Question

Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Canada this is also the case, but ownership is more often concentrated in the hands of a majority shareholder. In Germany and Japan, banks, other financial institutions, and large companies own most of the shares in public corporations. How do you think these ownership differences affect the severity of agency problems in different countries?

Answer 1

Corporate ownership involves the creation of a legal entity distinct from those of its owners. Although an individual may own all the shares of a corporation, they are not individually liable for it. That is because a corporation is, a legal entity, which can enter into and dissolve contracts, incur debts, sue or be sued, own property and sell it, as any individual may do.

Though the individuals have owned the majority of shares in public corporations in most parts of world but the decision making is done by the majority shareholders. Where the ownership is controlled by entities other than individual the major focus is on the wealth maximization and profit maximization. This leads to decision which may or may not be in agreement with the public at large, which creates difference between the Corporate and society.

Further, the lesser individual ownership in other countries, such as Germany and Japan, should lead to less agency problems as the entities controlling the corporate most often have similar goals, which reduces the number of differing opinions affecting the corporate goals and actions. In these situations, there are more institutional owners and fewer individual owners, leading to an overall smaller number of shareholders per company. Apart from these, the increase of institutional ownership also brings the expertise that comes with participating in the market as a firm, should lead to a higher degree of agreement amongst owners and management regarding what is acceptable and what is not acceptable, especially in terms of risky projects.