Controlled company

From CEOpedia | Management online
Controlled company
See also


Controlled company - it is a term, which refers to the shareholding structure of the company. Generally it means, that there is a group of shareholders, which bring together the majority of the company's shares and therefore this group has a decisive voice in managing the company. In other words, the majority of votes belonging to the controller in practice means that decisions made at shareholders meeting are actually his own decisions and this is why the company is said to be controlled.

Characteristics

As it has been already said, the controlled company is a company, which affairs are controlled by the group of shareholders, due to their majority shares. However it should be mentioned, that sometimes the controller does not have to collect a majority of the shares but it may be enough to own significant fraction. Some researches claim that dominant shareholder should concentrate nothing less than 30% of company's shares, otherwise it is not appropriate to use the term "controlled company" (Kastiel K. 2016, p. 106).

The concept of controlled company is much more common in Continental Europe than in the US and the United Kingdom. According to the researches the controller's function usually consists of the following entities (Hofstetter K. 2006, p. 600):

  • families,
  • founders,
  • parent companies,
  • shareholder groups.

What is interesting, many studies show that family controlled companies have better performance than these with non-family ownership and their cost of debt tend to be lower. However, it should be mentioned that in order to improve the company's operations, it is necessary to combine a moderate presence of the family board and a strong representation of independent directors. Furthermore, such companies are growing slower and becoming less efficient over time, but they can exist longer than other competitors on the market (Hofstetter K. 2006, p. 609-610).

Independent directors issue

The role of independent directors in the controlled company is indispensable. In general, their function consists of vigilant monitoring the management and promotores activity in the interest of public shareholders. Their task is also to support the board with strategic advice in maximizing the company's overall net worth. However, they should receive clear guidelines regarding their obligations and their responsibilities should be constrained (for example criminal liability). The independence of directors can be defined, inter alia, as not having financial dependencies with the controlling shareholder so that to prevent conflicts of interest (Khanna V., Mattew J. S. 2010, pp. 37-49).

Minority shareholders issue

On the other hand, it should be noted that in this shareholder structure it is extremely important to develop methods to protect the interests of shareholders, who do not have enough voting power. The main concern of minority shareholders is associated with the risk of not receiving proportionate shares, as well as the practice of transferring the company's resources for private purposes by the controlling shareholders. Moreover, it is obvious that if the interests of the minority are adequately protected, then the whole company has better prformance. It should be also mentioned that the opposite type to this share structure is called a widely held company (Rachagan S. 2006, pp. 264, 267).

References

Author: Agnieszka Wierzba