This blog post examines whose interests a modern company with separated ownership and control should center on. We explore the meaning of the corporate system as proposed by Burley and its implications today, particularly at the point where the perspectives of shareholders, managers, and the community collide.
In today’s textbook view, the concept of ‘separation of ownership and control’ signifies the establishment of a professional management system. Consequently, it is understood to inherently involve conflicts of interest arising between shareholders and managers. That is, it has become established as a concept emphasizing that as stock ownership becomes widely dispersed, the influence of founding families or major shareholders weakens, and as a result, managers can prioritize their own interests over those of shareholders, who are the sole claimants to corporate profits. However, the meaning of this concept when Burley first proposed it was not the same as today. He sought to use this concept to explain the unique nature of the property rights structure in modern society, namely the ‘corporate system’. For Burley, ‘ownership’ signified the right to the profits generated by the business, ‘control’ denoted the power to decide how the business would be utilized, and ‘management’ referred to the actual act of operating the business. In other words, these three terms described functions, not designations for specific entities.
According to Burley, businesses before the Industrial Revolution were generally operated by a single person performing all three functions. However, as the 19th century began, a functional separation emerged in earnest: owners retained the function of holding profits and exercising decision-making power, while hired managers took charge of operations. By the 20th century, as the corporate system became established, the function of exercising decision-making power became even more distinctly separated from the function of ownership. Consequently, the act of owning stock came to be merely the act of holding a certificate symbolizing ownership of the business entity. The actual power to determine the business entity’s long-term and short-term direction was vested in the entity capable of moving the business by utilizing the physical and human resources within the company. In companies where shares were widely dispersed, multiple groups possessing the power to elect directors—such as founders and their descendants, major shareholders, managers, or the controllers of parent or holding companies—came to exercise this decision-making authority. As the functions of risk-bearing and corporate control became separated, the company, traditionally regarded as a private property, gradually lost its original meaning as a tool of production. This is why Burley called the modern corporation a ‘quasi-public corporation’.
So, for whom should a functionally separated corporation operate? Burley examined three possible answers. First, according to the logic of traditional jurisprudence, which regards property rights as absolute rights, it follows that the corporation should operate solely for the benefit of its shareholders. However, Burley points out a crucial problem here. It is unjust that the fact that an owner who controls their own property should be protected in fully enjoying the benefits arising from that property should lead to the logic that an owner who has relinquished control over the property should also be recognized as the sole claimant to those benefits.
Second, according to the logic of traditional economics, the view emerges that the company should be operated with the interests of the controller at its core. Traditional economics does not view the protection of property rights as an end in itself, but rather understands that property rights are socially useful because they stimulate efforts to acquire wealth, and thus should be protected. Applying this logic directly could lead to the conclusion that a company should be operated in a way that maximizes the interests of the entity that effectively decides how to utilize the company as property. However, Burley saw that a structure where the company operates for the benefit of a controller who bears no risk leads to the most catastrophic outcomes.
Third, the fact that applying the traditional logic of law and economics to a functionally separated corporate system yields conflicting conclusions reveals that the 19th-century laissez-faire order presupposed by both disciplines is no longer suitable for the modern corporate system. Byrne assessed that, since society based on a laissez-faire market order has already transformed into a corporate system, prioritizing the interests of the dominant class is the worst choice, while prioritizing shareholder interests is merely the lesser of two evils as a realistic alternative. He ultimately concluded that, within the corporate system, companies must be operated for the benefit of the entire community.
However, he simultaneously held strong reservations about hastily codifying such principles into law without a realistic institutional foundation. He viewed it as undesirable to expand the scope of directors’ fiduciary duties beyond shareholders to other stakeholders in corporate law, when the community was unprepared to accept rational planning or lacked the legal basis to support it. This led to the misconception that Burleigh appeared to support the view that companies should operate solely for shareholders’ benefit. Yet his intent was different. He feared that recognizing multiple groups of owners would render managers incapable of representing anyone’s interests effectively, plunging the company into an economic civil war of conflicting interests, and ultimately strengthening only the social power of dominant owners wielding significant economic clout. Therefore, he argued that fiduciary duties should be imposed not only on managers but also on owners, to protect passive property rights from predatory control of the company. He saw this as the essential starting point for ensuring the company operates in the community’s interest. He further argued that by establishing institutional mechanisms beyond corporate law—such as income tax laws, labor laws, consumer protection laws, and environmental laws—to ensure companies effectively fulfill their obligations to the community, inactive property rights can be made to rightfully yield to the interests of society. Only when such a system is stably established can modern companies fully function as economic organizations bearing communal responsibility.
