Question

Answer the question below in 450 words

How do you evaluate the pros and cons of ownership concentration?

Answer 1

Introduction

Each company in todays time requires a structure and a pattern of distribution of its shares which ultimately decide the level of concentration of ownership respectively. In Private Limited companies for example, even though the capital is divided into shares, these are privately held meaning that all decision making is done by a small number of people known as the management.

On the other hand, in listed companies i.e. those which have shares trading in the exchanges of a country, the level of concentration can vary from being entirely owned by the public or having large block investors or a mix of both respectively.

Thus, ownership concentration refers to the amount of stock or shares which is owned by individual investors or large block shareholders within a company. A high ownership concentration reflects on the ability of these groups to take major decisions within the enterprise and the opposite happens in case of low concentration respectively. It widely effects the management of a small company which is at the core of microeconomics respectively.

The next section includes the Pros and Cons of ownership concentration

Pros:-

When ownership of an organization is concentrated, meaning that individual investors and large block ones tend to have a higher share holding in a company, decisions are well planned and organized than being impulsive in nature. Block investors have a lot of money at stake which is invested into companies. Thus as a result of this they gain expertise in managing companies which is crucial for its long term survival. Small shareholders tend to be more profit focused and would prefer dividends for an example over long term growth of the company.

Thus, the key benefits of ownership concentration are that companies tend to be in better managed hands and decisions are taken after due considerations to the overall market scenarios and other macro and micro economic factors than being impulsive in nature.

Cons:-

It is long advocated, that the interest of masses gets lost when ownership is concentrated in nature. The resultant is that shareholders which have little ownership tend to have very less say in the management of the organization. This leads to a situation in which even correct suggestions which could help the company in growing get ignored in favor of those which hold larger amount of shares and may still not be able to manage the enterprise properly.

Please feel free to ask your doubts in the comments section if any.