Extensiveness of Adoption of a Code of Good Governance: The Role of Ownership Concentration and Shareholder

Heterogeneity

Raúl Barroso Casado HEC Paris

1 rue de la Libération 78350 Jouy en Josas

barroso@hec.fr

Michael Burkert University of Fribourg

Boulevard de Pérolles 90 CH-1700 Fribourg

Switzerland michael.burkert@unifr.ch

Antonio Dávila

IESE Business School University of Navarra

Ave. Pearson 21 08034 Barcelona

Spain ADavila@iese.edu

Daniel Oyon

HEC-Lausanne Internef

1015 Lausanne Switzerland

Daniel.oyon@unil.ch

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Extensiveness of Adoption of a Code of Good Governance: The Role of Ownership Concentration and Shareholder Heterogeneity

Abstract This paper addresses the extensiveness of adoption of the Swiss code of good governance in the

presence of shareholder heterogeneity (i.e., both family and private equity ownership). The code

represents a bundle of recommended mechanisms that companies could adopt or not without

being legally forced. Theoretically, we build on recent developments in agency theory to address

the influence that heterogeneous shareholders have in the adoption of governance mechanisms.

We argue that ownership concentration leads to the adoption of fewer of the mechanisms

proposed by the code. We further argue that the presence of heterogeneous shareholders mitigates

the ‘principal-principal’ conflict and leads to the adoption of more of the proposed mechanisms.

Our results show that ownership concentration negatively affects the extensiveness of adoption of

the code but that shareholder heterogeneity has a positive effect. We find, moreover, positive

interaction effects between ownership concentration of two types of large shareholders; however,

these effects depend on how active the two large shareholders are.

Keywords: Adoption, Corporate governance, Principal-principal, Shareholder type

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1. Introduction Research on the effects that different types of shareholders have on the governance

structure of a company has recently grown as an important topic in the management field (Colpan

et al., 2011; Connelly, Tihanyi, et al., 2010; Wiseman et al., 2011). We build on this growing

literature addressing situations in which different types of shareholders co-exist, leading to a

diversity of interests (Connelly, Hoskisson, et al., 2010; Wiseman et al., 2011). We argue and test

that these heterogeneous interests affect the extensiveness of adoption of the Swiss code of good

corporate governance.

Our contribution to the literature is twofold. First, whereas prior literature discusses the

effects of single types of large shareholders on a specific corporate governance mechanism (see

Connelly et al. (2010) for an overview), we theorize and test the effects of having two large

shareholders of different types (i.e., family and private equity) in place and their joint effect on

corporate governance. The presence of multiple large shareholders has been largely overlooked

by prior research, even given the background that more than 35% of European firms (Laeven and

Levine, 2008) and more than 47% of the firms in our sample have not only one large shareholder

but multiple large shareholders. We argue that the heterogeneous interests of different powerful

shareholders lead to stronger rather than weaker governance structures.

Second, whereas prior research has paid considerable attention to examining drivers of

adoption of single corporate governance mechanisms (e.g., Davis (1991), Zattoni and Minichilli

(2009)), we focus on differences in the extensiveness of adoption of a code of good governance

as a bundle of individual corporate governance mechanisms. We theorize and test that in a setting

in which all companies have adopted a code of best practices but have no legal obligation to

implement any particular mechanism, considerable differences regarding the extensiveness of

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adoption of the code will be determined by the ownership structure of the firm—in particular,

ownership concentration and shareholder heterogeneity.

In a first step, we use agency theory (Jensen and Meckling, 1976; Shleifer and Vishny,

1986, 1997) to argue that ownership concentration leads to a lower extensiveness of adoption of

the code (i.e., fewer of the proposed governance mechanisms are adopted). In a second step, we

go beyond classifying ownership structures as either 100% small shareholders or one large and

many small shareholders (see Laeven and Levine (2008) for a critique) to a setting with

heterogeneous large shareholders (i.e., shareholders of different types). We argue that having a

second large shareholder from a different category can be an effective way to mitigate the risk of

expropriation from minority shareholders (‘principal-principal’ conflict). We further expect that

such shareholder heterogeneity leads to a higher extensiveness of adoption of the code. In those

cases, we consider that the larger number of corporate governance mechanisms adopted (i.e.,

higher extensiveness of the code’s adoption) is not only a means to monitor the other type of

shareholder but also a platform to reconcile diverging interests. We also hypothesize that

increasing levels of ownership concentration of two types of large shareholders further interact to

lead to more governance mechanisms being adopted.

To test the influence of ownership concentration and heterogeneity of shareholders on the

extensiveness of the adoption of the code, we analyze a hand-collected dataset covering Swiss

listed companies over a nine-year period (2002–2010). The database starts in 2002, when the

Swiss code of good governance (‘Swiss Code’ hereafter) was developed. Economiesuisse, an

employer association representing the interests of the most important organizations and industries

in the country, put together this code. The adoption of the Swiss Code was mandatory for listed

companies, but companies had discretion to select which of the recommended practices they

would adopt. This situation contrasts with that of countries such as the United States, Germany,

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and France, where many of these mechanisms were legally imposed on corporations (Enriques

and Volpin, 2007) or companies at least were required to explain why they did not implement a

certain mechanism (‘comply or explain’). We follow La Porta et al. (1999) to classify a

shareholder as a large shareholder if ownership is more than 5% of the voting rights. We then

categorize them into family, corporation, banks, government and pension funds plus an additional

category including private equity. We moreover use the adoption of 10 corporate governance

mechanisms (for which adoption can be unambiguously measured) as a proxy for the

extensiveness of the code’s adoption.

Our data reveal significant differences in the extensiveness of adoption of the code in

terms of the number of corporate governance mechanisms adopted. Our results confirm our

hypotheses that ownership concentration is associated with a less extensive version of the code

being adopted. We also find empirical support for our theoretical reasoning that shareholder

heterogeneity is associated with more extensive adoption of the code. When testing whether

ownership concentration of two types of shareholders interacts to jointly affect the code’s

adoption, we find that, although in different ways, only combinations of ‘activist’ shareholders

(family, private equity and corporation ownership) have a significant and positive effect.

‘Activist’ shareholders are large and powerful shareholders that try to exert an influence on the

company’s strategy, actions, and governance systems using different means (e.g., direct meetings

with management). These shareholders are different from more passive ‘buy-and-hold’

shareholders (Connelly, Hoskisson, et al., 2010; Ryan and Schneider, 2002). Specifically, we find

that with high levels of private equity ownership, increases in family and non-financial

corporations’ ownership are associated with more governance mechanisms being implemented.

We do not find significant effects for more passive shareholders.

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These results are relevant from a policy perspective because governments must decide

whether adopting governance mechanisms should be legally compulsory or not. The results also

offer new evidence to better understand why some organizations implement ‘lighter’ versions of

a practice whereas others opt for a more extensive version (Ansari et al., 2010; Lounsbury, 2008;

Shipilov et al., 2010).

Our results further clarify why active institutional investors push for stronger governance

structures in particular in countries where the principal-principal conflict is acute. In countries

with high ownership concentration, it might be interesting to consider, from a minority

shareholder’s point of view, the improved governance structures that heterogeneous large

shareholders may provide, and therefore the reduction on the risk of expropriation.

The findings suggest a vision of corporate governance structures beyond any monitoring

function. Agency conflicts may be reduced with better governance structures that are able to

reduce moral hazard and adverse selection (Eisenhardt, 1989). However, these governance

structures may also be able to act as a platform to smooth and settle the heterogeneous interests of

diverse shareholders.

