Ownership and Corporate Control
Dr Yifan Zhou
Ownership, Control, and Governance
• Who is the owner?
UK US Japan Germany Asia…..
• How do the owners control the company?
• How many stocks should hold?
1% vs 99%?
Agency Problems and Corporate Governance
• Agency problems:
• Conflicts between shareholders’ and managers’ objectives.
• The shareholders are the principals; the managers are their agents.
• Agency problems arise when agents work for principals.
Agency Problems and Corporate Governance
• Agency costs are incurred when
1. Managers do not attempt to maximize firm value.
2. Shareholders incur costs to monitor the managers
constrain their actions.
and
Ownership, Control, and Governance
• Good governance matters.
• Good governance systems to align managers’
and shareholders’ interests.
Ownership, Control, and Governance
Corporate governance mechanisms:
1. Ownership: monitoring via voting
2. Board of directors
3. Compensation
4. Regulations
Ownership, Control, and Governance
Who own the companies?
Does the ownership matter?
Large shareholders vs minor holders?
Ownership, Control, and Governance
• Financial managers need to financing funds from financial
markets.
• Stock markets: shareholders.
• Firms have significant owners, who are they?
• The company held by the institutional investors, family, banks,
governments and widely held.
Ownership, Control, and Governance
The number of listed firms for Germany, UK,
US, and world stock markets: 1990–2012.
The figure shows the number of domestically
incorporated companies listed on a country's
stock exchange divided by the country’s
population in millions.
Financial Claims
•
The total values of bank loans,
private
(nongovernment) bonds, and stock markets
indifferent parts of the world in 2013.
•
To measure these financial claims on a com
parable basis, amounts are scaled by gross
domestic product (GDP).
Financial Claims
The United States:
•
Market-based financial system
•
Large amount of bank loans, stock market,
and corporate bond market.
Financial Claims
•
In United Kingdom, bank loans are much
more important than the bond market.
•
Stock market value is also high.
Financial Claims
•
Most countries in Europe, have bank-based
financial systems.
Household portfolio allocations
1995–2012, percentage of GDP
In the United States, a large
fraction of households’ portfolios
is held directly in equity securities,
mostly common stocks.
Household portfolio allocations
1995–2012,percentage of GDP
U.K. households tend to hold shares
indirectly, through equity-link insurance
and pensions.
Household portfolio allocations
1995–2012,percentage of GDP
Direct equity holdings are smallest
in Japan.
Household portfolio allocations
1995–2012,percentage of GDP
Investment in bank deposits,
insurance policies, and mutual and
pension funds are large in Japan.
Financial institutions’ portfolio
allocations
1995–2012, percentage of GDP
Financial assets held by financial
institutions, including banks, mut
ual funds, insurance companies,
pension funds, and others.
These investments are smaller in
the United States,
Financial institutions’ portfolio
allocations
1995–2012, percentage of GDP
Financial assets held by financial
institutions, including banks, mut
ual funds, insurance companies,
pension funds, and others.
These investments are smaller in
the United States,
Financial institutions’ portfolio
allocations
1995–2012, percentage of GDP
Financial institutions in the
United Kingdom, Europe, and
Japan have invested large
sums in loans and in deposits.
Nonfinancial corporations’ portfolio
allocations
1995–2012, percentage of GDP
Large cross-holdings of shares
among European corporations.
The large blocks of a company’s
stock are often held by other
corporations.
Ownership, Control, and Governance
Who owns the companies?
Does the ownership matter?
Large shareholders vs minor holders?
Ownership, Control, and Governance
Who owns the companies?
In the United States and United Kingdom,
saying “the stockholders”
Issue class of common stock, and each share has
one vote.
Ownership, Control, and Governance
Agency problem?
➢ In the United States and United Kingdom
➢ Financial objective: “to maximize stockholder value.”
➢ Why?
Ownership, Control, and Governance
Agency problem?
➢ According to U.S. and U.K. corporation law, manag
ers have a fiduciary duty to the shareholders.
➢ Mangers are legally required to act in the interests
of shareholders.
Ownership, Control, and Governance
Agency problem?
Case of the Ford Motor Company:
➢ Henry Ford announced a special dividend to spend for the
benefit of employees.
➢ A shareholder sued on the grounds that the management did
not have the right to improve that benefit at shareholders’
expense.
➢ Ford lost the case.
Ownership, Control, and Governance
• How do owners maintain their power?
• Founders or family company hold the shares with superior voting
rights.
• Dual-Class Equity: extra voting rights.
✓ For example, a firm’s Class A shares could have 10 votes, and the
Class B shares only 1.
Ownership, Control, and Governance
How do owners maintain their power?
Shareholder can select the board director to control company.
Statutory voting: each share represents one vote.
Cumulative voting: shareholders to direct their total voting rights to
specific candidates
Ownership, Control, and Governance
Statutory voting:
• For shareholder, maximum of 100 votes for each candidate.
Shareholder owns 100 shares
Shareholder owns 200 shares
100 votes
• Directors A
200 votes (win)
Directors B
Directors C
Directors D
Ownership, Control, and Governance
Cumulative voting:
•
Total voting rights number of shares X board directors being elected.
