Is there an Expectations Gap in the Roles of Independent Directors? An Explorative Study of Listed Chinese Companies

Abstract

This paper investigates whether an expectations gap exists in the control, strategic and resource provision roles that independent directors play in the corporate governance of listed Chinese firms and the factors that affect their performance of these roles. For this purpose, we interviewed Chinese executive directors, independent directors, institutional investors, and stock exchange regulators. We find a performance gap, but no reasonableness gap with respect to the control and strategic roles. The results suggest that the performance gap may be attributed to such factors as the ill-defined roles, independent directors' limited amount of time commitment and their lack of competence and objectivity. Interestingly, there is disagreement over the protection of minority interest as the objective of the control role. We find no consensus on the desirability, reasonableness and effectiveness of independent directors' resource provision role, perhaps because of a pejorative interpretation of this role as an exercise of Guanxi.

Monitoring corporate boards: evidence from China

“…However, Lu (2005) argues that INEDs have no actual role given the insiders' influence which does not provide a healthy environment for INEDs to exercise their monitoring role over directors. Li et al (2012) find a performance gap with respect to the control and strategic roles of INEDs due to the lack of their time commitment, lack of objectivity and limited expertise. Therefore, we argue that the potential conflict in roles between INEDs and the supervisory board may influence the overall board effectiveness.…”

Empirical Research on Corporate Governance in China: A Review and New Directions for the Future

“…In addition, there are studies showing duality to be positively related to firm performance (Berkman et al, 2010; Peng, 2004; Peng et al, 2007; Tian & Lau, 2001), contrary to the agency prediction about the impact of CEO duality. Although several studies find that duality is negatively related to board independence and executive turnover (Chen & Al-Najjar, 2012; Firth et al, 2006b; Shen & Lin, 2009; You & Du, 2012; Zhang, Ji, Tao, & Wang, 2011), their findings may have been an artifact of ownership concentration given its significant impact on the composition of the boards of directors (Chen et al, 2011; Li et al, 2012; Su et al, 2008). Overall, there is little evidence that duality increases CEO power and weakens corporate governance in the listed firms in China.…”

“…The largest increase in independent directors occurred in 2002 and 2003, when the CSRC required the listed firms to have one third of board members be independent by June 30, 2003 (Chen & Al-Najjar, 2012). Although these ‘independent’ directors meet the requirements specified by the CSRC, they may not be truly independent because many of them are nominated by the controlling shareholders (Li, Parsa, Tang, & Xiao, 2012). Given both their low presence (Conyon & He, 2012) and the influence of the controlling shareholders over board composition (Chen et al, 2011; Li et al, 2012; Su et al, 2008), independent directors are perceived by investors as ineffective in corporate governance.…”

“…Although these ‘independent’ directors meet the requirements specified by the CSRC, they may not be truly independent because many of them are nominated by the controlling shareholders (Li, Parsa, Tang, & Xiao, 2012). Given both their low presence (Conyon & He, 2012) and the influence of the controlling shareholders over board composition (Chen et al, 2011; Li et al, 2012; Su et al, 2008), independent directors are perceived by investors as ineffective in corporate governance. For example, none of the eight institutional investors interviewed by Li et al (2012) considered independent directors as an important factor influencing their investment decisions.…”

“…(Chen & Al-Najjar, 2012). Although these 'independent' directors meet the requirements specified by the CSRC, they may not be truly independent because many of them are nominated by the controlling shareholders (Li, Parsa, Tang, & Xiao, 2012). Given both their low presence (Conyon & He, 2012) and the influence of the controlling shareholders over board composition , independent directors are perceived by investors as ineffective in corporate governance.…”