Appendices Table 1: Recommendations and requirements about outside directors

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Table 1: Recommendations and requirements about outside directors

Year Country Issuer Recommendations and requirements

Since 1970

U.S. The Securities Exchange Commission, the New York Stock

Exchange etc.

A series of recommendations and codes about the outside directors and the independent of the board

1992 U.K. Cadbury Committee At least 3 outside directors 1993 Sweden Swedish Shareholders Association At least 3 outside directors 1994 South

Africa

King Committee At least 2 outside directors and equal numbers of inside and outside directors 1994 Canada Toronto Stock Exchange A majority of outsiders

1995 Australia Bosch Committee A majority of outsiders and at least one-third be independent

1998 India Confederation of Indian Industry At least 30% of outside directors 1998 Thailand Stock Exchange of Thailand At least 2 outside directors 1998 Belgium Brussels Stock Exchange A majority of outside directors

1998 Korea Korea Stock Exchange At least 3 outside directors and gradually increase the ratio of outsiders to greater than 50%

1998 Malaysia High level Finance Committee One-third of independent outside directors with no fewer than 2 outsiders 1998 France Conseil National Du Patronat

Francais & Association Francaise Des Entreprises Privees (CNPF &

AFEP)

One-third of independent outside directors with no fewer than 2 outsiders

1998 Greece Capital Market Commission At least 50% of outsiders 1998 Brazil Brazilian institute of Corporate

Directors

At least 50% of outsiders 1998 Mexico Mexico CCe/NVB At least 20% of outsiders 2001 China China Securities Regulatory

Commission (CSRC)

At least 2 independent directors, the proportion should be at least one-third

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Table 2: Outside directors’ effects on firm performance: methodology

and results

Author(s) Country Year Data Result

1 Morck, Sheleifer and Vishny (1988) U.S. 1980 CS ? 2 Rosenstein and Wyatt (1990) U.S. 1981-1985 CS ? 3 Brickley, Coles and Terry (1994) U.S. 1984-1986 CS +

4 Mehran (1995) U.S. 1979-1980 CS ?

5 Yermack (1996) U.S. 1984-1991 CS

6 Agrawal and Knoeber (1996) U.S. 1987 CS

7 Cotter, Shivdasani, and Zenner (1997) U.S. 1988-1992 Panel + 8 Lee, Rosenstein and Wyatt (1999) U.S. 1981-1985 CS +

9 Bhagat and Black (2000) U.S. 1988-1993 CS ?

10 Mishra and Nielsen (2000) Australia 1990 CS + 11 Hossain, Prevost and Rao (2001) New

Zealand

1995 CS +

12 Dehaene, Vuyst and Ooghe (2001) Belgium 1995 CS +

13 Tian and Lau (2001) China 1996-1997 CS ?

14 Limpaphayom and Sukcharoensin (2003) Thailand 1997-2000 Panel + 15 Panasian, Prevost and Bhabra (2003) Canada 1993-1997 CS + 16 Judge, Naoumova and Koutzevol (2003) Russia 2002 CS ? 17 Peng, Buck and Filatotchev (2003) Russia 1995 CS ? 18 Yoshikawa and Phan (2003) Japan 1999-2001 CS ?

19 Ghosh (2003) India 1997-2002 CS +

20 Peng (2004) China 1992-1996 CS +

21 Randoy and Jenssen (2004) Sweden 1996-1998 CS +

22 Alshimmiri (2004) U.S. 1996 CS +

23 Choi, Park and Yoo (2005) Korea 1999-2002 Panel + 24 Miwa and Ramseyer (2005) Japan 1986-1994 Panel ? 25 Sarkar, Sarkar and Sen (2006) India 2003 CS ?

Notes. (i) Data: ‘CS’ denotes cross-sectional data, while ‘Panel’ denotes use of combined

cross-sectional time-series data in the respective analysis. (ii) Result: regression analysis finds a ‘+’ (positive and statistically significant),

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Table 3: Outside directors’ development in China

Year Key Events

1993 Tsingtao Brewery Co. Ltd. issued H-share and introduced two outside directors according to the stipulation of Hong Kong Stock Exchange (HSE). It is the first firm who introduce outside directors in China. 1997 China Securities Regulatory Commission (CSRC) formulated “Shang

shi gong si zhang cheng suo yin” (the guide of public listed firms) which pointed out that firms can introduce outside directors if they need.

