1、 外文翻译 Independent Directors: A New Chapter of the Development of Corporate Governance in China Material Source: JIANQIAO UNIVERSITY Author: Helen Wei Hu This paper examines the development of corporate governance in China, with a focus on independent directors. Corporate governance is regarded as th
2、e core of the ongoing State-Owned Enterprises (SOEs) reform, and the newly introduced independent director system is viewed as a revolutionary change to the Chinese corporate governance development. This paper analyses the characteristics of independent directors in the Chinese context, proposes fiv
3、e internal factors that would affect independent directors performance, namely independence, remuneration, qualification, assurance and autonomy. It is suggested that these factors are essential for independent director system to work effectively, and hence will lead to better board performance. 1 I
4、ntroduction China launched a major economic reform and liberalisation program in 1978, which transformed the planned economy to a market economy. Since then, the reform of state-owned enterprises (SOEs) has been considered the key to the success of Chinas economic growth. In 1992, the Chinese govern
5、ment reformed its SOEs through corporatisation, and the concept of “modern enterprises” was introduced accordingly. During this process, the separation of state ownership and control was adopted, and company managers were granted fourteen control rights in July 1992. However, with increased manageri
6、al autonomy and unclearly defined property rights, the agency problem of Chinese managers was more serious than that in Western countries. Insider control problems occurred during the SOE reform. Examples of these problems include collusion between managers and workers； transferring firm assets from
7、 the state-owned enterprise to non-state-owned enterprise； tax evasion and corruption among SOEs managers, and ultimately led to poor firm performance. In fact, the existence of insider control problem can be explained by the fundamental principle of agency theory, which is the conflict of interests
8、 between the principal (owner) and the agent (manager). Hence, an effective control mechanism needs to be in place that not only maximises shareholders interests, but also reduces the cost of monitoring. By addressing insider control problems and poor SOEs performance, many Chinese researchers urge
9、the need for an efficient corporate governance system. Moreover, after Chinas entrance into the World Trade Organization (WTO) in December 2001, Chinese companies became exposed to the opportunities and challenges of todays international market. In order to remain competitive and attract more financ
10、ial and human capital, Chinese authorities see the urgent need for sound corporate governance. However, empirical studies from the West show that good corporate governance has no direct impact on financial performance. But, sound governance provides improvement when the company is under-performing d
11、ue to poor management, or leads to a better performing board. From the study of bankrupt firms and hostile takeover, results suggest that good corporate governance is positively related to the successful reorganization of a financially distressed firm, or reduce the probability of a firm paying gree
12、nmail. 2 Theoretical background of the development of independent director System In most transition economies, insider control problems exist when the government hand-over its control rights to the management. Due to the absence of external market control mechanism and inefficient internal monitori
13、ng system in China, management tends to have stronger autonomy in business operation and decision-making. As agency theory argues that individual is driven by opportunistic behaviour, thus, managers would engage in self-interest serving instead of maximising shareholders returns. In the case of Chin
14、ese joint stock companies, it is found that over 1,200 listed companies in China to date, about 80% to 90% came from the restructuring of SOEs, and the state still owns about 50% shares of the listed companies. Under the “socialist market economy” background, central and local government agencies te
15、nd to carry out shareholder functions, appoint directors to the board and give direction to firm management. Many researchers argue that the interest of the state shareholders might not be the same as that of other institutional or individual shareholders. Because government might be more interested
16、 in pursuing social and political goals instead of profit maximisation. Obviously, a firm is either controlled by insiders or the state shareholder, without proper monitoring from outsiders is not healthy for the development of countrys economy. In August 2001, the China Securities Regulatory Commis
17、sion (CSRC) released the “Guidelines for Introducing Independent Directors to the Board of Directors of Listed Companies” (CSRC, 2001； hereafter referred to as the “Guideline”) to strengthen the importance of board independence, and protect the interests of nearly 60 million Chinese shareholders. Fo
18、ur months later, the “Code of Corporate Governance for Listed Companies in China” (CSRC, 2002； hereafter referred to as the “Code”) was introduced to further speed up the development process, and hence improve individual companys corporate governance practice. After introducing the independent direc
19、tor system, the remaining question is, “Will firm have better performance by having independent directors on the board?” Studies from the West show that there are some controversial views on the effectiveness of board independence in relation to firm performance. On the one hand, some researchers ag
20、ree that independent directors do have a positive relationship on firms corporate performance. Early work by Fama and Jensen contends that independent directors provide a means to monitor management activities through an increased focus on firm financial performance. Lee, Rosenstein and Rangan suppo
21、rt this view, provide evidence that boards dominated by outside directors are associated with higher returns than those dominated by insiders. Similarly, Pearce and Zahra point out that there is a positive correlation between the proportion of independent directors and firm financial performance. Ba
22、ysinger and Butler report that changes in board composition over a ten-year period from 1970s to 1980s appear have a causal relationship with accounting performance. In addition, Millstein and MacAvoy find a statistically significant relationship between active, independent boards and superior firm
23、performance. On the other hand, Furthermore, Rosenstein and Wyatt argue that insiders are more effective because they have superior knowledge of the firm and its industry than outside directors, and they are just as diligent as outside directors, given their legal responsibilities and their own inte
24、rests in the firm. Similarly, Bhagat and Black also state there is no convincing evidence suggesting that greater independence results in better performance, but some evidence shows that firms with supermajority independent directors perform worse than others. From the above discussions, it is obvious that scholars have not reached a consensus view of the board composition in the corporate governance literature. Moreover, the importance of independent directors as a governance mechanism to protect shareholders interests and safeguard managerial employment contracts is
