Ownership, managerial control and the governance of poorly performing companies listed on the London and Brussels stock exchanges

Renneboog, L (1996) Ownership, managerial control and the governance of poorly performing companies listed on the London and Brussels stock exchanges. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation provides insights in how corporate control is exercised in poorly performing companies of two countries with markedly different equity markets : the U.K. and Belgium. Since there seems to be little relation between hostile takeovers and poor performance in the U.K., we examine how corporate control is exerted when companies perform poorly. We find an important relation between the composition of corporate boards, share ownership and the exercise of corporate control. This is reflected in a strong relation between board turnover and concentration of share ownership in the sample of poorly performing firms and is particularly pronounced for certain classes of large outside shareholders. However, where there is substantial insider ownership, the incumbent management is more successful in retaining control following poor performance. Corporate control seems to be exerted by coalitions of shareholders. We also report trades in share stakes between shareholders in poorly performing companies. These trades are closely associated with changes in the management of poorly performing companies, which suggests that changes in the pattern of large shareholdings are an important way in which corporate control is exercised in the U.K. In the second part of the thesis, we contrast the U.K. findings with the results from the study of corporate control in Belgium. Both the board of directors and large shareholders discipline managerial underperformance, but only when the company reaches critically low profitability. Specific classes of large shareholders, especially those holding majority share stakes or at least stakes of blocking minority size, are involved in disciplining underperforming management. Control is not only exerted by direct shareholders on the first ownership tier, but also by ultimate shareholders. Furthermore, like in the U.K., poor performance triggers a market in share stakes. Those shareholder classes with superior monitoring abilities increase their shareholdings so that they can substitute errant management. Post-disciplining performance in the form of dividends per share improves over a two year period after management restructuring.