THE STRUCTURE OF

CORPORATE
OWNERSHIP

Presented by:
DASCO, ROSABELLE A.
CORPORATE GOVERNANCE is the
system by which companies are directed and
controlled – (Cadbury, 1992)

CORPORATE OWNERSHIP
STRUCTURE simply means the
management and ownership of the business
or corporation.
 TYPES OF CORPORATE
OWNERSHIP STRUCTURE
 Ownership of a firm or corporation can either be
diffused (dispersed), meaning that the majority
of shares is owned by multiple, small
shareholders or concentrated, meaning that the
majority of the shares is owned by one or a few,
larger shareholders.
G
OWNER
O
V
E
R BOARD OF
N DIRECTORS
A
N
C
E CEO
M
A
N
A
EXECUTIVES G
E
M
E
EMPLOYEES N
T
 OWNERSHIP STRUCTURE
ILLUSTRATION OWNER

Financial
Advisors

Institutional
Investorsv

Board of
Directors
OWNER

CEO CEO
 CONCENTRATED OWNERSHIP
(majority of shares is owned by one or few large shareholders)

WHAT MOTIVATES CONCENTRATED OWNERSHIP?

 SHARED BENEFITS OF CONTROL – Superior Management or
monitoring than can result from the substantial decision rights.
 PRIVATE BENEFITS OF CONTROL – Incentive to use their voting
power to consume corporate resources or to enjoy corporate benefits that
are not shared with minority shareholders.
 The greater the right of the controlling shareholder the greater is his
ability to influence the way the company run, and hence greater is his
ability to obtain private benefits of control at minority shareholder’s
expense.
 CONCENTRATED OWNERSHIP
(majority of shares is owned by one or few large shareholders)

 As ownership becomes more concentrated, an overall reduction of

agency costs will not necessarily result. Large shareholders may engage
in undesirable behavior at the expense of minority shareholders if the
private benefits exceed the private costs of doing so.
 Conflict of Interest may arise between controlling shareholders and
minority shareholders when the controlling shareholder realizes a
disproportionate share of the private benefits, while the costs are shared
with the firm’s other shareholders. (Abuse their power and extract private
benefits of control at the expense of the minority shareholders.)
 DIFFUSED/DISPERSED OWNERSHIP
(majority of shares is owned by multiple, small shareholders)

 Ragazi, 1998, defined diffused or dispersed ownership as “one whose shares are
owned by large number on individuals none of whom is in a position to obtain
direct or indirect benefits per share greater than those available to other
shareholders and whose top managers do not receive either direct or indirect
benefits other than market salary”, with the limitation that any salary shall be
considered as a market salary.
 Leech & Leahy, 1991 – “Dispersed Ownership Structure in US means that there is no
individual or group with either voting power or the incentive to exercise control and
enforce profit maximization.”
 The Fraction of Shares of one shareholder is below 5% of the shares in the whole
company. Characteristics of dispersed ownership are the separation of risk over more
shareholders and the specialization by the management (Thomsen and Pederson,
1999).
 DIFFUSED/DISPERSED OWNERSHIP
(majority of shares is owned by multiple, small shareholders)

One of the benefits of Diffused Ownership is the “increased liquidity of smaller

holdings as such can be sold rather quick and easily, while selling more holding is
more difficult.

THREE REASONS WHY OWNERSHIP MAY BE DISPERSED IN

REALITY (M. BECHT, ET AL, 2003):
 Individual investor’s wealth may be small relative to the size of some
investments
 Diversification of Risk by Investing to less
 Investor’s Concern for Liquidity
 DIFFUSE/DISPERSED OWNERSHIP
(majority of shares is owned by multiple, small shareholders)
 The shareholders get the opportunity to vote on matters for the company.
 Separating the control and ownership of the company means that the
executive and the upper-level managers of the company are not
necessarily those that own the majority of the company’s share. (Separate
those who make they day-to-day operational decisions from those who
own the stocks).
 But the most obvious disadvantage is the greater incentive for shirking by
owners that results. The cost of shirking, presumably the poorer
performance of the firm, is shared by all owners in proportion to the
number of shares of stock they own,
 DIFFUSE/DISPERSED OWNERSHIP
(majority of shares is owned by multiple, small shareholders)

Basic theories of Corporate Governance start with an idealized picture of a

firm with widely DISPERSED OWNERSHIP, but in practice, theoretical
model of diffuse ownership faces problem too:
 It can be difficult to small shareholders to get information about firm’s
operation - the great deal of control rests with the management.
 Principal-agent problem arises and company performance can suffer, to
the detriment of the owners.
“The separation of ownership and
control in publicly owned firms
induces potential conflicts between
the interest of the managers and
stockholders.”
-Berle and Means, 1932
“Large publicly traded corporation are
frequently characterized as having
highly diffuse ownership structures
that effectively separate ownership of
residual claims from control of
corporate decision.” – Demsetz & Lehn, 1985
SEPARATION OF OWNERSHIP AND CONTROL refers to the
phenomenon associated with publicly held business corporation in which the shareholders
(residual claimants) posses little or no direct control over management decisions.