We organize the paper as follows. Section 2 outlines the background and describes the

specific institutional context. Section 3 presents the hypotheses and theoretical development.

Section 4 presents the research design and data, and Section 5 the results of hypothesis testing. In

Section 6, we discuss and summarize our findings and provide concluding remarks.

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2. Background and institutional context

We test our hypotheses using the institutional setting of Switzerland. The rich cultural and

legal diversity of this country, together with the loose approach toward adoption of the

governance mechanisms associated with the Swiss Code, provides an interesting setting in which

to examine the determinants of a firm’s design of its governance structures. The setting is such

that companies did not have any legal requirement to adopt certain governance mechanisms or

any requirement to explain their decisions if they did not adopt mechanisms. Thus, Switzerland

offers a context for examining how ownership concentration and heterogeneous shareholders

influence the extensiveness of adoption of a code in terms of the number of specific individual

governance mechanisms adopted.

2.1 Swiss stock market and large shareholders

The Swiss stock market is an important financial market with a high market capitalization.

Although Switzerland ranks high in terms of governance indicators (The World Bank Institute,

2012) and enforcement variables, it scores low in terms of shareholder protection, allowing for

the creation of large block-holders (Dyck and Zingales, 2004; La Porta et al., 1999) that influence

the extensiveness of adoption of governance mechanisms. In this context, it is noteworthy that the

percentage of companies with two or more large shareholders is 47% (considering the 5%

ownership threshold we use to define a large shareholder). Laeven and Levine (2008) found this

percentage to be around 35% using a 10% ownership threshold to consider a large shareholder as

such. The main large shareholders of Swiss companies are families, banks, non-financial

corporations, private equity, and Swiss pension funds. In contrast to the US pension funds, Swiss

pension funds are passive “non-activist” shareholders characterized as ‘buy-and-hold’ owners

(Connelly, Hoskisson, et al., 2010). Private equity investors have become more active in

Switzerland as major investors over the last 15 years. These ‘activist’ shareholders invest in

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publicly traded companies to exert direct influence on the management, putting in place

governance mechanisms.

2.2 The Swiss Code of good governance

Switzerland, like many other countries around the world, adopted important changes in

corporate governance after the financial scandals of 2001 (e.g., Enron). In contrast to other

neighboring countries, such as France and Germany (Enriques and Volpin, 2007), that legally

enforced some of the changes in corporate governance or at least forced companies to explain the

reasons why they had not adopted a certain mechanism (‘comply or explain’), Switzerland

delegated most of the discretion regarding these changes to companies and business associations.

These institutions took a proactive approach and worked on developing a new framework for

corporate governance. Instead of having the government come up with new regulations,

development of the Swiss Code of good governance was carried out by a large, representative

professional association, Economiesuisse. This employers’ association defends the interests of

over 100,000 companies from all sectors of the Swiss economy and is an active lobbyist in the

country. Economiesuisse succeeded in developing a framework that legitimized the transition to

new institutional practices while maintaining the traditional values of flexibility and broad

management discretion.

Economiesuisse prepared a “Code of Best Practices for Corporate Governance” as the

conclusion of an in-depth study (Economiesuisse, 2002) that benchmarked the governance

practices of the United Kingdom, Germany, and France. The result of this study was the

foundation of the “Directive on Information Relating to Corporate Governance,” introduced by

the Swiss Stock Exchange (SWX) in 2002 (Swiss Exchange, 2002). This document tackles the

complexity of the governance of firms in the form of 30 ‘recommendations’ (p. 4), consistent

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with the Swiss tradition of legislative flexibility and guided by ‘shareholders’ interests’ (p. 6).

The Code provides general rules for disclosure, but no indications of which mechanisms to

implement, for the following topics: the group structure and shareholders, capital structure,

members and organization of the board of directors and executive committee, compensation,

shareholdings and loans of the directors and executives, shareholders’ participation rights,

changes of control and defense measures, auditors, and the policy for publishing information. The

Code was revised in 2008. Although the revision did not substantially change the Code in terms

of new governance mechanisms being proposed, it recommended providing more detailed

information on individual compensation.

Although adoption of the Swiss Code was mandatory for all publicly listed companies, these

companies had the choice of whether or not to implement each of the individual governance

mechanisms. Lack of implementation did not require any explanation. This policy is in contrast

to other countries, such as Germany, where adoption of governance mechanisms was mandatory

and an explanation was required if a particular mechanism was not adopted (‘comply or

explain’).

The code was structured into a number of provisions. Some of them were very general, but

the code contained 10 specific governance mechanisms that can be coded unambiguously (that is,

there is no doubt as to whether or not a company adopted that particular mechanism). We

discarded any mechanism that might have been adopted, but information was not reported that

could verify adoption. We use the adoption of these 10 specific mechanisms as a proxy for the

overall code’s adoption. The mechanisms proposed are:

• One-share-one-vote

• Establishment of an independent board of directors

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• The non-duality of CEO-chairman appointment

• Disclosure of the number of meetings of the board of directors

• Establishment of three classical sub-committees (audit, compensation, and nomination

committees —three separate mechanisms)

• Pay for performance plans for directors and managers (two separate mechanisms)

• The transition from Swiss GAAP to IFRS accounting standards

Although all listed companies formally adopted the code within the year 2002, important

differences were expected regarding the extensiveness of adoption of the code in terms of

adoption of these 10 specific mechanisms. We hypothesize in the following section how

conflicting interests of heterogeneous large shareholders (Connelly, Hoskisson, et al., 2010) have

a direct impact on the extensiveness of adoption of the code of good governance.

3. Theory and hypotheses

The corporate governance literature traditionally is grounded on agency theory

predictions about the consequences of separation between ownership and control (Berle and

Means, 1932). This body of knowledge examines governance arrangements under the lens of a

principal-agent relationship and from a shareholder’s perspective (Shleifer and Vishny, 1997;

Sloan, 2001). In this framework, opportunistic managers set personal and organizational

strategies that allow them to exploit information asymmetries to extract rents from shareholders

through excessive compensation, shirking, perks, empire building, and other agency costs (Fama,

1980; Jensen and Meckling, 1976). In efforts to see how these agency costs to shareholders can

be mitigated, a large literature has developed around governance mechanisms such as incentives

alignment, monitoring of boards of directors, and markets for corporate control (see Dalton et al.

(2007) for a review).

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International research on corporate governance, however, has pointed out the narrow

application of agency theory, arguing that the theory’s main assumptions hold only in the Anglo-

American setting, where ownership is dispersed (see Holderness (2009) for an exception).

Corporations elsewhere around the world differ significantly from this original institutional

setting, and ownership is generally highly concentrated (Davis et al., 1997; La Porta et al., 1999).

In these alternate settings, ownership concentration can play a key role in reducing the principal-

agent problem (Jensen, 1993; Shleifer and Vishny, 1997). Because of this, ownership

concentration is seen as a defensive measure for shareholders to compensate for weaker legal

protections or a broader stakeholder approach of the legal systems (Ball et al., 2000; La Porta et

al., 1999; La Porta et al., 2000; Young et al., 2008). Shareholders who own a large block of

equity have both the incentives and the means to impose their interests and therefore minimize

the principal-agent problem, either through alignment (shareholders and managers are the same

individuals) or through direct monitoring of management (La Porta et al., 1999).

