Current research status and
Issues of Corporate Governance
-Focusing on issues of Korean
Corporate Governance
Chang Min, Lee
August 2010
1
Table of Contents
1. Introduction
2. Forms of corporate governance
a.
Existence, Forms, and Management participation of Controlling
Shareholders
b.
One share-One vote Principle deviation
3. Family firm control structure and Succession of control
a.
b.
Family firm control structure
Succession of Control
4. Business group structure
a.
Business Group structure in Emerging market
2
1. Introduction
Increasing Trend of theoretical and
empirical study
Family firm
• A family firm is the firm which the
founder and his or her family hold
shares or are the members of the
management or board of directors
of the company in a broad sense. In
a narrow sense, it refers the firm
which the founder and his or her
family are the controlling
shareholders<1>
Business Group
• A business group indicates the
form of the firm where several
independent companies are
connected because of shares or
family relations
3
1. Introduction
Rafael La Porta et al (1999)
• Analyzed corporate governance of large companies in 27 developed countries.
• Many of large companies have controlling shareholders<2>.
• Many of large companies are controlled by the family and the state.
• Many firms are out of One share-One vote principle through Pyramid or
management participation.
• Cross-shareholding is rare, except in Sweden and Germany.
• Controlling family participates in management in 75% of family firms in countries
with good shareholder protection<3>, while the family does so in 64% of family firms
in countries with poor shareholder protection.
4
1. Introduction
Anderson and Reeb (2003)
• Motivation: Empirical research about recognition that Founding-Family Ownership is
less efficient than separation of ownership and control.
• Analyzed US S&P 500 companies in 1992(except bank and utility industry) and
Classified firms where the founder and related family own shares or are the
members of the board of directors as family firms<4>.
• One-third of S&P 500 companies are classified as family firms
• The family owns 18% of shares on average.
• The family control and influence is much more powerful than shareholding
Ex) Control power over election of directors is 2.5 times more powerful than their
holding shares
• Performance of family firms is superior to that of non-family firms.
5
1. Introduction
Rafael La Porta et al (1999)
Anderson and Reeb (2003)
Two studies above trigger follow-up
studies through arousing following issues
• Existence and forms of controlling shareholders of firms in each country. (family,
financial institutions, etc.)
• Fact that whether controlling shareholders participate in management or not.
• Advantages and disadvantages, and effects on corporate value of difference in
ownership and control structure.
• The proportion of family firms, corporate structure, and performance in each country.
• Succession of control in family firms.
• Characteristics of a family business group.
6
1. Introduction
▣ The follow-up study has significant importance in terms of its intimate
connection with corporate governance issues of conglomerates in Korean
society
• Most Korean conglomerates can be defined as family business groups, and
show properties of both a family firm and a business group.
▣ Major issues on corporate governance structure in Korean conglomerate
Issue 1
• Existence of a controlling shareholder (ownership concentration) and
Issue 4
control by the founder and family
• Ownership-Control deviation by controlling shareholder: Problems of
pyramid, circular equity investment, etc.
• Controlling shareholder’s management participation and management
stabilization
• Control of financial capitals over industrial capital
Issue 5
• Succession of control in family firms
Issue 2
Issue 3
7
1. Introduction
▣ Issue 1: Existence of a controlling shareholder (ownership concentration)
and control by the founder and family
• Cons
−Dispersed governance structures are more efficient.
−Control of companies by family members is the phenomenon appearing in
developing countries.
• Pros
−A controlling shareholder has positive influence on corporate value since
he or she has plenty of incentives for monitoring management.
−It is not proved that family business is inefficient.
8
1. Introduction
▣ Issue 2: Ownership-Control deviation by controlling shareholder: Problems
of pyramid, circular equity investment, etc.
• Cons
−A controlling shareholder exercises more powerful control through pyramid
or circular equity investment compared to shares he or she owns.
※ Possible conflict of interest between a controlling shareholder and minority shareholders
Ex) When the controlling shareholder has considerable amount of shares of company A and
controls company B through company A there is possibility to redirect company B’s assets
in favor of company A, thus causing conflict with shareholders in company B.
−Mutual assurance through circular equity investment or mutual investment
brings the problem of concentration of financial power<5>.
9
1. Introduction
▣ Issue 2: Ownership-Control deviation by controlling shareholder: Problems
of pyramid, circular equity investment, etc.
• Pros
−It is correlation among companies in a business group through mutual
investment or pyramid that performs a role of risk sharing.
−Deviation of ownership and control is needed to stabilize management
−Possibility of resource redirection substantially low due to the development
in the market and the monitoring functions.
10
1. Introduction
▣ Issue 3: Controlling shareholder’s management participation and
management stabilization
• Cons
−Direct management by a controlling shareholder leads absence of
monitoring body; there arises a problem that who check management
board when the controlling shareholder and the one who is in charge of
management are the same, because advantage of existence of the
controlling shareholder is effective monitoring on management board.
−Since a controlling shareholder executes powerful control and manages
the company directly with few shares, it builds trenches around the
management power and no one can check management
11
1. Introduction
▣ Issue 3: Controlling shareholder’s management participation and
management stabilization
• Pros
−Direct management by the controlling shareholder reduces possible moral
hazard induced by CEOs.
−Management stabilization not only facilitates long-term investment but also
is the only protection mechanism from hostile merger and acquisition
activities of foreign capital.
12
1. Introduction
▣ Issue 4: Control of financial capitals over industrial capital
• Cons
−One of the main functions of financial capital is monitoring management of
industrial capital.
※Financial capital loses its independent monitoring ability if financial capital and industrial capital
are included under conglomerates and correlated by mutual investment or other methods.
• Pros
−Financial capital has competence in rich information and management
monitor.
