Performance Of Independent Directors And The Company’s Risk Characteristics

At the beginning of this century, with Enron, WorldCom and other events exposed, the independent director system began to be widely applied to corporate governance. This system was first created by the United States. And China started this system on August16,2001, by publishing the document Guiding Opinions on Establishing the Independent Director System in the Listed Corporations, in order to improve the corporate governance structure, and to play a role in protecting the interests of minority shareholders. And since the establishment date of this system in our country, academics and practitioners have failed to come to a point whether it really helps to monitor and restrict the management and major shareholders of listed companies or not.This paper reviews the current research situation of independent director system, and tries to use of the Agency Theory, by case study, to approach the relationship between the performance of independent directors and the risk characteristics of the company.In the theoretical analysis section, firstly, this essay takes an overview about the studies at home and abroad. These studies are about the independence of independent directors, the remuneration of independent directors, corporate performance vs. independent directors and other related aspects. Then the principal-agent theory is used to explain the motivation of the introduction of independent director system. Later on it introduces the establishment and improvement process of the independent director system in our country, as well as the responsibilities and authority of independent directors.In the case study section, the paper selects three companies from IT industry as the research object. They are Hanwang Technology, Royal Bank shares and ZTE. Hanwang Technology, which was established in September11,1998, listed on the SME board in Shenzhen Stock Exchange March3,2010. The company, relying on its scientific research, has been supported by numerous key projects, developing rapidly. And it also was selected as one of the "Top30Cultural Enterprises". Besides, The Royal Bank shares was established in February28,2003, and listed in November2007on The SME board in the Shenzhen Stock Exchange. And different from Hanwang Technology’s main business, The Royal Bank Shares is to provide self-service banking equipment and integrated solutions to the financial services industry. And it is now the top one of the domestic ATM manufacturers. Then, ZTE was founded in1985, and listed in November18,1997at the Shenzhen Stock Exchange. In addition, the company also traded on the SEHK on9December2004. ZTE is focusing on communications. And it is the world’s fourth largest mobile phone manufacturer, and also the world’s leading provider of integrated communications solutions. ZTE’s business is in over140countries or regions in the world, and setting up107branches, establishing a great international market. Although belong to the sarne industry, the risk characteristics of the three companies are quite different. Therefore, this essay hopes to analyze reasons of different risk characteristics according to the performance of Independent Directors.Data are collected from2010to2012. Through case studies, the paper concluded as follows:First, if the independent directors to perform their duties better, then the financial and legal risk will be relatively lower, or at manageable levels; or else, the risk would be high. Second, if the company is in a much sound legal environment, the effects of the independent directors’performance will be more obvious; otherwise, less obvious.Finally, according to the conclusion we’ve come to, several recommendations are made as follow. First, improve our corporate governance mechanism, establish and improve relevant laws and regulations and improve China’s legal environment in order to provide a good environment for the independent directors to perform their duties. Second, improve the reputation of the market, and strengthen the role of external incentives to encourage independent directors to perform their duties, so that independent directors are willing to take the initiative to fulfill their duties actively. Third, reform the independent director system in order to impel independent directors to perform actively due to incentive payment. Fourth, make clear the standard qualification of the independent director, to make sure that he has the ability to supervise the company.