An Empirical Study on the Influence of Independent Directors on Fund
Performance in China Fund Management Company 1
Tiao-yan Hui, Fei-lan Lu
Department of Economics and Management, University of Xidian, Xi’an, China
(huity@163.com, lfl11456@163.com)
Abstract - This paper makes an empirical study on the
influence of independent director on fund performance,
based on the data of the fund management company in
China and its equity open-end Fund and the mixed open-end
fund from 2005 to 2010. According to the descriptive
statistics and linear regression analysis using SPSS13.0
software, the results show that: To the China's fund
management company, the independent directors’
proportion is low, and they are mainly master and doctor
degree, economic management major and from the
university research institutes; The higher of the proportion
of the independent director, with senior professional titles,
and form industrial and commercial enterprises, the higher
the performance of the fund is; The education and
professional of independent directors have no significant
impact on fund performance.
Keywords – The fund management company,
independent director, fund performance, empirical study
I. INTRODUCTION
The independent director is directors, who not be
employed by the company or its affiliates and not be
closely related to the company or its management through
significant economic, family or other ties. In 1940
<Investment Company Act>was putted forward by United
States, the proportion of independent directors in the
Investment Company should not be less than 40%. For the
important role of the independent directors, it has received
widely attention, and a lot of scholars have done
researches on it about the number of independent
directors, background characteristics, and so on. But, due
to the research samples, research time, research method,
we still do not get consistent conclusions.
Securities investment fund has become an invest
manner and is developed largely in recent years. By the
end of 2011, there are 914 securities investment funds in
China, the scale is2646.465 billion which has grown up
9.17% over the last year. At the same time, various kinds
of matters, such as Interests transmission, Tunnel Digging,
Mouse storehouse take place usually. So how to improve
the governance structure of the fund management
company to protect the interest of investors is becoming
emergent. The independent directors as an important
governance mechanism in fund management companies
are endowed with great expectations. According to the
analysis of independent director’s structure and its
influence on fund performance, this paper hopes to
1 Supported by the National Science Fund of China (NO: 70802047)）
promote the development of the fund management
company healthily and rapidly in China.
II. LITERATURE REVIEW
Based on the principal-agent theory, resources
dependence theory, and so on, domestic and foreign
scholars make numerous studies on independent directors,
but mainly focus on the listed company and the research
for the fund management company is relatively lack. In
2001 year, the CSRC requested the fund management
company to have independent directors and further
requested there should be at least three or more
independent directors which are more than the number of
directors appointed by the company's largest shareholder,
and the proportion of dependent directors should not be
lower than one third [1].
The representative literature on the relationship
between the structure of independent director and
company performance is shown in the table1, especially
for the fund company as shown in table 2.
TABLEI
THE LIST OF RESEARCH LITERATURE ABOUT GENERAL COMPANY
Author
Zhang
Na,Guan
Zhongliang,
GuoZhiguang
[2]
Dependent
Variables
ROA
Data sources
14banks listed on
shanghai and
shenzhen stock
2006—2009
Research Conclusions
The independent director
has significantly positive
effect on performance to
bank.
ROE is negative
correlation with the
ROE
proportion of the
independent directors, but
not significant
The proportion of
Meng
ROA、 3740A-shares listed independent directors is
Xianglong [4] Tobin’s Q companies
weak related to company
governance performance
The proportion of
141civilian-run
LiuJinhong,
independent directors is
LiZheng,Wan
ROA listed companies
not an important factor to
Guang [5]
affect the company
2004—2007
performance.
863 listed
companies in
The independent board
LiBin,Zhang Tobin's Q manufacturing
system has significant
Jun[6]
industry in crosspositive effect toward
section from Japan company performance.
2001- 2006
FanLimin,Li
Xiuyan [3]
109listed
companies in
Guangxi 2002—
2006
TABLEII
THE RESEARCH LITERATURE ABOUT THE FUND MANAGEMENT COMPANY
Author
Dependent
Variables
Data sources
StephenP.
