Models and practices of corporate governance (Conf. dr.

Voicu Dragomir)
Shareholding
Structures
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Ownership and control
• Ownership must be understood in a strictly legal sense, as a
residual interest, and not as a holding on company assets. A
shareholder can not raise any claim on a firm’s buildings, cars,
or cash, as he will not assume the payment of any liabilities to
suppliers, creditors or the state.
• Corporate control is limited to that group manifesting its
decision power of running the business. Control is available to
those who have the ability to select the board of directors, by
direct appointment or by pressure to take certain decisions.
• In other cases, control is not proved through the decision to
influence the Board, but through the power to dictate certain
strategies and policies to the management, like the case of a
2
creditor which imposes the restructuring of the enterprise.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Shareholding structures (I)
• The general opinion about large corporations listed on the
stock exchange is that a dispersed ownership structure creates
a deep separation between ownership and control over
management decisions. For a firm with dispersed ownership,
responsibility for poor financial performance is borne by a
large number of shareholders, to the point where none of
them will act to remedy the situation. The more concentrated
the ownership, the lower the number of people who share the
costs and benefits of business.
• Shareholders usually cannot viably separate the effects of the
external environment from the effects of management
decisions. A turbulent economic environment will require a
closer monitoring of internal strategies. Thus, it is assumed 3
that firms in unstable markets will be characterized by
concentrated ownership.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Shareholding structures (II)
• The fundamental hypothesis of corporate governance is that a
dispersed ownership leads to non-involvement of the owners
and to managers running company in a discretionary manner.
• Firm growth leads to higher dispersion of ownership, because
each share is worth more, and is more coveted on the market,
as the firm’s activities are expanding.
• In addition, a small group of owners will have to invest in a
growing company to be able to maintain control over it. Thus,
the dilution of ownership is a response to market pressures
and share trends, which show a direct relationship with firm
size and business complexity. The larger a company grows, the
more difficult it will be to maintain a concentrated ownership,
4
because the cash needs are greater, and the financing
strategies require external involvement.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Matrix of shareholder interests (I)
• For private (unlisted) companies

Shareholders Investment Individual Preferred attitude of

horizon (private) Board of Directors
benefits
Minority owner, Short term Pecuniary and To maximize these
private persons non-pecuniary benefits
Minority owner, Short term - To maximize the
institutional value of the
company
Minority owner, Long term Pecuniary A profitable
commercial commercial
partner relationship
5
Majority owner Long term Pecuniary and To maximize these
non-pecuniary benefits
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Matrix of shareholder interests (II)
• For companies listed on stock exchanges:

Shareholders Investment Individual Preferred attitude of Board

horizon (private) of Directors
benefits
Undiversified Long term Pecuniary and A sustainable growth of stock
selectively non-pecuniary value and dividends, including
(ethical the maximization of non-
investments) pecuniary benefits

Diversified Long term Pecuniary Actions which influence the

selectively or index- share price trend and profit
based distributions
Selective Short term Pecuniary Actions which create sharp
speculative trader modifications of share prices
Commercial partner Long term Pecuniary Profitable commercial
6
relationship
Majority owner Long term Pecuniary and To maximize these benefits
non-pecuniary
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Types of control (I)
• Control through holding the complete package of shares by
a person, family or small group. In this case, it is assumed
that the respective shareholders appoint and dominate the
management, and closely coordinate the business.
• Majority control, by a person or a small group, giving
shareholders the same rights as full ownership - mainly the
appointment of the Board. However, some elements of
power may be limited by a coherent and hostile minority of
shareholders. Legal actions permitted by law may weaken
shareholder domination, but they cannot limit its influence.
• A holding is a type of institutional ownership, where
another firm holds a majority package, with the sole
intention of collecting dividends from the subsidiary. In this
case, the holding (the parent company) will interfere less in 7
managerial strategies, performing a speculative monitoring.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Types of control (II)
• Pyramid control occurs whenever an investor holds the
majority of shares in a company, which also has invested in
the majority package of another company, in a virtually
endless chain. The essence of this scheme is holding a
permanent exclusive control, simultaneously with a
progressive diminishing of equity interest (dividends). The
owner at the beginning of the chain will receive a negligible
interest in the companies which are at the end of the chain,
but will hold the control over all entities in the consolidation
perimeter, whose functioning is thus interrelated. The top
shareholder will be rewarded for his investment through other
means than dividends; for example, being a preferred business
partner of any company in the consolidation perimeter or by 8
satisfying his professional interest in a certain field.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Types of control (III)
• Minority control assumes the existence of a minority
shareholder or a small concerted group which act as a
nucleus, in the absence of any majority shareholder. Many
U.S. corporations are run through minority control, whose
force is greater when the shareholding is more dispersed. In
practice, the minority shareholder does not have the financial
power to secure the majority package of the company. For
that reason, it is less costly to contract with other
shareholders, to attract the votes of undecided investors or to
run legal battles against the management. Minority control is
obtained through negotiation, but in many cases it can be as
effective as majority control. For extremely large corporations,
it is more economic to hold control with a minority package 9
than to buy control with a majority holding.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Types of control (IV)
• Managerial control appears when ownership dispersion is so
pronounced that no overseeing is possible at shareholders’
level. To attend and to vote directly the appointment of
directors is a waste of time for a shareholder with infinitesimal
property. In this case, he/she can either choose not to
participate in the General Shareholders’ Meeting or vote in
order to handle the votes to a third-party mandated by
managers to elect the Board. This destroys the supervision
function held by the Board over management.
• The result is the same: investors with atomized ownership
have no means of control and management is likely to remain
in place for long periods of time. This arrangement indicates a
total separation between ownership and control, and 10
investors are remunerated for their non-involvement.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Types of control (V)
• Joint control is contractual or implied, through an agreement
between shareholders with converging interests. Joint
financial control refers to the firm as a whole, and is usually
undertaken by two minority shareholders who cannot decide
individually. Joint operational control can have one party as a
majority shareholder, but which cannot take operational
decisions without the consent of the other party.
• Joint control can occur not only on a company as a whole but
only on certain assets, facilities or production lines. In this
case, “a group of assets” shall include liabilities that are
incurred on behalf of assets, and the risks and costs of
economic activity. In some industries, such as the oil and gas,
most facilities are jointly operated by several companies, and 11
decisions are made jointly.
 Models and practices of corporate governance (Conf. dr. Voicu Dragomir)
Resources
• La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999).
Corporate Ownership Around the World. The Journal of
Finance, 54(2), 471–517.
• Moerland, P. W. (1995). Corporate Ownership and Control
Structures: An International Comparison. Review of Industrial
Organization, 10, 443–464.

Class task
• On first round, each student names a different company which
she or he believes to be a good investment, and gives reasons
for her or his opinion. On second round, each student makes a 12
portfolio of companies proposed by her or his colleagues.