The Role of Supervisory Board Heterogeneity on Corporate Irregularity: New Insights and Management Opportunities
Round 1
Reviewer 1 Report
Reviewer’s Comments:
Thank you for sharing the article, "The role of supervisory boards heterogeneity on corporate irregularity: New Insights and Management Opportunities." This study is interesting and contributes to the literature on corporate governance. It discusses a critical debate in corporate governance, which is worthy of further exploration.
The paper is well motivated and well organized. The empirical study is appropriate, and the contribution is significant. Yet, I have a number of concerns, listed below.
I have the following comments to improve the paper:
1. The authors provided “the contribution of the study” that needs improvement. The authors should provide both theoretical as well as practical contributions to the study.
2. The presentations of the paper need to be improved. The authors noted this in section 2. “Theoretical analysis and data selection” and section 3. “Pathway hypothesis and study design”. These sections are presented poorly and are difficult for readers to understand in their current form. The authors should properly explain them. The authors should first explain the “Theoretical framework and hypotheses” and then come to the “data selection, design, and analysis.”
3. The authors should rule out the endogeneity concerns in their study. In their baseline analysis, the authors used the SEM, which is highly recommended for such kind of study. However, as mentioned in Wintoki et al., (2012), the endogeneity problem is persuasive almost in all corporate governance studies.
4. The authors should provide the theoretical and practical implications of the study.
I hope you consider my comments helpful, and I wish you all the best as you continue your work.
Reference:
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate governance. Journal of financial economics, 105(3), 581-606.
Comments for author File: 
Comments.pdf
Author Response
The authors provided “the contribution of the study” that needs improvement. The authors should provide both theoretical as well as practical contributions to the study.
R: Thank you very much for your valuable advice. We have made the following modifications:
The possible contributions of this article are mainly reflected in two aspects:
At the theoretical level, the governance of supervisors board is actually a complex and controversial system, and a single theory or evaluation cannot interpret and judge its operational effectiveness. Chinese supervision mechanism has a unique social environment and development context, and there is still a need for reform, as well as a great space for reform. This paper broadens the research field of the heterogeneity of the board of supervisors, finds and demonstrates that there are great differences in legal systems and employment mechanisms between common law and civil law countries, and the functions of the board of supervisors and enterprise executives are also very different. The theories and tools that have been verified in many foreign literatures are not necessarily applicable to the measurement and analysis of the heterogeneity of Chinese corporate supervisors board.
At the practical level, designing and managing a small team is the basis for planning and leading the healthy development of the company. This study preliminarily selected and determined the heterogeneity dimensions and indicators by referring to the research status and results of the heterogeneity of senior management teams, then, collected relevant data of Chinese listed companies with extreme differences (CSI 300 and ST companies) from 2015 to 2019. Subsequently, Structural Equation Model (SEM) was used to verify the explanatory power of more important heterogeneous factors and observation indicators, depict and analyze the Potential Characteristics of the supervisors board further. Meanwhile, providing important practical basis and data basis for selecting the team of the supervisors board and improving the supervision system, so as to reduce the loss of violations and improve the efficiency and level of supervision. Finally, the paper demonstrates the rationality of measuring supervisory board performance by corporate irregularities, and explores the paths of supervisory boards in affecting irregularities, linking supervisory board heterogeneity to corporate irregularities, extending the research on corporate violation risk, and laying the foundation for further research to assess supervisory board monitoring performance.
The presentations of the paper need to be improved. The authors noted this in section 2. “Theoretical analysis and data selection” and section 3. “Pathway hypothesis and study design”. These sections are presented poorly and are difficult for readers to understand in their current form. The authors should properly explain them. The authors should first explain the “Theoretical framework and hypotheses” and then come to the “data selection, design, and analysis.”
R: Many thanks for your valuable comments. Based on your recommendations, we have elaborated on them. The adjusted article structure as follow:
- Theoretical Framework and Hypotheses
2.1 Reasonableness demonstration of measuring the performance of the supervisory board by corporate irregularities
2.2 Theoretical basis for measuring the performance of the board of supervisors
2.3 Path of action of the model and the underlying hypothesis
- Data Selection, Design and Analysis
3.1 Data sources for selecting heterogeneity indicators for supervisory boards
3.2 Data sources for selecting indicators for Corporate Irregularities
3.3 Structural equation modeling (SEM) based research and analysis
The authors should rule out the endogeneity concerns in their study. In their baseline analysis, the authors used the SEM, which is highly recommended for such kind of study. However, as mentioned in Wintoki et al., (2012), the endogeneity problem is persuasive almost in all corporate governance studies.
R: Thank you so much for offering us this valuable and helpful suggestions. Endogenous problem is indeed the most important problem and defect in this paper. Our sincere explanation for this is that the main purpose of this paper is to use structural equation model to explore important influencing factors and potential influence relationships, and this paper is also indeed from a part of a doctoral thesis, or a chapter. The endogenous problem will be specifically solved in another related article, mainly using the two-stage model method proposed by Heckman (1979), the first stage builds a Probit model, estimating the Inverse Mills Ratio (IMR) to predict the probability of a irregularities for each company; in the second stage, IMR is added as a control variable to the OLS model to correct the problem of sample selection bias. Moreover, the empirical conclusion is that IMR is significantly negatively correlated with the number of irregularities at the 5% confidence level, which verifies the hypothesis of sample selection bias in the original model. At the end of this paper (section 4.2), we give a simple explanation of this problem.
