Ownership Structure Follows Managerial Strategy: Management Control Revisited

: Economics of corporate governance treats the ownership structure of shares as an independent variable. This follows the scheme by Berle and Means (1932) that asserts the fact that the broad dispersion of stock ownership promotes “management control” by managers. However, Chandler’s (1977) review of the cases of the telephone and railways at the time indicate that the arrow of cause and effect for the telephone is pointed in reverse, and the pursuit of a larger scale of capital by outstanding managers leads to a dispersion of stock ownership. In railways, management work was extremely complex, and management was left to managers since specialized skills and training were required. In other words, ownership structure was not an independent variable for the separation of ownership and control. In actuality, salaried managers acquired power in Japan’s zaibatsu , which had no dispersion of ownership, at the time.


Introduction
Economists conceive corporate governance as questioning the method of setting up a system that guarantees funders enough profits for their funding in terms of the conflict of interest between funders and managers (Hanazaki & Teranishi, 2003, Preface). This can be stated differently as "disciplining managers to ensure that shareholder profit is an important objective" (Osano, 2001, p. 11). Immense literature in economics has focused on the impact of ownership structure of corporate shares on management behavior and corporate performance. For example, among major companies in Japan's manufacturing industry, some studies have noted the positive influence that insider ownership has on corporate performance (Lichtenberg & Pushner, 1994). Further, the negative influence on performance, when the shareholding ratio of financial institutions is low, shifts to a positive influence when the shareholding ratio is high (Morck, Nakamura, & Shivdasani, 2000).
However, is ownership structure such a decisive independent variable? Research on ownership structure and disciplining managers directs us to the studies of legal scholar Adolf A. Berle, Jr. and economist Gardiner C. Means, with Berle and Means (1932) using US data from the end of the 1920s to note the separation of ownership and control in major corporations. The reason for this separation was explained as the broad dispersion of stock ownership.
This idea is handed down as it is to the current economics research, but is it true?

Separation of Ownership and Control
Institutionally, managerial decision-making is influenced by the demands, opinions, advice, and objections of powerful owners, or rather, major shareholders. However, Berle and Means (1932, pp. 69-90)  Stage 4 (management control): as the shareholder ratio of the largest shareholders becomes extremely small, the shareholders cannot dismiss managers unless the company falls into a crisis state, and the managers then become self-perpetuating. Berle and Means (1932) noted that, as the dispersion of stock ownership in major US companies progresses, a new situation is created wherein "there are no dominant owners, and control is maintained in large measure apart from ownership" (Berle & Means, 1932, p. 117). This situation is termed as the "separation of ownership and control". Berle and Means (1932, Book 1, chap. 5), an expanded edition of Means (1931b), analyzed this state of separation of ownership and control in 1930 through the following steps (a) and (b).
(a) The largest 200 non-financial companies in the US (as of January 1, 1930) were categorized and summarized in 11 tables (Berle & Means, 1932, pp. 95-114) as Table 12  it must be noted that in Table 12 (G) "management control" was not a category defined by the shareholder ratio of the largest shareholder but was originally a qualitative classification. This exhibits a striking contrast to the categorization by shareholder ratio of the largest shareholders for (A) "private ownership and control," (B) "control by majority ownership," and (D) "minority control through ownership of an important minority block of stock." After the qualitative classification of Table 12 (G) into "management control," Berle and Means (1932) stated that "it is notable that in none of the companies classed under management control was the dominant stock interest known to be greater than 5 per cent of the voting stock" (Berle & Means, 1932, p. 93). As a result, when the shareholder ratio of the largest shareholder is between 5% and 20%, the company is categorized as "joint minority-management control by the minority owners and managers" in Table 12 (F).
Apart from these, (C) "control by a legal device" would be, for example, pyramiding, whereby Company X has control of another Company Y (subsidiary) by owning majority shares and Company Y is made to own majority shares of another Company Z (the subsidiary's subsidiary), resulting in Company X then having control of Company Z, and so forth. At the time, the Van Sweringen brothers (Oris Paxton and Mantis James Van Sweringen) used pyramiding to successfully and practically control a major railroad network across the entire American continent with an asset value of more than two billion dollars, using an investment of less than 20 million dollars in shares of a company at the top of the controlling pyramid.
Two hundred companies were categorized through these categorization procedures. The companies whose type of ultimate control of the controlling company was classified into "management control" rose to 44.25% of all companies, with assets of 58.11% (Berle & Means, 1932, p. 115, Table 13). Berle and Means (1932) termed management control and control by a legal device as "separation of ownership and control" and subsequently combined the percentage of companies totaling 64.75% and the accumulated assets totaling 79.78%.

