Personal liability and independent directors: Evidence from China

The debate over strengthening independent directors’ personal liability to enhance their governance role continues, with concerns it may lead to increased resignations. Existing research has left gaps in understanding the legislative effects of increasing this responsibility and its heterogeneity across different contexts, especially in rapidly growing emerging markets. Our study bridges this gap by investigating how increased personal liability influences independent director turnover and corporate governance efficiency following the amendment of China’s Securities Law. We argue that these amendments signify the end of lax penalties for independent directors, thereby boosting corporate governance. Using a dataset of Chinese listed firms spanning 2017 to 2021, we observe a significant increase in independent director resignations post-amendments. This effect is more prominent in firms with higher litigation risk, more opaque information, higher internal corruption, and lower independent director remuneration. Independent directors who are weakly independent, are frequently absent, use proxy voting, hold multiple independent directorships, live far from the firms they serve, or have academic backgrounds are more likely to resign when facing increased personal liability. Further analysis reveals that the resignation of independent directors who are weakly independent, live far from the firm, and hold multiple independent directorships after the amendment is positively associated with stock returns. Additionally, the increased personal liability introduced by the amendment improves corporate governance efficiency. These findings provide new insights into governance reforms in emerging markets and the general role of diligent independent directors.