The benefits of the corporate structure are well known. They include the ability to mobilise small pockets of personal capital within the investor community (supported by some public trading platform such as a share market); access to economies of scale and scope that would not be available to many individuals operating their own enterprises; and the protective umbrella of limited liability.
Proliferation of the corporate form of enterprise has in turn provided an opportunity for another market to thrive - a market for managerial skill, separate from the ownership of capital. As companies grew and diversified, it became apparent that there was a natural limit to the ability of many owners to cope with the sheer size and complexity of their businesses (referred to as 'bounded rationality').
These businesses and owners faced a choice - they could choose to retain the owner-manager nexus, and of necessity remain small and ultimately risk being gobbled up by larger businesses. Or they could supplement their owner-supplied pool of managerial skills with the skills of professional managers who would not necessarily have any capital with which to obtain ownership, but who would bring specific skills and experience that were relevant to the particular business. Demand for non-owner managers provided the impetus for the ambitious, competent poor (relatively speaking) to leverage up their skills and become the supply side of the market for managerial skill.
The issue then became how to ensure that these non-owner managers would work as hard, and as honestly in pursuit of the wealth of owners, as the original owner-managers had worked. This entirely reasonable question as to the motivation of managers to work for the benefit of others poses the Agency Proble ...