Corporation
Corporation
The corporation, the central economic institution of modern society, is, in its most general definition, an association of individuals united for a common purpose and acting in a common name. With this definition, it is an institution of unknown antiquity. Certainly corporations organized for business and other purposes were well known to the Romans, but there is evidence that such institutions, intermediate between the individual and the state, are much older than this. Other characteristics that particularize the corporation as we know it have been present or absent throughout history, depending on the purposes of the association, the character of institutional innovation, and the permissiveness of the state.
Early history
The law is prone to emphasize that the corporation is a body chartered or recognized by the state; that it is a formal agreement, in the nature of a contract, among people joined in a common purpose; that it can hold property, contract, and sue and be sued in a common name; and that it has a length of life not subject to the lives of its members. These formal attributes, however, tend to compress the corporation as a historical and developing institution into too narrow a mold. Roman corporations were not chartered by the state before the third century a.d., and in seventeenthcentury Eng-land there were many associations doing business on a joint-stock basis that were not chartered by either Crown or Parliament. Indeed, alarm at the activities of these unchartered associations was an important reason for the Bubble Act of 1720.
The significance of the agreement of the several hundred thousand stockholders of a large American corporation and the commonness of their purpose is a matter of some doubt. The holding of property, contracting, and suing in a common name are highly significant attributes of the business corporation; but they may have little importance to an association incorporated for the improvement of the breed of Airedales. Even a life beyond the lives of its members is not a necessary attribute of the corporation as a historical entity.
Likewise, most of the elements that are emphasized as essential attributes of the modern business corporation are the product of social invention and have not been characteristic of business corporations from their beginning. Roman business corporations traded on a joint stock; but prior to the development of double-entry bookkeeping in the Italian city-states, the distinction between common and individual stocks tended to be somewhat fuzzy. The early English overseas trading companies also traded on a joint stock, but normally the capital was redistributed to the stockholders at the expiration of a voyage and reconstituted only for the next. The Dutch East India Company, founded in 1602, is supposed to be the first corporation established with a permanent capital stock. The practice of issuing transferable shares developed on the Continent and was brought to England in the sixteenth century. It was, and still is, the Continental practice to issue bearer shares, a device that has not been used in Anglo-Saxon jurisdictions. Limitation of the liability of stockholders for the debts of the corporation, characteristic of most modern business corporations, is a privilege that, on occasion, has been granted or withheld. In England it was not generally made available until 1855.
The delegation of authority to manage the corporation's daily affairs to a board of directors has developed slowly. This delegation is of no—or little —importance to the small, privately owned corporation and, in the large corporation, it has been subject to limitations that have varied considerably among countries and over time. The proliferation of participation rights in capital and income represented by different classes of securities is largely the product of American railway finance in the nineteenth century. And the various devices for assuring and perpetuating minority ownership or management control, such as voting trusts, nonvoting and multiple-voting stock, pyramiding via the holding company, and use of the proxy, are largely the invention of our own epoch.
In other words, the corporation is an evolving entity, and the end of its evolution is by no means in sight. There is every reason to believe that the business corporation a century hence will be a rather different institution from the one we now behold. The relations between the corporation and the state, between management and the various participants in capital and income, and between the corporation and its suppliers, customers, and labor force are in process of change.
If we consider the long sweep of corporate history, it is useful to distinguish the typical forms and uses of the corporation before and after the industrial revolution. Although the corporation was early put to business use, in the early period it was established predominantly for other purposes. Universities, monasteries, guilds, bishoprics, boroughs, were familiar types of corporations. Typically, the emphasis was on association for a common purpose rather than for utilization of a common stock of capital. The incorporators were a group of men related to each other by the place where they lived and the things they did. In the period since the industrial revolution, the business corporation has become the overwhelmingly important form. The emphasis has come to be placed on the management of a stock of capital rather than on the cooperation of a group of individuals. In the words of one observer, the “associative elements have been refined out” of the corporation, and in law it has become the expression “of a complicated relationship between men and things.”
In England the corporation was known as early as the Norman period; and from the fourteenth century on, incorporation by the Crown of boroughs, guilds, and ecclesiastical bodies was used as both an administrative device and a method of extending royal power against the baronage. Insofar as business activities were involved, the emphasis was not on a common stock, but rather on the regulation of the affairs of a group of craftsmen or tradesmen, each operating with his own capital. To this end the incorporated guilds developed effective internal legislative, judicial, and executive instrumentalities. More often than not, a functional or territorial monopoly was claimed for its membership.