Independent of the context, ownership concentration thus may be considered as an

informal governance mechanism for the principal-agent conflict. Large equity ownership aligns

insiders’ objectives to those of shareholders and provides incentives for these shareholders to

monitor management (Connelly, Hoskisson, et al., 2010; Dalton et al., 2003). This property of

aligning principal-agent interests may become a substitute for other formal governance

mechanisms because it allows control of the board of directors and reduces the risk of unwanted

takeovers. Increasing ownership concentration, however, creates a second agency conflict, one

between controlling and minority shareholders, because a controlling shareholder may exploit its

dominant position to extract rents from the other shareholders (Villalonga and Amit, 2006). This

second agency problem, called a principal-principal conflict, typically reflects how a powerful

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shareholder with a dominant position extracts rents from multiple minority shareholders (Young

et al., 2008).

Furthermore, as ownership concentration increases, the costs of additional governance

mechanisms increasingly will be borne by the controlling shareholder (fewer shareholders to

dilute the costs). Therefore, as a large shareholder increases equity holdings in the firm, it will

tend to reduce the enactment of formal governance mechanisms. We can then say that a higher

degree of ownership concentration tends to lessen the adoption of formal governance

mechanisms. Notably, the introduction of a code of best practices of corporate governance,

mostly inspired by the Cadbury report (Aguilera and Cuervo-Cazurra, 2009) traditionally has

aimed to address both types of agency problems in relation to deficiencies in shareholder

protection (Fernández Rodríguez et al., 2004; Zattoni and Cuomo, 2008). These codes usually

were issued by the stock exchanges (Aguilera and Cuervo-Cazurra, 2004) and have focused on

elements such as the separation of the CEO and chairman positions, a minimum number of non-

executive directors, composition and roles of board committees, and the enhanced role of

institutional investors (Dedman, 2002). As a result, the introduction of a code of governance

might lead to the adoption of more formal governance mechanisms.

The implementation of a larger number of governance mechanisms to protect minority

shareholders, therefore, usually is not in the interest of a large shareholder. This is the second

argument for why one should expect that ownership concentration leads to fewer governance

mechanisms adopted. We hence propose:

Hypothesis 1 (H1): A higher level of ownership concentration leads to a less extensive

adoption of the code of good governance (i.e., fewer governance mechanisms are

adopted).

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3.1 Heterogeneous shareholders

Although there is a growing body of literature addressing governance as a principal-principal

conflict, this issue traditionally is pictured as the presence of one large shareholder in

combination with multiple small ones. Laeven and Levine (2008) show that one third of

European listed corporations have multiple large shareholders. Scant research exists, however, on

the effect of having more than one type of large shareholder. We look at this issue with respect to

its implications for the number of governance mechanisms that firms adopt.

We theorize that a heterogeneous ownership structure of a company (i.e., having at least

two large shareholders of different types) should mitigate both the principal-agent and the

principal-principal conflicts. A second large shareholder of any type not only should have an

interest in reducing rent extraction from the management through monitoring and control

(principal-agent conflict) but also should have an interest in preventing any rent extraction from

the other large shareholder (principal-principal conflict). Along these lines, Attig et al. (2013) and

Attig et al. (2008) highlight the importance of the existence of multiple large shareholders on the

improvement of internal monitoring and on the reduction of agency costs related to a firm’s cash

holdings and cost of capital.

We consider that it is not only the number, but also the type of shareholders that

contribute to the governance structure of the firm. We therefore align with Wiseman et al. (2011)

in calling for a broader view of agency theory. Potential conflicts between large shareholders

involve not only wealth maximization but also other objectives and preferences. Such diverging

and sometimes conflicting interests and objectives can occur in particular when considering the

different motivations that heterogeneous shareholders might have, as described in the governance

literature (Connelly, Hoskisson, et al., 2010; Fiss and Zajac, 2004). These multiple motivations

generate different conflicts of interests in terms of such things as strategic decisions, time

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horizons, and risk preferences (Connelly, Tihanyi, et al., 2010), and these agency conflicts also

should drive stronger governance structures (Dey, 2008). When two large shareholders of

different types are in place (specifically, when they have active interests in how the company is

managed), both shareholders have an interest in implementing a larger number of formal

governance mechanisms. These governance structures not only help to prevent the other large

shareholder from extracting rents but also serve as formal structures to coordinate and eventually

reconcile diverging interests. We therefore propose:

Hypothesis 2 (H2): Having heterogeneous large shareholders (i.e., more than one type of

large shareholder) leads to a more extensive adoption of the code of good governance

(i.e., more governance mechanisms are adopted).

3.2 Ownership concentration and heterogeneous shareholders  

So far, we have argued from an agency perspective that ownership concentration leads to

the adoption of fewer governance mechanisms. We have further argued that shareholder

heterogeneity (the presence of two or more large shareholders of different types) leads to the

opposite prediction, that of a larger number of formal governance mechanisms. In this section, we

explore arguments concerning how increasing levels of ownership size of two large shareholders

of different types further affects the adoption of governance mechanisms.

Having more than one large shareholder should, for the reasons outlined above, increase

the motivation of each large shareholder to put in place more governance mechanisms.

Theoretical models of multiple shareholders agree on the limitations that having multiple

shareholders impose concerning rent extraction from minority shareholders (Bennedsen and

Wolfenzon, 2000; Bloch and Hege, 2003; Gomes and Novaes, 2001) and can have an impact on

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valuation (Attig et al., 2013) and cost of capital. This impact is greater when the large

shareholders are of different types (Attig et al., 2008; Laeven and Levine, 2008) The arguments

above lead to an expectation that differences in the level of ownership (i.e., differences in the

number of voting rights held by each of the large shareholders) should have an impact on the

design of the corporate governance of the firm. For instance, the level of fear a “smaller” large

shareholder has regarding the principal-principal conflict may depend on how many shares the

“large” shareholder holds, with larger holdings associated with more fear on the part of the

smaller shareholder. Greater differences in ownership size provide the “smaller” large

shareholder with stronger incentives to push for a larger number of formal governance

mechanisms.

Additionally, the “larger” shareholder, in the presence of the “smaller” one, may bear

greater risk of expropriation. Bennedsen and Wolfenzon (2000) theorize that a shareholder with

sufficient influence but with less money at stake (the “smaller” large shareholder”) has important

incentives to expropriate from the “larger” shareholder. This reasoning provides motivation for a

large shareholder to desire additional corporate governance mechanisms as a means of protecting

its interests.

We therefore expect the negative relationship posited in H1, that a greater degree of

concentration leads to fewer governance mechanisms being implemented, is mitigated when there

are two or more types of large shareholders and the size of shareholding of one of them increases.

Hypothesis 3 (H3): Increasing levels of ownership size of heterogeneous large

shareholders positively interact to increase the extensiveness of adoption of the code of

good governance. (i.e., more governance mechanisms are adopted).

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4. Research Design

4.1 Data

To examine the relationship between elements of the shareholder structure and the adoption

of governance mechanisms, we collected data from all firms listed on the Swiss Stock Exchange

(SWX) between 2002 and 2010, with the exception of financial companies (banks and insurance

companies). To analyze the influence of large shareholders (which we define as owning at least

5% percent of the voting rights), we use La Porta et al.’s (1999) methodology to classify them by

type in our database. We tracked the pyramidal ownership (with a pyramid defined as a structure

in which one firm owns another firm, which is owned by another firm, and so on) of these voting

rights, using the 20% threshold, until we found an individual (or family) or a widely held

corporation as the ultimate shareholder. We collected this information from companies’ annual

reports and their Web sites. We use the percentage of votes reported by these shareholders at the

year’s end in the annual report. To simplify, we considered each owner holding 5% percent or

more of the votes for the firm under review. If no firm or individual owned more than 20%

percent of this shareholder’s shares, we considered the firm as widely held. On the contrary, if

another shareholder held more than 20% of this firm’s voting rights, we followed the same

process until we identified the final shareholder of the pyramid.

