On January 6, 2022 presenter, Michael Weisbach, and Discussant, Xiaoyun Yu, gave the seminar “Risk Perceptions, Board Networks, and Directors’ Reporting.” Independent directors of corporate boards have monitoring and advising duties. One incentive for independent directors to monitor is regulatory penalties. However, it is challenging to pin down a causal effect of regulatory penalties on directors’ monitoring behavior because public information on board monitoring rarely exists. Relying on the unique feature of the Chinese financial market, Professor Weisbach and his coauthors show that an independent director is more likely to vote against management after observing another director in his/her board network being penalized for negligence. The effect is long-lasting and stronger for directors with similar traits and at firms prone to frauds.
View the slides from Michael’s seminar.
Below you will find the Q&A from Michael’s seminar:
 Who decides what should be penalized? Who levies the penalities, and what happens to the money?
The CSRC (China SEC) decides who should be penalized based on the Securities Law of China and the Company Law of China. CSRC levies the penalties, and the money goes into CSRC’s revenue. However, this amount is relatively small compared with the overall budget of CSRC.
 Who imposes the penalties – the company or the state? And who decides what behavior to penalize? I wonder if the penalties are partly based on state rather than purely firm objectives. That is, the state may penalize directors more harshly when the directors ignore a state objective.
The regulator imposes the penalties. The behaviors to be penalized are prescribed in the Securities Law of China and the Company Law of China. Therefore, all punishments analyzed in this paper are purely based on national laws and thus state objectives.
 Do you see the effect of penalty risk orthogonal to reputation risk and direct incentive? For example, the penalty imposed on another director may also affect reputation risk and perhaps direct incentive.
In line with the view that penalties damage directors’ reputations, we show that directors get fewer appointments and positions with lower compensation after receiving a penalty.
 Does these penalties induce increased risk aversion among those directors who are not penalized and the colleagues of the penalized directors? And if it does, will this increased risk aversion lead to the firm’s possible underinvestment problem?
For colleagues of the penalized director, we find evidence that they increase dissension votes more than the connected directors we investigate in this paper. However, we exclude those directors from the sample to make a cleaner causal inference.
 Does the effect stop at the first link in the network? Or does it propagate to second-order links and so on?
We did not look at more distant connections in the network, so we cannot answer this question at this point.
 How do you know/measure whether “dissent from management” is the “optimal” decision for a firm? (a director could also dissent to pseudo monitor)
It is unlikely that directors use dissensions for pseudo-monitoring. If a director would do that, the market and other firms would quickly learn about that since dissension has to be disclosed. Thus, dissenting too often without good reason would harm the directors’ reputation and credibility.
 What is the risk perception impact if the firm has preventive/internal controls of penalizations compared to other external events? Will the impact be positive?
The internal control of penalization of each firm is hard to identify. Therefore, we cannot answer this question at this point.
 Could it be a possibility of an information transfer from a business press news that a director in a firm belonging to the same industry was penalized?
Yes, this is clearly a possibility. We use the professional network because it is possible to identify these links in the data. There might be several other links that increase a directors’ risk perception. However, the existence of other possible links does not weaken the causal inference of our research but suggests that we identify a lower bound of the spillover effect of penalties.
 You identify the spillover effects of penalization on directors that serve on multiple boards. How frequent is this the case in China? Are these special types of directors? What considerations should we make about the external validity of your findings?
Since we are observing independent directors, such multi-appointment are common. On average, each independent director holds 1.8 positions. When we compare the observable characteristics of those independent directors who hold multiple positions to those who only hold a single position, we find no differences with regard to age, gender, or education (academic background is more likely among directors with multiple positions).
 I know in Italy, some professionals serve on several boards. They tend to be very busy individuals that might be overly concerned about penalties (for reputational reasons). This might lead you to overestimate the effects of penalties.
The average independent director in our sample holds 1.8 positions. The respective numbers for treated and control directors are 2.2 and 1.6, respectively. Thus, despite their slightly higher number of positions, it seems likely that our treated directors are comparable to the average director in China in terms of busyness. Furthermore, our baseline results are unchanged if we exclude control directors with less than two positions.
 In the Chinese context, independent directors have been criticized for acting as “vases for decoration” on boards. Under different kinds of pressure, they are more likely to “vote on feet” rather than “voice” if they disagree with a proposal. Based on this, I am concerned with the real effect of such voting against?
Dissension is a mechanism to protect oneself if the problem is not severe enough to resign from the board. In addition, dissension reveals important information to the investors that there is something worth noticing in this firm. As our paper shows, dissensions exist in China, especially in more recent years (although it is still not a very frequent event).
 Did you look at whether membership of the Communist Party was a factor?
We find no significant difference between party members and others in untabulated results.
 When a penalty is imposed, is this publicized in any way? If so, how? My question is whether the information about the imposition of a penalty is known to all directors (e.g., because the regulator tells them about it). If not, does the connection between directors just reflect the fact that they know about the penalty? If so, would better information about penalties provided to directors better sensitize them to the possibility of a penalty being imposed?
Yes, the penalty is publicized on the CSRC website and is accessible to the public. However, anecdotal evidence suggests that some directors even do not know there is such a place for announcements. We can only speculate here, but a more direct way of delivering penalty information, such as emails from regulators to all registered directors, could increase directors’ awareness.
 Could dissension simply capture distrust? In other words, because a person has a spotty record, they are more likely to be attacked/opposed in the boardroom.
Since directors should also disclose why they dissent, it is not likely that dissension simply captures distrust.
About the Speaker:
Michael S. Weisbach is the Ralph W. Kurtz Chair in Finance at Ohio State University, as well as a Research Associate of the National Bureau of Economic Research. He has previously taught at the University of Illinois, the University of Chicago, the University of Rochester, and the University of Arizona. Professor Weisbach is a former editor of The Review of Financial Studies, one of the leading academic journals in finance, and has been an associate editor of five other academic journals. Professor Weisbach has broad-ranging research and teaching interests in finance and economics, with specialties in corporate finance, corporate governance, and private equity. He has 63 publications on these and related topics. These papers have won a number of major awards, including the Brattle Group Prize (twice), the Jensen Prize, the Fama/DFA Prize, and the Wharton/WRDS award.
For further information on the webinar please contact Professor Jun Yang, Director of the Institute for Corporate Governance at email@example.com.