The holding company and corporate control

152 Pages·1978·6.048 MB·English

by  Herman Daems (auth.)

THE HOLDING COMPANY AND CORPORATE CONTROL
NIJENRODE STUDIES IN ECONOMICS
Volume 3
Advisory Board
Professor R. E. Caves, Harvard University, Cambridge (Mass.), U.S.A.
Professor K. D. George, University College, Cardiff, United Kingdom
Professor E. Heusz, University of Marburg, West Germany.
Professor H. W. Lambers, Erasmus University, Rotterdam, The Netherlands
Professor W. G. Shepherd, University of Michigan, Ann Arbor, Michigan,
U.S.A.
Professor T. Wilson, University of Glasgow, Glasgow, United Kingdom
Board of Editors
Professor A. P. Jacquemin, University of Louvain, Belgium
Professor H. W. de Jong, University of Amsterdam, The Netherlands
L. Prins, Nijenrode, Instituut voor Bedrijfskunde, Breukelen, The Netherlands
The holding company
and corporate control
Herman Daems
European Institute for Advanced Studies in Management and UFSAL
c:Jvfartinus cfJVijhoff Social Sciences Division
CLeiden IG fJoston 1978
ISBN-13: 978-1-4613-4058-4 e-ISBN-13: 978-1-4613-4056-0
001: 10.1007/978-1-4613-4056-0
© 1977 by H. E. Stenfert Kroese B.V. Leiden, the Netherlands.
Softcover reprint of the hardcover 1st edition 1977
No part of this book may be reproduced in any form, by print, photoprint, microfilm or any other
means, without written permission from the publisher.
to Marielle
ACKNOWLEDGMENTS
Writing a foreword for a book, a task which implies that the writer's job is
finished and the reader's about to begin, is a very pleasant one and an excel
lent opportunity to acknowledge the people and institutions who have contrib
uted to my research and thinking over the years.
First of all I would like to thank Professor Herman van der Wee of
K.U. Leuven who, besides conceiving the original idea for this work, has
consulted me all along. He became a very good friend and counsellor. I also owe
a special word of gratitude to Professor Alfred D. Chandler Jr. of Harvard
University. He not only taught me everything I know about the modern business
institution but also gave me generous opportunities to pursue my research
interests at Harvard. Jacqueline Corluy-Janssen deserves additional credit for
her efficient support in collecting, sorting and re-calculating the original data
banks and for repeatedly helping me to meet deadline crises. It was Professor Jan
Lindemans, President of UFSAL in Brussels, who kindly allowed me to take
time off from my teaching duties to finish this research and start a new project.
And I have to thank Professors Alexis Jacquemin of UCL and John van
Waterschoot of K. U. Leuven for their sincere interest in my work and for their
friendly encouragement.
Institutions as well as people have contributed to this research. The list is long
so I will mention only two that have been particularly helpful. The Harvard
Graduate School of Business Administration repeatedly offered me fellowships
and grants and provided an outstanding intellectual environment in Cambridge
from which I benefitted enormously during my long stays there. The European
Institute for Advanced Studies in Management in Brussels has been a crucial aid
in shaping my research. It also gave me a friendly and hospitable base to which it
was a pleasure to return when I needed some shelter.
Although people and institutions contributed much, it was my lovely wife and
children, always willing and prepared to give the highest priority to my wildest
projects, who did most to help me finish this study.
Herman Daems
CONTENTS
Acknowledgements VII
Herman Daems
I. INTRODUCTION I
l. Research subject and objectives / 1
2. What is a holding company? / 2
3. Previous literature and the contribution of this study / 4
4. Plan of the study / 6
II. A POWERFUL INSTITUTION I 7
l. Introduction / 7
2. The history / 7
3. The main characteristics of the Belgian holding company system 16
4. International comparison and the reasons for the stability and viability of the holding
company / 23
5. Managerial organization of control / 34
6. Concluding remarks / 36
III. HOLDING COMPANIES AND FINANCIAL INTERMEDIATION:
THEORY I 37
l. Introduction / 37
2. The basic model: capital-as set-pricing in a two-parameter world 37
3. The case for and against security substitution by holding companies / 43
4. Conclusion / 47
IV. HOLDING COMPANIES AND SECURITY SUBSTITUTIONS:
EVIDENCE I 49
I. Introduction / 49
2. The statistical methodology 50
3. The sample / 54
4. The empirical results 55
5. Conclusion / 63
CONTENTS
V. HOLDING COMPANIES AND CORPORATE CONTROL I 65
1. Introduction I 65
2. A methodology for measuring the control influences of the holding companies I 66
3. Concentration of corporate power in the Belgian economy I 74
4. The market for corporate control in Belgium I 85
5. Concentration of corporate power and competition I 88
6. Conclusion I 90
VI. FOUNDATIONS FOR A THEORY OF HOLDING COMPANY
BEHAVIOR I 93
1. Introduction: the holding companies' problem I 93
2. Control for the pure sake of control or power I 94
