Industrial foundations as long‐term owners

• Author: Thomas Poulsen,Christa Børsting,Johan Kuhn,Steen Thomsen
• Date: 01 May 2018
• DOI: http://doi.org/10.1111/corg.12236
• Published date: 01 May 2018

ORIGINAL ARTICLE

Industrial foundations as long‐term owners

Steen Thomsen |Thomas Poulsen |Christa Børsting |Johan Kuhn

Department of International Economics and

Management, Center for Corporate

Governance, Copenhagen Business School,

Porcelaenshaven 24, Frederiksberg 2000,

Denmark

Correspondence

Thomas Poulsen, Copenhagen Business

School, Department of International

Economics and Management, Center for

Corporate Governance, Porcelaenshaven 24,

Frederiksberg 2000, Denmark.

Email: tpo.int@cbs.dk

Abstract

Manuscript Type: Empirical

Research Question/Issue: Does foundation ownership lead to long‐term corporate

governance and business behavior in foundation‐owned companies?

Research Findings/Insights: Short‐termism has become a serious concern for cor-

porate governance, and this has inspired a search for institutional arrangements to

promote long‐term decision‐making. In this paper, we call attention to long‐term own-

ership by industrial foundations, which is common in Northern Europe but little

known in the rest of the world. We use a unique Danish data set to document that

industrial foundations are long‐term owners that practice long‐term governance.

We show that foundation ownership is highly stable compared to other ownership

structures. Foundation‐owned companies replace managers less frequently. They

have conservative capital structures with low financial leverage. They score higher

on an index of long‐termism in finance, investment, and employment. They survive

longer. Overall, our paper supports the hypothesis that corporate time horizons are

influenced by ownership structures, and particularly that industrial foundations pos-

sess characteristics that promote long‐termism. Policymakers, business owners, and

managers interested in promoting long‐term governance models should therefore

reconsider the role of ownership structure.

Theoretical/Academic Implications: This paper supports the hypothesis that time

horizons are influenced by ownership commitment and particularly that industrial

foundations promote long‐termism. We contribute to the corporate governance liter-

ature by further developing the concept of long‐termism as a multi‐faceted corporate

governance concept associated with ownership commitment. We also show that

foundation ownership is associated with long‐termism.

Practitioner/Policy Implications: Policymakers interested in promoting long‐

termism should encourage long‐term ownership, for example by industrial founda-

tions. Practitioners should consider the importance of ownership commitment in

ensuring long‐term corporate governance.

KEYWORDS

Corporate Governance, Industrial Foundations, Long‐termism

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided

the original work is properly cited.

© 2018 The Authors Corporate Governance: An International Review Published by John Wiley & Sons Ltd

Received: 18 November 2015 Revised: 2 February 2018 Accepted: 7 February 2018

DOI: 10.1111/corg.12236

180 Corp Govern Int Rev. 2018;26:180–196.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Concerns about short‐termism have been mounting in recent years

(Bair, 2011; Mayer, 2013; McKinsey & Company, 2015; Phelps,

2010; Roe, 2013) and have influenced the proposed EU shareholder

directive (European Council, 2016), the US presidential debate

(Reuters, 2015), and the French Florange Act (Solomon, 2015). Larry

Fink, CEO of Blackrock, the largest investor in the world, is worried

(Fink, 2016). Scholars, politicians, and executives argue that companies

pursue short‐run profitability (McKinsey & Company, 2015) at the

expense of long‐run investments (Sampson & Shi, 2016) and sustain-

ability (Stiglitz, 2016). The perceived trends are blamed on corporate

governance‐related issues like incentive pay (Bhagat & Bolton, 2014;

Bolton, Scheinkman, & Xiong, 2006; Ladika & Sautner, 2014), quar-

terly reports (Kim, Su, & Zhu, 2017), share analysts (DesJardine,

2015), takeover threats (Asker, Farre‐Mensa, & Ljungqvist, 2011,

2015; Stein, 1988, 1989; Wang, Zhao, & He, 2015), managerial turn-

over (Kaplan & Minton, 2012), or speculative stock market fluctua-

tions (Cremers, Pareek, & Sautner, 2013). Several remedies have

been suggested including loyalty shares (extra voting rights or divi-

dends for long‐term shareholders; Johnson, 2015; Solomon, 2015),

abolishing quarterly reports and earnings guidance (Kay, 2012), bonus

caps (the EU Capital Requirements Directive), or limiting hostile take-

overs (Milliband, 2012).

