Economic Organization #4

This continues the topic of control of a corporation with many owners-stockholders and day-to-day decision-making delegated to professional managers.

Rather than try to control the decisions of management, which is harder to do with many stockholders than with only a few, selling provides a much easier way for a stockholder to exit from management with which he disagrees. Nevertheless, restricted salability is not uncommon, e.g. minimum holding periods for insiders, especially after an initial public offering and stock grants.

In addition to competition from outside and inside managers, more control may be temporarily gained via voting blocs owned and/or controlled by one or a few contenders. Proxy battles or stock-purchases concentrate the votes required to displace the existing management or modify managerial policies.

Without capitalization of future benefits, there would be less incentive to incur the costs required to exert informed decisive influence on the corporation's policies and managing personnel. Temporarily, the structure of ownership is reformed, moving away from diffused ownership into decisive power blocs, and this is a transient resurgence of the classical firm with power again concentrated in those who have title to the residual.

The benefits obtained by the new management are greater if the stock can be purchased and sold, because this enables capitalization of anticipated future improvements into present wealth of new managers who bought stock and created a larger capital by their management changes. In contrast, nonprofit corporations, colleges, churches, country clubs, mutual savings banks, mutual insurance  companies, and "coops," the future consequences of improved management are not capitalized into present wealth of stock-holders.