Why Ownership Concentration Matters

Alissa Kole Amico is the Managing Director of GOVERN. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy (discussed on the forum here); The Specter of the Giant Three (discussed on the Forum here), both by Lucian Bebchuk and Scott Hirst; and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

If the global economy was a chess game, few figures would be left standing at the center of the board, while others would be relegated to the role of by-standers, observing an increasing concentration of power in the hands of an ever-dwindling number of global players. Now let us imagine that the figures left standing are corporate entities, at the helm of which sit a shrinking number of ultimate owners. This analogy fundamentally characterizes the global economy today, featuring a growing concentration of corporate ownership.

In the 1990s, we watched in awe the rise of the multinational corporation, an entity which operates cross-border and is able to rapidly crush local competition in smaller markets. With the advent of the internet economy a decade later, the power of many of these companies was further amplified by online distribution which also gave birth of behemoths the likes of Amazon, Google and Airbnb. These new corporate models have solidified corporate concentration and even monopolization of specific sectors, prompting recent calls for Facebook to be broken up.

Today, corporate ownership concentration is fostered by a new set of parameters and it may pose a systemic threat to the global economy. One of the new trends encouraging concentration is the decline of public equity markets across developed economies, whereby the number of companies accessing them has halved. In most markets apart from Asia, new firms are not listing, on the contrary, in light of greater compliance and regulatory obligations, some are de-listing.

This is occurring despite policymakers’ attempts over the past 5 years, to revitalize capital markets and create incentives for fresh listings, especially of technology and state-owned firms. The recently aborted WeWork public offering highlights the languishing state of public equity markets. The listing of Saudi Aramco, confirmed yesterday, has galvanized attention not only due to its size, but also since IPOs have become sparse.

With the decline of IPOs, wealth is becoming further concentrated in private hands, with the result that the “too large to fail” companies today are not financial institutions, but in many cases privately held non-financial firms. Ownership concentration is also a reality for listed firms, where the top 3 shareholders have majority control in 50% of the world’s largest companies, according to recent OECD estimates. This picture will likely be exacerbated in the coming years.

For example, the Snapchat IPO has highlighted a rift of economic ownership rights between company founders and ordinary investors, which—for the first time in modern history—were given non-voting shares. The offering, which generated an investor outcry, is however to some extent representative of the ownership structures of other large public companies such as Tesla, Uber and Amazon, where founders control with minority ownership due to multiple class shares.

At the same time, with the decline of the privatization momentum globally, governments also remain significant and, in many cases, controlling owners of large pockets of corporate wealth through direct ownership and specific mechanisms such as golden shares. The result of this can be seen in the Nissan-Renault debacle, which highlights governance perils of state-invested multinationals.

Some investors such as Norges in Norway, which owns 2% of every European listed company, have a diversified approach, while others such as the Public Investment Fund in Saudi Arabia, has much more concentrated stakes, including in domestic state-owned enterprises. Indeed, in almost 10% of the world’s listed companies, the public sector has a controlling stake. As of late, not only sovereign investors are becoming concentrated players.

With the ongoing shift of capital from actively to passively managed funds, asset managers’ portfolios are becoming more concentrated as well. A recent study by two Harvard researchers, Lucian Bebchuk and Scott Hurst, has highlighted that 80% of the capital allocated to investment funds today is going to Vanguard, Blackrock and State Street. In two decades, they are predicted to cast as much as 40% of the votes in S&P 500 companies, at the same time as their resources to behave as effective stewards remain insufficient.

Their growing concentration raises a spectrum of new concerns, not least competition-related, since asset managers vote on strategic matters in companies which could be competitors. In the airlines industry for example, the largest 10 institutional investors own 20% of the global market capitalization. Indeed, concentration-related conflicts of interest faced by institutional investors and asset managers are already subject to raised eyebrows in policy circles.

This picture is further complicated by the concentration of other financial intermediaries. Stock exchanges are now longer mutualized or state-owned, most are now organized in a few large, self-listed exchange groups. As a result, competition for new listings is not occurring between national stock exchanges but between an oligopoly of exchange groups whose ultimate objective is increasingly less the rights of shareholders or listed companies, but more of their own shareholders.

Ultimately, these recent trends translate into a dwindling number of large enterprises and financial intermediaries whose underlying ownership is increasingly concentrated. This is equally true for the industrial and financial companies, privately and state-owned, resulting in a death of a “dispersed ownership company”, on which modern economic theory is premised.

While a degree of ownership concentration can create value, it can create macro-level negative externalities on competition, wealth distribution and fiscal transparency. On the micro-level, it can have adverse externalities on corporate sustainability and minority shareholder rights. The current level of economic concentration facilitates neither fair rents to minority shareholders, nor the respect of consumer rights affected by oligopolies, nor overall citizen welfare affected by aggressive corporate tax planning.

A novel concoction of economic and corporate governance approaches is needed in the corporate ownership and financial system configuration facing us. Broadening the purpose of the corporation and board responsibilities towards stakeholders and focusing on the stewardship responsibilities of institutional investors and asset managers—both policy remedies currently in vogue among policymakers—will prove insufficient as they are challenging to monitor and enforce.

Instead, a focus on duties of controlling shareholders towards minorities and specific prerogatives for minority investors and directors representing them are needed. At the same time, stronger checks and balances, and maybe even Chinese walls already in place in the proxy advisory industry, need to be introduced for large asset managers. These are other remedies to address concentration are needed not only in the name of better corporate governance, but ultimately to address a wave of unprecedented protests in New York, Paris, Beirut, and Santiago against unjust systems of wealth distribution.

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