Foreign Independent Directors (FID) on Chinese Firms: The Isomorphism and Conformance-Performance Conflict

Abstract

The globalization of businesses has induced the globalization of boards, and to conform to this trend in the globalization of boards, Chinese firms have had to hire foreign independent directors (FID) as a counterpart to domestic independent directors (DID). Agency theory suggests that an FID contributes to a firm’s financial performance by monitoring and advising the firm’s management. This article explores whether the FID indeed predicts the financial performance of the firm as output and input. Output financial performance refers to the return on investment, and input performance refers to the attraction of foreign investors to the firm after hiring the FID. The evidence from the top 200 Chinese firms shows that the FID does not affect the firm’s financial performance in terms of ROA (return on assets) or ROI (return on investment). However, the FID positively correlates with foreign investment, suggesting that the FID outperforms the DID in attracting foreign investment. These findings point to an alternative explanation, one of which aligns with institutional theory and isomorphism. Institutional theory explains that FID appointments serve conformance rationality more than they serve technical performance rationality. Instead of financial performance pressure, normative conformance pressure influences Chinese firms to adapt to global norms and standards. Such memetic practices support their search for international legitimacy.