The Visible Hand
With these figures, Berle and Means (1932) emphasized that, by the end of the 1920s, separation of ownership and control in the US had progressed such that the phenomenon of management control had also advanced. As if in response to Berle and Means (1932), business historian Alfred D. Chandler, Jr. provided case studies focusing on the period of time from the 1840s to the 1920s. The picture portrayed by Chandler (1977) was evidently different than that outlined by Berle and Means (1932).

Telephone
The case of AT&T (American Telephone and Telegraph) is particularly impressive (Chandler, 1977, pp. 200-203). Alexander  Figure 1, the dispersion of stock ownership does not ensure that managers appear on the scene, but rather the arrow of cause and effect is in reverse. This implies that "ownership structure follows managerial strategy," to apply Chandler's (1962) famous proposition "structure follows strategy" to the separation of ownership and control.

Railroads
Railroad companies were first noted by Chandler (1977) and described in detail in about 20% of the pages of his study (Chandler, 1977, pp. 81-187). Between the latter half of the 1840s to the 1850s, the US saw its first nationwide railroad boom, which allowed, for example, people to travel by railway from New York to Chicago in only two days by 1857. However, the greatest strength of the railroads was not the speed, but rather the high reliability that guaranteed shippers that their deliveries would arrive according to a carefully laid out schedule without being impacted by the weather.
These railroad companies were the first modern enterprise in the US. Managing the railroads to maintain a high level of reliability was an extremely complex task requiring special skills and training, and therefore, shareholders and their representatives were unable to provide such management. These companies were the first to manage numerous personnel and offices spread out over a vast territory. The managers with these specialized skills and training Causality designated by Berle & Means (1932) created a hierarchical organization for operating railroads and created an organization structure clearly delineating responsibilities, rights, and communication among central/regional headquarters and operating divisions. Roles were outlined in organizational manuals and organization charts.
Forty-two of the 200 companies covered by Berle and Means (1932) were actually railroad companies. Among these were the Alleghany Corporation, created by the Van Sweringen brothers, that stood at the top of the pyramid. Combined with five other railroad companies in that group, six of the 42 companies were controlled by the Van Sweringen brothers, and Berle and Means (1932, pp. 73-75) described Alleghany Corporation in detail as a typical example of pyramiding.
Considering the railroad companies that were under the Alleghany Corporation umbrella, Erie Railway 3 categorized under "minority control" was actually used by Chandler (1977) as an example where managers appeared on the scene, and the company was very frequently referred to.
In particular, Daniel C. McCallum of the Erie Railway was a central figure described by Chandler (1977) as a pioneer of modern management. From the 1850s to the 1860s he was a manager at the Erie Railway, serving as a superintendent and then as a general superintendent of the railroads. He proposed the six basic principles of general administration, cost accounting, and cost management, and garnered a broad interest in these organizational innovations. These principles of general administration were particularly famous. The "Superintendent's Report" written by McCallum in 1856 is listed in some readings (e.g., Shafritz, Ott, & Jang, 2005) of organizational theory to this day.  Berle and Means (1932), and their remaining assets at the time were known to be only a few thousand dollars. During that time, management of the railroads was complex enough, despite any major changes in ownership structure to require managers with the necessary specialized skills and training. In fact, strategy and structure follow technology (Takahashi, 2016a). Ownership structure has almost no explanatory power. Berle and Means (1932) asserted that the dispersion of stock ownership was the reason for the appearance of managers on the scene, though counterexamples can be found in Japan's wealthy cliques known as zaibatsu (Takahashi, 2016b). Prior to World War II, Japan's zaibatsu employed a system termed soyusei, wherein one capitalist family provided all the assets. For example, zaibatsu families such as the Mitsui family owned all assets, and though they were able to obtain all the profits, they could not sell off their assets. Thus, when the future of their companies was in doubt, they were unable to find a means of escape.

Concluding Remarks
Thus, zaibatsu had no dispersion of ownership. Despite this, zaibatsu companies had salaried managers who played very important roles. In the latter part of the Meiji era, it became common to use individuals with professional management skills to manage companies. For example, the Mitsubishi Zaibatsu had Heigoro Shoda  Berle and Means (1932) completely missed the mark for major Japanese companies at that time. Simply put, ownership structure is not an independent variable for separation of ownership and control.