−Holding industrial capital of financial capital in a certain degree helps
resolve potential conflict of interest.
※If a bank makes relationship with a company only through a loan, there exists the possibility of
conflict of interest between the bank (lenders) and shareholders in that company when
monitoring management of the company.
※One of the solutions is increasing shares holding
13
1. Introduction
▣ Issue 5: Succession of control in family firms
• Cons
−Election of management board in family members brings decline in
competency of management board, thus has negative impact on corporate
value and performance.
• Pros
−Management by family members directs companies with long-term view
and reduces agency cost because the executive from family is also the
controlling shareholder.
14
1. Introduction
▣ This paper classifies follow-up studies in following three categories,
summarizes results, and offers implications on Korean conglomerates: (1)
Diverse forms of corporate control, (2) corporate governance structures and
business succession of family firms, and (3) business groups
• (1) Diverse forms of
corporate control
• (2) corporate governance
• (3) business groups
structures and business
succession of family firms
15
1. Introduction
• (1) Diverse forms of corporate control
• (2)
• (3)
•Governance structures have various forms in each country, depending on the
law, the system, the degree of market development, or management-union
relations.
•Firms in which a controlling shareholder exists are common globally.
•Most controlling shareholders are families and financial institutions (banks,
insurance companies, etc.)
•The ratios of participation in management of a controlling shareholder (family) in
US and Asia are equal.
•Deviation of ownership and control is largest in Asia and US has larger deviation
than Europe.
16
1. Introduction
• (1)
• (2) Corporate governance structures
and business succession of family
firms
• (3)
•Most family firms(US, Europe, and Asia) show deviation of ownership and
control
•Studies result in different research results on the influence of pyramid or others
upon corporate value.
•Ratio of firms that is controlled and managed by the family is highest in Europe,
and about the same in US and Asia.
•The impact of succession of control on corporate value and performance
depends on various conditions, showing different results.
17
1. Introduction
• (1)
• (2)
• (3) Business groups
•Business groups, especially family business groups, generally appear in
developing countries.
•Internal market in a business group performs as capital market and labor
market, which are underdeveloped: complicated governance structure, such as
pyramid or mutual investment, has been made under that historical circumstance.
•Risk sharing exists in conglomerate groups in Japan, Korea, and Thailand.
18
1. Introduction
• (1) Diverse forms of
corporate control
• (2) corporate governance
• (3) business groups
structures and business
succession of family firms
▣ In conclusion, implications on Korean conglomerates are summarized as
following: "(1)Corporate governance structure of the conglomerates,
represented by pyramid or circular equity investment, is the product of
circumstances and has both advantages and disadvantages. (2)It is not an
exceptional phenomena in Korea that, the controlling shareholders exists,
participates in management, and shows deviation of ownership and control.
(3)It is hard to draw definite conclusion on the influence of Korean corporate
governance upon corporate value and performance.
19
Table of Contents
1. Introduction
2. Forms of corporate governance
a.
Existence, Forms, and Management participation of Controlling
Shareholders
b.
One share-One vote Principle deviation
3. Family firm control structure and Succession of control
a.
b.
Family firm control structure
Succession of Control
4. Business group structure
a.
Business Group structure in Emerging market
20
2. Forms of corporate governance – a.
a. Existence, forms, and management participation of controlling shareholders
▣ Analysis on controlling shareholders of US firms
<Chart 1: Analysis of controlling shareholders in US, Europe, and Asia>
US
Asia
Europe
Distributive structure
40.26%
20.28%
13.72%
Firms with controlling
shareholder
59.74%
79.72%
86.28%
Firms controlled by the
family
30.60%
45.05%
55.87%
Firms controlled and
managed by the family
24.57%
24.57%
37.32%
Firms controlled by
financial institutions
16.33%
17.80%
18.34%
• Gadhoum et all. (2005) analyzed controlling shareholders of listed
companies(Family and Non-family firms) in US
21
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of US firms
Gadhoum et all. (2005)
−Data: Controlling shareholder analysis of 3,607 US firms in 1996
−Firms with controlling shareholder: 59.74%(Asia 79.72%, Europe 86.28%)
※ Though the rate is lower than Asia and Europe, considerable number of US firms have
controlling shareholders
※ Define controlling shareholder as a shareholder with voting rights more than 10%
−Firms controlled by the family: 36.6%(Asia 45.05%, Europe 55.87%)
※ As size of firms gets bigger, the rate of family firms gets lower. However, family firms consist
20.36% of top 20% firms based on size
22
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of US firms
Gadhoum et all. (2005)
−Firms controlled and managed by the family<6>: 24.57% (Asia 24.57%,
Europe 37.32%)
※ Practically, US and Asia has same rate of firms that the family has strong management power
−Firms controlled by Widely-Held Financial Institutions: 16.33% (Asia
17.80%, Europe 18.34%)
※ In case of US, Pension Fund, Mutual Fund, and Insurance companies, not banks, controls
12.38% of firms
• In conclusion, though there is powerful protection for minority shareholders by
law<7>, many firms are controlled by the family or by financial institutions
23
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of US firms
<Chart 2: Comparison of Corporate governance in 5 developed countries>
US
Japan
Germany
France
UK
Distributive
structure
44.26%
42%
3.6%
6.2%
22.59%
Family
controlled
firms
36.6%
13.1%
37.26%
34.3%
25.27%
Financial
Institution
controlled
firms
16.33%
38.5%
22.35%
20.73%
37.04%
24
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of US firms
• Corporate governance figures of 5 developed countries(US, Japan, Germany,
France, UK) are..
