Does the academic profession really matter in board monitoring? Evidence from individual director voting

ABSTRACT

This study examines the voting behaviour of independent directors from academia based on manually collected voting data. We find that academic independent directors are less likely to dissent on board proposals than other independent directors, especially the directors who have fewer industry-specific experiences or have a relatively higher pay from the focal firm. The academic directors are also more likely to lose board seats after dissension, consistent with their concern of less job security as they are easily replaced. Lastly, although academic directors generally have weaker incentives to vote against insiders, they are more likely to dissent on proposals concerning related-party transactions. Overall, our study sheds new light on the role of academic independent directors in board monitoring effectiveness.

KEYWORDS:

• Academic independent directors
• proposal voting
• corporate governance
• board monitoring
• director turnover

JEL CLASSIFICATION:

• G30
• G34
• M12

Acknowledgments

Authorship is listed alphabetically. All the authors contribute equally.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Some studies suggest that the stock market does not value academic background of director appointees (Fich 2005); the market reaction varies depending on firm characteristics (White et al. 2014); director compensation is not related to academic experience (Fedaseyeu, Linck, and Wagner 2018). On the other hand, some studies document the positive effect of academic directors on firms’ investment performance (Francis, Hasan, and Wu 2015; Chen, Garel, and Tourani-Rad 2019).

² In the robustness check, we also find consistent evidence that academic independent directors are more likely to adopt soft forms of expressing their disagreement (i.e. ‘abstain’), rather than harshly disagree (i.e. ‘against’).

³ Francis, Hasan, and Wu (2015) find that the presence of academic directors is associated with higher firm performance, while Chen, Garel, and Tourani-Rad (2019) infer the value of academic directors by exploiting the compulsive resignations of academics with higher administrative ranks due to Regulation 11 in China and find negative market reactions to related director turnovers.

⁴ Well-compensated directors may reciprocate for higher compensation by approving excess compensation for CEOs (Brick, Palmon, and Wald 2006) and become more tolerant towards management (Vafeas 2000).

⁵ For example, the real industry expertise of outside directors prompts firm value (Drobetz et al. 2018), value-enhancing acquisitions (Burns, Minnick, and Smith 2021), leads to higher R&D investment and high-quality innovation output (Kang, Kim, and Lu 2018), and curtails firms’ earnings management (Wang, Xie, and Zhu 2015).

⁶ Vafeas (2000) documents that directors with higher compensation will be more friendly towards management. Brick, Palmon, and Wald (2006) finds that CEOs receive more generous compensation when outside director compensations are higher, and this excess compensation for CEOs affect firm performance adversely.

⁷ First, in terms of voting outcome, according to the Companies Law of China, board proposals must receive the majority support (i.e. ‘approve’ votes) from all the directors to be effective. Second, in terms of disclosure requirement, any non- approving votes (i.e. ‘abstain’ or ‘against’ votes) should be given reasons and be publicly disclosed. Third, in terms of liability judgement, directors who cast ‘abstain’ and ‘against’ votes enjoy the same relief from liabilities associated with the company’s wrongdoing according to the Code of Governance for Listed Companies in China.

⁸ There is unavoidable cost of this empirical strategy that our investigation is limited to the proposals that exhibit with-proposal variation in voting outcomes, a relatively small sample compared to the universe of all proposal of board meetings. We also conduct robust analysis at the firm-director level to relax the assumption of restricting with-proposal variation.

⁹ For example, China regulator requires independent directors make up at least one-third of the boards of listed companies and major U.S. stock exchanges require a greater percentage of independent board members.

¹⁰ In China, independent directors are formally elected for three-year terms at shareholder meetings.

Additional information

Funding

The work was supported by the National Natural Science Foundation of China [72102041,72202035]; Ministry of Education Project of Humanities and Social Sciences [22YJC630099]; “the Fundamental Research Funds for the Central Universities” in UIBE [CXTD12-03,CXTD13-03]; Innovation Engineering Laboratory of the International Business School of the University of International Business and Economics under Grant [102/78220301].