Concentrated Ownership, State-Owned Enterprises and Corporate Governance

Abstract

Concentrated ownership companies are increasing worldwide, a significant percentage of which are state-owned enterprises (SOEs), whose controller is the government. Government owners are the world’s second largest type of shareholder. Despite extensive literature on SOEs, there is little analysis of how corporate governance can be undermined by the state as the controller of SOEs or how it can be deployed by the government to serve its own ends. This article critically examines how the conflict of interest between the government as the controller of SOEs on the one hand and the minority shareholders and stakeholders on the other, as well as the conflict of interest between the government as the controller on the one hand and the government as the regulator on the other, can affect three corporate governance regimes, namely, sustainability (environmental, social and governance) reporting; directors’ duty to act in the best interests of the company; and stewardship code.

Sustainable corporate governance: A review of research on long‐term corporate ownership and sustainability

“…However, in less fortunate cases, political benefits may also reflect political rent-seeking, cronyism, corruption, and low corporate governance quality, which is likely to reduce overall social welfare (Borisova et al, 2012;Duchin & Sosyura, 2012;Shleifer, 1998). In addition, it may be worth considering that government ownership may give rise to conflicts of interests between the dual roles of regulation and business ownership, and thus the consequences thereof (Lim, 2021). As regards time horizon, because of their non-economic objectives and because they often benefit from preferential access to government financing (Faccio et al, 2006;Sapienza, 2004), state-owned enterprises are believed to have long time horizons.…”

“…However, a non-negligible number of studies show negative effects or non-significant effects. Negative effects may be attributable to difficulty on the part of government organizations (regulators) in monitoring other government organizations (Lim, 2021).…”

Managerial ability and informative earnings management: the role of CEO-commissioner relationship and board independence

“…A concentrated ownership structure allows firms to have the type controlling and minority shareholders. There is a possibility that managers' stewardship behavior is only for controlling shareholders' interests while minority shareholders do not get any benefit from firms' stewards (Lim, 2021). In the case of Indonesia, the absence of the CEO-commissioner relationship aims to ensure the board of commissioners acts independently, without CEO intervention, to facilitate the managers' stewardship behavior to fulfill the minority shareholders' interests which is the need for high-quality information.…”

“…However, it can only apply in Anglo-Saxon countries such as the USA, where the ownership structure is dispersed, and there are no controlling shareholders. In Indonesia, where the ownership structure is concentrated, there is the possibility that managers only act as controlling shareholders' stewards (Lim, 2021). In this case, independent commissioners in Indonesia (as a proxy of board independence) are still needed to ensure that managers also act as minority shareholders' stewards.…”

“…Corporate governance, especially in concentrated ownership structures such as in Indonesia, is needed to ensure that managers do not only fulfill the controlling shareholders but also minority shareholders (Sun, 2019). Lim (2021) suggests that minority shareholders tend to get less benefit from managers’ stewardship behavior when there are controlling shareholders. Second, although there is an alignment between shareholders’ and managers’ interests, shareholders do not always give all aspects of authority to managers (Davis et al , 1997).…”