Classifying firm as owner or management controlled
The pattern of share ownership at company level varies widely. In the UK, companies ownership is generally described as being widely dispersed among large numbers of shareholders.The largest shareholder often owns 5% or less of the stock aand a proportion is owned by non-bank financial institutions. The board of directors typically own a tiny proportion of the shares, often much less than 0.5%. Thus, managers rather than owners control many medium and large-sized companies and set the firm’s objectives. In France and Germany shareholding tends to be more concentrated with greater blocks of shares held by companies and banks.to Denis and McConnell (2003) concentrated ownership structures are more likely to be in most countries in contrast to the dispersed ownership patterns that are typical only of the UK and the USA.
How then can companies be classified as owner or managerially controlled? If a single shareholder holds more than 50% of the stock, assuming one vote per share, then they can outvote the remaining shareholders and control the company. If the largest shareholder owns slightly less than 50% of the equity then they can be out voted if the other shareholders formed a united front. If the majority of shareholders do not form a united front or do not vote, then an active shareholder with a holding of substantially less than 50% could control the company.
Berle and Means (1932), who first identified the divorce between ownership and control, argued that a stake of more than 20% would be su⁄cient for that shareholder to control a company but less than 20% would be insu⁄cient and the company would be management-controlled. Radice (1971) used a largest shareholding of 15% to classify a firm as owner-controlled; and a largest shareholder owning less than 5% to classify a firm as managerially controlled. Nyman and Silberston (1978) severely criticized the ‘‘cut-off’’ or threshold method of assessing control and argued that the distribution and ownership of holdings should be examined more closely. They emphasized that there was a need to recognize coalitions of interests, particularly of families, that do not emerge from the crude data
Cubbin and Leech (1983) also criticized the simple cut-o¡ points for classifying firms. They argued that control was a continuous variable that measures the discretion with which the controlling group is able to pursue its own objectives without being outvoted by other shareholders. Management controllers, they argued, would be expected to exhibit a higher degree of control for any given level of shareholding than would external shareholders.
They then developed a probabilistic voting model in which the degree of control is defined as the probability of the controlling shareholder(s) securing majority support in a contested vote. Control is de¢ned as an arbitrary 95% chance of winning a vote.
This ability depends on the dispersion of shareholdings, the proportion of shareholders voting and the probability of voting shareholders supporting the controlling group. The likelihood of the controlling group winning increases as the proportion voting falls and the more widely held are the shares. Applying their analysis to a sample of 85 companies, they concluded that with a 10% shareholder turnout, in 73 companies than a 10% holding was necessary for control and in 37 companies with a 5% turn out, less than a 5% holding was necessary for control
Control of a company is therefore a function of the following factors:
1.The size of the largest holding.
2.The size and distribution of the remaining shares.
3. The willingness of other shareholders to form a voting block.
4.the willingness of other shareholders to be active and to vote against the controlling group.
SYSTEMS OF CORPORATE CONTROL
The differences between countries in shareholder ownership patterns influence thenature of their corporate governance systems. According to Franks and Meyer (1992),there are fundamental differences between the corporate control systems of the UK and the USA and France, Germany and Japan. The former they describe as outsider systems and the latter as insider systems.
Insider systems are characterized by relatively few quoted companies, concentrated ownership, dominance of corporate and/or institutional shareholders and reciprocal shareholding. Shares are infrequently traded, but when they are they often involve large blocks. Takeover activity is largely absent, and where mergers take place they are largely done by agreement. However, Vodafone did acquire Mannesmann following a hostile bid. These characteristics, it is argued, lead to more active owner participation. Owners and other stakeholders are represented on the boards of companies, and there is active investor participation in controlling the company; this minimizes external influences in the control of the company. Ownership lies within the corporate sector rather than with a multiplicity of individual shareholders. Directors representatives of other companies and interest groups, while a two-tier board structure allows a wider group of stakeholders to o¡er the company a broader spectrum of advice tending to reinforce longer term goals and stability for the company. Information about the firm’s problems and performance is available more readily to corporate or institutional shareholders than to individual shareholders; this enables them be better informed about the firm’s performance because they have inside information.
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