Corporate Governance & Organization Life Cycle: The Changing Role ...

1.1. Agency Theory:
Separation of Ownership and Control

Many theoretical perspectives have been developed to understand and analyze the functions and composition of the key participants and institutions in the governance arena. Agency theory remains one of the most important theoretical lenses for understanding the relationships among three key stakeholders in the governance of the corporation: shareholders, board members, and top management. Articles written on this topic decades ago are still relevant to current governance issues related to a board’s monitoring of top management on behalf of shareholders.

In their pioneering work, Berle and Means (1932) observed that the separation between corporate ownership and control delegates management control to a small group within the company, which leads to shareholders (or owners of capital) losing not only the function of management but also most of their rights to exercise control or to modify the terms of the initial delegation arrangement. In the prevailing context of the 1930s, the control exercised by owners was, in practice, ineffective because the ownership of capital was scattered among numerous shareholders. The authors noted that most of the fundamental alterations to the traditional concept of combining ownership and control had taken place because of judicial precedents and changes in legislation.¹For the authors, the ultimate checks and balances system remains the stock exchanges and the “respectable open market appraisal” (p. 293) that it brings when companies need capital to finance growth. In light of the post-Enron scandals, the “respectability” of this appraisal has come into question. In their conclusion, the authors recommended a more technocratic management control, one freed from desire for private gain: