Top Managers Turnover, Corporate Performance And Governance System

It is a "window" to observe the effectiveness of corporate governance system by examining the relation of top manager's turnover and corporate performance. According to the literature, it is the most serious agency problem that the unqualified top manager staying in the company. So the effective corporate governance system should be able to timely punish the top manager performing poorly. The effective corporate governance is not only able to fire unqualified top manager timely but also able to choose and employ a better qualified successor. These points have been well proved in the developed countries.China is in the transition from planned economy to market economy. The ownership of the companies is diversiform. And their marketing processes are different. During the time, with China's stock market created and increasingly developed, some characteristics formed in the stock market, which is different from western countries. During the period, there are many events of top managers' turnover. The issue is what triggers the managers' turnover, and what the relation between the turnover and performance is. Is the top manager's turnover led by external takeover, or it is the consequence of boards' doing their monitor duties or it is caused by other factors outside the market? And what is the consequence of the frequently turnover? How do the companies choose their successor? It is the paper's basic motivation to observe the effectiveness of China's corporate governance by answering above questions.To do this, three steps are considered. The first is examining the relation of top manager's turnover and performance occurred under the takeover conditions to analyze the effectiveness of external system. The second is considering turnover that occurs in ongoing companies which haven't been taken over during the study period to analyze the effectiveness of internal system. And the third is discussing the mode of top manager's successor choice to examine the improvement degree of governance.To examine the effectiveness of corporate governance, two models are created. One of them is the probit model about turnover pre-turnover's performance and governance, in which the board optimally decides when to replace the top manager and illustrate that the sensitivity of turnover to performance depends critically on the level of performance. The other is the OLS regression model about turnover post-turnover's performance and governance to test if the performance is improved after changing top managers.This paper can be divided into two parts. The first part is about the governance theories and turnover's facts and figures. The second part is the empirical studies about turnover. The conclusion is as follows:1. The facts and figures about turnoverIt shows, from 1998 to 2006 many top managers' turnover events occurred in the listed companies. Quitting and work transfer were the most frequent claimed excuses. While judging from the manager's age and tenure, turnover was more obliged action. The primary analysis shows control rights transfer is the important causes. And the performance more poorly, the top managers are more probably changed.2. The relation between turnover and performanceThe performance of the companies in which turnover occurred through control rights transfer is worse than the average market performance. Among the control-rights-transfer companies the performance of the turnover-companies is more poorly than the companies' that keep the original top manager. It indicates that only the poor performance companies will change their top managers after the control rights being transferred, while the well performance companies will not even when their control rights are transferred. The empirical study on internal turnover demonstrates the turnover is significantly related to poor performance. The lower the performance is the higher the probability of the turnover. But it is disappointed that the performance was not improved after changing the top managers. And the probit regression result of successor choice also proves there is no significant relation between performance and successor choice.3. The relation between turnover and board characteristicsSince boards being composed of representatives of shareholders, the coordination between boards of directors is based on the shareholders' right, not on their abilities and learning. So the size of boards is insignificantly related to internal turnover.Leadership structure of boards significantly affects internal turnover. Under the duality condition, it is difficult for boards to change the unfitted top managers. Even having changed the top managers, boards are more inclined to choose an insider as the successor. As the affiliation of CEO, boards are short of independence, which reduces the governance efficiency.The system of independent director has increasingly done its monitory work since 2003. The higher the ratio of independent director is, the higher the possibility of dismissing the unfitted top managers will be. But the indicator is irrelevant to the performance improvement or successor choice. This phenomenon associates to the occupation background and independence of independent directors. It also hasn't improved the companies' performance to have the managers holding stock shares. This because of the shares is too low, and can't be traded in the second market, which impairs the incentive function.Upon the above empirical results, the paper forms the following opinions: (1) The external governance system has formed certain constraint to the top managers. The threats of control rights transfer stimulates the managers, during which the managers perform poorly are possibly changed. While by now, for the state-owned shares uncirculated in the market, the external governance mechanism is weakened. (2) The internal governance system has being working much better since 2003. The board has played his monitor role, but there are still many problems. Besides, too small shares held by top managers and incomplete circulations impair the effectiveness of boards. These factors hinder the process of successor choice.In general, China's corporate governance goes through a rapid development, and makes great progress in formation. But it is relative lagged in practice. So this paper suggests some measures should be taken to improve external and internal governance, such as strengthening boards' functions, building external markets, perfecting information disclosure system, raising the level of manager's stock shares.