Does the criminalization of independent director's breaches of fiduciary duties increase shareholder value? Evidence from Singapore

Abstract

Whether a breach of directors’ fiduciary duties should be treated as civil or criminal in nature is a controversial issue. In a recent court case, for the first time in Singapore, independent directors were arrested and criminally sanctioned for breaches of their fiduciary duties to exercise reasonable diligence in corporate disclosure. Exploring relevant events around this case, I examine whether criminalizing the breach of independent directors’ fiduciary duties increases or decreases shareholder value. I find a significantly negative stock market reaction to the events associated with the criminal sanction of independent directors for firms with more independent directors. I explore three possible channels through which shareholder value is decreased. First, I examine whether independent directors become overcautious and request additional unnecessary disclosures which increase companies’ disclosure costs. Second, I examine whether independent directors request additional directors’ fees to compensate for the increased liabilities. Third, I examine whether the chilling effect of the court case is so strong that even competent independent directors leave the company. I find evidence consistent with the first story but no evidence consistent with the other two.