The Hollowing Out Of Major Shareholders And The Failure Of The Independent Director System

In China’s capital market,listed companies generally have the characteristic of controlling by major shareholders.As of September 30,2021,the top ten shareholders of Kangmei Pharmaceutical held a total of 50.69% of the shares,with Kangmei Industrial holding 27.58% of the shares alone.The top ten shareholders,except for trust funds and investment companies,all form related party relationships through equity pledge,related party transactions,occupation of book funds,and capital operation to reduce holdings and cash out,Damaging the rights and interests of small and medium-sized investors in the capital market,major shareholders of listed companies have the ability and motivation to empty Kangmei Pharmaceutical.Pledging equity by major shareholders is one of the ways in which major shareholders can maximize their access to surplus funds.At the same time,it will increase the operational leverage of the enterprise and increase the possibility of market circulating funds failing to invest in listed companies;By engaging in related party transactions and occupying book funds,the overall cash flow of the listed company is occupied,which undermines the efficiency of the company’s capital turnover.This is a form of hollowing out of the listed company’s cash by major shareholders;Major shareholders can also engage in illegal trading through their large amount of equity holdings,raise stock prices,package their own low value stock prices,facilitate self selling in exchange for maximum residual economic benefits,disrupt the overall rules of the capital market,and harvest the funds of small and medium-sized shareholders.Listed companies are controlled by major shareholders and are prone to theft.Listed companies should control both external and internal governance,requiring third-party supervision and regulation.In August 2001,the China Securities Regulatory Commission issued the "Guiding Opinions on Establishing an Independent Director System in Listed Companies",proposing the introduction of an independent director system to improve the company’s internal governance level.As the function of independent directors is to serve all shareholders,It is also a part of the external governance structure where small and medium-sized shareholders with dispersed equity and internal governance are most likely to achieve cooperation.Independent directors can professionally and independently balance the interests of major shareholders who have taken out small shareholders.Independent directors have supervisory and advisory functions,which protect small and medium-sized shareholders and also serve as a check and balance for major shareholders.This article mainly studies the equity pledge,related party transactions,occupation of book funds,and the behavior of reducing holdings and cashing out through capital operations carried out by major shareholders in the case of Kangmei Pharmaceutical.It summarizes the situation and reasons for the failure of independent directors’ functions in the process of tunneling by major shareholders,Further study the relationship between the failure of the independent director system and the hollowing out of major shareholders.In response to the four major problems of the current busy independent director system,including unfavorable supervision,unequal division of powers and responsibilities,difficulty in ensuring independence,and insufficient compensation for incentives,this paper proposes a solution that summarizes the four aspects of protecting the right to know and the need for performance,selection and salary mechanisms,talent market and practice characteristics,and incentive mechanisms.It summarizes how independent directors can effectively perform their duties and the impact on major shareholders’ hollowing out,It is conducive to improving the internal governance system of listed companies,promoting more fair transactions between the capital markets in which listed companies operate,and safeguarding the maximum rights and interests of all stakeholders,including small and medium-sized shareholders.At present,research on the effectiveness of independent directors mostly focuses on empirical papers,with few case studies.The construction of the value relationship of empirical samples is not clear enough,and details are easy to be ignored.The analysis of the independent director system is also easy to stay superficial.Therefore,Kangmei Pharmaceutical,which is already heavily constrained by large shareholders,is chosen.By analyzing Kangmei Pharmaceutical’s financial fraud data and the China Securities Regulatory Commission’s punishment decision,By comprehensively using literature analysis,case analysis,qualitative analysis,and statistical analysis,it is found that the independent directors of Kangmei Pharmaceutical are ineffective in their supervisory functions and independence,which in turn affects the checks and balances of major shareholder tunneling behavior.This provides effective reform suggestions for the independent director system of listed companies to adapt to the new Securities Law and the corresponding Criminal Law Amendment(11),and promote the reform and development of the independent director system,At the same time,it also provides beneficial reference for the improvement of the independent director system of other listed companies,which is beneficial for the governance of listed companies.