Comparative CG 2023-2024 (max 3 pages, stapled, font size 10, line spacing 1; keep margins)

First Name: Riccardo Last Name: Baratieri

Student #: 5708206 Tutorial no (e.g., 1, 2, etc.): 2

La Porta, Lopez-de-Silanes and Andrei Shleifer, Corporate ownership around the world (1998)
In this paper the authors investigate the controlling shareholders of different large corporations. In countries where
shareholders’ protection is good, firms are widely held (there are many shareholders). Most of the time though, firms are
controlled by families or the State and equity control by financial institutions or other widely held corporations is less
common. Through participation in management the controlling shareholders usually exercise their powers and results point
that the central agency problem in large corporations is about preventing actions where majority or controlling shareholders
exploit or take advantage of minority shareholders for their own benefit or gain. The paper starts by comparing the historic
perspective provided by Berle and Means in their 1932 work on US companies, which shows the prevalence of widely held
corporations with dispersed capital ownership but concentrated managerial control. The study conducted by La Porta, Lopez-
de-Silanes and Andrei Shleifer challenge this historic prospective showing ownership concentration even in major US firms
and abroad. The paper is based on a database of the 20 largest publicly traded firms in 27 economies. By including in the
database the poorer countries, the incidence of family and State control would be only higher, and the prevalence of widely
held firms significantly lower. The sample run in the objection that the largest companies in some countries are much larger
than the largest companies in other countries. This is a serious issue because larger companies presumably have less
concentrated ownership and hence the authors should be careful that the measures of ownership do not simply proxy for
size. To fix this, another sample that included the smallest 10 firms in each country with market capitalization of common
equity of at least 500 mln was collected. For some countries (those with small stock markets) the two samples intersected.
Other restrictions on the sample are: excluding all affiliates of foreign firms, excluding banks and utilities from the medium
firms sample (the second sample of the 10 smallest firms with common equity of at least 500 mln) to prevent the domination
of these two industries.
To describe control of companies, the authors looked for all shareholders who controlled over 10% of votes. This threshold
was selected because of its significance in terms of votes and because most countries mandate disclosure of 10%+ ownership
stakes. In many cases, the principal shareholders in the firms examined are corporate entities and financial institutions. The
authors then tried to find the major shareholders of these firms (major shareholders of major shareholders) and so on until
they found the ultimate controllers of votes. In some cases the ultimate shareholder is the State, a widely held financial
institution or a widely held corporation, while in other cases it is an individual or a family. Firms are categorized in those that
are widely held (1) and those with distinguishable ultimate owners (2), where in this last category 5 sub-categories were
choosen (1. family or individual owners, 2. state ownership, 3. ownership by widely held financial institutions like banks or
insurance companies, 4. ownership by widely held corporations, and 5. miscellaneous ownership). Central to this approach is
the reliance on voting rights rather than cash flow rights. The results show that in the large firm sample with a strict 20%
control definition, it's revealed that around 36% of firms globally are widely held (and 64% are not), challenging the common
perception of widely held corporations as the dominant ownership structure. The analysis highlights the prevalence of
family-controlled and state-controlled firms, with family ownership being the most prevalent form of controlling
ownership globally. Moreover countries with better shareholder protection tended to have a higher proportion of widely
held firms (48%) compared to those with poor protection (27%). When using a slightly less stringent 10% control definition,
the prevalence of widely held firms decreases to 24%. Across different firm sizes and definitions of control, family-controlled
firms emerge as the dominant ownership pattern, particularly in medium-sized firms. Berle and Means' notion of widely held
corporations accurately characterizes large American corporations but does not universally apply to all firms globally. In
terms of instruments to separate ownership and control, pyramidal ownership (situation in which a single entity or individual
controls a chain of subsidiaries or affiliated companies, each of which, in turn, owns or controls further subsidiaries  it
facilitates tunneling and propping) appears to be more prevalent in achieving this separation compared to differential voting