The use of the corporation as both a business device and an arm of the state is clearly evidenced in the operations of the large overseas trading and colonizing companies of the sixteenth and seventeenth centuries. The British East India Company, the Levant Company, and others were as much governments as they were business enterprises. The American colonies were established by chartered corporations that governed as well as traded in their respective areas. Here again a grant of monopoly privileges was a common feature of incorporation. The colonists had every reason, from their experience, to associate monopoly with incorporation; and this view continued to influence American attitudes toward the corporation until well into the nineteenth century.
This customary relation between monopoly privilege and incorporation contributed in a major way to making the right of incorporation one of the issues in the struggle between Crown and Parliament in the seventeenth century. Parliament first sought the right to confirm such grants and later the independent power to grant charters. During the eighteenth century, corporations were chartered by both the Crown and Parliament; this issue was not finally settled until the enactment of general incorporation laws in the nineteenth century.
If we consider the transition from the older business or nonbusiness corporation to the modern, predominantly business corporation to be principally a shift from the emphasis on association, with all the problems of governance of men in association for a common purpose, to an emphasis on the administration of a joint stock of capital for profit, it is probable that the British joint-stock company is the closest forerunner of the modern business corporation. Before the industrial revolution, the sole proprietorship and partnership were overwhelmingly the most important types of business organization, both in numbers and in assets owned and controlled. But the seventeenth century witnessed an increasing number of business associations, both incorporated and unincorporated, trading on a common stock and acting in a common name. Participation in a joint stock recommended itself particularly as a device for spreading the risk in hazardous overseas trading operations. Before the end of the seventeenth century, many joint-stock companies had been formed in England for domestic operations as well.
Early in the eighteenth century, in both England and France, the formation of such companies assumed boom proportions. The two companies that achieved particular prominence in the ensuing debacle, the South Sea Company in England and John Law's Compagnie de la Louisiane ou d'Occident in France, were both chartered—the South Sea Company in 1711 and John Law's company in 1717. But in England, at least, many of the joint-stock companies that fell into disrepute were not chartered. The Bubble Act of 1720 struck directly at these unchartered companies, but its effects seriously inhibited the formation of chartered companies as well. This piece of legislation described itself as “An Act to Restrain the Extravagant and Unwarrantable Practice of Raising Money by Voluntary Subscriptions for Carrying on Projects Dangerous to the Trade and Subjects of this Kingdom.” It prohibited:
the acting or presuming to act as a corporate Body or Bodies, the raising or pretending to raise transferable Stock or Stocks, the transferring or pretending to transfer or assign any Share or Shares in Such Stock or Stocks without Legal Authority either by Act of Parliament or by any charter from the Crown to warrant such acting as a Body Corporate. … (quoted in Davis [1905] 1961, pp. iii-iv)
Although the Bubble Act left the door open for duly chartered corporations, very few business corporations were in fact chartered. During the eighteenth century the corporation was in eclipse. It was not that businessmen ceased to understand the merits of the corporation as a business form. Applications for the privilege of incorporation during the eighteenth century continued to stress the advantages of the holding of property in a common name; the legal right to contract, sue, and be sued; the effective delegation of power to a directorate; life extending beyond the lives of members; and limited liability. But the sentiments aroused by the crash of 1720 were deep and long-lasting. Adam Smith, writing on the eve of the industrial revolution, expressed these sentiments firmly. In his view, the joint-stock company, without monopoly privileges, was likely to be a successful enterprise only in conducting such routine operations as banking and insurance, or the management of canals and urban water systems.
Such enterprises usually required more capital than could be provided by a sole proprietor or a partnership. With the advent of the industrial revolution, the number of business opportunities that could be effectively exploited only by sizable amounts of capital increased rapidly. The joint-stock company was frequently the most effective way of assembling the required quantities of capital, and the management of such companies rather quickly demonstrated that the effectiveness of this type of business enterprise was not, in fact, limited to routine operations. With the industrial revolution the business corporation came into its own. Its subsequent development falls roughly into two periods. The first saw the spread of free incorporation under permissive general laws. The second has witnessed the growth of the large, multiplant corporation, frequently through the amalgamation of small local and regional concerns.