We then classify the final shareholders as ‘family inside ownership’, ‘family outside

ownership’, ‘private equity’, ‘banks’, ‘non-financial’, ‘government’, and ‘pension funds and

foundations’. We classified the block of shares as ‘family’ if the block is directly or indirectly

controlled by an individual, a group of individuals linked through family ties, or a pool of

individual investors. We could not measure ‘family inside ownership’ directly, but we believe

that our classification is a reasonable proxy for it. When executives’ or shareholdings are larger

than 5%, we argue that a member of the family (large shareholder of the firm) is a member of

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either the board of directors or the executive team. Particularly, because the information provided

in our setting regarding the shareholdings of the members of the board of directors and the

executive team relates only those shares directly controlled by the individuals and not by a

company he or she might represent. We classify these cases as ‘family inside ownership’ as

opposed to ‘family outside ownership’. Shareholding is described as ‘private equity’ if the block

is in the hands of a ‘private equity’ firm, a leveraged buyout boutique, or an active investment

management fund; ‘banks’ if the block is controlled by a widely held bank or an insurance

company; ‘corporation’ if the block is controlled by a ‘non-financial’ for-profit organization;

‘government’ if the block is directly or indirectly controlled by a government agency of some

type; and ‘pension funds and foundations’ for pension funds and not-for-profit foundations.

We added the ‘private equity’ shareholders and the distinction between family active and

family passive ownership to the list used by La Porta et al. (1999). Private equity ownership has

increased its presence considerably in the last few years in Switzerland and in other countries.

This has been reflected in increasing attention from the academic literature (Connelly, Hoskisson,

et al., 2010; Filatotchev and Wright, 2011; Jensen, 1989). We considered it important to

differentiate this category because private equity firms actively manage a portfolio of investments

and are organized around governance practices that align the interests of ‘private equity’

managers with the interests of the equity providers and, therefore, in the case of listed companies,

shareholders’ value (Cumming et al., 2007; Jensen, 1989). (Because we test for multiple types of

shareholders and not for multiple (amount of) shareholders, we created a variable to control for

the total number of large shareholders. This variable, which takes integer values from 1 to 5,

controls for the possibility of having more than one large shareholder of the same category (i.e.,

two family shareholders). It counts the total number of large shareholders, independently of the

typology.

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We further collected data on individual directors, including their professional

backgrounds, nationalities, and whether they were subject to ‘pay for performance’ compensation

plans. As control variables, we consider the number of seats held by each director in different

companies (‘number of boards’), to control for the board’s network as a source of diffusion of

ideas, innovations, and organizational practices through members’ network ties (Galaskiewicz

and Wasserman, 1989). We collected information only on board appointments outside the

company’s group. Companies can be listed or not listed nationally or internationally. We did not

consider membership on boards of non-profits, subsidiaries of the firm in question, or sport and

cultural clubs.

We used the percentage of the combined share ownership of directors and managers as

another control variable because higher levels of directors’ and managers’ ownership empowers

their alignment with shareholders (Hermalin and Weisbach, 2003). Two further variables were

the number of changes of the CEO and the percentage of members of the board of directors who

change every year. We included CEO turnover because a change in the CEO is believed to

reorient the organization during a period of environmental change (Wiersema and Bantel, 1992);

we included a variable for the change in the board of directors using similar reasoning.

Additionally, we identified the firms participating in Economiesuisse’s Best Practices on

Corporate Governance panel. Professional associations such as this are considered agents of

diffusion of practices (Greenwood et al., 2002).

We further controlled for company performance (with a lag) using the variation of Tobin’s

Q defined by Demsetz and Villalonga (2001) and Seifert et al. (2005). This definition consists of

the ratio of the year-end market value of the common stock plus the book value of total debt and

preferred stock to the book value of total assets. Tobin’s Q has been used as a measure of firm

performance in numerous studies on corporate governance, including those by Yermack (1996),

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Agrawal and Knoeber (1996), Morck and Nakamura (1999), and Seifert et al (2005). We

obtained financial information from the Thomson Financials and DataStream databases. We also

tested the lagged return on assets (ROA); those results are not reported but are consistent with our

other results.

We included the average tenure of the board members and the tenure of the CEO to control

for entrenchments. We used the log of year-end market capitalization to control for ‘firm size’ as

a sign of centrality in the organizational field (Greenwood et al., 2011). Finally, we controlled for

year fixed effects and clustered standard errors by firm. Definitions of the variables can be found

in Table I. Table II presents descriptive statistics for these variables.

-------------------------------------------- INSERT TABLE I ABOUT HERE -------------------------------------------- -------------------------------------------- INSERT TABLE II ABOUT HERE --------------------------------------------

4.2 Governance Mechanisms

The corporate government mechanisms studied here are identified and defined in Table III.

To develop “The Swiss Code of Best Practices for Corporate Governance”, Economiesuisse

created a panel of experts on corporate governance. The Swiss Stock Exchange (SWX) adopted

the code in 2002. The code is divided into three main areas – shareholders, board of directors and

executive management, and auditors – as the three pillars in the formal structure of firm

governance. For each of these three pillars, the code recommends a number of mechanisms to

improve the governance of publicly listed firms. We looked at those individual governance

mechanisms in the code that could be unambiguously classified as adopted or not. These specific

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governance mechanisms have been studied individually in previous research and have been found

to have a potentially high impact on the structure of the firm. We did not pursue a more

exhaustive list of governance mechanisms (see Akkermans et al. (2007) for one example of an

exhaustive list) for two reasons. First, our context does not allow us to go into such detail,

because there is no obligation to ‘comply or explain’; therefore, in most cases, the absence of

information does not mean that the recommendation is not fulfilled. That lack of information

limits which mechanisms we can examine. Second, aggregated measures of corporate governance

have been highly criticized (Larcker et al., 2007; Sonnenfeld, 2004), so we decided to focus on a

number of mechanisms that have been established as reliable links between corporate governance

and shareholder orientation.

--------------------------------------------- INSERT TABLE III ABOUT HERE ---------------------------------------------

From the shareholders’ pillar, the adoption of ‘one-share-one-vote’ principle can be used to

align the economic and the political power within the firm to the economic investment of

shareholders. The code encourages the disclosure of any restrictions on the capital–voting rights

proportionality. The lack of proportionality allows shareholders to control the firm beyond their

capital rights, defying the principle of equality of each share and creating defensive mechanisms

that reduce the effectiveness of the market as a corrective governance mechanism.

The second pillar, which is treated extensively in the code, considers the board of directors

and the executive management team as key constituents in the governance of the firm. Among

the possible issues, we explore three main areas linked to the balance of power between

management and shareholders: conflict of interest, structure, and compensation. We use

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independence of the board members and non-dual CEO-chairman appointments as critical

governance mechanisms. ‘Non-duality’ refers to the clear separation between the executive role

of the CEO and the chairman of the board of directors, with the latter responsible for advising

and monitoring the former. Duality usually is linked to managerial power, and it generates a

conflicting relationship between shareholder value and staggered executives (Morck et al., 1988).

‘Independence’ of the board refers to the fact that at least two thirds of the directors are

considered non-executives and do not report conflicts of interest with the firm or the

management. The objective of having independent directors is to safeguard the interests of

shareholders.