Ferris,Xue
Expense ratios
min
(Sterling)
Yan[7]
Sharp ratio of
Xing
the investment
Qin,Song
target after the
[8]
Futie
Adjustment
6228 funds in
448 fund families
in the CRSP
database at the
end of 2002
25 fund
companies in
Shanghai 2005—
2009
53closed-end
funds in all the
listed fund
Zhou Ting
companies in
Annual
net
yield
[9]
2006, which set
up before
December 31,
2005
Annual fund net
income,Jenson 54closed-end funds
index,Treynor of 17 listed fund
He Jie[10]
index,Sharpe
companies before
index,Tobin’s Q,December 31, 2002
expense ratio
Li Na[11]
Fund
return,fund's
annual average
rate of return
more than fund
industry
Annual net ratio
of growth,fund's
average annual
XiaoJihui,
rate of return
Peng Wen
more than fund
[12]
ping
industry’s
median , Jensen
index
Wu Xiao
jun[13]
Research Conclusions
The percentage of
independent directors is
negatively related to
expense ratios.
The proportion of
independent directors is
positive related to
company performance.
The proportion of the
independent directors
with experience of
finance, legal, financial
work 5 years or more is a
significant positive to
fund performance.
The proportion of the
professional independent
directors is larger , the
fund performance is
better and the expense
ratio is lower
The proportion of
The fund
independent directors
companies had
and with the professional
managed a full
knowledge have a
year by the end of significant positive
2009
correlation to company
performance
131fund
companies raised
stock funds and
mixed funds to
the public before
January 1, 2005
the year average 47stock funds in
revenue rate
2004
The proportion of
independent directors
has no significant
influence on fund
performance.
The proportion of
independent directors
has a significant positive
correlation to fund
performance.
In all, the independent directors play a positive role
in company performance, but as a result of the diversity of
each research samples, research time, research methods,
the research scope, the results are very different.
III. HYPOTHESIS
1) The relationship between the proportion of
independent directors and fund performance: Director
Independence is the foundation of decision-making and
supervision for the board of directors. For the fund
management company, usually, compared to association
board of directors, driven by social reputation and longterm material interests of themselves, independent
directors can supervise managers effectually, make
independent and impartial judgments, protect the interests
of the fund holder and promote the fund performance. So,
we put forward assumption 1:
H1: The proportion of independent directors is
positive related to fund performance.
2) The relationship between the education of
independent
directors
and
fund
performance:
<Administration of Securities Investment Fund
Management Companies> issued by the CSRC on
September 27 in 2004 required that: the board in the fund
management company must have at least three
independent directors who have experience of finance,
law or financial more than 5 years, and have enough time
and energy to perform their duties. This law is proposed
new requirements to maintain the independence and
effectiveness of the board of directors in the fund
management company. The educational background is the
symbol of human capital and it can embody people’s
ability and qualify to the work, so the higher the
proportion of independent directors with high degree, the
more it can improve the efficiency of management. So,
we come up with assumption 2:
H2: The proportion of independent directors with
high degree is positive related to fund performance.
3) The relationship between the major of
independent directors and fund performance: The major
not only decides the skills of the individual have, but also
influences their mode of thinking. Majoring in economic
and management will provide a systematical study of
economic, management and financial knowledge, which
will help the independent directors to improve their ability
of insight of macro-economic environment and analysis of
enterprise management decision. Even though science and
technology majors are stronger in logic, they lack of
knowledge in the enterprise management, to a certain
extent, which hinders their functions of the management
decision, supervision and control. So, we put forward
assumption3:
H3: The proportion of independent directors in
economic management major is positive related to fund
performance.
4) The relationship between the professional title of
independent directors and fund performance: The
professional title represents a level of person in academic
or job, symbolizing a certain identity, affirming the ability
of independent directors. Therefore, we proposed
hypothesis 4:
H4：The professional title of independent directors
is positive related to fund performance.
