The term “private benefits of control” refers to the privileges and advantages that accrue to controlling shareholders at the exclusion of minority shareholders. These benefits can take a variety of forms, ranging from cash extractions to more intangible manifestations, such as nepotism and decision-making that prioritizes the controller’s prestige over the profitability of the firm. For example, former Delaware jurist Leo Strine has likened the ownership of a culturally salient business to possession of a “tool that allows [the owner] to hang with stud athletes, supermodels, hip hop gods, and other pop culture icons.”[1]

The Current View on PBOC – Concentrated Ownership of Media and Sports

Extant explorations of private benefits of control surmise that certain industries naturally have potential for substantial production of private benefits and predict that firms in such industries should find themselves owned by controlling shareholders. For example, previous scholarship has often held up the media as a leading example of how some industries naturally produce an abundance of “nonpecuniary” benefits (or “amenities”) and how such benefits in turn lead to concentrated ownership.[2] Scholarship has also long surmised that sports teams are likely to have individual controllers because the primary owner gains significant non-pecuniary emotional benefits from controlling a winning team.[3]

Inconsistencies Between Theory and Reality

In a new article, I challenge these and other narratives. For instance, the plutocrat-dominated media landscape that most Americans evidently take for granted in fact emerged only in the 1980s. Before then, as my article shows, the post-war American media landscape was populated with numerous widely held firms without controlling shareholders, as illustrated by the below chart showing periods in which the Big Five publishers, the Big Three broadcasters, and the Big Six studios were held by a controlling shareholder.

As I argue, private benefits, and, in turn, concentrated ownership in the media industry are products of the changing regulatory and economic environment in addition to any endogenous character of the industry.

Likewise, the narrative that the sports industry creates particular private benefits (such as psychic joy from leading a winning team) that can only be enjoyed by a single owner is not only undermined by casual observation, but also the fact that dispersed ownership of sports teams, usually by fan clubs, is reasonably common outside of the United States. Indeed, many of the wealthiest and most successful soccer teams in the world are owned by their fans and have no controlling shareholder, including Real Madrid, F.C. Barcelona, and effectively all of the teams in the German Bundesliga.

Additional Analytical Dimensions of PBOC

In light of the shortcomings of current theory in explaining empirical patterns of ownership and control, I argue that previously overlooked characteristics of private benefits of control are important to understanding those benefits, the associated patterns of corporate ownership and control, and the ultimate social effects. My article proposes consideration of the following: (1) the divisibility and rivalry[4] of a benefit, (2) the degree to which a benefit is separable, or distinct, from control itself, and (3) the externalities imposed on non-corporate constituents by a benefit and the effects of external conditions, such as the legal environment, on a benefit.

The concepts of divisibility and rivalry help significantly in explaining why dispersed fan ownership is a competitive ownership model for sports teams. In particular, non-rivalrous benefits such as the joy from voting one’s shares in a favorite team can result in greater total shareholder welfare as the number of shareholders grows. Importantly, a surfeit of non-rivalrous benefits may mean that even financially costly decisions that would reduce shareholder welfare if the firm were held by a single shareholder may increase shareholder welfare when the firm’s ownership is dispersed. Thus, the shareholders of a fan-owned sports team might consider high roster-spending that results in more entertaining spectacles to be in their best interests, even if such spending reduces team profits. Not-so-coincidentally (and in contrast to American sports), low profits are pervasive in European soccer leagues, where even controlled teams must compete with widely held teams for players and fans.

My paper then turns to whether a benefit is separable from control itself. For instance, any CEO can enjoy private jets, a handsome office, and sometimes even social fame. (Indeed, even an entry-level employee could enjoy some of these benefits, at least in theory.) However, without a controlling stake, CEOs cannot completely insulate themselves from the risk of being fired or, by the same token, exercise unfettered discretion over their firms’ business directions. Valuable separable benefits, such as a corner office or extravagant compensation, can be readily awarded to an agent-CEO, thus decreasing the necessity of obtaining actual control if a CEO seeks only such benefits. By contrast, it is essentially impossible to compensate agent-CEOs with inseparable benefits, such as the social benefits from being known as the controller of a high-flying technology firm. In these cases, the benefit is obtainable only with control itself. Thus, as the perceived value of such benefits rises, so does the frequency with which these firms should find themselves under the thumb of a controlling shareholder. However, unchallengeable control over business direction can be extremely expensive to firms (and, in turn, to society). After all, most business failures (even if those business are controlled) are caused not by theft, but by garden–varietymismanagement.

