Independent Director Dissent, Shareholder Activism And Corporate Governance Efficienc

Since the advance of modern company,it has become a vital question for shareholders,market participants and regulators how to protect the legislative rights of minority shareholders.Since the civil liability system in China is far behind that in America,the current shareholder protection work should be coordinated with other governance mechanisms.In traditional corporate governance theory,independent directors are the agents of minority shareholders,monitoring the operation of firms and providing professional suggestions on behalf of minority shareholders.Since the establishment of independent director system,the effectiveness of independent directors has been continuously discussed.In academic field,the research mainly focusses on the percentage of independent directors in boards,the background and identity of independent directors,the compensation and salary of independent directors and so on.However,those measures are endogenous factors,influenced by firm fundamental characteristics,which may lead to bias results.A more ideal research method is to open the black box of the behavior of independent directors,directly examine the work of independent directors.The public dissention of independent directors is one of the major and straightforward manifestation of independent directors’ performance.In China,the dissention of independent directors can be publicly available,which makes the empirical study possible based on Chinese settings.Although shareholder-independent director relationship is a vital component in the principal-agency relationship in modern companies,the research findings about the governance effect of the dissention of independent directors from the perspective of minority shareholders are quite rare and existing literature relevant to the governance effect of the dissention of independent directors mostly focus on the creditors,regulators,and secondtier capital market.Due to the “free rider” problem,minority shareholders are lack of motivation of activism,called the dilemma of collective action.However,the phenomenon of minority shareholder rebellion has become more common as the gradual maturity of Chinese capital market.Therefore,it should be paid attention to by academics how shareholders view their agents,independent directors(Carcello et al.,2011).To respond to the call of Carcello et al.(2011),we aim to explore the effect of the dissention of independent directors on shareholder activism,and the effect of shareholder activism on the monitoring outcome of the dissention of independent directors,which can deepen the understanding of the attention paid by minority shareholders to their agents,independent directors,and relevant economic consequences.We explore the ‘flow’ of proposals from board meetings to shareholder meetings in Chinese listed firms during 2004 and 2018.Our main findings are as follows:First,we examine whether minority shareholders respond to the dissenting opinions of independent directors from the perspective of the proposal voting outcomes.We find that shareholders do cast more non-supporting votes on proposals that received dissenting opinions of independent directors at board meetings,no matter whether there is any disclosure of reasons for the opinion.However,the specific voting types of independent directors(i.e.,against or abstain)have no significant impact on the shareholder voting response.Besides,by utilizing the separate voting of minority shareholders system,we further explore which type of shareholders respond to independent directors’ dissension.It is found that it is minority shareholders rather than block-holders who pay attention to independent directors’ dissension.Second,we explore under which circumstances minority shareholders would respond more strongly to the dissenting opinions of independent directors.We discuss this issue from three aspects,that is,ownership,personal characteristics,and organization forms of shareholder meetings.We find that(i)the impact of dissenting opinions of independent directors on shareholders is only significant for non-state-owned-entities(non-SOE)companies,but not for SOEs;(ii)shareholders,and non-SOE shareholders in particular,cast more non-supporting votes when the dissenting independent directors attend all board meetings in person or have more directorship seats in listed firms.These findings suggest that shareholders do respond to outside directors,particularly to those dedicated and experienced agents;(iii)shareholder cast more non-supporting votes to dissenting opinions when the shareholder meeting is held in a timelier manner,or when the shareholder meeting is scheduled with a reasonable number of proposals.These findings suggest that shareholders do respond to outside directors particularly when the meeting is well organized.Finally,we analyze the corporate governance effect of the dissension of independent directors.To evaluate the subsequent situation of the event toward which independent director put forward concerns,we analyze each outcome-observable proposal with dissenting opinions from independent directors and evaluate whether the concern is addressed to any extent after the shareholder meeting.We find that when shareholder response is abnormally stronger,the concerns contained in the independent directors’ dissenting opinions are more likely to be addressed.Also,we find that the shareholder response would trigger regulatory sanctions or comment letters from stock exchange market,or media coverage.It can be inferred that regulation and media are two vital mechanism leading to the improvement of independent directors’ concerns.Based on the Chinese special institutional background and the current developing stage of Chinese listed firms,we systematically analyze the attention paid by minority shareholders to independent directors and the relevant economic implications by utilizing the publiclyavailable data,voting outcome of board meetings,in China.We aim to enrich the research pertaining to the effectiveness of independent director system and the practice of shareholder activism in China,to help both independent directors and minority shareholders to better understand the positive effect of their monitoring behavior,to tentatively provide suggestions concerning the regulation of independent director system and the establishment of shareholder meeting organization form.We contribute to the relevant academic research in the following four aspects:First,we explore the direct impact of independent directors’ monitoring behavior on shareholder activism,strengthening the causal inference.Prior research examine the market reaction around the announcement of the dissenting opinions of independent directors,so as to conclude that the market participants pay attention to the dissenting opinions of independent directors.However,it is difficult for the firm level analysis to exclude various confounding factors.Unlike prior study,utilizing a firm-proposal level sample,we measure shareholder response by shareholder voting outcomes for each proposal and consider both independent directors and non-independent directors,so as to strengthen causal inference.Second,we try to understand the determinants of shareholder activism.In China,the empirical studies relevant to minority shareholder voting behavior are not abundant,most of which focus on separate voting system of seasoned equity offering and split-share structure reform,auditor recruitment proposals.These researches fail to comprehensively analyze the shareholder voting behavior,only focus on specific period or particular issues.In western countries,prior research find that shareholder voting behavior is influenced by proxy voting agencies,financial press,management opinions,the perceived independence of audit committee and auditors,and the business connections between managers and shareholders.But the potential impact of independent directors seems to be neglected.Based on publicly disclosed board meeting voting data in China,we explore the extent of attention paid by the investors to the dissenting opinions of independent directors.Meanwhile,we enrich the relevant research by exploring the impact of disclosure formation,dissenting types,personal characteristics,and meeting organization forms on the shareholder reactions.Third,we expand the channel through which independent directors can make a difference in corporate governance.Prior studies find that the dissenting opinions of independent directors would trigger the attention of regulators and creditors,and then improve the governance quality.However,the basic agent-principal relationship(independent directors-minority shareholders)has long been ignored.We further explore the potential effect of shareholder activism in the improvement of corporate governance,better understanding the channel through which independent directors can make a difference in corporate governance.Fourth,we enrich the application of limited rational theory in the research field of shareholder activism.Prior studies generally apply classical economic theory to examine the shareholder behavior,assuming that people are totally self-interest,making utility-maximum decisions after fully considering all possible factors.However,limited rational theory challenges classical economic theory by arguing that the rationality and the information process ability of people is limited,the disclosure formation in the capital market can impact the valuation and trading behavior of investors.We analyze the voting behavior of shareholders in the shareholder meetings by applying the limited rational theory and verify the usefulness of limited rational theory in the field of corporate governance in emerging market.We respond to the call of Carcello et al.(2011)for paying more attention to how shareholders perceive their agents,independent directors,and make important implications for independent directors,minority shareholders,regelation institutions and managers.For independent directors,we provide evidence how minority shareholders perceive the monitoring behavior of independent directors,and the economic consequence of their highquality performance,which helps independent directors better understand their monitoring effect.For minority shareholders,we make minority shareholders better understand the determinants and effects of their voting behaviors.By revealing the vital economic outcome of shareholders activism,we encourage minority shareholders engage more actively in corporate governance.For managers in listed firms,our findings attach importance to the role of independent directors and minority shareholders in corporate governance,which helps managers give priority to shareholders when making decisions.