Strong External Regulation and the Supervision Function of Independent Directors
With the emergence of a strong regulatory era in the capital market and the implementation of a comprehensive registration-based IPO system,there has been considerable attention from various sectors of society on how to leverage the supervisory effectiveness of regulatory bodies,particularly independent directors.In light of the current backdrop,the China Securities Regulatory Commission and the China Association for Public Companies have promulgated the"Measures for the Administration of Independent Directors of Listed Companies"and the"Guidelines for the Performance of Duties by Independent Directors of Listed Companies(Revised in 2024)"on August 42023,and November 52024,respectively.These documents aim to establish policy frameworks that enhance the supervisory roles of independent directors.Despite of these efforts,the suboptimal performance of independent directors in China should be largely attributed to the minimal legal risks they face,among the regulatory penalties imposed on listed companies,a negligible proportion extends to the individual level of independent directors.Against this context,this study endeavors to investigate whether corporate regulatory penalties can stimulate independent directors to diligently execute their supervisory responsibilities by impacting their reputation,given the low legal risks associated with their role.Therefore,this study focuses on independent directors of A-share listed companies from 2005 to 2021,and empirically investigates the potential influence of corporate regulatory penalties on dissenting behavior by independent directors.This study finds that after a listed company received a regulatory penalty,independent directors who were not subject to regulatory penalties are more likely to express dissenting opinions and generate significant positive spillover effects.Mechanism analysis demonstrates that the regulatory penalty on listed companies strengthen the positive spillover effect on dissenting behavior of independent directors mainly through the increasing of the reputational risk of independent directors,but not in the way of strengthening the legal risk of independent directors.In addition,compared to independent directors with long tenures,this spillover effect is more pronounced among independent directors with shorter tenures.Besides,the positive effect of corporate regulatory sanctions on independent directors'dissent voting is more pronounced in sanctioned firms than in other part-time firms.Furthermore,having previously held positions in the company during violation years further strengthens the impact of corporate regulatory penalties on independent directors'dissenting behavior,and this related spillover effect primarily exists among those who have not expressed dissent votes before.Finally,this paper explores the role played by non-governmental market supervision in influencing the effects of corporate regulatory penalties on the dissenting behavior of independent directors,taking external analysts and institutional investors as representatives of market supervision subjects.The results show that the spillover effect of corporate regulatory penalties on independent directors is stronger in companies with lower analyst attention and institutional investor shareholding,reflecting the substitution effect of government regulation and non-government market supervision.In conclusion,this study not only enriches existing literature on spillover effects of regulatory penalties and dissenting behavior among independent directors,but also enhances the comprehension of regulators and listed companies regarding the motivations that drive independent directors to fulfill their supervisory and duty-related roles.Furthermore,it offers insightful decision-making support for the refinement and enhancement of the accountability framework for independent directors.Additionally,the findings on the substitutive effect between government regulation and market supervision entities in bolstering the supervisory function of independent directors provide valuable insights for the reform and practical implementation of the independent director system within the current regulatory environment.
regulatory penaltyspillover effectindependent director reputation mechanismdissenting opinion
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