The Effect Of Nomination Committee And Compensation Committee Of Chinese Listed Companies

The introduction of regulation regarding corporate governance could be traced to the year of 2001, when listed companies in China were required to recruit independent directors to the board. After the development of more than one decade, to strengthen the independency of the board and establish sub-committees become two main streams in this field. It is recommended by the CSRC that listed companies should set up sub-committees affiliated to the board to assume different responsibilities. Thus, more and more listed companies set up their audit committee, compensation committee, nomination committee and strategy committee. However, it is criticized that such committees just serve for the purpose of window dressing, with little effect on the improvement of the quality of corporate governance. So, we believe that it is critical to understand the theoretical pattern followed by effective committees and the practice of these committees in Chinese market. This paper mainly focuses on nomination committee and compensation committee which were less discussed in the existing literature.We apply a number of theories such as agency theory, resource dependency theory and executive power theory to analyze why these committees could work and which characteristics of these committees play a critical role. Based on our analysis, we set up several hypotheses.Our sample period is from 2003 to 2012, which is used for our empirical test. Our main findings are listed as following:Firstly, the nomination committee plays a limited role in practice. Although the nomination committee does strengthen the independency of the board, it doesn’t improve the probability of hiring female candidates as directors. The independent directors in the nomination committee do increase the probability of independent directors being selected in case of board expansion, but the effect is not statistically significant. Also, the female directors in the nomination committee do increase the probability of female directors being selected in case of board expansion, but the effect is not statistically significant either. Compared with board downsizing, the number of independent directors are more likely to change in case of board expansion.Secondly, the structural characteristics of compensation committee do have an impact on the pay-performance elasticity. We could increase the independency and size of the compensation committee to increase pay-performance elasticity. It is also found that the common membership regarding audit committee and compensation committee could also have this effect.Thirdly, CEOs who also serve in nomination committee or compensation committee tend to justify their rent extracting behavior. As opposed to executive power theory, CEOs serving in nomination committee tend to strengthen the independency of the board, and CEOs serving in compensation committee tend to strengthen pay-performance elasticity.Lastly, based on our methods of calculating the peer performance, there is no evidence of the existence of RPE hypothesis in Chinese market no matter whether we use accounting performance or market-related performance.Based on our research, it is recommended that regulation authority should rise the bar about the minimum percentage of independent directors on board and issue codes of best practice for sub-committees. Moreover, mandatory disclosure should be imposed to listed companies, regarding the detailed disclosure about how committees honor their responsibilities.