I also examine how private benefits can affect and be affected by external factors. For instance, as Professor Ronald Gilson identified years ago, large volumes of private benefits of control could harm macroeconomic competitiveness.[5] Moreover, there are numerous ways in which private benefits of control extract their value not from minority shareholders, but rather from the public. For instance, suppose a controller leverages his or her business position (but not firm financial resources) to pressure state lawmakers to lower personal income taxes by threatening to move jobs elsewhere. Assuming that the threat is successful, the controller extracted a benefit via his corporate position, though the benefit did not impose a cost upon minority shareholders.[6] Likewise, the social influence exerted by the controller of a media company may not come at the cost of minority shareholders, but rather society.[7] And sports-team owners who can exclude widely held teams (and the vast nonpecuniary amenities that accompany such dispersed ownership) from a league might be able to more easily collude to raise ticket prices or lower player salaries. This would not necessarily hurt minority shareholders, but rather fans and employees.

Policy Implications

Among other things, my analysis suggests that there are ways to effectuate a more restrained media environment other than direct governmental regulations on speech. Instead, regulators could take harder looks at the ownership of media firms, particularly when reviewing M&A activity. Just last spring, there was a contest for the Paramount media conglomerate between Skydance, which is controlled, and Sony, which is not. Given that Skydance won the contest, should antitrust regulators scrutinize the now-pending sale of Paramount more closely than they would if Sony had won? Likewise, given that foreign sports leagues seem perfectly capable of operating without the collusive agreements to restrict dispersed ownership that pervade American sports, should U.S. courts be more skeptical of the necessity or reasonableness of these agreements?[8] These and other policy issues may be better analyzed with a renewed consideration of the private benefits of control.

ENDNOTES

[1] In re Synthes, Inc. S’holder Litig., 50 A.3d 1022, 1036 (Del. Ch. 2012).

[2] See, e.g., Harold Demsetz & Kenneth Lehn, The Structure of Corporate Ownership: Causes and Consequences, 93 J. Pol. Econ. 1155, 1161–62 (1985); Ronald J. Gilson, Controlling Shareholders and Corporate Governance: Complicating the Comparative Taxonomy, 119 Harv. L. Rev. 1641, 1666 (2006).

[3] See, e.g., Demsetz & Lehn, supra note 2, at 1161–62; Michael J. Barclay & Clifford G. Holderness, Private Benefits from Control of Public Corporations, 25 J. Fin. Econ. 371, 381 (1989); Gilson, supra note 2, at 1166–67.

[4] By rivalry, or rivalrousness, I mean the economic concept concerning whether a resource may be consumed by one party without diminishing the resource’s availability to other parties. A common example of a rivalrous good is physical media, such as books or magazines. If someone is reading a particular copy of War and Peace, nobody else can read it. By contrast, broadcast and digital media are non-rivalrous. If someone listens to a radio broadcast, that does not diminish anyone else’s ability to tune in to the same broadcast.

[5] Gilson, supra note 2, at 1167–70.

[6] At least not in their capacity as minority shareholders.

[7] My analysis of media companies differs from most traditional narratives regarding media concentration, which focus on firm concentration and largely look past ultimate ownership or even attack dispersed ownership as too profit driven. These narratives often defend controlling shareholders and even suggest subsidies for multimillionaire controllers to maintain “ownership diversity.” See, e.g., C. Edwin Baker, Media Concentration and Democracy 183-86 (2007).

[8] Cf. Sullivan v. Nat’l Football League, 34 F.3d 1091, 1102 (1st Cir. 1994) (“we accept the NFL’s claim that its public ownership policy [forbidding public ownership] contributes to the ability of the NFL to function as an effective sports league, and that the NFL’s functioning would be impaired if publicly owned teams were permitted.”).

This post comes to us from James An at Stanford Law School. It is based on his recent article, “Dimensions of Private Benefits of Control,” available here.