Additionally, we consider the ‘disclosure of the number of board of directors meetings’ as a

proxy for more transparency of information, particularly because this particular detail was low in

the first years of our sample (see Table IV). We include the setup of an ‘audit committee’,

‘nomination committee’, and a ‘compensation committee’ as improvements in corporate

governance through establishment of these formal monitoring structures. These four mechanisms

each aim at increasing the accountability of the board, its focus, and the competencies of its

members. The audit committee sets the principles for choosing and evaluating external audit

services. The nomination committee is established “to ensure proper compliance with established

nomination procedures and to facilitate and coordinate the search for a balanced and qualified

board” (OECD, 2004, p. 34). The compensation committee “recommends to the board the

remuneration of the executive directors and managers in all its forms, drawing on outside advice

if necessary” (Cadbury, 1992, p. 23). All four mechanisms therefore were designed originally to

serve the interests of shareholders. In addition, ‘pay for performance plans for directors’ and ‘pay

for performance plans for managers’ attempt to align the interests of directors and managers,

respectively, with those of shareholdersi.

21

----------------------------------- TABLE IV ABOUT HERE -----------------------------------

Finally, we use the adoption of ‘IFRS’ as a proxy for accounting quality. In contrast to

Swiss GAAP, IFRS accounting principles are linked to the disclosure of more information to the

market, because the Swiss GAAP are framed in the conservative European accounting tradition

and give more flexibility to management than do IFRS (Bonvin, 2007; Lapointe-Antunes et al.,

2006; Raffournier, 1995). Compared to the Swiss GAAP, the IFRS accounting principles are

recognized to exhibit higher accounting quality, taking away opportunistic discretion from

managers (Barth et al., 2008), and their early adoption has been associated with a lower cost of

capital (Daske et al., 2008). In 2005, however, Swiss GAAP were ruled out for large firms, with

IFRS becoming the mandatory standard. Small cap firms still have a choice of which accounting

standards to use.

5. Results

We tested our hypotheses using Poisson regressions, with total number of governance

mechanisms adopted as the dependent variable (Davila, 2005; Roggenkamp et al., 2005; Sanders

and Tuschke, 2007). Although it is not a linear model, it is widely used to analyze count data

(Greene, 2005). We logged and mean centered the ownership variables and controlled for year

fixed effects clustering robust standard errors per company.

Count data may suffer from over-dispersion. This happens when the conditional variance

exceeds the conditional mean (Wooldridge, 2010). This is not the case in our sample. Because

our dependent variable has no zeros in most years, we additionally tested with a zero-truncated

model; the conclusions remained the same. To test for the importance of the different governance

mechanisms that constitute our aggregated dependent variable, we tested the model repeatedly,

22

eliminating of one mechanism each time. Once again, we did not see any major changes in the

results. To control for possible endogeneity concerns, we lagged all the dependent variables.

Only the combination of ‘family active’ and ‘corporations’ is no longer significant. We decided

to report our original results to maintain the full sample. Correlation coefficients between the

variables are reported in Table V.

------------------------------------------- INSERT TABLE V ABOUT HERE ------------------------------------------- 5.1 Hypothesis Testing: Predicting the Extensiveness of Adoption of the Code of Corporate Governance

Tables VI and VII report the results of the Poisson regressions. We predict that the

ownership structure of the firm will affect corporate governance design, controlling for

management changes, characteristics of the board of directors characteristics, and the firm’s role

in the development of the Swiss Code. Table VI presents the results of our tests of Hypothesis 1

(H1). H1 predicts that ownership concentration leads to fewer formal corporate governance

mechanisms being adopted. Model 1 presents the results for aggregated ownership concentration

(without making any distinction regarding the identity of the large shareholders). As H1

predicted, ownership concentration is negatively associated with the number of governance

mechanisms implemented (-0.57, significant at the 0.1% level). Model 2 introduces shareholder

heterogeneity, and Model 3 disaggregates ownership concentration into the different categories of

shareholders. Our Hypothesis 2 (H2) predicts that the presence of heterogeneous shareholders

will create additional agency conflicts and that the firm therefore will strengthen its governance

structures to mitigate them. In both models, with aggregated (Model 2) and separated (Model 3)

ownership, the results support our hypothesis. Having two or more large shareholder types with

23

heterogeneous interests leads to significant implementation of corporate governance practices

(0.051, significant at the 10% level, and 0.144, significant at the 0.1% level).

----------------------------------------------- INSERT TABLE VI ABOUT HERE -----------------------------------------------

Given that different types of shareholders have heterogeneous objectives (Connelly,

Tihanyi, et al., 2010), we looked, in a second step, at specific combinations of shareholders.

Results for all those interactions are reported in Table VII. Considering the Poisson analysis

reported in Model 3, we tested for all possible bivariate interaction effects between our seven

categories of large shareholders. We report only those interactions with more than one interaction

per year.

----------------------------------------------- INSERT TABLE VII ABOUT HERE ----------------------------------------------- ----------------------------------------------- INSERT TABLE VIII ABOUT HERE -----------------------------------------------

The last column of Table VII (Model 13) reports the results from testing the interaction

effects between all different shareholders. We found, in total, five significant interaction effects:

‘Private equity’ interacts positively with ‘family active’ (5% significance level) and ‘family

passive’ ownership (1% significance level) as well with ‘corporation’ ownership (1%

significance level). We also found significant interaction effects between ‘corporate’ ownership

with both ‘family active’ and ‘family passive’ ownership (10% level each). In order to facilitate

24

interpretation of the interaction effects, we plotted the five interaction effects graphically (Figure

1 and Figure 2).

----------------------------------------------- FIGURES 1 AND 2 ABOUT HERE -----------------------------------------------

For the first three interaction effects, we take ‘private equity’ ownership as a moderator

variable. When ‘private equity’ ownership is low, increases in ‘family active’ and ‘family

passive’ ownership do not affect the number of governance mechanisms adopted (Figure 1,

Panels A and B). When ‘private equity’ ownership is high, however, increases in ‘family’

ownership (both passive and active) lead to more governance mechanisms being adopted. These

results are consistent with the prediction of H3. It is interesting that the slope of the regression

line for ownership concentration for ‘corporation’ ownership is negative when ‘private equity’

ownership is low but positive for higher levels of ‘private equity’ ownership. This result is

consistent with H3 as well (Figure 1, Panel C) and shows the importance of both the type of

shareholder and the voting rights held by each shareholder type.

The graphical visualization of the fourth and fifth interaction effects depicts that increasing

levels of corporation ownership are again negatively related to the number of governance

mechanisms adopted as long as ‘family’ ownership (both passive and active) is low (Figure 2,

Panels D and E). When ‘family’ (both active and passive) ownership is higher, this negative

effect is at least offset, a result that is partially in line with the predictions of H3.

6. Discussion and conclusions

This study tested, from an agency theory perspective, the effects in Swiss companies

(quoted in the Swiss Stock Exchange) that ownership concentration and the presence of

25

heterogeneous large shareholders have on the extensiveness of adoption of the governance

mechanisms of the Swiss Code of Good Practices for corporate governance. The results of this

study partly confirm the predictions from this theory. Ownership concentration limits the

adoption of the governance mechanisms identified in the code. When we tried to disentangle

these results based on the types of shareholders, we found a more nuanced view of the process of

adoption.