rights. Results also showed that common law countries (ex. USA, UK, Australia) indeed have a significantly higher fraction of
widely held firms. Results showed no significant differences between countries with different financial systems. In
conclusion, the quality of investor protection, as determined by shareholder rights or legal origin (common law countries),
consistently emerged as a robust determinant of ownership concentration, outweighing plausible alternative explanations
such as financial systems, tax rules, market liquidity, and corruption. In conclusions, in many nations, especially those with
poor shareholder protection, large firms predominantly have controlling shareholders, often familial or state-owned. This
situation leads to the concentration of significant ownership and control, differing from the Berle and Means narrative
(ownership and control are separated). Addressing the challenge of expropriation of minority shareholders by controlling
ones is a critical aspect of CG globally and some legal reforms trying to fix this are proposed. ANTI-DIRECTOR INDEX IN WEEK
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Aguilera & Crespi-Cladera, Global CG: On the relevance of firms’ ownership structure
Ownership is at the source of the conflict between owners and managers, a theme that has occupied much of the first wave
of CG research as well as at the essence of the conflict between owners and owners (more recent wave of governance
research). Cross-national research on ownership pursues a straight forward comparison on who owns large listed firms
around the world on the basis of a certain ownership percentage (20% threshold) of the largest owner. Governance
measures such as board independence, employee participation or shareholder engagement are more subjective to the
institutional aspects of the country. The article focuses on the diverse nature of the agency problem, first among
shareholders and managers, known as Principal-Agent (type I) and then among large and minority owners, known as
Principal–Principal (type II). The focus on the conflict of interest between different types of owners captures the unique
singularities of the CG system in the US and in the international contexts. The design of CG mechanisms is largely focused on
mitigating or solving the managers-shareholders conflict in the context of widely held firms. To align interests of managers
and shareholders, there is little incentive by shareholders to involve in monitoring activities, preferring the monitoring
executed by others, the free riding behavior. The ‘‘exit’’ solution dominated the ‘‘voice’’ option in the governance of the
firm. Outsider systems (ex. USA) have wide dispersed ownership, while insider systems (ex. Japan) have concentrated
ownership where the controlling shareholders may be families, individuals, financial institutions and other corporations
acting through a holding company or cross shareholdings. Therefore, the CG conflicts are, on the one side, between a
controlling manager and ‘outside’ widely dispersed shareholders and, on the other side, between ‘inside’ controlling
shareholders and outside minority shareholders. Common law countries have greater legal protection than civil law
countries, while civil law countries have higher ownership concentration. In the end studies have shown that where legal
protection is scarce, firms are expected to have concentrated ownership. Other studies that focused on firm-level
governance showed that the inverse relationship between the legal minority protection and ownership concentration does
not hold if instead of reporting country averages, one conducts the analysis at the firm-level. CG practices differ significantly
across firms’ ownership concentration. In concentrated shareholding structures, known as principal–principal, dominant
shareholders actively monitor managers, aligning with corporate interests. However, this can disadvantage minority
shareholders, especially when controlling shareholders prioritize their benefits. Effective CG mechanisms, including fiduciary
duties and equal treatment mandates, are necessary to balance these interests. Large shareholders, often less risk-averse
than minority ones, influence corporate strategy based on their unique risk preferences and time horizons. Family firms,
significant in various governance systems, exhibit both positive elements like long-term investment focus and challenges like
reluctance to external financing. The shift from state to private ownership in the 1990s in developing countries has led to a
transition from relational to transactional owners. Privatizations involving foreign investors have been linked to more
effective CG and restructuring, especially in transition economies like Central and Eastern Europe. This finding aligns with
evidence from developed countries, where foreign ownership correlates with stronger governance practices. Global CG
efforts aim for process improvement and risk minimization, but cultural differences hinder uniform governance convergence.
