Policy targets boards of directors

Notice clarifies and enhances role of members who act independently

A newly-issued guideline on reforming the corporate governance system for independent directors of listed companies is likely to improve quality and accelerate the development of listed firms in China and in the long run, catalyze the growth of China's capital market, officials and experts said.

On April 14, the General Office of the State Council, China's Cabinet, released a notice on reforming the system, defining the legal role of independent directors and strengthening the leadership of the Communist Party of China in the process.

An independent director is a member of a company's board of directors who does not have a material relationship with the company, and is not part of its executive team.

The notice stated that the move is aimed at addressing matters such as the unclear role of independent directors, unequal rights and responsibilities and insufficient supervision.

It was made clear that independent directors should participate in decision-making and management, and help preserve checks and balances and the quality of consultation among the board members, as they are in a better position to protect the company's overall interests. Independent directors should also focus on the rights and interests of minority shareholders.

The China Securities Regulatory Commission, the national stock market regulator, stated in a notice that the move is significant as it marks the first time that the role, scope of responsibilities and evaluation criteria of independent directors have been clearly defined since the country adopted the current system in 2001.

The goal of the reform is to accelerate the formation of a more effective system of independent directors, optimize their functions, strengthen their supervisory abilities and improve the process by which they are appointed to company boards.

Officials and experts, particularly those in the fields of finance and corporate governance, hailed the move, which they believe will improve the overall quality of listed companies in China and help better align corporate governance with international standards.

Tian Xuan, associate dean and a professor at the PBC School of Finance at Tsinghua University, said that although the current system governing independent directors has been in place for two decades, previous government documents failed to clarify their position, and the market is still uncertain as to what role they play.

"With China steadily expanding its registration-based initial public offering system, the governance of listed companies has entered a new stage that requires tailored advancement through more precise efforts," he said.

In early February, the CSRC published draft rules on expanding the IPO system, marking a big step toward reforming the world's second-biggest stock market. This means the system, which has been adopted by Shanghai's STAR Market, the Shenzhen ChiNext board and the Beijing Stock Exchange on a pilot basis, will be adopted by the boards of more companies.

Tian added that reforming the independent director system will improve overall capital market conditions, resolving problems such as the lack of professionalism and the subpar performance of duties, and will usher listed company governance in China into a new era.

Tian Lihui, a chair professor of finance at Nankai University, also said that expanding the IPO system was a catalyst in the creation of the new guideline, which marks the start of corporate governance reform and optimization.

"The development of listed companies is an integral part of the development of the capital market. Corporate governance is the foundation and key to company development, and independent directors are a vital link in the governance of listed companies," he said.

"Only when listed companies develop and minority shareholders are properly protected can China's capital market achieve substantial development. The long-term, healthy growth of the capital market is also an important fulcrum in China's economic recovery and the development of strategic emerging industries," Tian Lihui continued.

The notice also encourages listed companies to optimize the composition of their boards of directors and stated that independent directors should account for a third of the boards, while external directors should make up the majority of the boards of State-owned listed enterprises.

Overall management of independent directors will be improved, as will the mechanism used to nominate them for board membership.

In addition, the accountability mechanism for independent directors needs to be improved, and violations of securities laws and regulations should be cracked down upon. The notice also stressed the need to follow the CPC's overall leadership of the reform process.

zhangyue@chinadaily.com.cn