Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy

Abstract

Corporate governance scholarship has shifted focus in recent years from hostile takeovers, which occur primarily in the held systems of the United States and the United Kingdom, to the comparative merits of the shareholder systems that are the norm most everywhere else in the world. In this emerging debate, the simple dichotomy between controlling systems and held systems that has largely dominated the discourse is too coarse to allow a deeper understanding of the diversity of ownership structures in different national capital markets and their policy implications. In this Article, Professor Ronald Gilson seeks to complicate the prevailing analysis of controlling shareholders and corporate governance by developing a more nuanced taxonomy of controlling structures and examining the implications of this view on our understanding of held and controlling systems. Development of a new taxonomy begins with recognition of the controlling tradeoff: focused monitoring in return for some private benefits of control and at a cost in speed of adaptation. Building from this tradeoff, this Article looks closely at two central features of a more complex taxonomy: the concepts of controlling shareholders and of private benefits of control. In particular, the framework highlights the value of distinguishing between efficient and inefficient controlling systems, and between pecuniary and nonpecuniary private benefits of control. Together, the two distinctions reframe the taxonomy of distribution to distinguish between regimes that support companies with a diversity of distributions and regimes that support only companies with a controlling shareholder. This Article concludes by examining potential macroeconomic effects and policy implications and calling for research under this new framework to further the debate on controlling systems. I. INTRODUCTION The big issue in corporate governance scholarship is changing. Over the last fifteen years, the academic and policy debate has focused on hostile takeovers. The terms and tenor of the debate in the United States are by now numbingly familiar. The same pattern is now observable in Europe, (1) where the tone of the debate, if not necessarily its politics, seems to have moderated a great deal. (2) As the issues surrounding hostile takeovers have clarified, attention has begun to shift from debating a phenomenon--observed largely in the United States and the United Kingdom, because only in those two jurisdictions is control of most public companies in the public float--to understanding the kind of control structure that dominates public corporations everywhere other than the United States and the United Kingdom. Put simply, public companies in the rest of the world typically have a single or group of shareholders with effective voting control, often but not invariably without corresponding equity holdings. Debate is now turning to the merits of these shareholder systems, both on their own terms and in comparison to the widely held shareholder systems of the United States and the United Kingdom. In this Article, I venture some early thoughts concerning how this inquiry might usefully be framed. The simple dichotomy between controlling systems and held systems that has largely dominated academic debate thus far seems to me much too coarse to allow a deeper understanding of the diversity of ownership structures in different national capital markets and of the policy implications of those structures. My goal here is to complicate the prevailing analysis of controlling shareholders and corporate governance by developing a more nuanced taxonomy of controlling structures, and then by examining the implications of this view on our understanding of held and controlling systems. …