A Study Of Independent Directors’ Supervision Role On Company Violations

In China’s capital market, the phenomenon of majority shareholders infringingthe interests of minority shareholders is getting worse, which has seriously disruptedthe order of the capital market and undermined investor confidence. Corporategovernance is beginning to receive the attention of all walks of life. In2001, with thepurpose of protecting the interests of minority shareholders by introducingindependent directors to improve corporate governance, China’s regulatory authoritiesintroduced the independent director system. However, due to the prevalencephenomenon of "internal control" and “one share jumbo " in China’s listed companies,can the independent directors play supervisory role in China’s listed companies?Can the independent directors inhibit the occurrence of violations of the listedcompanies?The supervisory role of independent directors depends largely on whetherit could inhibit the company violations. Based on combined data of listed companiesin China during2003to2010, by establishing the simultaneous equations model andusing the logistic regression analysis method, this paper finds out that: on one hand,the enhancement of the proportion of independent directors will significantly increasethe company’s violation probability, indicating that the directors fail to play asupervisory role in inhibition of company violations, and are more likely to colludewith corporate insiders; on the other hand, when violations occur, interested partieswill pay more attention to the role of independent directors, and thus significantlyincrease the proportion of independent directors. Further empirical evidences showthat, the collusion between independent directors and insiders is limited to violationsof the lesser degree, the relation between the proportion of independent directors andsevere violations is not significant. the supervisory role of independent directors is notsimply determined by the corporate governance structure, but may be closely relatedto the construction of the external institutional environment.