شبکه های هیئت مدیره و کنترل سهامداران مدیران مستقل رفتار تونل زن

As one of the channels by which board directors build important relationships, board networks can affect the governance role of independent directors. Defining director board networks as their connections based on direct ties they establish when serving on at least one common board, this paper explores the role of the network centrality of independent directors in restraining tunneling behavior by controlling shareholders in the Chinese capital market. Our empirical evidence shows that tunneling behavior by controlling shareholders is negatively related to the network centrality of independent directors and that this relationship is stronger when non-operating fund occupation is used as the measure of tunneling. The results of our study show that board networks can help independent directors to restrain tunneling behavior by large shareholders, which plays a positive role in corporate governance.

In the corporate governance field, relations among directors are one kind of social network that cannot be ignored (Conyon and Muldoon, 2006, Engelberg et al., 2012 and Fracassi and Tate, 2012). The behavior of directors depends simply not only on their own contacts, but also on the influence of other people’s contacts within social networks (Granovetter, 1985). Independent directors not only play a role in monitoring the company, but also play many other social roles, such as serving as company executives, industry association leaders, government officials, university professors and members of a variety of associations. Directors with many social roles naturally have a variety of social network connections, such as through their membership of professional associations, alumni networks and clubs, fellowships, in-law relationships and kinship networks. This paper focuses on one of the unique forms of social networks – interconnections forged among directors of listed companies by serving on at least one common board at the same time – to investigate the governance role of independent directors in China.1 Specifically, this paper examines the role of independent director board networks in mitigating agency problems between large shareholders and minority shareholders. That is, whether the network centrality of independent directors pushes them to deter tunneling by controlling shareholders. In comparison with the U.S. and a few countries with characteristics of dispersed ownership, most countries have more concentrated equity ownership (La Porta et al., 1999), and most firms are controlled by one or a few large shareholders. The existence of controlling shareholders gives prominence to agency problems with minority shareholders and tunneling2 is the most direct form of evidence of controlling shareholders’ agency problems that seriously damage the interests of minority shareholders.3 The tunneling behavior of controlling shareholders in China’s capital market hinders its healthy development (Chen and Wang, 2005 and Jiang et al., 2010). A series of policies have been issued to restrain tunneling behavior by controlling shareholders. However, these policies have not achieved their goals in practice (see Section 3 for more details). Many tunneling events have occurred in China’s capital market to date. Moreover, these events are becoming increasingly serious.4 This paper does not examine all types of network relations among directors and is limited to an investigation of the network centrality and governance role of independent directors. There are three reasons for this approach: first, the weak tie and structural hole theories hold that independent directors play the key role in board networks, whereas most inside directors are isolated and their network characteristics are not obvious. Second, most inside directors are also executives, which reduces their monitoring role (Fama and Jensen, 1983). This is especially in China, where the chairman of the board plays a role somewhat similar to that of the CEO in the U.S. (Firth et al., 2007; Ye et al., 2011). Third, due to the mandatory policies on independent directors implemented in China’s capital market from 2003 to date, many prior studies find that the average proportion of independent directors is one third, just meeting the CSRC requirement, and that they have no obvious governance role in China. Hence, given this institutional background, this paper only investigates independent director networks and their economic consequences. Among the various mechanisms designed to prevent controlling shareholders from tunneling in China, governance by independent directors has been one of the key measures since it was introduced for A-shares in 2001. Independent directors of companies listed on the Chinese capital market have special powers in the supervision of “significant related party transactions and related financial problems,” one of six regulatory requirements. Thus, independent directors must monitor and issue independent opinions on significant related party transactions and the use of related funds. While no clear conclusion can be drawn from existing empirical evidence on the governance role of independent directors (Gao et al., 2006 and Ye et al., 2007), this paper adopts a board network perspective to provide detailed new evidence on the role of independent directors in curbing tunneling behavior by controlling shareholders. Using various measures for the use of controlling shareholders’ funds, the empirical results show that the higher the degree of network centrality among independent directors, the smaller the extent to which controlling shareholders use shareholders’ funds, especially when the use of non-operating funds is used as the tunneling measure. These empirical results imply that the network centrality of independent directors promotes their governance role in deterring tunneling by controlling shareholders. In other words, board networks can contribute to the governance practices of independent directors and reduce Type II agency problems (problems between large shareholders and minority shareholders). This paper differs from studies focusing on the role of director networks in the United States. For example, Hwang and Kim (2009) find that independent directors who have social networks with the firm lose their independence. Fracassi and Tate (2012) find that internally prompted earnings restatements and value-decreasing M&A activities occur in firms with more extensive relations among their directors. The remainder of this paper is organized as follows. Following a review of the literature in Sections 2 and 3 analyzes the institutional background and develops our hypothesis. Section 4 describes the research design. Section 5 provides the empirical analysis and Section 6 concludes the paper.

In China, the motivation for establishing a system of independent directors was to constrain the tunneling behavior of controlling shareholders and protect the interests of minority investors. However, because the appointment of independent directors is controlled by controlling shareholders themselves, the expectation that the monitoring ability of independent directors would be enhanced by increasing their number and proportion has undoubtedly proven futile. Moreover, given their concern with social status and reputation, not all independent directors are willing to serve as whistleblowers. Hence, more attention should be paid to the motivations and abilities enabling prospective independent directors to monitor controlling shareholders. Few prior studies focus in detail on the relationship between social networks and corporate governance. This paper adopts a social networking perspective to investigate the governance role of independent directors in China. Specifically, using various indicators of the use of company funds by controlling shareholders, we examine the relationship between the network centrality of independent directors and controlling shareholders’ appropriation of firm funds. Empirical evidence shows that tunneling behavior is negatively related to network centrality, especially when non-operating cash is used as the measure of tunneling. All of our results imply that independent directors can reduce tunneling by large shareholders through their board network and play a positive and meaningful role in corporate governance. Although we define networks as direct connections among directors sitting on at least one common board, we also recognize that other networks of independent directors that are unrelated to their board activities, such as school ties, will also have an effect on their governance role. We look forward to collecting data relevant to such networks for further study.