas and mechanisms to protect individuals’ property rights and interests.

Summary of Event

The 1932 publication of The Modern Corporation and Private Property by Adolf A. Berle, Jr., and Gardiner C. Means recognized and documented the corporate system that was gradually replacing the free enterprise system in the United States. The pioneering book brought to national attention the existence of a forceful trend that already had resulted in concentration of power and control. Such concentration of power within corporations was taking place at the cost of alienating a diverse group of owner-managers, innovators, and entrepreneurs, the same group of individuals who had made Adam Smith’s laissez-faire philosophy so workable. The thesis developed in the book has since become known as the paradigm of separation of ownership and control. According to this theory, the structure of corporate ownership, with numerous stockholders putatively owning companies that in fact were controlled by managers, led to owners’ having little control over their property. [kw]Berle and Means Discuss Corporate Control (1932)
[kw]Means Discuss Corporate Control, Berle and (1932)
[kw]Corporate Control, Berle and Means Discuss (1932)
Modern Corporation and Private Property, The (Berle and Means)
Business;corporate centralism
[g]United States;1932: Berle and Means Discuss Corporate Control[07910]
[c]Business and labor;1932: Berle and Means Discuss Corporate Control[07910]
[c]Economics;1932: Berle and Means Discuss Corporate Control[07910]
[c]Publishing and journalism;1932: Berle and Means Discuss Corporate Control[07910]
Berle, Adolf A., Jr.
Means, Gardiner C.
Jensen, Michael C.
Meckling, William H.

Berle and Means’s claims regarding the emerging economic, social, and political order fell on deaf ears for some time. Theirs was not the message that economists, and possibly other scholars, wanted to hear. The separation of ownership and control, and the consequential conflict of interest between managers and owners, meant that there was something very wrong with prevailing economic theories and practices. Accepted knowledge among economists, legal scholars, and policy makers was that corporate managers were hired by shareholders and therefore they would do their best to maximize shareholders’ wealth and welfare. The direct implication was that stockholders held real power as well as real wealth. They could hire and fire quickly and effectively without any adverse consequences on the company’s operations. Shareholders were assumed to be fully represented by their elected representatives on a corporation’s board of directors. Such boards were supposed to be free of any influences, threats, and possible manipulations that might be initiated by the managing directors.

Berle and Means, however, discovered a different picture. Shareholders did not appear to be exerting the natural control that would accompany the holding of property, in this case shares of common stock. Stockholders had become passive investors who did not—and in practice could not—have any say in the operation of the companies that they owned. It appeared that Adam Smith’s worst nightmare was in the making. He had warned about the potential conflict of interest in diversely owned corporations. Managers of other people’s money, rather than of their own, Smith wrote, are unlikely to exercise full care and vigilance because they will neither receive the benefit from such care nor suffer the losses resulting from poor management.

The statistical evidence and conclusions provided by Berle and Means regarding the emerging separation between ownership and control and the resultant changes in the structure of private ownership were irrefutable. Aside from the many changes occurring at the time in intellectual, judicial, and policy-making circles, the new trend toward a corporate state was gathering momentum.

The main thesis advanced in The Modern Corporation and Private Property was based on two major statistical observations. First, the American economic system showed trends of increasing concentration of wealth. Second, separation between ownership and control in the public corporation appeared to be expanding. Both developments seemed to be incompatible with the spirit of the free enterprise system.

