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Control and Ownership Structure

CONTROL AND OWNERSHIP STRUCTURE 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, C

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Mahmudur Rahman
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958 views15 pages

Control and Ownership Structure

CONTROL AND OWNERSHIP STRUCTURE 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, C

Uploaded by

Mahmudur Rahman
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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CONTROL AND OWNERSHIP STRUCTURE 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.

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