Study On Issues Of External Directors In State-Owned Enterprises

In order to tackle the issue of "internal control" in the corporate governance of state-owned enterprises in China,enhance the scientific decision-making of the state-owned enterprise’s board of directors,and refine the corporate governance structure,the State-owned Assets Supervision and Administration Commission of the State Council has gradually introduced the system of external directors in state-owned enterprises.Recently,with the implementation of the three-year action plan for state-owned enterprise reform,the pace of establishing boards of directors with a majority of external directors in state-owned enterprises has accelerated,presenting a fresh opportunity to further leverage the role of external directors.Regarding the institutional level of external directors in state-owned enterprises,in 2004,central enterprises initiated pilot projects to standardize the construction of the board of directors,and for the first time,the State-owned Assets Supervision and Administration Commission of the State Council explicitly proposed the establishment of the system of external directors in its "Guiding Opinions." The draft revision of Article 149(2)of the Company Law in 2021 for the first time recognizes the establishment of the system of external directors in wholly state-owned companies.After nearly 20 years of pilot exploration,the system of external directors may gradually evolve from internal management policies to national laws.Concerning the practical level of external directors in state-owned enterprises,in 2004,the State-owned Assets Supervision and Administration Commission of the State Council listed seven central enterprises as the first pilot companies.In recent years,through the three-year action plan for state-owned enterprise reform,state-owned enterprises at all levels have essentially achieved the establishment of boards of directors,and central enterprises and subsidiaries of local state-owned enterprises have mainly completed the construction of boards of directors with a majority of external directors.Overall,as the construction of the system of external directors in state-owned enterprises deepens,the system plays an irreplaceable role in all aspects.Nevertheless,it is essential to note that no system is perfect,and the system of external directors in state-owned enterprises is no exception.Since the proposal of the system of external directors,some institutional problems that urgently require solutions have arisen during the specific exploration process.This paper adopts a combination of historical analysis,comparative analysis,and normative analysis.Apart from the introduction and conclusion,the paper is divided into three chapters.Chapter One provides an overview of the external director system to form a preliminary understanding of this system.Firstly,the article defines the external director system and expounds on the connotation of external directors,as well as the unique characteristics of external directors compared to other directors.Through a comparative analysis of the external director system in state-owned enterprises and the independent director system in listed companies,the article clarifies the differences and connections between the two systems and elaborates on their differences in terms of interest positioning,independence,application scope,and responsibility.Secondly,by reviewing the history and analyzing the current situation,the development of the external director system in state-owned enterprises is summarized,which has gone through two stages of initial start-up and comprehensive development.The broad development prospects of the external director system in Chinese state-owned enterprises are introduced.Finally,the paper emphasizes the irreplaceable value of the external director system in promoting the transformation of the era of decision-making and execution,strengthening the internal balance of decision-making,optimizing the structure of the board of directors,and improving the modern corporate system in state-owned enterprises.In the second chapter of the paper,a thorough analysis is presented of the existing problems with the external director system in state-owned enterprises,with the aim of providing a more profound understanding of this system.Firstly,the chapter expounds that the mechanism for selecting and cultivating external directors is not sound.The main issues include a narrow selection source,insufficient internal participation in external director selection,and a need for optimization in the selection process.Additionally,the training mechanism lacks pertinence,systematicity,and effective evaluation.Secondly,the chapter further elaborates on the outdated incentive and evaluation mechanisms for external directors.In particular,the incentive mechanism suffers from poor compensation and reputation incentives,as well as an imbalance between overall remuneration levels and corresponding responsibilities.Meanwhile,the evaluation mechanism has limitations regarding the evaluation subjects,contents,and application of results.Thirdly,the chapter describes how the management and supervision of external directors have been neglected,indicating that the management of state-owned assets and the self-regulatory function of external directors need to be strengthened.Finally,the chapter discusses the ambiguous legal responsibilities of external directors,such as the legislative silence on their legal liability and the excessive number of entities responsible for the accountability of the state-owned enterprise’s external directors.These issues have to some extent impeded the implementation of the external director system in the state-owned enterprise and limited the further development of external director roles.Based on the above conclusions,the paper proposes the following suggestions for improvement: Firstly,optimize the selection and training mechanisms for external directors to ensure the quality and level of the external director team.Secondly,strengthen the incentive and evaluation mechanisms for external directors to enhance their performance motivation and efficiency.Thirdly,enhance the management role of State-owned Assets Supervision and Administration Commission of the State Council and strengthen the self-supervision function of external directors to fully leverage their roles.Fourthly,establish a sound legal liability mechanism for external directors to effectively constrain their behavior.