Separation of Ownership and Control

Peñaranda, Ralph Roger M.
BSBA MM - 1
BACSore TTh 4:30:6:00 September 13,
2020
Instructions: Do an internet research on the topic. List down the advantages and
disadvantages of separation of ownership and control and explain each?
A. Advantages
Limited liability
A corporation exists as a separate legal entity with its own rights and liabilities.
The owners of the company have limited liability. This means that, if something goes
wrong, they are not personally liable.
Democratic Decision Making
One of the advantages of the modern corporation is that it uses a democratic
decision-making process on major issues. When the shares of a corporation divide,
each share of common stock typically carries with it one vote. The shareholders get
the opportunity to vote on matters for the company. Instead of having one person
that is in charge of making all of the important decisions, the group can decide what
is most appropriate.
Unbiased Structure
Another advantage of separating the control and the ownership of the company
is that the executives and the upper level managers of the company are not
necessarily those that own the majority of the company. This separates those who
make the day-to-day operational decisions for the company from those who own
stock. This means that the managers and Chief Executive Officer, or CEO, can
make decisions based on the interest of the company and not themselves.
Professional management
Shareholders appoint boards of directors to run corporations. The directors in
turn appoint managers, whose responsibility is to manage business assets in such a
way as to generate profits for the shareholders. This means that there is an efficient
allocation of capital and that the business is run in a professional manner. People
with expertise in marketing, finance, and other business functions are responsible for
the day-to-day decisions of the business.
B. Disadvantages
Complications
One of the potential problems of using this method is that it complicates making
decisions and forces them to take longer than they should. For example, if the
shareholders are not happy with the board of directors, they can elect new board
members. However, it takes time to distribute information to all of the shareholders
and then have a vote for the board members. By comparison, other business entities
can make decisions much more quickly.
Disconnect
Separating the ownership and control of the company can be beneficial in cases,
but it can also lead to a disconnect between the two parties. The investors in the
company may not understand what really goes on within the company. Alternately,
the employees of the company may not understand exactly what the investors are
thinking on important matters. This can lead to communication problems and
assumptions.
Little shareholder involvement
A disadvantage of the very large numbers of shareholders in a typical public
company is that most shareholders in fact have very little involvement in the
company. In most companies, large blocks of shares are owned by pension funds
and other groups of investors. The very largest funds may be consulted,
occasionally, by the board, but it is a near impossibility to consult all shareholders
about even major decisions. All shareholders can reasonably do to influence a
company's direction is sell their shares.
Slow decisions
The checks and balances created by separating ownership and control in a
corporation can also slow down decision-making. Managers find it hard to respond
quickly and flexibly to changes in the marketplace and to the introduction of new
technology.
References
Traditional Vs. Contemporary Organizational Structure. (2010). Bizfluent.
https://bizfluent.com/facts-6955724-traditional-vs--contemporary-organizational-
structure.html
The advantages and disadvantages of the separation of ownership and control in the
modern corporation. (2017).
https://www.ehow.co.uk/info_12269619_advantages-disadvantages-separation-
ownership-control-modern-corporation.html
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