Divorce between Ownership and Control

A divorce between ownership and control happens when an owner of a business does not control and does not get involved in the day-to-day decisions of the business. Instead, the decisions are made by managers and directors. In such a situation the ownership belongs to shareholders and the control belongs to managers and directors (see table below). It typically takes place when a large company is owned by a large number of shareholders. Let's take a look at the impacts of a divorce between ownership and control!

Difference between ownership and control

Ownership is a state of having complete legal control of the status of something whereas control is to have an influence on something and contribute to its decision-making.

When does the divorce between ownership and control happen?

It typically takes place by large companies which are owned by a large number of shareholders. Then the owners hire managers and directors to control the enterprise’s resources for them.

The opposite situation occurs in small companies where directors and shareholders are typically the same people. However, if shares are sold to external investors, the original owners are forced to sacrifice their control.

Example of divorce between ownership and control

Let’s have a look at Amazon's analysis from July 2021 (see figure 1 below).

Figure 1. Amazon Ownership Analysis - StudySmarter, Source: finance.yahoo.com

As you can see, Amazon is owned by states, governments, public companies, individual insiders, the general public and institutions. It would not be even possible for all of the shareholders to get familiar with all the decisions made by the firm.

The negative impact of divorce between ownership and control

A divorce between ownership and control typically leads to conflict between shareholders and directors/managers. This is known as the principal-agent problem.

What is in the best interest of directors and managers does not necessarily have to be the same as what is in the best interests of the shareholders. What is more, even the shareholders might have different objectives. Shareholders usually aim to get high returns such as dividend payments and a rising share price, whereas directors and managers may have aims such as power, bonuses, prestige and status.

The problem here is what to do to make the employees (directors and managers) act in the interests of the shareholders rather than their own when the shareholders cannot have day-to-day control over the employees?

How to deal with problems arising from the divorce between ownership and control?

• Company legislation - directors and managers must be legally responsible for their actions. They need to be aware of the impact of decisions they make and how they affect shareholders.

• Rewards and incentives - directors and managers should be offered some financial bonuses and other incentives when they have worked in compliance with the shareholders’ interests and have contributed to reaching the shareholders’ goals.

• Corporate governance - shareholders should implement a system of rules by which a business is directed and controlled. Here, the shareholders should be protected as much as possible.