Legitimate violation: how companies covertly neutralize the independent director system in China

Abstract

Purpose

This study proposed and examined a unique but underresearched strategic response to coercive institutional pressure, covert neutralization, in which organizations neutralize coercive institutional pressure by manipulating influential factors within their discretion while conforming to the pressure. In addition, this study pointed out that the extent of covert neutralization is contingent on organizational decision-makers' willingness and ability to take countermeasures.

Design/methodology/approach

To find evidence for covert neutralization and its strategic nature, a historical review with secondary data was conducted in the context of the coercive introduction of the independent director system in China. The board structure adjustments of 318 Chinese A-share listed companies from 2000 to 2004 were examined using univariate T-tests, robust ordinary least squares (OLS) regression models and ordered logit regression models to test the hypotheses.

Findings

This study found that in response to the coercive introduction of the independent director system, Chinese listed companies adjusted their board structures while conforming to the system, which neutralized the constraints on controlling shareholders' board control. Specifically, listed companies reduced the number of dependent directors and the ratio of directors representing noncontrolling shareholders to those representing controlling shareholders. Moreover, the extent of board structure adjustments was positively associated with the shareholding percentage of controlling shareholders. These findings provide evidence for covert neutralization and its strategic nature.

Practical implications

This study indicates the inefficacy of simple legal coercion and suggests that authorities should be aware of the covert countermeasures used by regulated organizations and employ normative approaches to improve the efficacy of regulations. This implication is rather instructive for regulators to effectively promote imposed changes in transitional economies with strong governments.

Originality/value

By differentiating conformity behavior from conformity inclination and considering the inevitable incompleteness of laws, this study challenges the conventional wisdom regarding organizational conformity and shows that organizations can strategically respond to coercive institutional pressure while conforming to it. In contrast to other strategic responses that aim to defy, avoid or resist the implementation (the means) of institutional pressure, covert neutralization aims to neutralize its efficacy (the ends).

Citation

Zhang, Q., Yao, X., Wang, X. and Xiang, T. (2021), "Legitimate violation: how companies covertly neutralize the independent director system in China", Management Decision, Vol. 59 No. 6, pp. 1477-1503. https://doi.org/10.1108/MD-08-2018-0893