The Advantages & Disadvantages of the Separation of Ownership & Control in the Modern Corporation

With the structure of the modern corporation, the ownership of the company and the control distribute among the shareholders. The structure of business can provide some advantages to the company overall, but it can also create some extra burdens along the way. Before choosing to incorporate, it helps to understand both sides of the issue.

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.

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.

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About the Author

Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.