Non-controlling Shareholders Research Articles

Legitimate violation: how companies covertly neutralize the independent director system in China

PurposeThis study proposed and examined a unique but underresearched strategic response to coercive institutional pressure, covert neutralization, in which organizations neutralize coercive institutional pressure by manipulating influential factors within their discretion while conforming to the pressure. In addition, this study pointed out that the extent of covert neutralization is contingent on organizational decision-makers' willingness and ability to take countermeasures.Design/methodology/approachTo find evidence for covert neutralization and its strategic nature, a historical review with secondary data was conducted in the context of the coercive introduction of the independent director system in China. The board structure adjustments of 318 Chinese A-share listed companies from 2000 to 2004 were examined using univariate T-tests, robust ordinary least squares (OLS) regression models and ordered logit regression models to test the hypotheses.FindingsThis study found that in response to the coercive introduction of the independent director system, Chinese listed companies adjusted their board structures while conforming to the system, which neutralized the constraints on controlling shareholders' board control. Specifically, listed companies reduced the number of dependent directors and the ratio of directors representing noncontrolling shareholders to those representing controlling shareholders. Moreover, the extent of board structure adjustments was positively associated with the shareholding percentage of controlling shareholders. These findings provide evidence for covert neutralization and its strategic nature.Practical implicationsThis study indicates the inefficacy of simple legal coercion and suggests that authorities should be aware of the covert countermeasures used by regulated organizations and employ normative approaches to improve the efficacy of regulations. This implication is rather instructive for regulators to effectively promote imposed changes in transitional economies with strong governments.Originality/valueBy differentiating conformity behavior from conformity inclination and considering the inevitable incompleteness of laws, this study challenges the conventional wisdom regarding organizational conformity and shows that organizations can strategically respond to coercive institutional pressure while conforming to it. In contrast to other strategic responses that aim to defy, avoid or resist the implementation (the means) of institutional pressure, covert neutralization aims to neutralize its efficacy (the ends).

Protection of Minority Shareholder Investment in the Small and Medium-sized Enterprises

This study aims to examine the relationship of the four factors that increase the protection of minority shareholder investment. The factors are non-controlling shareholders, corporate governance, free cash flow, and shareholder wealth. The data for this study is obtained from the 2017 annual reports of 136 Thai public companies listed in the Market of Alternative Investment of Thailand (MAI). The analysis uses a multiple regression model to determine which factors encourage and which inhibit the protection of minority shareholder investment. The study tests four hypotheses. The results rejected H1 because non-controlling shareholders have negatively correlated with minority shareholder investment protection (beta -0.155 and p-value 0.050). The results accepted H2, H3 and H4 as follows. H2: corporate governance has positively correlated with minority shareholder investment protection (beta 0.17 and p-value 0.031). H3: free cash flow has positively correlated with minority shareholder investment protection (beta 0.214 and p-value 0.007). H4: shareholder wealth has positively correlated with minority shareholder investment protection (beta 0.318 and p-value 0.000). The major findings suggest strong minority shareholder investment protection was enhanced by increasing corporate governance, free cash flow and shareholder wealth. The protection of minority shareholder investment needs to reduce non-controlling shareholding pattern.

The Practice of Expropriation through Related Party Transactions In Indonesia

The purpose of this study to examine the influence of governance toward an expropriation practice in Indonesia and to examine the institutional ownership that acts as a moderator in strengthening the effect of corporate governance toward an expropriation practices as measured by related party transactions. This study uses panel data regression analysis. The results showed that corporate governance negatively affects the practice of expropriation and institutional ownership cannot strengthen the influence of corporate governance toward an expropriation practice. This research contributes to the type II agency theory (conflicts between controlling and non-controlling shareholders), which can be minimized by implementing corporate governance.

Stock price reactions to capital structure changes in Chilean firms: Examining the effects of ownership structure, growth opportunities and leverage

We analyzed the effects of ownership structure, capital structure and growth opportunities on stock price reactions when companies issued debt or equity. Our results, based on event study methodology and IV regressions from a sample of 70 Chilean firms, indicate that controlling shareholder ownership has a negative effect on stock price reactions for debt issuances and a positive effect for equity issuance. These results indicate that debt issuances are a substitute for majority shareholder monitoring, and that equity issuances are associated with superior corporate performance. Equity issuances are a means for expropriating wealth from non-controlling shareholders. Debt and growth opportunities have a non-linear effect.

