Global Variations in Ownership Structures

Shareholder ownership structures are commonly classified as dispersed, concentrated, or a hybrid of the two.

• Dispersed Ownership reflects the existence of many shareholders, none of which have the ability to individually exercise control over the corporation. e.g. Australia, UK, US and Ireland.

• Concentrated Ownership reflects an individual shareholder or a group called controlling shareholders with the ability to exercise control over the corporation. e.g. China, India, Russia, Singapore and South Africa.

• Hybrid Ownership is a mix of dispersed and concentrated ownership. E.g. Canada, Japan and Germany. [Controlling shareholders may be either 'Majority Shareholder' i.e. own more than 50% shares or 'Minority Shareholder' i.e. own less than 50% shares]

Horizontal Ownership involves companies with mutual business interests (e.g. key customers or suppliers) that have cross-holding share arrangements with each other. This structure can help facilitate strategic alliance and foster long-term relationships among such companies.

Vertical Ownership or Pyramid Ownership involves a company or group that has a controlling interest in two or more holding companies, which in turn have controlling interests in various operating companies.

In many ownership structures, shareholders may have disproportionately high control of a corporation relative to their ownership stakes as a result of horizontal and/or vertical ownership arrangements.

Straight Voting Share: shareholders are granted the right of one vote for each share owned.

Dual-Class Share: have more voting power than the class of shares available to the general public. It can benefit one group of shareholders over another. The existence of dual-class shares can also serve to disconnect the degree of share ownership from actual control. When used in connection with vertical ownership arrangements, the company or group a the top of the pyramid can issue to itself all or a disproportionately high no. of shares with superior voting rights and thus maintain control of the operating companies with relatively fewer total shares of the company owned.

Conflicts within Different Ownership Structures

1. Dispersed Ownership & Dispersed Voting

• Principal-Agent problem: Weak shareholders, strong managers.
• Takeovers are possible.

2. Concentrated Ownership & Concentrated Voting

• Principal-Principal problem: Strong shareholders, weak managers.
• Takeovers are possible.

3. Dispersed Ownership & Concentrated Voting

• Strong shareholders, weak managers. Strong controlling shareholders with less than majority ownership can exert control over other minority owners through certain mechanisms, such as dual-class and pyramid structures and can also monitor management owning to their outsized voting power.
• Takeovers are impossible.

4. Concentrated Ownership & Dispersed Voting

• Weak shareholders, strong managers. This arises when there are legal restrictions on the voting rights of large share positions known as 'Voting Caps'. Voting Caps have been imposed by a no. of sovereign governments to deter foreign investors from obtaining controlling ownership positions in strategically important local companies.
• Takeovers are different.

Types of influential shareholders include banks, families, state-owned enterprises, institutional investors, group companies, private equity firms, foreign investors, managers and board directors.

Effects of Ownership Structure on Corporate Governance

1. Director Independence An independent board member is a board of directors who has no direct relationship with the company. The number of independent board members is higher in areas where many companies have dispersed ownership structures. The presence of independent members strengthens corporate governance by monitoring management and the board. In jurisdictions with concentrated ownership structures, independent board members are not mandatory.

2. Board Structures Board structures can either be one-tier or two-tier. A one-tier board structure is composed of a single board of directors with executive and non-executive members. A two-tier board structure has two boards: the management board and the supervisory board, which oversees the management board. In addition, the supervisory board serves as a control function by auditing and inspecting the corporation's group.

3. Special Voting Arrangements Special voting arrangements are put in place in different jurisdictions to improve the position of minority shareholders in board nominations.

4. Corporate Governance Codes, Laws, and Listing Requirements Several countries have national corporate governance codes where companies must adopt and comply with corporate governance codes. In situations where corporate governance codes are non-existent, company law or stock exchange listing requirements can achieve the same corporate governance codes.

5. Stewardship Codes Stewardship codes are voluntary codes introduced by a country that encourages investors to use their legal rights as shareholders to increase corporate governance engagement. In some countries like the UK, stewardship codes are mandatory.