Separation of Ownership and Control

TLDR

Separation of ownership and control is a well‑studied feature of large corporations and is also common in professional partnerships, financial mutuals, and nonprofits. This paper analyzes the survival of organizations where decision agents do not bear a major share of the wealth effects of their decisions. In these organizations, contract structures separate the ratification and monitoring of decisions from their initiation and implementation. The authors argue that such separation persists because specialization of management and risk bearing, together with a common approach to controlling agency problems, confer benefits.

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.