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POWER INDICES
AND THE MEASUREMENT OF CONTROL
IN CORPORATE STRUCTURES
YVES CRAMA
QuantOM, HEC Management School, University of Liège,
4000 Liège, Belgium
Yves.Crama@ulg.ac.be
LUC LERUTH
IMF, Central AFRITAC,
Washington DC 20431, USA
lleruth@imf.org
This paper proposes a brief review of the use of power indices in the corporate governance
literature. Without losing sight of the field of application, it places the emphasis on the
game-theoretic aspects of this research and on the issues that arise in this framework.
Keywords: Simple games; voting; power index; corporate governance; ownership struc-
ture.
1. Introduction
Power indices reflect the importance of the players in a cooperative game. In the
context of simple games, or voting games, they have been first introduced in pio-
neering papers by Penrose [1946], Shapley and Shubik [1954], Banzhaf [1965], and
subsequently investigated in a huge number of papers spanning across many scien-
tific disciplines, from political science and economics to mathematics and computer
science. Closely related concepts have been investigated in electrical engineering,
in reliability analysis, in database theory, and so forth. We refer to Crama and
Hammer [2011] for numerous references in the broader context of Boolean theory.
In practice, however, the analysis of voting rules by means of power indices seems
to be mostly restricted to two types of real-world applications: the measurement
of the (relative) power of members of political assemblies, on one hand, and of
shareholders of corporations, on the other hand. These two paradigmatic examples
were already identified by Shapley and Shubik [1954], and have been the subject of
much subsequent work.
1
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a The comments in Eurostat [2010] are especially interesting because they arise in a non-academic
application, where we may want to compute the amount of control detained by various entities, or
to identify the ultimate shareholders of a given firm, or to determine corporate groups, based on
large amounts of numerical data. This turns out to raise several challenges, as we explain further
down.
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the voting rights (...) amount only to 40%.” This example clearly illustrates
the distinction between ownership and control.
3. Power Indices
In view of the above considerations, and especially in view of the shortcomings
of analyses based on “cutoff points”, several authors have advocated the use of
game-theoretical power indices in order to measure control in corporate groups. In
such models, shareholders are interpreted as players in a simple (or voting) game.
Recall (Shapley [1962]) that a simple game is a set function v : 2N → {0, 1}, where
N = {1, 2, . . . , n} is a finite set of players and 2N is the power set of N , such that
(i) v(∅) = 0;
(ii) if S ⊆ T , then v(S) ≤ v(T ).
Equivalently, a simple game can be modeled as a monotonically nondecreasing
Boolean function fv : {0, 1}n → {0, 1}. Here, the variables of fv are in 1-to-1
correspondence with the players of the game (variable xi takes value 1 exactly when
player i votes “Yes”) and the value of the function reflects the outcome of the vote
for each vector of individual votesb . More precisely, for all X = (x1 , x2 , . . . , xn ) ∈
{0, 1}n ,
b The multilinear extension of a game introduced by Owen [1972] is based on a particular repre-
sentation of the Boolean function fv , called its (pseudo-Boolean) polynomial expression in Crama
and Hammer [2011].
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where {i : xi = 1} is the index set of the players who vote “Yes”. This equiva-
lent model allows us, in particular, to speak of the composition of k simple games
g1 , g2 , . . . , gk by another game g: this is just the compound game
f = g(g1 , g2 , . . . , gk ). (1)
In (1), the players are viewed as playing first the subgames g1 , g2 , . . . , gk ; next,
in a second stage, the outcomes of these subgames are combined by means of the
aggregating game g to produce the final outcome of the compound game f (see
Shapley [1962]).
In the simplest situation, the game v associated with a firm is the weighted
majority game played by its shareholders, where shareholder i ∈ N carries a weight
wi corresponding to its voting rights, and a decision requires a simple majority of
the votes: for all S ⊆ N ,
X 1X
v(S) = 1 ⇐⇒ wi > wi . (2)
2
i∈S i∈N
A main theme of study in game theory is the computation of the amount of power
held by each player, and several indices have been proposed for this purpose. In the
context of corporate networks, power indices are expected to reflect the influence
of each shareholder (be it a firm or an individual investor) on the outcome of a
vote, that is, the relative capacity of each shareholder to impose its will on the
management of the target company.
We briefly define here the two main power indices, and we refer to Owen [1995],
Felsenthal and Machover [1998], or Bilbao [2000] for details. The Shapley-Shubik
(SS) index of player of player j ∈ N in game v is defined as
X |T |!(n − |T | − 1)!
SSv (j) = [v(T ∪ j) − v(T )] . (3)
n!
T ⊆N \j
4. Research Questions
Keeping in line with the objectives of the special issue, we now raise several questions
that directly relate to the game-theoretic framework described in previous sections.
We start in Section 4.1 with two points regarding the relevance of power indices
for the analysis of control in corporate structures.
