The study explores the issue how distinct is the separation of ownership and control of Sri Lankan listed companies and what implications the corporate ownership structure have on the corporate governance structure. Firstly, the study examines the ownership structure of sixty companies listed in the Colombo Stock Exchange during the period 2000-2004 by focusing on their ultimate ownership and thereafter, they are categorised into two ownership groups as ‘widely held/management controlled’ (MC), where the ownership is dispersed and ‘owner managed/owner controlled’ (OC), where the ownership is concentrated. Secondly, the salient governance characteristics of these two groups are identified based on the level of compliance with the Corporate Governance Best Practice. Thereafter, these characteristics of two ownership groups are compared, synthesised and discussed by drawing inferences from the extant literature to assess the implications of the ownership structure on the corporate governance structure. The study finds that the ownership is concentrated in most Sri Lankan listed companies with the presence of a controlling shareholder and widely held entities are rare as in most other Asian Countries. Hence, the majority of these companies fall into the OC group. This indicates that the separation of ownership and control of Sri Lankan companies lies mainly between the controlling shareholders and the minority shareholders. The study also finds the following salient characteristics as to the corporate ownership structure: the controlling shareholder is usually another corporate entity and in most occasions it is the parent company or group companies; wide prevalence of family ownership as the ultimate owners; extensive use of pyramid ownership structure, cross-holdings and participation in management by controlling shareholders to enhance the corporate control; and absence of a large community of arms-length institutional shareholders. The study finds that the level of compliance of MC companies with the Best Practice is significantly higher than that of OC companies indicating that the level of ownership concentration has a significant influence on the governance structure and practices of Sri Lankan companies. As the controlling shareholders achieve control rights in excess of cash flow rights in these companies through pyramid and cross-holding structures, they could use these methods to gain private benefits by expropriating minority rights, which would ultimately have adverse implications on the functioning of the capital market and the allocation of resources in the Sri Lankan economy. Hence, the critical governance issue of Sri Lankan companies is the protection of minority shareholders from the controlling shareholders’opportunism. The study contributes to the literature by analysing the ultimate ownership structure and its implications on the governance structure and practices of Sri Lankan companies. Therefore, the corporate governance issues identified in the study provide useful insights into the future corporate governance reforms in Sri Lanka.
Keywords: Corporate Control, Corporate Governance, Controlling Shareholder, Minority Rights, Ownership
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Department. of Accounting
University of Sri Jayewardenepura, Sri Lanka
Faculty of Management and Finance
University of Colombo, Sri Lanka