Modern Companies and Private Property -- A Series of Translations on Institutional Economics

Author: (American) Berle
Publisher:
Publish Date: 2005-08-18
Features:
■ This timeless classic on corporations has become one of the landmark works of its era. Cited by many, read by few, Modern Corporation and Private Property still provides a fundamental introduction to the internal organization of corporations in modern society. The book combines Adolf Berle's analytical techniques as a public service lawyer with the insights of Gardiner C. Means, a pioneer in the field of theoretical economic history, to raise some core questions.
■ The most enduring theme in the 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 by-products of the emergence of modern corporations and examine how these by-products 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 foreword, 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 relevant to all the 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 foreword 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 institutions. In 1928, when the project was launched, 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, with individual owners gradually disappearing into it due to the rise of massive industrial oligopolies. Furthermore, this trend of development seemed logical and wise in many aspects, and the process was irreversible, with both advantages and dangers inherent in it. The project required a collaborative effort from economists. Mr. Gardiner C. Means, an economist, undertook a detailed statistical and economic analysis of this situation. Theoretically, working together would yield richer results than working 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 the argument is well proven. Of course, this collaboration was extremely difficult, as specialists from different fields had to first reach a consensus on a common language, then apply their respective research methods while keeping in mind the strengths and weaknesses of each, and finally arrive at conclusions both parties could agree on. On one hand, because lawyers primarily focus on 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 was not easily bridged. We express our sincere respect to Mr. Means, who was willing to accommodate us more 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 burden 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 reach them. Any other approach would make 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 the legal aspect, I conducted technical research on related issues and also had teaching assistants and doctoral students at Columbia Law School conduct some research. Most of these findings have been published in various legal journals nationwide and serve as references for readers to understand the technical papers that analyze cases, statutes, and precedents in detail. 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 often demonstrate the authors' erudition rather than aiding 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 observation data used as the basis for these speculations) are unrelated to the data used in the aforementioned research. For any given data, everyone will inevitably draw their own conclusions; the researchers vary in their perspectives, and their conclusions differ accordingly. The authors have disclosed their own conclusions in this book because they believe that the reasoning and thinking scholars apply when studying materials should be recorded along with their views on the basic facts. In a sense, they can tolerate some discount on the actual data to better reflect the authors' preferences and provide a more realistic judgment of the investigation. However, in a broader sense, scholars have no right to reject descriptions and predictions based on the collected data. We fully understand the intellectual and academic risks of stating these conclusions. We feel that the development problems studied here are phenomena of major changes in the trends of social organization, and the future course of development will largely grow from them. It is therefore 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, 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 substantial evidence that this process will go further and last longer than it has already. 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 remains the ultimate question of the relationship between corporations and the state—is it the corporations that manipulate the state, or the state that controls the 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 will take a long time to answer. Clearly, the corporate system is not just a flower of industrial organization but also a system that the public 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 this can only be a starting point. The completion of this research owes a great deal to Professor Edwin F. Gay of Harvard University, who proposed concrete ideas on how to conduct work in this field. We would also like to express our special gratitude to Professor James C. Bonbright of the Columbia Business School, who patiently reviewed the entire book and provided continuous assistance; to 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; to President Smith of Columbia Law School, who was willing to allow the law school to undertake research in this unprecedented field of law and economics; and to 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.