The Sound of Silence in Corporate Director Resignations
One critical aspect of corporate governance is transparency between shareholders and management. Shareholders entrust managerial agents to run the firm’s operations while partaking in the profits from afar. This agency relationship creates information asymmetry between the passive shareholders and active day-to-day managers, limiting the shareholder’s ability to effectively monitor the firm’s operations (Jensen & Meckling, […]
Asaf Eckstein is an Associate Professor of Law and Ziv Granov is an LLB Student at the Hebrew University of Jerusalem. This post is based on their recent article forthcoming in the Washington and Lee Law Review Journal.
One critical aspect of corporate governance is transparency between shareholders and management. Shareholders entrust managerial agents to run the firm’s operations while partaking in the profits from afar. This agency relationship creates information asymmetry between the passive shareholders and active day-to-day managers, limiting the shareholder’s ability to effectively monitor the firm’s operations (Jensen & Meckling, 1976).
Information disclosure, whether mandatory or voluntary, is an effective tool to mitigate this asymmetry. By requiring firms to periodically disclose material facts that may affect shareholders, policymakers minimize the informational gap between the parties and keep shareholders engaged. This exchange is especially relevant between shareholders and directors, who act as monitors and develop the firm’s long-term business strategy. The corporate literature often discusses increasing transparency with shareholders, specifically regarding topics like executive compensation, compliance and oversight, and ESG practices.
