Definition of ownership concentration

Ownership concentration refers to the amount of stock owned by individual investors and large-block shareholders (investors that hold at least 5 per cent of equity ownership within the firm). In publicly traded firms, large block holders are normally institutional investors in the form of pension funds and mutual funds. A higher level of ownership concentration or more block holders suggest a stronger monitoring power from investors over a firm’s managerial decisions because of the incentives from these owners to proactively safeguard their investment. Owners with significant amount of shares may take aggressive actions, either directly or indirectly, over firm decisions such as the election of board members and replacement of CEO or poor management with their voting power. As such, ownership concentration can be an internal governance mechanism that helps reduce the likelihood of managerial opportunism because managers and boards of directors are more likely to take into account the preferences and interests of large shareholders.

By contrast, firms with a low level of ownership concentration (diffused ownership) might indicate weaker governance power because investors with less ownership interests have little incentive to pay attention to the strategic decisions of the firm and thus, are less motivated to closely monitor and discipline top executive behaviors. Compared to large block holders, small investors are more likely to “vote with their feet” in cases of poor firm performance.

Example

Large investors are more likely than small ones to actively voice their concerns over the firm’s strategies and board governance. A recent example is that large institutional shareholders of BSkyB were putting pressure on James Murdoch, the non-executive Chairman of the board, to step down after the phone-hacking scandal at News Corp where Mr Murdoch holds dual roles as a CEO/Chairman. Large owners have strong incentives to safeguard their investment in the event of corporate scandals (unethical behaviors, financial restatement, accounting misrepresentation, etc.) because they are likely to suffer significant losses once the scandal is publicly discovered. For top executives involved in the inappropriate practices, such scandals can cause them negative reputation and image, employment, and sometimes personal costs. [1]

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Article: Murdoch sidesteps investor pressure

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