A Study of Independent Director’s Reputation Incentive Mechanism Based on the Principal-Agent Theory

Xiaoning LV, Yang LIU

Dalian Jiaotong University, Dalian, China.
Dalian University of Technology, Dalian, China.

DOI: 10.4236/ib.2009.11006                

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.

Keywords

reputation incentive mechanism, independent directors, principal-agent relationship, market signal

Conflicts of Interest

The authors declare no conflicts of interest.

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