First, although we found strong support for our hypothesis that ownership concentration is

negatively related to the number of governance mechanisms adopted (specifically, for large

shareholders of the private equity, family passive, government, corporation, and miscellaneous

ownership types), we did not find support for that hypothesis for the ‘family active’ and ‘banks’

types of shareholders. Second, we found that shareholder heterogeneity is a good predictor of

more extensive adoption of the code. It suggests that in the presence of principals with

heterogeneous objectives, organizations tend to strengthen their governance structures rather than

weaken them (this may indicate collusion of interests, as Bennedsen and Wolfenzon (2000)

would expect.) Regarding the principal-principal conflict (Villalonga and Amit, 2006; Young et

al., 2008) we found that empowering a second principal helps reduce the problem.

Next, we aimed at obtaining a better understanding of how ownership concentration

interacts with shareholder heterogeneity in reducing these agency conflicts through better

governance structures. To do this, we interacted the voting rights of the types of shareholders

(family active, family passive, private equity, banks, corporations, and miscellaneous) with each

other. We found support for the predictions of Hypothesis 3 (H3) for combinations of ‘private

equity’, ‘family’, and ‘corporation’ ownership. Using Ryan and Schneider’s (2002)

categorization, these three types of shareholders can be distinguished from the other three as

being more “activist”.

26

Private equity investors invest in companies and become directly involved in the

management of these companies. They are known for implementing effective governance

structures in order to increase the likelihood that value is created. Corporations typically do not

invest in companies merely for financial reasons, but for strategic ones. Owner corporations may

have different ideas concerning how resources at the controlled firm should be allocated for the

benefit of the whole group and not necessarily for the specific company (Connelly, Hoskisson, et

al., 2010). Our results indicate corporations as a type of shareholder with preferences for weaker

corporate governance structures. Family firms are probably a more nuanced category, because

many motivations regarding corporate governance may coexist, such as altruism (Schulze et al.,

2001), socio-emotional wealth (Gómez-Mejía et al., 2007), or the effect of generation (Villalonga

and Amit, 2006), to mention a few. The interests coincide in the strong informal influence of

family firms in the organization (Schulze et al., 2003; Schulze et al., 2001). The remaining

categories of shareholders are traditionally not considered ‘activist’, particularly in the Swiss

context. In particular, banks are reducing their role in the supervision of other companies

(Ruigrok et al., 2006) and pension funds take a very passive approach to the use of their voting

rights to change management practices. This may explain why we find support for H3 only for

combinations of ‘activist’ shareholders.

The distinction between activist and passive shareholders is relevant only when we

consider the percentage of shares held by the different shareholders. For instance, ‘private equity’

ownership needs high ownership concentration to push for more governance mechanisms when

interacting with the ‘family’ and ‘corporations’ types of shareholders. Family ownership, on the

other hand, only offsets the negative influence that a corporation’s ownership concentration has

on the adoption of governance practices. These results shed some light on emerging issues of

agency theory in general and on the corporate governance literature in particular. We provide

27

evidence on issues such as ownership concentration and diversity of principals (Wiseman et al.,

2011), the interaction of family firms and other large shareholders (Wiseman et al., 2011; Young

et al., 2008), ownership influence, and shareholder activism (Connelly, Hoskisson, et al., 2010).

We contribute to theory through our exploration of the complex agency relationships that

develop in the presence of heterogeneous shareholders in the ownership structure of a firm. In

particular, our results contribute to the emerging literature on the effects of shareholder

heterogeneity on management choices (Connelly, Hoskisson, et al., 2010; Connelly, Tihanyi, et

al., 2010; Hoskisson et al., 2002), integrating the effect that principals with heterogeneous

objectives have on the governance design of the firm (Wiseman et al., 2011). We do this by

following Connelly, Tihanyi, et al.’s (2010) approach of tackling the agency problem from the

principal side, and we try to understand how organizations change in order to adapt to the agency

conflicts related to their complex ownership structure.

6.1 Implications for Practice

The results in this study shed light on management practice by clarifying how

organizations reconcile the conflicting interests present when they have large shareholders of

different types (family, banks, corporations, governments, private equity and pension funds and

foundations). More hands-on shareholders seem to resolve agency conflicts with stronger rather

than weaker governance structures; however, even within this group, this effect depends on the

type of shareholders. Whereas private equity shareholders lever their votes to achieve stronger

governance structures, family owners merely limit the influence of ownership concentration from

other shareholders, which serves to decrease the number of corporate governance mechanisms.

Our results provide relevant hints to minority (and large) investors. A single large owner

is likely to create a corporate governance structure with fewer governance systems in place,

28

which might not be in the interest of minority shareholders; the risk for them in investing in such

firms is higher than being invested in companies with heterogeneous large shareholders. Our

results propose that the combination of two active large shareholders with conflicting interests

represents a good environment for strengthening the corporate governance practices of a firm.

Minority shareholders are hence informed by our results that two ‘activist’ shareholders will

likely monitor each other, thus reducing the risk of rent extraction at their expense.

Our findings also are relevant for policy makers. Designers and implementers of codes of

good practices should consider not only the institutional environment of the country but also the

ownership structures of companies when considering whether to make adoption mandatory or

voluntary. Finally, we propose a vision of corporate governance systems beyond a role of

monitoring management to prevent self-serving; instead, they can serve as frameworks for

different prominent stakeholders to reconcile potential conflicting interests.

6.2 Future research and limitations

Our findings open opportunities for future research. This study contributes to the literature

by studying the firm-level determinants of the adoption of a code of good corporate governance

practices. In particular, we focused on ownership concentration and shareholder heterogeneity.

Future research could build on this study to enhance understanding of how the competing

interests of multiple large shareholders are resolved by means of stronger governance structures.

Such research may not exclusively be quantitative in nature but could be qualitative as well, so as

to provide a better understanding of the complexity of the conflicts that arise between different

types of shareholders. Furthermore, research could focus on the solution of specific conflicts

through different combinations of governance mechanisms.

29

In this line, future studies could shed light on the question of the extent to which adopted

governance mechanisms are succeed in mitigating different principal-principal conflicts and

suggest alternative ways to address them, as well as whether value creation is affected. From our

results, we would expect that such effects would depend on the types of shareholders and their

specific interests.

One of the limitations of this study is that our sample consists of firms from only one

country. We chose this country, Switzerland, because the adoption of individual governance

mechanisms is not mandatory, and if they are not implemented, a firm is not required to explain

why. Similar results can be expected as long as adoption of governance mechanisms is not legally

enforced, but the specific effects for some shareholders may be different in other countries. For

example, government ownership may have a different impact in countries where government

more actively interferes in companies’ actions and strategies (e.g., France). Moreover, whereas

Swiss pension funds are very passive shareholders, US pension funds are known for playing a

more active role, exerting a similar influence on governance systems as private equity funds.

Future research should expand to an international scope in order to provide understanding of

some national-level differences as well as substantiate generalizability of our findings to other

settings, such as emerging economies (Young et al., 2008).

In this paper, we use 10 governance mechanisms to proxy for the adoption of a full code

of best practices. Although we did all we could to measure all governance mechanisms, we chose

only those for which we could have no doubt regarding their implementation. This, however, may

have created measurement bias. Despite the difficulties of measuring a valid construct for

corporate governance (Larcker et al., 2007), we hope to extrapolate the structural indicators we

used as proxies to the adoption of the code and not to the quality of the governance.

30

Through the paper, we assumed that shareholders of a given defined type share some

common objectives. Although this might be true in general (Connelly, Hoskisson, et al., 2010),

there might be situations in which this assumption does not hold. Research on the presence of two

(different) family shareholders may provide a rich ground in which to better understand the

motivations of family shareholders.

