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Shareholder Voting Power and Ownership Control of Companies

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  • Leech, Dennis

Abstract

The pattern of ownership and control of British industry is unusual compared with most other countries in that ownership is relatively dispersed. Typically the largest shareholder in any large listed company is likely to own a voting minority of the shares. Majority ownership by a single shareholder is unusual. It is not uncommon for the largest shareholding to be under 20 percent and in many cases it is much less than that. A broadly similar pattern is observed in the USA. Two inferences about corporate governance are conventionally drawn from this, following the early work of Berle and Means: (1) All but the very largest shareholders are typically too small to have any real incentive to participate in decision making; (2) All but the very largest shareholdings are too small to have any real voting power. The question of voting power is the focus of this paper. Conventional analyses use a rule of thumb of 20%, assuming shareholders to be fundamentally passive in relation to the running of the company, whatever their style of investment management, unless one of them is above this figure. The London Stock Exchange defines a controlling holding to be one greater than 30 percent. Much empirical work uses declarable stakes, which in the UK are those of 3 percent or more, and disregards anything smaller assuming it to be powerless. In fact, however, a 1% stake in the 100th largest company (Smiths Industries) is worth about £29million, which suggests its owner has strong incentives to be active, and might wish to use his voting power. Theoretical voting power of minority shareholding blocks is studied using the gametheoretic idea of voting power indices. This is applied to a model of ownership control based on the definition of control used by Berle and Means in their classic study. The results give support for use of a 20 percent rule in many cases but not all. Also they support the idea that many companies are potentially controlled by a block of a few large shareholders working in concert.

Suggested Citation

  • Leech, Dennis, 2002. "Shareholder Voting Power and Ownership Control of Companies," Economic Research Papers 269335, University of Warwick - Department of Economics.
  • Handle: RePEc:ags:uwarer:269335
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    References listed on IDEAS

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    1. Leech, Dennis, 1987. "Ownership Concentration and the Theory of the Firm: A Simple-Game-Theoretic Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 35(3), pages 225-240, March.
    2. Pohjola, Matti, 1988. " Concentration of Shareholder Voting Power in Finnish Industrial Companies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(2), pages 245-253.
    3. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    4. repec:hrv:faseco:30728046 is not listed on IDEAS
    5. Stephen L. Nesbitt, 1994. "LONG‐TERM REWARDS FROM SHAREHOLDER ACTIVISM: A STUDY OF THE “CalPERS EFFECT”," Journal of Applied Corporate Finance, Morgan Stanley, vol. 6(4), pages 75-80, January.
    6. repec:hrv:faseco:30747162 is not listed on IDEAS
    7. Leech, Dennis & Leahy, John, 1991. "Ownership Structure, Control Type Classifications and the Performance of Large British Companies," Economic Journal, Royal Economic Society, vol. 101(409), pages 1418-1437, November.
    8. Dan S. Felsenthal & Moshé Machover, 1998. "The Measurement of Voting Power," Books, Edward Elgar Publishing, number 1489, November.
    9. Dennis Leech, 2002. "An Empirical Comparison of the Performance of Classical Power Indices," Political Studies, Political Studies Association, vol. 50(1), pages 1-22, March.
    10. Dennis Leech, 1988. "The Relationship Between Shareholding Concentration and Shareholder Voting Power in British Companies: A Study of the Application of Power Indices for Simple Games," Management Science, INFORMS, vol. 34(4), pages 509-527, April.
    11. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    12. Short, Helen, 1994. " Ownership, Control, Financial Structure and the Performance of Firms," Journal of Economic Surveys, Wiley Blackwell, vol. 8(3), pages 203-249, September.
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    Cited by:

    1. Hamadi, Malika & Heinen, Andréas, 2015. "Firm performance when ownership is very concentrated: Evidence from a semiparametric panel," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 172-194.
    2. Luc Renneboog & Grzegorz Trojanowski, 2007. "Control structures and payout policy," Managerial Finance, Emerald Group Publishing, vol. 33(1), pages 43-64, January.
    3. T. Biebuyck & Ariane Chapelle & Ariane Szafarz, 2002. "Les leviers de contrôle des actionnaires majoritaires," Working Papers CEB 03-001.RS, ULB -- Universite Libre de Bruxelles.
    4. Levy, Marc, 2011. "The Banzhaf index in complete and incomplete shareholding structures: A new algorithm," European Journal of Operational Research, Elsevier, vol. 215(2), pages 411-421, December.
    5. Shanti Chakravarty & Anthony Dobbins & Lynn Hodgkinson, 2013. "Poverty of Agency Theory and Poverty of Managerial Practice: The Royal Bank of Scotland Fiasco," Working Papers 13013, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    6. Renneboog, L.D.R. & Szilagyi, P.G., 2006. "How Relevant is Dividend Policy under Low Shareholder Protection?," Discussion Paper 2006-73, Tilburg University, Center for Economic Research.
    7. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.

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    Keywords

    Industrial Organization; Political Economy;

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