The Modern Corporation and Private Property PDF
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Page iii The Modern Corporation and Private Property Adolf A. Berle and Gardiner C. Means With a New Introduction by Murray L. Weidenbaum and Mark Jensen Page iv Third printing 1999 New material this edition copyright © 1991 by Transaction Publishers, New Brunswick, New Jersey 08903. Originally published in 1932 by Harcourt, Brace & World, Inc. Copyright © 1968 by Adolf A. Berle. All rights reserved under International and PanAmerican Copyright Conventions. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without prior permission in writing from the publisher. All inquiries should be addressed to Transaction Publishers, Rutgers—The State University, New Brunswick, New Jersey 08903. This book is printed on acidfree paper that meets the American National Standard for Permanence of Paper for Printed Library Materials. Library of Congress Catalog Number: 9048752 ISBN: 0887388876 Printed in the United States of America Library of Congress CataloginginPublication Data Berle, Adolf Augustus, 1895–1971. The modern corporation and private property / Adolf A. Berle and Gardiner C. Means; with a new introduction by Murray L. Weidenbaum and Mark Jensen. p. cm. "Originally published in 1968." Includes index. ISBN: 0887388876 1. Corporations—United States. 2. Corporation law—United States. 3. Cor porate governance—United States. I. Means, Gardiner Coit, 1896– . II. Title. HD2795.B53 1991 338.7'4'0973—dc20 9048752 CIP Page v CONTENTS Tables and Charts vii Introduction to the Transaction Edition ix Property, Production and Revolution xix A Preface to the Revised Edition By Adolf A. Berle Implications of the Corporate Revolution in Economic Theory xli By Gardiner C. Means Preface (1932) li Book I Property in Flux: Separation of the Attributes of Ownership under the Corporate System I: Property in Transition 3 II: The Appearance of the Corporate System 11 III: The Concentration of Economic Power 18 IV: The Dispersion of Stock Ownership 47 V: The Evolution of Control 66 VI: The Divergence of Interest between Ownership and Control 112 Book II Regrouping of Rights: Relative Legal Position of Ownership and ''Control" I: Evolution of the Modern Corporate Structure 119 II: Power over Participations Accruing to Shares of Stock 141 III: Powers over the Routing of Earnings As between Shares of Stock 171 IV: Power to Alter the Original Contract Rights of Security Holders 186 Page vi V: The Legal Position of Management 196 VI: The Legal Position of ''Control" 207 VII: Corporate Powers As Powers in Trust 219 VIII: The Resultant Position of the Stockholder 244 Book III Property in the Stock Markets: Security Exchanges As Appraisers and Liquidators I: The Function of the Public Market 255 II: Flotation and Bankers' Disclosure 264 III: Disclosure by the Corporation to the Market 278 IV: Management in the Market 286 Book IV Reorientation of Enterprise: Effects of the Corporate System On Fundamental Economic Concepts I: The Traditional Logic of Property 293 II: The Traditional Logic of Profits 299 III: The Inadequacy of Traditional Theory 303 IV: The New Concept of the Corporation 309 Appendixes 317 Statistical Appendix to Revised Edition 343 By Gardiner C. Means Table of Cases 363 Table of Companies 367 Index 375 Page vii TABLES AND CHARTS Table I: The 200 Largest Nonbanking Corporations in the United States, Jan. 20 1, 1930 Table II: Gross Assets of 150 Identical Corporations Common to Both 1919 35 and 1928 List of 200 Largest American Corporations Table III: Comparison of Growth of Large Corporations with Growth of All 36 Corporations Table IV: Growth of Large Corporations As Indicated by Relation of Their 39 Statutory Net Income to That of All Corporations Table V: 144 Out of 200 Largest Companies Distributed According to Number 49 of Stockholders Table VI: Stockholdings by Management 50 Table VII: Stockholders of the Three Largest American Corporations 52 Table VIII: Estimated Number of Book Stockholders of American Corporations 56 (1900–1928) Table IX: Estimate of the Number of Book Stockholders of American 57 Corporations in 1922 by Industries Table X: 20 Largest Stockholders of the Pennsylvania Railroad Co. (As of Dec. 79 31, 1929) Table XI: United States Steel Corporation, Stockholdings of Board of 81 Directors Table XII: Control of the 200 Largest Corporations 86 Table XIII: Summary According to Type of Ultimate Control of 200 Largest 106 Corporations Table XIV: Summary According to Type of Immediate Control of the 200 107 Largest Corporations Chart I: Rate of Growth in Number of Book Stockholders 55 Chart II: Distribution in Ownership of Corporate Stocks 61 Chart III: Major Elements in the Control of the Van Sweringen System of 70 Railroads Page viii Statistical Appendix Table I: The 100 Largest Manufacturing Corporations in 1962 Measured by 347 Size of Assets Table II: Adjusted Assets of the 100 Largest Manufacturing Corporations in 351 1962 and the Assets of All Manufacturing Corporations Table III: Manufacturing Concentration in 1929 353 Table IV: Comparison of Total Assets Held by the 100 Largest Manufacturing 354 Corporations with Assets Held by All Manufacturing Corporations and All Manufacturing Enterprise Table V: Change in Concentration 1950–1965 Derived from Statistics of 356 Income Table VI: The 200 Largest Nonfinancial Corporations Classified by Type of 358 Ultimate Control, 1929 and 1963 Chart I: Share of Value Added by Manufacture Accounted for by 200 Largest 354 Manufacturing Companies, 1947–1963 Page ix INTRODUCTION TO THE TRANSACTION EDITION Berle and Means' monumental work on the corporation has become one of those enduring classics that many cite but few read. As would be expected, a current rereading reveals that much of the book has become a period piece. In part, its success has been its undoing. The initial reaction to its publication led a generation of researchers to answer questions raised in the book. Consequently, much of the field of study focusing on the corporate system has moved beyond the point at which lawyer Adolf Berle and economist Gardiner Means wrote about it. Also, the economy has evolved. Who, writing in the depth of the Great Depression of the 1930s, would have anticipated the doubledigit inflation of the late 1970s? Nevertheless, this classic raises many