Does Cumulative Voting Matter? The Case of China: An Empirical Assessment

Abstract

What specific corporate governance arrangements matter in the governance of public firms worldwide has been the subject of an ongoing debate in comparative corporate governance. In this debate, the role of cumulative voting has attracted increasing attention. Using a unique, hand-collected dataset of formal adoptions of cumulative voting in 1,060 Chinese listed firms during the period from 2002 through 2012, we extend the growing comparative literature to encompass, for the first time, the case of China. Our empirical inquiry shows that an overwhelming majority of the sample Chinese listed firms have formally embraced cumulative voting. Whereas cumulative voting is mandatory for blockholder firms (i.e., firms with a blockholder controlling more than 30 per cent of the outstanding shares) and elective for non-blockholder firms, the levels of cumulative voting adoption were similarly high by the end of 2012 (95.7 per cent and 89.3 per cent, respectively). Market reactions to the formal adoptions of cumulative voting have, however, been negative on the whole. As such, we argue that cumulative voting does not matter in China. This, as will be further argued, is attributed in large part to certain defining characteristics of the adopting firms, more specifically, the comparatively small size of their boards, the relatively low shareholding levels of (large) minority shareholders, as well as the pervasive presence of the overwhelmingly dominant shareholder. Weak public enforcement by the regulatory authorities and the near-absence of private enforcement through shareholder lawsuits are also important contributing factors. This research supports the view that the value of a particular corporate governance measure is dependent on the context, at both firm and country level. The research also has implications for the growing discourse on the global proliferation of corporate governance codes.