NEGOTIATED BLOCK TRADE AND REBUILDING OF TRUST

AbstractWe investigate the impact of corporate governance on customers' trust using a dynamic model of experience‐goods firm. In the optimal equilibrium, customers' trust in the firm is linked to its behavior in the market for corporate control, so that the controlling shareholder has incentives to ensure high product quality while noncontrolling shareholders' interests are protected. Following a trust‐damaging event, turnover of the controlling share block restores customers' trust and enhances total shareholder value. Our analysis identifies an endogenous cost of corporate control, offers implications for the control premium, and provides a novel rationale for the separation of ownership and control.

Tracing back to the source: Understanding the corporate governance of boards of directors in Chinese SOEs

Based on the relevant theories of corporate governance and the special institutional background of Chinese state-owned enterprises (SOEs), this paper systematically reviews the literature on the independence and governance effect of SOE boards. We find that the governance effect of SOE boards is driven by the dual characteristics of SOEs: state involvement in ownership and market incentives. With the state involved in ownership, SOEs adhere to the leadership of the Communist Party of China (CPC), which results in an enhanced governance effect. Under market incentives, SOEs tend to have an optimal board structure that helps mitigate both the shareholder–management agency problem (Type I agency problem) and the controlling shareholder–minority shareholder agency problem (Type II agency problem). In terms of the governance effect of boards, directors appointed by non-controlling shareholders are effective in alleviating Type I and Type II agency problems, and this highlights the importance of mixed-ownership reforms in SOEs. Independent directors, especially those with a professional background, also play a role in improving corporate governance. However, independent directors in SOEs have relatively weak incentives to monitor, which limits their governance effect. This paper shows positive implications for promoting mixed-ownership reforms and improving board governance in SOEs.

The Effect of Ownership Structure and Board Independence Towards Overinvestment Behavior of Family Firm in Indonesia

Firms with concentrated ownership structures are commonly found in Southeast Asia. In Indonesia, the biggest control of the firm comes from the family. Concentrated ownership can lead to agency problem between controlling shareholders and non- controlling shareholders where, controlling shareholders together with management, can make decisions which bring personal benefit at the expense of non-controlling shareholders for example by investing on projects with negative NPV or known as overinvestment. This study explains the effect of the presence of directors and independent commissioners on relationship between family ownership and overinvestment. Using firms listed on Indonesia Stock Exchange from 2011 to 2017 as research samples, the presence of independent director is negatively related to overinvestment. From the regression results, only independent directors were found to have a moderating effect in weakening the positive relationship between family ownership and overinvestment. This effect is seen more clearly if family ownership in the company is low. This is because if family ownership in the company is low the process of selecting a board of directors can be more objective so that the possibility of a number of independent directors sitting on the board of directors is much greater. Thus the effect of moderation by independent directors will be greater in companies with lower family ownership.
 Keywords: ownership structure, board independence, overinvestment, corporate governance, Indonesia

Large Shareholders’ Power and the Quality of Corporate Governance: An Analysis of Brazilian Firms

This paper analyzes the incentives of large shareholders to implement the corporate governance system that favors their interests within a framework of highly concentrated ownership and poor legal protection for investors. A metric for corporate governance based on the fulfillment of non-mandatory rules of good corporate governance is used. System GMM (Generalized Method of Moments) estimates for a balanced panel data of Brazilian firms reveal that the ownership concentration is detrimental to corporate governance quality and the quality of board composition. In accordance with the expropriation effect on principal-principal agency conflicts, by weakening the corporate governance system and board composition, large controlling shareholders may use private benefits of control. As proposed by the substitution effect, in a complementary way, controlling shareholders may renounce strong boards and directly perform management monitoring, mitigating agency conflicts with managers. Finally, the ability of large shareholders other than the main blockholder is not enough to contest his/her power to shape the corporate governance system. The work provides evidence of the prominence of the principal–principal agency problem in an emerging market, by analyzing the effect of ownership concentration over the quality of the corporate governance system, and also that other large non-controlling shareholders are not able to contest the power of the main blockholder.

