One Size Does Not Fit All: Corporate Governance for 'Controlled Companies'

Corporate governance discussions focus mostly on widely held firms. Controlled companies, e.g. family companies or listed subsidiaries, pose different challenges, however. Where a company is under the control of a large active shareholder, the "agency"-conflict between shareholders and managers is less pronounced. Yet, the power of controlling shareholders gives rise to another "agency"-issue: the potential conflicts of interest with minority shareholders. Thus, corporate governance rules that were developed for widely held firms may overshoot or undershoot in the context of controlled companies. Specifically adjusted rules might therefore be called for. This paper analyzes the particular corporate governance issues faced by controlled companies with a functional, efficiency-based perspective. It conceptualizes the pros and cons of controlled company structures and tries to draw normative conclusions. Looking at regulatory regimes in the US, the UK, Germany or Switzerland, it argues for regulatory flexibility to allow controlled companies to choose specific corporate governance structures where this is in the interest of shareholders as a class. Furthermore, it posits that control premiums and dual class shares have a potential to efficiently promote controlling shareholder structures. Allowing controlling shareholders to recoup some of their costs of control as shareholders (external costs of control) through control premiums (external private benefits of control) adds to their incentive to produce benefits of control for all shareholders (shared benefits of control). Dual class share structures, in turn, allow controlling shareholders to protect (external) private and shared benefits of control when new financing needs arise.