Why Do Large Investors Avoid Seats on the Board?

If you owned 10% of a company, wouldn’t you want a seat at the table where major decisions are made? Surprisingly, the majority of large shareholders do not seek representation on the board of directors. Fewer than 20% of large U.S. public firms have an outside blockholder-director on their board—a pattern also seen among Germany’s listed firms.

This is puzzling for two reasons. First, the board approves major investments, shapes strategy, and hires or fires CEOs. Second, the direct costs of serving on a board are negligible compared with the size of a large shareholder’s investment. Why, then, would major owners remain on the sidelines?

Our study, “Blockholder Representation on the Board: Theory and Evidence,” explores this question. We find that the main reason is not apathy or cost, but the signal board participation sends to capital markets. Because large shareholders frequently have private information about the firm, their decision to join the board can be interpreted by outsiders as a sign of trouble inside the firm. Even if joining the board improves governance and long-term performance, the negative signal can depress the firm’s stock price—reducing large shareholders’ ability to leverage their private information when trading. 

The Hidden Cost of Showing Up

At first glance, a board seat offers low-cost access to influence and information. But it also carries a public signal: markets observe when a large shareholder takes a board seat. For outside investors, this can be a signal of an underlying problem in the firm. Even if the blockholder’s motive is to improve oversight and firm value, markets can initially react negatively.

This decline in share price has real consequences. Many large investors rely on their ability to trade using their superior information. A price drop reduces the value of this informational advantage and limits exit opportunities. By joining the board, blockholders commit to staying engaged; they cannot quietly withdraw anymore

Thus, while direct costs are negligible, indirect costs—signaling effects and reduced flexibility—are substantial. The result is a governance paradox: those best positioned to monitor management by being on the board often avoid doing so.

Modeling the Trade-Off

We formalize this idea in a model in which the blockholder has private information about the existence of an underlying agency problem in the firm. If the firm operates smoothly, there is little reason to intervene. If problems arise, joining the board could help fix them—but doing so reveals that such problems exist.

The model produces four key predictions:

1. Too few large shareholders seek board seats;
2. the news that shareholders are taking a board seat can trigger a negative stock market reaction, as the negative signal of taking a board seat outweighs its governance benefits;
3. once shareholders join the board, they are less likely to sell their shares;
4. blockholder-directors become active monitors once on the board.

Evidence from German Firms

Testing these predictions empirically is challenging because board formation is endogenous and a shareholder’s decision to seek board representation is non-random. Germany’s two-tier board system, however, provides a natural testing ground. There, supervisory boards are legally separate from executive boards (management), reducing CEO influence over board composition. In some cases, German courts even appoint directors, creating quasi-random timing. Furthermore, Germany hosts a diverse set of blockholders—families, corporations, mutual funds, and private equity firms—allowing rich comparisons.

The evidence aligns closely with our model:

• Stock-price reaction: On average, firm value drops by 1.04%—about $64 million in market value—when a blockholder takes a board seat. This decline does not reflect value destruction by the blockholder but rather the market’s recognition of previously hidden issues.
• Results are driven by legacy shareholders: the negative stock price reaction is concentrated among events where incumbent blockholders seek board representation absent a contemporaneous acquisition of an ownership stake, which would confound results.
• Commitment: After joining, blockholders are 7–10 percentage points less likely to exit the firm within three years.
• Monitoring: Boards with blockholder-directors are more active—committees with them hold up to 19% more meetings.
• Performance: These firms exhibit lower operating costs, higher payouts, and a stronger link between cash holdings and firm value, suggesting reduced agency costs.

When Good Governance Looks Like Bad News

The market’s negative reaction does not necessarily represent a sign of potential self-dealing or extraction of private benefits by blockholders at the expense of minority shareholders. Our findings suggest a more nuanced story. The negative stock market reaction likely reflects existing governance problems, not new agency costs caused by the blockholder. As our results on performance, monitoring, and the role of legacy blockholders suggest, the blockholder steps in to improve governance, ultimately generating long-term security benefits for all investors.

Implications for Policy and Practice

Boards and policymakers should recognize shareholder engagement as a valuable governance tool. Yet joining the board comes with a trade-off: losing trading flexibility in exchange for influence. For long-term investors—such as family owners or patient institutional funds—this trade-off may be worthwhile. For shorter-term investors, the signaling costs and reduced liquidity deter board involvement.

Understanding this trade-off helps explain a long-standing puzzle: despite their large stakes, most investors stay off the board. The fear of sending a negative signal to markets—and losing strategic flexibility—often outweighs the governance benefits of direct participation.

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Paul Voss is an Assistant Professor of Finance at HEC Paris.

Samed Krüger is an Assistant Professor at the Schumpeter School of Business and Economics, University of Wuppertal.

Peter Limbach is a Professor of Finance and Corporate Governance at the University of Bielefeld, and a research fellow of the Centre for Financial Research (CFR), Cologne.

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This blog is based on a paper presented at the First Annual Corporate Governance Academic Forum at the University of Toronto. Visit the event page to explore more conference-related blogs.

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