To conclude, this study examined whether ownership concentration and shareholder

heterogeneity explain differences in the extensiveness of adoption of the code of good

governance. Beyond finding support for the assumption that ownership concentration negatively

affects the extensiveness of adoption of a code, we contribute to the literature by studying the

effects of heterogeneous large shareholders in the ownership structure of a firm. We find that

having a second type of large shareholder may be a driver for further implementation of the code,

in order to mitigate the principal-principal conflict. That effect, however, is contingent on the

type of shareholder (‘activist’ versus ‘less activist’) suggesting that some shareholders use

stronger governance structures to deal with the agency problems than do others. Ultimately, our

study provides a step toward the construction of the “model of the interactions between large

shareholders” demanded by La Porta et al. (1999, p. 476).

31

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Table I Definition of Variables

1 Ownership concentration % Percentage of votes held by shareholders with holdings greater than 5% ofthe shares

2 Family active % votes Percentage of shares held by an individual or family when those holdings are greater than 5% of the shares and hold a position in the management or onthe board of directors

3 Family passive % votes Percentage of shares held by an individual or family when those holdings are greater than 5% of the shares and do not hold a position in the managementor on the board of directors

4 Private equity % votes Percentage of shares held by a private equity firm when those holdings aregreater than 5% of the shares

5 Bank % votes Percentage of shares held by a widely held bank or insurance company when those holdings are greater than 5% of the shares

6 Government % votes Percentage of shares held by a state (domestic or foreign) when thoseholdings are greater than 5% of the shares

7 Corporation % votes Percentage of shares held by a widely held non-financial company whenthose holdings are greater than 5% of the shares

8 Pension funds and foundations % votes

Percentage of shares held by a firm when those holdings are greater than 5%of the shares and the firm is a pension fund or a foundation

9 Shareholder heterogeneity Dummy variable that equals 1 if there is more than one type of shareholderand 0 otherwise

10 Number of large shareholders Number of shareholders with holdings greater than 5% of the voting rights11 New CEO Dummy variable indicating a change of CEO12 New BoD % Percentage of new directors13 Number of boards Total number of board seats held by all members of the board in other

companies14 Economiesuisse Dummy variable indicating that the company was part of the committee

designing the Swiss Code15 Market capitalization Log10 of year-end market capitalization in millions of Swiss francs16 TQ t-1 Tobin's Q in the previous year. We use the variation of TQ as the ratio of the

year-end market value of the common stock plus the book value of total debtand preferred stock to the book value of total assets

17 Leverage Ratio of debt to total assets18 CEO tenure Number of years served as CEO 19 Tenure avg BoD Average time (in years) of directors serving as board members in the firm20 Year Dummy variable considering the year of the observation

37

Table II Descriptive Statistics of the Variables

Mean Sd Min Max

CG mechanisms 7.22 2.09 0 10Concentration of votes % 0.42 0.26 0 1Shareholder heterogeneity 0.47 0.50 0 1Number of large shareholders 2.36 1.37 0 5Private equity % votes 0.06 0.10 0 0.73Family active % votes 0.19 0.27 0 1.00Family passive % votes 0.09 0.20 0 0.96Bank % votes 0.02 0.07 0 0.61Government % votes 0.02 0.10 0 0.78Corporation % votes 0.05 0.16 0 0.95Pension funds and foundations % votes 0.00 0.02 0 0.25Non-executive ownership % 0.10 0.18 0 0.90Executive Ownership % 0.08 0.18 0 0.87New CEO 0.02 0.12 0 1New BoD % 0.11 0.17 0 1Economiesuisse 0.19 0.90 0 12Total boards 23.81 13.01 0 75Market capitalization 5980.64 22058.66 3.61 191310.77TQ t_1 1.43 1.31 0 11.30Leverage 0.19 0.16 0 0.87FCF/Assets 0.03 0.13 -1.49 0.53Tenure avg BoD 6.67 3.98 0 24.25CEO tenure 6.12 5.18 0 28Year 2005.68 2.55 2002 2010n 910

Variables are defined in Table I.

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Table III Definition of Governance Mechanisms

1 Independence At least two thirds of the directors are considered non-executives and do not report conflicts of interest with the firm (1/0)

2 One-share-one-vote The voting rights of all shares are equal to their economic rights (1/0)3 Non-duality 0 if the positions of CEO and chairman of the board are held by the same person

and 1 otherwise4 Number of meetings of the board of

directorsThe firm discloses the number of meetings of the board of directors held duringthe year (1/0)

5 Audit committee Committee appointed by the firm to set the principles for choosing and evaluatingexternal services (1/0)

6 Compensation committee Committee appointed by the firm to define remuneration policies for board ofdirectors and top management (1/0)

7 Nomination committee Committee appointed by the firm to define nomination policies and ensure theirapplications (1/0)

8 Pay for performance management The board of directors has set compensation plans including equity grants for themanagement (1/0)

9 Pay for performance board of directors

The board has set compensation plans including equity grants for the board ofdirectors (1/0)

10 IFRS The firm has adopted the International Financial Reporting Standards (1/0)11 CG mechanisms Sum of governance practices implemented by the firm

This table presents the definition of the 10 governance mechanisms that constitute our dependent variable. Variable 11 (CG mechanisms) is the sum of all the binary variables (1–10)

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Table IV Descriptive statistics on Corporate Governance Mechanisms

Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD Mean SD

CG mechanisms 6.36 2.05 6.66 2.21 6.94 2.15 7.37 2.01 7.53 2.00 7.62 2.03 7.61 2.05 7.65 1.84 7.76 1.80 7.22 2.09One-share-one-vote 0.91 0.29 0.93 0.25 0.94 0.24 0.94 0.23 0.96 0.19 0.92 0.28 0.93 0.25 0.92 0.28 0.94 0.24 0.93 0.25Independence 0.83 0.38 0.78 0.41 0.80 0.40 0.79 0.41 0.78 0.42 0.84 0.37 0.85 0.36 0.87 0.34 0.88 0.33 0.82 0.38Non-duality 0.80 0.40 0.81 0.39 0.84 0.37 0.80 0.40 0.83 0.38 0.81 0.40 0.83 0.38 0.85 0.36 0.88 0.33 0.83 0.38Number of meetings of the board of directors 0.75 0.43 0.78 0.42 0.83 0.37 0.92 0.27 0.95 0.21 0.97 0.17 0.98 0.15 1.00 0.00 1.00 0.00 0.90 0.30Audit committee 0.71 0.46 0.77 0.42 0.80 0.40 0.82 0.39 0.88 0.32 0.88 0.33 0.86 0.35 0.86 0.35 0.87 0.34 0.82 0.38Compensation committee 0.66 0.47 0.69 0.46 0.71 0.46 0.74 0.44 0.74 0.44 0.76 0.43 0.78 0.41 0.81 0.39 0.82 0.39 0.74 0.44Nomination committee 0.29 0.46 0.36 0.48 0.42 0.50 0.45 0.50 0.45 0.50 0.55 0.50 0.60 0.49 0.60 0.49 0.61 0.49 0.47 0.50Pay for performance management 0.34 0.47 0.41 0.49 0.39 0.49 0.44 0.50 0.49 0.50 0.45 0.50 0.40 0.49 0.38 0.49 0.40 0.49 0.41 0.49Pay for performance board of directors 0.50 0.50 0.54 0.50 0.52 0.50 0.58 0.50 0.58 0.50 0.57 0.50 0.47 0.50 0.44 0.50 0.46 0.50 0.52 0.50IFRS 0.58 0.50 0.58 0.50 0.69 0.46 0.87 0.34 0.88 0.33 0.89 0.32 0.91 0.29 0.91 0.29 0.90 0.30 0.79 0.41

n 88 86 82 910

2008 2009 2010 Total

98

2002 2003 2004 2005 2006 2007

116 116 114 106 104

CG mechanisms is our dependent variable and counts the average number of practices implemented by the firms. It is constructed by adding all the other governance mechanisms (binomial) listed below (10 considered). Variables are defined in Table III.