It took more than a quarter of a century for the warnings and thoughts expressed by Berle and Means to sink in. Eventually, researchers and practitioners from the fields of economics and law started addressing the issues of ownership and control. Publication of “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure” “Theory of the Firm” (Jensen and Meckling)[Theory of the Firm] by Michael C. Jensen and William H. Meckling in the mid-1970’s elevated the separation of ownership and control paradigm to a new level of recognition, sophistication, and interest. This paper integrated elements from the fields of property rights, corporate finance, and agency relations to build a new theory of ownership structures of business enterprises. Jensen and Meckling based their work on the insights and realities recognized and outlined in The Modern Corporation and Private Property and provided new insights into changing relationships in ownership structure. Jensen and Meckling’s work resulted in numerous other studies on the subject. Almost all such studies tried to both downplay and justify the separation of management and control. For example, Eugene F. Fama introduced the idea of a “managerial labor market” as a mechanism for disciplining nonloyal and nonabiding managers. He assumed that such markets were efficient, and that shareholders therefore should not be concerned about any conflict of interest. Berle and Means’s work did not allow for any such mechanism.


At least two major contributions to the U.S. and world economies can be attributed to the publication of The Modern Corporation and Private Property. First is the fundamental impact the study had on the passage, as well as strengthening and modification, of U.S. federal legislation concerning corporate securities. Berle and Means’s book became the foundation for the 1933 Securities Act and the 1934 Securities Exchange Act. Securities Act (1933)
Securities Exchange Act (1934) The 1933 act dealt with full and truthful disclosure of material information concerning new securities sold in primary markets, and the 1934 act provided federal rules governing the sale of securities sold in secondary markets, including organized markets such as the New York Stock Exchange and the over-the-counter (OTC) markets. The 1934 act created the Securities and Exchange Commission Securities and Exchange Commission (SEC) to operate as a watchdog for the securities industry.

More important, The Modern Corporation and Private Property, along with similar studies it inspired, provided justification for the SEC to institute further regulations to protect the interests of stockholders against the discretionary power of managers. The role of the SEC in protecting stockholders’ interests became obvious when a frenzy of management-led special buyout arrangements surfaced in the 1980’s. Such deals, generally known as management buyouts Management buyouts (MBOs) or leveraged buyouts Leveraged buyouts (LBOs), were not all in the best interests of shareholders. In an MBO, the ruling management buys enough of the company’s shares from other investors to take control of the company. To finance the purchase, management may borrow needed funds from financial institutions. In such a case, the managers or other buyers leverage their capital by using the company as collateral for loans—thus the term “leveraged buyout” for this kind of takeover. A problem arises because the buying management has full and free access to all available information within the corporation, giving management an advantage over the selling parties, the shareholders. The buying management has a much better idea of the true worth of the company.

The second major contribution of The Modern Corporation and Private Property was the fact that the study acted as a forceful advocate for the free enterprise system in the United States and elsewhere. The book aroused awareness and curiosity among scholars and the general public. As part of the awareness exercise, Berle and Means explained the new corporate form as “a commercial instrument of formidable effectiveness, feared because of its power, hated because of the excesses with which the power was used, suspect because of the extent of its political manipulations within the political State, admired because of its capacity to get things done.”

The major concerns expressed by Berle and Means turned out to be justified. Transformation of the American economy to one of corporate dominance came close to becoming reality. The Modern Corporation and Private Property prompted systems of checks and balances to be designed and put in place, so that a complete change to insider control of American business never materialized.

One of the resultant movements was the formation in the United States of the United Shareholders Association United Shareholders Association (USA) in the 1980’s. This association of stockholders was built on the theses and principles discovered by Berle and Means in the early 1930’s. USA became a powerful voice in shaping public opinion regarding the massive power held by management in large corporations. It mobilized and united shareholders across the United States and educated them about how to watch after their interests in publicly held corporations. As a result, many combative corporate managers had no choice but to cooperate with shareholders or launch expensive proxy fights to keep their jobs. The shareholder revolt did not stop at the level of individual investors. Institutional investors such as pension funds and insurance companies, which by the 1980’s held a majority of outstanding common stock, also became active participants in running the companies in which they invested.