 In owner-managed firm, the owner/manager possesses 2

attributes: firm’s decision making & claim to the profits.
 In large publicly held corporation, the share holders own
residual claims but lack direct control over management
decision making while managers have control but possess
relatively small (if any) residual claims.
 DETERMINANTS OF CORPORATE
OWNERSHIP STRUCTURE
 VALUE MAXIMIZING SIZE

 CONTROL POTENTIAL

 REGULATION

 AMENITY POTENTIAL
Since advantages do exist, a
decision to alter firm’s ownership
structure in favor of greater
diffuseness presumably is guided
by the goal of value maximization.
Demsetz & Lehn, 1985
Harold Demsetz and Kenneth Lehn
(1985) argues that “the structure of
ownership varies systematically in
ways that are consistent with value
maximization.”
 VALUE MAXIMIZING SIZE / FIRM
SIZE
 VALUE MAXIMIZATION means the act or process of adding to
an individual’s net worth by increasing share price of the common
stock in which the individual has invested in.
 The larger is the competitively viable size, the greater is the firm’s
capital resources and, generally, the greater is the market value of a
given fraction of ownership.
 The higher price of a given fraction of the firm should, reduce the
degree to which ownership is concentrated.
 The effect of the size imply greater diffuseness of ownership the
larger is the firm.
VALUE MAXIMIZING SIZE / FIRM
SIZE
“There is a negative effect of firm size on ownership
concentration.” – Demsetz and Lehn (1985) & Himmelberg, et al.
(1999)
• Large firm has more dispersed ownership and small firm is more
concentrated with few shareholders.
• A simple interpretation of this effect is that it is very costly to obtain
large portion of shares in a large firm, what leads to more dispersed
ownership.
 CONTROL POTENTIAL

 CONTROL POTENTIAL is the profit potential from exercising

the more effective control.
 Is the wealth gain achievable through more effective monitoring of
managerial performance by a firm’s owner.
 If the market for corporate control and managerial labor market
perfectly aligned the interests of managers and shareholders, then
the control potential would play no role in explaining corporate
ownership structure.
 CONTROL POTENTIAL

 Owners believe they can influence the success of their firms and
that all outcomes are neither completely random nor completely
foreseeable.
 “The firm’s control potential is directly associated with the
noisiness of the environment which it operates. The noisier a firm
environment, the greater the pay off to owners in maintaining tighter
control.” – Demsetz & Lehn, 1985.
 Hence, as the owners want a noisier environment, this would give
rise to more concentrated ownership structure.
 REGULATION
 PUBLIC POLICY FOR INVESTOR PROTECTION – Protects Small Shareholders
from benefit taking large shareholders.
 THE COST OF HOLDING LARGE BLOCKS OF SHARES IS INCREASED BY
PUBLIC LAWS THAT PROTECT MINOR INVESTORS FROM
EXPROPRIATION ( BHAGAT AND BOLTON, 1994)
 Research of Thomsen, et al. (2006) explains how such governance systems have an
effect on ownership concentration – “In system with high investor protection, like
US, small shareholders are protected from benefit taking actions from high
shareholders. So large shareholders in US may be more motivated to sell their shares
and give up private gains, what leads to more dispersed ownership structure.
 AMENITY POTENTIAL OF FIRM’S
OUTPUT
 When Owners can obtain their consumption goals better through firm’s business
than through household expenditures, they will strive to control the firm more
closely to obtain these goals.
 These consumption goals arise from the particular taste of owners, so their
achievement requires owners to be in position to influence managerial decision.
 Ownership is more concentrated in firms for which this type of amenity potential
is greater. Example: (Professional Sports Club and Mass Media Firms)
 Demsetz & Lehn, 1985 consider Amenity Potential a more speculative
explanation of ownership concentration in the special industries than size,
control potential and regulation
 CONCLUDING ARGUMENT
 While Corporate Law and Finance Scholars have typically treated
the presence of controlling shareholders as the source of bad
corporate governance and the result of bad corporate law,
characterized by abusing their power (controlling shareholder) and
extract private benefits of control at the expense of minority
shareholders, but these accounts, however, are in sharp contrast
with the success achieved by many firms with concentrated
ownership, with uncontested control, as evidenced by Google,
Facebook, Ford, and many others.