How does one define control? Control is about being able to influence a company's decisions and policies. From a shareholder point of view, this would normally mean holding voting rights. Voting rights enable a shareholder to vote for or against individual agenda points at the annual general shareholders' meeting (AGM). Although equity shares typically come with a voting right, this is not always the case. For example, some shares may not confer any votes (i.e. they are non-voting shares) or may confer a lower number of votes (e.g. 1 vote per share compared to 10 votes per share for the superior class of shares). A rare case of a British firm with both voting and non-voting shares is the Daily Mail and General Trust plc. This implies that there can be a difference between control and ownership.
In what follows, we define control as control rights. Again, control typically stems from voting rights. However, there are other channels for control. For example, a company's articles of association may include a clause which allows the founder to appoint three of the members of the board of directors, independent of the size of his equity stake in the company. In turn, we define ownership as cash flow rights. Cash flow rights give their holder a pro rata right to the firm's assets (after all the claims of the other stakeholders have been met) if the firm is liquidated and a pro rata right to the firm's earnings while it is a going concern.
If one wants to determine whether a company is controlled by a large shareholder or not, one needs to set a threshold for control. How many votes would the largest shareholder have to hold to be in control? As the typical agenda point voted at the AGM requires a simple majority of votes, it would make sense to define a controlling shareholder as a shareholder who owns more than 50% of the votes in the company. However, some decisions, which are likely to cause a substantial change to the nature of the company, require a supermajority of votes. Unfortunately, the way a supermajority is defined varies across countries. In some countries, a supermajority is defined as more than 75% of the votes; in other countries, the threshold may be lower (e.g. two thirds of the votes) or higher (e.g. 80%). For simplicity, in what follows we assume that a supermajority requires more than 75% of the votes. This would then mean that a company, which receives a takeover offer from another company, would require at least 75% of the shareholder votes to accept the offer. This implies that if shareholders holding more than 25% of the votes vote against the offer, the company will have to reject the offer. As a consequence, a stake of 25% or more confers a so called blocking minority. While a blocking minority does not confer full control, the holder of a blocking minority can nevertheless vote against a decision requiring a supermajority, thereby staling the decision. In other words, holding a stake of 25% or more of the votes confers a veto right to the holder.
Figure 1 below shows the control structure of a company, "Quoted firm", which is listed on its national stock exchange. Focusing on the direct or first-tier shareholders of the company, there are three such shareholders: a family and two holding companies. Whichever of the above control thresholds we adopt (i.e. 25%, 50% or 75%), this company does not have a controlling shareholder as its largest shareholder, the family, holds only 15% of the votes. However, who controls the two holding companies?
Figure 1: Direct or first-tier control
Figure 2 attempts to answer this question. The figure suggests that the family is the largest shareholder in both holding companies. As it is the only shareholder of holding company A, it has uncontested control over this holding company. As a result, the family controls the 10% stake holding company A holds in "Quoted firm". Depending on how we define control, the family also controls the 20% stake holding company B holds in "Quoted firm". This is the case, if control is defined as a blocking minority or a simple majority. In this case, the family holds a total of 45% of the votes (15% + 10% + 20%) in the quoted firm. If control is defined as a blocking minority, "Quoted firm" now has a controlling shareholder, i.e. the family, holding 45% of the votes. Nevertheless, if control is defined as majority control or a supermajority, the quoted firm still does not have a controlling shareholder and is therefore widely held.
Figure 2: Ultimate control
To sum up, it is important to consider that control may be held directly and/or indirectly. This is exactly what the study of corporate control across Western Europe undertaken by the European Corporate Governance Institute (ECGI) did. It focused on the ultimate control of listed firms across Europe because:
- Not every shareholding may confer control, and
- control may be held indirectly via intermediaries.
The results of the study were reported in a book published by Oxford University. Before this study, most studies had focused on direct control, thereby possibly underestimating the concentration of control across Europe.
What did the ECGI study find? When it defined control as majority control (see Figure 3 below), it found that a significant percentage of listed firms in Continental Europe had a majority shareholder. Firms with a majority shareholder ranged from more than 26% of the firms in Sweden to 68% of the firms in Austria. In contrast, in the UK and on the two main American stock exchanges (i.e. the New York Stock Exchange (NYSE) and Nasdaq) the percentage of listed firms with a majority shareholder was negligible.
Figure 3: Percentage of listed companies with a majority shareholder in Europe and the USA
When control was defined as a blocking minority of 25% or more of the shares (see Figure 4 below), virtually all of the listed firms from Continental Europe had such a shareholder. The percentage of such firms ranged from 64% in Sweden to 94% in Belgium. Again, the UK and the USA were different with only 16% of the firms and 5% to 8% of the firms, respectively, having a shareholder with at least a blocking minority.
Figure 4: Percentage of listed companies with a shareholder holding a blocking minority in Europe and the USA
Who are these major shareholders? Table 1 below provides the answer to this question. Across all of Continental Europe, the most important type of largest shareholder is holding companies and industrial companies. However, other types of largest shareholder are also important. For example, Italy sticks out given the importance of family control. Again, the UK is very different from the rest of Europe. We already know that most British firms do not have a large controlling shareholder. However, they also differ in terms of the most common type of largest shareholder. In the UK, the most common type of largest shareholder is institutional shareholders. Indeed, when adding up the percentages of votes held by the various types of institutional shareholders we arrive at a total of 16.8% (banks with 1.1%, insurance companies with 4.7% and investment funds with 11.0%). The only other country in Europe where institutional shareholders are important is the Netherlands. In addition, the UK is the only country in Europe where shareholdings by the directors are substantial. In contrast, in the rest of Europe -- unless they are part of the controlling family -- the directors do not normally hold shares in their company.
Table 1: Distribution of control across types of large shareholders in Europe
Similarly, in the rest of the world control is concentrated. However, the type of largest shareholder may still vary. For example, in China it tends to be the government whereas in India, Latin America and the Philippines it is families. To conclude, while in the UK and USA (as well as some other Anglo-Saxon countries) corporate control is typically widely held, in the rest of the world most listed companies have a controlling shareholder.
I hope this overview has given you an idea about how corporate control differs across the world. As this was always intended to be a brief overview, I focused on the USA and Western Europe. If you would like to obtain further details about corporate control in Western Europe, Eastern Europe or Asia, I suggest you read Chapter 2 of my textbook entitled Corporate Governance. A Global Perspective. Hard copies of the textbook are available from the IE Library as well as other libraries.