Rethinking Private Benefits of Control

The term ‘private benefits of control’ refers to the privileges and advantages that accrue to controlling shareholders at the exclusion of minority shareholders. These benefits can take a variety of forms, ranging from cash extractions to more intangible manifestations. For example, former Delaware jurist Leo Strine has likened control of a culturally salient business to possession of a ‘tool that allows [the controller] to hang with stud athletes, supermodels, hip hop gods, and other pop culture icons.’

The Current View on PBOC – Concentrated Ownership of Media and Sports

Extant explorations of private benefits of control surmise that certain industries naturally have potential for substantial production of private benefits and predict that firms in such industries should find themselves owned by controlling shareholders. For example, previous scholarship has often held up media and sports as industries that naturally produce an abundance of ‘nonpecuniary’ benefits (or ‘amenities’) in the form of public influence and pride, respectively.

Inconsistencies Between Theory and Reality

My in-progress article, ‘Dimensions of Private Benefits of Control’, challenges these and other narratives. For instance, the plutocrat-dominated media landscape that most Americans evidently take for granted in fact emerged only in the 1980s. Before then, as my article shows, the post-war American media landscape was populated with numerous widely held firms without controlling shareholders, as illustrated by the below chart showing periods in which the Big Five publishers, the Big Three broadcasters, and the Big Six studios had a controller.

As I argue, private benefits, and in turn concentrated ownership, in the media industry is a product of the (changing) regulatory and economic environment in addition to any endogenous character of the industry.

Likewise, the narrative that the sports industry creates particular private benefits (such as psychic joy from leading a winning team) that can only be enjoyed by a single owner is not only undermined by casual observation, but also the fact that dispersed ownership of sports teams, usually by fan clubs, is reasonably common outside of the United States. Indeed, many of the wealthiest and most successful soccer teams in the world, such as Real Madrid, Barcelona, and Bayern, are owned by their fans with no controlling shareholder.

Additional Analytical Dimensions of PBOC: Divisibility/Rivalry, Separability, Effects on and by External Factors

Given the shortcomings of current theories in explaining empirical patterns of ownership and control, I argue that previously overlooked characteristics of private benefits of control are important to understanding those benefits, the associated patterns of corporate ownership and control, and the ultimate social effects. My article proposes consideration of the following: (1) the divisibility and rivalry of a benefit, (2) the degree to which a benefit is separable, or distinct, from control itself, and (3) the externalities imposed on non-corporate constituents by a benefit and the effects of external conditions, such as the legal environment, on a benefit.

As I argue, the concepts of divisibility and rivalry help significantly in explaining why dispersed fan ownership is a competitive ownership model for sports teams. In particular, non-rivalrous benefits, such as the joy from voting one’s shares in a favorite team, can result in total shareholder welfare that rises with the number of shareholders. Importantly, a surfeit of non-rivalrous benefits may mean that even financially costly decisions that would reduce shareholder welfare if the firm were held by a single shareholder may increase shareholder welfare when the firm’s ownership is dispersed. As such, the shareholders of a fan-owned sports team might consider high roster spending that results in more entertaining spectacles to be in their best interests even if such spending reduces team profits. Not-so-coincidentally (and in contrast to American sports), low profits are pervasive in European soccer leagues, where even controlled teams must compete with widely held teams for players and fans.

My paper then turns to whether a benefit is separable from control itself. For instance, any CEO can enjoy private jets, a handsome office, and sometimes even social fame. (Indeed, even an entry-level employee could enjoy some of these benefits, at least in theory.) Such separable benefits can be readily awarded via compensation agreements even to an agent-CEO who lacks ultimate control.

However, without a controlling stake, a CEO cannot completely insulate themselves from the risk of being fired or exercise unfettered discretion over their firm’s business direction. Such benefits are obtainable only with control itself, and control invariable confers those benefits. Thus, as the perceived value of such benefits changes (changes that might vary by industry), so might the frequency with which firms should find themselves under the thumb of a controlling shareholder. A problem, however, is that unchallengeable control over business direction can be extremely expensive to firms (and, in turn, to society at large). After all, most business failures (even if those business are controlled) are caused not by theft, but by garden-variety mismanagement.

I also examine how private benefits can affect and be affected by external factors. For instance, as Professor Ronald Gilson identified years ago, large volumes of private benefits of control could harm macroeconomic competitiveness. Moreover, there are numerous ways in which private benefits of control extract their value not from minority shareholders, but rather from the public. For instance, suppose a controller leverages their business position (but not firm resources) to pressure state lawmakers to lower personal income taxes by threatening to move jobs elsewhere. Assuming that the threat is successful, the controller extracted a benefit via his corporate position, though the benefit did not impose a cost upon minority shareholders. Likewise, the social influence exerted by the controller of a media company may not come at the cost of minority shareholders, but rather society at large. And sports-team owners who can exclude widely held teams (and the vast nonpecuniary amenities that accompany such dispersed ownership) from a league might be able to more easily collude to raise ticket prices or lower player salaries. This would not necessarily hurt minority shareholders, but rather fans and employees.

Policy Implications

I finally turn to the policy implications that might result from the above. For instance, my analysis suggests that there are ways to effectuate a more restrained media environment other than direct governmental regulations on speech. Instead, regulators could take harder looks at the ownership of media firms, particularly when reviewing M&A activity. Just last Spring, there was a contest for the Paramount media conglomerate between Skydance, which is controlled, and Sony, which is not. Given that Skydance won the contest, should antitrust regulators scrutinize the now-pending sale of Paramount more closely than they would have if Sony had won? Similarly, given that foreign sports leagues seem perfectly capable of operating without the collusive agreements to restrict dispersed ownership that pervade American sports, should U.S. courts be more skeptical of the reasonableness of these agreements? These and other policy issues may be better analyzed with a renewed consideration of the private benefits of control.

James An is Teaching Fellow and Lecturer in Law, Stanford Law School.

The paper is available here.