Ownership and Control of Corporations

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OWNERSHIP STRUCTURE

Introduction

The ownership structure theory, involves the choice of ownership structures. It suggests that equity claims of shareholders reflect the influences of shareholders’ preferences in terms of shareholdings held by investors in a firm in a course of competitive selection for an equilibrium organization of the firm. This means that shareholdings held by individual investors in a firm not only represent shareholders’ positions in a course of competitive selection of the organization of the firm but also reflect their preferences in choosing such an organization, which determines the corporate governance pattern of the firm. This choice demonstrates that shareholders of the corporation balance their preferences in the separation of ownership and control, which plays an important role in corporate governance. This Chapter examines ownership structure and corporate control and focuses on ownership nature, shareholding concentration and shareholder identification of listed companies in China, compared with that of the United States and New Zealand. Difference of ownership nature, degree of shareholding concentration and distinction of shareholder identification are used in this research to elucidate problems in connection with the relevant ownership structure and corporate control and capacities of the relevant shareholders to deal with such problems in corporate governance. The statistics presented in this Chapter show that ownership structure and corporate control of listed companies in China is substantially different from the United States and New Zealand. This is especially because of the role of state capitalism via the SOEs’ shareholdings of listed companies in China, which has a significant impact by the government, either directly or indirectly, on corporate governance of listed companies. This finding suggests that ownership structure and corporate control of listed companies are in essence still under government control in China, either directly or indirectly, even after the share structure split reform of listed companies by the end of 2006. This is because the reform has not fundamentally changed the fact that state shares have still been the mainstream of the types of shares of Chinese listed companies.

Ownership and Control of Corporations

Since Adam Smith first proposed in 1776 the notion that managers may not act in the best interests of stockholders owing to separation of ownership and control in the dispersed ownership structure in companies, management control has nevertheless come to prevail in Anglo-American modern corporations over time. Berle and Means in 1932 identified five main corporate control types. These are by means of control through: (1) almost complete ownership; (2) majority control; (3) control through a legal device (such as the use of non-voting stock, a voting trust or the device of “pyramiding”); (4) minority control; and (5) management control, based on the ownership structure of corporations.They pointed out that the first three types of control rest on a legal base but the last two rest on a factual base. According to this classification, management control was dominant in (total number) 44% and (total wealth) of 58% of the largest 200 corporations in the United States in 1929. This gives evidence to support Adam Smith’s proposition that management may be left with uncontainable powers to pursue their own interest, which will divert from that of stockholders.^[Management control is based on the existence of a widely dispersed ownership structure that diffuses stockholders’ power to impose corporate policy on managers. “Where ownership is sufficiently sub-divided, the management can thus become a self-perpetuating body even though its share in the ownership is negligible”. The nature of this ownership structure makes it unrealistic for widely diffused stockholders to retain a block stock individually that is large enough to participate in corporate management in large publicly traded corporations. Berle and Means theory suggests that ownership structure potentially influences corporate control in corporations, which consequently has impact on corporate governance in a country’s legal system. Berle and Means corporations became the dominant corporate paradigm in the US in the following decades. Subsequent empirical research revealed a similar picture and documented evidence for this trend. For example, Larner claimed that management control increased substantially to 84.5% of total number and 85% of total assets of the top 200 non-financial corporations and thus became the overwhelming predominant type of corporate control in corporations in the United States in 1963. In a similar study fifteen years later, Herman also conducted an investigation of the 200 largest nonfinancial corporations in the US in the mid-1970s and found that 82.5% of them were controlled by management. These studies indicate that the concentration of corporate wealth and control power is accompanied by the diffusion of ownership in corporations. Thus, “a greater degree of outsider control is gradually being introduced into systems that have hitherto been mostly insider-controlled” in the field of corporate governance since the turn of the twentieth century and this type of corporate control is described as “Strong Managers, Weak Owners”. However, dissident voices cast doubts on this corporate paradigm in view of the rise of institutional ownership on the growth of management control even during the era of Berle and Means corporations’ dominance in the US. Recent studies show that ownership re-concentration in the hands of institutional investors has already reversed the separation of ownership from control at the heart of the Berle and Means’ critique. Indeed, Cox commented that there has been a shift in shareholding in common and preferred shares from individuals, fiduciaries and brokers to nominees and institutions since 1922 and this declining shareholding of dispersed shareholders reflects the rising importance of institutional investors and investment companies in corporate ownership American.²⁴⁶ This is especially true after the Investment Company Act came into force in 1940, which allowed the formation of mutual funds and insurance companies that led to a substantial expansion of institutional shareholdings at market value from less than 0.1% in 1922 to 4.2% in 1945.²⁴⁷ Table 4.2.1 and Table 4.2.2 give details of the growth of institutional shareholding and the institutional ownership re-concentration and indicate that Berle and Means Corporation, based on the dispersed shareholding structure, arguably no longer reflects corporate ownership in America. Three main observations can be made from Table . First, institutional shareholding in the US corporations in 2009 is about 1,176.9 times than that in 1950 while total outstanding equity of the US corporations in 2009 is about 141.7 times than that in 1950. In comparison, total institutional holdings of outstanding equity in the US corporations are 8 times than that of total outstanding equity of the US corporations during this period of 5 decades, which shows that the growth of institutional investments in stock markets is faster than the growth of total outstanding equity of the US corporations in the US stock markets. Second, the percentage of institutional holding of total outstanding equity in the US corporations was only 6.1 in 1950 but it increased to 50.6 in 2009, which is about 8.3 times than that in 1950. At the same time, the Compound Annual Growth Rate (CAGR) of Total Outstanding Equity held by institutional investors in 2009 is 28.2% more than that the year before. Thus, it can be seen that the percentage of institutional ownership has increased significantly in the ownership structure of the US corporations since 1950. Third, the CAGR of Total Outstanding Equity held by institutional investors in 2000 is -9.7% and this means that the CAGR decreased, compared with that the year before; the percentage of institutional holding of total outstanding equity in the US corporations was 52.7% in 2007, the highest percentage in 50 years, but the CAGR was only 5.1%, the relevant lowest CAGR in the same period. These statistics imply the sensitivity of institutional stockholding to the US stock market, frustrated by Southeast Asian financial crisis in 2000 and excited before the credit crunch in 2008. It is interesting that the CAGR in 2009 is the highest, which implies that institutional corporate stockholding had already recovered from the 2008 market crash.

