Reflection On Chinese Independent Directors System

The independent directors, borrowed from the U.S. corporate law, constitute animportant part of Chinese corporate system. Ever since1993, when we witnessed thefirst two independent directors in mainland China, they have developed for more than20years. The development of the independent directors in the legal system startedfrom the security exchange rules, expanded to the CSRC regulations, and was finallywritten into the newly modified Company Law of the People’s Republic of China in2006. It is widely accepted that independent directors play a vital role in monitoringcorporate insiders, improving board decisions, and protecting the interests of thecorporate stakeholders especially shareholders with small to medium shares. However,as a matter of fact, there are still lots of problems with independent directors in China.This thesis elaborates on the existing problems of independent directors, and furtherprovides suggestions according to the problems we’ve found.This thesis starts with introducing necessary information background forindependent directors. It first clarifies a few terminologies (e.g., outside directors,independent directors, non-executive directors), then briefly reviews the supportingtheories for independent directors, explains the history of them, and summarizes thelegislative conditions of the independent directors system. Due to the fact that theindependent director system is transplanted from other countries, this part focuses oncomparing the differences of independent directors in China, the U.S., and HongKong.Chapter five is the central part of the thesis, which elaborates the existingproblems of the Chinese independent directors. The problems can be divided into two big categories: the first category covers the intrinsic problems of the independentdirector system itself, while the second category consists of the problems arising fromChinese corporate governance system and Chinese legal environment. For the firstcategory, although they are common problems shared by many countries, thingswould get more complicated in the special settings of China. For example, the factthat controlling shareholders are rather common in China, and the special socialculture that interpersonal relationships are more important, inevitably hinder theindependency of independent directors; also, the unique expertise background of theindependent directors in China (academies and politicians) and the natures of part-time independent directors cause them to work indecisively and unresponsively. Thesecond category includes the co-existence of independent directors and the supervisorcommittee, and the deficiencies in the Chinese director accountability mechanism.The co-existence problem stems from the incompatibility of two corporate legalsystems (the two-tier structure in continental law and the one-tier structure in commonlaw), and gets worsened by the pure fact that both the supervisors and the independentdirectors share the monitoring function. The deficiencies in the director accountabilitysystem are two-fold: first, it does not consider the central value and the keyobligations of the independent directors; second, it suffers from the lacking of judicialpowers, since almost all of the penalties that independent directors received in Chinaare administrative penalties.The last part of this thesis provides suggestions to the Chinese independentdirector system. Based on the considerations of the operationality and feasibility, thethesis develops corresponding solutions to the problems listed in chapter five. Thesesuggestions require the collaboration of the legislative, judicial and administrativeauthorities, as well as the sense modification of corporations and independentdirectors themselves, in order to build a complete and effective independent directorsystem in China.