Family controlled firms
Germany
(37.26%)
US
(36.6%)
France
(34.3%)
UK
(25.27%)
Japan
(13.1%)
Financial Institution controlled
firms
Japan<8>
(38.5%)
UK
(37.04%)
Germany
(22.35%)
France
(20.73%)
US
(16.33%)
Family firms within top 20%
based on distribution
France
(23.68%)
Us
(20.36%)
Germany
(16.66%)
Japan
(6.66%)
UK
(4.05%)
Financial Institution controlled
firms within top 20% based on
distribution
Germany
(40.9%)
Japan
(28.26%)
US
(16.48%)
UK
(16.21%)
France
(14.47%)
• Family firm rate of US is relatively high compared to developed countries
25
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of US firms
• How to explain figures shown in <Chart 2> theoretically is a problem
−Assume that Corporate governance which maximize shareholder value(either
family control or financial institution control) is chosen: Compare Resource
Tunneling Costs by family control and Agency Costs by financial institution
control and choose the option with lower cost.
−In countries where protection for shareholder rights is weak, control by
financial institution is more general<9>.
※Possibility that control by financial institution, rather than family, can reduce conflict between major
and minor shareholders: family control may leads to Resource Tunneling
26
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of US firms
−In countries with advanced system of protection for shareholder rights, control
of family, rather than financial institution, is more general<10> .
※In case where minor shareholder rights are well protected, since the possibility of Resource
Tunneling is scarce(Lower cost of ‘Private Benefit of control’), Agency Costs by financial control is
inferior<11>.
※ Control of firms by financial institution is rare in US, not only because of Glass-Steagall act which
restricts banks from owning stocks, but also because optimal structure under given legal
environment has been chosen.
27
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of European firms
Faccio and Lang (2002)
• Faccio and Lang (2002) analyzed Corporate governance in Europe
−Data: 5,232 firms of Austria, Belgium, Finland, France, Germany, Ireland,
Italy, Norway, Portugal, Spain, Sweden, Switzerland, and UK
−Including large, medium, small-sized companies, financial and Non-financial
institutions
−Distributive structure: 36.93%, Family contorlled fims: 44.29% (Define
controlling shareholder as a shareholder with voting rights more than 20%)
※Countries with distributive structure: UK(63.08%), Ireland(62.32%)
※Countries with family firms: Continental Europe(France:64.82%, Germany:64.62%, etc)
28
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of European firms
Faccio and Lang (2002)
−Distributive structure by financial institutions: 39.92%, Control by the family:
26.54%
※Countries mainly with distributive structure: UK(60.11%), Ireland(63.64%)
※Countries mainly with family control structure: Continental Europe(France:33.16%,
Germany:37.58%, etc)
−In case of Major-corporations(top 20 companies), ratio of distributive structure
rises overall
29
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of Asian firms
Claessens et al. (2000)
• Claessens et al. (2000) analyzed Corporate governance of East-Asian firms
−Data: Ownership data of 2,980 firms from Hong Kong, Indonesia, Japan,
Korea, Malaysia, Philippines, Singapore, Thailand, and Taiwan in 1998
−Tendency not to use stocks with Superior Voting Right
−38.7% of the firms with Ultimate Owners have pyramid structure (Indonesia
66.9%, Korea 42.6%, Thailand 12.7%)
−10.1% are Cross-Holdings
30
2. Forms of corporate governance – a.
▣ Analysis on controlling shareholders of Asian firms
Claessens et al. (2000)
−Firms with only one controlling shareholder (have no second-largest
shareholder with shares more than 10%) accounts for 67.8% (Japan 87.2%,
Korea 76.7%, Philippines 35.8%)
−Case where controlling family is directly participating in management(CEO,
Board Chairman, or Vice-Chairman) accounts for 57.1% (Malaysia 85%,
Korea 80.7%, Japan 37.2%)
31
2. Forms of corporate governance – a.
▣ Analysis on determinants of family control
Mueller and Philippon (2008)
• Mueller and Philippon (2008) suggested theory and empirical analysis on
determinants of family control
−Family firms are (1)efficient in dealing with difficult(hostile) labor relations
(2)appear much in countries where labor relations are difficult(labormanagement relations is hostile)
※Family firms are more likely to have more paternalistic labor-management culture because, (1)the
controlling family of the firm is more likely to have long-term perspective and, (2)since the controlling
family is interested in stability of the firm, interest of both sides is likely to be matched
−In France, family firms offer better employment insurance compared to firms
with distributive structure
32
2. Forms of corporate governance – a.
▣ Analysis on determinants of family control
Mueller and Philippon (2008)
−Analyzed correlation of labor-management relation and family control in 30
countries around the world
※The more hostile labor-management relations a country had, the more it has family firms
※The argument that family firms appear much in countries with weak protection for minor
shareholders only explain part of the phenomenon
33
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
• Analysis on control of firms by Bank Holding Company of US and Universal
banking of Germany
Santos and Rumble (2006)
• Santos and Rumble (2006) analyzed control situation of US S&P 500 firms by US
banks
−Data: Analyzed 71 Bank Holding Company among top 100(based on asset
size) in 2000
34
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Santos and Rumble (2006)
−71 Bank Holding Company invested in stocks of 5,513 corporations through
Trust, and 4,641 were Non-financial firm → 403 firms among 4,614 Non-
financial firms were S&P 500<12>.
※Bank Holding Company invests 86% of Trust asset in stock
※Bank Holding Company holds more than 5% of ownership for 44 firms in S&P 500 through Trust
and holds more than 10% of ownership for 12 firms: Trust is the key factor in Financial-Industrial
connection in US
※Bank Holding Company holds 12% of stocks and 10% of voting rights from S&P 500 corporation
through Trust
※Bank Holding Company holds 12% of stocks and 10% of voting rights from Major corporation(185
firms, over $10billion) through Trust
※Bank Holding Company holds 5% of stocks and 4% of voting rights from total Non-financial firms
through Trust
35
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Santos and Rumble (2006)
−This study analyzed possession of stocks and voting rights from Non-financial
firms by Bank Holding Company through Trust. If we consider direct
possession and possession through other channels additionally, ratio will get
even higher.
