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Shareholder Empowerment and Board of Directors Effectiveness *
Author(s) -
Drymiotes George,
Lin Haijin,
Ertimur Yonca
Publication year - 2020
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/1911-3846.12581
Subject(s) - shareholder , dismissal , empowerment , business , incentive , position (finance) , compensation (psychology) , agency (philosophy) , value (mathematics) , power (physics) , accounting , corporate governance , finance , economics , microeconomics , law , political science , psychology , economic growth , philosophy , physics , epistemology , quantum mechanics , machine learning , psychoanalysis , computer science
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.