CLS Blue Sky Blog

How Foundation Ownership Affects Creditor Governance

Foundation ownership represents a distinct form of corporate governance that challenges the traditional profit-maximization motive of the shareholder capitalism model. Foundations are independent self-governing bodies that own and control companies and pursue both commercial and social (often philanthropic) goals. As large blockholders, foundations are characterized as having purposeful businesses, sustainable governance, longer-term strategies, and charitable societal activities. For example, Novo Nordisk is a Danish foundation-owned healthcare company and is the maker of weight loss and diabetes drugs Wegovy and Ozempic. At the time of writing, Novo Nordisk also happens to be the most valuable European company. Other well-known foundation-owned companies include Carlsberg, Bosch, Zeiss, Heineken, Mahle, Rolex, Tata, and Ikea.

Foundation ownership offers an alternative governance structure to many conventional ownership structures (e.g., state, family, and institutional investor ownership). However, the traditional corporate governance view tends to focus on shareholders. Policies or mechanisms that benefit shareholders may not necessarily benefit creditors. Compared with the shareholder-manager conflict, there is a relative dearth of literature on the shareholder-creditor agency conflict and ownership structure. If creditor governance deteriorates, agency costs will increase along with debt and managerial opportunism. This would lead to an increase in credit risk and the cost of debt.

In a new paper, we examine the effects of foundations as blockowners on credit ratings, the probability of default, and bank loan conditions. Our central research question examines the effect of foundation ownership and control on credit governance. Since foundation owners have similar incentive structures, they provide a clean and robust test of whether foundation ownership influences credit risk. To this end, we address two specific research questions:

After controlling for year and industry effects as well as country-level financial and legal factors, we posit that foundation-controlled ownership of public firms increases firm creditworthiness and reduces agency conflicts between equity and debtholders, causing credit risk to decline.

For our empirical analysis, we use an international sample of 411 publicly listed companies between 2003 and 2021. The oldest sample foundation-controlled firm (FOC) is Husqvarna AB (founded in 1689), and the youngest FOC is Bonava AB (established in 2013). Although our sample firms are to be found mainly in Western Europe, we find an increasing FOC presence in emerging markets (e.g., Tata Group in India).

Syndicated bank loans are employed to investigate the effect of foundation-controlled ownership on loan relationship with banks. In our paper, we have several major findings. First, foundation-controlled ownership increases creditworthiness and lowers credit risk, and this finding is robust across several different credit risk measures. We also find that FOCs enable better loan contracting terms, such as fewer covenants and lower interest rates. Overall, we find that foundation ownership delivers effective monitoring and complements the bank monitoring role.

Compared with institutional investor-controlled and family-controlled firms, FOCs have more favorable conditions in their loan contracts. Overall, we find that banks value the identity of controlling owners in publicly listed companies. Our empirical results are supported by robustness tests, including country-specific legal frameworks and financial development indices.

Our findings have significant policy implications, particularly given the 2020 European Commission statement urging EU companies to shift away from short-termism. Our empirical analysis suggests that foundation ownership is not only an effective governance structure, but also enhances relationships with other stakeholders, such as creditors. Unlike traditional ownership, foundations prioritize long-term objectives in a firm’s investment strategies, growth, management, sustainability efforts, and responses to climate-related challenges. Given their unique, ownerless nature, foundations are increasingly recognized as suitable candidates for the controlling ownership of large publicly listed companies, playing a pivotal role in advancing sustainability across our societies and the natural environment.

This post comes to us from Bonnie Buchanan, a professor of finance and director of the Sustainable and Explainable FinTech (SAEF) Center at Surrey Business School, University of Surrey, and Caglar Kaya, an assistant professor of finance at Aalborg University and the University of Goteborg and a researcher at the Center of Corporate Governance (CCG) of Copenhagen Business School. It is based on their recent paper, “Foundation Ownership and Creditor Governance: Evidence from Publicly Listed Companies,” available here.

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