−The higher the ratio of voting rights Bank Holding Company has, the higher
the probability that management of Bank Holding Company acts as outside
director of the firm
−Overall, despite America’s strict separation policy<13>, banks exercise
dominance over Non-financial firms by holding considerable amount of voting
rights and putting their management as outside director of the firm
36
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Gorton and Schmid (2000)
• Gorton and Schmid (2000) analyzed an influence that the control of firms by
Universal Banking in Germany does to a performance of the firm
−Data: 283 firms in 1975 and 280 firms in 1986
−Existance and form of Ultimate Owner: One who has more than 25% of
voting rights based on stock holding is defined as Ultimate Owner
37
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Gorton and Schmid (2000)
<Chart 3: Corporate governance of German corporation>
With Ultimate Owner
In 1975
In 1986
84%
81%
Form of Ultimate Owner
Bank(domestic or foreign)
29%
22%
Insurance institution
6%
6%
Family and family Trust
20%
28%
Non-financial firm
57%
53%
−Analyzed how banks exercise dominance over firms
38
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Gorton and Schmid (2000)
<Chart 4: The way Universal banking of Germany exercise dominance>
In 1975
In 1986
Voting rights through stock
holding
8%
13%
Proxy voting
21%
23%
※Bank’s control through stock is far less than 25%
※As we can see in <chart3>, the rate of Non-financial firms as Ultimate Owner is quite high and the rate
that these Non-financial firms are the only Ultimate Owner is also high
※However, most of the firms have voting restriction: 5% or 10%%<14>
※Proxy voting by banks representing minor shareholders is exception of the restriction and this makes
bank’s control power stronger
39
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Gorton and Schmid (2000)
−Various theories on how bank’s control over firms influence their performance
exist
※Possibility that performance is positively influenced because interest of banks and shareholders of
the firm is likely to be matched
※Possibility that banks gain monopoly profits by abusing their position as a controlling shareholder in
situation where capital market is not competitive: Negative influence on performance
※Possibility that two effects described above are mixed and, as a result, negative influence arises
when bank’s control power is weak and positive influence arises when bank’s control power is
strong
40
2. Forms of corporate governance – a.
▣ Control of firms by financial institutions
Gorton and Schmid (2000)
−Effect that proxy voting by banks will do to a performance
※Proxy voting makes ownership and control different ※Hypothesis that the effect of proxy voting
would be similar to the effect of difference between ownership and control does to performance
−Result of empirical study: (1)Bank’s control over firms through stock holding
gives performance a positive influence and the positive influence is larger
than what Non-financial controlling shareholder can give, (2)Proxy voting
does not affect performance
41
Table of Contents
1. Introduction
2. Forms of corporate governance
a.
Existence, Forms, and Management participation of Controlling
Shareholders
b.
One share-One vote Principle deviation
3. Family firm control structure and Succession of control
a.
b.
Family firm control structure
Succession of Control
4. Business group structure
a.
Business Group structure in Emerging market
42
2. Forms of corporate governance – b.
b. Existence, forms, and management participation of controlling shareholders
▣ The core of One Share-One Vote Principle is..
• Since shareholder is the most interested in maximizing
corporate value, Voting right or Control right should be given
based on number of shares: Based on logic that shareholder is
the only Residual Claimants
• Voting right based on number of shares is reasonable in
economic incentive sense
• Argument above is now under debate: Some say other
stakeholders should also have Control right(Shareholder is not
the only Residual Claimants), and others say giving Control
right only to shareholders may not maximize corporate value
(Allen and Gale (2002), Allen (2005), Allen et al. (2006))
43
2. Forms of corporate governance – b.
▣ Pros and cons of One Share-One Vote Principle Deviation
Adams and Ferreira (2007)
• Adams and Ferreira (2007) analyzed benefits and costs of One Share-One Vote
Principle Deviation
<Chart 5: Pros and cons of One Share-One Vote Principle Deviation>
Pros
ㆍ Business Group replaces underdeveloped
market
ㆍ Large Shareholders’ Control
ㆍ Management protection benefits
stakeholders other than shareholder
Cons
ㆍ Distorted investment decisions
ㆍ Resource Tunneling
ㆍ Inefficiency in Corporate dominance market
(기업지배권 시장의 비효율)
ㆍ Inefficient Perk Consumption
44
2. Forms of corporate governance
▣ Pros and cons of One Share-One Vote Principle Deviation
Adams and Ferreira (2007)
−Problem of One Share-One Vote Principle Deviation: Most family firms show
deviations through ways like pyramid structure and this is thought to be the
problem
※ Distorted investment decisions: Exercising more Control right than shares they are holding may
lead to investment decisions that is against shareholder value Ex) Empire Building
※Resource Tunneling Ex) Unfair support among affiliates
※ Inefficiency in Corporate dominance market: Powerful ownership and management power with only
a few share distorts outside M&A market
※Monopoly: Through relations with affiliates, secure the monopoly position in the market
※Inefficient Perk Consumption Ex) Excessive management compensation
45
2. Forms of corporate governance
▣ Pros and cons of One Share-One Vote Principle Deviation
Adams and Ferreira (2007)
−Benefits of One Share-One Vote Principle Deviation
※Business Group replaces underdeveloped system(underdeveloped capital market and etc):
Formation of Internal capital market/Risk sharing within Business Group/Replacement of labor
market<15>(Khanna and Yafeh (2006))
※Large Shareholders’ Control has many benefits: Large shareholders have enough incentive to
monitor management and have better ability than minor shareholder to monitor management
