Are Good Managers Required for a Separation of Ownership and Control?
50 Pages Posted: 23 Jun 2003
Date Written: April 2003
Logically, in a corporate governance system where big companies are widely held and control over corporate policymaking is delegated to a cohort of full-time executives, there needs to be "good" managers. Still, the relevant literature has had little to say about this variable. This paper seeks to remove the quality of management variable from its relative obscurity, primarily by examining historical events in Britain. In the U.K., ownership separated from control in large business enterprises at some point between the 1950s and the 1980s, a period during which the country's corporate executives were allegedly amateurish and complacent. Correspondingly, Britain provides a robust test for the proposition that there needs to be "good" managers in order for a corporate economy to be dominated by companies where decision making is carried out by full-time executives and share ownership is highly diffuse.
The paper acknowledges that the criticisms levelled against those managing U.K. companies may not have been fully justified. Still, there is sufficient ground for doubt about the capabilities of those running large business enterprises to wonder how demand for corporate equity could have been sufficiently robust to foster diffuse share ownership. The paper resolves this British paradox by focusing on the role played by financial intermediaries such as pension funds and insurance companies. In the decades following World War II, there was a readjustment in investment priorities by institutional investors in favour of shares. The momentum involved apparently outweighed whatever doubts might have existed about the quality of management. Correspondingly, there was a suitable platform for a separation of ownership from control.
JEL Classification: G30, G32, K22, L22, M53, N24
Suggested Citation: Suggested Citation