TITLE:
A Study of Independent Director’s Reputation Incentive Mechanism Based on the Principal-Agent Theory
AUTHORS:
Xiaoning LV, Yang LIU
KEYWORDS:
reputation incentive mechanism, independent directors, principal-agent relationship, market signal
JOURNAL NAME:
iBusiness,
Vol.1 No.1,
September
8,
2009
ABSTRACT: This paper applies principal-agent theory to research into the incentive compatibility problems of the independent directors (IDs). The traditional fixed-pay system could preserve the independence of IDs, however, lacking of in-centives, the performance-related incentive mechanisms have great impact on IDs' independence which is the core of the system. This paper considers reputation incentive mechanism (RIM) as an effective way to solve this dilemma. The results, after our study, show that appropriate RIM can maintain IDs' independence as well as their incentive compati-bility. Furthermore, taking the market-signal theory as reference, this paper sets up a model to introduce another func-tion of RIM, which can help the company to identify the different roles of IDs.