※Management protection benefits other stakeholders<16>
46
2. Forms of corporate governance – b.
▣ Effect the One Share-One Vote Principle Deviation does to corporate value
Claessens et al. (2002)
• Claessens et al. (2002) analyzed correlation between One Share-One Vote
Principle Deviation and corporate value<17>
−Data: Ownership data of 1,301 firms from Hong Kong, Indonesia, Korea<18>,
Malaysia, Philippines, Singapore, Thailand, and Taiwan in 1996 (Except
financial and regulated industry)
−Results of research
※The higher the raio of Large shareholders' Share of Cash-Flow Rights, the higher the corporate
value become(Incentive effect)
※소유와 지배의 차이(Control minus Ownership)는 기업가치에 부정적 영향 (특히 가족기업)
47
2. Forms of corporate governance – b.
▣ Choice between Pyramid VS Horizontal structure within Business Group
• Prior explanation for Pyramid structure was deviation of ownership and control: To
exercise powerful control with small Cash Flow Rights
Almeida and Wolfenzon (2006)
• However, Almeida and Wolfenzon (2006) said,
−it is not general that deviation of ownership and control to appear in Pyramid
structure and,
−even in case where deviation can be reached through other ways, Pyramid
structure appears widely. Ex) Allowance of Dual-Class Share<19>
48
2. Forms of corporate governance – b.
▣ Choice between Pyramid VS Horizontal structure within Business Group
Almeida and Wolfenzon (2006)
−Analyzed determinants of Family Business Group control structure under two
hypothesis
※Investor protection by law is not perfect
※Firms expend to new business with time difference
−If investor protection by law is weak, Pyramid structure becomes attractive:
Private Benefit of Control increases
49
2. Forms of corporate governance – b.
▣ Choice between Pyramid VS Horizontal structure within Business Group
Almeida and Wolfenzon (2006)
−In case where internal financing for new business through Pyramid structure
is Optimal
※Outside investors’ discount on Resource Tunneling: Financing cost from External Capital Market
increases
※Lack of External Capital Market
※When it needs large funds and is long-term investment that has long payback period, internal
financing through Pyramid structure is optimal
50
Table of Contents
1. Introduction
2. Forms of corporate governance
a.
Existence, Forms, and Management participation of Controlling
Shareholders
b.
One share-One vote Principle deviation
3. Family firm control structure and Succession of control
a.
b.
Family firm control structure
Succession of Control
4. Business group structure
a.
Business Group structure in Emerging market
51
3. Family firm control structure and Succession of control – a.
a. Family firm control structure
▣ Family firm control structure of US
Gadhoum et all. (2005)
• Gadhoum et all. (2005) analyzed control structure of listed companies(family and
non-family firms) in US: Focusing on deviation of ownership and control
−Though it analyzed 3,607 US family and non-family firms, since most of the
family firms show deviation of ownership and control, it can be interpreted as
a analysis for family firms
52
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Gadhoum et all. (2005)
−Research result for deviation of ownership and control is..
<Chart 6: Analysis on Deviation of Ownership and Control in US, Asia, Europe>
Pyramid
Multiple control chain
Multiple Class share
US
8.46%
1.15%
8.19%
Asia
45.68%
11.02%
Europe
22.43%
6.69%
19.91%
※Pyramid (8.46%)<20> (Asia 45.68%, Europe 22.43%)
※Multiple control chain 1.15%(Asia 11.02%, Europe 6.69%)
※Multiple class shares 8.19%(Europe 19.91%)
−13.55% of US firms are controlled through Family Trust
※Since many family entrepreneur manage their asset through various Trust with different names, the
number of family firms may increase
53
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Villalonga and Amit (2006a)
• Villalonga and Amit (2006a) analyzed control structure of US family firms
−Data: 3,006 Firm-Year Observations of 515 firms from Fortune 500 in
1994~2000
−40% of samples are Founder or Family-Controlled Firm(Family firm):
Classified as Family firm when founder or his/her family is in the position of
management, director, or controlling shareholder
54
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Villalonga and Amit (2006a)
−Research result I: In US firms, measures that create deviation of ownership
and control or strengthen control can be classified into 4 categories: Dual-
Class Share, Voting Agreements, Pyramid, Disproportional Board
Representation
55
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
<Chart 7: Cases and measures of control strengthening in US family firms>
Dual-Class
Share
In case of Camcas, Ralph Robert, the founder, and Brian Robert, his son, have
3.14% of all shares and hold 85.64% of voting right.(Viacom, Tyson foods, Ford
mortors)
Voting
agreements
Katharine Graham of Washington Post and her 4 children have 44.9% of voting
right → Berkshire Hathaway had 18.3% of voting right → Berkshire Hathaway
delegated their voting rights to Donald Graham, the son of Katharine Graham. As
a result, they holds 63.2% of voting right.
Pyramid
Tisch brothers hold 32% of Loews → Loews holds 100% of LT holding → LT
holding holds 17.63% of CBS
As a result, Tisch brothers hold 5.64%(32%*17.63%) of CBS, but hold
17.63%(=min(32%, 17.63%) of voting right → CBS is controlled by Tisch brother
through Pyramid.