The authors should provide the theoretical and practical implications of the study.
R: Thanks a lot for your kind and valuable comments. Based on your recommendations, we have explained this part.
4.2 Implications and further research
In terms of theoretical research, the current research on the board of supervisors is still very limited and prejudiced in China. Compared with the board of directors system and the independent director system, the organizational structure of the supervisors board is relatively simple as well. So that, it is difficult and hard to collect cases and documents. At the same time, the vast majority of the board of supervisors are still composed of equity supervisors and employee supervisors. There are no independent supervisors or external supervisors. Some enterprise board of supervisors are mainly part-time, they often lack sufficient energy and time to conduct comprehensive and detailed supervision and inspection of enterprises. On the other hand, many studies have focus on the causes, mechanisms or harms of violations in the past, but few have taken irregularities as performance indicators. This paper links the heterogeneity of the board of supervisors with the corporate irregularities, furthermore, demonstrates the rationality of measuring the performance of the board of supervisors by corporate irregularities. This work enriches the research on the risk of company violations, and also lays a foundation for further research and evaluation of the supervisory performance of the board of supervisors.
For practical implications, it is found that the supervisory board as a whole has a “comprehensive coordination” role for individual supervisors, even if each supervisor has different individual characteristics and represents different interests, the supervisory board will “absorb” the different voices and “resolve” the contradictions between interests. Therefore, with the heterogeneity dimensions and indicators of the supervisors board as the starting point, the research on micro individuals has gradually expanded to team relations and comprehensive evaluation. However, the sample selection has limitations that require more in-depth research. When collecting sample data, this paper selects the information of 441 members of the supervisors board of Shanghai Shenzhen 300 companies and ST companies, and makes preliminary comparative observation in the process of statistical analysis, so as to highlight the differences in company size, asset quality and internal governance structure. Although the sample can represent the two extremes of asset scale and operating performance, it cannot further distinguish industries and regions, which affects the statistical validity of the empirical analysis conclusions to a certain extent.
At the same time, the endogeneity of the model is not considered. When using Irregularities Behavior as an alternative variable of supervision performance, the sample selection deviation will be caused by the lack of information disclosure. Considering that the statistics on Irregularities of Listed Companies are actually based on the probability set of two events: “Irregularities of listed companies” and “disclosure by regulatory authorities”, that means not all irregularities are the result of random selection, e.g. companies that have not been found or have not disclosed violations are assigned a value of 0, just like companies that have disclosed no violations. Therefore, only using disclosed violations to examine influencing factors will lead to sample selection bias. In order to solve this problem, the two-stage model method proposed by Heckman can be used in future research.
Reviewer 2 Report
The paper is well written, the authors clearly presented the evidence found. In my opinion the paper can be accepted for publication in present form. No changes or modifications are required.
Author Response
Reviewer2:
The paper is well written, the authors clearly presented the evidence found. In my opinion the paper can be accepted for publication in present form. No changes or modifications are required.
R: Many thanks for your comments.
Reviewer 3 Report
Thank you for the opportunity to review this paper. Heterogeneity of supervisory boards is an interesting topic.
In the first paragraph you have many quoted terms. Could you paraphrase these instead and also number them for the reader.
The contributions of this paper are worthwhile, but they would be more compelling if stated more clearly and succinctly.
These hypotheses read as if they are findings:
· “Hypothesis 1: The internal heterogeneity of the supervisory board has an impact on corporate irregularities, but the direction cannot be verified.”
· “Hypothesis 2b: The size of the supervisory board has an impact on corporate irregularities, but the direction cannot be determined.”
Instead of stating theses hypotheses as if they are conclusions, please just state a nondirectional hypothesis.
The data set is impressive. The results appear in a satisfactory manner. The overall model is quite interesting and makes a novel contribution.
You list both AMOS and Amos. Pick one and use it consistently.
This manuscript would benefit from editing and proofreading.
Author Response
Reviewer3:
In the first paragraph you have many quoted terms. Could you paraphrase these instead and also number them for the reader.
R: Many thanks for your valuable comments. We have made modifications based on your recommendations and all relevant contents have been adjusted accordingly.
The contributions of this paper are worthwhile, but they would be more compelling if stated more clearly and succinctly.
R: Thanks a lot for your kind and valuable comments. Based on your suggestions, we have simplified the 4.1 Research conclusions.
These hypotheses read as if they are findings:
“Hypothesis 1: The internal heterogeneity of the supervisory board has an impact on corporate irregularities, but the direction cannot be verified.”
“Hypothesis 2b: The size of the supervisory board has an impact on corporate irregularities, but the direction cannot be determined.”
Instead of stating theses hypotheses as if they are conclusions, please just state a nondirectional hypothesis.
R: Many thanks for your valuable comments. We have modified this section as follows:
“Hypothesis 1: Internal Heterogeneity has an impact on Corporate Irregularities.”
“Hypothesis 2b: Organization Size has an impact on Corporate Irregularities.”
Relevant contents such as Table 5 hypothesis test results have also been adjusted accordingly.
You list both AMOS and Amos. Pick one and use it consistently.
R: Thank you very much for your advice. We have made modifications based on your recommendations.