A drive toward entrepreneurialism and innovation beginning in the 1970’s also aided in taking power from large corporations and their management teams. That trend, which surfaced with full power in the late 1970’s in the United States, gathered strength, and its effects were seen through the end of the twentieth century and into the twenty-first. Corporate monoliths became susceptible to attack from such entrepreneurial companies as Apple Computer and Novell. This apparent reversal of power made traditional corporate power much more vulnerable and less secure. Managers in large corporations had greater reason not to ignore their fiduciary responsibility to shareholders, as executive jobs were not as well protected as they once were.

Berle and Means found an intellectual ally in Thomas Peters. In 1992, Peters published Liberation Management: Necessary Disorganization for the Nanosecond Nineties. The message of this book is very clear: Large corporations are a thing of the past. To stay competitive and agile, businesses must disorganize, shedding bureaucracy and allowing individual innovation and entrepreneurship. Top management should become much closer to the production lines—that is, it should be subject to close scrutiny by workers, owners, and other stakeholders. In such a world, the power of the corporate manager comes from below.

In large part as a result of awareness initiated by The Modern Corporation and Private Property, the trend toward corporate centralism was reversed. According to statistics published by the U.S. Small Business Administration, about 41 percent of all U.S. private sales in the early 2000’s were under management by smaller companies. In addition, small firms produced more than half of U.S. output and employed half of the private workforce. Trends appeared to favor smaller and entrepreneurial firms, which have relatively few problems with conflicts of interest. Modern Corporation and Private Property, The (Berle and Means)
Business;corporate centralism

Further Reading

  • Berle, Adolf A., and Gardiner C. Means. The Modern Corporation and Private Property. Rev. ed. New York: Harcourt, Brace, & World, 1968. This revised edition of Berle and Means’s classic work includes an introduction written by the authors in 1967. Appropriate for general readers as well as readers with background in economics.
  • Brown, Courtney C. Putting the Corporate Board to Work. New York: Macmillan, 1976. Presents a form of organization and practice—along with suggested reforms—that could correct shortcomings of the board-of-directors form of corporate control. Intended for corporate managers.
  • Freeland, Robert F. The Struggle for Control of the Modern Corporation: Organizational Change at General Motors, 1924-1970. New York: Cambridge University Press, 2001. Examines the nature of the modern corporation and how corporations have changed by focusing on the specific case of General Motors.
  • Herman, Edward S. Corporate Control, Corporate Power. New York: Cambridge University Press, 1981. A reassessment of Berle and Means’s work in the light of changes that occurred following World War II. Asserts that the power of government to restrict or limit corporate action is exaggerated and that corporations have remained faithful to their basic objective of profit maximization.
  • Jensen, Michael C., and William H. Meckling. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” In The Modern Theory of Corporate Finance, edited by Michael C. Jensen and Clifford W. Smith. New York: McGraw-Hill, 1984. Original publication of this pioneering work in the mid-1970’s effectively rejuvenated and placed in a new framework the principles and theses developed by Berle and Means. Successfully took the issues to a wider audience and developed new interest in the area. Recommended for readers with some background in economics and business.
  • Mason, Edward S., ed. The Corporation in Modern Society. Cambridge, Mass.: Harvard University Press, 1959. Collection of readings contains interesting pieces from both legal and economics scholars. The main purpose of the collection is to shed new light on issues related to ownership and control. Most contributions are accessible to general readers.
  • Mueller, Dennis C. The Modern Corporation. Lincoln: University of Nebraska Press, 1986. Discusses different frameworks and models in the theory of the firm and addresses some negative aspects of managerial capitalism. Intended for readers with background in business administration.
  • Peters, Thomas. Liberation Management: Necessary Disorganization for the Nanosecond Nineties. New York: Alfred A. Knopf, 1992. Envisions the future of corporations and management. Aimed at readers with ties to the business world.
  • Putterman, Louis, and Randall S. Kroszner, eds. The Economic Nature of the Firm: A Reader. 2d ed. New York: Cambridge University Press, 1996. Collection of classic papers on the topic of the economic nature of firms includes Jensen and Meckling’s “Theory of the Firm.” Intended for readers with backgrounds in business and economics.

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