Slide 2.
International Corporate Governance
Corporate Control Across the World
By the end of this session, you should be able to:
1. Describe the differences in the levels corporate control across the world
2. Be aware of differences in the importance of various types of
shareholders across regions and countries
3. Explain why the Berle-Means hypothesis does not hold outside the UK
and the USA.
4. Distinguish ownership from control
5. Explain how to obtain the various combinations of weak or strong
control with dispersed or concentrated ownership
6. Define security and private benefits of control, assessing the importance
and amplitude of private benefits of control across countries
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.2
Introduction
The previous lecture mentioned that the principal–agent
model has limits.
The model is based on the Berle-Means premise of a
separation of ownership and control in stock-exchange
listed firms.
However, this premise is only valid in the UK and the
USA.
In most the rest of the world, listed corporations tend to
have large shareholders.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.3
Introduction- The Evolution of Control after the IPO
This unit focuses on Ownership control rather than cash flow rights
because:
– Corporate governance is about the distribution of power within the
corporation and this power depends, among other factors, on the votes
held by various shareholders
– In most countries, there are disclosure requirements for the ownership
of control rights, but not for cash flow rights
IPO(initial public offering) as test of validity of Berle & Means hypothesis
– UK vs German IPOs over 6 years after IPO, matched by size (market
capitalisation) and initial control(family control)
– Initial shareholders of UK IPOs lose control 2 years after IPO so a fairly
rapid separation of ownership and control
– Initial shareholders of German IPOs keep majority control, 5 years after,
so no such a separation
– No difference in terms of control held by new shareholders.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.4
How long initial owners remained in control?
Table 2.1 – Evolution of control in German and UK IPOs
German firms UK firms
Time after Initial Free float New large Initial Free float New large
IPO (years) share- (%) share- share- (%) share-
holders holders holders holders
(%) (%) (%) (%)
Immediately 76.4 22.2 1.5 62.8 37.2 0.1
1 73.7 24.0 2.4 51.4 43.1 5.5
2 69.6 25.0 5.4 47.3 39.5 13.3
3 64.9 25.3 9.8 37.7 36.0 26.4
4 59.4 25.0 15.5 33.6 37.6 28.8
5 50.7 26.3 23.1 31.4 36.5 32.1
6 45.0 24.8 30.2 30.0 40.8 29.2
Goergen (1998), Goergen and Renneboog (2003)
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.5
Table 2.2 – Distribution of largest shareholders
in Europe and the USA
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.6
Level of Control in Western Europe & the USA
Control is direct (or indirect) ownership of voting rights
• A majority- for most AGM voting related decisions
• A supermajority (75%) e.g. takeover approval decision
• A blocking minority 25% to block Supermajority related decisions
Levels of control in
A. Continental W. Europe, most firms have 1 majority shareholder;
and a blocking minority shareholder; potential agency problems
between minority shareholders and large shareholder
B. UK and US, most firms ‘widely held’ or dispersed ownership; votes
of 3 largest owners 30% count only; potential agency problems
between shareholders and management
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.7
Who held the shares?
Table 2.3 – Distribution of control across types of large shareholders in Europe and the USA
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.8
Corporate Control in Western Europe and
the USA (Continued)
Nature of control
– Industrial and holding firms are the major shareholders in most
of Continental Europe
– Institutional shareholders are main shareholders in the UK and
Netherlands
– Family control is important in Continental Europe
– Control by the management is important in the UK(in fact the
US, too).
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.9
Corporate Control in Asia
o Japan- Keiretsu- a group of corps connected to a bank, cross-
ownership
o Korea- ‘Chaebol’- group of corps controlled by a family
o China- state-owned enterprises (SOEs)- mixed ownership &
control
o India- conglomerated/ ‘business group’ of corps, family
controlled, ownership pyramids & cross-holdings
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.10
Corporate Control in Asia & Transitional Economies
China: 5 major types of shareholders
1. Central government- largest shareholder in 67% of the firms!
2. Institutions & founders- largest shareholder holds ~43% of shares!
3. Employees,
4. Domestic investors (A shares), and
5. foreign investors (B and H shares).
Corporations of former communist countries’ transiting to
market economy use concentrated control, not following
US/ UK’s corp. control!
