Private Benefit of Control (PBC)

The existing literature often identifies private benefits of control (PBC) as “the ‘psychic’ value some shareholders attribute simply to being in control”, as well as the “perquisites enjoyed by top executives and/ or majority shareholders” (Harris and Raviv, 1988; Aghion and Bolton, 1992; Dyck and Zingales, 2004, p. 540). This includes anything that is not shared with non-controlling shareholders (Coates, 2003). Based on that, Benos and Weisbach (2003) define private benefits of control as “benefits that accrue to managers or shareholders that have control of the corporation, but not to minority shareholders” (p. 218). Accordingly, “any benefits that controlling shareholders receive above and beyond the benefits which accrue to them in proportion to their fractional ownership in the corporation” are described as PBC (Miletkov, 2007, p. 2).

According to Pacces (2008), the analysis of corporate governance, based on this broad PBC definition, includes all kinds of benefits accruing exclusively to the corporate controller by means of their staying in charge of the company management, and not just those who result in reduction of shareholder value. In most cases, the extraction of private benefits harms shareholders particularly when reducing “the actual or potential returns on their investment, which are named conventionally as security benefits”[1] (Pacces, 2009, p. 4).

Ehrhardt and Nowak (2003) classify the benefits of control into four categories based on two dimensions: the first is how transferable the benefits are and the second whether they are pecuniary or non-pecuniary.

Table 2: Four Categories of BPC according to Erhardt and Nowak (2001)

  Pecuniary (“Tunnelling”) Non-pecuniary










I. “Self-Dealing”

– Excessive (above-market) compensation

– Diversion of resources

– Asset transfers at arbitrary prices

– Cheap loans and guarantees

III. “Amenities”

– Winning the world series

– Influencing public opinion

– Owning a luxury brand

– Physical appointments

II. “Dilution”

– Insider trading

– Freeze-out (squeeze–out)

– Issuance of shares at dilutive prices

IV. “Reputation”

– Social prestige

– Family tradition

– Promotion of relatives

– Personal relations

Source: Erhardt and Nowak (2001)


Pecuniary private benefits are “the non-proportional flow of real resources from the company to the controlling shareholder” (Gilson, 2005) and include two types of private benefit: self-dealing and diluting corporate resources. In Johnson et al., (2000a), a study of legal cases describing the expropriation of minority shareholders, the authors refer to self-dealing and dilution with the term ‘tunnelling’, and defined this process as the transfer of assets and profits out of the firm for the benefit of its controlling shareholders. Moreover, self-dealing transactions are pecuniary benefits that emanate from asset transfers from the company straight to those who control shares making a large profit on transfer pricing, excessive compensation, loan guarantees, and asset sales. This occurs while dilution activities keep increasing controlling shareholder benefits without directly transferring assets and continue to decrease minority shareholder wealth (Ehrhardt and Nowak, 2003, p. 5).

Private benefits are similarly defined by Modigliani and Perotti (2000) who talk about asset transfers at arbitrary prices, transfer investments at deflated prices, and sales of control blocks without equal treatment. Hanouna et al. (2001) offer a similar perspective when they try to explain the rationale behind a ‘control premium’, that is, control carries with it the ability to engage in self-dealing by means of excessive salary, looting, and squeeze-outs.

More elaborately and relying on the previous classification of Johnson et al. (2000b), Atanasov et al., (2008a) divide ‘tunnelling’ into three basic types: the first two types are correspondents to Johnson et al. (2000b) self-dealing transactions and called ‘cash flow tunnelling’ and ‘asset tunnelling’, while the third type is referred to as  ‘equity tunnelling’ (correspondent to dilution). Cash flow tunnelling affects the current year’s financial results, but does not affect the long-term productive assets, and thus does not directly affect the firm’s value. Examples include transfer pricing (sale of outputs to an intermediary controlled by insiders for below-market prices; or purchase of inputs at above-market prices), excessive executive salaries or perquisites, and small-scale sales or purchases of assets, which do not significantly affect the firm’s cash-generating capacity. Cash flow tunnelling can repeat year after year, but the fraction of cash flow which is tunnelled can change over time (Atanasov et al., 2008a., pp. 2-3).