Nineteenth-century growth
France took the leadership in liberalizing corporation laws. The Code de Commerce of 1807 recognized three classes of business associations, of which one—the société anonyme—was the business corporation with transferable shares. The formation of such companies required special government authorization until the law of 1867, which permitted corporations to be formed on the basis of public registration. In England the Bubble Act was repealed in 1825, but incorporation continued to be permitted only by special grant until 1844. Limited liability was not granted as a matter of course until 1855. In Germany freedom of incorporation was not established until 1870.
The terms used to characterize the business corporation in different countries emphasize different aspects of the institution. The German Gesellschaft mit beschränkter Haftung stresses limited liability. The French société anonyme suggests the juristic as against the real person—a “person” whose life is independent of the lives of the incorporators. The British “limited joint-stock company” emphasizes the common capital, with participating rights and limited obligations. The American “corporation” refers back to the older meaning of an association of individuals united for a common purpose.
In the American colonies the only business corporations important enough to justify the investment in royal charters were the colonies themselves. And the extension to the colonies of the principles of the Bubble Act in 1741 effectively precluded the formation of unincorporated joint-stock companies. Thus, the United States came into being with a population highly suspicious of the business corporation as an instrument of royal prerogative and royal favor. It was not long, however, before the business corporation was domesticated to the American environment. The state legislatures, conceived as heirs to the sovereign power, took it upon themselves to grant charters, and a sizable number of businesses were incorporated before the constitution was ratified. Despite the fact that a power of the federal government to incorporate was deliberately omitted from the constitution, Congress chartered a corporation as early as 1791; the Supreme Court, in McCulloch v. Maryland, ratified this use of power. Federal incorporation, however, has been relatively rare; and corporate policy very early in the nineteenth century became a prerogative of the several states.
Some 335 businesses had been incorporated in the United States by 1800, mainly banks, insurance companies, and canal, turnpike, and bridge companies. Although special charters were required, these were readily granted for almost any business purpose; in 1811 New York enacted the first law permitting extensive self-incorporation. This act covered the principal areas of domestic manufacture and permitted the self-incorporation of companies with an authorized capital of less than $100,000. Larger companies required special charters, and such charters continued to be sought even by a number of small companies. The Connecticut Act of 1837 was still more general, and before the beginning of the Civil War a dozen states had enacted general incorporation laws. Most of these states, however, still left the way open for special charters. In fact, the general laws tended to be relatively restrictive and limited to smaller companies. Larger companies frequently attained a substantially greater freedom of action by special legislative enactment.
Competition among the states for the business of incorporating led, after the Civil War, to a rather rapid relaxation of legislatively imposed limitations. This movement was favored by a business environment in which incorporation came to be regarded as a “right” rather than a “privilege”; a “right” that was conceived to be an essential element of the doctrine of individual liberty. The New Jersey Act of 1875, which was highly permissive, was perhaps the first of the modern incorporation laws; it was followed over the next two decades by similar laws in other states. This process led to a substantially more lax regulation of business corporations than characterized the company law of most European countries.
The modern corporation
The large majority of business corporations formed in any economically advanced country are hardly to be distinguished from other types of business organization. They normally enjoy limited liability and a different tax status, but in essential respects function like other small firms. Economic theory has tended to see entrepreneurial activity as unaffected by the particular organizational form with which it happens to be clothed. But while the small, private corporation may be economically— and in other respects—undistinguishable from other types of firms, this is clearly not true of the large, quasi-public corporation. The large firm, because of its capital requirements, is almost inevitably a corporation; most of the problems commonly associated with corporate activity are problems of size and dispersion of ownership. The small, private corporation and the large, quasi-public corporation as legal persons may be equal in the eyes of the law, but they are so in no other respect.
The business area in which capital requirements first demanded the large corporate organization was railway transportation. Since individual fortunes were quite inadequate to meet these financial requirements, means were sought to enlist the savings of both public bodies and small private contributors. American railways were typically undercapitalized, and, in search of funds to meet underestimated financial requirements, a long series of financial instruments was devised. Preferred stock was issued first in 1830, when the Baltimore and Ohio ran out of funds and appealed to the Maryland legislature. The state sought to protect itself by asserting a first claim on earnings. Early preferred stock was cumulative, participating, voting, and temporary. All these characteristics were later varied and combined in different relationships. Debt financing was typical from the beginning of the railway era; and a wide variety of forms, sound and unsound, was evolved during the century. This variety of financing techniques developed by the railways became available to the growing industrial corporations after the Civil War. Still, as late as 1900, three-quarters of the corporations whose securities were listed on the New York Stock Exchange were railways.
