Issue #30                                                                                       September 2021
Governance relationships between shareholders: Learnings from private equity investments in family firms
by Professor Jeroen Neckebrouck

A firm’s shareholders are diverse and rarely have fully homogenous objectives. An outcome is that conflicts among shareholders constitute a topic of high practical relevance and broad academic interest. Research in this area has paid particular attention to the conflicts that arise when ownership is shared between a dominant, controlling shareholder and minority shareholders. In such a scenario, majority shareholders have incentives to pursue personal goals through the business (since they appropriate the benefits but do not fully bear the economic costs), and can misuse their power to expropriate minority shareholders. That is, the majority shareholder may push management and the board to pursue objectives that align with their own priorities but that are detrimental for the minority shareholder. Studies have shown that such conflicts have a detrimental effect on firm performance, firm valuation and innovation. In listed companies, market regulators try to avoid this abuse of power, but in private equity markets there is no regulator to prevent this conflict.

Surprisingly, however, far less research has examined whether and how different types of shareholders can complement each other so that mutual benefits arise. In a recent study, to examine shareholder relationships in privately held firms more deeply, we analyzed the outcomes of private equity investments in privately held family businesses. This setting provides a valuable “case”, as the objectives of professional investors and family owners should markedly differ. PE investors focus on maximizing financial returns through a medium-term exit and generally have lower levels of risk aversion. Family shareholders, in contrast, generally have most of their wealth concentrated in a single firm, hold longer time horizons, and are often particularly concerned about non-economic benefits the firm brings to the family (e.g., reputation in the community). So can we expect successful collaborations to arise?

Our research suggests that private equity investors can make strong contributions to family businesses. A general insight that emerged from our study is that the time horizons, risk preferences and objectives of shareholders may vary over time. A family business owner who may previously have been critical of the private equity industry, may at one point find out that the next generation is not interested in taking over the business. In such a scenario, private equity investors may offer a great pathway to give the company a push, in terms of professionalization and growth, before a joint exit. In another scenario, a family business owner may find that the next generation is willing to take over the business but is not yet ready. In such a scenario, selling a part of the shareholdings to an external investor can offer a valuable way for an owner to buy time, while already monetizing part of its shareholdings.

Just like boards of directors and management need to stay aligned with shareholders’ objectives of that specific moment, shareholders should also regularly review the extent to which they are still aligned in terms of time horizons, risk preferences, need for cash and the prioritization of financial goals versus goals that are more societal and environmental in nature. Ultimately, wise shareholders should incorporate the varying goals of other shareholders in their decisions about what to own, when to own, and how to own.


​​​​​Jeroen Neckebrouck 
Professor of Entrepreneurship
IESE Business School

Upcoming: IESE-ECGI Corporate Governance Conference 

"Boards of Directors and Corporate Strategy in a High-Uncertainty Context"
Hybrid, October 4-5, 2021 

Corporate strategy is considered a central driver of the firm’s long-term orientation. Corporate governance suggests that boards of directors have the duty to govern the firm and develop it sustainably for the long term. This implies that boards are supposed to discuss the firm’s strategy and make relevant decisions on corporate strategy.

In dealing with strategy, boards face a slew of challenges. Board directors need to understand the company's business and make complex strategic decisions concerning issues such as digital transformation, decarbonization, or corporate restructuring in an increasingly uncertain context.

The IESE-ECGI Corporate Governance Conference 2021 aims to shed light on these issues by bringing together leading scholars from the areas of corporate strategy, corporate finance and organizational economics, as well as CEOs and chair persons from top-tier companies.

Confirmed speakers include: Renée Adams, Oxford University; Jay Barney, University of Utah; Marco Becht, Université libre de Bruxelles and ECGI; Jordi Canals, IESE Business School; Herman Daems, Chairman of BNP Paribas Fortis; Bengt Holmström, MIT. Nobel Laureate in Economics; Ioannis Ioannou, London Business School;
Sophie L'Hélias, Chair of LeaderXXchange and co-Founder of ICGN; Juvencio Maeztu, Deputy CEO and CFO of Ingka (IKEA); Tobias Martinez, CEO of Cellnex Telecom; Rafael del Pino, Chairman of Ferrovial; Francisco Reynés, Chairman Naturgy; Risto Siilasmaa, Investor and former Chairman of Nokia;  Jean-Pascal Tricoire, Chair and CEO of Schneider Electric; Margarethe F. Wiersema, University of California, Irvine. 

