Global Variations in Ownership Structures

Global differences in legal, social, political, and economic factors have led to differences in ownership structures.

Concentrated Ownership vs. Dispersed Ownership

Corporate ownership structures can be classified as either concentrated, dispersed, or a hybrid. Globally, the most common ownership structure category is concentrated ownership, where a single shareholder or a group of shareholders have control over the corporation. These controlling shareholders can be a family, other companies, or a sovereign entity.

Dispersed ownership refers to the situation where the shareholders are numerous and none has control.

Percentage ownership is not always a reliable indicator of concentration of control: certain shareholders may have a greater degree of control than their ownership percentage would suggest. A minority shareholder (i.e., holding less than 50% of shares) could have control of a corporation through a vertical ownership arrangement (where the group has a controlling interest in holding companies, which in turn have controlling interests in operating companies) or a horizontal ownership arrangement (where companies with common suppliers or customers cross hold each other’s shares).

Another disconnect between control and percentage ownership comes in the form of dual class shares, wherein one class of shareholders has fewer voting rights, while the other class has superior voting rights.

Conflicts Within Different Ownership Structures

Depending on the type of ownership structure present in a corporation, different kinds of conflicts may emerge among shareholders and between managers and shareholders.

Dispersed ownership and dispersed voting power describes a situation where shareholders (called weak shareholders) do not hold power over managers (called strong managers). In this situation, principal agent conflict is likely: shareholders want shareholder value maximized, while managers may use the firm’s resources to their own advantage. This problem can be mitigated by the presence of controlling shareholders.

Concentrated ownership and concentrated voting power refers to a situation where so called “strong” shareholders hold power over minority shareholders and “weak” managers. This arrangement allows controlling shareholders to control the board of directors and effectively control and monitor management. The downside of this situation is that a principal principal problem may arise: controlling owners can take advantage of firm resources to the detriment of minority owners.

Dispersed ownership and concentrated voting power indicates that the majority of the shares of a company are not owned by strong controlling shareholders. Rather, the controlling shareholders gain control over other minority shareholders through pyramid structures or dual class shares, despite the controlling shareholders having less than majority ownership (again, the principal principal problem). These controlling shareholders’ voting power also allows them to monitor management.

Concentrated ownership and dispersed voting power occurs in the presence of voting caps, where the voting rights of large share positions are restricted. Sovereign countries sometimes enact voting caps to discourage foreign investors from taking a controlling position in a company belonging to an industry that is considered important.

Categories of Influential Shareholders

To properly identify various corporate governance risks, it can be helpful to consider the various types of shareholders and how they may impact corporate governance.

1. Banks. When a bank lends money to a firm or holds an equity stake, the bank can often exert some control over that corporation. (This is especially common in Asia and Europe.) If a bank is both a lender and a shareholder to a firm, the bank may use its influence to encourage the firm to take out large expensive loans from the bank. Corporate governance controls here could ensure that the bank does not take advantage of its role as lender at the expense of other shareholders.

2. Families. In Latin America and some other places, family ownership is common. It is also common for individuals to sit on the boards of numerous companies, a term called interlocking directorates, resulting in one family controlling multiple companies. One advantage of family control is that principal agent issues may be reduced.

On the other hand, family ownership can make it difficult to recruit quality outsiders for management and often leads to lack of concern for minority shareholders, as well as minimal transparency and low accountability by management.

3. State owned enterprises. When a corporation operates in a sector that the government feels is strategically important, or needs to produce some good or product essential to a country’s population, or if the capital required exceeds what the private sector can fund, the corporation may be operated as a state owned enterprise (SOE). A listed SOE is partly owned by the government and also trades on an exchange.

It may be the case that SOEs will seek to provide social benefits to the public rather than focusing only on shareholder value maximization.

4. Institutional investors. In many countries, institutional investors (e.g., pension funds, insurance companies, mutual funds) can represent a large portion of equity ownership, and tend to wield their shareholder rights with expertise because of the experience and resources that they bring to the table. While institutional investors usually will not own a large enough position to be a controlling shareholder, they can typically pressure a firm’s management and board to act in the interest of shareholders.

5. Group companies, such as South Korea’s Samsung, can achieve an outsized amount of control through cross holding of shares via vertical and horizontal ownership. These cross holding schemes make it difficult for outsiders to acquire shares. Crossholding also increases the potential for the firms to participate in related party transactions that do not advantage minority shareholders.

6. Private equity firms invest in private companies (or public companies that they plan to take private). The involvement of private equity firms may bring beneficial changes to the portfolio firms’ corporate governance, such as introducing performance based compensation for managers, or the addition of codes.

7. Foreign investors. Foreign investors typically demand greater accountability and transparency.

This is particularly true in emerging market countries. Minority shareholders can benefit when a company decides to cross list its shares in a country that has a greater protection for investors and higher standards of transparency.

8. Managers and board directors. When the board of directors and company managers own shares in a firm, their interests become more aligned with those of other shareholders, and these insiders are more likely to use the firm’s resources to boost profitability over the long term. On the other hand, there is also the potential for insiders to use their ownership stakes to protect their own interests rather than those of other shareholders.

Ownership Structure and Corporate Governance

Some of the major ownership structure factors that impact corporate governance include:

1. Director independence. When a board member has no significant remuneration, ownership, or employment relationship with the firm, the board member is considered independent. Independent directors are important in countries with dispersed ownership where the principal agent problem is greater and thus the board’s role of monitoring managers is key. The portion of directors on boards that are independent has grown in the aftermath of corporate scandals (e.g., Enron).

2. Board structures. Boards of directors can generally be categorized as one or two tier. A one tier board is the most common and is made up of both internal (executive) directors and external (nonexecutive) directors. Under a two tier structure (required in countries such as Russia, Germany, and Argentina), the management board is overseen by a supervisory board.

This supervisory board performs functions such as determining management compensation, supervising external auditors, and reviewing the firm’s financial records. In some jurisdictions, representatives of stakeholders such as labor groups sit on the supervisory board.

3. Special voting arrangements. Some countries attempt to provide an advantage to minority shareholders through special voting arrangements for board nomination and election.

4. Corporate governance codes, laws, and listing requirements. Some countries have adopted national “comply or explain” corporate governance codes that require firms to either adopt best practices of corporate governance or explain why they have not.

5. Stewardship codes. Stewardship codes exist in some countries that seek to engage investors in corporate governance by exercising their legal rights. In some cases, these codes are voluntary, but in the U.K., for example, institutional investors are required to “comply or explain” with respect to the U.K.’s Stewardship Code.