Under the microscope: An experimental look at board transparency and director monitoring behavior

Abstract

Research Summary: It is well known in corporate governance scholarship that independent directors differ in the vigilance with which they monitor corporate insiders. This difference depends largely on whether independent directors are concerned more with their public reputation or with their prospects in the director labor market. The explanation for this difference depends on an assumption of information asymmetry, however. In the present study, we relax the assumption of information asymmetry to examine how boardroom transparency affects directors’ monitoring behavior. Using a randomized experimental study of actual independent directors, we find that boardroom transparency amplifies the effect of directors’ inclinations toward either active or passive monitoring, with directors inclined toward vigilant monitoring becoming even more vigilant, and directors inclined toward passive monitoring becoming even more passive. Managerial Summary: In most advanced economies, the board's internal decision processes are either undisclosed or disclosed only to a very limited extent. It remains unknown, then, whether directors would behave differently if their behaviors were made public. We find that when their actions are disclosed to the public, directors concerned with their public reputations become more vigilant, whereas those concerned with their prospects for additional board seats become more passive in monitoring corporate insiders. Whereas regulatory bodies and corporate governance watchdogs have recently advocated for greater disclosure of the boardroom decision‐making process, our study suggests that such mandatory disclosure requirements can exacerbate, rather than alleviate, the problem of passive director monitoring.

When Is a Governmental Mandate not a Mandate? Predicting Organizational Compliance Under Semicoercive Conditions

“…To identify independent directors, we used the director classifications provided in the databases that followed the criteria as specified by the CSRC. These classifications have been validated and used in research on independent directors in China (Li et al, 2018;Ma & Khanna, 2016).…”

Do Board Gender Diversity and Non-Executive Directors Affect CSR Reporting? Insight from Agency Theory Perspective

“…The main reason for the existing conflict of interest in Chinese companies relates to their ownership structure, as most of the companies are family-owned and thus, they have the power to appoint the board of directors, who in turn are also family members [38]. Thus, the presence of non-executive directors to some degree ensures the protection of rights of other stakeholders along with minority shareholders as compared to other directors, as non-executive directors are independent [39]. Since 2001, it became a paramount concern for regulatory authorities and thus, they incorporated many regulations including systems for the compulsory appointment of non-executive directors in every listed company, and clearly defined the duties and powers of these directors.…”

The Effect of Independent Director Reputation Incentives on Corporate Social Responsibility: Evidence from China

“…Independent directors are rewarded more due to good reputation. Thus, independent directors are more concerned with their public reputation in the independent director labor market [27]. Masulis and Mobbs (2014) emphasize that reputation creates strong incentives for independent directors, and document that reputation incentives positively affect the independent directors' attention and effort devoted to their directorships [20].…”

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