In case of New york Times, they have two kinds of Common stock(A and B), and
Disproportion A accounts for 99.56% and B accounts for 0.44% → Shareholder of Class-A
Board
stock can elect 5 directors out of 15 and Shareholder of Class-B stock can elect
Representation 10 directors → Ochs Sulzberger family hold 17.9% of shares → However, since
they hold 88.7% of Class-B stock, they have election right for 66.7% of directors
56
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Villalonga and Amit (2006a)
−Research result II: 40% of all samples are family firm: Among them, 46% are
founder-controlled firm, and 54% are founder's family-controlled firm
−Research result III: Comparative analysis between family firms and nonfamily firms<21>
※Tobin's Q of Family firms is higher than Non-family firms, but gains statistical significance in 10%
level. (가족기업의 Tobin's Q 가 비가족기업보다 높으나 10%수준에서 통계적 유의성 획득)
※Size difference between family and non-family firms is not statistically significant
※Non-family firms are older than family firm
※Family firms grow faster and have higher Market Return
※Family firms have higer Capital Expenditure and smaller Leverage
57
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Villalonga and Amit (2006a)
−Research result IV: Deviation of ownership and control in family firms
※Founder or family holds 15.3% of shares and 18.8% of voting right
※Non-Family Blockholder holds 16.2% of shares and 13.2% of voting right
−Research result V: Measures to create deviation of ownership and control
※Disproportional Board Representation: 66%
※Dual-Class Shares: 21% (Europe 17.61%, UK 18.84%)
※Voting Agreements(7%) and Pyramid(6%) is relatively small
−Research result VI: Degree of ownership-control deviation
※Control Right is 1.28 times larger than Cash-Flow Right<22>(East-Asia 1.34, Western-Europe 1.15)
※Deviation of ownership and control is the largest when Dual-Class Share is used(2.55 times): Firms
controlled by founder often uses Dual-Class Share(May be to enable effective Succession)
58
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Villalonga and Amit (2006a)
−Research result VII : Other mechanisms for control strengthening
※Family members consist 17.3% of directors
※Family member is a CEO of the firm: 51%, Family member is a CEO or a Chairman of the board:
59%
※가족에 의해 지배되는 이사의 비율이 보유주식 비율보다 2% 높음
59
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of US
Villalonga and Amit (2006a)
−Research result VIII : Correlation of control strengthening mechanism and
corporate value
※There has been prior empirical studies that showed deviation of ownership and control in family firm
negatively affect corporate value<23>: Discount exists in stock market
※Analyzed each mechanism's effect specifically: Pyramid and Voting Agreement positively affect
corporate value, but Dual-Class Share affect it negatively<24> ☞Poses hypothesis that Pyramid is
not just for Resource Tunneling, but has other purposes.
※Voting Agreement is a Coalition: 의결권을 위임하거나 의결권 행사 시 약정을 맺는 등 주요 의사 결
정에서 전략적 도구로 사용될 수 있음
60
3. Family firm control structure and Succession of control – a.
▣ Family firm control structure of Europe
Faccio and Lang (2002)
• Faccio and Lang (2002) analyzed control structure of family firms in Europe
−Data: 2,332 firms controlled by family (44.5% of all firm samples)
−Research result
※Among family firms, Dual-Class Share 17.61%, Pyramid 13.81%, Multiple Control Chain 3.22%
※With only one controlling shareholder: 54.74%
※Top 15 family firms' assets of each country account 33.8% of all French firms, 25.01% of German
firms, and 25.01% of UK firms
61
Table of Contents
1. Introduction
2. Forms of corporate governance
a.
Existence, Forms, and Management participation of Controlling
Shareholders
b.
One share-One vote Principle deviation
3. Family firm control structure and Succession of control
a.
b.
Family firm control structure
Succession of Control
4. Business group structure
a.
Business Group structure in Emerging market
62
3. Family firm control structure and Succession of control – b.
b. Succession of Control
▣ Pros and Cons that Succession of control within family has
<Chart 8: Pros and Cons that Succession of control within family has>
Pros
-Family has long-term perspective
Cons
-Management selected from family which often
-Control by family who is major shareholder can is a small group can be inferior to professional
reduce agency cost
management from the market
-Collaboration and knowledge transfer within
organization is easy
63
3. Family firm control structure and Succession of control – b.
▣ Determinant of family firm's succession of control
Burkart, Panunzi, and Shleifer (2003)
• Burkart, Panunzi, and Shleifer (2003) suggested theory about family firm's control
structure and succession of control
−Analyzed what founders care when deciding control structure and succeeding
control
※Current founder is controlling shareholder and a manager
※Assume professional management is better skilled than family members
−If investor protection by law is powerful, founders prefer distributive
ownership/control structure and professional management
64
3. Family firm control structure and Succession of control – b.
▣ Determinant of family firm's succession of control
Burkart, Panunzi, and Shleifer (2003)
−If investor protection by law is moderate, founders prefer professional
management, but have incentive to remain as major shareholder and monitor
management.
−If investor protection by law is weak, founders succeed control to the family
65
3. Family firm control structure and Succession of control – b.
▣ Influence of owned, managed, and controlled by family to corporate value in
US
Villalonga and Amit (2006b)
• Villalonga and Amit (2006b) analyzed an influence of owned, managed, and
controlled by family to corporate value
−Data: 2,808 Firm-Year Observation of 508 firms from Fortune 500 in
1994~2000
−家族소유(지분율)은 창업자가 CEO 또는 Chairman으로 고용된 CEO와 함께
현직 활동을 하는 경우 기업가치에 긍정적 영향
※창업자가 가장 큰 가치를 창출하는 경우는 지배강화의 기제(피라미드,상호출자, 복수의결권 주식 등)
가 없는 경우
66
3. Family firm control structure and Succession of control – b.
▣ Influence of owned, managed, and controlled by family to corporate value in
US
Villalonga and Amit (2006b)
−When family firm is managed by Successor CEO, not by the founder,
corporate value is negatively influenced (Influence is negative even in case
where the Founder exists as a chairman)
※Negative influence done by Successor CEO is due to a second generation
※A third generation CEO does no influence and a forth generation CEO does positive influence on
corporate value
67
3. Family firm control structure and Succession of control – b.
▣ Influence of control succession in US family firm to its performance
FRANCISCO PEREZ-GONZALEZ (2006)
• FRANCISCO PEREZ-GONZALEZ (2006) analyzed an influence of control
succession to performance
−Data: Analysis of 335 control succession cases in US firms: 122 were within
family members, and 213 were non-family succession
−Succession to family member who is well-educated in good college does not
influence corporate performance
−Succession to family member who is not well-educated in good college does
corporate performance a negative influence
68
Table of Contents
1. Introduction
2. Forms of corporate governance
a.
