13
the role of active owners. By 1992, the largest owner controlled on average 46% of the voting
rights in the 62 largest Swedish corporations, and the five largest controlled on average 72%.
The regulations regarding voting rights coupled with strong protection of minority
shareholders, illustrate the emphasis Swedish authorities have placed on enabling active
ownership to be established in Swedish corporations.
Alongside the few large family conglomerates there is often a pervasive influence of the state in the
economy. The entire infrastructure as well as large parts of heavy industry and the financial system are
usually in the hands of the state. This can be seen both as a result and a cause of the rise of family-based
conglomeration: on one hand, the state has to be able to counter the concentrated power of these
Shumpeterian giants. On the other hand, family-based businesses feel that they have to acquire political
weight against such an overwhelming state presence by branching out in as many sectors as possible.
There is a premium for sheer size, employment capacity and political voice.
In these systems, outside financing of the firm is overwhelmingly bank-based, as equity and the corporate
bond markets are underdeveloped. Hence, the behaviour of the banks as monitors of corporate behaviour
is very important. But banks are rarely the solid, independently governed and tightly regulated institutions
that have become the norm in most OECD countries. Very often, banking systems are state-centred. In
Italy, Greece and Turkey more than 50% of banking assets were under state ownership until the early
1990s. Frequently, banks had ownership ties to their main corporate borrowers. In Korea, banks were
only nominally privatised in the early 1990s, with control being left largely to the state.
18
Controlling the
banking sector is crucial because it is used as a conduit to direct credit to selected sectors or, alternatively,
to control the expansion of non-state industry. This credit rationing function has resulted in weak
corporate governance of banks, a very low capacity to analyse credit risk and inadequate regulatory
supervision of the banking sector. Competition has been kept at bay with strict restrictions or total bans on
commercial banking for foreign financial institutions. At the end of the day, banks become either conduits
of state subsidies or captives of the family controlled conglomerates.
A common trend in most of these systems has been the persistence of deficient market exit arrangements.
High entry barriers, hidden subsidies to the local industry, and (usually indirect) obstacles to foreign direct
investment lower contestability; hence, exit becomes less likely. Often the state steps in to either arrange
marriages between failing corporations or take over failing firms in order to restructure them. The social
safety net that usually serves as a counter weight to labour flexibility is weak or non-existent. Last but not
least, insolvency legislation is rarely used as a means of reallocation of resources. Most of the time, it
remains an antiquated mechanism, punishing debtors without benefiting the creditors.
But the family/state model has also produced some notable benefits, especially at the early stages of
development of these economies. The stability of ownership, high degrees of reinvestment of earnings,
long-term commitment and firm-specific investment by stakeholders in firms has contributed to high rates
of growth. Where the state managed not to be captured by either the interests of the “founding” families or
of its own expanding bureaucracy, its presence may have actually encouraged investment and lowered the
cost of capital. However, as these economies moved to a higher gear in terms of value-added and capital
intensity, they also moved away from these arrangements in order to tap into international capital markets.
This has caused some important institutional shocks.
18
Thompson (1999).
14
III. The changing role of corporate governance principals
Families, corporations and other blockholders
In the previous part, we briefly examined some stylised versions of ownership and control systems to be
found in the OECD area. In some of them concentrated ownership plays a predominant role in the way
enterprises are governed. Controlling owners are the centres of gravity in these systems, high in stability
and long-term commitment but low in flexibility and the capacity to attract outside investment. There
seems to be growing evidence that the role of these agents - we could generically name them
“blockholders” - in both insider and outsider systems, is evolving.
Firms are beginning to address the obstacles to outside investment that cross shareholding arrangements
represent. In France, the last few years have seen a systematic trend at unwinding such positions in every
sector. From 1993 to 1997, inter-company holdings declined from 59% to less than 20% of total market
capitalisation. Core shareholdings, or noyaux durs, in French companies declined by almost a third during
the last decade.
19
The same wind seems to be blowing in Japan, where the simmering crisis in the financial
sector seems to have shaken the foundation of several
keiretsu and has signalled the beginning of the end
(through the unwinding of complex cross-shareholding) for some of them. From 55.8% of total market
capitalisation, Japanese cross-shareholdings have come down to 45.7% in 1997, while anecdotal evidence
suggests that this trend has accelerated substantially in 1998-1999.
20
This trend has also been reflected in the tighter regulation of other control devices such as interlocking
directorates. Directors in French and Italian publicly-held companies have been subject to stricter rules in
recent years, as regards the number of board seats that they can occupy in different corporations.
Transparency related to ownership patterns (such as consolidated or combined balance sheets) has been the
order of the day since the early 1980s in many OECD jurisdictions; the 7th European Company Law
directive dates from that time. Better disclosure of business combinations has been one of the less
acknowledged yet fundamental causes of the development of equity markets in economies dominated by
complicated, obscure ownership arrangements and blockholder control. Intensified disclosure of off-
balance sheet transactions (such as debt guarantees or, recently, derivatives) is also becoming the norm in
most OECD countries.
The fullest glimpse of the forces of convergence at work can be had by looking at the behaviour of
blockholders in some of the countries concerned. In Sweden, the Wallenberg family is restructuring its
whole portfolio of holdings with the aim of becoming an arm’s length investor with a mainly financial
perspective and more international portfolio diversification. Japan and, since last year, Korea, have
allowed the formation of holding companies (previously prohibited) with the goal of rationalising equity
holding by blockholders. At least in their public pronouncements, some owners of Korean chaebol are
slowly coming to realise that a shareholder-, rather than firm-driven diversification strategy is better
adapted to global, open capital and product markets.
Convergence forces are also working in outsider systems. Alongside the evolution of rules-based
governance mechanisms for the established “blue chip” companies, there has been a greater recognition of
the possible benefits of continuing involvement by the founders of the firm and the resulting concentrated
control patterns. Most of the hugely successful, high-tech firms are still closely-controlled, albeit publicly
19
See Loulmet and Morin (2000).
20
See Yasui (2000).