Alternative Internal Controls as Substitutes of the Board of Directors


*University of Oviedo, Fac. De CC. Economicas y Empresariales, Avda. Del Cristo s/n CP33071, Oviedo, Asturias, Spain. Tel: 00 34 985 104979; Fax: 00 34 985 103708; E-mail:


Empirical literature on corporate governance often assumes independence among different control mechanisms. However, different studies in the Anglo-Saxon context find that control mechanisms are interrelated. The Spanish corporate governance system, unlike the Anglo-Saxon one, is characterised by the dominance of internal controls, mainly the stock ownership concentration and the board of directors. In this internal control context, we specifically analyse the possible substitution of the supervisory potential of the board outsiders by the incentive effects derived from managerial stock ownership and the supervisory role of large shareholders. Our main results show a negative relationship between the proportion of outside directors and managerial and large blockholders’ ownership stake. These findings support the substitution among internal controls and suggest that Spanish firms form an efficient conglomerate of managerial controls, in which deficiencies in a single mechanism can be compensated by the action of an alternative one.