1999 State Economic and Trade administration, PRC and CSRC issued “Guan yu jin yi bu cu jin jing wai shang shi gong si gui fan yu zuo he shen ru gai ge de yi jian” (the opinion for Chinese firms listed aboard) which required Chinese firms listed aboard should introduce outside directors mechanism.

2000 State Economic and Trade administration, PRC required large Chinese corporations should adopt outside directors mechanism gradually. In the same year, the office of the State Council of the People’s Republic of China issued “Guo you da zhong xing qi ye jian yi xian dai qi ye zhi du he jia qiang guan li de ji ben gui fan” (the basic norm about the establishment of modern firm system and strengthen the management for large and medium state owned firms), formally proposed that firms can introduce outside directors who have no share and position in firms.

2001 CSRC formulated the “Guan yu zai shang shi gong si jian li du li dong shi zhi du de zhi dao yi jian” (Guidelines for Introducing Outside directors to the Board of Directors in Listed Companies) in August, 2001. It stipulated all list firms should hire at least two outside directors by June 30, 2002 and the proportion of outside directors should be no less than one third by June 30, 2003.

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Table 4: Descriptive statistics and correlations

Variables Mean S.D. Median Maximum Minimum Skewness Kurtosis

ROA 5.85 8.56 5.96 34.73 -36.74 -0.97 7.26 POD 0.34 0.05 0.33 0.60 0.13 0.17 8.14 Background 1.62 1.05 2.00 5.00 0.00 0.41 2.89 Non-traded share 58.90 12.03 60.53 100.00 14.16 -0.50 3.30 Board size 9.68 1.99 9.00 17.00 5.00 0.91 4.46 Firm age 9.50 3.59 9.00 22.00 0.00 0.51 3.02 Firm size (log) 7.57 1.08 7.61 10.73 1.79 -0.70 5.41

Variables 1 2 3 4 5 6 7 1. ROA 1 2. POD 0.07 1 3. Background 0.44 0.11 1 4. Non-traded share 0.08 -0.02 0.19 1 5. Board size 0.08 -0.17 0.32 0.05 1 6. Firm age 0.00 0.09 -0.09 -0.37 -0.02 1 7. Firm size 0.15 -0.02 0.17 -0.06 0.19 0.08 1 N=1,660 firm-years. Definitions of variables

ROA Return on assets

POD The dummy variable. When the proportion of outside directors is less or equal to 1/3, the value of this term is 0; when the proportion of outside directors is more than 1/3, the value of this term is 1.

Background The number of outside directors who are working or have worked as an official.

Non-traded share The non-traded share of firms. Board size The total number of directors.

Firm age The number of years since the listed firm was founded.

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Table 5: OLS Regression results for effect of outside directors on firm

performance

Variables 2003-2006 ROA 2003 ROA 2004 ROA 2005 ROA 2006 ROA Independent variables POD 1.71 (4.16) 13.77* (7.06) -0.09 (8.96) -4.20 (8.81) -16.57 (7.69) Background 3.70*** (0.20) 2.32*** (0.37) 3.90*** (0.44) 4.88*** (0.38) 5.70*** (0.40) Control variables Non-traded share 0.02 (0.02) 0.03 (0.04) 0.09*** (0.04) -0.02 (0.04) 0.08*** (0.03) Board size -0.37*** (0.10) -0.21 (0.19) -0.50** (0.19) -0.37* (0.22) -0.64*** (0.19) Firm age 0.10* (0.06) 0.09 (0.11) 0.04 (0.11) 0.09 (0.12) 0.07 (0.10) Firm size 0.73*** (0.18) 0.91** (0.39) 1.42*** (0.37) 0.17 (0.37) 0.35* (0.27) Adjusted R2 _0.21 _0.14 _0.22 _0.30 _0.37 F-statistic 73.98*** _11.24*** _21.18*** _32.20*** _40.29*** Observations 1,660 392 425 433 410

Standard errors are reported in the parentheses. *_{Significant at the 0.1 level;}**_{Significant at the}