Board Games: Timing of Independent Directors’ Dissent in China

April 24, 2013 Leave a comment

Board Games: Timing of Independent Directors’ Dissent in China

Juan Ma 

Harvard Business School

Tarun Khanna 

Harvard University – Strategy Unit
April 18, 2013
Harvard Business School Strategy Unit Working Paper No. 13-089

Abstract: 
This paper examines the circumstances under which so-called “independent” directors voice their independent views on public boards in a sample of Chinese firms. Controlling for firm and board characteristics, we find that independent directors’ dissent is associated with breakdown of directors’ interpersonal ties with board chairpersons, who locate at the center of the board bureaucracy in China. In particular, independent directors tend to “time” their dissent into a restricted set of socially-appropriate circumstances, either when the board chairperson who appoints the independent director has left the board, or when the voting occurs at the end of board “games” that corresponds to a 60-day window prior to departure of the board chairperson or departure of the independent director herself. The endgame effect is particularly strong: 27% of the dissent was issued at board “endgames” which represent merely 4% of independent directors’ average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accounting and law professionals are significantly more active. We also show that dissent is consequential, to the director and the firm. Although dissent has no significant marginal effect on the total number of board seats received subsequently by an independent director, it significantly increases the chance for a director to exit the director labor market. Firms suffer an economically and statistically significant cumulative abnormal return of -0.97% around announcement of dissent. Literature has suggested that dissent might be reflecting of diverse viewpoints, perhaps beneficial in and of itself through reducing variability of firm performance, however we do not find this offsetting beneficial effect to be strong.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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