The link between the profiles of Independent Non-Executive Directors (INEDs) and adoption of best corporate governance practices in Hong Kong listed companies

Corporate governance is a critical issue and draws attention from companies, government, investors, and public alike. Corporate management executives recognise the benefits prevailed from the implementation of good practices of corporate governance. Besides, Hong Kong regulatory authority has put in considerable effort to increase directors’ accountability due to recent scandals in Asia. As a result, Hong Kong regulatory authority revised the Listing Rule to enhance corporate governance by increasing the number of Independent Non-Executive Directors (INEDs) on the board of directors and also revised the code of conduct and accountability of INEDs. To perform their duties effectively, INEDs must have relevant industry experience and professional knowledge. However, the regulators have not yet formulated any qualification requirements and criteria for INEDs. Hong Kong listed companies usually appoint their INEDs based on their preferences and likings without standard judgement and appointment process. Eventually, this leads to chances of poor performance among incompetent INEDs due to lack of professional knowledge, experience and competency. The key objective of this study is to analyse the relationship between the profiles of INEDs and best corporate governance practices in Hong Kong listed companies so as to assess how educational level, tenure of service in the company, industry experience, and remuneration of INEDs affect the corporate governance practices. In addition, this study also analyses whether the proportion of INEDs on the board has any moderating role in influencing the relationship between INED’s profiles and the adoption of the best corporate governance practices. The hypothetico-deductive method, with positivist research paradigm, is adopted in this research. Quantitative research methods, using correlation and multiple regression analysis, are used to analyse the sample of 73 listed companies in the Hong Kong Main Board. Data sources used are secondary databases, annual reports, company websites and corporate governance reports of the sample companies. The empirical evidence shows that educational level, relevant industry experience, and remuneration of INEDs are positively related to good corporate governance practices. A higher educational level of INEDs, more relevant industry experience of INEDs and higher remuneration of INEDs positively correlate to better corporate governance practices. Tenure of INEDs, however, is not related to better corporate governance practices. The proportion of INEDs on the board does not affect the association between the profiles of INEDs on the board and adoption of the best corporate governance practices. Greater relevant industry experience of INEDs is associated with higher remuneration of INEDs. When listed companies plan to appoint their INEDs with more industry experience and/or retain INEDs with more industry experience, this could be done by offering a higher and attractive remuneration to INEDs in order to attract appropriate INEDs with more relevant industry experiences to continue working on the board. The finding of this research has implications for Hong Kong regulatory authorities and Hong Kong companies moving ahead to enhance corporate governance by improving INEDs’ profile (education level, relevant industry experience, and remuneration) instead of only increasing the number of INEDs on the board. This research provides information to government regulators, policy makers, and the corporate sector with regard to the appointment of appropriate INEDs so as to improve corporate governance practices. This indirectly helps to increase company’s value and maintain Hong Kong’s reputation as the financial centre in the world. In addition, increasing the proportion of INEDs on board does not affect the association between the profiles of INEDs on the board and adoption of the best corporate governance practices. The findings of this research provides a reference to regulatory authorities and listed companies that merely increasing the number of INEDs on the board may not an effective way to enhance corporate governance.