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FN0360 Ethics and Governance
Lecture One
The Corporate Structure, Ownership
and AgencyTim Nichol
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Objectives
The objectives of this lecture are to
discuss the nature and implications of Berleand Means Corporate System;
introduce the concept of corporategovernance;
examine the corporate structure and the
nature and role of shareholders and directors. Discuss corporate ownership and control
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Need for Study of Ethics and
governance Role of/Resource controlled by companies
Role of individuals in corporate decision
making Persistence of corporate scandals fraud,
theft, abuse of power, self-enrichment
Importance of public confidence Need to develop awareness of future
managers
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The Corporate System
Grown to tremendous proportions, there maybe said to have evolved a corporate system
as there was once a feudal system which has
attracted to itself a combination of attributesand powers, and has attained a degree ofprominence entitling it to be dealt with as amajor social institution
A.A.Berle and G.A Means
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Implications
Company is a legal device providing a meansby which private individuals could gathertogether to perform business transactions.
But
the company has also become a method ofproperty tenure; and
a fundamental means of organizing economiclife
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The company as a means of organising
economic life
The concept of a separate legal personality :
ability of the company to create legal relations
limited liability of shareholders provide ameans of limiting shareholder risk and so
encourage participation
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System of Property Tenure
Accumulation of wealth by companies
only 24 counties in 2007 had GDP greater thanthe 2008 earnings of Wal Mart
the top 50 companies had earning greaterthan the GDP of 124 countries appearing onthe IMF listing of national GDP
Concentration of economic and potentiallypolitical power
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Nature of Corporate Governance:
Concerns
the structure within which management
decisions are made;
the composition of the group making thosedecisions; and
the relationship between those making
management decisions, the owners of
companies and external stakeholders
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Corporate Structure
Shareholders
Contractual Relationship
Company Contract Board ofDirectors
Other RelationshipsContractual Other Legal Relations Other Relations
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Analysis of Shareholding in some
European Countries
Austria Belgium France Germany UKAustria Belgium France Germany UK
Public SectorPublic Sector 4.84.8 33 1111 77 00
IndividualsIndividuals 11.311.3 1919 66 1515 1414
Private Non FinancialPrivate Non Financial 22.622.6 88 1515 4242 22
Private FinancialPrivate Financial 27.527.5 1717 2929 1515 5151
Foreign InvestorsForeign Investors 33.833.8 5353 3939 2121 3333
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Board Choices
a unitary or a double board structure;
a choice of executive and/or non-executive
directors; and the separation or combination of the role of
Chairman and Chief Executive Officer.
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Unitary Board Structure : UK
Board run by Chairman
Led by CEO
Composed of Executive
Directors
Consist of 50% of the
Board
Led by Senior Non-
Executive Director
Majority independent
Non-Executive Director
Consist of 50% of the
Board
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Two Tier Structure : Germany
Supervisory Board
Shareholder Employees
50% 50%
Management BoardExecutive Directors
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Concept of ownership
Exercise legal rights to use
Enjoy beneficial rights
Recognise legal obligations of ownership
Usually benficial/legal rights fused to give
ownership and control
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Questions regarding share ownership
public companies provide alternative levels
of participation by shareholders in
management; and
the motives underpinning share ownership
may not be similar to those underpinning
the acquisition of other assets.
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Ownership/Control Situations
1. Control through almost complete ownership
exists only in private companies
all shares are held by an individual or a smallgroup of individuals
All are involved in the management of thecompany
de jure and de facto control over the assets
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2. Majority Control
first point of separation between control and
ownership Democratic principle one share one vote
51% gives control
Consenting minority excluded from control
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3. Control through a legal device
legal devices gives control even where
majority ownership is not possible examples were provided by Berle and Means
include pyramiding, the use of non-voting
stock, differing voting rights and voting trusts
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Pyramiding
company A takes a 51% stake in company B
company B then acquires company C by purchasing
51% of the shares
C to acquires 51% of the shares of company D
in de facto terms company A will control companies
B,C and D
direct shareholding company A has in company D isless than 13.26% ( that is 51%x51%x51%)
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4. Minority Control
individual or small group of shareholders hold
sufficient interest in the company to exercise control
De facto control in these circumstances is based on
the ability of the minority to attract support from the
majority shareholders
proxy system is crucial in effecting the exercise ofsuch control.
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5. Management Control
ownership is widely dispersed : no single shareholder orgroup of shareholders have sufficient shares to dominate thecompany, even as minority shareholders
no one shareholder or group can gather around them thenecessary voting power to exercise control over management
control over the assets and the direction of the company lieswith the directors of the company, none of whom havesignificant ownership interests in the company
shareholders excluded from the exercise of control overcompany assets
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The Motives of Shareholders
The corporate stockholder has certain well-defined interestsin the operation of the companyIn general, it is to hisinterest, first that the company should be made to earn themaximum profit compatible with a reasonable degree of risk:
second, that as large a proportion of these profits should bedistributed as the best interests of the business permit, andthat nothing should happen to impair his right to receive hisequitable share of those profits which are distributed: andfinally, that his stock should remain freely marketable at a fair
price
A.A.Berle and G.A. Means The Modern Corporation andPrivate Property Page 114
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Management Abuse of Control
the unlawful appropriation of assets by the directors;
the use of corporate assets for the directors private use
directors may pay themselves excessive sums
remuneration schemes may cause the directors to make decision thatmaximize their position rather than the long term position of the
company; directors may dilute the ownership of the shareholders through the
inappropriate use of share option schemes; and
where the directors themselves are controlling majority/minorityshareholders, related party transactions may be used to legally channelfunds away from the company.
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The Agency Problem
the management, in the absence of gross
incompetence or serious misfortune, has open to it a
wide range of discretionary behaviour in which it
can, without fear of punitive action by stockholders,pursue policies which serve its own interests at the
expense of the owners.
R J Larner Management Control and the Large
Corporation
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Regulatory Response
UK Combined Code;
the composition of the board means that it is not numericallydominated by Executive directors;
the majority Non-Executive directors are required to be
independent of the company; the Non-Executive directors dominate or exclusively staff sub-
board committees;
a Senior Non-Executive director is appointed to represent theother Non-Executive directors and hold meetings with the
major shareholders; specific provisions are provided dealing with the relationship
between the institutional investors and the company.
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Alternative Views
On the one hand, the owners of passive property, by surrendering controland responsibility over the active property, have surrendered the rightthat the corporation should be operated in their sole interest ..At thesame time, the controlling groups, by means of the extension of corporatepowers, have in their own interest broken the bars of tradition whichrequires that the corporation be operated solely for the benefit of theowners of passive property. Eliminating the sole interest of the passiveowner, however, does not necessarily lay the basis for the alternativeclaim that new powers should be used in the interests of the controllinggroups The control groups have, rather, cleared the way for the claims ofa group far wider than either the owners or the control. They have placedthe community in a position to demand that the modern corporationserve not alone the owners or the control but all society
(Berle and Means page 312)
