Variation in Ownership Structures
It's nice to think about owners and managers being on the same team. It's not even close to being true, but it's nice to think about.
Consider a family business. How might you describe that company's ownership?
No, you would need a lot of owners for that; families don't tend to be so big.
Absolutely.
Some companies owned by families, other companies, or even the state have concentrated ownership. This is the most common ownership structure around the world.
No, that's not it.
That may be the case, but it doesn't speak to ownership.
How could a minority shareholder have effective control?
No, that won't help. The shareholder will only get so many votes.
Right. In fact, if half of votes aren't cast, then you'd really only need 25% ownership to control everything. Minority shareholders will also have more power than it looks like if there is horizontal ownership (cross-holding arrangements with other companies with similar interests) or vertical ownership (holding companies or operating companies).
No, that doesn't suggest control at all.
What would be the impact on voting power concentration?
No, there wouldn't be any dilution of voting power due to the issuance of dual-class shares.
Exactly.
Even though the ownership concentration wouldn't change (it could still be dispersed), the voting concentration would increase.
Not quite—the ownership concentration wouldn't change, but the voting concentration would.
What do you think managers of a corporation would prefer, in terms of both ownership and voting power?
Absolutely!
Management wants to spend company money on management. If owners are spread around with little power, then managers are strong and stockholders are weak. If ownership and voting power are more concentrated, then stockholders are strong and managers are weak. This is the principal–agent problem.
No, it would be hard to justify a preference for this. Consider what managers want to do.
No, it would. Consider the motivations of management vs. owners.
There is also the principal–principal problem, where some shareholders have concentrated voting power, but ownership is dispersed among other shareholders having very little power. Do you think having dual-class shares would make this problem less likely or more likely?
No; actually, it would make it more likely.
Of course.
The highly concentrated voting power in dual-class shares leads to exactly this problem and may also be a tool for large shareholders to keep and strengthen their power.
Some governments have stepped in to limit voting concentration with voting caps.
To summarize:
[[summary]]
Instead, these two stakeholder groups have different goals. The power that each have depends a lot on the ownership structure.
In certain countries like the US, UK, and Australia, you'll find dispersed ownership. This of course requires a lot of owners, so there are many minority shareholders. A majority shareholder owns over 50% of shares and controls the company.
Some companies are even more explicit: they offer special shares that provide holders of those shares many times the voting power of other shareholders. It's a whole separate class of power. They call them **dual-class shares**.
Dispersed
Concentrated
State regulated
The shareholder votes by proxy
Many shareholders don't vote
The shareholder always goes with management's decisions
Less concentrated
More concentrated
Same number of owners, so no change
It wouldn't matter to management
They would prefer more dispersed
They would prefer more concentrated
Less likely
More likely
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