Large shareholders’ power and the quality of corporate governance: An analysis of Brazilian firms

This paper analyzes the incentives of large shareholders to implement the corporate governance system that favors their interests within a framework of highly concentrated ownership and poor legal protection for investors. A metric for corporate governance based on the fulfillment of non-mandatory rules of good corporate governance is used. System GMM (Generalized Method of Moments) estimates for a balanced panel data of Brazilian firms reveal that the ownership concentration is detrimental to corporate governance quality and the quality of board composition. In accordance with the expropriation effect on principal-principal agency conflicts, by weakening the corporate governance system and board composition, large controlling shareholders may use private benefits of control. As proposed by the substitution effect, in a complementary way, controlling shareholders may renounce strong boards and directly perform management monitoring, mitigating agency conflicts with managers. Finally, the ability of large shareholders other than the main blockholder is not enough to contest his/her power to shape the corporate governance system. The work provides evidence of the prominence of the principal–principal agency problem in an emerging market, by analyzing the effect of ownership concentration over the quality of the corporate governance system, and also that other large non-controlling shareholders are not able to contest the power of the main blockholder.

Government ownership and stock liquidity: Evidence from China

This paper documents that state ownership is associated with higher stock liquidity, a finding consistent with lower investor risk perception of firms that benefit from state ownership, like preferential financing and implicit government guarantees. The effect is found to be stronger when government ownership confers stronger benefits like firms with state controlling rather than non-controlling shareholders, and when the benefits of government ownership are important – for smaller firms, for financially constrained firms, and especially during the financial crisis period. These results suggest that investors perceive government ownership as value-enhancing, which increases their willingness to trade in such stocks.

Dividend policy on controlling and non-controlling shareholders: case in Indonesia

The purpose of this study is to examine dividend policy on both the controlling and non-controlling shareholders based on assumptions according to theories of life cycle, and free cash flow.The sample for this study is 241 listed firm in Indonesia Stock Exchange during the period from 2010 to 2015. This study divides the sample based on quartiles and analyzes it by conducting logistic regression with significant rate at 0.05. This study provides the evidences that: (1) firms as dividend payers tend not distribute their dividend for controlling shareholders and non-controlling shareholders while the composition for both shareholders are almost equal; (2) firms as dividend payers also have tendency not to distribute dividend on controlling shareholders when this shareholders have largest percentage of ownership; and (3) firms as dividend payers tend not distribute dividend on non-controlling shareholders while they have lowest retained earnings.The findings imply that life cycle theory and free cash flow theory can explain the behavior of dividending policy on controlling shareholders and non-controlling shareholders depend on their circumstances.The study uses alternative measurement for non-controlling shareholders as this variable together with controlling shareholders are moderating the other independent variables for testing the model of dividend policy.

A CONCEPTUAL ANALYSIS OF CORPORATE GOVERNANCE AND ITS ENFORCEMENT

Reducing agency costs is the principal problem of corporate governance. Although the scope and stringency of the laws and rules on eliminating agency costs are expanding, there is stillneed for the understanding of the supervision and enforcement of these rules. Enforcement can take the forms of public and/or private. With dispersed and concentrated ownership patterns, the relevance of public and private enforcement mechanism may differ; due to the appearance of agency problems unlikely. The purpose of this paper is to provide a conceptual analysis on corporate governance strategies involving the exercise of control rights, the appointment of independent directors, auditing, and disclosure. This paper will also include a guideline on the enforcement mechanism in Turkey and the ways in which they are used to control the agency problems; between owners and managers, controlling shareholders and non-controlling shareholders or creditors.

Multiple large shareholders and corporate social responsibility reporting

This study examines whether multiple large shareholders play a role in corporate social responsibility (CSR) reporting. Employing data from Chinese listed firms during 2008–2015, we find both the shareholding and the identity of large shareholders are associated with CSR reporting. Specifically, we show the higher shareholding of the controlling shareholders, the poorer quality of CSR reporting. However, this entrenchment effect is mitigated when the power is more balanced between the controlling and non-controlling large shareholders. Further examination shows the power balancing effect is more significant when the controlling and non-controlling shareholders are of the same identities.

Pyramid of Structure, Pengungkapan Transaksi Pihak Berelasi, dan Tata Kelola Perusahan : Indikasi Ekspropriasi

The objective of this study is to analyze the effect of company’s ownership through pyramid structure, and related party transaction disclousure, on expropriation practices, with corporate governance as moderating variable. Analytical technique used is hierarchical regression analysis for testing hypotheses developed in this study. Research population is a manufacturing company listed in Indonesia Stock Exchange (IDX) during years 2014-2016, and the sample is selected using purposive sampling method. The results of this study fails to prove effect of company’s ownership through pyramid structure, and related party transaction disclousure on expropriation practices. Furthermore, this study indicates the corporate governance can to increase the level of related party transactions disclosure, but has not been to reduce the expropriation practices caused by company’s ownership through pyramid structure. This study contributes to the theory of agency type II which discusses conflict of interest between controlling and non-controlling shareholders, and especially the problem of information asymmetry, which can be minimized by the role of corporate governance.

