Governance and Ownership

Governance and Ownership (Corporate Governance in the New Global Economy Series), Robert Watson, editor (Edward Elgar, 2005). This is an excellent collection of 20 papers, most published in the late 1990s, enhances our understanding of the relationships between ownership corporate ownership governance. Issues investigated include:

• diversity of ownership forms and corporate control implications
• effectiveness of such forms in influencing executives to enhance corporate value
• role of owners in appointing and removing executives
• influence of ownership structures on corporate restructuring, mergers and acquisitions
• motivation of various classes of owners – their ability and willingness to influence corporate decisions

Many of the findings are interesting and run counter to common assumptions in the field. For example, the La Porta et al. (1999) study found that contrary to Berle and Means, companies in most countries (the US included) have “controlling” (10%) shareholders (generally the State or families). Families control about 35% of the largest firms in the richest economies, compared to 24% held by the State. Monitoring and protection of minority shareholder rights take on new meaning.  

Wahal (1996) examines pension fund activism in the US and finds, contrary to other studies, no evidence of long term performance improvements. Wahal concludes pension fund activism is no substitute for an active market for corporate control.

Holland (1998) examined fund managers in the UK and finds that institutional voice is typically highly constrained by relative powerlessness and a general unwillingness to interfere, especially during times of good corporate performance. Quasi insider knowledge was typically held “in reserve” until performance took a downturn. Are the costs of monitoring justified if they are only going to be used to accelerate sacking the CEO in times of financial crisis? 

David et al. (1998) views the struggle between CEOs and owners over pay. They find that institutional owners that have only an investment relationship with the firm are able to influence CEO compensation, whereas those that also depend on the firm for business are not. (No surprise there, but considers factors not always taken into account by other studies.)

In general, this book has much to recommend it, especially to complacent investors and over-confident executives. Governance and Ownership provides a ready reference to studies that will continue to influence scholarship and practice over the next decade.