tween ownership concentration and corporate performance. Berle and Means argue that diffuseownership gives significant power into the hands of managers whose interests do not coincide with
the interest of shareholders.9 As a result, corporate resources are not used for the maximisation of
shareholders' value.10 On the basis of these observations, Berle and Means conclude that
block-holders can therefore alleviate one of the main principal-agent problems in the modern
corporation, that is, the conflict of interest between shareholders and managers.
However, at the other end of the spectrum, recent research studies have come to question the
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empirical validity of the Berle and Means image of modern corporations.11 Notably, La Porta et al. 12
focus on another problem associated with ownership concentration--the conflict between controlling
and minority shareholders. As La Porta et al. observe, when controlling shareholders effectively
control the firms, their policies may result in the expropriation of minority shareholders.13 The conflicts
of interest between controlling and minority shareholders can be numerous, including controlling
shareholders enriching themselves by not paying out dividends, or by transferring profits to other
companies they control. On the basis of these observations, La Porta et al. conclude that restricting
expropriation of minorities by the controlling shareholders is the real challenge to corporate
governance in most countries.14 More significantly, Claessens and Lang15 extend the analysis of the
ownership and control pattern of La Porta et al. by examining evidence of the expropriation of minority
shareholders in nine East Asian economies, including corporations in Hong Kong. Claessens andLang examine the relationship between the concentration of cash-flow rights and control rights andthe type of block ownership, on the one hand, and corporate valuation, on the other hand. Theiranalysis indicates that higher cash-flow rights are associated with higher market values; in contrast,
deviations of control from cash-flow rights through the use of pyramiding and cross-holdings are
associated with lower market values. This is especially true for corporations under family control, suchas corporations in Hong Kong which are predominantly controlled by families, and, in Japan, underthe control of widely *I.C.C.L.R. 183 held financial institutions.16 Consistent with La Porta et al.,Claessens and Lang conclude that the risk of minority expropriation is the principal agency problem in
family firms.
In Hong Kong, some commentators are of the view that controlling shareholders are ideally placed to
monitor the management.17 It has been argued that these controlling shareholders, whose wealth is
tied up in their firms, have clear economic interests in more efficient and economic management.18
These arguments have, however, for the most part failed to consider that the controlling shareholders
may not act in the interest of the minorities. In fact, top management of family firms is usually part of
the controlling family whose interests are unlikely to be the same as the minority shareholders.19
These controlling shareholders usually dominate the board, which, as a collective unit, exercisesunfettered powers of management over the company.Governance problems arise where the controlling shareholders wield control vastly exceeding theiractual owne
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