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Article
Publication date: 10 July 2009

Niu Yuan

China adopted an independent director system in 1997 in order to perfect company management structure in the country. The purpose of this paper is to assess the…

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688

Abstract

Purpose

China adopted an independent director system in 1997 in order to perfect company management structure in the country. The purpose of this paper is to assess the effectiveness of that system.

Design/methodology/approach

This paper starts from the current status of the independent director system in the country and gives comments on the independent nature and designation procedure of the independent directors, rationalization of the incentive system and completion of responsibility mechanism.

Findings

The unique function of the independent director system plays a decisive role in preventing control by people within a public company, minimizing power abuse by shareholders and best maintaining the interests of medium and small shareholders. But there still exists certain shortcomings in independent director system in China such as unclear of the independence nature, irrationality of designation method, incomplete incentive system and short of relative responsibility mechanism which restrict independent director system to be brought into full play.

Originality/value

Management of a company is always a hot topic in the company law and an independent director system is a very important aspect. On the basis of learning from advanced experience from the western world, China imported the independent director system to improve the management system of its companies. This paper analyses defects of the current independent director system in China and puts forward improvement measures.

Details

International Journal of Law and Management, vol. 51 no. 4
Type: Research Article
ISSN: 1754-243X

Keywords

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Article
Publication date: 13 May 2020

Quoc Trung Tran

In this study, we examine how ownership structure affects the use of independent directors in Vietnam – an emerging stock market.

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734

Abstract

Purpose

In this study, we examine how ownership structure affects the use of independent directors in Vietnam – an emerging stock market.

Design/methodology/approach

We develop logit and tobit regression models to investigate the effects of ownership structure on the propensity to use independent directors and the number of independent directors on the board, respectively. Insider ownership and the use of independent directors are proposed to have a non-linear relationship.

Findings

With a sample of 1,318 observations collected from 192 listed firms over the period from 2008 to 2017, we find that insider ownership and independent director appointment have a U-shaped relationship. It is positive when insiders hold a small proportion of shares, and turns out to be negative when insiders hold a large percentage of shares. In addition, both state ownership and foreign ownership are negatively related to firm decisions of appointing independent directors.

Practical implications

Our findings imply that minority shareholders should have appropriate actions to reduce agency costs and protect their own interests. In addition, policymakers should improve the effectiveness of corporate governance legislation to increase the presence of independent directors in order to protect minority shareholders. Moreover, government agencies also need to increase the number of independent directors in state-controlled firms as a means to improve their corporate governance. Foreign investors may be a substitute for independent directors; therefore, firms without independent directors are able to improve their corporate governance by attracting foreign investors.

Originality/value

While the extant literature shows that independent directors can help firms decrease agency costs of equity in financial decisions and performance, there are relatively few studies investigating corporate decisions to use independent directors. This paper contributes to the literature of corporate governance mechanisms through independent directors in emerging markets.

Details

Journal of Economics and Development, vol. 22 no. 2
Type: Research Article
ISSN: 1859-0020

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Article
Publication date: 17 August 2021

Zhe Li, Emre Unlu and Julie Wu

Studies on corporate boards examine how social ties between the CEO and independent board members affect the effectiveness of board monitoring. Much evidence suggests that…

Abstract

Purpose

Studies on corporate boards examine how social ties between the CEO and independent board members affect the effectiveness of board monitoring. Much evidence suggests that social connections between the CEO and independent directors are associated with inadequate monitoring and lower firm value (Hwang and Kim, 2009; Fracassi and Tate, 2012). In this study, the authors note that social connections of the independent directors are of different nature and thus should not be treated as a homogeneous group; that is, the nature of connections among directors can be quite different from that between the CEO and directors, which is the primary focus of previous studies.

Design/methodology/approach

The authors classify independent directors into four mutually exclusive groups based on their social connections to the CEO and other independent board members and examine what role each type of connection plays in corporate monitoring using panel data and cross-sectional fixed effect regressions.

Findings

The authors find that Only_CEO%, the proportion of independent directors who are connected only to the CEO, is negatively associated with monitoring intensity. Specifically, firms with higher Only_CEO% have larger CEO compensation, lower likelihood of dismissing the CEO, more co-opted board and worse firm performance. In contrast, No_CEO_Ind%, the proportion of independent directors who have no connection to either the CEO or other independent directors is associated with more effective monitoring. These findings suggest that independent directors with different degrees of social connections exhibit different monitoring qualities.

Practical implications

When more independent directors, who are connected exclusively to the CEO, are on the board, they consistently deliver low monitoring quality. However, when more independent directors with no connections to either the CEO or any independent directors are on the board, they enhance monitoring quality. These findings can be used to construct board structures with more effective monitoring ability.