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.11
Table 4 – Distribution of control across types of large
shareholders in Asia
Country Sample Family State Institutional Industrial
investors companies
10% cut-off
Hong Kong 330 64.7 3.7 7.1 23.9
Indonesia 178 68.6 10.2 3.8 16.8
Japan 1,240 13.1 1.1 38.5 5.3
Korea 345 67.9 5.1 3.5 9.2
Malaysia 238 57.5 18.2 12.1 11.2
Philippines 120 42.1 3.6 16.8 35.9
Singapore 221 52.0 23.6 10.8 12.2
Taiwan 141 65.6 3.0 10.4 18.1
Thailand 167 56.5 7.5 12.8 21.1
20% cut-off
Hong Kong 330 66.7 1.4 5.2 19.8
Indonesia 178 71.5 8.2 2.0 13.2
Japan 1,240 9.7 0.8 6.5 3.2
Korea 345 48.4 1.6 0.7 6.1
Malaysia 238 67.2 13.4 2.3 6.7
Philippines 120 44.6 2.1 7.5 26.7
Singapore 221 55.4 23.5 4.1 11.5
Taiwan 141 48.2 2.8 5.3 17.4
Thailand 167 61.6 8 8.6 15.3
Source: Claessens et al. (2000) Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.12
International Corporate Governance
Control versus Ownership Rights
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.13
Introduction
While in the UK and the USA most listed corporations are
widely held, in the rest of the world corporations tend to have
large shareholders with significant control.
How do these large shareholders manage to stay in control?
The short answer is that they leverage control, i.e. they manage
to hold a substantial percentage of voting rights while holding
fewer cash flow rights. We have already seen one way of
leveraging control which is ownership pyramids, but there
are others.
More generally, we shall analyse the various combinations of
dispersed or concentrated ownership and weak or strong
control.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.14
Nature of Corporate Control in
Western Europe
Second tier
?
Holding Holding
First tier
Family Company Company
A B
15% 10% 20%
Quoted
firm
Figure 2.1 – Direct
or first-tier control
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.15
Figure 2.2 – Ultimate control
Second tier
Family
100% 51%
Holding Holding
First tier
Company Company
A B
15% 10% 20%
Quoted
firm
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.16
Combinations of Ownership and Control
Cash-flow rights: debt gets paid first, "senior" claim!
Control rights: who decide on use of firm’s asset!
Combinations of
– dispersed or concentrated ownership, and
– weak or strong control
16
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.17
Figure 3.1- Combinations of Ownership and Control
Combination A: Combination B:
Anglo-Saxon corp. Prevalent outside
control model UK/ US!
Control
Weak Strong
A: weak control and B: strong control and
Dispersed
dispersed ownership dispersed ownership
Ownership C: weak control and D: strong control and
Concentrated concentrated concentrated
ownership ownership
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.18
Combinations of Ownership and Control
Dispersed ownership has two major advantages
– increased liquidity resulting in a lower cost of capital, and
– the exposure to hostile takeovers putting pressure on managers to
perform well.
Its main disadvantage is the free-rider problem whereby
each individual shareholder refuses to monitor the
management as she/he will bear all the costs from doing
so, but will share the benefits with all the other
shareholders.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.19
Combinations of Ownership and Control (Continued)
Concentrated control and ownership also have a major
advantage as there will be a shareholder with enough
power and sufficient incentives to monitor the
management.
Its main disadvantage is the danger of minority
shareholder expropriation.(conflicts of interests between
large holder vs minority; shareholders vs stakeholders)
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.20
Combination A: Dispersed Ownership and
Weak Control
Case of most UK and US firms.
Advantages of liquidity and takeover market.
Disadvantages of insufficient monitoring.
Main conflict of interests is between the management and
the shareholders.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.21
Combination B: Dispersed Ownership and
Strong Control
This combination prevails in most corporations outside the
UK and the USA.
Active market in the shares.
There is a controlling shareholder with enough power to
prevent the managers from expropriating the shareholders.
However, there is also an increased risk of minority
shareholder expropriation.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.22
Combination C: Concentrated Ownership and
Weak Control
This is a fairly rare combination.
It applies to only a few firms across the world, including
German firms with voting caps.
Minority shareholders are protected as no single
shareholder is able to dominate.
Lack of monitoring and low liquidity.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.23
Combination D: Concentrated Ownership and
Control
This combination creates strong monitoring incentives.
However, there is also low liquidity and a reduced
takeover probability.
