A central challenge in the regulation of controlled firms is curbing controller
tunneling. As independent directors and fiduciary duties are widely seen as not up
to the task, a number of jurisdictions have given minority shareholders veto rights
over these transactions. To assess these rights’ efficacy, we exploit a 2011 regulatory
reform in Israel that gave the minority the ability to veto pay packages of controllers
and their relatives (“controller executives”). We find that the reform curbed the pay
of controller executives and led some controller executives to quit their jobs, or work
for free, in circumstances suggesting their pay would not have received approval.
These findings suggest that minority veto rights can help curb controller tunneling.