Research On Predicting Governance Risk Based On Board

A series of corporate scandals and the current global financial crisis which have happened at home and abroad are due to the corporate governance risk deriving from the missing risk control mechanism at system-level. During the process of transformation from administrative governance to economic governance in domestic enterprises, there exist a more serious problem of "governance failure" phenomenon as to corporate governance mechanism, governance risks like insider control, financial risk, related-party transaction erupt now and then, predicting governance risk has become a focus of current corporate governance research and urgent need for practice circle.From China's market reform for opening till now has experienced about thirty years, enterprise reform has switched from initial construction of corporate governance structure to improve corporate governance mechanisms, and the critical point lies in displaying the central role of the board of directors in corporate governance fully. Sound board's governance mechanism is an important guarantee for avoiding governance risks and achieving sustainable development for domestic companies. A series of governance scandals at home and abroad make board governance become the focus of attention of all sectors, which highlights the importance of the effective development and implementation of internal control system in corporate governance for preventing and detecting fraud. However, there are few truly qualified boards of directors in domestic companies; the competence of board of directors on reacting to corporate governance risk is doubted and must be clarified.We find that existing research has focused on the relationship between board governance mechanisms and characterization of corporate governance risk by analyzing related board governance risk researches at home and abroad, also the problem about predicting governance risk based on the board of directors has not yet attracted sufficient attention. This paper analyze the generation mechanism of corporate governance risk using normative research methods based on the principal-agent relationship, and we define the corporate governance risk, that is the probability of deviation between corporate governance and the maximization stakeholders'interests induced from unreasonable design and operation of governance mechanisms under the impact of the external and external corporate governance environment. As a critical factor, the board of directors affects governance risk directly. In the absence of optimal corporate governance mechanism, it is more operational to measure corporate governance risk from the perspective of the seriousness of deviation between the corporate governance mechanism and the interest maximization.From above theoretical analysis, we adopt a sample data from the year 2002 to 2007 of listed companies to do a empirical research on predicting governance risk based on the board of directors, and construct a model for predicting using a proxy variable to measure governance risk which is derived from Altman Z, after this, we use the data of year 2008 to test the effect of the model which indicate the model is reasonable. Then we use this model to predict the governance risk of all the listed companies of China in year 2008, the results are:first, there exists a phenomenon of passive compliance for the board of directors of listed companies in China, governance which derives from the motivation of their actual need is in short, so there exists a phenomenon of ceiling effect; second, for the mechanisms of the board of directors, director incentives, like directors remuneration, the proportion of receiving remuneration for directors, board ownership percentage, and behaviors, like the setting of Remuneration and Evaluation Committee and the Nomination Committee, board meetings frequency, all these affect governance risk significantly; third, the predicting model which include directors remuneration, the proportion of receiving remuneration for directors, board ownership percentage, the setting of Remuneration and Evaluation Committee, the setting of Nominating Committee, the number of board meetings, return on assets, total assets growth rate, debt-asset ratio can make a better judge on whether there has been a governance risk for listed companies; fourth, studying on the data of the year 2008 from China's Shanghai and Shenzhen Stock exchange has shown that China's listed companies are generally facing greater governance risk. Improving the mechanisms of the b of directors in order to avoid governance risk is a realistic choice.The innovations maybe:first, we define the governance risk based on the perspective of principal-agent relationship, and clarify the generation mechanism of governance risk; second, construct a predicting model to predict the governance risk based on the board of directors; moreover, we test the effectiveness of the board governance mechanisms from the view of governance risk and provide a new perspective for rational construction of the board of directors. However, in the case of data are available, more indicators can be further used to build a comprehensive risk index to measure the governance risk and do researches on predicting the governance risk based on the board of directors.