Originality/value

This paper extends the literature on social networks in corporate finance. The authors show that independent directors with exclusive connections to other independent directors do not have a significant effect on board monitoring, but those truly independent directors are associated with better monitoring quality. These findings suggest that different types of social connections of independent directors play a different role in board monitoring and help extend our understanding of the function of social connections of independent directors in corporate governance.

Details

International Journal of Managerial Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1743-9132

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Book part
Publication date: 7 January 2015

This chapter analyzes and discusses the empirical results of the study. The discussion is organized under the following themes: independent director, audit committee…

Abstract

This chapter analyzes and discusses the empirical results of the study. The discussion is organized under the following themes: independent director, audit committee, auditor independence, corporate code of conduct, adoption of IFRS, and measures for improvement. Three main findings emerge from the analysis. First, the current institutional environment does not yet fully support the Anglo-American practices. Second, in recent years the quality of financial reporting has improved considerably, which is largely attributable to strengthened accounting rules and regulations. However, the imported Anglo-American models of corporate governance and financial reporting, except for enhancing auditor independence, have had only a minor impact on financial reporting quality. Third, although the imported practices are not working as intended, the vast majority of interviewees stated that it was appropriate to move toward internationally acceptable principles and standards. Improving laws and regulations seems to be the main measure for rendering the institutional environment in China more supportive of Anglo-American models of corporate governance and financial reporting.

Details

Adoption of Anglo-American Models of Corporate Governance and Financial Reporting in China
Type: Book
ISBN: 978-1-78350-898-3

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Article
Publication date: 17 September 2020

Zhe Li and Megan Rainville

The purpose of this study is to examine the relationship between independent director military service and monitoring effectiveness, focusing on chief executive officer…

Abstract

Purpose

The purpose of this study is to examine the relationship between independent director military service and monitoring effectiveness, focusing on chief executive officer (CEO) compensation.

Design/methodology/approach

The authors identify independent directors with military experience using BoardEx data. The authors focus on the level of CEO compensation. The methods used include panel data estimation, propensity score matching analysis and instrumental variable analysis.

Findings

The authors find more powerful CEOs are more likely to appoint independent directors with past military service to the board. Boards with a larger proportion of independent directors with military experience tend to award higher levels of CEO compensation. Moreover, the positive relationship between independent directors with military experience and executive compensation is stronger when the CEO is more powerful.

Originality/value

This paper examines a relatively unexplored director background, directors with military experience, and finds this type of independent director is associated with weak monitoring. The authors contribute to the literature examining the effect of executive and board member military experience on corporations. The authors identify weak monitoring of powerful CEOs as a potential weakness of directors with military experience. This drawback should be considered before appointing a director with military experience to the board.

Details

International Journal of Managerial Finance, vol. 17 no. 4
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 15 May 2009

Li Lixin

This paper aims to explore the extent of adequacy and confidence that can be enjoyed by minority shareholders in the supervisory controls on Boards in listed companies in China.

Abstract

Purpose

This paper aims to explore the extent of adequacy and confidence that can be enjoyed by minority shareholders in the supervisory controls on Boards in listed companies in China.

Design/methodology/approach

This study draws upon the legislative controls and case‐studies in China.

Findings

Being the cornerstone of the development of capital markets, listed companies are in complementary relationship with the latter, which in turn serves as the financing tool for the former. Recently, the financial markets all over the world have been thrown into deep crisis and the financing functions of the domestic capital markets have almost been paralyzed. In this context, it is high time for us to exert more efforts to improve the institutional arrangements of the supervisory functions in the governance of listed companies in China, to strengthen corporate governance, to restrain the actions and behaviors of major shareholders, directors and the executives, to strengthen their concerned responsibilities, to put greater attention and more protection on the promotion of minor shareholders' confidence on capital markets, and to maintain the steady and sustainable development of capital markets in the long run.

Originality/value

This study and findings should be of interest to those seeking to assess the adequacy of minority protection in China.

Details

International Journal of Law and Management, vol. 51 no. 3
Type: Research Article
ISSN: 1754-243X

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Article
Publication date: 6 September 2011

Yenpao Chen, Chien‐Hsun Chen and Will C. Wu

This paper sets out to explore the effects that the setting‐up of an independent director system has on the operating efficiency of information electronics companies in China.

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1517

Abstract

Purpose

This paper sets out to explore the effects that the setting‐up of an independent director system has on the operating efficiency of information electronics companies in China.

Design/methodology/approach

This paper uses 87 Chinese listed electronics companies during the initial stages of the independent directors system from 1999 to 2002 as sample subjects, and employs a two‐stage procedure for empirical investigation.

Findings

The non‐parametric test results verify that there is no significant difference in the operating efficiency of Chinese electronics companies following the establishment of an independent director system. The Tobit regression results show that the establishment of an independent director system in the Chinese electronics industry does not influence overall technical efficiency (TE), pure technical efficiency (PE), or scale efficiency (SE).

