The Modern Corporation and Private Property

Adolf Berle, a lawyer, and Gardiner Means, an economist, published this in 1932 and it established the framework in which corporate governance has been discussed since.

Their empirical finding, which was original research, is that ownership of large American corporations had become so dispersed that no shareholder or group held enough to control the company. They classified the two hundred largest non-financial corporations by control type and found that a substantial share were controlled by management rather than by owners. This separation of ownership from control is the book's central concept.

The consequences they draw are the beginning of agency theory, though not in that vocabulary. Managers who do not own the firm have interests that differ from those of the shareholders who do, and the mechanisms available to shareholders, principally the proxy vote, are ineffective because dispersed owners have no incentive to inform themselves. Berle and Means also argue that the corporation had become a social institution whose power exceeded that of many states, and that its legitimacy could no longer rest on the property rights of its owners since those owners no longer controlled it. Berle later engaged in a famous exchange with Merrick Dodd about whether managers owe duties to shareholders alone or to a wider set of constituencies. The empirical claim about ownership dispersion has been reversed by the growth of institutional investors, which concentrated shareholding again without solving the underlying problem.