This highlights the complex interplay of factors in CG systems. First, for even those companies not directly investing abroad,
they tend to compete in a global space. This means that they are exposed and influenced by global business standards. Most
firms are part of a global value chain which transmits values and practices. Second, firms are increasingly relying on
governance arbitrage to gain efficiencies and enhance their legitimation. Think about firms that either de-list from the NYSE
because governance standards are too stringent or foreign firms that get listed in the LSE to access capital and gain
legitimation. Third, even if firms chose not to adopt global CG standards, they are aware of other practices as these tend to
diffuse more fluidly. Fourth, we count with a new type of private-public organizations of self-governance and monitoring
which are the gatekeepers of governance such as governance ratings, media, shareholder activists, and corporate raiders.
These are part of the external CG forces that shape how the internal governance is structured. CG models have been
characterized by the capital markets development or the level of investors’ legal protection of a country. We focus our
attention on the role assigned to the ownership structure. Indubitably the improvement of CG practices to protect
shareholders comes from the Anglo American setting of dispersed ownership structures. There was a failed attempt to
transplant some of these CG logics to the concentrated ownership structures of continental European countries and Japan,
which typically ended in decoupling or local governance adaptation. The more recent developments of capitalism in Asia and
Latin America show that concentrated ownership structures with relevant large shareholders as families play a significant
role yet global CG recommendations remain at the one rule fits all, a standardized norm setting of the OECD principles.

Aguilera, Capapé, Santiso, Sovereign wealth funds: a strategic governance view

Nowadays governments tend to share their ownership with nongovernmental owners and/or provide strategic support to
private firms by means of subsidized credit and/or other state protections. This reinvented state seeks to simultaneously
achieve financial efficiency and political pursuits. SWFs are government-owned investment funds without explicit pension
liabilities that typically pursue long-term investment strategies. This paper focuses on the strategic governance of SWFs
(investment strategies and governance traits). SWFs, managing a collective US $6 trillion as of 2014, are pivotal players in the
global economy, influencing various sectors including banking, natural resources, real estate, transportation, and utilities.
Post-2008 financial crisis, SWFs expanded their influence by recapitalizing Western banks and diversifying into complex asset
types like infrastructure, private equity, and real estate. Their investments extend beyond advanced industrialized nations to
non-OECD countries. SWFs are adaptive, learning organizations contributing to their own countries' economic
transformation. Despite their size and influence, SWFs function as equity owners without sovereign regulatory powers,
focusing on balancing financial efficiency with political effectiveness. SWFs vary in size, origin, and investment goals, with
their short-term financial impact comparable to other institutional investors. SWFs are established for reasons like
intergenerational balance, macro-stabilization, resource diversification, national development, and geopolitical influence,
fueled by an accumulation of international reserves. The paper categorizes SWF investments based on (1) motivation
(financial or strategic) and (2) ownership type of investee firms. SWFs aim for diversified global portfolios for financial returns
or strategic investments aligning with national interests. SWFs invest in both public companies (less uncertain, more
regulated, but with short-term pressures) and private firms (higher ownership concentration, long-term commitment,
specializing in natural resources and financial services). The paper strategic governance framework of SWFs is based on 2
dimensions (investment motivation and ownership type) and is composed by 4 quadrants that contains 4 key strategic
governance modes to solve PA and PP problems. 1° quadrant (financial goal + public firms): shareholders activism (here
SWFs play a strong monitoring role and help to improve the CG of listed companies. The SWF as the principal seeks to
improve the CG of the agent (investee firm) through active participation in the committees and annual general meetings.
