Expropriation by corporate insiders and board effectiveness in an emerging economy

Abstract

This dissertation investigates dominant shareholders¿ expropriation activities and board effectiveness in an emerging economy. Chapter 1 provides an overview of the dissertation and states its major contribution to the corporate governance literature and to the theoretical developments in strategic management and organization theory. Chapter 2 begins by discussing the institutional environment concerning China¿s state-dominated capital market, corporate ownership structure and fund misappropriation transactions between listed companies and their dominant shareholder. It also discusses the institutions of the board of directors and the supervisory board as a potential solution to China¿s corporate governance problems. As the external merger and takeover market for corporate control seldom exists and there is weak legal protection for investors in emerging markets, checks to corporate insiders¿ expropriation activities are mainly provided by internal governance mechanisms. Based on the tenets of agency theory and social embeddedness perspective, Chapter 3 addresses how corporate ownership structure and directors¿ affiliation with the dominant shareholder affect the incidence of that dominant shareholder¿s expropriation activities and the cost of such activities to a listed company. Specifically, this chapter examines whether the interests of state shareholders, foreign blockholders and corporate directors are consistent with the incidence and consequences of expropriation activities initiated by dominant shareholders. Regressions using data on all Shanghai-listed companies in 2004 and 2005 lend support to the predictions that the incidence of a dominant shareholder¿s expropriation activities decreases with the presence of foreign blockholders and increases with the percentage of affiliated directors, while the cost of such expropriation activities positively relates to the level of state ownership. Additional analysis is performed regarding the impact of foreign retail investors, dominant shareholders¿ portfolio considerations and other non-dominant large shareholders. As the board of directors is the highest internal control mechanism responsible for monitoring the activities of dominant shareholders, it is important to investigate the effectiveness of directors, especially independent directors. In addition to their limited power, independent directors are confronted with persistent challenges in making meaningful contribution to corporate decision-making. Drawing insights from multiple theoretical perspectives, Chapter 4 explores how the challenging involvement of an independent director in corporate decision-making depends on the availability of the director¿s intellectual capital; social influence received from corporate insiders and his/her organizational power. It identifies three arenas that an independent director is expected to provide challenging opinions: ¿monitoring executive performance¿, ¿protecting corporate resources¿, and ¿providing counsel to executives¿. Empirical analysis of Chapter 4 utilizes a sample of 2,806 independent directors from all Shanghai-listed companies in 2005. Using non-acceptance opinions of these independent directors released in corporate annual reports, this chapter finds that intellectual capital structure and social context of independent directors, not simply their presence or functional background, deliver an important impact on corporate decision-making. By examining the impact of independent directors¿ provision of challenging opinions on their turnover in the focal company, this chapter suggests that micro-social factors involved in the relationship between corporate insiders and independent directors, by reducing the objectivity of independent directors¿ opinions, may ultimately compromise corporate control.