Modern companies and private property

Author: (American) Berle
Publisher:
Publish Date: 2005-08-01
Features:
■ This timeless work on corporations has become one of the classics of its era. Many have cited it, yet few have read it. For the internal organization of corporations in modern society, Modern Corporation and Private Property still provides a fundamental introduction. This book combines the analytical techniques of public service lawyer Adolf Berle with the analysis of Gardner C. Means, a pioneer in theoretical economic history, to raise some core questions.
■ The most enduring theme in this book is the separation of ownership and control in modern corporations and the consequences of this separation. The authors view stock exchanges and stock markets as inevitable byproducts of the emergence of modern corporations and examine how these byproducts function. They pose the question: Are corporations run for the benefit of owners or managers? They explore what drives managers to use corporate assets efficiently? Finally, they examine the role of corporations as the dominant form of organizing production and distribution of goods and services.
■ In a new preface, the director of the American Business Center at the University of Washington, Wedenbaum and Jensen, critically evaluate the impacts of corporate developments that Berle and Means did not fully anticipate, such as the rise of the service sector and the pivotal role of institutional investors in balancing owners and managers. They note the authors' prescient comments, including the complex role of professional managers and their incentives, as well as the significance of insider information to the stock market. As they recognize, Modern Corporation and Private Property remains highly valuable for all factors related to the evolution of 20th-century social institutions.
■ "It can be proven that it is one of the most influential books in the history of American business." — Peter Drucker, Harvard Business Review. The task of writing the preface fell to me because I was the nominal director of this research project, which was funded by the American Social Science Research Council and guided by the Columbia University Social Science Research Council. The project required studying the new trends in corporate development. To make this research fruitful, multidisciplinary knowledge was needed. For any thoughtful observer, it is clear that American corporations are no longer private business organizations but have become a system. In 1928, when the project began, the rapid growth of financial institutions indicated that we were in the throes of a revolution in the private property system—at least in the industrial economy. The author once boldly conducted a series of technical studies on corporate securities, all of which concluded that through corporations, American industrial property was being funneled into a collective funnel, with individual owners gradually disappearing into it due to the rise of massive industrial oligopolies. Further, this trend of development seemed logical and wise in many aspects, a process that could not be reversed, with both advantages and dangers inherent in it. The project required a collaborative effort from an economist. Mr. Gardner C. Means, an economist, undertook a detailed statistical and economic analysis of this situation. Theoretically, it would have been more fruitful for a lawyer and an economist to work together than to work alone. The American Social Science Research Council held this view, and Professor Edwin F. Gay of Harvard University, in particular, strongly advocated it. Although we did not put the true benefits of collaboration in writing, we believe this view has been fully proven. Of course, this collaboration was extremely difficult because specialists from different fields had to first reach a consensus on a common language, then apply their respective research methods, always keeping in mind the strengths and weaknesses of different approaches, and finally arrive at conclusions acceptable to both parties. On one hand, because lawyers are primarily concerned with the fairness of individual cases and cannot ignore what should be done, and on the other hand, because economists primarily engage in description and analysis, the gap between the two is not easily bridged. We pay our sincere respects to Mr. Means, who was willing to cooperate more with us in terms of terminology and research perspectives; we, in turn, made equal efforts to accommodate him. The Columbia Law School, with its unique free atmosphere, willingly shared the pressure of this research project. Thanks to the kindness of President Young B. Smith, the college provided us with various facilities and opportunities, which this book cannot adequately repay. This book only states conclusions without explaining the methods used to arrive at them. Any other approach would have made the book overly lengthy, tedious, and uninteresting. The statistical research in this chapter has been published more fully by Mr. Means in the American Economic Review and the Quarterly Journal of Economics. Additionally, Mr. Means has a wealth of statistical data that may be published in the future. In legal matters, I conducted technical research on relevant issues and also had some research assistants and doctoral students at Columbia Law School study them. Most of these research findings have been published in various legal journals nationwide and are referenced in the main text to help readers understand the technical papers that provide detailed analyses of cases, statutes, and precedents. The basic cases and precedents have been compiled and published in Legal Cases and Materials on Corporate Finance (Western Publishing Company, St. Paul, 1930), as part of the aforementioned research project, for rough comparison with the legal issues discussed in this book. Through these methods, we have avoided excessive footnotes in this book, as they more reflect the authors' erudition than genuinely aid the reader's understanding. In the last four chapters, we make candid speculations on property rights and financing issues based on data related to corporate activities. (The data used for these speculations) are unrelated to the aforementioned research. For any given data, everyone will inevitably draw their own conclusions; the researchers vary in their thinking, and their conclusions differ as well. The authors have disclosed their own conclusions in this book because they believe that the reasoning and thinking scholars apply to research materials should be recorded along with their views on the basic facts. In a sense, they can tolerate some discounting of actual data to better reflect the authors' preferences and make more realistic judgments about the investigation. However, in a broader sense, scholars have no right to refuse to describe and predict based on the collected data. We fully understand the intellectual and academic risks of stating these conclusions. We feel that the development problem studied here is a phenomenon of major changes in the trend of social organization, and the future course of development will largely grow from it, so it is appropriate to clarify the direction of the trends we foresee. Such silent, substantive revolutions often go unnoticed until they are deeply developed. The so-called "Industrial Revolution" is an example of this, and the corporate revolution we are currently experiencing is no different. Approximately two-thirds of industrial wealth in the nation has shifted from individual ownership to large-scale, publicly financed corporate ownership, which will fundamentally alter the lives of property owners, workers, and the way property is held. This process of separating ownership and control will inevitably give rise to a new form of socioeconomic organization. It is clear that a series of evaluations are needed: Will this organization persist in the long run? Will it gradually strengthen, or will it collapse soon? Mr. Brandeis pushed the clock back to 1915; Professor Felix Frankfurter tended to believe that even now, this organization could not last. But for us, there is much evidence to suggest that this process will go further and last longer than it has so far. Accepting this large-scale corporate system (and we must), and studying it as a human institution, forces us to consider its impact on property, workers, and those who consume the products or use the services produced by corporations. This is a task that requires a lifetime of effort. The book before you primarily opens the way for studying the relationship between corporations and property. After considering these themes, there is still the ultimate question of the relationship between corporations and the state—is it corporations that manipulate the state, or the state that controls corporations, or will both coexist with little connection? In other words, which will be the dominant form between socioeconomic organization and socio-political organization? This is certainly a question that cannot be answered for a long time. Clearly, the corporate system is not just a flower of industrial organization but also one that society increasingly expects to bear greater responsibility for improving our economic well-being. Therefore, there is no need to justify the effort to analyze this system. The authors are fully aware of their lack of time, ability, and energy, and can only make a start here. The completion of this research owes a great deal to Professor Edwin F. Gay of Harvard University, who proposed concrete ideas on how this work in the field should be carried out. Additionally, we would like to thank Professor James C. Bonbright of the Columbia Business School for his patient review of the entire book and his continuous support; Mr. George May, president of Price-Waterhouse, vice president of the American Economic Association, whose incisive comments, rich experience, and delightful intellect have enlightened us in many places; President Smith of the Columbia Law School, who was willing to let the law school undertake research in this unprecedented field of law and economics; and our assistants, especially Mr. Abram Hewitt and Mr. Blackwell Smith, who did a great deal of hard work, much of which, though not published in this book, was indispensable to many of our conclusions. All scholars who study these issues and similar ones, including ourselves, will be grateful to Professor William Z. Ripley of Harvard University, whom we must acknowledge as a pioneer in this field.