Norway GPFG is the best-known active shareholder SWF and, on top of exercising its exit right, it seeks to express its voice in
governance issues such as director nominations and remunerations policies), 2° quadrant (financial goal + private firms): in-
house capabilities (here SFWs gradually develop in-house skills that allow them to have better investment capabilities and to
be less dependent on external fund managers. SWFs are drawing on strategic governance through their growing direct
investments in private equity to address 3 challenges: (1) engagement with PE fund managers forces SWFs to professionalize
their internal investment teams by developing and/or acquiring talent. Better human capital leads to a more efficient
organization. (2) reduction of fees due to less dependence on external management. (3) greater in-house capabilities reduce
agency costs by more closely aligning the interests between SWFs and investee shareholders (PP problem) as well as
between SWFs and investee managers (PA problem). In conclusion SWFs establish specialized teams looking for higher
returns and new asset classes and geographies. These are spillover effects for the organization: professionalization, fee
reduction, and lower agency costs. A SWF as a principal engages with other owners (also principals) in low shareholder
protection schemes. Setting up investment offices “closer to the action” helps to overcome this PP conflict), 3° quadrant
(strategic goal + public firms): legitimacy and decoupling (there are 4 strategic dynamics that fall into this quadrant,
complemented by two SWFs’ unique governance structure: state ownership of the SWF and the publicly traded ownership of
the investee firms. The 4 dynamics are: (1) the government responsible for SWFs develop financial relationships with host
country governments to minimize uncertainty and develop trust, (2) SWFs in this quadrant launch long-term investment
relationships with organizations equipped with critical economic or political power, (3) SWFs in this quadrant might decouple
and undertake dual agendas to overcome the liability of sovereignness. SWFs invest in publicly traded firms to legitimize
themselves, but their sovereign interest are not likely to be fully aligned with the core shareholder value maximization
interests of the publicly traded firms, (4) SWFs in this quadrant engage in cross-national institutional arbitrage. These SFWs
borrow from the host country’s national institutions to gain the home country legitimation they lack, this is called
“institutional bonding“. So in conclusion, Governments use SWFs to obtain longer-term state goals yet simultaneously seek to
acquire legitimacy as institutional investors. The trade-off between symbolic goals (efficiency by investing in top-listed
equities) and substantial goals (political legitimacy at home and abroad) drives these SWFs decision-making), 4° quadrant
(strategic goal + private firms): long-term learning (this quadrant introduces 3 strategic governance dimensions among
SWFs: (1) SWFs want to learn and acquire new capabilities through alliances and joint ventures with international private
firms. The governance associated with this strategic effort entails the need to keep a low governance profile in terms of
public scrutiny and financial disclosure, but also coping with the PP tension, (2) SWFs that seek more than just financial goals
will engage in extreme strategic governance such as taking over a private company to maximize control and minimize the
need for disclosure, (3) SWFs in this quadrant seek to develop long-term country-to-country relationships, and in this case
the SWFs represent their governments. This turns out in a win-win situation, in which foreign companies get long-term
investments and SFWs gain access to resources and know-how). SWFs might belong to more than one quadrant in the
framework analyzed. This mobility includes both public financial (asset classes and geographical allocation) and private
financial SWFs (in-house capabilities and new organizational challenges via international offices). We analyze 4 movements:
(1) from quadrant 1 to 2 (from publicly traded to privately held target firms). An example is Norway’s GPFG that started
investing in private real estate. This move from quadrant 1 to 2 will reinforce internal teams and increase in-house
capabilities. (2) from quadrant 2 to 4 (ex. SWFs fom Australia transforming into strategic funds by investing to promote
domestic sectors or secure natural resources). These SWFs might suffer from political instability or external shocks. A solution
could be to change their goal, from acquiring in-house capabilities to investing abroad toward more domestic and sector-
specific arrangements in an attempt to obtain long-term economic returns. (3) from quadrant 3 to 1 (from SWFs that invest
heavily in listed equities to SFWs that reduce their political alignment and become global financial players). (4) from quadrant
4 to quadrant 3 (natural evolution of among SWFs toward a more diversified international portfolio). In this case funds
transition from a development vocation to being more open to investing in listed companies. CLASS NOTES: CG is the design
of institutions that induce or force management to internalize the welfare of stakeholders. Ownership is a set of
right/obligations, applied to limited liability joint stock companies’ shareholders have: no user right, profit right, control right
(vote), selling right (the shares), free of responsability. Ordinary shares (regul or non-voting, A or B, mgmt shares),
transparency (Santiago principles), bandwagon effect, tunnelling (diversion of resources from the corporation to the
controlling shareholder), propping (controlling owner uses private funds to benefit companies in distress), preemptive rights.