State Ownership, Legal Institution, and Independent Director Compensation: An Exploratory Study in China

Abstract

This study examines the determinants of independent director compensation in China, with particular interest in the impacts of state ownership and legal institution. Controlling for the characteristics of directors, boards, and firms, we find independent director compensation is positively related to attributes of director's human and social capital such as education, effort, professional expertise, and connection (guanxi). We show that independent director pay is determined differently across the ownership structures. Independent directors are paid less in companies owned by local government units and the independent directors in such companies are paid less in a region with more developed legal institution. This study contributes to the limited literature on independent director compensation by extending beyond the market economies to explore the determinants of independent director compensation in a transitional economy like China. It also adds to the literature on legal institutions by examining the impacts of legal development on compensation. Finally, this study informs the public of the current compensation practice, which will facilitate future policy making.

The impacts of independent director and CEO duality on performance in the Chinese post‐institutional‐transition era

“…Under these circumstances, they are less likely to collude with managers to pursue personal interests at the expense of shareholder interests. Unlike them, independent directors who own a small proportion of the firm's stocks may have limited incentives to oversee the management with sufficient care and passion (Adithipyangkul and Leung, 2015;Ma and Khanna, 2016).…”

Large Shareholders and Independent Director Equity Compensation

“…Following the previous research, such as Holderness () and Konijn et al (), we focus on large shareholders with at least 5% ownership stake in a company, commonly referred to as ‘blockholders’. Using a sample of large companies listed on the ASX from 2005–2009, we perform our analyses at the director‐firm‐year observation level because previous research (e.g., Adithipyangkul and Leung ; Bryan et al ; Cordeiro et al ; Linn and Park ) shows significant relationships between compensation and director characteristics such as age, gender, experience, expertise and effort, after controlling for firm characteristics and corporate governance structure.…”