DP12697 The Effect of Minority Veto Rights on Controller Tunneling

Author(s): Jesse Fried, Ehud Kamar, Yishay Yafeh
Publication Date: February 2018
Date Revised: April 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 controller tunneling. As independent directors and fiduciary duties are widely seen as not up to the task, a number of jurisdictions have given minority shareholders veto rights over these transactions. To assess these rights' efficacy, we exploit a 2011 regulatory reform in Israel that gave the minority the ability to veto pay packages of controllers and their relatives ("controller executives"). We find that the reform curbed the pay of controller executives and led some controller executives to quit their jobs or work without pay in circumstances suggesting their pay would not have received approval. These findings suggest that minority veto rights can be an effective corporate governance tool.