A Study On The Mechanism Of Independent Directors' Switch And Selection

In August,2001, CSRC (China Securities Regulatory Commission) issued its guidance to the establishment on system of independent directors in listed companies which is called guidance shortly, and it required domestic listed companies must establish institution on dependent directors.However, as one effective system in foreign countries, had it play its role in supervision to protect interests of investors? Most scholars believe that the institution has encountered many obstacles in the context of the phenomena of "largest shareholders" and "internal control", it need to be improved and perfected continuously. Since the main part of the institution is independent directors and the listed companies, the game between them is one important topic, and this game will eventually reflected in the mechanism of switch and selection about independent directors.Therefore, the object of study on this paper is about the game between independent directors and listed companies, mainly for two aspects, one is about when independent directors say "no", does he lose his seats? The other aspect is the double choose between high reputation independent directors and different kinds of companies. The study of these two aspects will reveal the rationality of switch and selection mechanism, and find its drawbacks and salvations. Thus this study will help improve and perfect the system of independent director's mechanism.However, it is usually difficult to define the standard about whether independent directors have been performed his duties to protect interests of small shareholders. Our guidance issued in 2001 asked independent directors should convey its independent opinion to significant issues of listed companies; and when independent directors can not reach an agreement on one issue, the Boards should disclose all views of the independent directors. This obliged disclosure system provides one valuable opportunity for the study of the act about whether independent directors are on duty. In this paper, whether independent directors will say "no" will be the alternative variables of whether they are on duty, and the study will analyze the situation about the switch on the seats after the independent directors say "no", to answer the reasonableness of switch mechanism about independent directors.CSRC (2001) required that the listed company must have a certain number of independent directors, and reached the lowest proportion of the Boards. So, when some independent directors lost their seats, there must come new ones to take over their jobs. On the basis of study about switch mechanism, the research of selection mechanism about the game between independent directors and listed companies will go on to find that if nowadays mechanism is able to select out those who can play its role of supervisory to protect interests of minority shareholders,In addition, as most independent directors are celebrities who own good reputation and enviable main business, they always treasure their hard-won reputation, and try to enhance it. For the company, if it obtained high-reputation independent directors, it can transfer its good signal to the market. Then are high-reputation independent directors really favorites of companies? And how will the high-reputation independent directors choose his companies to avoid the risks. This paper will do study of the game between high-reputation independent directors and different kinds of companies, to find that whether high-reputation independent director will play its responsibility of supervision, as our expectations. This will also help test the effectiveness of reputation market about independent directors.The results of this study indicate that current switch and selection mechanism of independent directors is not conductive to promote good performance of independent directors. Under the hypothesis of an effective independent directors' reputation-market, independent directors doing duties should enhance their reputation. But this paper shows that their good performance make them more likely to lose their seats, and high-reputation independent directors who originally have abilities to discover problems of listed companies are unwilling to be employed by high-risked companies in order to protect its reputation. In thus mechanism, independent directors care more about the risk on them, and they usually make preparation to be one "vase". Regardless of independent directors' willing to make good performance and the pressure that listed companies given to them, this mechanism is not conductive for them to play important roles on protect interests of minority shareholders.In this paper, we also find that the insiders play one more important role in the switch of independent directors than substantial shareholders. If independent director does not listen to the insider, he will lose his seat. However, in the selection mechanism, the independent directors have more options than listed companies, and they care more about risk coming from big shareholders than the insiders. This shows that independent directors are more willing to maintain their friendship with the insiders, but when the relationship between them are destroyed, independent directors will be on the risk of losing seats.Innovations of this article are:(1) Using the data of independent opinion as the alternative variables, this paper finds the negative influence of independent directors'performance on their future career. On one side, they are more subject to major shareholders and insiders when doing duties; on the other side, if independent directors doing duties, it will destroy their friendship with major shareholders and insiders, and it will lead to independent director losing his seat, even destroy his reputation; (2) This paper adds some variables related to alteration and selection mechanism of independent directors, such as the proportion on the Boards, the existence of Nomination Committee.Based on the results of this paper, it will propose some relevant policy recommendations, as follows:(1)The third-part evaluation mechanism should be brought into switch mechanism. This third part may be special established agencies, may be other agencies which can evaluate the active of independent directors. The agency will evaluate the performance of independent directors, and awards marks to good-performance ones. Complementary with the policies and regulations, independent directors with certain points have qualifications to take an offer in large listed companies. This will not only protect independent directors'value of general human capital, but also avoid listed companies to select independent directors according to their own interests.(2)We should enhance the transparency of the information disclosure, and ensure smooth information-channels for independent directors'good performance. This will avoid lag information hindering independent directors doing duties better.(3)To the phenomenon of high-reputation independent directors more reluctant to choose small-risk companywide should set one insurance mechanism to them. This mechanism should give more courage to choose high-risk companies, and be more responsible to play their role on protecting interests of medium and small shareholders.