ISLAMIC UNIVERSITY IN UGANDA

FACULTY OF MANAGEMENT STUDIES

DEPARTMENT OF BUSINESS STUDIES
PROGRAM: MBA
COURSE UNIT: MANAGERIAL ECONOMICS

ASSIGNMENT
Companies A, B and C have the following share ownership structure;
a) Classify each firm according to whether it is owner or managerially
controlled and whether it is likely to be part of an insider or outsider system
of corporate governance. Specify how the behaviors of each firm can be
described?
b) Discuss the factors responsible for such ownership structures of the firms
and how they affect their performance.
c) With explanations, provide examples for each type of industry that might be
represented by the firms given above.

Classification
A corporation is composed of two organs; the board of directors-management and its shareholdersthe owners of firms equity. The separation of ownership from control is a situation where the
shareholders have indirect or very few controls over management decisions. In order to determine
whether a firm is owner or managerially controlled, the size of the largest shareholder and the
ability/motivation of the shareholders to form voting blocs, must be analyzed;

1)

50 % Majority Shareholding: Trefor Jones asserts that if a single shareholder holds more than
50% of the stock, then they can outvote the remaining shareholders and control the company. He
described such a firm as owner controlled since the majority shareholder has enough voting rights
to challenge managerial decisions.

2)

20% Majority Shareholding: The second criterion is advanced by Share Berle and Means
(1932), who argued that a stake of more than 20% would be sufficient for that shareholder to
control a company but less than 20% would be insufficient and the company would be
management-controlled.
3) 5% to 15% Majority Shareholding: On the other hand Radice (1971) asserted that a
shareholding of 15% was enough to classify a firm as owner-controlled; and a largest shareholder
owning less than 5% to classify a firm as managerially controlled.
However, Nyman and Silberston (1978), Cubbin and Leech (1983) mounted criticism on using
cutoff points to classify firms. To them control referred to the ability and discretion of the
controlling group to pursue its business objectives without fearing they will be out voted by
another group. The following firms are classified as follows;
Firm A: While some corporate structures are simple enough to allow the determination of a
controlled group, in other cases its complex and requires a detailed and time-consuming analysis of
all the facts and circumstances. Firm A, presents such a scenario.
Cubbin and Leech (1983) advanced that control means that a group has the discretion to pursue its
own objectives without being challenged. Although the board of directors controls a small
proportion of 10% shares and the largest shareholder is an individual with 10% and a family of
five holds a stake of 25%, and other 20,000 shareholders, this is a complex scenario where no one
group has perpetual control. The Directors can combine with the individual owner of 10% to
challenge the bloc vote of the 5 family members. Each group is capable of swinging the control
depending on the circumstances. This is where control cannot be said to lie in one group for a long
time.
There is also a held presumption that when a majority of shares is widely held and no single block
of stock is large as compared with all other stock holdings, the firm is deemed to be managerially
controlled unless evidence is provided to show otherwise. This would suggest a managerial
controlled firm, however the presence of family members holding a stake of 25% makes this
company owner controlled since family business a closely and monitored and are represented on
the boards directly or indirectly.
Firm B: This is a typically a managerial controlled firm. This is because; the largest shareholder
does not possess the required control percentage. Majority of the shares are scattered over a vast
number of individuals who may not be motivated to form voting blocs and have not enough voting
rights to challenge any decision pursued by the managers.
FIRM C: This is an owner controlled firm. Management has little room to pursue its interests
without being challenged by the shareholders since they hold a huge stake and can easily form
voting blocs. They are few in number and hold a 40%, 40% and 20% (own the entire shareholding)
stake in the company and will pay closer attention to its management.
Corporate Governance:
Corporate governance is as the system by which business corporations are directed and controlled
and it has two models;