3. Financial and economic benefits to control I 98
4. Conclusion I 121
VII. HOLDING COMPANIES, INVESTMENT STRATEGY AND ECONOMIC
GROWTH I 123
1. Introduction I 123
2. The retardation of the Belgian economy, revisited I 124
3. Industrial structure and economic growth I 130
4. Conclusion I 135
VIII. GENERAL CONCLUSION I 137
I. INTRODUCTION
1. Research subject and objectives
This study focuses on an economic institution, the large industrial holding
company, which continues to hold a prominent if not a strategic position in the
resource allocation process in many industrialised market economies. Powerful
multicompany combines like the famous Japanese zaibatsu and the less familiar
but equally powerful European industrial groups rely on the institution of the
holding company to tie their intermarket control network together. Two general
questions arise from this situation: first, what factors account for the viability
and growth within a market setting of those institutions which internalise
allocation decisions and, second, what effect do such institutions have on
resource allocation? These questions provide the framework in which the proper
research subject can be most adequately introduced.
Before doing so, it is crucial to point out that the holding company institution,
as analyzed in subsequent chapters, should not be confounded with the legal
constructs, bearing the same generic name and flourishing in fiscal paradises,
whose sole function is to organise tax evasion across national boundaries. The
institution, as studied here, is the large holding company through which
industrial groups manage multicompany systems. Such multicompany systems,
operating an intermarket network by means of holding companies, continue to
be more typical for Europe and Japan than for the United States where, for
legal reasons, but also because of managerial efficiency, the multicompany
system built around the holding company institution was rather short-lived and
the giant integrated multiunit enterprise rose to dominance 1 instead.
Multicompany systems and holding companies, therefore, must be analyzed in a
European setting. Particularly in Belgium, but also in France2, intermarket
combines and holding companies continue to occupy a crucial position in the
1. Alfred D. Chandler, Jr. (1977).
2. Francois Morin (1974).
2 INTRODUCTION
more basic sectors of the economy. Because of the remarkable stability of the
Belgian holding company structure, it was preferred to concentrate the analysis
of the holding company institution on the Belgian experience. However, an
analysis with particular reference to the Belgian intermarket c0mbines and
industrial holding companies does not imply a loss of generality. Indeed, the
theoretical, empirical and historical analysis of the holding company institution
and of the intermarket combines in subsequent chapters is sufficiently general,
we believe to provide analytical insight into the function and conduct of other
intermarket groupings and multifirm systems like the Japanese zaibatsu and the
American conglomerate.
The research objectives ofthis study, then, are: first, to determine the economic
and financial conditions which allowed the holding company institution to
remain remarkably stable over time; second, to define the economic function of
this controversial institution; third, to find new yardsticks for measuring the
holding companies' impact on Belgian finance capitalism; and, fourth, to
develop new foundations for a theory of the holding company and of corporate
control.
2. What is a holding company?
The large Belgian holding companies are best defined as financial institutions
which manage a portfolio of stocks in order to control the companies in which
they hold a share of the equity capital. The crucial term in this definition is the
concept of controL It is the struggle for corporate control which distinguishes the
holding company from other financial institutions, such as the mutual funds.
A precise definition of a holding company, then, requires a precise operational
definition of the concept of corporate control. What does control mean? What is
the purpose of control? What benefits are derived from the control function and
why is control desirable? Since Belgian holding companies are mainly financial
institutions, their activities are mainly directed towards control over the capital
management function. An operational definition of control must, therefore,
show the influence the holding company exerts on capital management. Control
over a company is best defined, then, as having the control instruments
(representation on the board of directors or a 'substantial' share of equity
capital) needed to monitor capital management in a company.
The large Belgian holding companies are used to control a complex in
termarket combine. Very often the operating enterprises under control are not a
part of the portfolio of the 'mother' holding company but are indirectly
controlled through an intermediate layer of subholding companies. This