Independent Director System

Independent directors are those who are external directors, independent of management, and whose primary duty is to oversee the management of the company without any kind of transactions or relationship with the company under which independent judgment made by them may be influenced. Independent directors are one of directors of the company with a unique feature of "independence" which cannot be found in general directors. Essentially, this feature of "independence" is that independent directors have no any direct or indirect interest relationship with the company for which they are serving.The fact that independent director institution came into being and outstood in the USA, and flourished in the countries of Britain's and Americanism, tending to move into the world suggests that this institution is of great value, with a high vitality and superiority. As a result of institutional innovation, it has an outstanding value as follows: forming an effective balancing mechanism in corporate governance structure, preventing against and curbing a situation of "being unable to control in case of insider's controlling" so as to maintain the whole claim of all shareholders and the company; consummating quality structure of board of directors and improving board's scientific and democratic overall decision-making ability; enforcing listed company to disclose corporate information in an objective, comprehensive, accurate and timely way so as to maintain interest of investors and social and economic order; making up theoretical drawbacks of continental and Britain's and Americanism law institutions in traditional corporate governance structure theories .Independent directors system came into being in the early of 20~th century, during which American corporate governance structure theories change from "shareholder assembly-centered "to "board of director -centered", shareholder assembly gradually became a pure form, operation of board of director was out of order, insider's controlling was always out of control. This institution is to strengthen internal supervisory function of board of director, and to maintain the whole interests of the company and all shareholders. It's gained further development and consummation in the developed countries, such as the UK, the USA in which market is highly liberalized and legalized particularly since 1990's. Independent director institution has been formally established in other developed countries in or after the mid-1990.Some scholars hold that independent director which is to be built on the basis of board of supervisor institution may cause the functions of these two institutions overlapped, being apt to pass the buck and shift responsibility. But the author believes that the functions of independent director institution and board of supervisors in China are compensated with each other, that different regulatory functions of these two institutions should be taken into full consideration, ensuring the effectiveness and flexibility of these two institutions from institutional arrangement.The main institutions of independent director include qualification institution of independent director, appointment and dismissal institution of independent director, right institution, pay systemand liability institution. The qualification of independent director refers to the premise for being an independent director, including active qualification and passive qualification. Appointment and dismissal institution of independent director is involved with nomination, election and dismissal of independent director. As an initial creator of independent director, the USA specifies the position power of independent director in the listing rule for New York exchange. The contents of pay of independent director includes fixed pay, deferred payment plan, stock option, other warfare such as life policy, accident insurance, and health insurance, director liability insurance, etc. which is determined by shareholder assembly or board of director. The obligation of independent director includes faith obligation and competition prohibition obligation.A Direction Opinion on Establishing Independent Director Institution in Listed Company is an essential legal basis for establishment of independent director institution, signaling a formal introduction of independent director into securities market, and good effect has been achieved. However, there are shortcomings in "Direction Opinion", such as rule for election and appointment of independent director is not scientific, design of position power of independent director hasn't been put in place, with an imperfect incentive and constraint mechanism. Viewing from practice, the situation in which most listed companies in China has enforced independent director institution has been quite good, playing a good role in consummating corporate governance of listed companies. Nonetheless, existing problems has been obvious, such as independent director lack of operation and management experience, some positioning powers are not authentic; independent director is not strong; some independent directors spend limited time in the listed companies.The following four measures should be taken in consummating independent director institution in China:The first is to set up a scientific institution of independent director election and appointment, basing on a rule combining looseness with strictness, trifling provision of independent director's competency, setting up a reasonable procedure for election and appointment of independent director, specifying the component of subcommittee of board of director, improving proportion of independent director.The third measure is to perfect an incentive and binding mechanism of independent director. It includes two aspects: reputation and pay incentive mechanisms. In China, it's compulsory to stick to a rule of balancing incentive, motive mechanism and improving corporate efficacy, taking capital size, operation environment of company, and pay level of different industries into consideration, minimal ware fee for independent director should be specified by related departments(China's Securities Supervisory Commission, departments in charge of prices ), a mixed pay combination of cash, stock and option should be determined by the company of its discretion. As for building a binding mechanism of independent director, we suggest that working time of independent director for each company in every month couldn't be less than l-2days, routine meeting of independent director (once for each year) should be held without non- independent director's presence; a person(retired, or taken-leave exports) is to hold the post of independent director of the company, the amount of which should not more than ten; a professional manager, or a professor take part-time independent director not more than five companies; post period for independent director in a company should not more than three years, and the qualification of independent director in a company will invalid after a post period of three years, only being appointed to be a common director or recommended to assume this post in other company.The third measure is to build an independent director intellectual resource base and independent director credit system. It's compulsory to broaden source channel of independent director as quick as possible, institutionalizing training independent director, building an intellectual base of independent director in order to foster potential intellectual of independent director. Besides, "Association of independent director" should be founded as early as possible, creating creditability be collective force. Setting up independent director public illustration institution, performance assessment institutions; establishing independent director personal credit file; creating independent director column on related websites, disclosing personal information, work experience and achievements of the independent director to the public and all shareholders, so as to provide the public and intermediary agents with a condition to assess the independent director's performance, improving personal reputation and social assessment system and fostering an orderly, competed independent director market.Finally, an institution of independent director liability insurance should be executed. At present, independent directors in China are mostly assumed by noted scholars who considerably lack of practical experience of business management and capital operation, and who are granted stronger power but have no liability capability of indemnifying losses. Furthermore, social insurance system in China has not been very sound at present, which has made a weaker capability of independent directors to assume risks. Therefore, the due interests of independent directors should be protected and an institution of independent director liability insurance should be established as early as possible, taking the experience in the USA and the UK for reference.