The Empirical Analysis Of The Relation Between Independent Director System And Firm Performance Of The Listed Companies

Since the 1990s, the global mature stock market had comprehensivelyintroduced independent director system. It made the construction ofindependent director system into an international trend and triggered acorporate governance reform called"revolution of independent directors".With the development of the world economy, enterprises'property rights andoperating right has further separated, and it brings forward a higher demandfor corporate governance. With their unique "independent" connotation,independent directors have played a positive and effective role in theguarantee benefits of all shareholders in particular small and medium-sizedshareholders maximization. Now, the practice of Western countries has provedto some extent that independent director system as an important component ofcorporate governance plays an active role in the development of modernenterprise. Since China's stock market has emerged, it already passed morethan 10 years; some of the listed companies which have good performancegradually degenerate into ST, PT, or even draw back the stock market. Itmakes the investors suffer losses; one of the major reasons is that they haven'testablished effective corporate governance structure. As an important solutionto govern structural defects in the corporate governance, SFC promulgated the"the guidance opinion of establishing independent director system on the listedcompanies" on August 21, 2001. Its primary purpose is to let the independentdirectors shoulder the responsibility to protect the interests of small andmedium shareholders and to prevent or stop the behaviors of the majorstockholders which damage interests of the small and medium shareholders in the corporate decision-making process and to solve the problems due to thedominance and internal control. The "Company Law" which was revised in2005 and implemented from the January 1, 2006 explicitly stipulates that thelisted companies should have a certain amount of independent directors.Independent director system ultimately affirmed in the legal stratificationplane.At first, this paper reviews the domestic and foreign research resultsabout the relationship between independent director system and firmperformance. The foreign countries implemented the system of independentdirector earlier and the scholars have done a lot of empirical researchregarding the relationship between independent director system and firmperformance, but they haven't been able to come to an agreed conclusion.Some scholars have obtained conclusion that independent director system andfirm performance are positively related, and some have obtained conclusionthat the two are not related, others think the two are negatively related.Regarding the relation between independent director system and firmperformance, the conclusions which the domestic scholars obtained are alsovarious.Then I take the A-share listed companies in Shanghai Stock market asstudy samples and analyze the relationship between the proportion ofindependent directors and firm performance of the listed companies on thebasis of Empirical analysis. I use EPS and ROE to measure firm performanceand use EVIEWS4.1 to process the collected 472 data. The average number ofindependent directors of the listed companies in China is 3.35, with a rate of34.6%. The average earnings per share of listed companies is 0.301425, theaverage net assets income rate is 8.4268018. The correlation coefficient of the proportion of independent directors and EPS and ROE is respectively0.017369 and 0.045220, and it demonstrates that they are basically irrelevant.Then I use the generalized least squares regression to estimate the equation,and obtain the conclusion that proportion of independent directors and firmperformance are not related.Then I analyzed the reasons, including the followings: (1) theindependent directors'independence is not strong. At first, it manifests in theselection and employment mechanism, major shareholders are in an absolutelysuperior on the appointment of independent directors. Second, it is alsoreflected in the way and quantity of payment of independent directors. Theindependent directors'salaries are generally decided by the company's boardof directors and the number of salaries has not been clearly defined. (2) Theposition of independent directors was not explicitly enough and independentdirectors'authorities are nominal. First, some companies are lack of specificprovisions of the rights and obligations of independent directors. Second, theindependent directors usually stem from their own interests and express theirviews only when listening, examining and approving the company's annualreport and major decisions and they are unwilling to offend the majorshareholder, thus, mostly the major shareholders say first in the board ofdirectors. Finally, from the exercise of power sources and channel, most listedcompanies don't establish organizations to facilitate the independent directors,and the independent directors have not been granted the power to makedecisions on some specific matters. (3) The independent directors'"oversightfunctions" can not be realized. First, because of the defects of collectionmechanism of the independent directors, independent directors have verycomplicated relation with major shareholders and management teams, and independent directors may not exercise supervisory authority. Second,regarding the background of the current independent directors, a majority ofindependent directors of listed companies in China are doing the concurrent joband the vast majorities are scholars or experts in a particular field. This causesthat independent directors are difficult to understand the overall operation ofthe company and unable to supervise due to the quality and time constraints.Third, information asymmetries make the independent directors carry on thesurveillance with difficulty. (4) It is lack of reasonable incentive and restraintmechanisms. At present, a majority of listed companies give the independentdirectors honor encouragement, and only give appropriate payment or nonpaymentof allowances. In the way of payment of independent directors, thepercentage of listed companies which adopt a fixed payment option (theallowance or allowance plus trip expenses, etc.) is 86.79%. Few listedcompanies adopt the stock or options incentive, so it is difficult to makeindependent directors consider the issue from the perspective of shareholders.In addition, the independent directors'incentive and responsibility areasymmetry. (5) The functions of independent directors and board ofsupervisors are conflict: first, the two are defined as internal supervisors, andtake the financial inspection and supervision as the core content, resulting inchaos in the company's institution structure relations, not only hinderscompany's operating efficiency, but also reduces performance of monitoring.Second, both of them have the right to supervise directors, managers. Third,independent directors are more active than board of supervisors, the action ofboard of supervisors is restrained, and its original position may be furtherelevated on the sake of the introduction of independent directors. Finally, theyhave the right to propose to hold the temporary general meeting of shareholders. (6) Lack of talented independent directors and a mature marketcompetition mechanism. China is in the economic transition period and eachkind of market is being in the development, growth and consummation stage,the lack of talent and the market mechanism is not strong binding. This kind ofmarket mechanism flaw is the reason why the introduction of independentdirectors system takes on"North tangerine South orange", and it directlyaffects the improvement of corporate governance structure.Finally, I propose the measures suited to China's national conditions: (1)To establish an independent mechanism for hiring independent directors andfurther increase the number of independent directors. (2) To further clarify thefunction of independent directors and the rights, obligations andresponsibilities. (3) To establish an effective incentive and restraintmechanisms. (4) To specify the job duties of independent directors and boardof supervisors. (5) To strengthen the system safeguard of independentdirectors to perform their duties. (6) To create a social environment suitablefor the survival of independent directors: to change "alone is big" ownershipstructure, decentralization of the stock rights and establish the systemfoundation which is suitable for the survival of the independent directors;create a good culture of corporate governance. Only in this way canindependent director system in China gradually achieve ideal results.