Shareholder nomination of independent directors: Evidence from China

Abstract

This study explores the motives behind individual shareholders nominating independent directors (IDs) in China. By tracing ID nominations to the specific nominators that independent directors represent and provides direct evidence how ID nomination is linked to the individual shareholders' motives of monitoring managerial self-interest and private benefits of control, we uncover two primary insights. Firstly, compared to nominations made by the board of directors, individual shareholders are more inclined to nominate IDs for oversight of managerial self-interest (monitoring motive). However, they tend not to make such nominations when it would enable them to potentially accrue private benefits of control (conspiring motive). Additional tests present the influence of ownership structure, state ownership and the cumulative voting system on ID nominations by these shareholders. Moreover, we find such nominations by individual shareholders amplify firm value by mitigating Type I agency costs between managers and shareholders, enhance financial reporting quality and alleviate information asymmetry. Our study suggests that ID nominations by individual shareholders serve as an effective governance tool, particularly beneficial for non-majority shareholders. These findings carry relevance for researchers and regulators concerned with corporate governance and capital markets.