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As long as there have been companies, there has been debate on how companies should be run and who should be in control of them. For many years the business landscape consisted mainly of individual traders who both owned their business and exercised control over it. This all changed with the dawn of the Industrial Revolution, an unprecedented period of social upheaval and economic change, most notably the emergence of the modern capitalist economy. During this era there was a huge increase in the wealth of the middle classes as well as many technological improvements, such as rail travel, that required mass amounts of investment to function. This was mostly done through unincorporated associations, though it was possible for a joint stock company to become incorporated (i.e. obtain a separate legal personality from its owners) this was rarely extended to many corporations as the protections and privileges they granted were well protected by the state. The result of this was that these companies had many shareholders, often spread over most of the country, which would have made any attempts at litigation extremely difficult, so the Joint Stock Companies Act 1844 introduced incorporation for joint stock companies, though shareholders could still be liable for the debts of the corporation until the Limited Liability Act 1855 which gave the option of limited liability for corporations. This encouraged further investment and increased both the number and the geographical distance between shareholders and their companies. It was at the time of the stock market crash of 1929 in the USA and the subsequent Great Depression that academic commentators started to discuss the separation of ownership, which was vested in the shareholders, and control, which lay in the hands of the managers.
Aggregate theory stipulates that corporations are formed when groups of people with a common interest come together for a common purpose, and these private individuals are the basis for all of the acts committed by the corporation, it has no independent existence separate from its owners. This way it can justify placing the interests of its shareholders as the most imperative objective for the company to obtain, known as shareholder primacy, namely profit maximisation with no regard for societal needs. This theory waned when shares became more freely transferrable, as shareholders became uninterested in exercising control over the company and instead behaved more like spectators.
Corporate realism, on the other hand, considered the company to have a separate existence from its shareholders with its objectives being defined instead by the managers, though this theory failed when faced with the issue of managerial accountability, as it assumed a neutral management. It was not until Adolf Berle and Gardiner Means published The Modern Corporation and Private Property  in 1932 that these deficiencies were challenged.
In ‘The Modern Corporation and Private Property’, Berle and Means disputed the Corporate Realism model with fears of unaccountable managers controlling the largest corporations in America as their owners were too dispersed or uninterested to be involved with the day to day running of the corporation. They feared that these powerful managers would be unaccountable to the owners of their respective companies, but could also hold power over those who relied on the company, such as employees, their families and the consumer. Berle and Means promoted greater transparency, voting rights for all shareholders and accountability to ensure that managers never gained too much control over the company. By advocating these shareholder rights, Berle and Means sought to reduce the gap between ownership and control, placing control firmly back in the hands of the owners, they viewed the corporation as a manifestation of shareholder will and felt that wherever possible those in control of the company ought to fulfil the objectives of the shareholders, and disregard any social responsibility where it would hinder the completion of said objectives, most notably profit maximisation.
Merrick Dodd aimed to respond to the lack of managerial accountability that Berle and Means pointed out in Corporate Realism and began a now legendary debate in the Harvard Law Review with Berle. Dodd theorised that a corporation is a real legal person rather than an aggregate of the private individuals behind it, and just as a normal person has responsibilities that impede their free will, so must a corporation. This suggestion of a ‘Socially Responsible Corporation’ required managers to exercise their power in a manner that recognises their social responsibilities to stakeholders such as employees and customers, which may at times be contrary to its economic objectives. With this theory “…Dodd emphatically rejected the notion of shareholder primacy and provided a clear basis of the separation of ownership from control.’  Berle believed that Dodd’s model was impractical and would encourage greater managerial dominance over the control of corporations, and offered a revised version of his original theory which placed managers as trustees for the shareholders, which would make managers accountable and place shareholder wealth as the sole corporate interest. Despite these reservations of Dodd’s pluralist model, managerial companies were highly successful in the period following World War II and despite fears of managerial accountability resurfacing, Berle admitted Dodd had won the debate and adopted his approach in 1959. Dodd’s ‘Socially Responsible Corporation’ viewed the corporation as a public entity due to its inevitable relationship with private individuals, and thus deduced that it was separate from its owners as they did not interact with the public. This gave the firm a legal personality all of its own and forced managers to act ethically so as to not harm the public.
