Question

Corporate ownership varies around the world. Historically individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why? In recent years, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control?

Answer 1

Historically, companies in USA were majority owned by individuals by holding public stock whereas companies in Japan and Germany have had most control of the company due to a higher proportion of ownership stake.

Having more number of shareholders creates an agency problem between the management of the company and the shareholders (owners) of the company. The management might try to achieve its own objectives due to non alignment of interests with shareholders. Example: Focussing on short term objectives at the cost of LT maximisation of shareholder value.

Also, there would be diverse opinions and objectives of multiple shareholders as compared to instituional ownership which will fuel the agency problem. The instituitional ownership pattern will lead to higher commitment and agreement between the owners and managers in key decisions.

Hence, Companies in USA would have severe agency problems as compared to companies in Germany and Japan.

With respect to Mutual Funds and Pensions Funds, institutional ownership will lead to reduction in agency problems in the United States due to the following reasons:

- Shareholder Activism by these funds on management.

- Advances and effective monitoring processes and controls over management than individual owners.

- Better Control of company due to reduced number of equity holders.