The wide variety of financial instruments in common use created a similar variety in the participation rights of various types of security holders to capital and earnings. In theory, participants, at least in equity, were all bound together in a common interest and all working toward a common end. In fact, their interests and purposes tended to differ substantially. With this proliferation of securities, management acquired powers to apportion earnings and assets among various participants that were in addition to and distinctly different from older powers to manage the enterprise. Corporate law has slowly taken cognizance of this difference and, to prevent or limit the possibilities of exploitation inherent in the ability to influence participation rights in earnings and assets, has been developing the doctrine that all such powers have been granted only in trust, to be used equitably among the participants.
The great merger movement of 1897–1903 created in the industrial area corporations of a size that had formerly been by and large limited to the field of railway transportation. It was during this period that the big “twos,” “threes,” and “fours” characteristic of so many American industries were largely established. These large manufacturing and mining corporations, together with the older railway enterprises and the rapidly growing corporations in the newer utilities, were organizations substantially different from private businesses incorporated for tax reasons or to secure the advantages of limited liability. Their market position, absolute size, and internal organization created a set of problems essentially unknown to the world of the early nineteenth-century, family-type corporation. [SeeMergers.]
Typically, these large corporations possess assets of $250 million or more, employ 5,000 or more workers, count their stockholders in thousands or hundreds of thousands, account for a relatively large share of output in their respective industries, and operate establishments in a number of different locations. A relatively small number of such corporations account for a large percentage of the economic activity in manufacturing, transportation and utilities, mining, banking and insurance, and in certain branches of commerce. A recent compilation of corporate income tax returns revealed 525,000 active nonfinancial corporations in the United States with assets of $413,000 million. The 202 largest of these, all with assets of $250 million or more, owned 40 per cent of total corporate assets.
This is not a recent development in the United States, nor is it limited to the United States. Although the evidence is far from complete, it suggests no significant increase during the last four or five decades in the share of business activity (by various measures) accounted for by the largest corporations in the areas of manufacturing, mining, and public utilities. Such increase in concentration as has occurred in the economy as a whole during this period is mainly to be attributed to the decline in the relative importance of agriculture, a typically small-enterprise sector. And with the relative growth of service industries, it is possible that concentration in the economy as a whole may even decrease. Recent studies in Canada, Britain, and western Europe suggest a degree of concentration that, by certain measures, is higher than in the United States. The large corporations in the United States are much larger than elsewhere, but so also is the economy.
Nevertheless, the facts indicate a situation in which a few very large corporations account for a high percentage of business activity in a number of important sectors. And there is, moreover, a high correlation between absolute size and relative size within the different sectors and the industries constituting the manufacturing sector. The “twos,” “threes,” and “fours” in most industries tend also to be very large corporations. It is the relation between relative and absolute size that occasions most of the concern for what is commonly called “the problem of the large corporation.” [SeeEconomies of scale; Industrial concentration.]
The controversy
A high degree of concentration in a particular industry, i.e., a measure of relative size, is commonly supposed to indicate a substantial degree of monopoly power. The difficulties, however, of assessing the “degree of monopoly” are so formidable that it is doubtful whether this is a useful concept. An industry, however defined, inevitably differs so substantially from a market, within which it is appropriate to discuss the relations of monopoly and competition, that the one substitutes only very imperfectly for the other. Products of one industry compete with products from another, and firms in one industry are sheltered by transport costs from the competition of other firms in the same industry. It may be possible through the study of the structure of particular industries and of the behavior of firms within this structure to come to a more or less objective judgment that the area of choice or scope of decision making of large firms is significantly greater than that of small firms or of firms whose behavior is compatible with the competitive model, but this is about as far as agreement among different students of the problem can be pushed. [See the articlesMarkets and industries; Monopoly.]
The area of choice or scope of action open to the large corporation has a good deal to do with the significance of the “corporate problem.” If large corporations were as circumscribed in their behavior as firms operating within the context of the competitive model, most of the aspects of this problem, as elaborated in the literature of the subject, would tend to disappear. In an atomistically competitive environment, firms—whether incorporated or not—have no alternative but to buy and sell at established market prices; and a failure to maximize profits is tantamount to a failure of the firm. Under these circumstances, the legal characteristics or the internal organization of the firm is irrelevant to its behavior. Economic analysis has, in fact, tended to neglect questions of internal organization and to assume that entrepreneurial behavior is unaffected by the absolute size of firms. There is reason to believe that the 95 per cent of American corporations employing fewer than 20 workers do indeed behave much as do small proprietorships and partnerships. Insofar, however, as large corporations are able to escape from competitive market restraints, they command an area of decision making within which behavior may be significantly affected by absolute size and the character of their internal organization. [SeeCompetition.]
