Management Demography, Board Governance and Reprimanding Sanction: Evidence from a Transitional Economy

Using the insights from upper echelons theory, resource-based view of firm and agency theory, this project explores how management demography and board composition can shape organizational outcomes. By employing data about the imposition and removal of reprimanding sanctions, we examine the characteristics of management and board which can lead the firms for better or worse. The upper echelons theory, resource-based theory and social capital literature emphasize that top management demography is an essential intangible asset and social capital of performance to achieve efficiency (Hambrick 2007; Hitt, Bierman, Shimizu and Kochhar 2001; Shipilov and Danis 2006). Combining these management theories, we examine how top management demography may affect performance and corporate governance of Chinese firms.We use the data about reprimanding sanctions (e.g., disclosure of “Special Treatment” status due to poor earnings; enforcement action announcement due to company violations such as embezzlement) to differentiate firms with good and poor performance/governance. Agency theory puts forward the importance of the board in monitoring the management (Fama 1980). We explore the relation between top management demography (age, gender, tenure, education level, professional status, multiple positions) and incidence of reprimanding sanctions, after controlling for the difference in board governance structure (board size, independent directors, female directors, CEO duality, managerial share-holdings, frequency of board meetings).When the firms are under reprimanding sanctions, the market reacts negatively (Cheng, Leung and Yu 2010). Therefore, it is of interest to further explore what type of demography can rescue firms from reprimanding sanctions. For the firms which recover from poor performance/governance (i.e., removal of reprimanding sanction), we examine the change in demographic characteristics and if the board would replace top management. In particular, we compare the difference in management demography before and after the removal of reprimanding sanction. The findings of this project should have potential implications for the design of board governance structure. We examine if management demography is an important determinant in affecting performance/governance and explain why some firms have a higher likelihood of reprimanding sanctions. In addition, we also explore the type of management demography which helps improve performance/governance by comparing the demographic characteristics before and after the removal of reprimanding sanctions. As management turnover is a direct outcome of corporate governance, we assess if the firms under reprimanding sanctions voluntarily dismiss top management to improve performance/governance. These results may provide insights to regulators about the effectiveness and design of the current disciplinary, enforcement and prosecution systems.