The Dynamics of Shareholder Concentration and Control in Australia
There is ongoing interest in understanding share ownership and control dynamics in publicly listed companies, given the governance and regulatory implications arising therefrom. My recently published article (also available here) analyses shareholder data within the largest 50 listed companies in Australia, filling a striking gap in the literature. The first contribution of this research is to accurately map the shareholder landscape in large Australian companies. Second, the data enables an empirical exploration of several potential explanations of the observed patterns. Third, the article considers the implications arising from the prevalence of institutional shareholders as registered owners while control rights are dispersed. The information gaps identified between owners and those who exercise control give rise to agency costs. The article concludes with an evaluation of the policy implications and reform options arising therefrom.
The main empirical findings are summarised as follows: institutional and corporate shareholders dominate the groups of 20 largest registered shareholders within the ASX 50 in Australia. Individual registered ownership is 2.2% across all 50 groups of 20 largest shareholders. That is, 97.8% of the ASX 50 groups of 20 largest shareholders are institutions or companies, indicating an increase in their register dominance as compared with previous research.
The three-firm concentration ratio was calculated for each of the ASX 50 companies to determine the degree of concentration of these registered holdings. Within the ASX 50, the mean level of concentration is 53.87%. This may be compared with the increasing levels of institutional shareholder concentration and register dominance, and is consistent with the reconcentration of registered ownership which has been observed in both the US and the UK.
Interestingly, 97% of the three largest shareholders in each of the ASX 50 companies are nominee and/or custodian institutions. This revises our understanding of both the prevalence and the degree of holdings of nominee institutions in Australia, when contrasted with the lower levels reported by prior studies. This finding is consistent with the agency capitalism shareholder model which exists in both the US and the UK. Moreover, the prevalence of the same institutions across the ASX 20 and ASX 50 is striking.
In my article I also investigated substantial shareholding notices. Within the ASX 50, there were 93 substantial shareholders across the 50 companies, with 83.9% holding between 5% and 10% of the voting rights. At the 10-15% level of control, there were 11 substantial shareholders (11.8%), and only four shareholders (4.3%) fell within the greater than 15% category of control. Additionally, the results of this research have a bearing on the relevance of common ownership theory within Australia. In relation to the ‘Big Three’ index funds, these institutions comprise 33.33% of the substantial shareholding positions across the ASX 50. Notably, 87.1% of these substantial holdings are in companies within the financial sector.
Further, the substantial shareholding results indicate that dispersion has increased, as measured by control rights. While registered ownership is concentrated, there is a very low degree of concentration (high degree of dispersion) of control rights. Substantial shareholding notices allow for the identification of control rights above the 5% threshold, allowing for a replication of the influential La Porta et al study (1999). Based on this information, the 20 largest listed companies in Australia can all be classified as widely held (versus 13 in the La Porta et al study) at the 20% level of control. At the 10% threshold of control, 17 out of the 20 largest listed companies can be classified as widely held (versus 11 in the La Porta et al study). The study results thus indicate an increase in shareholder dispersion over time.
The clear separation between ownership and control highlights the divergent incentives of registered and beneficial share owners, as well as potential impediments to optimal levels of stewardship. This is due to the different interests of investment fund managers and beneficial owners, because registered institutional shareholders (such as superannuation funds and managed funds) invest the money of their beneficial shareholders, and not their own. This raises questions relating to stewardship decisions, such as whether these investors are likely to make the same decisions as they would make if they were investing their own capital, or whether they are incentivised to take a divergent, suboptimal approach.
The results, moreover, indicate that there is an informational gap when it comes to beneficial share ownership. The current substantial shareholding provisions require disclosure to be made where shareholdings reach 5% (or above). This disclosure still effectively hides many of the ultimate beneficiaries of the shares, where those beneficiaries possess voting rights which equate to less than 5%. That is, shareholders wishing to avoid disclosure requirements simply hover slightly below the relevant threshold. This results in an informational gap whereby the ultimate share ownership within the ASX 50 remains opaque to the investing public, and there are certainly good reasons for investors to know who company shareholders are.The Cohen Committee Report (UK) and the Eggleston Committee Report (Australia), indicate that substantial holding disclosure requirements aim to reduce information asymmetries and increase the information available about shareholders, for the purpose of increasing investor knowledge and confidence. Yet, the results show that the substantial shareholder disclosure requirements do not uncover the beneficial shares held by the identified nominees. Indeed, any beneficial owners sitting below the 5% disclosure threshold are entirely unknown to their co-adventurers, in the absence of a successful tracing notice.
To address this informational gap, the article argues that an initial step that regulators might consider is to lower the relevant disclosure threshold. Drawing upon the UK regime as a comparison point, 3% is suggested. This would reduce information asymmetries, by allowing for a greater degree of transparency at a lower threshold of ownership.
The results highlight four central messages for regulators and policy makers. First, corporate governance and disclosure regulation must evolve in parallel to a more precise understanding of share ownership and distribution. Second, there is a need for complementarity between shareholder patterns and regulation which incentivises potential governance actors and mitigates identified agency costs. Third, the information gap present in the share registers studied may be partially overcome by lowering the relevant disclosure threshold. Fourth, the technical manner and complexity with which the tracing notice regime currently operates should be reviewed. Based on the data, reform focusing on beneficial shareholder disclosure and interest tracing will likely have a greater impact than policy proposals to create a beneficial share registry, given the informational gaps identified.
Dr Jenifer Varzaly is Assistant Professor of Commercial and Corporate Law, Durham University Law School and Research Associate, Centre for Business Research, University of Cambridge.
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