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Separation of Ownership and Control

32 Pages Posted: 29 Nov 1998  

Eugene F. Fama

University of Chicago - Finance

Michael C. Jensen

SSRN; Harvard Business School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Abstract

This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of ownership and control. Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.

JEL Classification: G32

Suggested Citation

Fama, Eugene F. and Jensen, Michael C., Separation of Ownership and Control. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998, and Journal of Law and Economics, Vol. 26, June 1983. Available at SSRN: https://ssrn.com/abstract=94034 or http://dx.doi.org/10.2139/ssrn.94034

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

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Michael C. Jensen

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