Ownership and Control: Patterns and Mechanisms

1. Chapter 16 Learning Objectives After studying this chapter, you should be able to: • Differentiate various ownership patterns around the world • Articulate the role of managers in both principal-agent and principal-principal conflicts • Explain the role of the board of directors • Identify voice- and exit-based governance mechanisms and their combination as a package • Acquire a global perspective on how governance mechanisms vary around the world • Articulate how institutions and resources affect corporate governance • Participate in two leading debates on corporate governance • Draw implications

2. OWNERSHIP AND CONTROL concentrated ownership and control - founders start up firms and completely own and control them on an individual or family basis diffused ownership - publicly traded corporations owned by numerous small shareholders but none with a dominant level of control separation of ownership and control - dispersal of ownership among many small shareholders, in which control is largely concentrated in the hands of salaried, professional managers who own little (or no) equity

3. FAMILY OWNERSHIP • vast majority of large firms throughout continental Europe, Asia, Latin America, and Africa feature concentrated family ownership and control • family ownership and control may provide better incentives for the firm to focus on long-run performance • may also minimize the conflicts between owners and professional managers • may lead to the selection of less qualified managers (who happen to be the sons, daughters, and relatives of founders), the destruction of value because of family conflicts, and the expropriation of minority shareholders

4. STATE OWNERSHIP • state-owned enterprises (SOEs) suffer from an incentive problem and often perform poorly • in theory, all citizens (including employees) are owners, in practice, they have neither rights to enjoy dividends generated by SOEs (as shareholders would) nor rights to transfer or sell “their” property • SOEs are de facto owned and controlled by government agencies far removed from ordinary citizens and employees • there is little motivation for SOE managers and employees to improve performance, which they can hardly benefit from personally

6. BOARD OF DIRECTORS inside directors - top executives of a firm outside directors - nonmanagement members of the board CEO duality – whenCEO serves as board chair interlocking directorate - one person affiliated with one firm sits on the board of another firm THE BOARD OF DIRECTOR’S ROLE control- effectively control managers service - advising the CEO resource - acquisition functions Boards’ effectiveness in serving the control function stems from their independence, deterrence, and norms

7. GOVERNANCE MECHANISMS voice-based mechanisms - willingness of shareholders’ to work with managers, usually through the board, by “voicing” their concerns • pay-for-performance link in executive compensation is usually not very strong • boards may have to dismiss underperforming CEOs exit-based mechanisms- means by which corporate control is gained from external sources when shareholders no longer have patience and are willing to “exit” by selling their shares • threat of takeovers does limit managers’ divergence from shareholder wealth maximization • private equity - acquisition of a significant portion or a majority control in a more mature firm • leveraged buyouts (LBOs) - means by which private investors, often in partnership with incumbent managers, issue bonds and use the cash raised to buy the firm’s stock

8. INSTITUTIONS AND CORPORATE GOVERNANCE • given reasonable investor protection, founding families may over time feel comfortable becoming minority shareholders of the firms they founded • when formal legal and regulatory institutions are dysfunctional, founding families mustrun their firms directly • absent investor protection, bestowing management rights to outside professional managers may invite abuse and theft • corporate governance ultimately is a choice about political governance