Ownership concentration is having adverse effects on competition, wealth distribution, and fiscal transparency, and they are likely to worsen in the coming years

Ownership concentration is having adverse effects on competition, wealth distribution, and fiscal transparency, and they are likely to worsen in the coming years

If the global economy were a chess game, few pieces would be left on the board. Most would be relegated to the role of bystanders, observing a concentration of power in the hands of an ever-dwindling number of global players. Now let us imagine that the pieces left standing are corporate entities, with a shrinking number of ultimate owners at the helm. This analogy fundamentally characterises the global economy today.

The globalisation that embodied the 1990s unleashed the power of multinational corporations, enabling them rapidly to crush local competition in smaller markets. With the advent of the Internet economy a decade later, online distribution and network effects boosted corporate concentration further, giving rise to behemoths like Amazon, Google, Airbnb, and Facebook.

Today, corporate ownership concentration is being fostered by new factors, which could ultimately pose a systemic threat to the global economy. One of the most important is the decline of public equity markets across developed economies: the number of companies accessing them has halved during the past decade. In most markets outside Asia, new firms are not listing; on the contrary, in response to greater compliance and regulatory obligations, some are de-listing.

This is occurring despite policymakers’ attempts over the past five years to revitalise capital markets and create incentives for fresh listings, especially of technology and state-owned firms. The recently aborted WeWork initial public offering (IPO) highlights the anemic condition of equity markets today. The listing of Saudi Aramco in December gained attention not only due to its size and symbolic importance, but also because IPOs have become rare.

With the decline in offerings globally, many of today’s “too-large-to-fail” companies are not financial institutions, as was the case during the 2008 crisis, but privately held non-financial firms. Ownership concentration is also a reality for listed firms, where the top three shareholders have majority control in 50% of the world’s largest companies, according to recent OECD estimates.

This trend – set to continue in the coming years – is underpinning an increasing rift in economic ownership rights between company founders and ordinary investors. For example, investors in the Snapchat IPO were offered – for the first time in modern history – non-voting shares. While the IPO prompted an outcry, Snapchat is representative of the ownership structures at Tesla, Uber, Amazon, and other large companies where founders use multiple share classes to retain control with minority ownership.

At the same time, with enthusiasm for privatisation declining globally, governments remain significant – and, in many cases, controlling – owners of large pockets of corporate wealth. Indeed, in almost 10% of the world’s listed companies, the public sector has a controlling stake. The consequences of this can be seen in the Nissan-Renault debacle, which highlights the governance perils of state-invested multinationals.

Some investors – such as Norway’s sovereign wealth fund, which owns 2% of every European listed company – take a diversified approach. Other sovereign investors, such as Saudi Arabia’s Public Investment Fund, have much more concentrated stakes and play a more active role in governance.

But not only sovereign investors are becoming concentrated players. With the ongoing shift of capital from actively to passively managed funds, asset managers’ portfolios are becoming significantly more concentrated. A recent study by two Harvard researchers, Lucian Bebchuk and Scott Hirst, found that 80% of the capital allocated to investment funds today is going to Vanguard, BlackRock, and State Street. In two decades, these three players are predicted to cast as much as 40% of the votes in S&P 500 companies, while their stewardship resources have not grown proportionately.

The growing concentration of capital in these investment funds raises a host of new concerns, not least competition-related, as asset managers vote on strategic matters in companies that might be rivals. In the airline industry, for example, the ten largest institutional investors own 20% of the global market capitalisation. Indeed, concentration-related conflicts of interest faced by institutional investors and asset managers are already raising eyebrows in policy circles.

This picture is further complicated by the concentration of other financial intermediaries. Stock markets are now no longer mutualised or state-owned, but are instead mostly organised in a few large, self-listed exchange groups. As a result, competition for new listings is not occurring between national stock exchanges, but between an oligopoly of exchange groups whose ultimate objective is less the protection of the rights of shareholders in listed companies and more the defense of their own shareholders rights.

Ultimately, these trends translate into a dwindling number of large enterprises and financial intermediaries with increasingly concentrated ownership. While a degree of ownership concentration can create value, it can also create negative externalities on competition, wealth distribution, and fiscal transparency on a macro level. On a micro level, the current level of economic concentration facilitates neither fair rents for minority shareholders nor respect for consumer rights.

Broadening corporations’ definitions of their purpose and responsibilities toward stakeholders, and focusing on the stewardship responsibilities of institutional investors and asset managers – both remedies currently in vogue among corporate executives and policymakers – is insufficient. Instead, what is needed is a focus on the duties of controlling shareholders toward minority investors. Stronger checks and balances, and perhaps even Chinese Walls, also need to be introduced for large asset managers.

These and other remedies to address concentration are essential, not only in the name of better corporate governance, but also as a response to the worldwide wave of protests against the increasingly unjust distribution of national income and global wealth.


