Essays on Roles of Directors in Corporate Governance

The three chapters in the thesis provide some innovative explanations and perspectives regarding the role of directors, particularly, independent directors in a transaction market – China and in a developed market- UK. In “Auditor Change and Corporate Governance: Audit Committee Reputation”, I provide a new empirical evidence that reputation is a strong incentive to independent directors to work diligently. I select audit committee in the UK as the study object because their roles on board are well-defined and the reputation cost for audit committee member is larger than that for other directors. Firstly, this chapter shows that the probability of auditor change increases with the proportion of reputable members. Second, reputable members tend to switch an auditor which offers a high audit quality, measured by better brand-name, bigger size, and higher independence. This chapter further shows that the reduce discretionary accruals, a proxy for earnings management, only follows an audit change driven/approved by the audit committee, rather than involuntary auditor change (market shock). In “CEO Dismissal, Compensation and Topics of Board Meetings: The Case of China”, I provide a better understanding of how board activity affects board effectiveness in linking CEO compensation/dismissal to firm performance. There are six major topics discussed in board meetings. Our results show that turnover-performance sensitivity is weaker when there is a higher frequency of board meetings discussing the nomination of directors and top management. Moreover, the link between CEO compensation and firm performance is enhanced only when directors meet more often to discuss growth strategies for the use of IPO proceeds, investment and acquisitions. These sensitivities are not influenced by meeting frequency of other topics. It also sheds lights on how board monitoring of different decisions at board meetings modifies the connection between CEO interests and firm performance, then affect the quality of corporate governance. In “The Hidden Information Content: Evidence from the Tone of Independent Director Reports”, I utilise a Naïve Bayesian machine learning algorithm combining with the Chinese word segmentation to inspect the information content (the tone) of independent director report, a unique disclosure of independent director. This chapter firstly examines the determinants of a report tone, firms with younger independent directors, more directors with accounting expertise, more board committees, more board meetings, less leverage, and controlled by private shareholders tend to have more positive IDRs. The chapter further tests whether the tone in the report has predicted power to the future performance given that the tone of reports is based on director’s overall satisfactions of the firm. The average tone of the IDRs is positively associated with future firm performance after controlling other factors that influence firm performance. Moreover, the negative tone of IDRs is negatively correlated with firm performance for firms with greater monitoring necessities.