Governance Ethics

1.Introduction

This essay, defines the ownership of the company and analyzes the relationship between the distribution of share ownership, and affection in the company's performance through the review of different theories and literature on this topic.

2.Definition of corporation ownership

The legal ownership of a company is made up of three categories: propiertorship, partnership and corporate ownership. In a proprietorship firm, the owner is responsible for all debts and losses of your business, there is not differentiation between personal and business income and the business end, if no heirs, with the death of the owner. A partnership is joint owned and therefore, in terms of personal responsibility, is similar responsibility, is similar in all respects to a propiertorship. Both categories of business ownership are simple arrengements that can be made and dissolved easily(sometimes, it is not necessary to have a written contract is valid with shaking hands).

Corporate ownership, on the other hand, is much more complex, because it involves the creation of a legal identity separate from those of its owners. While an individual may own all the shares of a corporation, he or she is not personally responsible for it. That is because a corporation is, strictly defined, a legal entity that is "immortal" (does not terminate upon the owner's death), which can enter into and dissolve contracts, incur debts, sue or be sued, own property and sell it, as any individual may do.

3. Agency Theory

The work of Berle and Means (1932) generated a stream of research that joins the study of Jensen and Meckling (1976). They discuss about the problems caused by the divergence of interests between principals and agents. The latter, by not receiving the full benefits for their decisions, they choose to take actions that deviate from the main interest. This problem called the agency, including costs related to monitoring (to agents), with the development of staff members and, in general, with those opportunity costs caused by the agent to match the actions that are optimal for him to that are beneficial to the principals. This practice leads to convergence of interests is necessary to reduce the effects of the gap between ownership and control raised by Berle and Means. We can identify two main agency problems: - Agency problem of equity, whereas outside shareholder are only interested in the maximization of shareholder value, corporate managers, pursue their own agenda. Managers may invest in negative NPV projects. This problem leads agency costs: monitoring expenses by the principal + bonding expenditures by the agent + the residual loss. - Agency problem of debt, one of the indirect costs of financial distress is the potential conflict between shareholders and debt holders. Shareholders may engage in projects with an excessive risk. In the case of success, shareholders benefit from the high payoff of the project. In the case of failure, bondholders will pick up the cost.

Today, as in most countries, companies are concentrated shareholder, agency problems do not occur between principals and agents, since the control over the agent is full. Occurs between the large shareholders and the minority, where the expropriation of benefits -use the controlling shareholder of his power in order to obtain a fraction of the residual benefits beyond their contribution, called private benefits- appears as the central problem. Grossman and Hart (1988) argue that large stakes confer benefits of control. Security benefits are those shared by all the shareholders, benefits from monitoring. Private benefits often come at the expense of other shareholder, non transferable benefits beyond security benefits. Several studies have tried to quantify the private benefits of control. Barclay and Holderness (1989) and others measure them by the premium paid for control blocks. Others measure them by the price difference between voting and non-voting stock.

4. Concentration of ownership

The concentration of ownership has been investigated mainly from two perspectives: the causes of the degree of concentration (or dispersion in the case of USA and UK) and the effects that are generated from that concentration.

4.1. Causes of ownership concentration

The channelling of private profit is the factor most often linked to the concentration of ownership, since it would be to obtain these benefits, the main reason for retaining large blocks of control despite the increased risk of obtaining them. The possibility of obtain private profit, incentive to those who control the firm to increase its monitoring efforts. This increase is a result of this greater concentration restricts the discretion of management, agency reducing costs and increasing profitability of the company (Shleifer and Vishny, 1986). Another factor that encourages the private benefit extraction is between control rights and rights to cash flow, since the larger this gap, the controller will see increased its incentives to channel the resources of the firm (Claessens).

Demsetz and Lehn (1985) identified the importance of ownership structure in the valuation of a company. A study on the determinants of the structure at 511 U.S. companies, modulate the determinants of concentration with the development characteristics of each company. According to them (Demsetz and Lehn, 1985), the original purpose of the company is maximizing the value thereof, then the share ownership structure is defined as that value is maximized. The study shows, among other things, that the size of the firm is negatively associated with concentration of ownership of it, also, volatility, product of the regulations, is positively correlated to the concentration. As the concentration of ownership and outcomes, found no link down, so say the degree of concentration of ownership is endogenous result of the efforts of maximizing the firm.

4.2. Effects of ownership concentration

According to Demsetz and Villalonga (2001), who took as a sample to 223 american firms during the period 1976-1980, there is a significant relationship between ownership structure and firm performance. This may be due to the efficiency of markets for control of the signatures, which, although not perfect, they tend to assume that firms more efficient structure based on the circumstances they face. Demsetz and Villalonga said: "If these structures were the outcomes of perfect markets for control, they would eliminate

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