Dominant Shareholders and Allied Directors: A Simple Model and Evidence from 22 Countries

Abstract

We present a simple model in which a dominant shareholder chooses a board composed of independent and allied directors. We test predictions of the model with firms from 22 countries. Consistent with the model, firms have more directors allied with the dominant shareholder in countries with weaker legal protection for minority shareholders and when profitability of the firm is lower, need for external equity financing is higher, the dominant shareholder owns a higher fraction of the firm's voting rights, and a lower fraction of its cash flow rights. Further, a higher fraction of allied directors is associated with lower firm value.