Annex 7. The 2008 SNA and the Corporate Group Approach
- Jose Cartas, and Qi He
- Published Date:
- June 2015
The 2008 SNA
A7.1 The System of National Accounts 2008 (2008 SNA) defines institutional units on the basis of their place of residence and principal economic activity, with institutional units aggregated in sectors and subsectors. The aggregated data are not consolidated. However, consolidated presentations are occasionally applied for specific sectors or subsectors (e.g., general government or money-issuing corporations) for analytical or policy purposes.
A7.2 The first column of Figure A7.1 illustrates the approach followed by the 2008 SNA.
Figure A.7.1The 2008 SNA and the Corporate Group Approach
The Corporate Group Approach
A7.3 Instead of classifying institutional units in sectors, a second approach—also described in the 2008 SNA, but not recommended for national accounts, where strict geographical and sectoral boundaries must be observed—is to arrange institutional units in corporate groups on the basis of ownership and control (i.e., rather than grouping them together on the basis of their principal functions, behavior, and objectives).1
A7.4 The concept of the institutional unit is also the starting point for explaining the corporate group approach. On the basis of the concept of control, controlling and controlled units are aggregated. These are then consolidated by eliminating intra-group positions and flows, resulting in the establishment of corporate groups.
A7.5 The controlling and controlled units forming a corporate group usually belong (in terms of the 2008 SNA) to different economies and different sectors/ subsectors.2 It is therefore impossible to reconcile aggregated data compiled on the basis of the 2008 SNA with the data underlying the corporate group approach. One option, however, is to divide a corporate group into various subgroups comprising units that reside in different places and belong to different resident sectors.
A7.6 Other modifications stem from the application of different consolidation concepts based on the international financial reporting standards (IFRSs) and supervisory principles.3
A7.7 Corporate groups may be large where a parent corporation controls several subsidiaries and some of those control subsidiaries of their own. However, each individual corporation in such a group remains a separate institutional unit. Even wholly owned subsidiaries are separate legal entities required by law and tax regulations to produce full sets of accounts (including balance sheets).
A7.8 For financial stability purposes, it is necessary to have information at the level of corporate groups (particularly for financial groups), so data used for this purpose are usually consolidated at group level.
A7.9 When assessing risks and their potential spread across institutions and markets, it is essential to know which unit is bearing the risk in question, regardless of where the relevant assets are held within the group. Where an institution or a whole group fails, it is also important to be able to identify which other groups are exposed to that group (whether directly on-balance sheet or indirectly through contingencies such as guarantees) and are therefore liable to incur losses.4
A7.10 It may be that publicly available information is provided only for the corporate group as a whole, with relationships between the constituent corporations in the various countries having been consolidated. In this case, national accountants would need to consult other sources in order to obtain the necessary unconsolidated data.
A7.11 Statistical data used for supervisory and financial stability purposes focus on the activities of the supervised institution as a whole. For financial groups, these data are, accordingly, consolidated across national boundaries in order to include the activities of foreign bank branches. The data may also be consolidated across sectoral boundaries in order to include the activities of financial subsidiaries that are not banks (or money-issuing corporations). The content of this information is also somewhat different. Although supervisors use the sectoral distinctions and the detailed financial instruments reported for statistical purposes, they are primarily interested in measuring risks (such as counterparty, credit, and market risks).
Corporate Groups and Ownership Structures
A7.12 Groups of financial or nonfinancial corporations or conglomerates (corporate groups) can be large where a parent corporation controls several subsidiaries, some of which control subsidiaries of their own, and so on. The shareholdings of a corporate group are presented in a consolidated form, and consolidated at group level.
A7.13 The debt securities holdings of a corporate group are presented in a consolidated form, at the group level. For financial stability purposes, it may be useful to have information on debt securities holdings consolidated at the level of groups of corporations as a whole (2008 SNA, paragraph 4.51), with a breakdown by issuer (e.g., on a sector and residence or ultimate risk basis), currency, maturity, and type of interest rate.
A7.14 Ownership structures concern the type and composition of shareholders in a given corporation. Ownership structures are determined using observable measures of ownership concentration or the extent of direct/indirect ownership.
A7.15 Ownership structures for corporate groups can involve pyramid, ring, and web structures, as well as cross-shareholdings.
A7.16 One example of a type of legally recognized corporate group with a complex structure is the German “Konzerne.” Similarly, “keiretsu” and “chaebol” are types of corporate group in Japan and South Korea, characterized by complex interlocking business relationships and shareholdings. Cross-shareholding arrangements are an essential feature of keiretsu and chaebol groups. The way in which corporations engage with shareholders and other stakeholders can vary substantially, depending on the ownership structure in place.
A7.17 In many economies, family interests dominate ownership structures. It is sometimes suggested that corporations controlled by family interests are subject to better oversight than corporations controlled by institutional investors.
A7.18 Markets have become increasingly institutionalized: investors are often institutions investing the pooled funds of their intended beneficiaries. These institutional investors include insurance corporations, pension funds, and investment funds (as well as deposit-taking corporations). This kind of investment is described as “institutional investment,” even though the vast majority of the funds are invested for the benefit of individuals.
