Locally-based Independent Directors And The Effectiveness Of Executive Compensation Contracts

Locally-based independent directors are able to obtain more information about companies and executives due to their natural geographical advantages.These are more conducive to their participation in corporate governance and fulfillment of the duties of independent directors.On the other hand because locally-based independent directors and listed companies executives are in the same area,they are more likely to be captured by executives.It is not conducive to maintaining their independence and they may become "relationship director" or "human directors".In the Chinese capital market,a significant proportion of listed companies have hired local independent directors and one of the main duties of the board of directors,especially its independent director-led pay and appraisal committee,is to develop executive compensation contracts.In view of this,this paper will examine the effective influence of locally-based independent directors on the corporate governance function from the specific perspective of the effectiveness of the executive compensation contract.This paper manually collects the geographical location information of all independent directors of Chinese A-share listed companies from 2004 to 2013 and then uses 10,687 companies-annual observation sample data from 2004 to 2013 to test the locally-based independent directors' effective influence of the executive compensation contract.The study found that compared with listed companies that did not employ local independent directors,the listed companies that had hired local independent directors had significantly higher executive compensation-performance sensitivity.It means the advantage that locally-based independent directors were locally served is stronger than the disadvantage that their independence may be reduced.the local independent directors help to improve the effectiveness of the executive remuneration package.Further,this study found that the effect of local independent directors on executive pay-performance sensitivity is mainly reflected in the private listed companies and companies located in the lower market environment,indicating that the relevant governance role of local independent directors is limited by the nature of property rights and the regulation of market environment.In the robustness test,this paper attempts to control the endogeneity problem by using the two-stage regression method of the tool variable and carries on the robustness test regarding the main variable measurement method.The result is that the main research conclusion of this paper is basically established.The possible theoretical contributions or research significance of this paper are mainly reflected in the following aspects.In the theoretical level,This paper breaks through the limitations of the discipline and examines the influence of the geographical location characteristics of the independent directors on the supervisory functions of the independent directors,which effectively enriches the research of the role of independent directors in governance.At the practical level,the conclusion of this paper has certain reference value for the establishment of more effective independent director team.Since the locally-based independent directors would help improve the effectiveness of executive pay contracts and play a more active role,the company may consider selecting more local candidates as independent directors.