of the fundamental questions that still beset those concerned both with the role of business in society and the governing power of the large corporation. In fact, the book is so rich with insights and thoughtprovoking analysis that, in this introductory essay, we can do little more than whet the reader's appetite, while simultaneously warning about the host of legal and statistical detail which is now mainly of historical interest. The Role of the Corporation The most enduring theme of The Modern Corporation and Private Property is the divorce of ownership from the control of the modern corporation. It is the view of the authors that, as a practical matter, stockholders have traded their legal position of private ownership for the role of recipient of capital returns (Book I, Chapter I). In addition, a close parallel is drawn between workers who surrender the direction over their labor and shareholders who become merely recipients of ''the wages of capital." Without using the term, Berle and Means show a keen awareness of the concern of modern "agency" theory: the interests of the directors and managers can diverge from those of the owners of the firm, and they often do so. This separation between ownership and control of a corporation through expanded ownership of the company creates what Berle and Means call the quasipublic corporation. The characteristics found in a quasipublic corporation are its tremendous size and its reliance on the public market for capital. In Book I, Chapter II, Berle and Means predict, on the basis of historical experience, that "practically all" economic activity will be carried on under Page x this quasipublic corporate form. That forecast has suffered from the rapid rise of the service sector of the economy. There, individual proprietorships and partnerships remain widely used methods of organizing business activity, and dependence on organized capital markets is far less than in the case of the large corporation. Nevertheless, Berle and Means are closer to the mark than the more recent and widely circulated projection in the late 1970s by Michael Jensen and William Meckling, that ''The corporate form of organization is likely to disappear completely. . . . the larger corporations as we know them are destined to be destroyed." Given the effective separation of ownership from management, Berle and Means noted the likely characteristic increase in the size of the modern corporation and the concentration of the economy. However, two more recent developments should be kept in mind. As the authors properly perceived in Book I, Chapter III, mergers and acquisitions are an important method of increasing corporate size. However, changes in corporate control can also lead to reducing the size of the company. An example during the 1980s was the split up of Beatrice Foods into a variety of smaller companies, which occurred in connection with that $12 billion giant corporation going "private." Table 1 Mergers and Acquisitions Over $1 Billion, 19821989 Number Value Year of Deals ($ millions) 1982 10 $19,440.3 1983 6 9,110.5 1984 19 55,178.5 1985 26 61,458.6 1986 31 67,932.4 1987 30 62,175.9 1988 42 96,399.4 1989 35 117,477.4 Source: Computed from Mergers and Acquisitions, various issues. A more basic criticism of the Berle and Means approach is that mergers among existing firms do not necessarily mean that the economy is becoming more "concentrated." In the dynamic industrial society that characterizes the Page xi United States, the rise of new companies overshadows the decline of the old. Thus, Berle and Means could accurately bemoan the demise of fortynine of the largest 200 corporations within one decade. Yet, we can celebrate the fortunes of many of today's giants that are not on their list–IBM, Philip Morris, Boeing, United Technologies, Dow Chemical, Xerox, Pepsico, Digital Equipment, Hewlett Packard, Sara Lee, Conagra, Unisys, Lockheed, Motorola, Monsanto, TRW, and Textron. Even Berle and Means would have to admit that this is an impressive array of ''newcomers." Mergers and acquisitions continue to be an important force in maintaining a dynamic economy. In 1989 alone, thirtyfive giant mergers occurred with an aggregate value of over $117 billion (see Table 1). At times, changes in control, or even threats of hostile takeovers, may serve to increase the efficiency and profitability of individual firms. The Management of the Corporation Berle and Means made a fundamental contribution in their analysis of the extent to which management of the modern corporation has been separated from its ownership. But they may have gone overboard in stating that the power and control has shifted away from the common stockholders (Book I, Chapter IV). Berle and Means state that this separation has totally eliminated the checks and balances that owners once exercised over management. With this undaunted power, management supposedly pursues its own interest, oblivious to the welfare of the owners. A contrary view has been developed in more recent years. According to Harold Demsetz, "In a world in which selfinterest plays a significant role in economic behavior, it is foolish to believe that owners of valuable resources systematically relinquish control to managers who are not guided to serve their interest." As the reader might suspect, neither polar alternative accurately describes the complex reality of the world of corporate decision making. Top managements do possess significant discretion over the use of corporate resources. Merely consider the ability of the CEO of a major company to satisfy his whim in terms of the selection of charities and pet causes that the organization will support. However, shareholders are not left powerless. Ample evidence is furnished by the proxy fights and takeover battles between different groups of owners grappling for control that, on occasion, brighten the financial pages of the daily newspapers. Clearly, the power of management is far from the absolute position that Berle and Means forecast. A fundamental development not foretold in The Modern Corporation and Private Property is the use by institutional investors of the latent powers they possess. Although Berle and Means were aware of the role of pension funds and insurance companies, they did not foresee either the growing
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