The Effect of Minority Veto Rights on Controller Pay Tunneling

45 Pages Posted: 13 Feb 2018 Last revised: 29 Apr 2020

See all articles by Jesse M. Fried

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Ehud Kamar

Tel Aviv University - Buchmann Faculty of Law; European Corporate Governance Institute (ECGI)

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2020

Abstract

A central challenge in the regulation of controlled firms is curbing rent extraction by controllers. As independent directors and fiduciary duties are often insufficient, some jurisdictions give minority shareholders veto rights over related-party transactions. To assess these rights’ effectiveness, we exploit a 2011 Israeli reform that gave minority shareholders veto rights over related-party transactions, including the pay of controllers and their relatives (“controller executives”). We find that the reform curbed controller-executive pay and led some controller executives to resign or go with little or no pay in circumstances suggesting their pay would be rejected. These findings suggest that minority veto rights can be an effective corporate governance tool.

Keywords: controlling shareholders, executive compensation, related-party transactions, shareholder voting, tunneling

JEL Classification: G34, G38, J33, J38, K22, M12

Suggested Citation

Fried, Jesse M. and Kamar, Ehud and Yafeh, Yishay, The Effect of Minority Veto Rights on Controller Pay Tunneling (April 20, 2020). European Corporate Governance Institute (ECGI) - Law Working Paper No. 385/2018, Center for Economic Policy Research (CEPR) - Discussion Paper No. DP12697, Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3119426 or http://dx.doi.org/10.2139/ssrn.3119426

Jesse M. Fried (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Ehud Kamar

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel
972-3-6407301 (Phone)

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)

HOME PAGE: http://bschool.huji.ac.il/facultye/yafeh/

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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