Separation of ownership and control
The investing public is a major source of funds for new or expanding operations. As companies have grown, their need for funds has grown, with the consequence that legal ownership of companies has become widely dispersed. For example, in large American corporations, shareholders may run into the hundreds of thousands and even more. Although large blocks of shares may be held by wealthy individuals or institutions, the total amount of stock in these companies is so large that even a very wealthy person is not likely to own more than a small fraction of it.
The chief effect of this stock dispersion has been to give effective control of the companies to their salaried managers. Although each company holds an annual meeting open to all stockholders, who may vote on company policy, these gatherings, in fact, tend to ratify ongoing policy. Even if sharp questions are asked, the presiding officers almost invariably hold enough proxies to override outside proposals. The only real recourse for dissatisfied shareholders is to sell their stock and invest in firms whose policies are more to their liking. (If enough shareholders do this, of course, the price of the stock will fall quite markedly, perhaps impelling changes in management personnel or company policy.) Occasionally, there are “proxy battles,” when attempts are made to persuade a majority of shareholders to vote against a firm's managers (or to secure representation of a minority bloc on the board), but such struggles seldom involve the largest companies. It is in the managers' interest to keep the stockholders happy, for, if the company's shares are regarded as a good buy, then it is easy to raise capital through a new stock issue.
Thus, if a company is performing well in terms of sales and earnings, its executives will have a relatively free hand. If a company gets into trouble, its usual course is to agree to be merged into another incorporated company or to borrow money. In the latter case, the lending institution may insist on a new chief executive of its own choosing. If a company undergoes bankruptcy and receivership, the court may appoint someone to head the operation. But managerial autonomy is the rule. The salaried executives typically have the discretion and authority to decide what products and services they will put on the market, where they will locate plants and offices, how they will deal with employees, and whether and in what directions they will expand their spheres of operation.
Executive management
The markets that corporations serve reflect the great variety of humanity and human wants; accordingly, firms that serve different markets exhibit great differences in technology, structure, beliefs, and practice. Because the essence of competition and innovation lies in differentiation and change, corporations are in general under degrees of competitive pressure to modify or change their existing offerings and to introduce new products or services. Similarly, as markets decline or become less profitable, they are under pressure to invent or discover new wants and markets. Resistance to this pressure for change and variety is among the benefits derived from regulated manufacturing, from standardization of machines and tools, and from labour specialization. Every firm has to arrive at a mode of balancing change and stability, a conflict often expressed in distinctions drawn between capital and revenue and long- and short-term operations and strategy. Many corporations have achieved relatively stable product–market relationships, providing further opportunity for growth within particular markets and expansion into new areas. Such relative market control endows corporate executives and officers with considerable discretion over resources and, in turn, with considerable corporate powers. In theory these men and women are hired to manage someone else's property; in practice, however, many management officers have come increasingly to regard the stockholders as simply one of several constituencies to which they must report at periodic intervals through the year.
Managerial decision making
The guidelines governing management decisions cannot be reduced to a simple formula. Traditionally, economists have assumed that the goal of a business enterprise was to maximize its profits. There are, however, problems of interpretation with this simple assertion. First, over time the notion of “profit” is itself unclear in operational terms. Today's profits can be increased at the expense of profits years away, by cutting maintenance, deferring investment, and exploiting staff. Second, there are questions over whether expenditure on offices, cars, staff expenses, and other trappings of status reduces shareholders' wealth or whether these are part of necessary performance incentives for executives. Some proponents of such expenditures believe that they serve to enhance contacts, breed confidence, improve the flow of information, and stimulate business. Third, if management asserts primacy of profits, this may in itself provide negative signals to employees about systems of corporate values. Where long-term success requires goodwill, commitment, and cooperation, focus on short-term profit may alienate or drive away those very employees upon whom long-term success depends.
Generally speaking, most companies turn over only about half of their earnings to stockholders as dividends. They plow the rest of their profits back into the operation. A major motivation of executives is to expand their operations faster than those of their competitors. The important point, however, is that without profit over the long term no firm can survive. For growing firms in competitive markets a major indicator of executive competence is the ability to augment company earnings by increasing sales or productivity or by achieving savings in other ways. This principle distinguishes the field of business from other fields. A drug company makes pharmaceuticals and may be interested in improving health, but it exists, first and foremost, to make profits. If it found that it could make more money by manufacturing frozen orange juice, it might choose to do so.
The modern executive
Much has been written about business executives as “organization men.” According to this view, typical company managers no longer display the individualism of earlier generations of entrepreneurs. They seek protection in committee-made decisions and tailor their personalities to please their superiors; they aim to be good “team” members, adopting the firm's values as their own. The view is commonly held that there are companies—and entire industries—that have discouraged innovative ideas. The real question now is whether or not companies will develop policies to encourage autonomy and adventuresomeness among managers.
In Japan, where the employees of large corporations tend to remain with the same employer throughout their working lives, the corporations recruit young men upon their graduation from universities and train them as company cadets. Those among the cadets who demonstrate ability and a personality compatible with the organization are later selected as managers. Because of the seniority system, many are well past middle age before they achieve high status. There are signs that the system is weakening, however, as efforts are more often made to lift promising young men out of low-echelon positions. Criticism of the traditional method has been stimulated by the example of some of the newer corporations and of those owned by foreign capital. The few men in the Japanese business world who have emerged as personalities are either founders of corporations, managers of family enterprises, or small businessmen. They share a strong inclination to make their own decisions and to minimize the role of directors and boards.
