The Governance of Foundation-Owned Firms

Abstract

The burgeoning literature on corporate governance, both in economics and in law, has focused heavily on the agency costs of delegated management. It is therefore striking to encounter a large number of well-established and highly successful companies that have long been under the complete control of a self-appointing board of directors whose compensation is divorced from the profitability of the company and who cannot be removed or replaced by anyone except themselves. The companies in question are those controlled by “industrial foundations,” which are nonprofit entities that possess a controlling interest in an otherwise conventional business corporation. Although common throughout Northern Europe, industrial foundations are particularly numerous in Denmark, where they control a quarter of the country’s 100 largest corporations. We work with a data set of 110 foundation-owned Danish firms to explore whether, and how, the governance structure of industrial foundations helps explain the strong performance of the firms they control. Given the absence of substantial material incentives, we concentrate on governance structures. We find a strong and robust relationship between the structure of foundation governance and firm performance. These results reinforce the view that, with the proper governance structure, pure fiduciaries can perform more efficiently than conventional economic models would predict. More specifically, these results underline the potential importance of the legislation that, in 2018, removed the long-standing barrier to forming industrial foundations in the USA.