Existence, Forms, and Management participation of Controlling
Shareholders
b.
One share-One vote Principle deviation
3. Family firm control structure and Succession of control
a.
b.
Family firm control structure
Succession of Control
4. Business group structure
a.
Business Group structure in Emerging market
69
4. Business group structure –a.
a. Business Group structure in Emerging market
▣ Business Group is group of legally independent firms connected through
stocks or family
▣ Hard to determine whether Business Group influences the economy positively
or negatively
• Positive: Replace external capital and labor market
• Negative: Monopoly power
▣ Khanna and Yafeh (2006) analyzed Business Group in Emerging Market
• In emerging market, Business Group exists a lot: Poses a hypothesis that
Business Group is general in country where market system is underdeveloped
−Business Group replaces underdeveloped Capital and Labor market by itself
Ex) Form an Internal Capital Market
70
4. Business group structure –a.
▣ Diversification
• Pros: Sharing management ability and technology, Reducing risk through
industrial diversification
• Cons: Empire Building by management, Risk evasion, Inefficient resource
allocation because of Division Manager's pursuit for the rent
71
4. Business group structure –a.
▣ Diversification
• Two different studies co-exist. One suggests Diversification Discount and the
other suggests Diversification Premium.: Analysis result of US firms<25> shows
discount mostly.
−Negative influence exists only in developed countries with advanced system
and capital market. In underdeveloped countries, negative influence does not
exists, but rather positive influence exists (Fauver et al.(2003))
−In case of Korean Cheabol(Conglomerate), they had positive influence till the
early 1999's but, after 1994, they showed negative influence (Lee, Peng, and
Lee (2001))
−In case of Korea, Taiwan, and Thailand, Risk Sharing among corporations
exists (Khanna and Yafeh (2005))
72
4. Business group structure –a.
▣ Operation of financial business
• Having financial business and Related Lending within Business Group<26> are
quite general and have studies about both positive and negative effect
<Chart 9: Case and effect of financial business and Related Lending within
Business Group>
Financial
business within
Business Group
is general
-Multinational Business Groups of UK operated financial business
extensively in the early 20th century(Jone2000)
-Business Groups of Chile operated financial business in 1980's when
financial business is not developed
-Almost every bank in Turkey is Group-affiliated
Positive and
negative effect
of Related
Lending within
Business Group
-Large Business Groups of Indonesia uses financial affiliate when capital
demand increases to start a new business.
-Mourer and Haber (2006) showed positive effect of Related Lending using
data from Mexican Business Groups in 1888~1993: No negative effect of
Related Lending(Tunneling and inefficient allocation of resources) exists
but rather firms which received Related Lending shows better performance
compared to competitors.
-La Porta et el (2003) showed that the default rate of Related Lending is 33%
higher than non-related lending using data of Mexico in 1990's.
73
4. Business group structure –a.
▣ Ownership and Control structure of Business Group
• Possibility that Pyramid and Circular equity investment within Business Group can
be more seen in countries where shareholder protection law and system is not
strong
• Pyramid and Circular equity investment appear widely in East-Asia countries
• Possibility that positive(Risk Sharing and Mutual Assurance) and
negative(Tunneling of resouces) effect of Pyramid and Circular equity investment
can coexist.
• Korean Business Group have two different studies about positive case of Risk
Sharing and negative case of issuing CB(Convertible Bond) and BW(Bond with
Warrant)<27>
74
4. Business group structure –a.
▣ Ownership and Control structure of Business Group
<Chart 10: Pros and Cons of Pyramid, Circular equity investment>
Pros
Cons
-Tunneling of resources
-Risk Sharing and Mutual Assurance: Firms
within group can share risks and enjoy mutual
assurance effect through investment relation
and mutual lending
(1) Controlling shareholder tunnels resources
from firm that he has less share to firm that he
has more share.
(2) Controlling shareholder sacrifices some
firms shareholder value in order to maximize
his profit.
-Buysschaert, Deloof, and Jegers(2004)
-Kahnna and Yafeh(2005)
-Chang and Shin (2005)
-Bae, Jang and Kim (2002): 대기업 집단 내
인수합병
- Bae, Jang and Lee (2006): 신주인수권부사채
발행
75
Foot notes
* <1>"지배주주란 어느 회사의 전체적인 주주 구성과 주식의 분산도를 감안할 때 그 회사의 주요 의사결정과 일상적 의사결정에 결
정적인 영향을 미칠 수 있는 주주를 뜻하는 사회학적 개념이다. 회사의 의사결정 과정은 주주총회와 이사회에서 이루어지므로 완
전한 지배권을 장악하자면 주주총회의 특별 결의 요건을 충족시킬 수 있는 주식 수, 즉, 발행주식수의 3분의 2 이상을 가져야 할
것이다. 하지만 발행주식 수의 과반수만 갖더라도 보통결의는 자신의 의사대로 지배할 수 있고 이사를 자신이 추천하는 자로 구
성함으로써 일상적인 경영의사결정을 지배할 수 있다. 그러나 상장회사에는 주식이 일반 주주에게 널리 분산되므로 주주총회의
출석률이 낮아 과반수보다 훨씬 적은 수의 주식을 가지고도 주주총회의 의사결정을 지배할 수 있다.” 이태준 이철송 공저, 사회법
의 7판 전영사
* <2>A controlling shareholder is the one who is given more than 10% of voting right in this study.
