Page 85 - SBL Integrated Workbook STUDENT 2018

Approaches to governance

3.2 Insider-dominated structures

Insider-dominated structures are where the listed companies are dominated by a
small group of shareholders.

Benefits:

 The agency problem is reduced – i.e. establish links with owners and managers.

 Greater access to and potentially lower cost of capital i.e. smaller base of
shareholders.

 Smaller base of shareholders willing to take a long term strategic view of
investment.

 Improved communication and influence over management.

Problems:

 Lack of minority shareholder protection (unlike protection in law in outsider-
dominated structures).

 Opaque operations and lack of transparency in reporting.

 Misuse of power i.e. reluctance to employ outsiders in influential positions and
NEDs.

 The market does not decide or govern (shareholders cannot exit easily to
express discontent).

 Tend to be reluctant until forced to develop formal governance structures.

 Reluctance of large independent shareholders to invest.

Illustrations and further practice

Now review Illustration 3.

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