The Governance of Foundation-Owned Firms

Abstract

Despite the extensive attention paid to corporate governance in the literature of both law and economics in recent years, empirical work to date has largely failed to establish a link between formal governance structures and economic performance. In this paper, we explore the relationship between corporate governance structures and economic performance in a setting that is, in important respects, more favorable than the publicly-traded U.S. business corporations that are the typical focus of previous research. We work with a rich data set comprising 121 Danish industrial foundations, which are industrial companies controlled by autonomous nonprofit foundations. These industrial foundations have several important advantages as subjects of study. First, by conventional measures, the industrial companies perform, on average, as efficiently as their investor-owned counterparts – a remarkable fact, given their ownership structure. Second, because the management of the companies is ultimately in the hands of a self-perpetuating board of directors that is free of control by outside owners, the impact of the firm’s internal governance structure on managerial decision-making, and hence on company performance, should be both more intense and more easily isolated than in conventional investor-owned firms. Third, the industrial foundations display broader variance in internal governance structures than do U.S. business corporations. We focus in particular on a composite structural factor we term “managerial distance.” We interpret this as a measure of the clarity and objectivity with which a firm’s top managers are induced to focus on the operating company’s profitability. More particularly, managerial distance seems best interpreted as a factor, or aggregate of component factors, that put the firm's top managers in the position of “virtual owners,” in the sense that the information and decisions facing the managers are framed for them in roughly the way they would be framed for true owners of the firm. Our empirical analysis shows a positive, significant, and robust association between managerial distance and company economic performance. The findings appear to illuminate not just foundation governance, but corporate governance more generally.