Changing Ownership Structure Is Good for the Balance Sheet

Businesses with dynamic ownership structures -- those that fragment or concentrate ownership over the years -- perform better than those that keep the same structure over time, according to the latest edition of the Corporate Governance Lab's Osservatorio Imprese at SDA Bocconi School of Management, supported by partners PwC TLS, Banca Generali and NUO S.p.A.

In the Italian situation, in particular, revenues in companies that increased ownership concentration between 2014 and 2022 grew by 13 percentage points more than those that reduced it and as much as 19 percentage points higher than those that had kept the same ownership structure for the entire period.

The Corporate Governance Lab mapped the more than 14 thousand Italian firms owned by individuals and with a turnover of more than €20m in 2014 and selected a sample of 2,592 firms (1,296 with one controlling shareholder, 1,296 with multiple shareholders), of which it tracked all changes in ownership structure up to 2022.

Changes in ownership structure turn out to be quite common. Among the 1,296 companies with more than one partner, 627 (48 percent) changed ownership structure during the period under consideration, in most cases (501) in the direction of concentration and on 126 occasions in the opposite direction.

Companies that stayed with the same ownership structure recorded an average cumulative sales revenue growth of 34.9 percent; those that reduced concentration grew by 40.2 percent; and those that increased it reached 53.4 percent.

"This is a mixed picture. Companies seem to get an advantage in terms of greater clarity from concentrated ownership, with performance-boosting benefits; on the other hand, data confirm that it is somewhat hard to foster natural fragmentation of ownership over time, probably also due to a difficulty in designing more sophisticated governance systems," says Alessandro Minichilli, Director of the Corporate Governance Lab.

"Our analysis suggests a tailor-made approach with respect to ownership structures: by evaluating different combinations of ownership and governance structures, and the use of the different solutions available, such as holding companies, it is possible to best reconcile ownership and business needs, but there remains the problem that the average company size is still too small," says Valentino D'Angelo, Coordinator of the Corporate Governance Lab.

"It was very interesting to observe how quality governance," adds Daniela Montemerlo, co-author of the Observatory, "amplifies the positive effects of both concentration and fragmentation."

The Lab has developed a Corporate Governance Index, which measures the quality of corporate governance by considering five parameters: the presence of a board of directors (BoD); individual leadership; openness of the BoD to outside directors; separation of the offices of chairman and CEO; and diversity of the BoD by gender, age and geographic origin.

Companies that, as well as changing ownership structures, improve this index record better results in terms of both revenue growth (1.5 percentage points higher for those who concentrate and as much as 17.1 percentage points for those who fragment) and debt (0.3 percentage points lower for those who concentrate and 3.8 for those who fragment).

"It is to the credit of SDA Bocconi's CG Lab, with which we share a technical-scientific approach, to cover areas of research that are often little explored but crucial in the debate on the sustainability of firms over time, such as this one on the dynamics between ownership structure and governance," comments Fabrizio Acerbis, partner of PwC TLS.

"The results of the Corporate Governance Lab confirm-despite the period of volatility and uncertainty-the direct correlation between dynamic ownership structures and good financial results. This is a concept that is increasingly evident in our daily encounters with entrepreneurs on the ground and has prompted us to develop an entire ad hoc advisory module for our entrepreneur-clients. The bank's goal is now to integrate within our holistic advisory model the results and best practices that have emerged from the Observatory, so as to provide through our Advisors to our clients accurate and personalized for their business assets in a market scenario made increasingly complex by geopolitical, inflationary and business cycle-related uncertainties," says Andrea Ragaini, Deputy General Manager of Banca Generali.

According to Tommaso Paoli, CEO of NUO S.p.A., "In an increasingly complex global scenario, it is clear how dynamism is, in a broad sense, an indispensable tool to foster growth. In particular, the evolution of ownership structure and especially the effect of this evolution on good governance is a critical factor for business success."

The Corporate Governance Lab's research team includes Alessandro Minichilli, Daniela Montemerlo, Valentino D'Angelo, Francesca Collevecchio, Joao Pedro Bastos Castilho, Giovanni Di Caprio e Carlotta Alice Gherardi.