Regulating controlling shareholders in Thai private companies

ABSTRACTIn a private company, conflicts arise from disagreements between controlling and non-controlling shareholders. Controlling shareholders may be involved in the management and active monitoring of directors in order to maximize the value of the company. On the other hand, they may also use their power to benefit themselves at the expense of the company and other shareholders such as by appointing their family members or acquaintances to be on the board of directors regardless of their qualification and performance and granting them high remuneration. Controlling shareholders can also oppress non-controlling shareholders by removing the latter from management positions and refusing to distribute dividends even when the company has sufficient profits to do so. This leaves non-controlling shareholders with no financial benefits and eventually these shareholders involuntarily decide to leave the company. This article discusses how controlling shareholders dominate the company and examines how Thai laws, particularly the Civil and Commercial Code which governs private companies, prevent controlling shareholders from exploiting the benefits of the company and non-controlling shareholders and provide remedies for both the company and non-controlling shareholders. The author argues that the legal mechanisms for deterring controlling shareholders from wrongdoing and providing remedies are not effective enough.

Independent minority directors and firm value in a principal–principal agency setting: evidence from Italy

Following the agency theory, this paper contributes to the literature on board independence as a mechanism to mitigate agency costs by investigating the impact of independent minority directors on firm value in a principal–principal setting. Independent minority directors might alleviate agency costs associated to the risk of self-dealing transactions and, in turn, increase firm value. However, since non-controlling shareholders are also self-interested, particularly for firms characterized by strong uncertainty about future financial results and high information asymmetry, independent minority directors might negatively impact firm value by creating frictions within the board, increasing the risks of potential hold-ups by minority shareholders and limiting the ex-ante incentives of the block-holder to undertake profitable idiosyncratic investments. By examining a sample of Italian listed companies, we find some evidence about a positive relationship between the proportion of independent minority directors and firm value. Although weaker, a positive relationship between the proportion of independent minority directors and firm value is also found for firms characterized by high information asymmetry and—therefore—exposed to the risk of opportunistic actions by minority shareholders against the dominant shareholder. Our results shed new light on the relationship between board composition and firm value in a concentrated ownership setting, revealing the role played by independent minority directors in mitigating agency costs.

Corporate social responsibility versus corporate shareholder responsibility: A family firm perspective

Recent literature suggests that some socially responsible corporate actions benefit shareholders while others do not. We study differences in policy toward corporate social responsibility (CSR) between family and non-family firms, using environmental performance as the proxy for CSR. We show that family firms are more responsible to shareholders than non-family firms in making environmental investments. When shareholder interests and societal interests coincide, i.e., when it comes to alleviating environmental concerns that have potential to harm society and elevate the firm's risk exposure, family firms do at least as well as non-family firms in protecting shareholder interests. However, when shareholder and societal interests diverge, i.e., when it comes to making environmental investments that might benefit society but do not benefit shareholders, family firms protect shareholder interests by undertaking a significantly lower level of such investments than non-family firms. Our findings suggest that lack of diversification by controlling families creates strong incentives for them to act in the financial interest of all shareholders, which more than overcomes any noneconomic benefits families may derive from engaging in social causes that do not benefit non-controlling shareholders.

Procedural and Substantive Review of Related Party Transactions (RPTs): The Case for Non-Controlling Shareholder-Dependent (NCS-Dependent) Directors

