The Research Of The Question For Independent Directors' Effectiveness Security

The independent directors system is an important system in the design of the corporate governance system and eventually become a global trend. Modern of economics and law provides a strong theory support for the introduction and function of such a system. As a system that can improve the corporate governance efficiency and inhibit major shareholder from occupying the interests of the small shareholders, it is also introduced in the governance structure of China's listed companies. However, in the end of the 20th century so as the early 21st century, it happens a series of corporate scandals in the listed companies as Enron,WorldCom in the world and as Yinguangxia,red light industrial,the Monkey King in China. At that time, the independent directors were jokingly called "difficult Dong" or "vase "of the corporate governance. All that happened above puzzled the academia and the practice of a profession:why the system is so effective in theory but is so vulnerary in reality? I believe the answer is the ideal theory deviates the complex reality, which is the problem always encountered in the process of all theory applied for the practice. Through the design of the system to guarantee the effectiveness is the settlement road. This paper mainly researches how to protect the system's validity from three ascents and discuss the related issues around the three-parts which are the independence of independent directors and its protection mechanism,the incentives of independent directors and anti-collusion contract design,responsibility reconciled of the Audit Committee and the Board of Supervisors. In the end, it makes the empirical study of the system run on listed companies in China and proposes policy recommendations.This paper finds the system is a derivative of the board governance system from the angle of the independent director system changes. The primitive of the system is to improve the efficiency of the Board, which is a mechanism that can be used to solve the agent problem in the company. Immediately, from the angle of shareholding structure and control right, the paper analyzes the main agent problem in the different shareholding structures company and believes the shareholding structure decide the company's main agent problem. In the companies which have disperse shareholding structure, the main agent problem is the interests conflict between the operator and all shareholders, which performs that the actual controller——the operator occupy the interests of all shareholders; in the companies which have focus shareholding structure, the main agent problem is the interests conflict between the major shareholders and the small shareholders, which performs that the actual controller——the major shareholders occupy the minority shareholders interests. By analyzing the character of shareholders of listed companies in China, I find its main features are the highly concentrated ownership and control of major shareholders, correspondingly, the system is introduced in China to inhibit major shareholders from occupying the interests of minority shareholders, which is the same as the facts and the mind of the system designers.In this paper, as a monitoring mechanism, the independent director system is a proxy relationship and also exists a certain agency problem itself, because it helps client to exercise oversight functions, therefore, this agency problem may lead independent director system ineffective or inefficient. In order to safeguard the effectiveness of independence director system, this paper studies three mechanisms:First, the independence of independent directors and its protection mechanismsThe view of this paper is that the independence of the independent directors is the combination of subjective and pbjective. Under the independent directors keeping objective independent to the company, they make an independent judgment according to their knowledge structure, practical experience and enterprise information owned by themselves. The independence also has special independence that is interest independence and judgment independence. To achieve their independence, the independent directors must be target independent and content independent. Therefore, the independent directors must have a majority position in the Board and led the Board's decision-making process, rather than just depend on executive directors and only play staff, advisory and impact role in the decision-making process of the Board. At the same time, the paper study the system security of the independence from the selecting and firing mechanism of the independent directors connecting the requirements of China's existing laws and regulations. Second, the rational design of independent directors'incentive contracts and anti-collusion leasesThe relationship between shareholders clients and agents is contractual relationship, their rights and obligations must be defined through contracts, so a rational and scientific motivation lease contract is designed between the independent directors and their clients can effectively prevent the independent director system ineffective or inefficient.1,By the analysis of game theory and information economics, the paper draws the optimal design of incentive contracts depends on the degree of information symmetry and risk attitude of clients and agents. When there is a more than one period time contract between the independent directors and their clients, the reputation mechanism will work. Specifically:When shareholders can observed the efforts of independent directors, if shareholders are risk-neutral, but the independent directors is risk aversion, then the Pareto optimal design contract designed by shareholders should require independent directors not bear any risk, only require the shareholders pay the independent directors a fixed reward which just the same as the keeping wage costs adding their efforts cost; In the circumstances of asymmetric information, the independent directors must assume certain risks in the lease. The optimal incentives contract designed by shareholders should be it is a balance between incentives effectiveness and retain effectiveness of the independent directors. If the commission-acting relationship is multi-phase, considering the future reputation, the agent problem between the independent directors and shareholders is not as serious as it in the single-agent period because the "time" itself may be alleviates the agent problem. In the process of resolving problems, the reputation effect as a hidden incentive mechanism has the same results as the dominant excitation mechanism.2,In the company having the controlling shareholder, it is generally impossible that the bribery acts are forbidden between controlling shareholder and the independent directors unless the penalties are increased.Third, the reconcile of responsibility and right between the Board and the board of supervisors The corporate governance structure of China is a "two-tier" structure, there are two parallel institutions that is the Board and the board of supervisors under the shareholders. It is a great characteristics that the independent directors system and the audit committee is introduced in the China's corporate governance structure, however, the coexistence of two surveillance system do not bring satisfactory supervision results of "one plus one equals two" or "more than two", however, bring a waste of supervision resources and the reduction of the monitoring efficiency. Therefore, the recondition is necessary. The recondition focus on two facts, on the one hand, the relationship between the audit committee and the board of supervisors should be properly handled. The audit committee mainly supervises management. The board of supervisors inspects the company's financial,supervises and inspects directors,managers and other senior management staff duties; The board of supervisors focuses on post-supervision but not participate in the decision-making process. The audit committee more focuses on oversight in advance and has to participate in the decision-making process. As one of the committee of the Board, the audit committee is also be over sighted by the board of supervisors. The audit committee should take part in the audit activities exercising by the board of supervisors, mutual cooperate with the board of supervisors to monitor corporate governance issues; on the other hand, the scope of the responsibility and right is defined.