SEPARATIONOFOWNERSHIPANDCONTROLEugeneF.FamaUniversityofChicagoandMichaelC.JensenHarvardBusinessSchoolmjensen@hbs.eduAbstractThispaperanalyzesthesurvivaloforganizationsinwhichdecisionagentsdonotbearamajorshareofthewealtheffectsoftheirdecisions.Thisiswhattheliteratureonlargecorporationscallsseparationof“ownership”and“control.”Suchseparationofdecisionandriskbearingfunctionsisalsocommontoorganizationslikelargeprofessionalpartnerships,financialmutualsandnonprofits.Wecontendthatseparationofdecisionandriskbearingfunctionssurvivesintheseorganizationsinpartbecauseofthebenefitsofspecializationofmanagementandriskbearingbutalsobecauseofaneffectivecommonapproachtocontrollingtheimpliedagencyproblems.Inparticular,thecontractstructuresofalltheseorganizationsseparatetheratificationandmonitoringofdecisionsfromtheinitiationandimplementationofthedecisions.©E.F.FamaandM.C.Jensen,1983JournalofLawandEconomics,Vol.XXVI,June1983.alsopublishedinFoundationsofOrganizationalStrategy,MichaelC.Jensen,HarvardUniversityPress,1998.ThisdocumentisavailableontheSocialScienceResearchNetwork(SSRN)ElectronicLibraryat:http://papers.ssrn.com/sol3/paper.taf?ABSTRACT_ID=94034SEPARATIONOFOWNERSHIPANDCONTROL*EugeneF.FamaandMichaelC.JensenJournalofLawandEconomics,Vol.XXVI,June1983,andFoundationsofOrganizationalStrategy,MichaelC.Jensen,HarvardUniversityPress,1998.I.IntroductionAbsentfiat,theformoforganizationthatsurvivesinanactivityistheonethatdeliverstheproductdemandedbycustomersatthelowestpricewhilecoveringcosts.1Ourgoalistoexplainthesurvivaloforganizationscharacterizedbyseparationof“ownership”and“control”—aproblemthathasbotheredstudentsofcorporationsfromAdamSmithtoBerleandMeansandJensenandMeckling.2Inmorepreciselanguage,weareconcernedwiththesurvivaloforganizationsinwhichimportantdecisionagentsdonotbearasubstantialshareofthewealtheffectsoftheirdecisions.Wearguethattheseparationofdecisionandrisk-bearingfunctionsobservedinlargecorporationsiscommontootherorganizationssuchaslargeprofessional*Thispaperisarevisionofpartsofourearlierpaper,TheSurvivalofOrganizations(September1980).InthecourseofthisworkwehaveprofitedfromthecommentsofR.Antle,R.Benne,F.Black,F.Easterbrook,A.Farber,W.Gavett,P.Hirsch,R.Hogarth,C.Holderness,R.Holthausen,C.Horne,J.Jeuck,R.Leftwich,S.McCormick,D.Mayers,P.Pashigian,M.Scholes,C.Smith,G.Stigler,R.Watts,T.Whisler,R.Yeaple,J.Zimmerman,andespeciallyA.Alchian,W.Meckling,andC.Plosser.FinancialsupportforFama’sparticipationisfromtheNationalScienceFoundation.JensenissupportedbytheManagerialEconomicsResearchCenteroftheUniversityofRochester.1Alchian(1950)isanearlyproponentoftheuseofnaturalselectionineconomicanalysis.Forasurveyofgeneralissuesintheanalysisoforganization,seeJensen(1983).2Smith(1776);BerleandMeans(1932);andJensenandMeckling(1976).FamaandJensen19832partnerships,financialmutuals,andnonprofits.Wecontendthatseparationofdecisionandrisk-bearingfunctionssurvivesintheseorganizationsinpartbecauseofthebenefitsofspecializationofmanagementandriskbearingbutalsobecauseofaneffectivecommonapproachtocontrollingtheagencyproblemscausedbyseparationofdecisionandrisk-bearingfunctions.Inparticular,ourhypothesisisthatthecontractstructuresofalloftheseorganizationsseparatetheratificationandmonitoringofdecisionsfrominitiationandimplementationofthedecisions.II.ResidualClaimsandDecisionProcessesAnorganizationisthen...
