Stock blockholders do not use to take a board seat. Why?

Alex Edmans (1) published in 2013 a study on the methods blockholders use to influence their investee firms, and signaled voice, exit (or the threat of executing them) and private benefits extraction. After reviewing the theoretical literature, he analyzes the empirical evidence, (profitability versus different blockholderism metrics). The relation  is a two-way avenue, (which affects the causal relationship identification), but both the positive governance effects of blockholders and the cost of their presence have been found.

But if this is the case, why is it that blockholders do not generally seek to take a seat on the board of companies they invest in? This is what Samed Krüger, Peter Limbach, and Paul Voß try to understand in their (2) article “Blockholder representation on the board: Theory and Evidence”. In this post we will try to expose their views.

Their first insight refers to the low costs of taking the seat, (positions are paid and eventual costs of attending meetings are low relative to amounts invested). But it is an empirical fact that blockholders do not often join boards; the ideas promoting their model and empirical research are described in aht follows:

• An indirect cost of the announcement of the representation may arise if outside shareholders generate a negative stock price effect, (this would reduce their trading options, and is hypothesis H1). This may happen as the entry reveals an agency problem, even if it also signals a governance improvement to come, (enhanced advise or monitoring). This is their hypothesis H3.
• Also, the fact that a director is granted access to insider information, the freedom to trade the company stock may be reduced.
• A seat on the board may also be considered a last resort option for the blockholder, when unseen engagement does not work.
• Moreover, freedom to exit may be reduced, so staying investee and being forced to exert effort to increase the company value may be a harm in cost and investment timings, (hypothesis H2).