The aspects of size and internal organization most often stressed in the literature on the large corporation are the separation of ownership from control, the growth of a managerial class with motivations allegedly different from those of the classical nineteenth-century entrepreneur, and a changing relationship of the corporation to government and to the local community. The separation of ownership from control is alleged to be producing, on the one hand, a change in the meaning and significance to be attached to private property and, on the other, a group of manager-controllers no longer owing exclusive responsibility to owners but also to other groups, such as suppliers, workers, and customers, who are attached in one way or another to the corporation. The management groups in large corporations are said to be self-selected and their activities to have the customary bureaucratic characteristics: hierarchical organization, professionalization of function, formality of recruitment and promotion procedures, and a proliferation of written rules, orders, and record keeping. The changing relation of the large corporation to government is described by some as an increasing vulnerability of size to public opinion and governmental action or threats of action, and by others as increasing opportunity for manipulation of public policies by large business as a “system of power.” The changing relation to the local community is supposedly the product of multiestablishment corporations whose local installations are run by hired managers with only tenuous roots in the community. Obviously, some of these assertions are more speculative than others.
Separation of ownership and control
An increasing separation of ownership from control of the large corporation was clearly portrayed in the classic study of Berle and Means, The Modern Corporation and Private Property (1932). Nothing has appeared since then to deny this thesis, and much to confirm it. Very few among the largest corporations in the United States could be correctly described as majority-controlled. A larger number are controlled by discernible minority interests but, under the influence of estate duties, this group is declining relatively. A still larger number can only be described as management-controlled, and this number is increasing. The dominant influence at work, of course, is the increasing percentage of equity holdings in the hands of those concerned with returns rather than control. Management control has been assisted by such devices as voting trusts, nonvoting and multiple-voting stock, and pyramiding; but the trend to management control would exist without these devices. Nor has the securities legislation of the 1930s in the United States, which sought to support “shareholders' democracy” by regulating the system of proxy voting, had significant effect on this trend.
Much less clear, however, are the effects, if any, on the controllers and on the owners of the separation of ownership from control. Wide dispersion of shareholdings has accentuated certain characteristics of corporate ownership that have been there from the beginning. The shareholder of today has typically become a rentier concerned only with dividends and capital gains, but this is implicit in an organization that puts many capitals together to form a joint stock. In Berle's words, “The capital is there, and so is capitalism. The waning factor is the capitalist” (1954, p. 39). The capitalist as owner-manager of a local grist mill or corner garage is indeed hard to discover in the owner of 100 shares of Standard Oil. Eighteenth-century justifications of private property become somewhat obsolete in this context. But whether the stock-and-bond owner of the twentieth century is any less devoted to the institution of private property than the “full-blooded capitalist” of the nineteenth century is not obvious.
Nor is it clear to what extent the separation of ownership from control has affected the behavior of the firm. Managements of large firms typically and increasingly recruit their own replacements, taking account frequently of the interests of large lenders, investors, and possibly suppliers and customers; but without consulting the amorphous mass that represents majority stockholdings. This procedure of self-recruitment and self-replacement of management, together with a certain vagueness as to whom management owes responsibility, does raise questions concerning the “legitimacy” of managerial power. But it does not follow that this power, whether legitimate or not, is used very differently than it would be if it were in the hands of owners. There is considerable evidence that, with respect to policies affecting dividends, retention of earnings, and relative reliance on outside financing, separation of ownership from control has not had much influence. In other areas the supposed influence is rather speculative. Furthermore, there are influences other than the separation of ownership from control that impinge on the behavior of the large corporation.
Role of size
Absolute size, particularly if measured in terms of numbers of employees, regardless of the location of ultimate control, creates a managerial problem for which bureaucracy is the only answer. Major decisions tend to be group decisions in which the divergent interests of separate functional or area divisions of the corporation are represented by established suborganizations with procedures and expectations of their own. Authority that would be centralized in a small firm is delegated, but within the limits necessary to the maintenance of cohesion in the organization as a unit. The major as well as the minor decision makers are hired employees whose principal remuneration is by salary and whose expectation of economic improvement is through advancement in the hierarchy.
