The Effect of Minority Veto Rights on Controller Pay Tunneling

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

There 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: 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), Volume 138, Issue 3, December 2020, Pages 777-788, Available at SSRN: https://ssrn.com/abstract=3119426 or http://dx.doi.org/10.2139/ssrn.3119426