Commitment and Entrenchment in Corporate Governance

69 Pages Posted: 24 Oct 2015 Last revised: 10 Dec 2015

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Saura Masconale

University of Chicago - Law School

Simone M. Sepe

University of Arizona - James E. Rogers College of Law; University of Toulouse 1 - Université Toulouse 1 Capitole; IAST - Fondation Jean-Jacques Laffont - TSE; European Corporate Governance Institute (ECGI)

Date Written: October 1, 2015


Over the past twenty years, a growing number of empirical studies have provided evidence that governance arrangements protecting incumbents from removal promote managerial entrenchment, reducing firm value. As a result of these studies, “good” corporate governance is widely understood today as being about stronger shareholder rights.

This Article rebuts this view, presenting new empirical evidence that challenges the results of prior studies and developing a novel theoretical account of what really matters in corporate governance. Employing a unique dataset that spans from 1978 to 2008, we document that protective arrangements that require shareholder approval — such as staggered boards and supermajority requirements to modify the charter — are associated with increased firm value. Conversely, protective arrangements that do not require shareholder approval — such as poison pills and golden parachutes — are associated with decreased firm value. This evidence suggests that limiting shareholder rights serves a constructive governance function as long as the limits are the result of mutual agreement between the board and shareholders. We argue that this function commits shareholders to preserve a board’s authority to exploit competitive private information and pursue long-term wealth maximization strategies.

By documenting that committing shareholders to the longer-term matters as much as, if not more than, reducing entrenchment for good corporate governance, our analysis sheds much needed light on issues such as the optimal allocation of power between boards and shareholders, managerial accountability, and stakeholder interests. We conclude by outlining the implications of our analysis concerning the direction corporate governance policies ought to take.

Keywords: Corporate Governance, Firm Value, Long-term Commitment, Entrenchment, G-Index, E-Index, C-Index, I-Index

JEL Classification: G34, K22

Suggested Citation

Cremers, K. J. Martijn and Masconale, Saura and Sepe, Simone M., Commitment and Entrenchment in Corporate Governance (October 1, 2015). Northwestern University Law Review, 2016; Northwestern Law & Econ Research Paper No. 15-22. Available at SSRN:

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Saura Masconale

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Simone M. Sepe

University of Arizona - James E. Rogers College of Law ( email )

P.O. Box 210176
Tucson, AZ 85721-0176
United States

University of Toulouse 1 - Université Toulouse 1 Capitole ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042

IAST - Fondation Jean-Jacques Laffont - TSE ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
Toulouse Cedex, F-31042

European Corporate Governance Institute (ECGI) ( email )

B-1050 Brussels

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