The Effect of Minority Veto Rights on Controller Pay Tunneling

The Effect of Minority Veto Rights on Controller Pay Tunneling

Jesse Fried, Ehud Kamar, Yishay Yafeh

Series number :

Serial Number: 
385/2018

Date posted :

February 19 2018

Last revised :

April 30 2020
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Keywords

  • controlling shareholders • 
  • executive compensation • 
  • related-party transactions • 
  • Shareholder voting • 
  • tunneling

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.

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Published in

Published in: 
Publication Title: 
Journal of Financial Economics (JFE), Forthcoming

Authors

Professor
Real name:
Yishay Yafeh
Research Member
School of Business Administration, the Hebrew University of Jerusalem