A study of the relationship between independent non-executive directors (INEDs) and company performance

This study examines the influence of and relationship between independent non-executive directors (INEDs) and the performance of firms listed on the Hong Kong Stock Exchange (SEHK).Many studies argue that INEDs can improve corporate governance and firm performance. Research in this area is on-going in different countries and stock exchanges and has produced inconsistent conclusions. The results of this study should help in reviewing the suitability of the current INED standards and whether they can be applied to different firm segments in Hong Kong. Given the stringent INED requirements applied to SEHK-listed companies over the last 20 years, a comprehensive literature review is conducted to provide supportive evidence and investigate whether increased INED presence is beneficial. INEDs have different effects on firm performance across different segments in Hong Kong. The effects are inconsistent across companies in Hong Kong and insignificant for HSI constituent companies in general. This observation is supported by some researches that find no connection between board independence and firm performance. However, increasing the number of INEDs has strong positive effects on firm performance in the growth enterprise market, negative effects on the performance of H-share companies in China and insignificant effects on the performance of red chip companies in China. The effects are inconsistent for family-controlled firms, but generally positive for non-family controlled firms. The policy of increasing INED presence should be tailored to different market segments based on agency and resource dependent theory. This study also discusses the optimal INED proportions (different from the current one-third INED ratio in Hong Kong) for Hong Kong markets. It aims to help policymakers/regulators determine whether further revision of the current INED policy is necessary. The results can be further investigated and applied to other emerging markets/regions worldwide and may be particularly suitable for regions with many family-controlled and state-owned enterprises.