View/Open - Research Commons - The University of Waikato

shareholders, had failed to mitigate "the rigidities of the „folklore‟ of corporate entity in
favour of the legitimate interests of the company‟s creditors." 6
The modern economic theories of corporation generally can be divided into two main
approaches: managerialism and contractarianism. 7 Managerialism stems from the work of
Berle and Means in 1932 and influences the development of corporate law. 8 The heart of
this theory based on a study of American capitalism, revealed that the majority of large
public companies' managements have escaped effective shareholder control. 9 The current
economic system shows that most companies are owned by passive investors who, in
many cases, have not even seen the property from which they derive their profits. 10 A
company‟s control, as a result lies, with the management.
The idea of the company and the person controlling the company as separate does not sit
well with the company structures. 11 This is because the decision-making which lies with
directors raises opportunity for them to swindle the company‟s assets at the expense of
both creditors and shareholders. 12 This weakness of control results in shareholders opting
to remain passive or to vote with management. 13 The state of shareholders‟ inactivity
enables managers to pursue objectives of their own choosing, other than the
6 Otto Kahn-Freund “Some Reflections on Company Law Reform” (1944) 7 MLR 54 at 55.
7 Adolf A Berle and Gardiner C Means The Modern Corporation and Private Property (The Macmillan
Company, New York, 1932); Adolf A Berle and Gardiner C Means The Modern Corporation and
Private Property (Revised ed., Harcourt, Brace & World, New York, 1968) at 312-313; Ross Grantham
and Charles Rickett Company and Securities Law Commentary and Law (Brookers Ltd, Wellington,
2002) at 54-55; Brian Cheffins Company Law: Theory, Structure and Operation (Clarendon Press,
Oxford, 1997) 31-41; John Parkinson Corporate Power and Responsibility (Clarendon Press, Oxford,
1993) at 54-56 and at 97-132.
8 Ibid.
9 Ibid.
10 Ibid.
11 Farrar “Frankenstein” above n4 at 149.
12 Berle and Means above n7 at 67; Grantham and Rickett above n7 at 62; Cheffins above n7 at 65;
Parkinson above n7 at 63-70.
13 Ibid; Edwin M Dodd: For Whom are Corporate Managers Trustees?” (1932) 45 Harv LR 1145 at 1153.
13