* <3>The law and systematic protection on shareholders cover vastly; corporate law or commercial law, for example,
determines one share-one vote rule, shareholding ratio for opening general meeting of shareholders, or possibility of class
action. Countries can be regarded as those which with good shareholder protection if guaranteeing one share-one vote,
lowering shareholding ratio required to summon for extraordinary general meeting, and enabling class action.
* <4>Choi, from National Assembly Budget Office, argued at Hankyoreh in Oct. 10, 2010 that (1) the range of family firms
are too wide to regard results as comparison of performance between family firms and non-family firms, (2) families in
family firms in US often exercise control without participation in management and 소유와 지배의 차이가 거의 없기 때문에 ,
thus it is hard to compare them directly with conglomerate group in Korea.
* <5>Strictly saying, it is the problem of fair trade rather than that of 소유와 지배의 차이에서 오는 corporate governance
structure. According to Economic Reform Reports 2008-5 from Solidarity for Economic Reform, among Korean 200
companies (by asset size) 127 companies are subsidiaries of 40 conglomerates and occupy 62.7% of asset and 69.5% of
total sum of revenue.
* <6>Firms managed by the family means that the family members are in position of CEO, Honorary Chairman, Chairman or
Vice-Chairman
76
Foot notes
* <7>Prior researchers thought of shareholder protection law as critical factor of corporate governance. They thought that, if
there is powerful protection for minority shareholders by law, Private Benefit of governance will decrease. Therefore,
distributive structure will become universal
* <8>Figure shows that Japan has typical Bank-Dominated economy
* <9><chart2>It is hard to interpret why financial instition control shows such a high rate. Normaly, minor shareholder
protection in UK is considered as powerful as that of US’s. Since class lawsuit is prohibited and the fact that loser have to
pay for winner’s costs prevents minor shareholders from filing a lawsuit, Auther suggests that UK’s protection is not as
efficient as US’s.
* <10>Whether this theory can explain high family firm ratio in Germany and France is doubtful. Generally speaking,
Germany and France are consider to have weaker protection for minor shareholders compared to US.
* <11>When financial institution controls a firm, managers of financial institution have to monitor management of the firm ->
This is a system that agent monitoring agent and the system might cause additional agency cost. Example) Cartel
* <12>In 2000, 407 Non-financial firms were in S&P500
* <13>The Bank Holding Company Act of US restricts Bank Holding Company from holding voting share of non-bank firm
more than 5%
* <14>Even though one holds lots of shares, he can only exercise voting right up to 5% or 10%.
* <15>Business Groups show One Share-One Vote Principle Deviation through pyramid, mutual investment, and etc
77
Foot notes
* <16>Bertrand and Mullainathan (2003) analyzed how the law which provides protection regarding M&A affects
management action or preference using data from US. In other words, they verified the theory which suggests that, when
management position is secure, management try to enjoy Private Benefit of Control rather than think of shareholder value
first. The results was (1)increase in employee's wages, (2)decrease in constructing new factories and closing down
existing factories, and (3) decrease in overall productivity and profitability.
Pagano and Volpin (2005) theoretically showed that, when management has high Private Benefit of Control and few shares,
management and employee have the same interest in dealing with M&A threats. Employees have incentive to resist against
hostile M&A because they want to maintain their high wage. This infers that wages will likely to drop after M&A, and this
inference is consistent with empirical study of Bertrand and Mullainathan (2003)
* <17>There are research results about how ownership and control structure affects corporate value other than this, but most of
them targets family firms.
* <18>There are few studies that analyzed Korean firms only, and they show different analysis before IMF and after IMF.
Before IMF, deviation of ownership and control affected performance negatively and, after IMF, it effects were neutral.
* <19>In Europe and Asia, though many countries allow Dual-Class Share, Pyramid structure appears widely.
* <20>One of the reason that Pyramid structure is not popular in US is the tax inposed on intercorporate dividends.
* <21>Family firms appear to be superior than non-family firms, but this comes from the superiority of firms controlled by
founders.
* <22>In US, main mechanism that makes deviation of ownership and control(control strengthening) is their influence on
director selection. Since this mechanism is not considered in ratio above, we can say that deviation in US family firms is
much larger. This also means potential conflicts between controlling and minor shareholder is not less than European or
Asian firms.
78
Foot notes
* <23>Classen et al. (2002) analyzed East-Asia family firms, Villalonga and Amit (2006b) analyzed US family firms, and
Barontini and Caprio (2006) analyzed Continental-Europe family firms. They analyzed relation between ownership/control
deviation and corporate value.
* <24>A similar result can be found in study of Bennedsen and Nielson (2005). After they researched European firms
empirically, they found out that Dual-Class Share affect corporate value far more negatively compared to Pyramid and
Mutual investment. Also, deviation mechanisms like Dual-Class Share, Pyramid, and Mutual investment does not affect
earnings.
* <25>In case of US, diversification was seen till 1980's, but after 1990's, concentration of capacity to core business is
seen.
* <26>연관대출의 긍정적 측면으로는 정보의 비대칭성 극복, 사금고화, 자원의 전용, 자원의 비효율적 배분 등이 있다.
* <27>Convertible Bond is bond that is issued as bond but can be converted to common stock after a certain period at
holder's request. Bond with Warrant is bond with right to purchase stocks of the company. When converting to stocks,
market price of conversion time is applied to CB, but agreed issuing price is used in BW so one can convert one's share
when market price of stock is higher than issuing price.
79