Asset tunnelling involves the diversion of major fixed assets from or to the firm. Transfers from the firm will be for underinflated prices in comparison with the market value. They are distinct from cash-flow tunnelling because of their scale; the transfer has a permanent effect on the firm’s future cash-generating capacity. Transfers to the firm will be at overinflated prices. Examples include overpriced purchases of assets, or investments in an affiliated firm, on better terms than the affiliate could obtain on its own. Further details about cash flow and asset tunnelling are presented in the following self-dealing section.

Equity tunnelling (dilution) increases the controller’s share of the firm’s value, at the expense of minority shareholders, but does not directly change the firm’s productive assets (Atanasov et al., 2008a, p. 4). The three central forms of dilution are: 1) dilutive equity offerings by issuance of shares to insiders at below market value (Baek et al., 2006; Black el al., 2000); 2) freeze-out (squeeze-out) by forcing minority shares to be sold to the controller for below market value (Nenova, 2005; Gilson and Gordon, 2003); and 3) by controllers organising loans from the firm to themselves at a below-market rate (Barak and Lauterbach, 2008).

Controlling shareholders may exploit the absence of statutory pre-emptive rights to dilute the other shareholders. In markets where the prevailing laws do not provide for pre-emptive rights, a listed company can easily issue fresh equity or convertible instruments to the controlling shareholders or their friends and associates, at underinflated prices. However, even in markets where shareholders have pre-emptive rights, tactics like a rights issue priced at a deep discount to the market price can be used to dilute the shareholders that do not participate in the issuance. (Singhai, 2002)

Insider trading also becomes a mode of dilution, as it transfers value from uninformed investors to insiders without directly affecting firm value. Moreover, other forms of dilution include the use of controlling shareholders for the firm’s stock to pay for the acquisition of an unlisted group affiliate at inflated valuations. Non-controlling shareholders’ are also diluted for no fault of theirs when a firm suffers financial distress due to inappropriate policies designed to further the interests of the controlling shareholders (Singhai, 2002).

There is also non-pecuniary PBC, which can include 1) amenities – from nice offices through to generous expenses accounts to private jets (Yermack, 2006); and 2) reputation – the prestige and social status that the controllers receive. Controllers may use firm funds for gaining public prestige (through large contributions to the community) and social status (by helping friends and relatives) (Barak and Lauterbach, 2008). These types of reputation benefits are hardest to transfer to another owner, because they take time to build, are owner-specific, and in many cases require family or at least geographical membership (Ehrhardt and Nowak, 2003, p. 5).

Consistent with the above classification and following Mayer (1999), Pacces (2008) suggests that PBC can arise from more or less directly ‘stealing’ corporate assets, thereby diverting profit from non-controlling shareholders. This type of benefit is referred to as ‘diversionary PBC’ and is similar to the definitions of ‘tunnelling’ advanced by Johnson et al., (2000b) and ‘pecuniary’ by Ehrhardt and Nowak (2003). Private benefit can also arise from distorting the management choices by controllers in order to maximise their own goals, an example of such ‘distortionary’ choices includes empire building, luxury expenses, and extravagant perquisites. This is intuitively illustrated by a broad notion of ‘shirking’ (Roe, 2003, p. 7).

Pacces (2009) argues that PBC can also play a virtuous role in corporate governance. He introduces a third category of private benefits of control called idiosyncratic private benefit. By this third type, the analysis departs from the standard principal-agent framework by assuming that idiosyncratic benefits account for a further value to be appropriated as a reward for applying entrepreneurship to the corporate structure. Originally, idiosyncratic PBC are harmless to non-controlling shareholders. The quasi-rent nature of this value makes appropriation by the corporate controller a necessary condition for efficiency, which implies that residual control rights be allocated separately from ownership.

In summary, as Miletkov (2007) suggests, there are three potential sources of private benefits of control: “the psychological value of being in control, the consumption of perquisites, and the expropriation of the minority shareholders”. We now consider how these private benefits can be measured.

[1] Some PBC have no opportunity costs to outside shareholders, because either the controller is in the unique position to appropriate their value or, similarly, they do not have yet any value to non-controlling shareholders (Hart 2001; Holderness 2003).

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