OWNERSHIP & CONTROL

Ownership & Control

Ownership & Control

Given an assumed separation of ownership and control in the modern corporation, the shareholder wealth maximization model regards the firm as a nexus of contracts through which various participants arrange their transactions (Fama, 2003).

Different countries have different governance practices in terms of the board composition and its functioning (Blair, 2004). However, in general, members of the board of directors can be grouped into two main categories: (1) executive directors, who also have a management function in the company; and (2) nonexecutive (outside) directors, who have no managerial responsibilities (Hansmann, 2006). Nevertheless, they can have executive functions in other companies. Nonexecutive directors are selected to ensure that a broad range of skills and experience is available. In addition, a nonexecutive director can be formally classified as “independent.” An “independent director” has no direct or indirect, current or previous, professional or personal interest or relationship in the company. It is believed that independent directors will empower the board with their ability to exercise independent judgment and effectively monitor management. Increasingly, the ownership and control practice of some countries has required or encouraged representation of formally independent directors on the board (Hansmann, 2006).

The trend toward the stakeholder perspective of the ownership and control is reflected in existing and emerging regulations of many developed countries (Hansmann, 2006). The codetermination laws in Germany, which require employee representation on the supervisory board; harmonization of the rules relating to company law and ownership and control in the European Union, which will take into account interests of employees, creditors, and customers; the Japanese well-known legal and customary model of corporations with its interrelated stakeholders including customers, suppliers, financial institutions, and other business partners; and the campaign toward stakeholder law in the United States all demonstrate demand for formal instruments to democratize the governance of corporations (Blair, 2004).

Market failures and corporate collapses have urged the need ...