2.2.3 Separation of ownership and control and difficulties attached

Adam Smith raised the issue described above in his book "An Inquiry into the Nature and Causes of the Wealth of Nations" (1776): "The directors of such (joint-stock) companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own" (Mallin 2010, p. 15).

Not being the owner of invested money results in other management than in the case of managing your own money. According to Smith, in such a situation one tends to pay less attention and is less careful than with self-invested money. The separation of ownership and control is not per definition a negative matter, but often necessary and inevitable. Shleifer and Vishny define the separation of ownership and control (or in their words finance and management) as: "An entrepreneur, or a manager, raises funds from investors either to put them to productive use or to cash out his holdings in the firm. The financier needs the manager's specialized human capital to generate returns on their funds. The manager needs the financier s funds, since he either does not have enough capital of his own to invest or else wants to cash out his holdings" (Shleifer and Vishny 1997, p. 740).

Berle and Means stress the necessity and inevitability of the separation of ownership and control in their work "The Modern Corporation and Private Property" (1932): the more countries developed their markets and industrialised, the more the ownership and control within firms had to become separated. Usually the group of investors was large and dispersed, and therefore not capable of managing the firm (the classic 'Berle and Means' firms, see section 1.3.4 on the convergence debate). The professional management of the firm (the directors) performs the daily management and the investors (the shareholders) provide the firm with their capital.1 To Davies as well, it is ofno surprise that the management of a company is not left with the shareholders but entrusted to a small group of managers (Davies 2002, p. 13). In his opinion it is a question of speed and costs; most efficient is to allow the management to take the daily decisions and only to convene the shareholders' meetings for major decisions. Moreover, being a good investor as a shareholder does not necessarily mean being skilled as a good manager and not all shareholders are motivated to invest - in addition to money - time in the firm.

Although separation of ownership and control is efficient and in time became inevitable, various difficulties occurred such as agency problems and information asymmetry. The management runs the company and makes the daily decisions, meaning that the management spends a great deal of time on the company and improves its knowledge regarding the company and the relevant market. A difference in knowledge arises between the manager and the shareholder - information asymmetry - which can give rise to the agency problems discussed below.

The other relevant theories (including the stewardship theory and stakeholder theory) are not neglected in the following discussion, but are addressed directly further in this chapter. However, for the sake of history and explanation the agency theory is explained first.