This international conference will be held at IESE, Madrid Campus on October 4-5, 2021. Due to our existing COVID-19 measures, we will only be able to accommodate a few participants on campus. But a hybrid format will be offered to attend all conference sessions online. The number of participants is limited and registrations will be handled on a first come, first served basis.

If you have not registered yet for the online modality, you are welcome to do so here

Corporate Governance News

Investors call for private firms to disclose more environmental data
Private market investors with USD 2.3 trillion in assets have teamed up with global non-profit organization CDP to create “the first ever standardized environmental disclosure platform specifically for private markets”. The investors are requesting more than 1,000 private companies disclose environmental data through the platform... read more ​
As COP26 approaches, experts talk tech, carbon pricing and what governments should do next
The U.K.’s official website for the summit (to be held in Glasgow October 31 to November 12) states it will “bring parties together to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change.” The Paris Agreement aims to “limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.” According to sources consulted by CNBC, much of the discussions at Glasgow will be centered around individual countries’ targets for cutting emissions and adapting to the effects of climate change… read more
Germany to reduce stake in Lufthansa
On August 16, 2021, the German government announced that it would sell up to a quarter of its 20% stake in Lufthansa over the coming weeks, citing the initial success of the firm’s recovery plan. The development occurs more than one year after the government offered the airline a EUR 9 billion bailout to maintain its solvency and mitigate the impact of the COVID-19 pandemic. The German government plans to sell the remainder of its stake by year-end 2023… read more ​​​​​
U.S. SEC imposes new rules on Chinese companies
The U.S. SEC will require Chinese companies listed in the U.S. to improve their disclosure on political and regulatory risks, specifically the use of offshore vehicles such as variable interest entities (“VIE”) as well as risks arising from Chinese authorities interfering with company operations. Last month, the regulator said it would halt new U.S. IPOs of Chinese companies until they increase transparency on these matters… read more ​​​​​
U.K. regulator to enhance audit firm governance
The U.K.’s Financial Report Council (“FRC”) has opened a consultation on proposals to update and strengthen its audit firm governance code. The proposals strengthen the Audit Firm Governance Code in key areas of accountability and firm resilience… read more ​​​​​
U.S. SEC prepares to take on corporate America over workforce disclosures
The SEC is headed for a scuffle with corporate America over how much information public companies must disclose about their most important asset: employees… read more ​​​​​
Amazon’s biggest, hardest-to-solve ESG issue may be its own workers
The National Council on Occupational Safety and Health recently included Amazon in its “Dirty Dozen” list of the most dangerous employers in the U.S. Amazon founder Jeff Bezos wrote in his last annual letter to shareholders that “we need a better vision for our employees’ success.” Roxana Dobre, associate director of consumer goods research for Sustainalytics, a Morningstar company that calculates ESG risk, said while Amazon’s ESG rating has improved on environmental metrics, it does need to improve in the social category, namely in terms of how it treats employeesread more ​​​​​

In Case You're Interested...

Two years after the Business Roundtable statement: Pointing in the right direction

The 2019 Business Roundtable statement was a welcome break from the position that the nation’s top corporate CEOs took in 1997, when the BRT pledged to prioritize achieving the highest returns for their shareholders. It will not, by itself, cause corporations to behave in the public interest, but it does help remove an excuse they have had over the last few decades for behaving badly. Rhetoric matters because it exposes the signatories of the BRT statement to shame if they fail to follow through… read more

