Short-Term FinancingInternational Corporate Governance
2.*
Lecture Aims
This lecture reviews the differences in corporate control patterns across the world.
The lecture shows that corporate control and ownership in the UK and USA differ markedly from corporate control and ownership in the rest of the world.
Whereas in the UK and the USA most stock-exchange listed companies are widely held, in the rest of the world control tends to be concentrated in the hands of one shareholder or a small number of shareholders.
In addition to the differences in the concentration of control, there are also differences in terms of the types of shareholders that prevail in each group of countries.
2.*
Learning Outcomes
By the end of this lecture, you should be able to:
1. Describe the differences in the levels of corporate control across the world
2. Be aware of differences in the importance of various types of shareholders across regions and countries
3. Explain why the Berle-Means hypothesis does not hold outside the UK and the USA.
2.*
Introduction
The previous lecture mentioned that the principal–agent model has only limited applicability.
The model is based on the Berle-Means premise of a separation of ownership and control in stock-exchange listed firms.
However, this premise is only valid in the UK and the USA.
In most the rest of the world, listed corporations tend to have large shareholders.
Slide 2.*
Introduction (Continued)
In what follows, we focus on control rather than ownership for two reasons
Corporate governance is about the distribution of power within the corporation and this power depends, among other factors, on the votes held by various shareholders
In most countries, there are disclosure requirements for the ownership of control rights, but not for cash flow rights.
Slide 2.*
The Evolution of Control after the IPO
Berle and Means hypothesise that, as companies grow, they experience a separation of ownership and control.
It is this separation which creates conflicts of interests between the managers and the owners (the shareholders).
A first step towards testing the validity of this hypothesis is to focus on what happens around the initial public offering (IPO).
Slide 2.*
The IPO consists of the firm
obtaining a listing on a recognised stock exchange, and
offering its shares to the public for the first time.
During my PhD research I compared the evolution of control in German and UK IPOs matched by
size (market capitalisation), and
initial control (family control)
Slide 2.*
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
My definition of a large shareholder was a shareholder with at least 25% of the votes.
I distinguished between
new large shareholders.
Slide 2.*
Goergen (1998), Goergen and Renneboog (2003)
Table 1 – Evolution of control in German and UK IPOs
Slide 2.*
German firms
UK firms
The evolution of control is different in the two countries
Initial shareholders of German IPOs keep majority control for 5 years after IPO
Initial shareholders of UK IPOs lose control 2 years after IPO
Free float is higher in UK IPOs
No difference in terms of control held by new shareholders.
The Evolution of Control after the IPO (Continued)
Slide 2.*
There is no separation of ownership and control in Germany.
German firms also tend to go public later (about 50 years after their foundation) than UK firms (about 13 years).
The Evolution of Control after the IPO (Continued)
Slide 2.*
Corporate Control in Western Europe and
the USA
The first detailed study on Europe was conducted by the European Corporate Governance Network (ECGN), the predecessor of the European Corporate Governance Institute (ECGI).
The study was commissioned by the Directorate General for Industry of the European Commission.
The study was published in Barca, F. and M. Becht (2001), The Control of Corporate Europe, Oxford: Oxford University Press.
Slide 2.*
Corporate Control in Western Europe and
the USA (Continued)
Control refers to the ownership of voting rights
Control may be held indirectly.
There are various ways of defining control including
a majority of votes as a majority is required for most decisions voted at the AGM,
a supermajority as some decisions require 75% of the votes (e.g. the approval of a takeover offer), and
a blocking minority of 25% which is sufficient to block decisions requiring a supermajority.
