Theoretical Analysis And Empirical Testing Of The Independent Director System

Since the emergence of independent director system, it has been attended and utilized by many stock companies throughout the world. Theoretically a more independent board of directors can balance the interests of shareholders better and improve the governance structure of a company. But practically how about the outcome of introducing the independent director system to the capital market of our country? Has it really been effective in improving a company's governance structure?This dissertation discusses the effect of introducing the independent director system to China both from theoretical and empirical perspectives. It first reviews the domestic and foreign research literatures, finding that different scholars have different views on the effect of the independent director system and some are totally adverse. Then it analyzes the inherent limitation of the independent director system in theory and discusses the corresponding systems needed to realize it.In order to testify the practical effect, the dissertation demonstrates in a statistic way. The author collected the relevant data of 326 listed companies to the date of June 30,2004, including 181 companies with the proportion of independent directors in a board less than one thirds and 181 companies with the proportion of independent directors in a board more than one thirds.Through the empirical testing, we can see that there is no distinct difference in their performance between the listed companies with less than one thirds independent directors in the board and those with more than one thirds. The independent director system has no much relation to a company's performance. So if we only limit the number of independent director strictly, but ignored other institutional construction, it will weigh against the effectiveness of independent director system. As a result, the system can't control the operators inside thecompany, restrict big shareholders and protect small shareholders.In addition, some listed companies also look for "superficial directors" on purpose to some degree in order to avoid regulations. That means restructuring the board only in numbers but not making it useful as it really is. As part of the corporation governance, the independent director system has to rely on the effectiveness of other relevant systems to play its role in improving the corporation governance.We can't optimize the corporation governance structure by purely relying upon independent director system. Actually there is no best mode for the corporation governance structure. Whether the mode is good or bad depends on if it is suitable for the systematical environment. The perfection of the corporation governance structure can't only depends on the construction of inside governance structure. Based on the reference to the governance mode of foreign companies, we must consider the specific systematic environment in our country. The groundwork for the improvement of the corporation governance structure can be well done if only adequately competitive market has been constructed and perfect product market, finance market and professional managers market have been developed.