Shareholder owns 100 shares
100*4(number of board directors)
400 votes (win)
• Directors A
Directors B
Shareholder owns 200 shares
800 votes (win)
Directors C
Directors D
Ownership, Control, and Governance
How do owners maintain their power?
A dual-share arrangement allows founding chairman and his family to
control
• more than 70 percent of the voting rights by Class A shares.
• board of director election process,
• corporate decision making, and other important aspects of managing
the company.
Ownership, Control, and Governance
How do owners maintain their power?
Share Class Arrangements at Viacom Corporation:
➢ Voting Rights—Holders of Class A common stock are entitled
to one vote per share. Holders of Class B common stock do not
have any voting rights, except as required by Delaware law.
Ownership, Control, and Governance
How do owners maintain their power?
Share Class Arrangements at Viacom Corporation:
➢ Dividends—Stockholders of Class A common stock and Class B co
mmon stock will share ratably in any cash dividend declared by the
Board of Directors, subject to any preferential rights of
nding preferred stock.
any outsta
Ownership, Control, and Governance
Ford family hold a special
class of shares with 40% of the
voting power in Ford Motor.
Ownership, Control, and Governance
Ownership and Control in Japan
Japanese corporate finance has been the keiretsu
A keiretsu is a network of companies, usually organized
around a major bank.
Ownership, Control, and Governance
Ownership and Control in Japan
The bank and other financial institutions at the keiretsu’s center
own shares in most of the group companies (though a commercial
bank in Japan is limited to 5% ownership of each company).
Ownership, Control, and Governance
Ownership, Control, and Governance
Ownership and Control in Japan
Because of the cross-holdings, the number of shares available for
purchase by outside investors is much lower than the total number
outstanding.
Ownership, Control, and Governance
Ownership and Control in Japan
Most debt financing comes from the keiretsu’s main bank or affiliated
financial institutions.
Managers sit on boards of directors of other group companies.
The “presidents’ council”: CEOs of the most important group
companies meets regularly.
Ownership, Control, and Governance
Ownership and Control in Germany
Traditionally banks in Germany played a significant role in corporate
governance.
➢ providing loans
➢ owning large amounts of equity directly
➢ proxy voting power
Ownership, Control, and Governance
Ownership and Control in Germany
Traditionally banks in Germany played a significant role in corporate
governance.
➢ providing loans
➢ owning large amounts of equity directly
➢ proxy voting power
1990 ownership structure of Daimler-Benz
The owners were :
•
Deutsche Bank with 28%
•
Mercedes Automobile Holding
with 25%,
•
Kuwait Government with 14%.
•
The remaining 32% of the share
were widely held.
1990 ownership structure of Daimler-Benz
•
Deutsche Bank with 28%
•
Mercedes Automobile Holding with
25%,
•
Kuwait Government with 14%.
•
The remaining 32% of the share we
re widely held.
2014 ownership structure of Daimler-Benz
•
Deutsche Bank with 0%
•
Kuwait Government with 6.8%.
•
The remaining 90.1% of the
share were widely held.
Why do firms reduce the shares held by banks?
• Cost of share selling:
✓ The corporate capital gains rate had been 52%.
• Using board representation to monitoring firm.
• Bank monitoring performs worse than others.
• Who holds the ownership is a matter.
Ownership, Control, and Governance
Ownership patterns: Pyramids
✓ Asian and European countries.
✓ In a pyramid, control is exercised through a sequence of contr
olling positions in several layers of companies.
✓ Bottom of the pyramid: actual operating firms.
Share Ownership of the French Luxury Goods Company LVMH
• LVMH is controlled by
Bernard Arnault and
his family held 61.5%
(57.5%+1%+1%+2%)
Ownership, Control, and Governance
• How much stock should owners hold?
• 100% or 0.1%?
• Family control is common in Europe and also
in Asia.
Ownership, Control, and Governance
• How much stock should owners hold?
• 100% or 0.1%?
• Family control is common in Europe and Asia.
Family control in Asia.
•
The family held
•
Hong Kong: 66.7%
•
Thailand: 61.6%
•
Japan: 90% widely held.
Ownership, Control, and Governance
• Ownership is widely held:
• Minority shareholders face the collective action problem
“free-ride”
• Does the concentrated ownership perform better?
Ownership, Control, and Governance
The concentrated ownership (family owners) of the company:
➢ Strong incentives to monitor managers, reducing the free-rider problem.
➢ The majority of shareholders may seek private benefits at the expense of
minority shareholders (Shleifer and Vishny, 1986).
Ownership, Control, and Governance
Does the concentrated ownership perform better?
➢ may maximize value by monitoring management
➢ ensure firm pursues the best operating and investment strategies
➢ capture private benefits at other shareholders’ expense.
Ownership, Control, and Governance
There are two main agency problems in public companies:
➢ The conflict between managers and shareholders (type I agency problem)
➢ The conflict between majority and minority shareholders
(type II agency problem)
Ownership, Control, and Governance
• Who is the owner?
UK US Japan Germany Asia…..
• How do the owners control the company?
✓ Voting rights/Dual-Class Equity/ Pyramids
• How many stocks should hold?
✓ Concentrated ownership (type II agency problem)
✓ Minority shareholders “free-ride” problem