Under the traditional Confucian culture, the relationship plays an important role in Chinese economy and society. The studies about independent directors have paid attention to related independent directors who have social relationships with companies’ executives. However, there are still disputes about the influence of related independent directors on corporate governance. In order to understand the role of related independent directors, it is necessary to investigate the recruiting process of related independent directors and analyze the potential influence of the social network. In China, social relationships can bring trust and support (Granovetter, 1973; Uzzi, 1997; Yang and Peng, 1999). Consequently, from the perspective of social relationships, related independent directors can build trust with managers and bring support to companies, which is beneficial to protect firm business secrets and implement important decisions. What kind of firms need the trust and support brought by related independent directors? In China, social connections are embedded in the business. More and more companies form cooperative relationships with their business partners to conduct relationship-based transactions with lower transaction costs. However, the maintenance of relationship-based transactions depends on the investment of specific assets (Williamson, 1983). Due to the asset specificity, it is difficult to take back the investment once the business relationship is broken. As a result, companies need the support of the board to do the specific investment. In addition, if the important business information, such as the customer list, the commodity price and the sale quantity in relationship-based transactions is known by their competitors (Heide and John, 1990; Lusch and Brown, 1996; Poppo and Zenger, 2002), companies may lose their competitive advantages and fail in specific investments. Consequently, companies relying on relationship-based transactions need the support of the board and keep the business secrets. Therefore, these companies are more likely to employ related independent directors to build trust and get support. In this paper, we collect social relationships of independent directors with the CEOs or chairmen of Chinese listed companies from 2008 to 2015. Using this data, we examine whether companies employ related independent directors to maintain business relationships. Moreover, we analyze the economic consequence of hiring related independent directors. We find that companies with more relationship-based transactions prefer to hiring related independent directors. Further analyses show that this phenomenon is more significant when companies face fiercer competitions and operate under poorer business environments. Finally, companies have invested more specific assets and achieved higher sales growth after employing related independent directors. Our research contributes to the literature in several ways. First, the extant studies neglect the match between related independent directors and the characteristics of companies. From the view of business maintenance, this paper reveals that the employment of related independent directors is not just the cronyism, and it may be a rational choice. Further, our study implies that the role of related independent directors may be to protect the business secrets and support executives’ decisions. Finally, few studies on business relationships examine how companies can adjust internal corporate governance to maintain their business relationships. Our study shows that companies can maintain their business relationships through director employment.
/ Journals / Journal of Finance and Economics
Journal of Finance and Economics
LiuYuanchun, Editor-in-Chief
ZhengChunrong, Vice Executive Editor-in-Chief
YaoLan BaoXiaohua HuangJun, Vice Editor-in-Chief
Is It only the Cronyism for Companies to Hire Related Independent Directors? An Analysis Based on Business Relationship Maintenance
Journal of Finance and Economics Vol. 44, Issue 08, pp. 128 - 140 (2018) DOI:10.16538/j.cnki.jfe.2018.08.010
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Cite this article
Huang Jun, Ding Zhu, Wei Haoqiang. Is It only the Cronyism for Companies to Hire Related Independent Directors? An Analysis Based on Business Relationship Maintenance[J]. Journal of Finance and Economics, 2018, 44(8): 128-140.
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