Ownership structure

Institutional investors have a large shareholding: An institutional investor with a large shareholding can monitor and exert influence on management.  All other shareholders benefit from this situation as agency problems are reduced through the actions of the large institutional investor (Shleifer & Vishny, 1997).  For example, Franks & Mayer (1990) find companies with large shareholders have higher director turnover.  Kang & Shivdasani (1995) find that companies with large shareholders are more likely to replace directors after poor performance than companies without large shareholders. This means the institutional investors enhance the monitoring of management. *We exclude Government as a large institutional shareholder.

  • Fulfillment criteria: Institutional investor with 5% or over shareholding (excluding govt.)?
  • Why this fulfillment criteria: FMC Act 2013 section 274 – substantial product holder 5%
  • Scoring: 0=no, 1=yes

Family/founders have a large shareholding: This structure could be harmful to smaller shareholders as their interests may not be considered by the family/founder shareholders.  Demsetz (1983) argues these large shareholders may treat the company’s output/assets as their own and therefore draw resources away from smaller shareholders.

  • Fulfillment criteria: Family/founder with 5% or over shareholding?
  • Why this fulfillment criteria: FMC Act 2013 section 274 – substantial product holder 5%
  • Scoring: 0=yes, 1=no

Government has a large shareholding: Borisova, Brockman, Salas, & Zagorchev (2012) find a negative relationship with government ownership and governance quality. The suggestion is government and company interests are not aligned as government has many stakeholders and interests to consider.

  • Fulfillment criteria: Family/founder with 5% or over shareholding?
  • Why this fulfillment criteria: FMC Act 2013 section 274 – substantial product holder 5%
  • Scoring: 0=yes, 1=no

Maximum score for the Ownership structure category is 3.

References

Borisova, G., Brockman, P., Salas, J., & Zagorchev, A. (2012). Government ownership and corporate governance: Evidence from the EU. Journal of Banking & Finance, 36(11), 2917-2934.

Demsetz, H. (1983). The structure of ownership and the theory of the firm. Jounral of Law and Economics, 25, 375-390.

Franks, J., & Mayer, C. (1990). Takeovers: Capital markets and corporate control: A study of France, Germany, and the U.K. Economic Policy: A European Forum, 10, 189-231.

Kang, J.-K., & Shivdasani, A. (1995). Firm performance, coporate governance, and top executive turnover in Japan. Journal of Financial Economics, 38, 29-58.

Shleifer, A., & Vishny, W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737-783.