Corporate ownership through company groups is a common and sometimes the preponderant pattern of shareholding in an important number of markets. Data on share ownership by corporations and affiliated individuals indicates that a significant portion of publicly-listed companies in many of the markets surveyed for this report are members of a company group.
Previous OECD reports identified important advantages and benefits to carrying out entrepreneurial activity through affiliated but legally separate companies, including scale economies, efficiencies in resource allocation, reduced dependence on external finance, fewer informational asymmetries, lower transaction costs and less reliance on contract enforcement. Protection of intellectual property rights and facilitation of cross-border activity are additional common rationales. These advantages and benefits, among others, continue to make company groups important contributors to economic development and employment generation in many markets.
From a corporate governance policy perspective, company groups present the same agency problems that face stand-alone companies with defined control. Notably, parent companies may attempt to appropriate undue private benefits of control. Since cooperation in pursuit of synergies is a key rationale for company groups, groups typically engage in frequent related-party transactions. The more complex the structure of a group, the greater the opportunity for such transactions to be carried out in a less transparent fashion, which may benefit some group companies at the expense of others. Like other majority shareholders, parent companies in groups may engage in transactions that do not benefit all shareholders equally, such as intra-group mergers and sales of control to third parties effected on questionable terms. Allocation of business opportunities is another area that can present conflicts of interest for boards, individual directors and managers of group companies.
Groups also present non-agency-related issues. Domination of an economy by groups, may slow the development of broader, deeper and more efficient national capital markets. The organisation of industry into networks of related companies may also reduce competition in product and service markets.
The challenge of regulation of company groups is to secure the benefits that company groups can confer while managing the potential risks of abuse and inequitable treatment of shareholders and other stakeholders. It is important in this process to view properly-crafted group company law and regulation as a means to foster legal certainty to enable the achievement of greater synergies and efficiencies. Clarity around the rules and expectations for how company groups should operate allows entrepreneurs, directors and employees to focus more on value creation and less on protecting against litigation or regulatory intervention.