5) The relationship between the sources of
independent directors and fund performance: Based on
the theory of check-and-balance ownership structure, the
diversity of the board source is beneficial to balance the
internal power and improve the performance of company.
Fu Gang (2008) have done empirical research on 336
companies about manufacturing in the Shanghai stock
exchange, found differences in the source of directors can
lead to diversity existing in the governance performance
of listed companies [14].This paper is divided the sources
of independent into: schools, research institutions,
accounting firm, law firms, financial institutions and
industrial-commercial enterprises. If the independent
directors do not have some certain experiences, their own
opinion cannot influence the board of directors to make
decision, which will become "vase directors" or " favor
directors ", and it will not do good for company
management and performance. Therefore, the rich
experience of independent directors has very great help to
improve the company performance. So, we put forward
hypothesis 5:
H5: The independent directors come from some
industries have more practicality, such as accounting firm,
law firms, financial institutions, which are positively
related to fund performance.
0.(BEAR)
Research variables in this paper are composed of:
dependent variables, independent variables, and control
variables. Their descriptions are shown in table 3.
C. The Descriptive Statistical Analysis
TABLE IV
DESCRIPTIVE STATISTICS OF SIZE OF INDEPENDENT DIRECTORS
Year
2005
2006
2007
2008
2009
2010
IV.EMPIRICAL RESEARCH
A. Sample and Data
The data is based on the fund management company
in China and its equity open-end Fund and the mixed
open-end fund from 2005 to 2010, eliminating the LOF
and QDII. In order to ensure the integrity of fund dates,
the fund must be established before the year of
researched.
N
35
47
52
55
58
58
Min
2.00
3.00
3.00
3.00
3.00
3.00
Max
6.00
5.00
6.00
5.00
5.00
5.00
Mean
3.5429
3.5319
3.4615
3.3636
3.3621
3.3793
Std.
.81684
.62035
.64051
.52223
.55245
.58722
The table4 indicates that, in 2005-2010 the size of
independent directors is changed little, the maximum and
minimum are 6 and 2, of which more than 90%
independent directors in the fund management company
are three or four, reached the requirement of the CSRC
that the fund management company should have at least
three independent directors.
100
N
80
B. Definition of Variables
60
40
TABLEIII
DEFINITION OF VARIABLES
Type
Variables
Fund return
Dependent
Variables
Fund risk
Risk-adjusted
fundperformance
The proportion
of independent
directors
The educational
background
The major
Independent
Variables
The professional
title
The sources
Control
Variables
Fund scale
Fund time
Bull market
Bear market
20
0
2005
Introductions
an annual average rate of return of
the fund more than the fund industry
the standard deviation of the return of
fund
adjusted sharp index, it is the ratio of
fund return to fund risk
the ratio of independent directors in
the board(PID)
the proportion of bachelor(BAC)
the proportion of master(MAS)
the proportion of doctor(DOC)
the proportion of economic
management major(ECO)
the proportion of law major(LAW)
the proportion of science and
technology major(SCI&TEC)
the proportion of senior title(SEN)
the proportion of school and research
institutions(SRI)
the proportion of accounting firms
(AF)
the proportion of law firms(LF)
the proportion of financial
institutions(FI)
the proportion of industrialcommercial enterprises(ICE)
an annual average fund share(FS)
the time of fund established (FT)
the year of 2006,2007,2009, it is
1;others it is 0.(BULL)
the year of 2008, it is 1;others it is
2006
BAC
2007
2008
MAS
2009
DOC
2010 Y
Fig.1The degree of independent directors
The Fig.1 shows, the degree of independent directors
in the fund management company is mainly doctor, the
proportion of it has increasing tendency, especially in
2010 it reaches at 44.0158%. Master degree also goes up,
but lower than that of the doctor degree. Only the
proportion of bachelor degree is reduced year by year,
from the highest 33.2258%in 2005 to the lowest
23.9444% in 2010, almost decrease by10% in six years.
