Seth-owned, Unlisted, Non-corporatised Stagnant Enterprises of Pakistan
The relationship between a firm’s ownership structure and its performance is a key area of study in corporate governance. Entrepreneurship, as a foundational concept, plays a crucial role in the formation and growth of firms. Entrepreneurs, driven by the prospect of profits, often aim to maximize efficiency and optimize resource allocation to achieve higher performance. The desire for profits acts as a primary motivator, and it is logical to assume that owners of firms will pursue decisions that favor profit maximization. However, the way a firm is owned and controlled becomes critical as businesses grow and face complex challenges.
Ownership structure refers to how a company’s ownership is distributed among its shareholders, ranging from concentrated ownership—often in the hands of family members or a small group of investors—to widely dispersed ownership among numerous shareholders. This structure can significantly influence decision-making, strategic objectives, and the firm’s capacity for growth and innovation. The ownership structure directly impacts a firm’s governance mechanisms, which in turn affect its performance in achieving financial and operational goals.
In the context of Pakistan, the corporate landscape is dominated by family-owned businesses, many of which are small to medium-sized enterprises (SMEs) with limited growth trajectories. Notably, the firms that Pakistanis often consider to be world-class and performing spectacularly are, in the global corporate landscape, equivalent to medium enterprises at best. Unlike in more developed or comparable emerging economies, Pakistan’s corporate sector faces challenges such as limited access to capital, insufficient professional management, and a lack of strategic expansion through mergers and acquisitions (M&A). This study compares Pakistani enterprises with those in similar countries, highlighting key differences in ownership structures and their implications for firm performance, governance practices, and overall growth potential.
Theory behind Firm Ownership and Performance
Entrepreneurship need not always be wealth-creating and growth inducing. Gordon Tullock (1989) and Krueger (1974) have shown that entrepreneurship can be directed towards the accumulation of wealth through unproductive enterprise. Rents can be earned from government awards of licenses and titles that impede market and goods development. The system of incentives that a country sets up in its governance mechanism can either promote healthy entrepreneurship leading to economic growth and prosperity or rent seeking where productive activities are at a discount. In the latter case, a society gets stuck in a low poverty-low growth trap.
The relationship between firm ownership and firm performance is a well-researched area in economic theory, with several key theories providing insights into how different ownership structures impact firm behavior, efficiency, and overall performance. Agency Theory, pioneered by Jensen & Meckling (1979), explores the relationship between owners (principals) and managers (agents), highlighting the potential for conflicts of interest when the separation of ownership and control occurs. This theory emphasizes the principal-agent problem, where managers may pursue personal goals that diverge from the interests of shareholders, leading to inefficiencies. To mitigate these issues, owners incur monitoring costs and align incentives, such as performance-based compensation, to enhance firm performance.