Prior to the debate between Berle and Dodd, Neo-Classical Economists were redeveloping the aggregate theory of the company and suggested four fundamental assumptions of a firm operating in a market, though it is important to note that they saw the firm as a person with the capacity to function in a market, rather than, for example, a nexus of contracts. The first assumption that the Neo-Classicalists made was that the supply of goods in a market and the demand for those goods will determine the price, and corporations will choose to trade in markets with the highest demand but the lowest supply, as this increases the selling price of the good. The second assumption is that the market is perfectly competitive, that is to say that all of the corporations within a market are selling identical products that cost an identical amount to create. The third assumption is that profit maximisation is the only objective for firms in this perfect market and they will not make reference to their competitors when in pursuit of this goal. The fourth assumption is that the company holds perfect certainty about its market, which is complete information about any future or present events that would affect the market and thus influence its decisions. Separation of ownership and control
In the 1930s the school of economic thought was beginning to evaluate the law of the company within their theory, and a small group started to refute the four assumptions of Neo-Classical Economics, that is to say that they believed that the laws of supply and demand did not set the price for goods in a market, but the corporations did. They also viewed imperfect markets as the norm, and that the sellers in a market created dissimilar products, each with their different production costs. Profit maximisation, they said, could not be assumed and instead argued that managers made decisions based on their own self interest, specifically to enhance their status, power and size of their salary. Managers could use their discretion to benefit themselves, though it was often through profit maximisation, the main objective of the shareholders, that they could reinforce their position in the company and gain greater status through their stewardship of a successful corporation. Scholars such a Coase disagreed with the assumption of perfect certainty and stated that uncertainty was inherent in the contractual process which entailed the burden of transaction costs, such as payments to economic forecasters, in an attempt to lessen this uncertainty.
The Market for Corporate Control was postulated by Henry Manne in 1965,  and theorised that managers are agents of shareholders, and whilst it was the shareholders that provided the capital that ensured the corporation could function, it was the managers who were intimately involved with the running of the firm and the shareholder must incur ‘agency costs’ to supervise managerial efficiency. Though this may seem a critique of managerial unaccountability, Manne argued that the market itself made managers more accountable as if they did not operate efficiently and maximise profits it would reduce the dividends that flowed back to shareholders and if the agency costs were greater than their profit, shareholders would be more willing to sell their holding in the in company which would lower the share price and leave the company open for a hostile takeover in which the managers would be replaced by others whom the new shareholders feel could perform their task more efficiently.
There was still a lack of corporate governance theory in the realm of economic thought until the development of the nexus of contracts theory that a firm was not a person, but instead a series of contracts between individuals thus constituting a market. A market has no legal personality and no interests so social responsibility has no place in this theory, instead the shareholders would maximise their own self interest by chasing the most efficient methods of production and the most profitable contracts. As Paddy Ireland put it “…contractual theories of the corporation, it suggests, seek to give legitimacy to a legal status-quo in which corporations are run exclusively for the private benefit of shareholders despite their overwhelmingly social and public nature.” 
In conclusion I believe that by their very nature, theories of the company as aggregates of individuals assert the will of their owners as the prime directive of the corporation. As such the managers of these companies owe a duty to the shareholders to put their interests above any other external sources, such as the well being of employees, and must disregard any societal influences that would otherwise impede the will of the shareholders. Conversely, theories that view the company as a legal person separate from its owners, such as Dodd’s Socially Responsible Corporation, come to the conclusion that, just like a real person, the company must give regard to anyone who its actions may affect and thus the objective of the shareholders may be forced to take a backseat to the rights of other stakeholders even when it is not economically viable to do so. There are of course exceptions to these theories, such as the economic theories which place emphasis upon efficiency and therefore profit, the objective of the shareholder, but do not view the corporation as a legal entity; instead they view it as a nexus of contracts and a market in its own right.
Word Count – 1872
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