divorce of ownership from control

divorce of ownership from control

a situation where although a firm is owned by its SHAREHOLDERS it is actually controlled by the firm's management (the board of directors, appointed by the shareholders at the annual general meeting to run the business on their behalf). Because the average size of individual shareholdings tends to be small and shareholders are remote from day-to-day decision-making, it is the firm's management that effectively determines the policies of the firm. Recognition of the control power exercised by management has led economists to develop theories of the firm that substitute managerial objectives for the traditional hypothesis of PROFIT MAXIMIZATION. (See MANAGERIAL THEORIES OF THE FIRM.)

It is to be noted, however, that two trends make a reconvergence of ownership and control more likely:

  1. the growing concentration of equity shares in the hands of the INSTITUTIONAL INVESTORS (pension funds, unit trusts, etc.) who may use their considerable voting power to exert pressure on boards of directors to adopt policies favourable to shareholder interests;
  2. the introduction of arrangements (see EXECUTIVE SHARE OPTION SCHEMES, LONG-TERM INCENTIVE PLANS) that award shares in the company to directors who meet various financial performance targets of interest to shareholders. See PRINCIPAL-AGENT THEORY, CORPORATE CONTROL.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005