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Table V Pairwise Correlation Coefficients Between the Variables

1 2 3 4 5 6 7 8 9 10 11 12

CG mechanisms 1.00Concentration of votes % -0.44*** 1.00Number of large shareholders 0.07* -0.00 1.00Shareholder heterogeneity -0.02 0.18*** 0.62*** 1.00Private equity % votes 0.03 -0.02 0.39*** 0.31*** 1.00Family active % votes -0.19*** 0.48*** -0.24*** 0.07* -0.26*** 1.00Family passive % votes -0.09** 0.33*** -0.05 -0.07* -0.09** -0.30*** 1.00Bank % votes -0.05 0.05 0.28*** 0.32*** 0.02 -0.18*** -0.09** 1.00Government % votes 0.02 0.18*** 0.14*** 0.08* -0.02 -0.14*** -0.07* 0.05 1.00Corporation % votes -0.30*** 0.32*** -0.01 -0.11*** -0.11*** -0.17*** -0.09** 0.03 0.00 1.00Pension funds and foundations % votes -0.15*** -0.03 0.19*** 0.15*** 0.01 -0.08* -0.03 0.18*** -0.03 -0.05 1.00Non-executive ownership % -0.04 0.25*** -0.15*** 0.04 -0.14*** 0.55*** -0.21*** -0.13*** -0.10** -0.02 -0.07* 1.00Executive ownership % -0.18*** 0.31*** -0.11*** -0.05 -0.15*** 0.61*** -0.18*** -0.09** -0.09** -0.09** -0.03 -0.10**New CEO -0.18*** 0.06 0.04 -0.01 -0.00 -0.03 -0.02 0.11*** -0.01 0.12*** 0.29*** -0.06New BoD % -0.00 -0.03 -0.01 -0.01 0.15*** -0.10** 0.03 -0.00 0.03 -0.01 0.01 -0.04Economiesuisse 0.13*** -0.10** -0.05 -0.05 -0.05 0.04 -0.07* -0.02 -0.04 -0.06 -0.03 -0.04Total boards 0.33*** -0.11*** -0.07* -0.16*** -0.08* -0.09** -0.01 -0.05 0.24*** -0.09** -0.04 -0.12***Market capitalization 0.17*** -0.09** 0.02 -0.10** -0.12*** -0.07* -0.02 0.03 0.02 0.05 0.01 -0.03TQ t_1 0.24*** -0.11** -0.01 0.12*** -0.01 0.07* -0.13*** 0.01 -0.03 -0.10** -0.05 0.06Leverage 0.01 -0.01 0.00 -0.10** 0.00 -0.13*** -0.09* 0.06 0.06 0.22*** 0.13*** -0.08*FCF/Assets 0.15*** -0.07* 0.04 0.06 -0.17*** 0.01 0.00 0.04 0.03 -0.06 0.00 0.03Tenure avg BoD -0.22*** 0.31*** -0.14*** -0.05 -0.23*** 0.36*** 0.01 -0.12*** -0.02 0.11*** -0.09** 0.23***CEO tenure -0.17*** 0.07* 0.05 0.03 -0.12*** 0.13*** -0.08* 0.01 -0.06 0.12*** -0.08* -0.06Year 0.21*** 0.01 0.07* 0.07* 0.01 -0.04 0.14*** -0.01 -0.02 -0.06 -0.14*** -0.04

13 14 15 16 17 18 19 20 21 22 23 24Pension funds and foundations % votes 1.00Non-executive ownership % 0.01 1.00Executive ownership % -0.07* 0.02 1.00New CEO 0.11** -0.03 -0.02 1.00New BoD % 0.00 0.03 0.02 0.09** 1.00Economiesuisse -0.06 -0.03 -0.03 0.16*** 0.46*** 1.00Total boards 0.04 -0.05 -0.02 0.14*** 0.10** 0.12*** 1.00Market capitalization -0.06 0.08* -0.01 -0.09** 0.01 0.01 -0.09** 1.00TQ t_1 0.00 -0.02 -0.05 0.06 0.07* 0.07* 0.12*** -0.05 1.00Leverage 0.20*** 0.02 -0.37*** -0.07* -0.03 -0.04 -0.07* 0.01 0.05 1.00FCF/Assets 0.26*** 0.03 -0.16*** -0.06 0.06 0.09** 0.04 0.00 0.01 0.35*** 1.00Tenure avg BoD -0.03 -0.04 -0.06 0.09** -0.02 0.09** 0.07* -0.15*** 0.04 0.09** 0.15*** 1.00 Definitions of variables can be found in Tables I and III *p < .10, **p < .05, ***p < .01.

41

Table VI Poisson Regression of Corporate Governance Practices, Ownership Concentration &

Shareholder Heterogeneity Model Model Model

VARIABLES 1 2 3

Shareholder heterogeneity 0.051* 0.144****(0.031) (0.038)

Private equity % votes -0.031**(0.015)

Family active % votes -0.027(0.018)

Family passive % votes -0.388****(0.110)

Bank % votes -0.026(0.020)

Government % votes -0.056****(0.013)

Corporation % votes -0.091****(0.018)

Pension funds and foundations % votes -0.160***(0.057)

Concentration of votes % -0.574**** -0.573****(0.099) (0.097)

Number of large shareholders 0.025** 0.013 0.004(0.010) (0.012) (0.014)

Non-executive ownership % 0.165* 0.186* 0.014(0.099) (0.100) (0.152)

Executive ownership % 0.084 0.096 -0.119(0.118) (0.117) (0.151)

New CEO -0.228**** -0.238**** -0.134**(0.065) (0.064) (0.064)

New BoD % -0.065 -0.060 -0.065(0.045) (0.045) (0.046)

Economiesuisse -0.014* -0.014* -0.014*(0.008) (0.008) (0.008)

Total boards 0.002* 0.003* 0.003**(0.001) (0.001) (0.001)

Market capitalization 0.046**** 0.046**** 0.049****(0.011) (0.011) (0.010)

TQt_1 0.012 0.014 0.014*(0.009) (0.009) (0.009)

Leverage 0.143 0.136 0.176*(0.088) (0.090) (0.091)

FCF/Assets 0.058 0.058 0.079(0.089) (0.089) (0.093)

Tenure Avg BoD -0.007 -0.006 -0.009*(0.005) (0.005) (0.005)

CEO tenure -0.010*** -0.010*** -0.009***(0.003) (0.004) (0.003)

Constant 1.809**** 1.813**** 1.811****(0.037) (0.037) (0.044)

Year control Yes Yes Yes

Observations 902 902 902Chi-square 211.583 212.616 433.945Pseudo R2 0.063 0.064 0.067

Log lilkelihood -1881.710 -1880.543 -1874.067 Definitions of variables can be found in Tables I and III. CG mechanisms is the dependent variable. Concentration of votes in Models 1 and 2 is then split into the different categories of shareholders in Model 3.

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Table VII (1/2) Poisson Regression of Corporate Governance Practices and Shareholder Heterogeneity

Model Model Model Model Model Model Model Model Model Model Model Model ModelVARIABLES 1 2 3 4 5 6 7 8 9 10 11 12 13

Private equity % votes x Family active % votes 0.005 0.017**(0.006) (0.007)

Private equ