Abstract
In companies with a controlling shareholder the agency relationship between controlling shareholders and minority shareholders poses significant issue. Managers may pursue, rather than the interests of the company as a whole, the interest of the controlling shareholder. When there is a controlling shareholder, independent directors may not prove sufficient to monitor the management behaviour, given that they are ultimately appointed by the same controlling shareholder whose possible opportunistic behaviour they are meant to constrain. Therefore, minority shareholders may be given appointment rights to the board: directors elected by minority shareholders may work as a corporate governance mechanism that fosters the board’s willingness and ability to monitor managers’ behaviour, on the assumption that managers are appointed by the controlling shareholder. This paper examines empirically whether having a minority-elected director on corporate boards increases the ability of the board to monitor management behaviour. Using a sample of the largest listed Italian companies in years 2008-2017, we find that minority-elected directors have a positive and statistically significant effect on board monitoring tasks. We also document that this effect is higher when they are elected by institutional investors. Our results have important implications for policy makers and, more generally, corporate governance best practice in all contexts in which companies have a concentrated ownership structure.
Highlights
Independent directors are a staple of basically all governance laws and best practices (Armour, Enriques, Hansmann & Kraakman, 2017), they were originally introduced in jurisdictions where ownership is dispersed, and the main agency costs arise from the relationship between managers and shareholders
This paper aims at testing empirically whether having minority-elected directors on the board increases board monitoring tasks
Our research question addresses the effect of directors elected by minority shareholders on board monitoring tasks
Summary
Independent directors are a staple of basically all governance laws and best practices (Armour, Enriques, Hansmann & Kraakman, 2017), they were originally introduced in jurisdictions where ownership is dispersed, and the main agency costs arise from the relationship between managers and shareholders In that context, their function is to serve as a monitoring device to ensure that managers would act in the interest of shareholders (Armour et al, 2017). We clarify the relevance of the monitoring role of minority-elected directors that are appointed by institutional investors
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