The effect of board structure and controlling shareholders on financial performance

Abstract:

The presence of controlling and major shareholders in the company causes the concentration of ownership in the hands of a limited number of people. The more this concentration of ownership increases, the greater the possibility of collusion between the major and controlling shareholders with the management. Institutional shareholders have been examined in this study to examine their impact on the negative effects of the presence of board members representing controlling shareholders. In this research, 109 companies were selected using the systematic elimination sampling method and the hypotheses were tested using the generalized least squares regression method. The results show that the presence of board members representing controlling shareholders increases the possibility of increasing the negative impact on the company's performance, and on the other hand, corporate governance mechanisms have been positive in reducing the negative effect of the presence of controlling shareholders on the board of directors.

Key words: controlling shareholders, institutional shareholders, independence of the board of directors. One of the tools for optimal allocation of resources is stock markets. Therefore, any problem that arises in the mentioned market is not only an economic problem; It also becomes a social issue in which the public interests of the society will be endangered. In 1929, a major crisis occurred in the American stock market, which was caused by the representation problem. The problem of representation or separation of ownership from management was first raised by Adam Smith in 1776 and was first analyzed by "Berle and Means". Today, this separation is known as the agency problem, and it means that how can you be sure that managers will use their freedom of action in line with the interests of investors, after the emergence of agency problems, in order to protect the public interest, information must be protected and the interests of managers and owners must be aligned, and various tools have been used in this case; Such as the application of ethics theory in accounting, the creation of accounting standards, internal controls, internal and independent audits, the presence of non-commissioned directors on the board of directors, and the use of long-term reward procedures. Despite all this, the problems have not decreased; Rather, its complications have increased. The control measures that were intended to reduce agency problems were not only ineffective; But he did not implement the minimum supervision either. In fact, all the criteria mentioned were superficial and only to comply with the laws without being able to support the interests of the shareholders in front of the managers. The reason may be the lack of corporate governance mechanisms; Especially the presence of shareholders is an institution that can, in addition to complying with all the mentioned criteria, to the ultimate goal of the company; It means increasing the interests of shareholders. Corporate governance means laws, regulations, structures, cultures and systems that achieve the goals of accountability, transparency, justice and respect for the rights of stakeholders. One of the main hypotheses of agency theory is that employers and agents have conflicting interests. In financial theories, the basic assumption is that the primary goal of companies is to increase the wealth of shareholders. But in practice this is not the case, the managers are not always fully looking for the interests of the owners and it is possible that they try to increase their interests through the wealth of the owners. The result of this thinking of the managers has led to the creation of information asymmetry between the owner and the manager, and their different motivations have caused the lack of trust of the owners in the managers. It is possible that the manager behaves in a way to convey incorrect or incomplete information to the shareholder, this happens when the manager tends to conclude a contract with the owner by having private information about what will provide his benefit. The non-executive members of the board supervise their decisions through the supervision of the authorized managers. As a result, the composition of the board of directors can affect the financial performance of companies. If the majority of the board members are non-obligatory independent directors, the board will be more efficient. Agency theory supports the idea that the board of directors should be under the authority of external (non-executive) managers to increase the independence of the board of directors from management. Because the management's opportunistic behavior must be controlled and supervised by the company's non-executive directors.. The presence of such managers can affect the quality of management decisions and provides appropriate solutions that should be carried out by the management to improve the company's performance (Hass Yeganeh et al., 2017). announced the separation of ownership from management (control). Subsequently, several studies have shown that even among the largest American companies there is a moderate level of ownership concentration (Demsetz and Lehn, 1985; Schleifer and Vishny, 1986; Mork et al., 1988; Holderness and Sheehan, 1988; Anderson and Reeb, 2003). Studies in other developed economies have shown above-average ownership concentration (Franks and Mayer, 1994; Gorton and Scheind, 1996; Faccio and Long, 2002). On the other hand, the ownership structure in developing economies is much more complex than in other developed countries. (Laporta, L?pez-de-Silans and Vishny, 1998 and 1999; Klassens, Dejankov and Long, 2000). In most of them, the controlling and dominant shareholders are the founders of the company or their children. The presence of centralized controlling owners raises several questions in the researcher's mind. Is the concentration of ownership useful or is it detrimental to the supervision of shareholders?

The results of empirical studies show different results in relation to the disadvantages and advantages of concentration of ownership. Darrica Holderness and Sheehan [2] (1988) found that family firms have lower financial performance (measured by Kiwi Tobin) compared to non-family firms, while Anderson and Reeb (2003) found the opposite results. Representation theory provides arguments in confirmation and rejection of ownership concentration. Some are that major owners (controlling the company) have the desire and ability to monitor management to reduce problems associated with agency principles; They support it. (Davis et al., 1997; Anderson and Rib[3], 2003). Other studies have found negative relationships between controlling shareholders and their monitoring (Burkart et al., 2003). Assuming that the recent conflict between the controlling shareholder and supervision imposes a cost on ownership concentration, which of the corporate governance mechanisms such as the board of directors and institutional owners work well to control these costs?

Observing studies with conflicting results on the advantages and disadvantages of ownership concentration, prompts the researcher to examine its effects on the company's performance, especially when the company's controlling shareholder has a representative on the board of directors. that the controlling and major shareholder has enough motivation to monitor the management, but the new results have shown that the presence of a controlling and major shareholder in the company and a high concentration of ownership, in addition to not monitoring the management's decisions, but aligning with the management's inefficient decisions and ignoring the rights of the minor shareholders and using them for their own benefit, in Iran, as in other developing countries, the concentration of ownership in many listed companies is quite evident, and examining the effect of the presence of a controlling and major shareholder who has a representative in the board of directors on the management's decisions It is important and necessary. Also, the investigation of the effective factors on increasing the supervision of the controlling and major shareholders on the decisions of the board of directors and finally the financial performance of the company is worthy of investigation. (ownership concentration) is not implemented in Iran. Since the controlling shareholders, due to having a high percentage of the company's shares, can be used as a monitoring and control mechanism on the management's activities and decisions in order to prevent the occurrence of profit-seeking activities and inefficient management decisions, but new studies have shown that the presence of controlling shareholders can not only create a supervisory role in the company, but also increase the profit-seeking activities of the management, because due to the greater connection of the controlling shareholders with the management, they can encourage the management in the direction of their wishes. and encourage them, and this time not for the interests of the management, but for the interests of the big shareholders and to the detriment of the small shareholders of the company.