Share Classification and Ownership Structure

Ownership structure and control are in connection with the type of share held by shareholders and share classification identifies shares categorized by corporate law that may affect shareholders in choosing corporate ownership and control. Because the type of share is related to such private benefits as the right to vote and the right to dividend that shareholders choose. The law then provides that different types of shares carry different types of voting and dividend rights. Hence, the identification of the type of share is related to shareholders’ choice of ownership structure and control. Countries may adopt in their laws different types of shares. In China, there is a unique classification of shares that is significantly different from that of the United States and New Zealand. The standard classification of share types in China is provided by the Standard Opinion for Companies Limited by Shares (Standard Opinion) issued by State Committee for the Restructuring of the Economic System (SCRES) in May 15 1992. According to Article 24 of the Standard Opinion, there are four basic share types based on the nature of investors, i.e., state share, legal person share, individual share and foreign share.

Shows the distribution of four basic types of shares

From the four basic types of shares evolve over time such a multiplicity of shares as state owned legal person share, domestic legal person share, foreign legal person share, staff (employee) share, A-share, B-share, H-share, L-share, N-share and S-share. These elaborate types of shares are further classified into two main categories based on the liquidity of shares, i.e., tradable (or negotiable) shares and non-tradable (or nonnegotiable) shares. According to the economic nature of assets invested in companies, state shares and state owned legal person shares are together called state-owned shares. Article 23 of the Standard Opinion provides that a company can issue common shares and preferred shares.

1. INTRODUCTION
1.1 Introduction
1.2 Evolution of Corporate Governance and Independent Directors
1.3 Objectives of the Research
1.4 Scope and Contribution of the Research
1.5 Structure of the Research
1.6 Restraint of the Research
2. THEORIES AND EMPIRICAL STUDIES
2.1 Introduction
2.2 Corporate Governance and Corporate Control
2.3 Theories and Models of Corporate Governance
2.4  Independent Directors and Corporate Performance
2.5  Independent Directors in China
2.6  Conclusion
3. RESEARCH METHODOLODY
3.1 Introduction
3.2 Comparative Analysis in Corporate Law
3.3 Meta-Empirical Study in Corporate Governance
3.4 Justification for the Combined Methodology
3.5 Research Method Design
3.6 Data Sources and Samples
3.7 Summery
4. OWNERSHIP STRUCTURE
4.1 Introduction
4.2 Ownership and Control of Corporations
4.3 Share Classification and Ownership Structure
4.4 Ownership Concentration and Corporate Control
4.5 Shareholder Identification
4.6 Problems Associated with Ownership Structure
4.7 Conclusion
5. THE BOARD OF DIRECTORS
5.1 Introduction
5.2 The Board of Directors as a Corporate Control Device
5.3 Characteristics of the Board of Directors
5.4 The Board of Directors: Some Statistical Evidence in China
5.5 Effectiveness of the Board of Directors
5.6 Conclusion
6. BOARD INDEPENDENCE
6.1 Introduction
6.2 Law and Regulation on Board Independence
6.3 Elements Impacting on Board Independence
6.4 Independent Directors as a Governance Mechanism in China
6.5 Efficiency and Effectiveness of Independent Directors
6.6 Conclusion
7. THE SUPERVISORY BOARD
7.1 Introduction
7.2 Characteristics of the Supervisory Board of Chinese Listed Companies
7.3 Interplay of Independent Directors and the Supervisory Board
7.4 Conclusion
8. INDEPENDENT DIRECTORS AND CORPORATE PERFORMANCE IN CHINA: A META-EMPIRICAL STUDY
8.1 Introduction
8.2 International Literature Review
8.3 Sample Collection of Chinese Research
8.4 Discussion and Analysis
8.5 Conclusion
9. CONCLUSION
9.1 Introduction
9.2 Answers to Research Questions
9.3 Findings and Policy Implications
9.4 Limitations of the Research
9.5 Suggestions for Further Research
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INDEPENDENT DIRECTORS IN CORPORATE GOVERNANCE: A COMPARATIVE STUDY BETWEEN THE US, NEW ZEALAND AND CHINA