Executive compensation,supervisory board,and China’s governance reform: a legal approach perspective

China’s corporate governance system implements both American and German style mechanisms, but the supervisory board, a typical feature of German style governance is generally considered dysfunctional. After 2006, the newly amended Chinese Corporate Law significantly enhances the role played by supervisory boards. Our study examines if the new Corporate Law improves supervisory board’s monitoring over executive compensation, which becomes one of the main agency concerns in China’s emerging market, thus providing a quasi-experimental testing of the legal approach of governance (La Porta et al. in J Financ Econ 58:3–27, 2000). We examine the effects of both size and meeting frequency of supervisory boards on executive compensations in Chinese listed companies, by using data before and after the new Corporate Law became effective in 2006. We find that before the new Corporate Law became effective, supervisory boards did not affect executive compensation, although their role after that became significant; both supervisory board size and meeting frequency affect total executive compensation, and supervisory board size also influences pay-performance sensitivity. Furthermore, we find that there exists a non-linear effect of supervisory board meeting frequency on executive pay, and an optimal range exists. Policy implications are discussed.     

Fraud,Enforcement Action,and the Role of Corporate Governance: Evidence from China

We examine enforcement action in China’s emerging markets by focusing on (1) the agents that impose this action and (2) the role played by supervisory boards. Using newly available databases, we find that supervisory boards play an active role when Chinese listed companies face enforcement action. Listed firms with larger supervisory boards are more likely to have more severe sanctions imposed upon them by the China Security Regulatory Commission, and listed companies that face more severe enforcement actions have more supervisory board meetings. Our findings are of interest, as supervisory boards in China are generally perceived to be dysfunctional. This study contributes to the existing literature in three ways. First, we shed light on the effects of supervisory boards whose role in a fraud setting has not yet been examined. Second, the study has important policy implications for governance reform. Finally, our analyses provide the most up-to-date picture of fraud and governance issues in China’s ever-growing markets.     

Reactivity and Passivity After Enforcement Actions: Better Late Than Never

We examine the dynamics between enforcement actions and the responses from both the board of directors and supervisory boards amid China’s governance reform. Rather than examining determinants of fraudulent activities, we investigate, after enforcement actions are imposed, whether the board of directors and supervisory boards react differently, and whether their different reactions play a role in preventing future occurrences of frauds. We find that both boards react to enforcement actions, but only the responses from the board of directors help us curb future enforcements under certain circumstances. The supervisory board fails to play any role in preventing future enforcements, even though it is one of the two monitoring mechanisms in the listed companies. Policy implications are discussed.