Berle and Means book summary

Berle A.A. & Means G.C (1932). The Modern corporation and private property, Harcourt, Brace & World Inc.

Primary focus

• The focus of the book is to study the phenomenon of the nature of private property ownership and control in the modern corporation.

Key concepts

• Most owners of firms do not manage and most managers do not own, and this trend is increasing in the American corporation.
• The atom of property is split in terms of ownership and control. Ownership is getting increasingly diluted, owners are becoming less active and more passive, and control in the hands of management is getting increasingly concentrated. The former is acting as a centrifugal force and the latter as a centripetal force.
• This trend challenges the fundamental assumption that the owner of the property will put it to the most effective use. However in this case, the owners are becoming absolved of any responsibility.
• Page 41, 45 summarise the main trends in terms of concentration of control and chart 2 on page 61 shows the trend in dilution of ownership towards those with moderate means, with the trend summary on page 65.
• Different types of control – complete ownership, majority, legal device (pyramiding, non-voting stock), minority and management control are described.
• Different types of stock and their legal history is traced. Regrouping of rights is possible through various mechanisms including altering the contracts of rights.
• The legal position of management and control are examined. Security exchanges play the role of appraisers and liquidators. Processes of flotation and disclosure are looked at in detail.
• The traditional logic of ownership of property meant that the owner was taking the risk of investing the capital, and also the responsibility for the management of the enterprise, and hence must receive the advantages accruing from the property. The traditional logic of profits says that profits act as a return for the risk taken by the owner to invest his wealth and as an inducement to effectively manage. Since owners are surrendering control and therefore no longer taking any risk, therefore only a fair return to capital must be given to the owners and the remainder should go to control as an inducement to efficient management.
• At a macro level, this has ramifications for the political (by the state) or economic (by corporations) organization of society, which is expected to dominate?

Learnings

• From the perspective of a researcher, this book is revealing in terms of the level of analyses, and also in making the connections between the levels. (Firm level to aggregates of firm having macro influence on society and the national economy at large)
• One of the fundamental questions that is proposed define the field of strategic management is “How do firms behave?” (Rumelt, Schendel, Teece, 1994). This book by Berle and Means makes a contribution towards answering sub-questions of this fundamental research agenda by looking at the structure of firms in terms of ownership and control, and indicating what could be the driving forces for their behaviour.
• Structure follows strategy as per Chandler (1962), but this book gives us insights as to the existence of control structures through the element of ownership and not necessarily only management rationale.
• The Barnardian view of cooperation or organizing being the reason for the existence of the firm, one needs to look at it in terms of how this concept is organized around both ownership and control.
• When we speak of the “theory of the firm”, the sense seems to be in terms of what are the boundaries of control (Coase, 1937) or administrative influence (Penrose, 1959). Does it make sense to contemplate on the theory of the firm from a perspective of ownership as well?
• If all firms (all modern American corporations) are exhibiting a similar pattern, can we view this from a lens of isomorphism and institutional theory? Can we identify what legitimacy reasons are driving the same?
• If we classify firms with similar ownership structures (Majority, minority, legal device et al) as populations of firms, can we study the macrolevel effects on society and economy at large from a lens of population ecology and explain the phenomenon observed by Berle and Means? The trends in page 41 and 45 seems to show that large American private corporations seem to be more dominant as a population of firms.