EVALUATION OF INDEPENDENT DIRECTORS' SUPERVISORY EFFECTIVENESS FROM A FINANCIAL PERSPECTIVE

Abstract

This research aims to examine the role of independent directors with financial experience in managing Chinese listed firms, in terms of quality of corporate governance and firm performance. Based on a quantitative research method, the study extracted data from the 1, 00 A-share listed companies on both the Shanghai and Shenzhen Stock Exchanges for five years (2018-2022). The research indicates that there is a correlation between financially expert independent directors and an increase in corporate governance, particularly, board activity, audit committees’ efficiency, and shareholders’ right protection. Also, the firms with such directors had higher average ROA and a higher average Tobin’s Q in the subsequent period. However, the study also revealed that the benefits of financially expert chairs are restricted by ownership concentration and political connection, where financially expert chairs appear to be less effective in firms with highly concentrated ownership or firms with strong political connections. Implications of this study are that, although financial expertise improves governance and performance, its effects are conditional on corporate governance environments. The study provides suggestions for emerging market nations that aim to improve their governance standards and indicates that the improvement of independent directors’ performance is crucial in this context.