Control does play a large part in modern corporations and is important. In certain scenarios it can be more important than ownership. If firms are subject to competitive pressure and they do not compete effectively and efficiently whilst maximising profit, they run the risk of not surviving in a competitive market. Therefore, in this scenario it is seen that it does not matter who has control because competition such as other firms and corporations take the control.
In a modern corporation the relationship between ownership and control suggests that there is a need for some discretionary behaviour. This is needed because firms are usually operating in imperfect competition such as in an oligopoly. This means decisions often need to be made quickly and there is very little time for all stakeholders to partake in the decision - making.
The traditional approach of who controls a corporation is to view the shares. Using this empirical data, it is seen that if shareholders own 51% of the shares then they can control the management. If they control less than 50% then they do not control the management and effectively the corporation, they still have a degree of influence over the running of the business but do not dominate.
Although described as being separate, ownership and control are often linked together because they are similar. They are similar in the sense that they are both affecting the business and that they are positions of great importance to the corporation. Whether it be shareholders of directors in control and owning the corporation, there is a similarity in terms of how close both parties are to the corporation and thus, the risks they both face. These risks could be from competition resulting in a threat to survival through to high fixed and variable costs and sales revenue not high enough to break even.
Ownership and control are often explained as being separate. “The thesis that there is a separation of ownership from control in the (large) public joint – stock company stems from the observation that in many companies share ownership is widely dispersed, with no individual or group accounting for a dominant proportion of voting strength.” This means that although directors of a corporation may not own a corporation they, although owning only a small amount of voting strength, will be controlling the company. This is because they will be working for it and also because they will have greater knowledge of the company and be able to get more information about the company; “Directors are ‘insiders’, most shareholders are ‘outsiders’”. This effectively means that ownership and control are separated because shareholders (owners) are not controlling the corporation whereas the directors (controllers) are.
Ownership and control are very different but they can often be incorporated. Depending upon the situation a corporation faces control and ownership can change. Shareholders can begin to influence the business and start controlling; directors can purchase more shares and increase their level of ownership. The relationship between ownership and control is that it is an ever - changing relationship, it depends on many conditions such as external influences including competitive forces and the economy as well as government. A famous case of the government intervening is the splitting of software company Microsoft. This resulted in a major change in ownership and control. Owner Bill Gates lost some ownership and control whereas shareholders gained some ownership and control.
Modern corporations are nowadays experiencing a combination of ownership and control from stakeholders such as owners, top management such as directors and managers and shareholders. With the number of firms in markets and increasingly competitive nature in the economy, along with increasing globalisation and the ever – developing world economy, competition is more fierce and competitive forces can more easily gain control within a corporation in the bid to survive and maximise profit. Ownership and control are paradigms used to show the way in which a corporation is managed and organised and those who are in command of it.
Allen and Unwin, (1975), ‘An Introduction to Industrial Economics’, page 106