An Empirical Study On The Relationship Between Supervision Of The Independent Directors And Illegal Actions Of Listed Companies

The CSRC (China Securities Regulatory Commission) promulgated the Instructional Suggestions about Founding Independent Directors System in Listed Companies in the August 16,2001, which marked the formal entry of the independent director system. Instructional Suggestions confirm the status of independent directors on the board of directors. Independent director system becomes an important measure to improve the governance structure of listed companies in China. In 2005, the Company Law required listed companies should have an independent director. It means that independent director system achieved the legal status in China. In the early stages of the independent director system entered, the effectiveness of the independent director system was carried out extensive and depth academic discussion. But, with the development of the independent director system, practitioners and academics have formed a consensus that whether the independent director system in China can really play a role to improve corporate governance structure, the key is not the system itself designed more sophisticated. It depends on whether each independent director can perform their duties effectively. Ten years have passed since the independent director system was introduced in our country. Have the independent directors played an effectively role in this decade?Firstly, the functions of independent directors should be defined. Through the analysis of the literature and the related laws, we believe that independent directors play a supervisory role. The supervisory function of independent directors is performed in these areas. The independent directors can monitor the abuses of the controlling shareholder, supervise the behavior of the management to reduce the agency costs, and prevent the transactions between the related parties from occurring in order to maintain the interests of shareholders, especially minority shareholders. However, the illegal actions in listed companies occurred in the disclosure of accounting information, the occupation of assets, and the violation of other relevant laws and so on. We can find that most of the illegal actions are relevant to the functions of independent directors. Thus, the independent directors can influence the occurrence of the illegal actions. Therefore, this paper bases on the supervisory function of the independent directors to test the relationship between the supervision and the illegal actions to explore whether the independent directors can carry out their functions effectively.This paper reviews the literature and introduces the motivation of the illegal actions, the effectiveness of supervisory function, and the measure of the supervision. The paper find that the scale of independent directors, expertise, salary, invested time and the reputation can be a good measure of independent directors’supervision. Meanwhile, the principal-agent theory, stakeholder theory, signaling theory and human capital theory provide the theoretical support for the independent director system.In the part of Research Design, firstly, this part proposes the hypothesis from the perspective of the supervisory function. It assumes supervisory function of independent directors has a negative correlation with the probability of the illegal actions occurred. Independent directors are expected to inhibit the occurrence of the illegal actions.In the part of Empirical Analysis, firstly, all of the variables are analyzed by descriptive statistics. Secondly, the models are analyzed by logistic model. We find that the proportion of independent directors and the average salary were a significant negative correlation with the probability of the illegal actions occurred. It well explains that the independent directors fulfill their supervisory function effectively. However, the number of the accounting in the independent directors, the number of views by the independent directors and the number of the companies serving are no significant correlation with the probability of the illegal actions occurred. Thirdly, we test the models by OLS in order to confirm reliability of the results.Through the analysis above, this paper argues that the higher the proportion of the independent directors, the higher the independent directors’salary in listed company will lead the probability of the illegal actions occurred to become lower. Therefore, we believe that the independent directors are able to perform their supervisory function effectively in our country. Then, this paper presents the policy proposal about the independent directors system.The innovation of this paper is that dependent variable is redefined in research model. In previous literature illegal company is matched with normal company. But, in this paper, all the illegal companies are divided into two categories. Classification standard is whether the reasons for illegal have a relationship with the independent directors’supervision. In addition, this paper chooses the number of independent opinions by independent directors to measure the invested time of independent directors. It can effectively measure the results of the independent directors’ work. This variable is used to investigate the invested time of independent directors will become more direct and reasonable.