Insider systems: These give the priority of control to stakeholders, dominance of owners in the
management of the company as members of the board of directors or other senior managerial
positions and there is absence of regular trading in shares. All this leads to active owner
participation and this minimizes external influences in the control of the company. Firm A and C
are likely to have insider systems in their corporate governance structure, because these
shareholders have a close interest in the affairs of the companies. They consider it as a form of
investment which needs closer participation and monitoring from the owners.
Outsider systems give priority to market regulation and the owners of firms tend to have a
transitory interest in the firm. It is believed that outsider systems have dispersed share ownership,
with the majority ownership lying with private individuals. The representation of owners on the
board is absent. Control and ownership are completely divorced from each other and Shareholders
play the role of passive investors. There is easy transferability of Shares under this model. This
model is assumed to mean managerial control; this is particularly true in the case of Firm B, where
owner participation is minimal.
Behaviors of each firm
Profit Maximization: Business firms adopt those investment projects, which yield larger profits,
and drop all other unprofitable activities. Factors of production costs and other operational costs
are adjusted with the goal of enhancing profitability. Unnecessary expenditure is also discouraged.
This behavior is noticeable in the owner-managed firms and Firm C is a good example of such.
Sales maximization occurs when the firm strives to sell as much as possible without making a
loss. Sales are measurable and can be used as a specific target and are used to evaluate the
performance of managers. This behavioral pattern is likely to be manifested in Firm B because it is
managerial controlled. Similarly, Firm A may exhibit this pattern as family shareholders prefer
expansion, good reputation and investments. Managers are also interested in the firms expansion
thus sales maximization since they hold a stake in the shareholding of Firm A and will want in the
long run to earn enough profits.
Williamsons Managerial Utility Model which assumes that senior management seeks to
maximize its own utility function rather than that of the owners. It is assumed that managers find
satisfaction in receiving a salary, job security, professional and public recognition plus other nonpecuniary benefits are related to luxurious expenditures. This behavioral pattern is expected to
manifest in Firm B, because managers here are allowed to pursue their own favoured projects
which comprise un questionable discretionary expenditure.
Behavioural theories of the firm, which postulate that the internal structures of a firm and their
interaction with various groups in the firm influence a firms objectives. No single firm can have a
single behavior and besides these behaviors are inter-related. Therefore both owner and managerial
controlled firms have one overriding behavior, which is survival rather than the maximization of
profits or sales. Thus Firms A, B and C will also fall under this behavioral theory since all the
stakeholders in these firms are interested in the preservation of their businesses.
Factors responsible for such ownership structures
Age and size of the firm is an important variable in determining the ownership structures in a
firm. There is paranoia that a young firm needs the presence of its founders who are the
owners. When the firm is getting older it can be left in the hands of the managers since it is

able to cope with the harsh economic environment. More stable and mature firms typically
need less attention and can be handled by managers.
As firm size increases, Demsetz and Lehn also argue, the price of a given fraction of equity
rises, which reduces ownership concentration. Furthermore, risk aversion in a larger firm size
should enhance this effect of a more dispersed ownership. This may also go hand in hand with
the need to gain and maintain a Competitive Advantage especially in family owned business
structures.
Government Restrictions and regulations also explain the different ownership structures.
The Financial Institutions Act for example prohibits ownership of a bank by one party beyond
51% and spells out the powers of the board of directors. This may give room for managerially
controlled institutions.
Economic culture: This refers to the traditional aspects of the economy. Most Asians prefer to
manage the affairs of their firms directly while Europeans entrust this role to a professional
Board to do so and report occasionally. This economic culture of the individual determines the
structure that will mostly evolve in the firm.
Control potential: This refers to the amount of wealth gained through increased monitoring
of managerial performance by a firms owners. In circumstances where monitoring and
control yield positive results for the owner, more concentrated ownership structures will
manifested when compared to circumstances where monitoring is costly, a degree of
ownership by professional management will be preferred. The private benefits of control
therefore play a big role.
Source of financing: This essentially refers to the firm's ability to raise capital. Suppose a
firm needs to borrow funds for a new plant, meaning investors are interested in the companies'
management and the people to entrust their investment with which calls for professional
management.
International Dimension: Virtually every organization is affected by the international
dimension.. The globalization of the economy has merged all the nations together and this is
essential in influencing the mode of ownership in a firm.
Amenity potential of a firms output: Amenity potential refers to the opportunity for
shareholders to obtain their consumption goals by influencing the activities of the firm outside
of providing general administrative leadership. For example, amenity potential for founding
family owners can stem from the reputational benefits associated with a traditional family
name. Thus, they will seek to maintain a significant equity stake in the firm.
Systematic Regulation: Systematic regulation restricts the options available to owners, thus
reducing control potential. Regulation also provides some subsidized monitoring and disciplining
of the management of regulated firms. The primary role of regulation is to reduce ownership

concentration to a greater degree than would be predicted. They are designed to protect the
public and management from owners of the entity.
All these aspects have a direct or indirect on the corporate structure of a firm.
Effect of ownership structures on Performance
Ownership structures affect the level of stock returns. Insider ownership is credited for
increased stock returns. However, excessive insider ownership rather hurts corporate
performance probably due to the problem associated with managers' entrenchment.
Ownership structures usually result into conflict of interest between managers and owners
which causes agency costs in monitoring management. Agency problems arise when managers
or controlling shareholders have the ability to redirect or consume corporate resources in ways
that benefit themselves but which are not in the best interests of the other owners, including
minority owners.
Large shareholders are risk- averse and deter the firm from making costly investments. This
may protect the firm against making loses but it may also miss out on highly profitable
ventures. Widely dispersed ownership on the other hand offers enhanced liquidity of stock and
better risk diversification for investors.
A more owner controlled structures register higher firm profitability because they tend to
follow profit maximization goals. Similarly, under owner-controlled assets utilization
generally improves and performance levels improve.
Inefficient investment choices, which could include the redirection of resources for personal
consumption are removed under owner controlled.
However, Demsetz (1983) argues that there is no reason to expect a systematic relationship
between profitability and ownership structure. He argues that it is unlikely a particular
ownership would remain in existence (even allowing for the costs of trading shares), if it were
not profitable.
It is therefore clear, that ownership structure may not be a major determinant of a firms
performance. Other factors play a big role in influencing the performance of a business entity.

