Do Social Ties Matter in Corporate Governance? The Missing Factor in Chinese Corporate Governance Reform

George Mason Journal of International Commercial Law Vol. 5, Issue 1, 39-74 (2013)

38 Pages Posted: 12 Jan 2013 Last revised: 2 Nov 2015

See all articles by Yu-Hsin Lin

Yu-Hsin Lin

City University of Hong Kong (CityUHK) - School of Law; City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law

Date Written: December 31, 2013

Abstract

In the past decade, Asian countries have adopted various corporate governance measures with the hope that good law will facilitate capital market development. One of the measures adopted by Asian countries to revamp corporate boards is to enhance board independence by introducing the institution of independent director. Empirical studies have shown that social ties could compromise independent directors’ monitoring capacity and, thus, do matter in corporate governance. Using theoretical and empirical studies, this article analyzes the effects that independent directors' social ties to corporate insiders can have on director efficacy and discusses how U.S., where the institution of independent director originated, addresses the bias of independent directors arising from such social ties.

Although U.S. courts exercise ex post judicial review over the true independence of independent directors in shareholder-derivative suits, most Asian countries simply did not have such ex post judicial review in place when they transplanted the new institutional form because shareholder suits are almost unheard of in these countries. Social ties among board members are common in Taiwan and China, whose shared traditional and contemporary culture prizes harmony and interpersonal relations (guanxi). In the business world, social ties among board members further enhance collegial board culture, facilitating boards’ advisory function but weakening their monitoring function. This article argues that the current Taiwanese and Chinese regulatory regimes’ failure to satisfactorily address the issue of social ties, whether through ex ante regulation or ex post judicial review, strongly suggests that the legislative objective of the institution of independent directors will remain unachieved and unachievable.

Keywords: Social Ties, Corporate Governance, Independent Directors, Legal Transplantation, Chinese Law

JEL Classification: G34, K22

Suggested Citation

Lin, Yu-Hsin, Do Social Ties Matter in Corporate Governance? The Missing Factor in Chinese Corporate Governance Reform (December 31, 2013). George Mason Journal of International Commercial Law Vol. 5, Issue 1, 39-74 (2013). Available at SSRN: https://ssrn.com/abstract=2198701 or http://dx.doi.org/10.2139/ssrn.2198701

Yu-Hsin Lin (Contact Author)

City University of Hong Kong (CityUHK) - School of Law ( email )

Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www6.cityu.edu.hk/slw/people/people_Yu_Hsin.html

City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law

83 Tat Chee Avenue
Room P5300, 5th Floor, Academic 1
Kowloon Tong
Hong Kong

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