Over the past half decade, although there have been a convergence in the economies and business practices, the difference of ownership structures amount countries have continued. Most companies shares the same goals which includes the utilization of resources efficiently, it’s ability to garner new capital, increase the company’s value and improve information for decision making. These goals should see many companies and organizations moving towards a single corporate set of rules and structures that will allow efficient and effective operations. However, today we continue to observe differences in corporate governance ownership and structure around the globe. There are two common systems under which most companies operate namely a concentrated ownership system and a dispersed ownership system. A concentrated ownership system, the majority of control is taken up by a small group of individuals, shareholders or bondholders. In dispersed ownership, there is a separation of ownership and control where the executives and directors do not necessarily own any shares or any huge blocks of shares within the company. Under the dispersed system, the markets tend to be very active especially the stock market and large volume of stocks traded daily. Typical example of this type of system is one under which United States of America and United Kingdom operates. Unlike the dispersed system, the concentrated system is weaker and less active than those in the dispersed market. There are also very low standard and accountability in this type of system unlike the dispersed ownership which is more regulated and provide a legal basis on which shareholders can be compensated for breaches and unethical practices. There is a high level of transparency and disclosure requirements for companies especially those listed on the stock exchange compared to the concentrated with very low disclosure standards and transparency .
The emergence of the alternative corporate governance system has led to a number of theorists seeking to justify the existence of such systems. La Porta, Lopez-de Silanes and Schleifer have raised and argued the point in regards to the protection of investors and have indicated that this protection is through the legal rules that exist in the jurisdictions where these securities are being issued. The existing law in a jurisdiction and the enforcement quality are very important factors in determining the rights of shareholders and what protection exists for their investments. These legal protection differences that exist around the world may be able to explain why firms owned and finance the way they do across the globe. LLS & V argued that a contributing factor of the differences in the legal rules that exist across various countries is mainly as a result of the differences in the origins of the legal rules. In their empirical test of their predictions, they have found that laws in countries like the US, UK and Canada were more protective than those that exist in the Jurisdictions of civil law , namely, Germany, France and Italy. LLS&V argued that little or no protection is offered to the minority shareholders in the civil law legal system; hence the notion that dispersed ownership can only survive in a common law legal system. In supporting this view, they developed a global database have indicated that the stock market’s liquidity and depth around the world is closely align to specific areas of the legal systems, common law systems
A typically example of the legal protection to shareholders in the common law jurisdiction is the scenario of the Enron Scandal. This scenario raises serious questions about the assumptions of LLSV and the legal protection that exist in these jurisdictions. However, the adoption of the Sarbanes-Oxley act of 2002 was a quick response and proof of good legal protection for investors in this jurisdiction. LLSV also found in their sample that even in countries with minimal shareholder protection, there were 27% of the large firms in the sample. It therefore explains that even where firms with dispersed ownership are minority in many countries, these firms exist in all markets regardless of the legal rules. The reality of the situation is that in most security markets, a number of firms with dispersed ownership exist together with a number of concentrated ownership usually the majority in some jurisdiction which attempts to discredit the explanation of dispersed ownership as a function strong legal protection. Dispersed ownership firms can basically survive in the worse legal atmosphere which would be an indicator that having a strong legal protection or not does not determine the survival of these firms.
The legal Explanation of the emergence of the dispersed ownership has been challenged by Mark Roe and Lucian Bebchuk who argued that it is politics that is the determinant of the corporate governance system and not law. According to Mark Roe, legal differences are merely values evolved through politics. They argued that European style social democracies influence managers to give up various opportunities so as to maximize the profit of the firm in order to maintain its high employment rate while utilizing the shareholders capital. They also argued that while in other political environment, firms may be expected to cut back on expenses based on the market conditions that exist, social democracies firms are expected and influenced to utilize their capital to subsidize the effects of the market. Private firms are therefore less exposed to the market conditions compared to the public firms. Roe attributed this exposure to a higher agency cost of the social democracies; hence concentrated ownership utilize a self -protective model in response to the immense pressures through creative accounting and tighter management supervision. Based on the arguments provided, it can be argued that large block of shareholders can resist the political pressure of exhausting capital of the firm rather than downsizing to maximize profitability. As it relates to the United States, the historical absence of social democracy accounts for the persistence of dispersed ownership in that country. The effect of social democracy is to separate ownership and control as it relates to shareholders and management, thereby increasing the agency cost. While both theorist agreed that the emergence of a liquid market requires the state to adequately address the problem of the high agency cost, it is important to understand that control and ownership cannot be considered separately without looking at the impact of the managerial agency cost, the impact of weak legal standards compared to the political pressures of firms to utilize their capital.
Bebchuk in his political explanation sought to use the argument that concentrated ownership will control dispersed ownership when there are high benefits to private control. He also argued that investors are expected to pay a higher price for controlling rights of block holdings in order to have the private benefits of control. It therefore means investor will prefer to sell to block shareholders where they will get a higher price for their voting rights against selling their rights to disperse shareholders. In essence, a bock shareholder will be more willing to pay a higher price in order to increase his rights of control or achieve sole rights of control. In the ensued discussion, it must be noted that the political explanation is not without its weaknesses similar to the legal explanation. A weakness identified is its correlation of ownership and political orientation.
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