divorce of ownership and control

hi im going through the specification and it says

"should understand the reasons for the seperation of ownership from control in modern industrial economier and discuss its significance for the conduct and performance of firms"

any ideas? is this to do with selling shares? other than that im clueless!

thanks alot

sarah xx

Reply 1

barry_4_england

I suppose it's just do to with...... in small firms, the owners tend to be the people in control. But as the firm gets larger it is harder to control the firm and therefore the owners have to allow others to control the firm eg. by selling shares to shareholders who then control how the firm is run etc etc.... u can make it up in the exam :biggrin:

Reply 2

librana

Throw in a bit about stakeholders too. Managers and directors tend to have control, but do not have exactly the same interests as each other or the owners/shareholders.

Reply 3

GorgaRW

I also used the spec and i've been having the same problem. I can't find anything on reasons why owners give control over to managers but i did find this on the other stuff...

Significance for firms’ conduct and performance (i.e. the principal-agent problem):
- Different incentives can lead to incongruous objectives: i.e. whilst the owners seek to maximise profit, managers may seek sales maximisation as this increases their bonuses; the complexity and uncertainty of decision-making may lead to managers following ‘rules of thumb’ rather than seeking optimal decisions all of the time (satisficing)

- The efforts of the agent are expensive and time-consuming to monitor

Solutions to the principal-agent problem (i.e. incentives):

- Share-ownership schemes
- Incentive pay schemes i.e. profit sharing
- Wages related directly to productivity/profitability
- Long-term contracts to increase loyalty to the business

see tutor2u.net and go onto as/a2 economics, and then find unit 5, for more info

Reply 4

starcarton

I would expect that the reasons why owners give managers control are probably the obvious ones: company may become to big to be run by owners; shareholders may not be interested in running the company, their motives simply lie in profit making, which is often the case with plcs.

The divorce between ownership and control is less about why companies have managers, but the effect of having them on the effeciency of the company. The key point is that the motives of the manager will be different to those of the owners. Owners look to maximise profit, whereas managers will instead be occupied with other things (their status, job perks etc) and so there is a conflict in interest. T

he main thing to know for this is that even though shareholders want maximum profits, they never know what the value of maximum profits actually are. Therefore the managers PROFIT SATISFICE, they make enough profit to keep the owners happy or satisfy them, but not the maximum because they do not want or need to put in the extra work required to make that extra £1000 for example.