BOOK REVIEW: Morgen Witzelreviews Corporate Ownership and Controlby Brian R Cheffins; Oxford University Press; £60 (€71)
THE SEPARATION of ownership and control is widely seen as one of the most important features to emerge in 20th-century capitalism. Before 1900, it is believed, most businesses - with a few exceptions, such as railways - were directly managed by their owners. By 2000, most big companies and many others were run by professional managers appointed by the shareholders. This was seen as benefiting shareholders and companies alike.
Recently, such separation has come under fire. Corporate governance scandals, and then the credit crisis and its aftermath, raised doubts that it works. Senior managers cannot always be trusted to act in the best interests of the company and shareholders. The rise of private equity seems to indicate that a closer relationship between owners and managers can have a useful disciplinary effect on the latter.
But in this new book, Brian Cheffins, professor of corporate law at the University of Cambridge, pours cold water on the idea that separation of ownership and control has had its day. At £60 (€71) the book is itself a big investment, but its ideas are too important to be limited to universities and libraries. And, although the focus is on Britain, it has relevance for other economies, not least the US.
Cheffins starts by correcting some myths. First, separation of ownership and control is not a global norm. Britain is one of the few countries, along with the US, where it is widely practised.
Second, this separation came much later to Britain than is usually assumed. Until the 1960s, most big British companies were controlled by family groups and other shareholders who held large blocks of shares and acted as chairmen or managing directors. Then, for a variety of reasons, these private investors began to sell off their block shareholdings. The baton was passed to big institutional investors more interested in share growth and dividend income than managing. Thus, it was not until the 1970s that separation of ownership and control became a reality.
All this might suggest separation in Britain is a fragile, short-blooming flower. The rise of shareholder activism post-Enron, the increasingly prominent role of private equity and, more recently, the British government taking an ownership role in parts of the financial services sector, could mean the day of the independent manager, unfettered by shareholder interference, is done.
Cheffins rejects this. He quotes Adam Smith's Wealth of Nations(1776): "The greater part of proprietors seldom pretend to understand anything of the business of the company, and . . . give themselves no trouble about it, but receive contentedly such yearly or half-yearly dividends as the directors think proper to make to them." He argues that shareholders' attitudes have not changed much since.
Families with a controlling stake in big companies became directly involved in management out of pride and self-interest, but other shareholders showed little interest in managing. The disappearance of old-style owner-managers in the 1960s and 1970s did not mean other shareholders stepped in: most were happy with the status quo, which reinforced separation of ownership and control.
Cheffins also warns against paying too much attention to high-profile cases such as Cadbury Schweppes in 2007, where pressure from an institutional investor apparently forced management to split the company. It now appears that management had planned this move long before. In other cases shareholder pressure failed to move management or change a policy, largely because not enough shareholders could be roused.
Private equity, he says, "is not a threat to the pre-eminence of the widely held public company in the UK". He believes there is room for both. And there must be doubt as to whether private equity firms will close the gap between owners and managers. Many private equity executives claim they do not intervene in management except in emergencies.
Following Cheffins's reasoning, it seems unlikely that either the credit crunch or government intervention will make much difference. There seems little reason to doubt his view that separation of ownership and control "should survive well into the 21st century". - ( Financial Times service)
