Financial Risk, Behavior Of Independent Director And Its Consequence

To improve the corporate governance and promote the standardized operation of listed companies, China Securities Regulatory Commission (CSRC) issued " Guiding Opinions on Establishing Independent directors in Listed Companies"(hereafter referred as guidance) in August2001, required all domestic listed companies establish institution on independent directors, it also set clear requirements on the number, qualifications, nomination, election and replacement of independent directors. Independent directors have an obligation to convey independent opinions to major issues of the listed companies, including the type of consent, reservations, objections,and unable to comment. When independent directors unable to reach an agreement, the listed company must disclose the different views respectively. Since then, China has entered a new era of fully implementing the independent director system. Up to now, the independent director system has been implemented for nearly13years in China, listed companies have already set up independent director, but for China’s special conditions of internal control" and " largest shareholder", have the independent directors play their role in supervision is not clear. Most of the scholars believe that the implementation of independent director system has encountered obstacles in China, the independent director system needs further improvement. Therefore, it is very necessary to study the independent director system. According to guidance, the board of directors, the board of supervisors, the people individually or jointly hold more than1%of the shares have the right to nominate candidates for independent directors. However, because of the special conditions of "internal control" and " largest shareholder" andin China, the appointment of independent directors is often determined by the largest shareholders, the independent directors are difficult to say "no" to the people hired them. In this case, independent directors would be inclined to express their negative opinion by resignation, which is called" voting with their feet". The behavior of saying "no" or resignation could be a new point to study the behavior of independent directors to provide further support for the validity of the independent director system.The listed companies must disclose independent directors’opinions, and independent directors shall be liable for the resolution adopted by the board of directors. If the resolution causes significant loss, the independent directors agreed in the resolution should bear the corresponding liability, but should not if expressed objections.Thus,the obliged disclosure system provides a good opportunity to study the act about whether the independent directors are on duty. In this paper, Whether independent directors will resign or say "no" will be the alternative variables to measure whether they are on duty.and this study will analyze the relationship among the company’s financial risk、accounting background of independent directors and the behavior of the independent directors by using the evidence form2005to2013.Independent directors who resign or say "no" are based on risk aversion considerations.They feel hard to be on duty in a situation of high financial risk. So,when independent directors choosing a new company to serve,we believe that they tend to choose companies with lower financial risk, which is natural reaction of avoiding risk. Therefore, this paper will study the difference of financial risk between the company independent directors used to serve and the company independent directors serving, to further examine the impact of financial risk on the independent directors’serving decisions.The responsibility of independent directors is to effectively supervise the company. If the independent directors issues a dissenting opinion or resigned non-normally, according to the signaling theory, investors will have a negative speculation,they will improve investment vigilance. In this case, the company will try to improve the company’s operating condition, reduce financial risk to regain investors’confidence; but on the other hand, as the fact that the independent directors belong to outside directors, they do not participate in all of the company’s business activities to fully understand the company’s operating performance. Coupled with a low ratio of resignation or saying "no".the impact of resignation or saying "no" on the company may be minimal. Therefore, this paper will study the change of financial risk with resignation or saying "no" to examine the impact of independent directors’behavior on the future financial condition of the company. The results of this study find that to maintain the reputation and avoid risk, independent directors tend to resign from a company with high financial risk; Meanwhile, when faced with high financial risk, the independent directors are also more likely to say "no". These results suggest that the financial risk of the company have a significant impact on independent directors’ behavior, the higher the financial risk is, the higher probability of the independent directors to resign or say"no".In addition, the independent directors with accounting background have stronger perception ability on financial risk,and are more likely to resign or say "no".By observing the subsequent employment of the independent directors who resigned before. We find that these independent directors tend to choose a new company with lower financial risk to serve, which is more obvious among the independent directors with accounting background. These results suggest that financial risk not only have impact on independent directors’ behavior during their service,but also on their decision-making of choosing a new employer.Finally, by analyzing the future financial condition of the company which suffered resignation or saying "no" from the independent directors. The company’s financial risk do not significantly change, independent directors’ behavior have little impact on the company. This can be explained from two aspects, firstly,The ratio of independent directors resigned or said "no" is too low to pose a threat to the company, secondly the independent directors as external directors do not have a full range of in-depth understanding of the company’s condition, and thus their decisions may not be representative enough for the true situation of the company.These findings suggest that the independent directors of the company have a keen perception of financial risk, financial risk has an important influence on the independent directors’ behavior, especially on the independent directors who have accounting background. However, the behavior of the independent directors do not have the desired impact on company, the independent director system needs further improvement and perfection. Specific policy recommendations are proposed as follows:(1) Improve the rules of independent director information disclosureCSRC requires listed companies to disclose independent directors’ opinions, as well as the behavior of independent directors’ resignation. However, during this study, we find that many reasons disclosed for independent directors’ resignation are fuzzy, which not only reduce the transparency of listed companies but also reduce the accuracy of this research. Therefore, the Improvement of information disclosure rules can further enhance the transparency of the company, and provide good sources for the theoretical study.(2) Improve the mechanism of independent director electionThe proportion of independent directors in the Board is requested not be less than one-third, in order to achieve regulatory requirement, listed companies tend to hire independent directors who can’t effectively perform their duties. Combined with the results of this study, the independent directors with accounting background are more able to perceive the risk of the company, along with a greater possibility of resignation or saying "no". Therefore, emphasis on professional background of independent directors is needed, and the intention to increase the proportion of independent directors with accounting background is necessary.(3)Improve the mechanisms established to promote the cultureThe results of this study show that when faced with serious financial risk, many independent directors choose to resign to express their dissenting opinions, they do not perform their duties well, this may be explained from two aspects, on one hand, independent directors’sense of duty is not established; on the other hand, the regulatory mechanism of independent directors performing their duties is not perfect, causing independent directors choose to resign to stake out their position. Hence it is necessary to vigorously promote independent directors culture, establish a perfect external monitoring mechanism, to further improve the validity of the independent director system.Compared with the existing research literature, This paper further examines the impact of financial risk on independent directors’behavior and that of independent directors’behavior on company’s financial condition. This kind of research method is not used before. Using the data of independent opinion and resignation as alternative variables, on the one hand,increase the study sample, improve the effectiveness of research,on the other hand, provide new point of studying the independent director system.