Ownership Structure, Fraud, and Corporate Governance

Date01 January 2016
Published date01 January 2016
DOIhttp://doi.org/10.1002/jcaf.22120
39
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22120
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Ownership Structure, Fraud,
andCorporate Governance
Stephen R. Goldberg, Dori Danko, and Lara L. Kessler
This article dis-
cusses national
differences in
corporate ownership
structures, the types
of fraud each of these
structures incentiv-
izes, and governance
techniques to miti-
gate wrongdoing. In
the first section, the
article describes two
ownership systems.
Adispersed own-
ership system has
widely disseminated
shares and no domi-
nant shareholder or
group of sharehold-
ers. This is more com-
monly the share own-
ership pattern in the
United States and the
United Kingdom. Aconcen-
trated ownership system is more
common in continental Europe.
In this system, one shareholder,
family, or group of sharehold-
ers has majority or dominant
control of companies. Addi-
tional capital may be provided
by minority shareholders and
banks. In the next two sec-
tions, the article addresses why
different types of fraud are
more prevalent under each sys-
tem. Dispersed ownership sys-
tems encourage earnings man-
agement so executives benefit
from short-term performance
measures. Concentrated con-
trol encourages appropriation
of private benefits of control.
The fourth section discusses
basic corporate governance
techniques to protect
shareholders and
which methods have
greater efficacy under
each system. Finally,
the article concludes
with implications
of the discussion
for shareholders,
board members, and
executives.
OWNERSHIP
SYSTEMS
Generally speak-
ing, the free market
world divides into
two alternative cor-
porate ownership sys-
tems. (SeeExhibit 1.)
Dispersed ownership
systems are more
common in English-speaking
countries such as the United
States and United Kingdom,
where capital tends to be raised
on stock and bond markets
from widely dispersed investors.
Concentrated ownership sys-
tems are more common in con-
tinental Europe, where capital
tends to be raised from families
or other private sources.
A dispersed ownership system has widely
disseminated shares and no dominant shareholder
or group of shareholders. This is more commonly
the share ownership pattern in the United States
and the United Kingdom. A concentrated own-
ership system is more common in continental
Europe. In this system one shareholder, family, or
group of shareholders has majority or dominant
control of companies. Different types of fraud
are incentivized under each system. Dispersed
ownership systems encourage earnings man-
agement, so executives benefit from short-term
performance measures. Concentrated control
encourages appropriation of private benefits of
control. Corporate governance is designed to
protect shareholders’ interests. Corporate owner-
ships systems have implications on the efficacy of
governance techniques. © 2016 Wiley Periodicals, Inc.
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