An Empirical Study On Relationship Between Independent Directors And Corporate Performance Of Small And Medium Enterprises

Small and medium enterprise (SME) is important to the development of economy and society in China. Due to the corporate governance, small and medium listed companies are difficult to protect the interests of small shareholders, and the business develops difficultly. An urgent problem is how to build an effective corporate governance structure, in order to protect shareholder interests, and make sustainable development for small and medium enterprises.Independent directors introduced into China have a supervisory role in the board, in order to protect the interests of small shareholders. However, due to the different institutional environment and governance mechanisms, they have always been controversial in theory and practice. Most previous studies used the large sample test. It is very easy to overlook the industry and company factors, and has an impact on the relationship between independent directors and corporate performance.This paper particularly focuses on the relationship between independent directors and corporate performance in small and medium listed companies in China. Based on principal-agent theory, resource dependence theory and modern theory of motivation, it analyzes 117 listed companies on SME board of Shenzhen Stock Exchange in 2006-2008. It examines how the independence, motivation, diligence and background of independent directors impacts corporate performance through multiple linear regression analysis. To examine the effectiveness of independent directors in China, it makes a deep research on the status quo of independent directors in small and medium listed companies, the comparison between them and other listed companies, and how the factors affect corporate performance.The result shows that corporate performance of the small and medium listed companies is better than other listed ones, and the relevant characteristics of independent directors are also better. The number of independent directors and the proportion of independent directors do not affect corporate performance significantly. It finds that the remuneration of independent directors has a significantly negative impact on corporate performance, which is different from the result of most studies. High fixed salary and allowances do not encourage independent directors, but have a negative impact to the independence. Location and age of independent directors has a significant influence to corporate performance. Independent directors working in local companies have a significant impact on corporate performance, and the young independent directors improve company performance more effectively. In addition, the proportion of independent directors attending board meetings do not have a significant impact on corporate performance. It does not find the proportion and age of independent directors may relate to corporate performance with a U-type relationship.This paper extends the research on the relationship between the independent directors and corporate performance in literature. It helps to design the independent directors system in small and medium listed companies in emerging markets like China. It also provides an empirical evidence for the selection of independent directors to listed companies.