Corporate Governance Insights Interview Series: Top corporate governance experts report on the latest research in emerging markets.
Yishay Yafeh is an associate professor at Hebrew University’s School of Business Administration.
The most interesting piece on corporate governance I read recently was…
A paper by Karl Lins, Paolo Volpin and Hans Wagner on how families and other groups that hold large blocks of company stock respond in times of financial crisis. This study of companies in 35 countries with large family-held blocks suggests that some blockholders and some firms with concentrated ownership actually fare rather well in crisis, comparatively speaking. The findings are notable because the conventional wisdom is often focused on the downsides of blockholders and family firms, such as their treatment of minority shareholders. This paper, together with a few others on related topics, suggests that a more nuanced view is emerging. Even though these tightly-held entities might not be so great in times of calm, it is possible that large voting blocks sometimes help firms weather a crisis, perhaps because they have access to sources of financing that are otherwise unavailable. This has some intriguing corporate governance implications, and worth a deeper look.
Right now, I am working on…
A study of American business groups during the Great Depression in the 1930s. We know they existed back then in a pyramid-type form somewhat similar to business groups prevalent in emerging markets today. But during the 1930s and 1940s they all disappeared or evolved into other forms. There is very little research that tracks the reasons for this. Were American pyramids legislated out of existence? Was it due to taxes or other regulatory measures? Did they just break up on their own? The preliminary answer seems to be that even though inter-corporate dividend taxes were imposed, this did not cause such groups to disappear. Other factors must have been at play, and we are working on understanding what these factors might have been.
I think the most relevant CG research topic for emerging markets now is…
How to regulate large, strong family-owned business groups. The existing literature suggests that these family-owned groups can contribute significantly to economic growth in countries that have low levels of economic development. These groups have the resources to move their businesses forward, even when the country has weak institutions, limited property right protections, difficult bureaucracies, or lagging infrastructure, for example. So, they can be a force for good, and a source of job creation and economic growth.
Once the country has moved beyond the early development stage, there must be more mechanisms in place to limit their influence. My research suggests that emerging markets trying to restrict the influence of such groups should consider various regulatory and legal interventions. In Israel, for example, a government- appointed committee recently recommended the separation of financial and non-financial activities in business groups and new antitrust-related approaches to regulate diversified entities operating in many industries.
One way to restrict the conflict between controlling and minority shareholders is to…
Assign a corporate governance role to institutional investors. While you might expect institutional investors to act as a sort of guardian angel to protect minority shareholders from abuse, we don’t really know if institutional investors are capable of standing up to the majority block to represent minority interests, particularly in emerging markets.
The evidence so far doesn’t completely support this, in part because in emerging markets these institutional investors tend to belong to family-owned groups themselves. So, there’s a self-interest situation that complicates things. They might not want minority shareholder activism in their own groups and that’s why they don’t act when entrusted with minority shareholders’ money as they invest in other groups. In my opinion, the only way to empower institutional investors and help them play a role in corporate governance when ownership is dominated by a large block is by making sure they are truly unbiased. This means that they can’t have any ownership or business ties with the business groups in which they invest. Of course, this disconnect can be hard to do in concentrated economies, where so much business activity is intertwined.
For more on controlling the influence of large shareholder blocks, Dr. Yafeh recommends:
Morck, Randall, Daniel Wolfenzon, and Bernard Yeung. 2005. “Corporate Governance, Economic Entrenchment, and Growth.” Journal of Economic Literature, Vol. 43, No. 3, pp. 655–720.
Bebchuk, Lucian and Assaf Hamdani (2009) “The Elusive Quest for Global Governance Standards,” University of Pennsylvania Law Review, Vol. 157, pp. 1263–1317.
Lauterbach, B. and Y. Yafeh (2011), “Long Term Changes in Voting Power and Control Structure following the Unification of Dual Class Shares,” Journal of Corporate Finance, Vol. 17, No. 2, pp. 215-228.
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