Voice or Exit? Independent Director Decisions in an Emerging Economy

Abstract

We examine the certification and resignation decisions of independent directors in China, and provide evidence on the relative influence that social, political and reputational factors have on the decisions of independent directors in the presence of private information about future adverse outcomes. Using a hand collected sample of independent director opinions and resignations in China over the period 2005 to 2009, the paper documents that some independent directors in China are fulfilling their mandatory governance role by conveying negative information to minority shareholders in a timely manner. However, many more independent directors are avoiding their governance and monitoring responsibilities to escape the social costs of dissention and/or to minimize the reputation costs by either remaining silent or by voluntarily departing the firm in advance of adverse events. The results confirm anecdotal evidence that the decisions of independent directors in China do not uniformly reflect the intent of CSRC regulations; instead, their decisions reflect a tradeoff of social, political and reputational factors that shape the incentives of each independent director.