Examples
1. Orient Bank
Orient Bank is an example of an owner controlled company. Its ownership is distributed
among 4 major shareholders Ketan Mojaria, 49.0%, 8 Miles Fund, 42.0%, Alemayehu
Fisseha, 4.5% and Zhong Shuang Quan 4.5%.

The bank was founded in 1993 by a group of business people who were related by blood and
marriage. Following a spate of Ugandan bank failures in the 1990s and early 2000s, the
banking laws in Uganda were changed to bar family members from jointly owning more than
49 percent in the same financial institution. Orient Bank was given a grace period to find a
suitable investor.
In February 2015, 8 Miles Fund acquired 42% shareholding from Orient Bank and the
remaining percentage was sold to three individuals, namely Ketan Morjaria (one of the
founders of the bank), Alemayehu Fisseha, and Zhong Shuang Quan. Orient Bank is
governed by a seven-person board of directors, two of whom are executive directors and the
other five are non-executive.
Firm C, share similar ownership structures with Orient Bank. Although executive managers
are at the helm of controlling the business of the firm, there are non-executive managers, who
are appointed to the boards to oversee the behavior of the executive directors. Besides, the
board does not have power to make crucial decisions without fearing that they will be
challenged by the shareholders who own bloc shares.
2. Microsoft Plc
At its inception, Paul Allen and Bill Gates owned the Microsoft Plc 50%/50%. However, this
ownership changed in 1977, Paul Allen 36% and Bill Gates 64%. The main reason for the
difference was that Paul Allen was working part-time and Gates reasoned that since he was
working full time needed a bigger share. Steve Ballmer was later employed CEO in 1980 and
in 1981 he bought 8% of the shares in Miscrosoft Plc thus diluting the ownership structure
further with by Bill Gates (53%), Paul Allen (35%) and Steve Ballmer (8%). As Miscrosoft
expanded and dominated the market, its shares gained a lot of market too and the ownership
structure kept on changing. Today, the marjority shareholder Steve Ballmer has 5%
ownership, followed by Bill Gates with 4% ownership and several institutions possessing
73% of the companys ownership.
In determining the control structure of Microsoft, it will be observed that in the beginning,
Microsoft Plc was an owner controlled entity and stayed as such for more than three decades.
It was owner controlled at the time when Paul Allen and Bill Gates possessed the largest
stake in the company, and their CEO Steve Ballmer had a lower stake to challenge their
control. Paul Allen and Bill Gates the largest shareholders at the time, were at the same time
involved in top management and their concentration in management was very visible. This is
the situation witnessed in Firm A. Although the Directors in Firm A possess 10%
shareholding, it is not enough to exert control and influence.
Currently, Microsoft Plc is managerially controlled. The largest shareholder has a mere 5%
control in form of shareholding and is no longer CEO of the company. Both Paul Allen and
Bill Gates have long exited the management of the company leaving it to the Board of
Directors to decide and control the affairs of this entity. Most of the shareholders appear to be
investors. This also true with Firm B. Most of the shares in Firm B are scattered over a range

of individuals and institutions just like the 73% stake held by several institutions in Microsoft
Plc.
3. Crane Bank Limited
The largest shareholder is said to be Dr. Sudhir Ruparelia who also doubles as ViceChairperson of the Board of Directors. It is privately owned and controlled by Sudhir
Ruparelia who commands a 48.67% of the voting rights in the bank because of the shares
that he and his close family members hold.
Crane bank falls under the owner managed firm. It has an insider system of corporate
governance are characterized by concentrated ownership and infrequent trade in shares. It
was once announced that Crane Bank was to be listed on the Uganda Securities Exhange, but
this was not done because the Bank wanted to focus on business expansion. Crane Bank
owners are represented on the board and are participators in controlling the company.
Because of family ties, Sudhir Ruparelia is able to control the company.
Firm As 25% stake belonging to family members plays this similar crucial role in ensuring
that family interests are protected and thus transform a would be managerially controlled
firm into an owner controlled firm.
In conclusion, by simply possessing a larger stake that is less than 51% no shareholder can be
said with a 100% absolute certainty that they possess control over the firm. Control without
the necessary 51% shareholding to challenge managements decision needs other members to
form a bloc vote. Similarly, there are legal mechanisms which are the only avenues that
shareholders can use to control the firm. However, the day today activities of managers may
not be subject to shareholders control as long as they are within the scope of their authority.
Therefore the best way to exert control over the firm is to have an entrenched insider system
where the interests of the larger shareholders are considered and represented.

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