Exercise J – Corporate Governance Around the World

Exercise J – Corporate Governance around the world.

For a family owned company, the ownership concentration would be high as most of the high level executive are family member. The advantage of family owned company is it may have better incentive for long term goals. They are more united and the communication are more frequently without barriers. There would be lesser principle-agent conflicts as the agent most often belong to one of the family member or pointed by family member. However, the manager may not qualified enough for the position, him or her in the job fairly because they are family. This is not good for me as I’m the minority shareholders, I would want everyone work in the firm to be the best. So, I might have problem with the current CEO or the future CEO but I don’t have a say about it as my power is to small compare to majority family shareholder. On the other hand, the strategies used again might not beneficial for me as the shareholder expropriation and cronyism may happen. Such as tunneling and related transactions. All of above situation can only happen in a situation where the CEO is one of the family member. In this situation, as shown in right section of Figure 2, no matter weak or strong institution, both are useless to protect me. Only the norms and values of the corporate governance can provide me with relief.

If the family business happen to have high cash flow, there would be high chance for the business to set up sub-division that the top pyramidal controlled. This is not bad as the top firm would have more access to the market. But this structure could cause problem for me, tunneling or related transaction. Tunneling is illegal, so strong institution should be able to protect me from tunneling. However, related transaction is legal. So my suggestion to myself would be ‘do not be the one’. As nowadays, even for family business, if they want to grow and raises funds, they have to sell their share to other. In most of case, they only account less than 50 or lessor share of the company. Hence, even we are the minority share, together we count more.

Recommendation, I would chose firm that have strong institution since in both Figure, the strong institution line have upward trend and I believe if I have to invest in a family business, the chance for family CEO is high. Moreover, when the firms become strong and have high cash flow, the probability of pyramidal ownership structure is also inevitable. So the chances are I will fall in the right side. But I will choose firm that have higher external governance which I could enjoy shareholder capitalism.