What are pyramidal ownership structure what impact have they had on the corporate governance of East Asian business - Essay Example

PYRAMIDAL OWNERSHIP STRUCTURE AND ITS IMPACT ON THE CORPORATE GOVERNANCE OF EAST ASIAN BUSINESS Introduction A pyramid is defined as an ownership structure in which the controlling shareholder exercises control of one company through ownership of at least one other listed company (Clarke, 2009, p. 254). This paper endeavours to discuss pyramidal ownership structure and its impact on the corporate governance of East Asian Business. Moreover, this paper will specifically focus on the aforementioned structure and its existence in China.

Definition Pyramidal ownership structure is illustrated as an entity whose ownership structure exhibits a top-down chain of control; in such a structure, the supreme owners are situated at the apex and what follows under are successive layers of firms (Ariffin, 2009). According to Eden and Dobson (2005), few rich families manage to gain authority over a web of corporations by utilizing a pyramidal ownership structure through cross-holding and placing family members in vital executive positions.

Aras and Crowther (2009) depicted pyramidal ownership structure by associating it with an example in a family business group employing the utilization of the aforementioned entity; the said authors highlighted that the family achieves control by a chain of ownership relations wherein the family directly controls a firm and so forth. Impact and Effects This type of ownership structure poses a variety of effects and apparent impact on control of businesses. Hence, this paper will highlight its impact on the corporate governance of East Asian Business specifically in China.

According to Ariffin (2009), the direct consequence of a pyramidal ownership structure is a separation of ultimate owners actual ownership and control in firms situated at the lower part of the pyramid structure. Moreover, Ariffin (2009) also gave emphasis that when such separation of power and control exists, there is an extensive occurrence of expropriation of minority shareholders. Another point highlighted by Eden and Dobson (2005) is that since such ownership structure entrust the governance of dozens or even hundreds of companies to a single wealthy individual or family, corporate governance problems related with a single individual or family are usually magnified into macroeconomic problems specifically on economy-wide resources allocation predicaments as discovered in evidences provided by financial economics researches.

In a research conducted by Fan, Wong and Tianyu (2005), they examined the pyramidal ownership structure of a large sample of newly listed Chinese companies run by local governments or private entrepreneurs. Both types utilize layers of intermediate companies to govern their firms; however, their pyramiding behaviours are possibly influenced by a variety of property rights difficulties because Chinese laws do not provide the opportunity for free transfer of state ownership (Fan, Wong & Tianyu, 2005).

In China, pyramiding provides business entrepreneurs the chance to credibly decentralize their firm decision rights to firm management without making them give up or sell off their ownership (Fan, Wong & Tianyu, 2005). Moreover, pyramiding also comes up with internal capital markets that aid in relieving their external financing constraints (Fan, Wong & Tianyu). Conclusion The Pyramidal ownership structure as unleashed in this paper brings about a variety of effects to the corporate world. It could either be a benefit or a negative consequence as provided in the instances of business companies in China.

However, knowing and understanding the aforementioned structure could facilitate its effective utilization in the business world. Bibliography Aras, G. & Crowther, D. (2009) Global Perspectives on Corporate Governance and CSR. United Kingdom, Gower Publishing Limited. Ariffin, B. (2009) Pyramidal Ownership Structure and Agency Problem: Theory and Evidence. Available from: [Accessed 29 May 2012]. Clarke, T. (2009) European Corporate Governance: Readings and Perspectives. New York, Routledge. Eden, L.

& Dobson, W. (2005) Governance, Multinationals and Growth. United Kingdom, Edward Elgar Publishing Limited. Fan, J.P.H., Wong, T.J. & Tianyu (2005) The Emergence of Corporate Pyramids in China. Available from: [Accessed 29 May 2012].