Concentration of ownership
Concentration of ownership is the term used to describe the situation when a small number of investors control a large proportion of a company’s stock. This can include individuals, institutions, or other corporations that own a large stake in the company. With a concentrated ownership structure, a small group of shareholders can have a great deal of influence over the company’s operations and strategic decisions. It can also lead to a lack of independent oversight, as the concentration of ownership reduces the number of voices representing the interests of all stakeholders.
Example of concentration of ownership
- One example of concentration of ownership is the Disney family’s control of the Walt Disney Company. As of 2019, the Disney family held over 40% of the company's common stock, and the family’s trust held an additional 4.7%. This gives the family a significant influence over the company’s decisions, both strategic and operational.
- Another example of concentration of ownership can be seen in the financial sector. For example, the top 10 holders of JP Morgan Chase's common stock owned a combined 44% of the company's outstanding shares in 2019. This gives the holders a large degree of control over the company’s operations and decisions.
- Concentration of ownership can also be seen in the tech industry. For instance, Mark Zuckerberg owns around 60% of the voting rights of Facebook. This means that he has sole control over the company’s strategic decisions, which can be beneficial for the company but also raises concerns about corporate governance and transparency.
When to use concentration of ownership
Concentration of ownership can be used in a variety of situations, including:
- To increase control over the company’s operations and strategic decisions, such as setting prices and making acquisitions.
- To reduce the number of shareholders and create a more unified group of owners.
- To increase the voting power of the controlling shareholders, allowing them to shape the course of the company.
- To limit outside influence and reduce the possibility of hostile takeovers.
- To facilitate the transfer of ownership between family members or other internal stakeholders.
Types of concentration of ownership
Concentration of ownership can take several forms. These include:
- Insider ownership: This is when a single individual, or a small group of individuals, owns a significant amount of a company’s stock. This could include the company’s founders, executives, or family members.
- Institutional ownership: This is when a large institutional investor, such as a mutual fund, hedge fund, or pension fund, owns a large portion of a company’s stock.
- Cross-ownership: This is when two or more companies have significant overlapping ownership. This could be between two subsidiaries of the same parent company, or between companies owned by the same individual or group of individuals.
- Block ownership: This is when a single investor, such as an individual or institution, owns a large number of shares of a company. This could be enough to give them a controlling stake in the company.
Steps of concentration of ownership
A concentration of ownership can be achieved in several steps:
- The first step is to identify the current holders of the company’s stock. This includes individuals, institutions, or other corporations that own a large stake in the company.
- The second step is to acquire additional shares in the company. This could be accomplished through a direct purchase or through a merger or acquisition.
- The third step is to increase the voting power of the shareholder’s stake by exercising voting rights associated with the shares.
- The fourth step is to use various techniques such as proxy voting, or the use of derivatives to increase the influence of the shareholder’s stake.
- The fifth step is to increase the visibility of the shareholder’s stake in the company by making public statements about their intentions for the company.
- The final step is to use certain legal tools such as shareholder agreements to further strengthen the shareholder’s control over the company.
Advantages of concentration of ownership
Concentration of ownership has a number of advantages. These include:
- Increased decision-making speed and efficiency, as decisions can be made quickly and without having to consult with a large number of stakeholders.
- Increased stability, as the shareholders are likely to have a long-term interest in the company and will not make short-term decisions that may be detrimental to the company’s long-term success.
- Reduced costs, as fewer shareholders mean fewer investments and less money spent on filing fees and other costs associated with managing a larger number of shareholders.
- Increased control, as the shareholders have a greater influence over the company’s operations and strategic decisions.
- Reduced risk, as the shareholders are less likely to be swayed by short-term market fluctuations, which can help protect the company’s long-term prospects.
Limitations of concentration of ownership
The concentration of ownership can have several limitations. These include:
- Poor corporate governance and lack of independent oversight. With a concentration of ownership, a small group of shareholders can have a great deal of influence over the company’s operations and strategic decisions. This can lead to a lack of independent oversight, as the concentration of ownership reduces the number of voices representing the interests of all stakeholders.
- High costs. Concentrated ownership structures can be expensive to maintain, as the company must pay the costs of shareholders exercising their voting rights, attending meetings, and so on.
- Increased risk of insider trading. When a small group of investors control a large proportion of a company’s stock, there is an increased risk of insider trading, as the shareholders may have access to confidential information about the company.
- Inability to take advantage of capital markets. Companies with a concentrated ownership structure may not be able to take advantage of the capital markets due to their inability to issue new shares or attract additional investors.
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- Mandacı, P., & Gumus, G. (2010). Ownership concentration, managerial ownership and firm performance: Evidence from Turkey. South East European Journal of Economics and Business, 5(1), 57-66.
- Wang, K., & Shailer, G. (2015). Ownership concentration and firm performance in emerging markets: A meta‐analysis. Journal of Economic Surveys, 29(2), 199-229.