CORPORATE GOVERNANCE

CONTROL AND OWNERSHIP

STRUCTURE
Zahurul Alam

2.CONTENTS

Defining Ownership and Control

Family Control
Diffuse Stakeholders
Institutional Investors
Mechanisms and Control
Internal CG Control
(IC) Monitoring by the BOD
(IC) Internal Control Procedures and Internal
Auditors
Other Internal Control Mechanisms
External CG Control

3. DEFINING OWNERSHIP AND CONTROL

Ownership is the ownership of cash flow rights
Control in corporate system means ownership of control
or voting rights.
So, Control and ownership structure refers to the types
and composition of shareholders in a corporation.
In most of Continental Europe, ownership is not
necessarily equivalent to control due to the existence of:

dual-class shares
ownership pyramids
voting coalitions
proxy votes; and
clauses in the articles of association that confer additional
voting rights to long-term shareholders.

4. FAMILY CONTROL
Family interests dominate ownership and control
structures of some corporations
Interestingly, and may be quite logically, the
oversight of family controlled corporation is
superior to that of corporations "controlled" by
institutional investors, or by management.
A recent study found that companies in which
"founding families retain a stake of more than 10% of
the company's capital enjoyed a superior
performance over other similar companies with nonfamily control.
Since 1996, this superior performance amounts to 8%
per year.

5. DIFFUSE SHAREHOLDERS

Diffuse ownership is characterised as a

large number of shareholders with
smallholdings and few, if any, large-block
shareholders
This type of ownership generally produces
weak monitoring of managerial decisions.

6. INSTITUTIONAL INVESTOR-1
Entity with large amounts to invest:

Investment Companies
Mutual Funds
Brokerages
Insurance Companies
Pension Funds
Investment Banks
Endowment Funds

Institutional investors are covered by fewer protective

regulations. Why?
Because it is assumed that they are more knowledgeable and
better able to protect their interests than the other investors
They generally account for major volume of shares

7. INSTITUTIONAL INVESTOR-2
Institutional investors may include operating companies
which decide to invest their profits to some degree
These investors have great influence in corporation
management and get actively involved in corporate
governance thereby
The institutional investors as well are in a position to
decide largely the fate of a companys solvency status
due to their ability to buy and sell large volume of shares
The significance of institutional investors varies
substantially across countries.
Unlike in Japan, in Australia, Canada, New Zealand,
U.K., U.S. etc., institutional investors dominate the
market for stocks in larger corporations.

8. MECHANISMS AND CONTROL

i) Objective

Corporate governance mechanisms and controls are

designed to reduce the inefficiencies that arise
from moral hazard and adverse selection. For
example, to monitor managers' behavior, an
independent third party (the external auditor) attests
the accuracy of information provided by management
to investors. An ideal control system should regulate
both motivation and ability.
ii) Types of Control
Internal
External

9. INTERNAL CG CONTROL

Monitoring by the Board of Directors

Internal Control Procedures and Internal Auditors
Balance of Power
Remuneration
Monitoring by Large Shareholders
Monitoring by Banks and Other Large Creditors

10. (IC) MONITORING BY THE BOD

BOD hires and fires, and compensates top
management
BOD safeguards invested capital
Board meetings identify potential problems and
solutions
Although the non-executive directors are more
independent, they may not yield effective corporate
governance
Executive directors possess superior knowledge of the
decision-making process and therefore evaluate top
management on the basis of the quality of its
decisions that lead to financial performance outcomes.

11. (IC) INTERNAL CONTROL PROCEDURES

AND INTERNAL AUDITORS
Internal control procedures are policies implemented by
an entity's:

Board of Directors
Audit Committee
Management
Other Personnel

The purpose is to provide reasonable assurance of the

entity achieving its objectives related to:
Reliable Financial Reporting
Operating Efficiency
Compliance with Laws and Regulations

Internal auditors are personnel within an organization

who test the design and implementation of the entity's
internal control procedures and the reliability of its
financial reporting

12. OTHER INTERNAL CONTROL MECHANISMS

i) Balance of Power: Recommends that the President be a different
person from the Treasurer.
ii) Remuneration: Performance-based remuneration is designed to
relate some proportion of salary to individual performance. It may
be in the form of cash or non-cash payments such
as shares and share options, superannuation or other benefits.
iii) Monitoring by Large shareholders and/or Monitoring by banks
and other large creditors:
They have large investment in the firm
They therefore have the incentives of different types
They have right degree of control and power, to monitor the
management

Note: In publicly-traded U.S. corporations, boards of directors are

largely chosen by the President/CEO, who often Chairs the Board
(Duality). This makes it much more difficult for the institutional
owners to "fire" him/her.
In the U.K. best practice recommends to avoid duality.

13. EXTERNAL CG CONTROL-1

External stakeholders play an important role

in ensuring proper corporate governance
processes in a business organization. Some
of the key external corporate governance
controls include:
Government Regulations
Media Exposure
Market Competition
Takeover Activities
Public Release and Assessment of Financial
Statements

14. EXTERNAL CONTROL-2

i) Government Regulations
Government regulations are the most effective external
controls on the governance of a company. Companies
are required to comply with these or face penalties for
violations.
Most corporate governance regulatory requirements are
based on the OECD Principles of Corporate
Governance.
ii) Media Exposure
Media scrutiny of the workings and processes of a
company ensures, to a certain degree, the proper
governance in an organization. Whistleblowers often
expose wrongdoing within a company to the government
and media organizations.

15. EXTERNAL CONTROL-3

iii) Market Competition
Companies with the best corporate governance
practices have the best standing in the market.
Reputation, credibility and positive public perception
play vital role in boosting a companys image and
thus help it trump its competition and best its peers.
iv) Takeover Activities
Takeover activities lay a companys internal
processes and workings open to public scrutiny.
Both government regulators and the media will focus
on the internal policies and governance structures,
thus acting as an effective external control.

16. EXTERNAL CONTROL-3

v) Public Release and Assessment of Financial
Statements
The public release of financial statements by
listed companies exposes them open to
assessment or scrutiny by regulators, investors,
members of the public and so on
This acts as an external control as companies
have to be careful about the details included in
these statements and in ensuring that they are
properly prepared and audited.

17. DUAL CLASS SHARE-1

The issuing of various types of shares by a
single company. A dual class stock structure
can consist of stocks such as Class A and
Class B shares
Different classes have distinct voting rights
and dividend payments.
One share class is offered to the general
public, and the other is offered to company
founders, executives and family.
The class offered to the general public has
limited voting rights, while the class available
to founders and executives has more voting
power and often provides a majority control of
the company.

18. DUAL CLASS SHARE-2

Dual class stock is intended to give specific shareholders
voting control. Well-known companies such as Ford and
Warren Buffett's Berkshire Hathaway have dual class stock
structures that provide founders, executives and family the
ability to control the majority shareholder voting power
with a relatively small amount of total equity in the
company.
The dual class structure at Ford, for example, gives the Ford
family control of 40% of the voting power while owning
only about 4% of the company's total equity.
Dual class stock structures are controversial. Supporters
feel that the structure allows strong leadership to put longterm interests first while seeing beyond the near-term
financial situation.
0pponents of dual class structures feel it allows a small
group of privileged shareholders to maintain control while
other shareholders (with less voting power) provide the
majority of the capital.

THANK YOU!