board independence in companies
According to Foo and Zain (2010), most companies have focused on ensuring board independence in their corporate governance to enhance financial performance (92-100). The study indicated that the companies had achieved board independence by incorporating outside directors into their board because outside directors are considered to ensure board diversity and significant objectivity in the decision-making process and effectively represent shareholders’ interests. A study by Li et al. (2015) indicates that companies in China are in a flux condition and need to adopt board independence. It will help in better understanding the business in the boardroom and enhance the implementation of initiatives for financial performance (162-175). The study further indicated that board independence is essential as it ensures the development of market reforms, which will support operations of the internal governance techniques, facilitating positive financial changes in Chinese Corporations. These dynamics in internal monitoring techniques are supported by market reforms and external regulations, which help elevate the duties of board members and the diligence of the directors. The study concluded that the changes in board independence have helped in changing the board composition and sensitizing the board directors for higher, effective, and quality decision making. Thus there is a positive relationship between board independence and company financial performance.
Negative
Some studies have indicated that there is a negative relationship between board independence and firm financial performance. A study by Leung, Richardson, and Jaggi (2014) showed that board independence advocates for employment of outside directors into the Chinese firms, and this affects CEO remuneration of the companies making it to be low (16-31). This is because the independent directors in the Chinese companies who attend the board meetings regularly will monitor excess CEO payments.
Non-Effect
However, other studies have indicated that there is no relationship between board independence and the financial performance of a company. Liu, Miletkov, Wei, and Yang (2015) noted that independent directors in the companies have close relationships with dominant shareholders, while others have personal interests (223-244). This shows that the directors’ functioning as independent parties is jeopardized; hence, there is no relationship between board independence and financial performance.
Hypothesis
H3: There is a positive relationship between board independence and company financial performance.