Volkswagen AG holds 99% of the shares of Audi AG.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.24
How to Achieve Dispersed Ownership and
Strong Control
There are five main ways of achieving this combination
– ownership pyramids,
– proxy votes,
– voting coalitions,
– dual-class shares, and
– clauses in the articles of association that confer additional votes
to long-term shareholders.
They all consist of leveraging control, i.e. having control
while holding a lower ownership stake.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.25
The Consequences of Dispersed Ownership
and Concentrated Control
Sanford Grossman and Oliver Hart argue that large stakes
create benefits of control.
There are two types
– security benefits originate from the increase in firm value due
the monitoring of the management and they are shared by all the
shareholders
– private benefits are extracted from the firm by the large
shareholder and are at the expense of the minority shareholders.
The latter include tunnelling, transfer pricing, nepotism
and infighting.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.26
The Consequences of Dispersed Ownership
and Concentrated Control (Continued)
The five main ways of achieving dispersed ownership
with concentrated control all violate the rule of one-vote
one-share.
The main consequence of violating this rule is the increase
in private benefits of control and the increased probability
of minority shareholder expropriation.
While private benefits are difficult to quantify, there are
nevertheless empirical studies that have tried to do exactly
that.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.27
Ownership Pyramids
Figure 2 – Simple ownership pyramid
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.28
Proxy Votes
We have already discussed proxy votes held by banks.
These proxy votes originate from the shares of the banks’
customers deposited with the banks.
However, proxy votes may also be solicited by
– the management, or
– small shareholders seeking the support of the other shareholders
to obtain approval for a motion they intend to put forward at the
shareholders’ meeting.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.29
Voting Coalitions
A voting coalition or voting pool consists of several
shareholders agreeing to vote in the same way.
In practice, voting coalitions are rare, especially those that
persist in the long term.
One reason for the infrequency of voting coalitions may
be the costs imposed by regulation.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.30
Voting Coalitions (Continued)
The UK City Code on Takeovers requires shareholders
that have acquired a stake of at least 30% to make a tender
offer to the remaining shareholders.
The same rule applies to voting coalitions.
However, there is evidence that in the UK voting
coalitions are formed on an ad hoc basis to intervene in
poorly performing companies.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.31
Dual-class Shares
Companies with dual-class shares have two classes of
shares
– a class with voting rights or superior voting rights, and
– a second class with no voting rights or fewer voting rights.
While non-voting shares have the disadvantage of no vote,
in some countries these shares confer preferential dividend
rights and a higher seniority (e.g. German preference
shares).
Dual-class shares are issued by some Continental
European firms, but also some American firms.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 3.32
2.32
Box 7 – Ford Motor Company dual-class shares
Percentage of Equity Represented by Class A and Class B Stock Voting Rights of Class A and Class B Stock
2.1%
40%
60%
97.9%
Class A stock Class B stock Class A stock Class B stock
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 3.33
2.33
Ford Motor Company has dual-class shares outstanding. The common stock represents
roughly 97% of the equity (33 / (33 + 1)) and the class B stock 3%. However, the common
stock has only 60% of the votes compared to 40% for class B.
Source: Ford Motor Company – 2009 annual report p.77 & p.150
“The Ford family holds all 71 million shares of the company's Class B stock, along with a
small number of the company's […] common shares. Under rules designed to preserve family
control and drafted when the company went public in 1956, the family holds 40 percent of
the voting power at the company as long as it continues to own at least 60.7 million shares of
the Class B stock [...]”
Source: Keith Brasher (2000), Ford Motor to Pay $10 Billion Dividend and Ensure Family
Control, New York Times, 14 April, Section C, p.1.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.34
Conferring Additional Votes to Long-term Shareholders
Many French companies confer additional voting rights to
their long-term shareholders via a clause in their articles of
association.
Frequently, such clauses are put in place at the time of the
IPO and are also retrospective.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 3.35
2.35
Box 8 – Double voting rights conferred to long-term shareholders of LVMH SA
Source: LVMH Reference document 2009, Bylaws, p.228; LVMH annual report 2009, p.12
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Slide 2.36
Conclusions
The combination of ownership and control determines the
main potential conflict of interests.
Combination A prevails in the UK and the USA whereas
combination B prevails elsewhere.
How to achieve combination B and its main consequence.
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