Insofar as absolute size is correlated with size in relation to the markets in which the corporation purchases inputs and disposes of output, the possibility exists of escape from the profit-maximizing behavior necessary to the continued existence of the competitive form. This is true whether the corporation is owner-controlled or management-controlled. But whether a management-controlled firm is more prone to take one or another course of action alternative to profit maximization than an owner-controlled firm is not clear.
The large corporation is likely to be confronted, on both the buying side and the selling side of the market, with units that are also large and well organized. In the capital market it confronts large banks, insurance companies, and other institutional investors well able to look after their own interests as capital suppliers. In the labor market it typically deals with large trade unions. The distribution of its product is frequently through dealers who are well organized and often protected by antidiscriminatory legislation. Finally, the large corporation acts within a political and social environment in which its size and conspicuousness make it a legitimate object of political inquiry and of public interest.
The large corporation is, then, typically management controlled; it is bureaucratically organized; it is usually able to escape to some degree from the competitive restraints that would compel action within a narrow range of alternatives; it is frequently confronted on the buying and selling sides of the market with large and well-organized units or groups; and it operates in a political and social environment in which its size makes it conspicuous. How these various characteristics act and react on each other and what influence, in concert, they have on the behavior of the large corporation is a subject on which there exists a large body of literature but little hard evidence. There does seem, however, to be substantial agreement that the “managerial capitalism” of the twentieth century is a different entity from the “classical capitalism” of the nineteenth and that the emergence of the large, multiproduct corporation, with widely dispersed shareholding, lies at the heart of the difference.
Profit maximization
There is strong emphasis in the literature of managerial capitalism on the proposition that profit maximization, as it was understood in the nineteenth-century context, does not now govern the behavior of the large corporation. By some this is interpreted to mean that long-run considerations rather than considerations of immediate gain are determining. Some hold that there are groups in addition to the owners whose interests are considered in the distribution of the gross proceeds of the corporation. Still others maintain that in a management-controlled corporation there are managerial preferences, running counter to profit maximization and concerned with the security and continued growth of the firm, that significantly influence corporate behavior. It must be said that whether corporations do or do not maximize long-run profits is not a proposition subject to statistical demonstration. Profit maximization can be precisely defined only in a static context with known cost and revenue functions. Any demonstration that corporations do not follow profit-maximizing procedures must produce weighty evidence of behavior clearly incompatible with any plausible concept of profit maximization.
That large corporations shape their price, output, and other policies with a relatively long time horizon in view does not require demonstration. But such behavior is not limited to large firms, nor is it dependent on particular forms of business organization. It is, rather, technologically determined and is dependent on the length of life of various inputs and on the possibility of cultivating persistent customer attachment.
Assertions that management is no longer exclusively responsible to ownership but owes obligations to labor, suppliers, customers, and others abound in writing on corporate management. But a distinction must be drawn between changes in the environment external to the corporation, to which management may react in ways that are compatible with sensible conceptions of profit maximization, and internal changes in corporate organization, creating obligations to interests other than ownership and incompatible with any principle of profit maximization. The twentieth-century corporation confronts an external politico-economic environment substantially different from that of its nineteenth-century counterpart. It would be strange if profit-maximizing behavior did not adapt itself to this environment. Increased emphasis on institutional advertising, expenditures devoted to improving the “corporate image,” grants for university scholarships, contributions to local community chests, the lending of executive personnel to various types of government service, are all evidence of an adaptive reaction to the changed environment within which the corporation operates; but they are not necessarily evidence of departure from profit maximizing.
Somewhat more persuasive is the argument that, in managerially controlled corporations in which the principal decision makers are not profit receivers, managerial preferences are likely to run counter to sensible interpretations of profit maximization. The obligations that management recognizes are not so much to various interest groups as to itself. Management compensation tends to be highly correlated with the size of the firm. So likewise are power, prestige, and status. It is suggested, therefore, that management's concern is centrally with the growth of the enterprise at rates and in ways that do not endanger the continued viability of the firm or the position of the existing officeholders. This may or may not be compatible with a sensible interpretation of profit maximization. There is a certain plausibülty to, and some evidence for, this proposition. It would be rather strange if the relaxation from immediate competitive pressures attendant on relative size, the administrative changes attendant on absolute size, and the expansion of managerial control had not had some significant influence on managerial preferences. Nevertheless, it must be said that these suggestions have not as yet been shaped into a clear and persuasive account of managerial motivation and behavior.
Edward S. Mason
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