In publicly traded companies, related party transactions (RPTs) are an obvious vehicle for shareholder expropriation. However, they may also be efficient, particularly when they are motivated by transaction cost savings. This paper aims to identify which type of RPT review is not only effective (i.e. stops value-decreasing transactions) but also efficient (i.e. allows value-increasing transactions occur). The paper argues that there is a trade-off between these two goals (effectiveness and efficiency), and that the optimal solution is company-specific. The review of RPTs can be based on substantive or procedural fairness. Ex-post review of substantive fairness by sophisticated courts, or the credible threat thereof, can be effective in policing RPTs, as in the U.S. However, such a review may overdeter efficient RPTs because these may look unfair in hindsight, when compared with arm’s length transactions. When courts review procedural fairness, the assessment is delegated to market professionals (shareholders or directors) who review the transaction ex-ante and have, in principle, good incentives to approve it only if it is efficient. However, this screen becomes ineffective if the reviewers are not well-informed or not independent. Moreover, a regime that tries to cope with this issue by empowering non-controlling shareholders in general, as in the UK, creates another problem: activist shareholders could more easily intervene with the controller’s strategy, which may be inefficient for the particular company. This paper recommends a different procedural standard as the default regime. RPTs should be considered fair when they are approved by non-controlling shareholderdependent (NCS-dependent) directors. Non-controlling shareholders should have the exclusive right to nominate, appoint and remove these directors. NCS-dependent directors should account for a minority of the board and their mandate should be limited to screening related-party transactions. This regime would be as effective as those of the U.S. and the UK, and arguably more efficient. Companies that can organize themselves efficiently without RPTs may opt out of this regime, for instance by choosing a substantive court review or a broader mandate for NCS-dependent directors to advise on strategy issues.

Do shareholder coalitions affect agency costs? Evidence from Italian-listed companies

This study investigates the relationship between agency costs and ownership structure for a sample of listed Italian companies to determine the impact of shareholder coalitions on agency costs. Using a balanced panel dataset of 1956 firm-year observations for the period 2002–2013, the results provide evidence that ownership concentration and debt play a limited role in monitoring agency costs, whereas the type of shareholder plays an important role in either mitigating or exacerbating agency costs. Family-controlled firms and coalitions among non-controlling shareholders seem helpful in reducing agency costs. The results suggest that coalitions among non-controlling shareholders both in family and non-family firms reduce agency costs. The findings also indicate that multiple blockholders play a key role as mediators. The paper provides a new perspective on assessing the role of agency costs in a bank-based, civil law country. The results enable one to better understand the impact of blockholders on agency costs and their interactions within family-controlled firms. The results also provide support for both the entrenchment effect and the alignment-of-interests hypothesis.

MOM Approval in a World of Active Shareholders

Majority of Minority (MOM) approval is a common mechanism used in many jurisdictions to control conflicts of interest in related party transactions. Recently, in M & F Worldwide, the Delaware Supreme Court held that MOM approval in a controlling shareholder freezeout shifted the standard of review from Entire Fairness to Business Judgement Rule. In this article, I investigate how MOM approval functions in the presence of active shareholders (both hedge funds and actively managed mutual funds). After reviewing the potential benefits and problems with MOM approval, I review the use of MOM provisions in controlling shareholder freezeouts in the U.S. between 2010 and 2017. I combine this with three case studies involving MOM approval: the Dell MBO; the Oracle/NetSuite merger; and the unsuccessful effort by the Dolan family to take Cablevision private in 2007. I then briefly consider a quite different sort of MOM approval: the EU Takeover Directive’s requirement that conditions mandatory freezeouts on achieving a very high level of ownership (90-95%), typically through a tender offer. The principal lessons of this investigation are ambiguous. First, I do not find significant evidence that the use of MOM conditions in Delaware has attracted the sort strategic behavior by hedge funds or actively managed mutual funds that transactional lawyers have worried about. Except for the 2007 Cablevision deal (an unhappy experience for both investors and the controlling shareholder), I have not found any cases in which shareholders have successfully used MOM provisions to block transactions. Second, as far as I can tell, the MOM condition also does not seem to do much good. I have not found any cases in which shareholders have successfully threatened to block a deal as a way of increasing the consideration paid by the controlling shareholder. Contrary to the hopes of optimists, the MOM condition does not seem to have empowered even large active shareholders to negotiate with controlling shareholders over price. Although it is possible that the MOM condition serves as a shareholder referendum on the performance of the special committee, there is little evidence that it has done so. Third, EU directive’s mandatory version of MOM (the 90-95% threshold for freezeouts) does seem to attract strategic investors who block transactions until they are bought out at a higher price. The lack of observable effects of MOM approval raise a question whether an independent special committee combined with MOM approval provides sufficiently robust protections of non-controlling shareholders to relieve Delaware courts of their traditional role in scrutinizing conflicted controlling shareholder transactions for Entire Fairness.