Blockholders on Boards and CEO Compensation, Turnover and Firm Valuation

Abstract:     
Independent directors who are blockholders (IDB) can generate arms-length bargaining in setting CEO contracts, but can also extract private benefits. Using a panel of about 11,500 firm-years and a unique, hand-collected dataset on IDB-identity, we find that IDBs are more prevalent in firms where blocks or board seats are easier to acquire and in firms with greater need for IDB presence. After controlling for other factors and accounting for endogeneity, CEOs of firms with IDBs have lower pay, lower flow and stock of equity incentives, and higher turnover-performance sensitivities. And firms with IDBs have higher valuations. These effects are large, robust and supported by analyses of switches to and from IDB presence. Our results suggest that IDB presence promotes better contracting, monitoring, and valuation. Our findings imply that by making it easier for blockholders to obtain a board seat, proxy access rules sought by the SEC can benefit shareholders.

Number of Pages in PDF File: 59

Keywords: Boards of Directors, Blockholders, Executive Compensation, CEO Turnover, Firm Valuation

JEL Classification: G32, G34, J33, M52

working papers series