ACGD213

ETHICS AND CORPORATE GOVERNANCE

TOPIC 4:
CORPORATE OWNERSHIP
STRUCTURE
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Course Outcome
At the end of this course, students should be able to:
 
CO2: Discuss the development of corporate governance and the
concept of corporate ownership structure.
 

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INTRODUCTION

Factors that influence corporate governance

Legal systems

Cultural & religious tradition

system

Political environments

Ownership structure

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OWNERSHIP & THE CONCEPT OF CONTROL

OWNERSHIP
• Ownership is reflected by the percentage of total residual risk borne by an
owner.
• The degree of ownership concentration in a company is based on the
distribution of power between its managers and shareholders.

CONTROL
• Control – as defined by Section 4(1) Companies Act 2016
• Controls the composition of the board of directors of the corporation
• Controls more than half of the voting power of the corporation
• Holds more than half of the issued share capital of the corporation
• Control right gives the controlling party numerous private benefit which include financial and
non financial.
• Private benefits such as gaining power and prestige, hiring themselves into managerial
position at rates above their true value, exploiting benefits.
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TYPE OF OWNERSHIP AND CONTROL STRUCTURE
Concentrated Ownership (insider)
 Ownership and/or control is
concentrated in the hands of a
small number of individuals,
families, managers, directors,
holding companies, banks and/ or
other non-financial corporations.
 These individuals or groups often
manage, control or strongly
influence the way the company is
run
Dispersed Ownership (outsider)
 A large number of owners each hold a
small number of company shares.
 Small shareholders have little
incentive to closely monitor a
company’s activities and tend not to
be involved in management decisions
or policies.
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 INSIDER SYSTEM OUTSIDER SYSTEM
Firm owned predominantly by insiders Firm controlled by managers but owned
Shareholder shareholders who also control the predominantly by outside shareholders
management
Institutional Concentrated equity ownership with less Dispersed equity ownership with large
of Wealth institutional of wealth institutional holdings
Control Insiders have significant control in the A large range of shareholders have moderate
company control in the company

Minority A less emphasis on the protection minority A strong emphasis on the protection
minority investors in securities law
Investors investors in securities law regulation regulation

Disclosure Relatively less requirement for disclosure Relatively strong requirement for disclosure

Frequent hostile takeovers acting as a

Takeover Hostile takeovers is rare disciplinary mechanism on company
management

Actions Shareholding characterised more by “voice” Shareholding characterised more by “exist”

than by exist. than by voice.

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 Government
Ownership

Family Company
ownership Ownership

OWNERSHIP
STRUCTURE Bumiputra
Cross-Holdings IN Ownership
MALAYSIA

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 1. Cross-holdings
A cross holding/ pyramidal group is a situation in which the same entrepreneur,
through a chain of control relations, controls many companies.

51% 51% Co’ C

Co’ A Co’ B
26%

Almost all PLC in Malaysia has pyramidal structure

Example: Gamuda Berhad, Tenaga Nasional Bhd (TNB) and Sime Darby Bhd.

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Example: Tenaga Nasional Bhd

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 Advantages for cross holding ownership

Minimise the controlling shareholders’ stake

Maximise the dilution of outside shareholdings by a reduction

in the ratio of voting rights to cash flow right

Group is also used as means of limiting liability

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2. Family Ownership
A family firm can be defined as a firm that is either owned by a family, managed by a
family, monitored by a family.

They are closely identified with the firm through leadership or ownership.

For example:
• Founder is the CEO or successor of the CEO who is related by blood or marriage,
• number of family members in its management, and
• family directors have ownership (direct and indirect shareholdings)
Example family company:
• prominent Malaysian family companies: Naza Group, Sapura, Genting, YTL, Tan Chong, Oriental
and Berjaya Group
• Smaller companies: Habib and Kamdar

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Example: Naza Group

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Examples of family bussiness
Family Business Survey 2018: The Malaysian Chapter

Source: https://www.pwc.com/my/en/publications/2019/2018-family-business-survey-malaysian-chapter.html 14
Advantages for family ownership

Stability Commitment

Flexibility Decreased Cost

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 FAMILY OWNERSHIP - ADVANTAGES
• Family position determines who leads the
business and as a result there is usually
longevity in leadership, which results in overall
stability within the organization.
• Leaders usually stay in the position for many
Stability years, until a life event such as illness,
retirement, or death results in change.
• Besides, family ownership is able to have long
term outlook which allows for good strategy
and decision-making.

• Since the needs of the family are at stake,

there is a greater sense of commitment and
accountability.
• This level of commitment is almost
Commitment impossible to generate in non-family firms.
• This long term commitment leads to
additional benefits, such as a better
understanding of the industry, organization
and job, stronger customer relationships.
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 FAMILY OWNERSHIP - ADVANTAGES
• The management is willing to wear several different
hats and take on tasks outside of their formal jobs in
order to ensure the success of the company.
• Families tend to be more lenient and forgiving when
Flexibility it comes to work schedules, work-related decisions
and judgments, and even mistakes.
• In a family business, there may be more leeway to
work a flexible or part-time schedule, or to choose
own hours.
• Family members working at family firms are willing to
contribute their own finances to ensure the long‐term
success of the organization.
• This could mean contributing capital, or taking a pay
cut.
Decreased Cost • This advantage comes in particularly handy during
challenging times, such as during economic
downturns, where it’s necessary to tighten the belt or
personally suffer in order for the business to survive.

