Reputation Concerns of Independent Directors: Evidence from Individual Director Voting1 Wei Jiang2 Columbia Business School
Hualin Wan3 Shanghai Lixin University of Commerce
Shan Zhao4 Shanghai University of Finance and Economics
This Draft: July 2012
1 The authors benefit from discussions with seminar and conference participants at ESCP Europe, EM Lyon, Grenoble School of Management, Reims Management School, the 2012 Asian Finance Association Meeting. 2 Send correspondence to Wei Jiang, Columbia Business School, 3022 Broadway, Uris Hall 803, New York, NY 10027; telephone: (212) 854-9002; e-mail: firstname.lastname@example.org. 3School of Accounting and Finance, Shanghai Lixin University of Commerce, No. 2800, Wenxiang Road, Songjiang University City, Shanghai, 201620; telephone: (+86) 021-67705231; e-mail: email@example.com. 4 School of Economics, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai, 200433, China; telephone: (+86) 021-65903214; e-mail: firstname.lastname@example.org or email@example.com. 1
Reputation Concerns of Independent Directors: Evidence from Individual Director Voting ABSTRACT Using a director-level dataset of board proposal voting by independent directors of public companies in China from 2004 to 2009, we analyze the effects of career concerns and current reputation stock on independent directors in their voting behavior. Younger directors and directors in their second (and last) terms, who have stronger career concerns, are more likely to be aligned with investors rather than the managers. Their dissenting behavior is eventually rewarded in the market place in the form of more outside career opportunities. Directors with higher reputation stocks (measured by positive news media mentioning) are also more likely to dissent. Finally, we find that career concerns are significantly stronger among directors who already enjoy higher reputation. JEL classification: G34; L25.
Boards of directors are key players in corporate governance. Within a board, the responsibility to monitor the managers and to mitigate agency issues falls mostly on independent directors. Independent directors, by definition in most markets, are outsiders without material business affiliation with the firms they oversee. Hence, they are not significant shareholders, and tend not to receive direct compensation that is nearly as generous nor performance sensitive as the managers they monitor (Bryan and Klein (2004), Yermack (2004), Fich and Shivdasani (2006)). Moreover, independent directors are often appointed by the management (Shivdasani and Yermack (1999)). Hence a natural question arises as what motivates these outsiders to align themselves with the shareholders rather than to side with the managers. In this paper, we study how reputation concerns drive independent directors to confront the management among public companies in China. The reputation concerns include both the traditional career concerns (i.e., the incentive effects of the prospect of having a reputation in the future, as modeled by Holmstrom (1982)) and the effect of one’s current reputation (as modeled by Diamond (1989)). Fama and Jensen (1983) conjecture that “outside directors have incentives to develop reputations as experts in decision control. . . They use their directorships to signal to internal and external markets for decision agents that they are decision experts. . . The signals are credible when the direct payments to outside directors are small. . .” A number of studies have supported their hypothesis. For example, Coles and Hoi (2003) document that directors whose firms opting out of stringent state antitakeover provisions gain additional outside 2
directorships. Similar pattern is documented for companies that fire their CEOs (Farrell and Whidbee (2000)), for firms that are sold at a premium (Harford (2003)), or for...
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