Next, we observe that much of the early literature on applications of power
indices in corporate finance focused on the analysis of the direct shareholders of a
single firm. In this case, as explained in Section 3, the voting game played by the
shareholders is a weighted majority game.
Real-world shareholding structures, however, often display several features that
are absent from this simple basic model, and which actually distinguish corpo-
rate governance applications from more traditional applications arising in political
science. In particular, shareholding structures frequently involve several layers of
ownership, which form subsets of very large financial networks (such as whole na-
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tional economies or industrial sectors), possibly involving cyclic relations, and for
which substantial amounts of data may be missing. The importance of these fea-
tures and their impact on the measurement of control have been stressed in many
publications, such as Gorton and Schmid [2000], Crama and Leruth [2007], Ed-
wards, Eggert and Weichenrieder [2009], Edwards and Weichenrieder [2009], and so
on. They are discussed in Sections 4.2 to 4.5.
• Different types of shares may either carry one vote per share, or multiple voting
rights, or no voting rights at all; some shareholders (for instance, large institu-
tional shareholders, such as banks) may carry a significant amount of proxy-voting
rights on behalf of other shareholders.
• For any given firm, only a few main shareholders are usually known. The trans-
parency requirements enacted in most countries frequently require that share-
holders owning more than 3%, or 5% of the shares be explicitly identified. This
leaves out, however, a very large number of small holders. Moreover, even this
regulatory information is not always included in easily accessible databases.
• When dealing with large databases including many layers of complex ownership
structures, such as those associated with national economies or with specific in-
dustrial sectors, it may be hard to decide to what depth the relevant information
should be collected: the “ultimate shareholder” of a corporation may be located
on a different continent and be active in a different industrial sector.
In practice, these (and other) features make it quite hard, or even impossible to
collect complete information about ownership networks.
From a theoretical point of view, a most interesting question concerns the choice
of an appropriate model for modeling the float, that is, the collection of small,
unidentified shareholders. Although each such shareholder may be powerless by
itself, the existence of the float may influence the amount of control held by the
main holders, as observed for instance by Cubbin and Leech [1983].c
Several researchers have discussed this issue. A possible model for the float is
provided by oceanic games, that is, weighted majority games involving a finite set
of major players, as well as a continuum of infinitesimal minor players. Shapiro and
Shapley [1978], Milnor and Shapley [1978], Dubey and Shapley [1979] investigated
the theoretical properties of power indices in oceanic games. They showed that both
the SS index and the PB index behave nicely in such limit games, and converge to
values that only depend on the weights of the major players.
c Rydqvist[1987] and Zingales [1994] focus on the amount of power held by the block of small
shareholders. Some authors, like Aminadav et al. [2011], disregard the float altogether.
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d Zwiebel [1995] assumes that the vote of the float is uniformly distributed.
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Example. Consider again Figure 1, let j be firm C and let N = {X, D}. Then,
G[M ] is the subgraph obtained by deleting Y from Figure 1. If X votes “Yes” and
D votes “No”, then the vote of X propagates first to A and B (independent of the
vote of the float), then to C by the majority procedure involving A, B, and D.
tures turns out to be nontrivial. Based on this observation, Edwards, Eggert and
Weichenrieder [2009], Edwards and Weichenrieder [2009] decide to use the product
of SS-indices at each tier of a pyramid as an approximation of the true SS-index.
The quality of this approximation is not known.
Gambarelli and Owen [1994] propose to compute the multilinear extension of
the game vj , and to use this multilinear extension in order to calculate the power
indices, as explained in Owen [1972,1978]. This approach, however, appears to be
computationally prohibitive and may be extremely difficult to apply to large net-
works involving several hundreds or thousands of firms.
Crama and Leruth [2007] rely instead on a Monte-Carlo approach to compute
PB-indices in large pyramidal networkse . This approach is applicable to general
simple games, and can also be used to obtain the SS-indices. In its principle, it goes
back to Mann and Shapley [1960]. Efficient variants and theoretical complexity
analyses for general games have been proposed by Bachrach et al. [2010] (see also
Karp, Luby and Madras [1989]).
Finally, the reader should note that, in our definition of the game vj at the
beginning of this section, we have assumed that the set of players N was given. In
practice, the ultimate controlling shareholders of a corporation may not be known in
advance: in fact, the objective of the analysis is frequently to identify these ultimate
shareholders; see La Porta et al. [1999] for a discussion. Crama and Leruth [2007]
and Aminadav et al. [2011] rely in various ways on the computation of power indices
to sequentially trim down the ownership structures, until a collection of ultimate
shareholders emerges. More work is needed to understand the properties and the
computational complexity of such heuristic procedures.
e The formula given by Crama and Leruth [2007] for the estimator of the PB-index is erroneous,
cycles into account; see, e.g., the input-output model in Chapelle and Szafarz [2005].
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References