The Effect of Minority Veto Rights on Controller Pay Tunneling
Center for Economic Policy Research (CEPR) - Discussion Paper No. DP12697
45 Pages Posted: 13 Feb 2018 Last revised: 29 Apr 2020
Date Written: April 20, 2020
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
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