Solving the problems of free-riding and rent-seeking in determining the directors fee and reward of joint-stock companies

Document Type : Scientific research

Author

• habib Ramezani Akerdi

Assistanc Professor, Department of Social Science, Imam Khomeini International University, Qazvin, Iran

https://doi.org/10.22067/economlaw.2025.88744.1379

Abstract

According to the mentioned introduction, the main goal of the research is to answer the question that considering the utilitarianism of the directors, how should their fee be determined so that it does not lead to rent seeking and the interests of the company are secured? In other words, what is the efficient mechanism in determining the fee of directors?
The structure of the rights of Iranian joint-stock companies is such that it does not reduce the mentioned problems; Because in determining the fixed fee, it seems that this full fee is considered and the reward is in excess of it; Therefore, the problem of rent-seeking disappears, but the problem of free riding still remains. Another point is that even if we accept the assumption that a difference can be made in the payment of reward between effective and ineffective directors, and in the case of profit maximization, only effective directors will participate in it, no mechanism has been provided to distinguish this difference in the general meeting. In fact, a part of the directors' fees should be paid in a fixed form and another part should be paid as a reward. The reward should also be proportional to the efficiency of directors. Another weakness of the rulemaking is that there is no task for the managers to improve the current situation of the company, so that if it is not fulfilled, the responsibility tool can be used. In fact, the tool of responsibility as a supplementary tool to create efficiency (resolving the problem of free riding) depends on the existence of a duty under the title of creating productivity for directors.

Keywords

• free ride
• rent-seeking
• directors’ Reward
• board of directors

Main Subjects

• Corporate Law

References

 [1] Abouata, Mohammad; Seyyedeh Zahra Pourrashid, “Civil Liability Claim of Stockholders against Directors of Companies in Iranian and Ferench Law”, (2017) Private Law Studies Quarterly, 47 (1). (In Persian) https://doi.org/10.22059/jlq.2017.61318

[2] Alchian, Armen and Demsetz, Harold (1972), “Production, information Costs and Economic Organization”, The American economic Review, Vol. 66.

[3] Blair, Margaret and Stout, Lynn (1999), “A Team Production Theory of Corporate Law”, Virginia Law Review, Vol. 85, No. 2.

[4] Erfani, Mahmoud (2016), Business Law, second volume, third edition, Mizan Publications, Tehran. (In Persian)

Pasban, Mohammad Reza, (2022), Company Law, 3rd Edition, SAMT, Tehran. (In Persian)

[5] Fakhari, Hossein and Esmat Al Sadat Taheri (2009), "The Study of Relationship between Institutional Investors and Stock Returns Volatility", Journal of Financial Accounting Research, Volume 2, Number 4. (In Persian). https://dor.isc.ac/dor/20.1001.1.23223405.1389.2.4.9.7

[6] Grossman, Sanford J., Hart, Oliver D. (1986), “The costs and benefit of ownership: A theory of vertical and lateral integration”, Journal of Political Economy, vol. 94, no. 4.

[7] Haji Yousefi, Amir Mohammad (1999), "Rent, rentier state and rentierism: a conceptual review", Political and Economic Information, No. 125-126. (In Persian)

[8] Issaei Tafarshi, Mohammad, Habib Ramezani Akerdi, Hamid Reza Abbasi Menesh (2014), "Promote the success of the company; A Duty for Directors (Study in English and Iranian Law)", Comparative Law Research, Volume 19, Number 4. (In Persian). http://dorl.net/dor/20.1001.1.22516751.1394.19.4.2.1

[9] Jafaritabar, Hassan (2009), “Philosophy of Legal Interpretation”, Enteshar co, first ed, Tehran. (In Persian)

[10] Kabirzadeh, Massoud (2008), "Effective structures in determining the remuneration of the board of directors (an empirical study in Tehran Stock Exchange)", Peyk Noor magazine, volume 6, number 1. (In Persian)

[11] Karami, Gholamreza and Hasan Jabari (2017), "A Board of Directors Compensation Model for Iranian Firms", Empirical Research in Accounting, Volume 8, Number 4 (33 series). (In Persian). https://doi.org/10.22051/jera.2018.20704.2056

[12] Kavyani, Koorosh (2009), commercial Law (II): company Law, second edition, Mizan Publications, Tehran. (In Persian)

[13] Khajavi, Shokrolah; Ahmad Shokrollahi (2018), “Investigation of Interactions between Managerial Ownership and Corporate Performance Using the Simultaneous Equations System (Evidence from Tehran Stock Exchange”, Vol.14, No.56. (In Persian). https://doi.org/10.22054/qjma.2017.8779

[14] Namazi, Mohammad and Ehsan Kermani (2007), " Investigating the Effects of Ownership Structure on The Performance of the Companies Accepted in the Tehran Stock Exchange", Accounting and Auditing Reviews, Volume 15, Number 53. (In Persian). https://dor.isc.ac/dor/20.1001.1.28210166.1384.3.10.3.1

[15] Namazi, Mohammad and Javad Moradi (2004), “An Empirical Investigation of Determinants of Board of Directors' Bonuses of The Firms Accepted In Tehran Stock-Exchange (TSE)", Empirical Studies in Financial Accounting, Volume 3, Number 10. (In Persian). https://dor.isc.ac/dor/20.1001.1.28210166.1384.3.10.3.1

 [17] Pasban, Mohammad Reza (2005), “Reviewing the inspection system in Iranian companies: a comparative study with English law”, vol 7, Issue 16.

[18] Pasban, Mohammad Reza; Farhani, Rasool (2022), “A Comparative Study of Independent Directors in American and Iranian Corporate Law”, vol 26, No. 102. (In Persian). https://doi.org/10.22034/ijts.2022.246920

[19] Parisi, Francesco, The Language of Law and Economics, Translator: mehrzad Abdali, first ^ed, (Tehran, Majdpub, 2023). (In Persian)

[20] Richard L. Stroup (spring 2000), “Free Riders and Collective Action Revisited”, The Independent Review, v. IV, n.4.

[21] Sadeghian Nodoushan, Mehrdad; Bagheri, Mahmoud (2015), "Conflict of interests of companies' stakeholders and Its Strategies", Comparative Law Research, Volume 30, Number 3. (In Persian). http://dorl.net/dor/20.1001.1.22516751.1395.20.3.5.9

[22] Sealy, L.S (2008), Cases and Material in Company Law, Eighth Edition, Oxford University Press, New York.

[23] Seyed Sajjadi Ahmadi, Seyed Ali (Autumn and Winter 2007), "Analysis of the company from an economic point of view", Private Law, No. 13. (In Persian)

[24] Sheikh, Saleem (2008), “A Guide to the Companies Act 2006”, First edition, Routledge-Cavendish, New York.

[25] Toosi, Abbas (2013), Economic analysis of corporate law, first edition, Legal Studies and Research Institute, Tehran. (In Persian)