Departmental Papers (School of Law)

Document Type

Book Chapter

Date of this Version

January 2000

Comments

Reprinted from Concentrated Corporate Ownership edited by Randall Morck (Chicago: University of Chicago Press, 2000) pages 81-103.

Note: At the time of publication, the author Ronald Daniels was affiliated with the University of Toronto. Currently, he is Provost of the University of Pennsylvania.

Abstract

The June 1997 edition of Canadian Business ranks the top ten Canadian corporations in terms of growth. It states of its number-one performer, the Goldfarb Corporation, "Goldfarb's expansion strategy is founded on a few basic principles: First, look to invest in global companies.... Second, own more than 50% of the company in order to consolidate and control the business. Last, use Goldfarb's own marketing expertise." It states of its number-three performer, on the other hand, "Question: What turns a $395-million pipeline company into a $2.5 billion powerhouse in just three years? Answer: losing the majority shareholder. Ever since Olympia and York Developments Ltd. sold its 65% stake in IPL Energy Inc. of Calgary in 1992, IPL has grown with a vengeance. Instead of maximizing dividend payouts to satisfy cash-hungry O&Y, it has focused on expansion" ("Performance 500, Top 10" 1997, 137, 141; emphasis added). Mere pages apart, the magazine partially credits majority ownership with driving a successful company and blames majority ownership for restraining the performance of a potentially successful company. As this paper will discuss, there may be some truth to both opinions.

At least since the time of Adam Smith, commentators have expressed concern about the effect of separating those who own a corporation from those who manage it, an effect resulting from the adoption of a widely held ownership structure (Smith 1937, 700; Berle and Means 1933). The suggested problem is that, if those who manage do not have a personal interest in the returns generated by the firm's assets, those assets will be utilized in a way that may be beneficial to the manager but not to the owners.

Berle and Means (1933), however, were more pessimistic, predicting not only that corporations not owned by their managers would underperform corporations owned by managers but also that these widely held corporations would eventually become the norm in developing industrial economies. The argument was simple. As an economy grows and firms strive for scale economies, entrepreneur-managers are not capable of raising money to finance the firm's growth on their own and thus are compelled to go to equity markets to finance expansion. In repeatedly going to equity markets, of course, the entrepreneur eventually loses control of the firm. Because of the unceasing demand for capital in a rapidly industrializing society, the economy will in time largely comprise widely held corporations, which, given their inadequate governance by disinterested managers, does not bode well for the efficiency of the economy.

It is apparent, however, that Berle and Means overstated the likelihood of an economy replete with widely held firms. While the widely held corporation is indeed the norm in the United States, firms controlled by very few shareholders remain predominant in other industrialized countries, such as Germany, Japan, and Canada. In Canada, for example, Morck and Stangeland (1994) report that just under 16 percent of the 550 largest corporations in Canada in 1989 were widely held in the sense that no single shareholder owned more than 20 percent of outstanding voting stock. Using the same definition, Demsetz and Lehn (1985) had found earlier that almost 50 percent of the largest 511 corporations in the United States were widely held.

We first provide. a brief outline of the literature on corporate governance and ownership concentration. l Next, we examine legal issues that, as a positive matter, may have contributed to the concentrated ownership structure in Canada. We then examine the normative implications of these causal relations.

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Date Posted: 17 July 2008