We examine the impact of blockholder board representation on a borrower's bank loan contract terms and find it is associated with lower spreads and fewer negative covenants. When examining the potential channels behind the relationship, we find that blockholder-directors who take dedicated monitoring roles, as opposed to the short-term or confrontational positions often associated with activist shareholders, drive the overall relationship. The findings, which are robust to alternative model specifications and explanations, suggest that blockholder-directors can serve as substitute monitors to debtholders when their incentives are aligned. The results also highlight the heterogeneity among blockholders who actively influence the management process.

Manager incentives are viewed as being better aligned with those of shareholders when they have an ownership stake in the firms they manage. However, manager ownership can exacerbate agency problems by better enabling managers to pass shareholder resolutions. We outline a model of strategic shareholder voting that allows outside shareholders to mitigate the influence of insiders. Consistent with our model, we find empirical support for strategic voting by outside shareholders and that strategic voting is more apparent when management-sponsored proposals are controversial or complex, when votes are close, or when other agency risks are greater.