Berle & Means' The Modern Corporation Relevant 75 Years Later

Dec. 11, 2007 (NEW YORK) The enduring nature and relevance of The Modern Corporation, by Columbia Law School Professor Adolf Berle and Harvard economist Gardiner C. Means, was the focus of a conference commemorating the 75th anniversary of the influential book.

 

The papers and comments delivered at the event on December 7 ranged widely, discussing what was, what is, what should be, and what may become of corporations, corporate governance, and government securities regulation. At the heart of most discussions was the “Berle-Means corporation,” a joint-stock company in which ownership, in the form of numerous small stockholders, and control, in the form of entrenched managers, are separate. The enduring nature of that separation and the principal-agent problems it can cause, explain the continued relevance of The Modern Corporation.

 

Harvard Law professor Mark Roe took an historical approach on the topic, arguing that after the demise of the Second Bank of the United States, America’s banking system devolved from the best in the world to one of the weakest, crippled by its reliance on unit (branchless) banking. That weakness, which made it difficult for businesses to obtain loans, spurred development of U.S. securities markets. However, the small size of financial institutions relative to the huge industrial and transportation companies they lent to, combined with Americans’ deep fear of financier-controlled industry, led to the creation of a large retail investor class unable to bring management to heel. Political forces, Roe warned, may again stymie the influence of institutional block holders, like hedge funds and private equity firms, which are willing and able to mitigate managerial agency costs.

 

 

(Left to right) Professor John Coffee; Prof. Curtis Milhaupt '89; Charles Niemeier, member of the Public Company Accounting Oversight Board; and Prof. Eilis Ferran, Cambridge University Law School

Columbia Law professor John Coffee focused primarily on the corporation as it is today, arguing that the United States is not losing its competitive edge in attracting global capital. Its “high enforcement intensity” regulatory regime attracts quality companies and results in a much lower cost of capital for corporations listing in U.S. markets. 

Professor Mark Roe	William Savitt '97, partner, Wachtell Lipton Rosen & Katz

Harvard University Law professor Lucian Bebchuk suggested what ought to be. Following up on his controversial Virginia Law Review article (Volume 93, No. 3, May 2007, p. 676), in which he advocated sweeping reforms in corporate election rules designed to again render directors “truly accountable to shareholders,” Bebchuk defended his views against critics, including those of Martin Lipton, a well-respected critic of shareholder activism. In his presentation, Bebchuk called for “private ordering,” a process whereby corporations change their stockholder election rules themselves rather than being legally forced to reform. Commentator William Savitt ’97 of Wachtell Lipton Rosen & Katz complained that Bebchuk has never explained why, in Savitt’s words, “management by marionette,” in which stockholders hold the balance of power, is preferable to the status quo.

Professors Ronald Gilson of Columbia Law School and Charles Whitehead ’86 of Boston University Law School argued that the private equity wave is fueled by more than low interest rates. Advances in risk management, the creation of private share markets, and Sarbanes-Oxley have increased the costs of going public while decreasing the costs of going (or remaining) private. University of Iowa law professor Hillary Sale demurred, noting that private equity relies on public markets for information. Frank Partnoy of the University of San Diego Law School also took issue, arguing that Knightian uncertainty -- risk that cannot be known, hedged, or diversified -- is still potent so risk-bearing shareholders remain necessary.