This shows the fund management companies have more
and more strict demand with independent director, the
pursuit of highly educated is one of the means to be an
independent director.
150
N
100
50
0
2005
2006
ECO
2007
LAW
2008
2009
SCI&TEC
2010
Y
Fig.2 The major of independent directors
From the Fig.2, we can see that, the majority of
independent directors in the fund management company
are mainly economic management and the annual average
proportion reaches up to 62.552% in 2005-2010. The
proportions of law major are decreasing. In recent years,
the irrational behaviors of some fund management degree
companies in the pursuit of high return, the cases lead the
Coeff is Standardized Coefficients
shareholders to suffer loss can be found everywhere. This
Regression results are show in table 5, among the
requires the fund management company to add more
variables of structure characteristics of independent
independent directors in science and technology major,
director in fund management company, the proportion of
and make its more reasonable judgments. Accordingly, the
the independent directors has a negative impact on the
proportion of independent directors in science and
fund return, but not significantly, and at the 0.05 level, it
technology major has a rising trend.
has a significant negative correlation with the fund risk,
also it is positively related to risk-adjusted fund
N
120
performance, which is consistent with the existing
100
literature. Now, the introduction of independent director
80
plays a positive role to control fund risk under the
60
condition of less effectively supervise and protection of the
40
fund holder’s interests, which can alleviate principal-agent
20
problems between the fund holder and the fund
0
2005
2006
2007
2008
2009
2010
management company. Meanwhile, relating to the internal
Y
CRI
AF
LF
FI
ICE
director, the independent director have little knowledge on
Fig.3The sources of independent directors
the company management and it is weak in supporting
Fig.3 shows, independent directors from the college
function of management decision, so it has a negative
and research institutions make up more than half of the
impact on the fund return, but the positive influence of its
proportion in the fund management company, the
risk control exceeds the negative influence, thus it has
following is financial institutions, and its proportion rises
positive influence to the risk-adjusted fund performance.
gradually in 2005-2010. And the others from accounting
The education and major of independent director are
firms, law firms and industry and commerce enterprises
not significantly influenced on fund performance, whether
accounts for only about 20% of all the independent
return, risk, or risk-adjusted fund performance. For the title
directors. Half of independent directors are from school
of independent directors, the proportion of independent
and research institutions with less company operating
director who has a senior professional title has a negative
experiences; it will lead to some problems on the function
influence with fund risk, which generally has a high status
of independent directors in the fund management
in society and practice experience, so they can control risk
company.
better. Besides, considering their own reputation, the
independent director has the motivation to work harder
and qualified for the role as an enterprise management
D. Regression analysis
supervisor.
TABLE V
The proportion of independent directors from industry
THE RESULT OF REGRESSION ANALYSIS
and commerce enterprises is significantly positive
correlation to fund return, and negative correlation to fund
Fund return
Fund risk
adjusted performance risk. This is mainly because of the independent director
Model
come from industry and commerce enterprise have no
Coeff
t
Sig. Coeff
t
Sig. Coeff
t
Sig.
relationship with fund management companies, they can
(C)
0.651 0.515
15.326 0.000
-0.096 0.924 better ensure the objectivity of their supervision, and longPID
-0.029 -0.847 0.397 -0.110 -4.237 0.000 0.035 1.903 0.057 term practices enrich their working experience, helping
MAS -0.063 -1.289 0.198 0.006 0.162 0.871 -0.017 -0.658 0.511 fund management companies make better investment
DOC -0.046 -0.880 0.379 0.015 0.381 0.703 0.006 0.210 0.834 decisions from the point of view outside the financial
enterprise, so they have some positive influence on the
ECO
0.012 0.243 0.808 -0.023 -0.632 0.527 -0.004 -0.150 0.881
fund performance.