In this paper, we focus on the pivotal role of long‐term ownership

as a remedy to short‐termism. Previous research has pointed to long

time horizons in family businesses (Asker et al., 2011, 2015; Chua,

Chrisman, & Bergiel, 2009; Kachaner, Stalk, & Bloch, 2012; Kappes &

Schmid, 2013) and short time horizons in companies owned by tran-

sient financial investors (Bushee, 1998; Della Croce, Stewart, & Yermo,

2011; Thanassoulis & Somekh, 2016; Zhang & Gimeno, 2016).

Following Mayer (2013), we argue that committed long‐term share-

holders have the power and the incentives to take into account the

long‐run effects of their behavior, including their choice of governance

structures, because they are more likely to be around to facethe conse-

quences of their decisions. Thus, if we can fix ownership structure, we

may be able to fix some of the problems of short‐termism.

Building on previous work by Schelling (1960, 1985), Kreps

(1990), and Mayer (2013), we propose that a credible long‐term own-

ership commitment enables companies to avoid the performance loss

due to short‐termism and to engage in mutually beneficial implicit con-

tracts with stakeholders (see also Cremers, Masconale, & Sepe, 2016;

Uhlaner, Floren, & Geerlings, 2007). Companies and their stakeholders

may benefit from a commitment not to breach such implicit contracts,

even when doing so would maximize profits ex post. For example,

employees are more likely to be loyal if they trust that they will be

rewarded by stable employment, even if the company could increase

its immediate profitability by laying off employees (Kreps, 1990).

We test these ideas on corporate ownership by “industrial foun-

dations”, which are independent non‐profit institutions, whose most

important goal is the preservation of a business company (Thomsen,

2017). Our research question is whether foundation ownership leads

to long‐term corporate governance of foundation‐owned companies.

We argue that industrial foundations are, by design, long‐term owners,

even compared to family ownership, because their charters oblige

them to long‐run ownership and company survival. Thus, they provide

an ideal setting in which to study the impact of long‐term ownership.

We use a unique Danish data set to test whether foundation own-

ership is associated with long‐term governance indicators like owner-

ship and management stability, capital structure, and investments,

employment, and corporate survival. Foundation ownership is observed

around the world in companies like Bosch (Germany), Bertelsmann

(Germany), Hershey (US), Tata (India), and Rolex (Switzerland), but it is

most common in Northern Europe and particularly in Denmark, which

makes it feasible to do statistical studies on Danish data.

The paper fills a gap in the sparse research literature on industrial

foundations, which has hitherto focused mainly on the consequences

of foundation ownership for financial performance (Dzansi, 2012;

Hermann & Franke, 2002; Thomsen, 1996, 1999; Thomsen & Rose,

2004). At the same time, we contribute to the growing literature on

long‐termism and short‐termism in corporate governance. Using data

on a uniquely long‐term ownership type, we provide new evidence

of the impact of ownership on corporate time horizons. Our study is

important because a growing body of academic research has shown

that increasingly short time horizons among corporations and inves-

tors have led companies to focus excessively on current earnings

and underinvest in the future to the detriment of shareholders and

society at large (Reilly, Souder, & Ranucci, 2016; Sampson & Shi,

2016; Souder, Reilly, Bromiley, & Mitchell, 2016). It is therefore impor-

tant to find remedies for short‐termism.

We show that industrial foundations are, in fact, highly stable

owners compared to other owner types. Moreover, as expected, foun-

dation‐owned companies are characterized by long‐term governance,

including stable management, low financial leverage, long‐run invest-

ments, and higher survival rates. Overall, we find that foundation‐

owned companies are more long‐term oriented than firms with other

ownership structures.

Our paper contributes to current corporate governance research

by identifying the important role of ownership commitment in pro-

moting long‐term corporate governance. In doing this, we also find

support for the part of the literature that points to the limited gener-

alization of agency theory because of its strong dependence on corpo-

rate governance context (see e.g. Choi, Park, & Hong, 2012; Kappes &

Schmid, 2013). Secondarily, we contribute to the limited literature on

industrial foundations, which we show to be a vehicle for long‐

termism in corporate governance.

2|THEORETICAL DISCUSSION AND

HYPOTHESIS DEVELOPMENT

Long‐termism and short‐termism can be conceived as extremes on a

continuous scale, temporal orientation, which measures “the relative

cognitive dominance of the near versus distant future”(Das, 1987:

203; Reilly et al., 2016). The concept was originally developed to mea-

sure variation in the future orientation of individuals and subsequently

applied to the firm level (Marginson & McAulay, 2008; Reilly et al.,

2016; Souder & Bromiley, 2012). Temporal orientation influences

the (subjective) weight that corporate decision‐makers attach to pres-

ent and future time periods. In allocating effort, capital, or other

THOMSEN ET AL.181