The Effects of Ownership Structure on Corporate Governance and Performance

(Executive Summary)

The corporate governance issues have received considerable attention because of their apparent importance for the economic health of companies and society at large especially after plethora of corporate scams and debacles in the recent times. The U.S., Canada, the U.K., other European Countries, the East Asian countries, and even India for that matter have witnessed severe strain on their economies together with the failure of several leading companies in the last two decades or so. This has resulted in greater emphasis and attention on the corporate governance issues.

In a narrow sense, corporate governance specifies the relationship among various primary participants (shareholders, directors, and managers) in determining the directions and performance of corporations. In a broader sense, it delineates the rights and responsibilities of each primary stakeholder and the design of institutions and mechanisms that induce or control board directors and management to best serve the economic interests of shareholders (and other stakeholders) of a company. Many of these other stakeholders also play a role in monitoring the behaviour of the board/management.

The part of any organization that has the most control over governance is the board of directors and the board is the ‘soul’ of a company – the foundation of all business decisions and the origin of corporate culture of the whole entity. The essence or attributes of good corporate governance include ethics, managerial discipline, independence, protection of shareholders’ rights, fairness, transparency, board responsibilities, accountability, and social awareness. One major corporate governance principle of OECD is to “focus on the company rather than on one group of people.” Most corporate governance rating agencies use some or most of these attributes for measuring the corporate governance scores on a corporate level.

Theoretical and applied work on corporate governance systems point to the importance of the structure of ownership and control in setting the background for the corporate governance issues that can arise in reality. Three aspects that need to be considered are the structure of ownership and its concentration; the instruments of control and exercise of control. The connection between ownership structure and performance has been the subject of an important and ongoing debate in the corporate finance literature. The debate goes back to the Berle and Means (1932) thesis, which suggests that an inverse correlation should be observed between the diffuseness of shareholdings and firm performance. Their view has been challenged by Demsetz (1983), who argues that the ownership structure of a corporation should be thought of as an endogenous outcome of decisions that reflect the influence of shareholders and of trading on the market for shares. The empirical studies about the relation between both variables seem to have yielded conflicting results. Further, it has been observed that the general features of the legal and regulatory system, and that the historical factors and experiences have contributed to the current corporate governance system and are still playing an important role.

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The Executive Director
National Foundation for Corporate Governance
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Shalini Budathoki
Director (CII), NFCG
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