It is not just CEOs who should benefit from equity ownership

According to FT’s Business editor Andrew Edgecliffe-Johnson, the conditions are ripe for a rethink of pay norms. According to him, a couple of strange things have happened in the two years since the U.S. Business Roundtable made its symbolic break with shareholder primacy. First, the investors, with whose interests executives were supposedly so well aligned, have begun voting against CEOs’ compensation packages in ever larger numbers. Second, executives’ incentives have remained overwhelmingly focused on shareholder outcomes, even as they have been busy professing what fine stakeholder capitalists they are. So the way companies now pay their top officers is failing to satisfy shareholders while undermining executives’ credibility as guardians of other stakeholders’ interests… read more ​​​​(subscriber content)

Entrepreneurs aren’t taking their companies public — and it’s a problem for our economy

In a recent study, University of Calgary’s professors Bryce Tingle and J. Ari Pandes highlight that the number of companies choosing to go public in Canada has been declining sharply since the late 1990s. American public markets are not much better. They’re about half the size they were in the 1990s. The usual explanations for the public market decline aren’t plausible. They either don’t explain why the decline is happening both in Canada and the United States, or they contradict the dominant fact of the last two decades: Public companies have been getting more and more valuable. So what’s causing the effect? The authors provide an explanation… read more ​​​​​

U.K.’s FRC corporate governance research tackles priority areas

The Financial Reporting Council (FRC) has commissioned and published research in the priority areas of remuneration, workforce engagement, and board diversity and effectiveness. These three areas attracted particular attention when the code was being revised. The research shows that the FRC is making progress on its original policy objectives… read more ​​​​​

Workforce engagement and the U.K. Corporate Governance Code: A review of company reporting and practice 

This report aims to provide a deeper understanding of the current intersection of corporate governance with employee voice, in light of the requirements in the 2018 Corporate Governance Code for boards to ensure effective workforce engagement. Through analysis of company reports, a survey of FTSE 350 firms (with 280 responses), and a series of interviews with directors, executives and workforce representatives, the authors explore the approaches firms have taken to providing a workforce voice in the boardroom, why different approaches have been chosen, what these changes have meant in practice and how effective they have been from both a management and workforce perspective… read more ​​​​​

Boards, talent, and culture

Board members are increasingly challenging management to ensure the organization’s talent pipeline can meet the needs of its strategy. In this episode of the podcast Inside the Strategy Room, McKinsey continues its series on board perspectives by looking at the board’s role in helping organizations develop the right talent and culture. To explore this topic, Frithjof Lund, the global leader of McKinsey’s board services work, speaks with two experts on governance and organization… read more ​​​​​

IESE's Recent Research on Corporate Governance 

“How top managers use the entrepreneurial gap to drive strategic change”

Journal article (September 2021)

Authors: Robert Simons and Antonio Dávila 
Journal: Accounting and Control
Read more

“The Big Three and corporate carbon emissions around the world”

Journal article (May 2021)

Authors: José Azar, Miguel Duro, Igor Kadach, Gaizka Ormazabal
Journal: Journal of Financial Economics
Read more

“The Impact of Logic (In)Compatibility: Green Investing, State Policy, and Corporate Environmental Performance”

Journal article (May 2021)

Authors: Yan Shipeng, John Almandoz, Fabrizio Ferraro
Journal: Administrative Science Quarterly
Read more

“Boosting international investment: The role of expert assessments of corporate governance”

Working paper (June 2021)

“Resilience of the financial system to natural disasters”

Study and Monograph (May 2021)

Authors: Patrick Bolton, Harrison Hong, Marci Kacperczyk, and Xavier Vives
Read more

“The international airline group rights issue ”

Case-study (June 2021)

Author: Nuno Fernandes
Read more

“Ingka in 2020. Corporate Governance, Purpose and Transformation”

Case-study (January 2021)

Authors: Masclans, R., Canals, J.
Read more

Upcoming Program

Executive Program: “Consejos de Administración Responsables”

Date: March 29 and 30, 2022

Location: IESE, Madrid Campus

Visit the program website

Executive Program: “Mujeres en Consejos de Administración”

Date: April 25 and 26, and May 18 and 19, 2022

Location: IESE, Madrid Campus

Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 23-26, 2022

Location: IESE, Barcelona Campus

Visit the program website
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