Revisiting Berle and Rethinking the Corporate Structure
22 Pages Posted: 23 Jul 2011 Last revised: 18 Sep 2011
Date Written: July 22, 2011
Adolf Berle and Gardiner Means painted what remains a defining portrait of corporate law. The separation of ownership and control they described and the agency costs it causes are still a central concern of the law of corporate governance. For that reason, Berle’s work is relevant nearly eighty years after its publication. Seemingly forgotten, however, is that Berle’s enduring description of the corporate structure was published before most of today’s corporate law was in place. His work preceded the Securities Act of 1933 and the Securities Exchange Act of 1934 and even preceded the dominance of Delaware common law in the field of corporate governance. Berle’s prescience is part of why his work is still so important to the development of the corporate law, but relying upon and taking for granted his observations has locked corporate law scholars and jurists into a paradigm that may no longer fit and that may be keeping us from moving forward as we ought to.
The separation of ownership and control is an unavoidable consequence of the corporate form, and many advantages of the corporate form lie in that separation. While the separation remains, the distance between corporate shareholders and officers and directors has shrunk and could shrink further. That is, shareholders have become more sophisticated and less dispersed and enjoy enhanced protection from managerial abuse and increased rights to corporate information relative to when Berle and Means published The Modern Corporation and Private Property. Further, advances in securities markets and innovations in investment have changed what kinds of investors hold significant interests in the maximization of a firm’s profits. With the ability to significantly hedge investments, shareholders may not have financial exposure to a firm’s financial health. Simultaneously, owners of derivatives may have substantial interests in the value of a firm’s residual claim, though they are not considered “owners” at all. The residual claim is most commonly regarded as the ownership interest in a corporation, yet those with an interest in the value of that claim are increasingly difficult to pinpoint. “Ownership” of a corporation just does not mean what it did in the late 1920s and the early 1930s. The corporate structure defined by Berle and Means is helpful but too simple. As corporate law and investment change, so must our assumptions about the corporate for - both as it is and as it should be.
Keywords: Berle, corporate governance, equity, securities, corporate law
Suggested Citation: Suggested Citation