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Shareholder Empowerment and Board of Directors Effectiveness

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  • George Drymiotes
  • Haijin Lin
  • Yonca Ertimur

Abstract

We develop a model to examine implications of empowering shareholders to replace directors. We find that shareholder empowerment functions as a double‐edged sword. On the one hand, it can weaken ineffective boards' incentive to hold on to their position. On the other hand, it can induce both effective and ineffective boards to behave strategically to avoid a potential dismissal. As a result, empowerment does not necessarily increase firm value; in some cases, empowerment exacerbates the agency problem it is intended to address. Giving shareholders the power to set board compensation (have a “say on pay”) can mitigate these problems. However, even when empowerment benefits (harms) the shareholders, firm value may decrease (increase). Finally, we discuss empirical and policy implications of the main findings. Habilitation des actionnaires et efficacité du conseil d'administration Nous élaborons un modèle pour examiner les conséquences de l'habilitation des actionnaires à remplacer les administrateurs. Nous avons observé que l'habilitation des actionnaires fonctionne comme une arme à double tranchant. D'une part, elle peut affaiblir les incitatifs visant à garder en poste les conseils d'administration inefficaces. D'autre part, elle peut inciter les conseils d'administration, qu'ils soient efficaces ou inefficaces, à agir de façon stratégique afin d'éviter une possible destitution. Par conséquent, l'habilitation des actionnaires n'accroît pas nécessairement la valeur d'une société; dans certains cas, elle aggrave le problème de représentation qu'elle tente de résoudre. L'octroi aux actionnaires du pouvoir d’établir la rémunération des membres du conseil d'administration peut atténuer ces problèmes. Toutefois, même lorsque l'habilitation profite (nuit) aux actionnaires, la valeur de la société peut diminuer (augmenter). Enfin, nous discutons des conséquences empiriques et stratégiques de nos conclusions.

Suggested Citation

  • George Drymiotes & Haijin Lin & Yonca Ertimur, 2020. "Shareholder Empowerment and Board of Directors Effectiveness," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2649-2695, December.
    • Handle: RePEc:wly:coacre:v:37:y:2020:i:4:p:2649-2695
    DOI: 10.1111/1911-3846.12581
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    References listed on IDEAS

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    1. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
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    Cited by:

    1. George Drymiotes & Konduru Sivaramakrishnan, 2021. "Strategic Director Appointments," Journal of Accounting Research, Wiley Blackwell, vol. 59(4), pages 1303-1347, September.

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