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Disadvantages for family ownership

Minority Interest Self Interest Family Conflict

Unstructured
Nepotism
Governance

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 FAMILY OWNERSHIP - DISADVANTAGES

• Weak BOD & control will exploit minority

Minority Interest
interest

• Controlling shareholder has own interest, at

Self Interest
expense of other shareholders .

• Because family members are involved,

Family Conflict conflict can be more difficult to solve and
can result in difficult endings.

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 FAMILY OWNERSHIP - DISADVANTAGES

• Governance issues such as internal

hierarchies and rules, as well as the ability
Unstructured to follow and adhere to external corporate
Governance laws, tend to be taken less seriously at
family businesses, because of the level of
trust inherent at family firms.

• Some family businesses are reluctant to let

outsiders into the top tier, and the result is
Nepotism
that people are given jobs for which they
lack the skills, education, or experience.

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3. Government Ownership
Ownership and control of companies by government
• the Government's ability (not just percentage ownership) to appoint Board members, senior
management, and/or make major decisions (e.g. contract awards, strategy, restructuring and
financing, acquisitions and divestments etc.) for GLCs, either directly or through GLICs.
• The GLICs in Malaysia are Khazanah Nasional (Khazanah), Lembaga Tabung Haji (LTH),
Lembaga Tabung Angkatan Tentera (LTAT), Employees Provident Fund (EPF), Kumpulan Wang
Amanah Pencen (KWAP), Ministry of Finance Incorporated and Permodalan Nasional Berhad
(PNB).
Monitored closely and supported by the government.
• the government, as an elected body, could be expected to be caring to community concerns.

Examples of GLC:
• Telekom Malaysia Berhad (TMB), Permodalan Nasional Bhd (PNB), Malaysia Airlines System
(MAS) and Tenaga Nasional Berhad (TNB).

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Example of Government-Linked Investment
Companies (GLICs)
Example: Tenaga Nasional Bhd

Source: TNB Integrated Annual Report 2019 23

Advantages and disadvantages for government ownership

Advantages
• Government intervention is expected to produce better
governance
• Improve the company’s business performance

Disadvantages
• Conflict of interest is more complicated
• Sensitive to political concerns
• Non-profit maximizing behavior
• Lower performance

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4. Company Ownership
Companies in Malaysia sometimes hold shares in other companies as
part of cross-ownership or business group structures.

Business group:
• A group of companies that does business in different markets under
a common administrative /financial control
• Most group organizations are both diversified & vertically integrated
& most group members do much of buying & selling within their own
groups.

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5. Bumiputra Ownership
Criteria to be bumiputra controlled company:

• a compulsory 30 percent equity ownership by bumiputeras in any

listed company in Malaysia.
• more than 50 percent of the equity is owned by Bumiputera
shareholders OR
• at least 35 percent of its equity is owned by an individual Bumiputera
shareholder

Affected by historical background & business practices

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List of Bumiputra Controlled Companies

As the definition of Bumiputera companies is quite complicated and ambiguous, there could be a possibility of including government- linked
companies or companies owned by ethnic-based political parties.

Source: www.ccsenet.org/journal/index.php/ijef/article/download/5905/4684 28
OWNERSHIP STRUCTURE & FIRM PERFORMANCE

ARGUMENTS BETWEEN:

Ownership will improve firm performance

• Large Investor vs Family Ownership

Ownership does not affect firm performance

• Family Ownership vs Government Ownership

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OWNERSHIP STRUCTURE & FIRM PERFORMANCE

Ownership will improve firm performance

Large investor

• Large owners may be more capable of monitoring and controlling the

management and solve the free-rider problem contributing to a better
corporate performance .

Family ownership

• Active family involvement will produce better performance (e.g. family

member as a CEO instead of an outsider).

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OWNERSHIP STRUCTURE & FIRM PERFORMANCE
Ownership does not affect firm performance
Family ownership
• Family control lowers the agency problem but gives rise to conflicts
between the family and minority shareholders.
• Family members could expropriate firms’ assets through various ways
- excessive compensation, related party transactions, special
dividends, and non-pecuniary benefits.
Government ownership
• Government is likely to pay special attention to political goals such as
low output prices, employment or external effects.
• Non-profit maximizing behaviour is a key rationale for government
ownership in welfare economics.

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SUMMARY OF TOPIC 4
Concept of ownership
and control
Concentrated
Ownership
Types of Ownership

Dispersed Ownership

TOPIC 4
Cross Holding

Family Ownership

Ownership Structure Government

in Malaysia Ownership

Company Ownership

Bumiputra Ownership

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