56. Kobi Kastiel, Executive Compensation in Controlled Companies, 05/2014; forthcoming in the Indiana Law Journal, Volume 90, Issue 3 (2015).
Abstract: Conventional wisdom among corporate law theorists holds that the presence of a controlling shareholder should alleviate the problem of managerial opportunism because such a controller has both the power and incentives to curb excessive executive pay. This Article challenges that common understanding by proposing a different view based on an agency problem paradigm. Controlling shareholders, I suggest, may in fact overpay managers in order to maximize their consumption of private benefits, due to their close social and business ties with professional managers or for other reasons, such as being captured by professional managers. This tendency to overpay managers is further aggravated by the use of control-enhancing mechanisms, such as dual-class structures, which distort controllers’ monitoring incentives.
The Article uses a novel approach to question conventional beliefs on executive pay by reviewing the ISS recommendations on say-on-pay votes, and finds empirical indications that compensation packages in U.S. controlled companies appear to be a bigger problem than initially predicted. I conclude by calling for a new regulatory approach: re-conceptualize the pay of professional managers in controlled companies as an indirect self-dealing transaction and subject it to the applicable rules that regulate conflicted transactions.