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Divorce between Ownership and Control

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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!

OwnershipControl
ShareholdersManagers and Directors

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.

Imagine a father buying a car for his son. A father is a legal owner of the car, but a son uses the car. Here, the ownership belongs to the father because the vehicle registration certificate has his name on it. However, the father does not use the car at all. It is just his son who drives the car on a daily basis and who has control over it.

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

Amazon, Apple and Microsoft are large corporations with numerous shareholders. The shareholders are not able to control the companies’ everyday decisions.

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

Divorce between ownership and control, amazon ownership analysis, StudySmarter 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.

The principal-agent problem is a conflict in priorities between people in an enterprise.

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.

Divorce of Ownership from Control - Key takeaways

  • 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.

  • Shareholders tend to only own an enterprise, but the control over it belongs to directors and managers.

  • Divorce between ownership and control typically occurs by large companies with numerous shareholders such as Apple and Amazon.

  • People who own a business and people who control it tend to have various objectives. This is called the principal-agent problem.

  • Some ways to deal with the problem are implementing company legislation, rewards and incentives, and corporate governance.

Final Divorce between Ownership and Control Quiz

Question

Who can companies be owned by?

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Companies may be owned by private companies, states, governments, public companies, individual insiders, general public and institutions.


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When does the divorce between ownership and control happen?

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It typically takes place by large companies which are owned by a large number of shareholders.


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How do original owners of companies lose their control?

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When shares are sold to external investors.


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Which business is the least likely to have divorce between ownership and control?

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Answer

Local coffee shop

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What are the typical objectives of shareholders?

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High returns such as dividend payments and a rising share price.


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Which business is the most likely to have divorce between ownership and control?

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Answer

Johnson and Johnson

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What is the principal-agent problem?

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It is a conflict in priorities between people in an enterprise.


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What is the negative impact of divorce between ownership and control?

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Conflict between shareholders and directors/managers caused by their different objectives.


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What is meant by corporate governance?

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It is a system of rules by which a business is directed and controlled.


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What is divorce between ownership and control?


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It is a system of rules by which a business is directed and controlled.

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To whom does the control belong?

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To whom does the control belong?

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Give an example of a company with divorce between ownership and control

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Amazon, Apple, Microsoft Companies.

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How to deal with the principal-agent problem?

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Implement company legislation, rewards and incentives, and corporate governance.

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To whom does the ownership belong?

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To shareholders

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What are the typical objectives of managers/directors?

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Power, bonuses, prestige and status.

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___ is a state of having complete legal control of the status of something.

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Ownership

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___ is to have an influence on something and contribute to its decision-making. 

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Control

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Imagine a father buying a car for his son. A father is a legal owner of the car, but a son uses the car. Who does the ownership belong to?


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Answer

Father

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Imagine a father buying a car for his son. A father is a legal owner of the car, but a son uses the car. Who has control over the car?


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Son

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The divorce between ownership and control typically occurs at...


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large companies.

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The person who owns and controls a company is always the same.

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False

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___ is a conflict in priorities between people in an enterprise.

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The principal-agent problem

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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.


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True

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


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principal-agent problem. 

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In small companies where directors and shareholders are typically the same people. 

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True

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Shareholders are always those who have control over a company.

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False

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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...


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managers and directors. 

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When shares are sold to external investors, the original owners __ control.

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lose their

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At Amazon, Apple and Microsoft, shareholders control the companies’ everyday decisions. 

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False

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___ happens when an owner of a business does not control and does not get involved in the day-to-day decisions of the business. 

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A divorce between ownership and control

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