A Research On The Effectiveness Of Independent Director System Of Listed Companies In China

The validity of Independent Director (ID) Mechanism (IDM) on which domestic and foreign scholars have made a great deal of research without a consistent conclusion is the core of the scheme. This theme employed theoretical and empirical methods to examine the effectiveness of China's IDM based on the characteristics and administration structure of the listed companies in China.The theoretical part analyzed China's corporate governance structure as well as the running conditions of IDM in China after comparing the modes of corporate governance all over the world. The functions of IDs in China include supervise function, balance function and consultant function. From the current state of IDM, we see that IDs'consultant role appears obvious, while the supervisory and balanced aspects are not prominent. This paper focuses on the IDs'incentive mechanisms based on the principal-agent theory. It is proved that the existing incentive compensation mechanisms in China are neither insufficient nor affecting IDs'independence. The reputation incentive mechanism can be taken as a new direction for IDM.Using factor analysis and regression analysis, the empirical part proposed two latitudes to do the research which are the proportion of IDs in the board of directors and their compensations. The proportions of IDs in China's listed companies are more or less close to 1/3, while the payments of IDs'salaries in each company are so not alike. Taking China's listed corporations as a sample, this study employs the data during 2007 to 2008 to examine the effectiveness of China's IDM. The results show that there is no significant linear relationship but inverted U-relationship between independent directors'proportion and the corporate performance. While there do exists a negative correlation between the compensations of IDs and the corporate performance, which reflects the irrationality of the existing incentive mechanism in China. To improve China's IDM, the proportion of IDs in the board of directors and their incentive models should be paid more attention to.This theme examined the effectiveness of China's IDM. The relevant policy recommendations include: an appropriate increase of the ratio of IDs in the board of directors, a reform of the incentive mechanisms, an increase of the supervise type IDs, to optimize the corporate structures of listed companies, to strengthen the relevant laws and to improve the information environment.