Research limitations/implications

Whether the related schemes of the current corporate governance structure practised in China can achieve their expected results, as well as the possible future development direction of the governance structure, is of the utmost importance, and is a research subject worth examining in greater depth.

Practical implications

It is of the utmost urgency for such corporate governance to improve the selection mechanism for independent directors, to establish incentives and responsibility‐taking mechanisms for independent directors, and to amend the company law and securities law to perfect the rules of an independent director system.

Originality/value

By using DEA and the Tobit regression model, this study attempts to investigate whether China, in addition to fraud prevention, has improved corporate operating efficiency by introducing a system of independent directors.

Details

Journal of Economic Studies, vol. 38 no. 4
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 29 July 2014

Wei’an Li and Jian Xu

– This paper aims to examine the effectiveness of independent directors based on the perspective of strategic control.

Abstract

Purpose

This paper aims to examine the effectiveness of independent directors based on the perspective of strategic control.

Design/methodology/approach

This is an empirical study carried out between 2007 and 2012 based on a sample of Chinese A-share-listed companies.

Findings

The results indicate that the departure of a CEO provides conditions for the new CEO to become empowered to carry out strategic change. The behavior of a new CEO results in the phenomenon of “a new broom sweeps clean” and increases the scope of strategic change. In addition, the results indicate that the board’s independence negatively moderates the relationship between the CEO’s succession and the scope of strategic change, and that independent directors are effective in supervising risk-taking behavior on the part of the CEO which ultimately results in damaging company performance.

Practical implications

The corporate internal and external supervisory mechanisms should be improved during the process of succession of a new CEO, and the effectiveness of the supervision of board directors should also be strengthened during the implementation of the strategic process of a new CEO.

Originality/value

Previous research on the effectiveness of independent directors mostly focuses on financial control, with a single leap from independent directors to corporate performance, which neglects the strategic control of independent directors. From the micro perspective of the strategic control process as a means of discussing the independent directors’ watchdog role, this paper extends and enriches the research on “the effectiveness of independent directors”.

Details

Nankai Business Review International, vol. 5 no. 3
Type: Research Article
ISSN: 2040-8749

Keywords

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Article
Publication date: 16 August 2019

Quoc Trung Tran

The purpose of this paper is to examine whether independent directors reduce corporate overinvestment and improve investment efficiency in an emerging market.

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1260

Abstract

Purpose

The purpose of this paper is to examine whether independent directors reduce corporate overinvestment and improve investment efficiency in an emerging market.

Design/methodology/approach

First, the author developed a research model in which corporate investment is a function of Tobin’s Q, the proportion of independent directors in the board and an interaction between them. Second, the author divided the full sample into groups of firms with a low- and high-financial constraint to compare the effects of independent directors between financially unconstrained and constrained firms.

Findings

With a full sample of 1,281 observations collected from 193 firms listed in Ho Chi Minh Stock Exchange during the period from 2009 to 2017, the author find that the proportion of independent directors is negatively related to firm investment but its interactive term with Tobin’s Q is positively related to corporate investment. These findings imply that independent directors can help firms reduce overinvestment and improve investment efficiency. Moreover, the research findings indicate that these effects of independent directors are stronger for financially constrained firms.

Originality/value

The extant literature shows that independent directors are an effective mechanism to reduce agency problems in firm decisions and operating performance. However, there has been no research on the role of independent directors in corporate investment policy.

Details

Journal of Economics and Development, vol. 21 no. 1
Type: Research Article
ISSN: 2632-5330

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Article
Publication date: 27 June 2008

Margaret McCabe and Margaret Nowak

The purpose of this paper is to examine the views of directors of public‐listed Australian companies regarding the role of the independent director and the significance of…

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7116

Abstract

Purpose

The purpose of this paper is to examine the views of directors of public‐listed Australian companies regarding the role of the independent director and the significance of that role in relationship to the composition of the board of company directors.

Design/methodology/approach

A qualitative study using a grounded research approach was used and 30 directors of Australian public‐listed companies were interviewed.

Findings

The analysis indicates that participating directors were convinced that a majority of non‐executive directors (NEDs) provided a safeguard for a balance of power in the board/management relationship. The difference between NEDs, who are also independent directors, and NEDs who are not independent, was highlighted as an important distinction. The capacity for board members to think independently was seen to be enhanced, but not necessarily ensured, with majority membership of NEDs. However, a majority of independent minds expressing multiple points of view was perceived to reduce the board room hazard of “group think.”

Research limitations/implications

The study was conducted within the context of the preferred model for board composition in Australian public‐listed companies which requires a majority of NEDs.

Originality/value

Conflicting evidence surrounding the claim that a majority of independent members in the board structure contributes to “best pratice governance” makes the paper relevant to governance issues being debated in the global arena.

Details

Managerial Auditing Journal, vol. 23 no. 6
Type: Research Article
ISSN: 0268-6902

Keywords

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