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Ownership concentration and independent director effectiveness: Governance challenges under China's new company law

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  • Zheng, Yanqiao

Abstract

The recently amended Company Law of China, effective July 2024, introduces new provisions aimed at strengthening the role of independent directors. This paper analyzes the impact of ownership concentration on independent directors' dissent in Chinese listed firms, drawing on board proposal and regulatory letter data. Results indicate that higher ownership concentration significantly suppresses dissent, highlighting governance challenges inherent to concentrated ownership structures. Specifically, a one-standard-deviation increase in ownership concentration, proxied by the Herfindahl index of the top three shareholders, reduces the likelihood of dissent by 0.06 %, a substantial decline given the average dissent rate of 0.42 %. Robustness checks, including alternative concentration indices and instrumental variable approaches, validate these findings. Heterogeneity analysis reveals that ownership concentration most strongly suppresses dissent in matters concerning personnel changes, related-party transactions, equity changes, and investments, and in industries such as the Real Estate and Information Technology sectors. The paper also contrasts director qualifications, highlighting that Chinese directors are predominantly academics, whereas their U.S. counterparts typically have senior business experience, potentially affecting their oversight capabilities. Low remuneration and the absence of penalties further reduce the incentive for Chinese independent directors to dissent. Consequently, dissent by independent directors has limited value of internal oversight, with only 11 out of 4784 regulatory letters linked to prior dissent. The paper proposes stricter nomination procedures, performance-based compensation tied to governance outcomes with punitive measures for non-compliance, and tailored training programs to improve oversight. These reforms are crucial for strengthening corporate governance and safeguarding minority shareholder interests in high-concentration environments.

Suggested Citation

  • Zheng, Yanqiao, 2025. "Ownership concentration and independent director effectiveness: Governance challenges under China's new company law," China Economic Review, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:chieco:v:93:y:2025:i:c:s1043951x25001324
    DOI: 10.1016/j.chieco.2025.102474
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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