Alissa Amico is Managing Director of the GOVERN Center. This content is © Project Syndicate, 2020, and is here with permission.

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Production needs capital and labour and Marx pointed out that while capital took the risk and the profit but labour (in those days that meant everyone - minimal students and beneficiaries) took just the risk. Marx thought everyone should have a share in the profits and that meant worker ownership. And today we have most businesses owned by pension funds and insurance companies; investment funds are investing individuals spare savings so we have almost reached what Marx wanted.
When companies are owned by individuals (Ford, Carnegie, Musk, Gates) they can act capriciously but when they are controlled by a pension fund they are risk adverse so less enterprise and speculation. Individuals may look for risky competition but insurance funds are adverse to it.

An interesting viewpoint re the risk. But what about the ethics/morals?

Individuals tends to retain some level of moral/ethical rational in their decision making, where as a corporate/fund just go for the money.

Not sure I agree about morals - from the GFC we know large investment banks have none but neither did Bernie Madoff.
My fear is lack of competition. Individuals naturally compete but a sane manager of a big pension fund will invest in all the businesses in a given area to minimise risk.
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Mahatma Gandhi said that the Rich should treat themselves as Trustees for the disadvantaged and not so rich and use their profits, wealth generated out of the needs of the populace to give back to their welfare. He had a better message than Marx, but sadly did not get the attention of the Western Economists of Business persons. Some corporate leaders in India tried to be so so, in a limited extent, but after Gandhi's death even their descendents have given up that ideal.

But, but , but, isn't this the consequence of excess regulation? The elite recommendation of more regulation and more interference and more money for the Bureaucrat Cartel, the Banking Cartel and the Lickspittle Academic Cartel that they control, seems, er, well, potty. The Communist Bureaucratic Central Banking Cartel has buggered money and now we only have debt, no money allowed. Money used to mean a physical quantity of something valuable or a representation of such. It is, or rather, used to be, completely different from debt. Shares are now more money-like than $$$. So are houses. All buggered by bureaucrats and bankers lining their pockets by stealing the common property, money, from the populace.

Is this why politics are so febrile and ugly in the West? People know they have been lied to. The "experts" are clueless about anything other than furthering the interests of their own excessively privileged tribes.

From https://www.spectator.co.uk/2019/11/toxic-regulations-not-the-fire-briga...
""What was important got lost in a fog of petty rules that obscured the view of Kensington and Chelsea’s building control officers on their 16 visits to inspect the refurbishment works. Building regulations have grown exponentially since the first national standards were introduced in 1965. The two volumes of the fire safety regulations alone run to 384 pages. Altogether, they run to thousands. ""
Everything was checked except whether the cladding was flammable.
On the other hand reduce regulation and we get Pike River.

Or did we get Pike River because those that know best have actively sought to destroy our once proud mining industry? I mean we can't have ordinary begrimed miners earning more than nice clean bureaucrats and clever academics, now can we? To me it was the loss of skills at all levels that caused the disaster. I mean, gosh, who knew methane in a coal mine could ignite? Sigh.

Skills matter, regulations just create cartels and jobs for the bureaucrat tribe that think they know best.

I can't understand why we don't just copy Aussie unless there is a good reason to do otherwise. So Aussie mines have two entrances - that is a simple regulation.

Pike was NOT allowed more than one entrance and one ventilation shaft. DOC land around, above and on the coal face outcrop in the Paparoa National Park. A more considered approach would have been to allow a vent shaft just above the upwards tilted coal seam, out into that cliff face (natural ventilation) and open up the roads below it, venting straight up and out. But no: single ventilation shaft behind that upward-tilted, gassy coal, and at the bottom of the mine after a 2+km stone drive to the one entrance. Boom.

The damage has already been done, like climate change. The One Percenters won't allow any meaningful change to happen to threaten their position, wealth and influence. Only small changes at the margins will be tolerated. Slavery is entrenched in the modern world in a different guise.

Wage slaves struggle ... and take up the burden of our taxation system through GST and PAYE ...

.. we need a simple to implement tax on capital ... not the poorly designed rubbish Cullen came up with , CGT sucks ....

.... we need a land tax ... water tax ... air tax ... to equalise the playing field somewhat , between the rich and the unrich ...

Why not a deliberately punitive tax on massive incomes over say $1 million with the excess taxed at 75%?

The concentration of wealth will continue, until those that control it lose it.

Wealth will be redistributed either by will, gifting or ineffective management. It has done so for centuries.

The current concentration has been driven by neo-liberal economics, which is unsustainable on a planet of finite resources. The main culprit being the banksters, who have used leverage as a means of control. Their declining interest rate charges is a sign their game is almost up, and it can not come soon enough.

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