11
voice their views, query management and directors and participate in decisions was narrowly
circumscribed.
The combination of corporate finance patterns (i.e. high levels of debt finance) with ownership
concentration and additional devices to shield management from outside pressure resulted in considerable
cohesion within the insider group, which was virtually immune from discipline by minority investors.
Even if the share price was bid to low levels, as long as the insider group maintained a consensus on
appropriate corporate policy, outsiders were powerless. The fact that management could be controlled by a
comparatively small identifiable group does not necessarily mean that the insiders were able to formulate
and pursue better policies. In the absence of a clearly agreed long-term objective, such as financial returns
to shareholders, "insider" companies seem to have considerable difficulties in specifying long-term goals.
Since the interests of many stakeholders have to be reconciled, the company may tend to pursue a more
diffuse, and possibly conflicting set of goals.
14
Insider systems exist in several varieties. In some European countries, commercial banks play a leading
role, with Germany being the classic example. It is worth emphasising that in these cases the banks are
powerful, independent and mostly private institutions. The universal banking system enabled them to
dominate all facets of financial intermediation, with the capital market remaining considerably less
developed than in other high income countries. The German tradition is for each firm to have a “house
bank” which took responsibly for most financial transactions of the company. We have already noted that
bank- based systems often rely on confidentiality as information is shared between the bank and its
corporate clients, an attitude which to some degree runs counter to that of outsider regimes which requires
strong public disclosure.
In addition to holding considerable equity portfolios themselves, banks name representatives to the boards
of the companies and are seen as exercising a leadership role in non-financial companies or among groups
of companies. They are often seen as representing all shareholders: their power extends beyond direct
share ownership, as they hold and vote shares for individual investors.
While Germany has the classic bank-centred system of governance, several other European countries, such
as Austria, Switzerland, the Netherlands and the Scandinavian countries also display important features of
this system. However, in the Netherlands, Switzerland and some Scandinavian countries, domestic
institutional investors are significant and have some voice in corporate governance.
In some countries (e.g. France and Japan), the pattern has been one of interlocking share ownership among
groups of financial and non-financial companies. In France, the process of privatisation that began in the
mid-1980s posed a problem for the authorities of how corporations would be monitored after having been
sold to private investors. Lacking powerful domestic institutional investors and wishing to develop a
transitional form of governance, systems of inter-company holdings were elaborated that enabled French
industry to maintain stable ownership and control. These cross holdings were supplemented by
shareholder agreements.
15
In Japan the technique of control has been through keiretsu structures which
brought together groups of industrial and financial companies and customers with suppliers. The Japanese
system also had a central role for banks in which the main bank was expected to assume a leadership
position within the group.
16
14
See Roe (1998).
15
See Morin (1998).
16
See Kanda (1998).
12
Numerous national variations on these models can be identified and all systems are undergoing rapid
change. In the first place, it is worth mentioning that there have always been a number of systems, which
stand somewhere between insider and outsider models. In particular, in the smaller English-speaking
countries, such as Australia, Canada and New Zealand, the pattern of ownership is more concentrated than
in the US or the UK with family-owned companies often predominating. However, the strong recognition
of shareholder rights, institutional ownership of wealth, the tradition of strong legal regulation of securities
markets and heavy insistence on transparency in accounting give these systems many points in common
with the US and UK. Countries with this kind of system in general have less experience with the
phenomenon of activism by major institutional investors as a factor influencing change in corporate
governance. On the other hand, they have extensive experience in dealing with the problem of balancing
the interests of controlling investors with those of minority investors, particularly through strong systems
to promote securities regulation, rules governing transparency and disclosure and strong requirements of
independence for board members
The family/state model
The main characteristic of this sub-category of the insider system is, on one hand, the important role of a
small number of “founding” families of entrepreneurs in many areas of the economy, and the pervasive
role of the state on the other.
The founding families and their allies usually exercise control over an extensive network of listed and non-
listed companies. They are often shielded from risk by directly holding only a limited number of shares.
Most of the rest is held by other corporations in the group or other “friendly” agents. Often, a minority is
floated on the local exchange. The families that control the Korean chaebols own an average of less than
15% in group companies, the rest of the controlling blocks being held by other affiliates in a complex web
of cross shareholdings.
17
A common characteristic of such systems is that the concept of limited liability, i.e. the separation between
the shareholders and the corporation (which has its own decision-making mechanism and assets/liabilities),
is weak. In Greece, it was standard practice for the banks to ask for guarantees by the individual family
shareholders for the granting of loans. In Korea, one of the most important hidden liabilities within
chaebols was the cross-guarantees for bank loans between chaebol affiliates. All decisions related to the
strategy of different affiliates within the group, including the ones that are publicly quoted, are taken by a
small group of family-related individuals in an informal way - i.e. outside the governing instances of the
corporations (board and general meetings).
Sweden is an example of a traditionally family-dominated ownership system which through
evolution over time now contains elements of both the “market-based" and the “insider”
systems. The Swedish stock market is highly liquid and supported by a market-oriented legal
framework of company law, securities regulations and disclosure practices. As in many other
countries, institutional investors have successively come to dominate the scene with direct
private ownership falling from about 70% of the market value in the early 1960s to less than
20% today. Foreign investors hold approximately one-third of the market value. Despite
these distinct features of a market-based system, the owners of Swedish companies have
generally been able to maintain and exercise considerable influence over corporate affairs.
This is partly due to the role of intermediary investment companies. These investment
companies are themselves listed joint-stock companies and serve as financial intermediaries
undertaking minority investments in a few selected companies, which they actively monitor.
The ownership function is also upheld by the system of multiple voting rights which reinforces
17
See OECD (1998).