A7.19 The largest pools of investment funds are designed to maximize the benefits of diversified financial assets by investing sufficient amounts in a very large number of different corporations. The idea is that this strategy will largely eliminate financial and other risks at the level of individual firms. One consequence of this approach is that these investors have relatively little interest in the governance of individual corporations.
Corporate Shareholder Networks
A7.20 The analysis of corporate shareholder networks is an important task in corporate governance. In all economies, cross-corporation and cross-border shareholding relationships exist, forming complex networks and dependencies linking corporations at national and international level.
A7.21 These networks of shareholders give rise, in turn, to complex investment and control structures linking the entities concerned. Control enhancing mechanisms (CEMs) are fairly common for listed corporations. For instance, nearly half of all European Union (EU) corporations have one or more CEMs, the main ones being pyramid structures and cross-ownership arrangements.
A7.22 Pyramid structures resemble a tree, with the shareholder at the top of the pyramid usually having control. Cross-ownership structures comprise horizontal links established by means of cross-holdings of shares, reinforcing and entrenching the power of central shareholders.
A7.23 The analysis of corporate shareholder networks involves various tasks:
Determining the degree of ownership concentration by identifying the largest shareholders (typically the controlling shareholders), as well as pyramid and cross-ownership structures.
Exploring the corporate control system and identifying the controlling shareholders.
Identifying the ultimate controlling shareholders.
Measures of Shareholder Structures
A7.24 In order to ascertain who are a corporation’s shareholders and how many shares they own, a corporation’s direct and indirect shareholdings need to be examined.
A7.25 Corporation networks are usually displayed as organigrams or ownership matrices. Corporations are presented as dots or squares, and shareholdings are shown as arrows. Colors can be used to distinguish between financial and nonfinancial corporations.
A7.26Figure A7.2 shows corporation A’s ownership and control vis-à-vis corporations B, C, and D in a pyramid structure. In this example, corporation A owns 50 percent of corporation B and 40 percent of corporation C, but only (indirectly) 29 percent of corporation D. It controls this corporation through its control of corporation B. Corporation A is the ultimate shareholder, as it is not owned by any other shareholder. Corporations B, C, and D are not under the influence of other dominating shareholders.
Figure A.7.2Indirect Control, Direct Control, and Indirect, Direct and Ultimate Ownership by Shareholders in a Pyramid Structure
Note: Squares represent corporations and arrows represent shareholdings (i.e., ownership). Numbers next to arrows indicate direct share ownership as a percentage of total shares. Numbers next to squares E, D, and F indicate indirect ownership as a percentage of total shares.
The Euro Groups Register
A7.27 The Euro Groups Register (EGR) is a statistical business register detailing all multinational corporate groups having at least one enterprise in the territory of the EU (including any members of the European Free Trade Association that wish to participate). It contains information on, inter alia, the legal entities that make up those groups (as well as their respective countries of residence) and provides statistics on global business activities, such as foreign direct investment (FDI).
A7.28 In order to support the EGR project, statisticians in the EU are devoting considerable effort to analyzing the legal, operational, and accounting structure of corporate groups at the national and international level.
A7.29 Globalization and structural changes in world production have had a considerable effect on statistics, in particular data on international transactions and FDI. The EGR is intended to act as a single point of reference and the primary tool for the improvement of these statistics. It facilitates analysis of the degree of international integration of economies and provides information on control relationships between enterprises
The Nationality Approach
A7.30 Nationality refers to the ultimate obligor, as opposed to the immediate borrower on a residence basis and is linked to the consolidation of assets and liabilities for related entities (corporate group approach).
A7.31 Information on a nationality basis is useful to analyze potential support that might be available from the parent company and to understand links between borrowers in different countries and sectors. For example, the parent bank may guarantee the debt of a Cayman Islands subsidiary of a Brazilian bank.
A7.32 Consistent with the approach taken in international banking statistics, the BIS bases the nationality of an issuer on the residence of its controlling parent, regardless of any intermediate owners. The classification of international issues by nationality, instead of residence, results in a reallocation of issuance from financial centers to major economies (i.e., where owners of issuers resident in financial centers reside).
Corporate groups may be financial or nonfinancial. Financial corporate groups comprise mainly financial corporations, but also some nonfinancial corporations, and include both resident and nonresident units. Nonfinancial corporate groups consist predominantly of nonfinancial corporations (2008 SNA, paragraphs 4.51 et. seq.). Large and complex corporate groups are also known as “multinational enterprises” (MNE)—operating in a number of different countries in order to maximize production efficiency and minimize their global tax burden.
For supervisory purposes, corporate groups may potentially be consolidated only at domestic level (i.e., only domestic subsidiaries are consolidated).
Discussions are ongoing on this issue as part of the Group of Twenty (G20) data gaps initiative (see the report entitled “The Financial Crisis and Information Gaps,” October 2009).
The Bank for International Settlements (BIS) follows this approach for its consolidated international banking statistics.