Slide 2.*
Figure 1 – Direct or first-tier control
Slide 2.*
Family
Holding
Company
A
Holding
Company
B
Quoted
firm
15%
Figure 2 – Ultimate control
Family
Holding
Company
A
Holding
Company
B
Quoted
firm
100%
51%
15%
Table 2 – Distribution of largest shareholders
in Europe and the USA
Slide 2.*
Slide 2.*
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Table 3 – Distribution of control across types of large shareholders in Europe
Slide 2.*
Slide 2.*
Levels of control
Continental WesternEurope:
In most firms a majority of votes is held by one shareholder or a group
Most firms have a shareholder with a blocking minority
Potential agency problems between minority shareholders and large shareholder
UK and US
Most firms are widely held
A coalition of the 3 largest shareholders votes for only 30%
Potential agency problems between shareholders and management
Corporate Control in Western Europe and
the USA (Continued)
Nature of control
Industrial and holding firms are the major shareholders in most of Continental Europe
Institutional shareholders are main shareholders in the UK and Netherlands
Family control is important in Continental Europe
Control by the management is important in the UK.
Corporate Control in Western Europe and
the USA (Continued)
Bank stakes are small:
They range from 0.4 to 7.2% in most of Continental Europe
The exception is France with 16%
However, figures may underestimate control by banks
In some countries, customers deposit their shares with the bank and the bank votes for the shares
Figures exclude proxy votes
Proxy votes are the votes from the shares held by the banks’ customers that the banks exercise on behalf of their customers.
Corporate Control in Western Europe and
the USA (Continued)
Corporate Control in Asia
In Japan, some firms are part of keiretsus.
A keiretsu is a group of industrial companies with close ties to a single banks which acts as the principal lender to the group.
The bank is also a shareholder of the group’s companies and there may be cross-shareholdings between the group companies.
Slide 2.*
Corporate Control in Asia (Continued)
The keiretsus originated from the pre-WWII zaibatsus.
Zaibatsus were groups of industrial companies or conglomerates
controlled by families via a holding firm at the top of the group, and
with a bank as one of the group companies providing the financing.
An example of a keiretsu originating from a zaibatsu is the Mitsubishi group of companies.
Slide 2.*
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Korea’s industrial landscape is dominated by chaebols.
A chaebol is a group of industrial companies controlled by a family.
Examples of famous chaebols are Hyundai, LG and Samsung.
China started an ambitious programme of economic reforms in the 1980s giving managers of state-owned enterprises (SOEs) more power.
Corporate Control in Asia (Continued)
Slide 2.*
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
In the early 1990s, China set up the Shenzen and Shanghai stock exchanges.
From now on Chinese SOEs were allowed to issue shares to individual investors.
Chinese SOEs have complex ownership and control structures.
Corporate Control in Asia (Continued)
Slide 2.*
They tend to have 5 major types of shareholders
the central government,
employees,
foreign investors (B and H shares).
The largest shareholder holds about 43% of the shares.
The government is the largest shareholder in 67% of the firms.
Corporate Control in Asia (Continued)
Slide 2.*
India is dominated by conglomerates or so called business groups.
About 60% of the 500 largest firms on the Bombay Stock Exchange are part of business groups.
These are typically controlled by families.
Control and ownership structures are highly complex and opaque with ownership pyramids and cross-holdings.
Corporate Control in Asia (Continued)
Slide 2.*
Engro Corporation (2010)
Categories of shareholding – Engro Corporation(2013)
*
Directors, Chief Executive Officer, and their Spouses and Minor Children
15
5,951,333
1.16
2
2
228,797,841
44.75
3
30
18,630,165
3.65
5
Shareholding Categories- Engro Foods
Directors, Chief Executive Officer, and their spouse and minor children.
11
43,009
0.01
2
2
667,374,991
87.06
4
12
37,237,359
4.86
5
10,994
766,596,075
100.00
a 10% shareholder
Slide 2.*
Slide 2.*
Goergen, International Corporate Governance, 1st Edition © Pearson Education Limited 2012
Table 4 – Distribution of control across types of large shareholders in Asia
Source: Claessens et al. (2000)
Slide 2.*
Country
Sample
Family
State
Corporate Control in Transitional Economies
The former Communist Bloc started its transition to a market economy in the early 1990s.
Albeit slightly lower than in Western Europe, control is also concentrated.
However, the votes held by the second largest shareholder can be substantial.
Slide 2.*
Source: Pajuste (2002)
Largest shareholder
Conclusions
The Berle-Means hypothesis is only upheld for the UK and the USA.