LAW 0.057 1.173 0.241 -0.016 -0.444 0.657 0.034 1.294 0.196
In addition, recent years the fund management
SEN -0.033 -0.886 0.376 -0.079 -2.811 0.005 -0.015 -0.733 0.464 companies in China do not have learning effect, the fund
AF
0.009 0.276 0.782 0.011 0.429 0.668 -0.009 -0.474 0.635 established time has negative influence on both the fund
LF
-0.022 -0.569 0.569 0.014 0.493 0.622 -0.028 -1.338 0.181 return and risk. It is maybe the longer time the fund
operates, the more conservative its operation is, so the
FI
0.039 1.015 0.310 -0.009 -0.309 0.757 0.006 0.271 0.787
fund’s incomes and risk are lower. Especially for the risk
ICE
0.079 2.286 0.022 -0.072 -2.791 0.005 -0.008 -0.436 0.663
control, a fund which through a long-term experience,
FS
-0.028 -0.882 0.378 -0.088 -3.645 0.000 -0.003 -0.160 0.873 management method and system are relatively mature, so
FT
0.065 1.985 0.047 0.158 6.362 0.000 0.009 0.512 0.609 it has a significant negative effect on fund risks at the 0.05
BULL 0.062 1.734 0.083 0.379 14.099 0.000 0.565 29.449 0.000 level, but is not significant to the risk-adjusted fund
performance. For the fund scale, it has a certain scale
BEAR -0.019 -0.540 0.589 0.670 24.670 0.000 -0.414 -21.386 0.000
effect, the greater the scale, the higher the fund return, but
ModleF=1.748
F=58.873
F=186.686
more difficulty to management, the lower is the fund’s
fitting
Sig=0.042
Sig=0.000
Sig=0.000
flexibility, that are more apparent in bear market. So, fund
size is positively related to fund risk, not significant to the
risk-adjusted fund performance.
Finally, fund performance is influenced by market
quotation significant in China. To bull market, fund return,
risk and risk-adjusted fund performance are higher and its
influence is significant at the 0.1 level. To bull market,
fund return is low, but the influence is not significant, and
because investment is more difficult, fund management
companies often due to the loss of some stock, they can't
sell them in time, hoping to earn profits with certain bets
psychological, thus significantly high risk is presented, and
at the 0.05 level it is significantly negative to the riskadjusted fund performance.
V.SUGGESTIONS
Firstly, the proportion of independent directors should
be increased. The empirical results show that the
proportion of the independent directors has positive
influence on fund performance, especially the risk control
and the risk-adjusted fund performance. At present the
average number of independent directors in the fund
management company is 3.37, just meeting the
requirement of CSRC to independent directors in the fund
management company not less than 3. In 2010, the scale of
independent director are 3,4and5, corresponding the
number of the fund management company are 39, 16 and
3, and the proportion of the fund management company
are 67.24%,27.59% and 5.17%, but the average proportion
of independent director just 3.3793, and is far less than the
requirement of two-thirds in the United States investment
management company. Therefore, in the future the fund
management company in China should further increase the
proportion of the independent directors, perfect the
mechanism of the hiring, and do the best to ensure its
independence.
Secondly, the professional titles of independent
director should be strengthened. The education
background and major should not become the only
standard to appoint independent directors in the fund
management company. Independent director in the board
of directors has the main function of supervision, exercise
this responsibilities needs more rich work experience.
Education background and major have little effect on this,
the professional title is an important signal of ability, so in
the choice of independent directors should pay more
attention to the professional title in the fund management
company.
Finally, the source of independent directors should be
optimized [15]. Now the practice of independent directors in
the fund management company are mostly academic
directors and celebrity directors, these independent
directors often have more famous, much positions, maxed
affairs, but have little time and energy to handle corporate
affairs, so they could not have effective function of
supervision. The empirical results in this paper show that
the independent director from industrial-commercial
enterprises has effectively improved the company
performance. So, in the choice of the independent directors
should be required some enterprise or business experience,
familiar with the laws and regulations, and possess the
knowledge of capital market operation theory, it will
makes them better to perform the duties of independent
directors.
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