DP12697 The Effect of Minority Veto Rights on Controller Tunneling

Author(s): Jesse Fried, Ehud Kamar, Yishay Yafeh
Publication Date: February 2018
Date Revised: November 2019
Keyword(s): controlling shareholders, corporate governance, corporate law, Executive compensation, minority shareholders, related party transactions, securities regulation, shareholder voting, tunneling, veto rights
JEL(s): G18, G34, G38, J33, J38, K22, L20, M12, M52
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12697

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.