Global Policy Forum

By David R. Francis

There's a newly revealed fact few Americans would know: About 42,000 top corporate managers - 0.00016 percent of the total US population - own a fifth of corporate America. They are really wealthy. This is even news to many economists - a profession that often looks at companies because of their social importance and economic power.

Nowadays, with widespread prosperity and soaring stock prices, companies are seen mostly favorably. Businesses continue to downsize, chopping jobs of employees to save money. Finding new work, however, is relatively easy. So downsizing doesn't inspire the public contempt it has in the past. During the Great Depression, when the jobless rate reached 25 percent, companies were often portrayed as evil beasts. Executives were frequently reviled.

In 1932, in the classic book "The Modern Corporation and Private Property," Adolf Berle, who later became a New Deal brain-truster, and economist Gardiner Means, identified an immense gap between ownership and control. By 1928, stockholders numbered 18 million, up from 4.4 million in 1900. Though in theory stockholders owned a company, they were too numerous to exercise any control over management. Executives essentially ran companies as they saw fit.

Stockholders couldn't provide the oversight of non-owner managers to see that they maximized profits and secured the prosperity of a company for their benefit. Managers, it was feared, would rather seek for themselves the perquisites of power - cushy jobs, great salaries, fancy offices, chauffeur-driven limousines.

Shareholders had become simply investors - not real owners.

That separation of ownership and control, Berle and Means wrote, "destroys the very foundation on which the economic order of the past three centuries has rested."

This separation has bothered analysts and even politicians ever since. New research casts fresh light on the issue. Three business school economists, Clifford Holderness of Boston College, Randall Kroszner of the University of Chicago, and Dennis Sheehan of Pennsylvania State University, University Park, have found that bosses own twice as much of the companies they manage as they did in the Depression. To be specific, the top few executives and members of company boards owned on average 13 percent of 1,500 publicly traded companies in 1935. By 1995, they owned 21 percent of a comparable sample of 4,200 corporations.

That finding, published in an article in the April issue of the prestigious Journal of Finance, has caused a stir. Back in the 1930s, Berle and Means held that publicly held corporations were social as well as economic institutions that should have a social or public accountability. They saw the American economy increasingly dominated by industrial oligarchies and professional managers, and argued that companies should be controlled by government in the interests of the public.

That view, combined with the Depression and New Deal, led to the imposition of strict new rules on stock issues and securities trading. Companies were obliged to provide full disclosure of executive compensation and other financial information. The Securities and Exchange Commission was created to enforce the law.

For a time, it was thought that institutional money like pension funds, and mutual funds, with their huge piles of stock, might exercise some control over corporate management. Peter Drucker, the famed management guru, wrote of "pension socialism." But not too much has come of that. Now, the three professors find, the separation of ownership and management has diminished - contrary to what Berle and Means forecast.

What is the significance? For a start, for huge companies, there has not been much change. Managerial equity amounted to 5.3 percent of the biggest 10 percent in 1935 for firms worth more than $1.3 billion in 1995 dollars. It has grown to 5.4 percent for companies valued at $4.4 billion plus in 1995. The average size of companies has grown. Most executives are not wealthy enough to own a large chunk of these huge companies, even with cheap stock options, notes Mr. Kroszner. But in constant dollars they own more stock.

For 90 percent of firms, the hike in management ownership is dramatic. Importantly, the change aligns management interests more with shareholder interests, says Kroszner. Both benefit if the bottom line grows and the stock price rises as a result.

The three professors see other ways management has been tamed. The constant wave of corporate takeovers puts managers at risk if they aren't performing well. Executive pay is structured to encourage performance. Foreign companies offer highly competitive products in the United States. Wall Street has put increased pressure on managers to focus on creating corporate value for shareholders, rather than for other corporate "stakeholders" such as employees and community. That focus, argues Kroszner, is ultimately good for workers and communities because it increases corporate efficiency and national productivity. Think more of the bosses as owners as well as managers.

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