A Study On The Impact Of Board Governance Of Family Firms On Their Internal Control

As a series of financial scandal have been exposed in domestic and overseas, anincreasingly number of people realizes that a reasonable internal control system is thekey to survive and develop in the market for enterprise. Board of directors is theprimary internal control environment factor. It is an important internal controlmechanism linking shareholders and mangers, playing decision-making and supervisingroles. In2008, ministry of finance along with securities regulatory commission, auditingadministration, the China banking regulatory commission, insurance regulatorycommission jointly issued the <basic norms of internal control>,and after that,in2010they also published18application guides. This indicates that Chinese enterprise internalcontrol has entered a legalized track, but in reality, the enterprise internal control invalidphenomena still very serious.Since the reform and opening up, china’s private economy is growing very fast,and now has embarked on a fairly large-scale industrial development. And a surveyindicates that china’s private enterprises are mostly family business. In this paper, wechoose the family enterprise in china as a target and made a thorough analysis of therelationship between the board of directors’ governance and the effectiveness of internalcontrol.In the theoretical research part, we build up an analyzing framework of “threelayers of two sides” principal-agent problem, which should embrace family enterprises’special factors. According to the framework we made a depth analysis to the agent issueinside the family enterprise, agent issue between owner of family enterprise andprofessional manager and agent issue between controlling shareholders and small andmedium shareholders.In the empirical research part, we use three indexes to measure the effectiveness ofinternal control which are efficiency and effectiveness of operations, reliability offinancial reporting and the compliance of laws and regulations. We use2010-2012listedfamily enterprises in Jiang Su, Zhe Jiang, Shang Hai as sample, then we build a multipleregression model to test to the relationship between effectiveness of internal controlbetween the factors of board governance which contains the proportion of independentdirectors, the proportion of family members Directors, board leadership, board meetingtimes, board size, family directors’ share ratio. Then we use SPSS17.0and SATA12.0 software, made a descriptive statistical analysis, correlation analysis and multivariateregression analysis on the129listed family enterprises389validated dates. The resultof demonstrate study shows that:（1）There exist positive correlation between efficiency and effectiveness ofoperations and the proportion of family members Directors, board meeting times, familydirectors’ share ratio;（2）There exist positive correlation between reliability of financial reporting andproportion of independent directors, board size, and family directors’ share ratio;（3）There exist positive correlation between compliance of laws and regulationsand proportion of independent directors, board leadership, and board meeting times.At present, the research of the relationship between board governance and internalcontrol effectiveness is still in its infancy, due to the difference of sample selection,variable selection and other factors, we can’t reach a consistent conclusion yet, andmost of exist research are based on whole market. However we made the research aimat the family enterprise.the governance structure of family enterprise is quite differentfrom other enterprise. We use this family trait both in the theoretical research andempirical research to demonstrate that. we selects the latest three consecutive years dataof listed family enterprise, excluding the delaying impact, in line with the latest trendsin the board governance, regression analysis of all samples, improves the accuracy andpersuasive of the results. At last, we make some suggestion to improve the boardgovernance.