Separation of Ownership and Control (Fama and Jensen, 1983)

In this article, Eugene Fama and Michael Jensen explain the survival of organizations characterized by the separation of ownership and control.  Fama and Jensen argue that the separation of risk-bearing and decision making functions survive because of two reasons: (1) the benefits of the specialization in risk bearing and management; and (2) the approach to controlling the agency problems that arise from the separation of ownership and control. The main hypothesis stated in the article is that the contract structure of an organization in this context must separate decision management from decision control.  The contract structures "distinguish organizations from one another and explain why specific organizational forms survive."

In the following, some questions related to the article are presented:

(1) When do agency problems arise in an organization? How can they be addressed?

(2) Are the initiation and implementation of decisions necessarily allocated to the same agents?

(3) What factors make the combination of decision management, decision control, and residual risk bearing efficient?

(4) What factors make the separation of these three functions efficient?

(5) What is the relationship between specific knowledge and the degree of complexity of an organization?

(6) What are the costs of restricting the residual claims to the important decision agents?

(7) In what aspects do the agency problems within a family business differ from the ones faced by other types of organizations?

(8) What are the implications of unrestricted residual claims in the cost of capital of the firm?

(9) How can the agency problems related to diffuse decision and diffuse residual claimants be addressed?

(10) Under what assumptions is the following statement made by Fama and Jensen valid? "Separation and diffusion of decision management and decision control limit the power of individual decision agents to expropriate the interests of residual claimants."

(11) What are some of the market and organizational mechanisms for controlling the agency problems of specialized risk bearing derived from the unrestricted nature of common stock residual claims?

The article can be found here:

http://are.berkeley.edu/~antinori/prclass/FamaJensen.pdf