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The Dilemmas of Independent Directors in China: An Empirical and Comparative Study

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Abstract

As independent directors have formed an integral part of the Chinese corporate governance model for more than a decade, it is now timely and important to examine their performance of their monitoring functions. By studying the administrative sanctions imposed on independent directors by the CSRC, this article can offer several important empirical findings. Based on these discoveries, it analyses the general fiduciary duties and specific monitoring functions of independent directors from comparative perspectives. It also explores the ‘independence’ of independent directors and examines their responsibilities in light of their reliance on professional third-party reports. The article argues that, similar to their Western counterparts, independent directors in China are facing intrinsic dilemmas in the process of performing their monitoring functions.

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Notes

  1. For a systematic review of research on relationships between boards and firm performance, see Hermalin and Weisbach (2003). See also Adams et al. (2010).

  2. Ringe (2013), at p. 402.

  3. Ferrarini and Filippelli (2014), at p. 4.

  4. See, e.g., Shen and Jia (2005), Clarke (2006a), Xi (2006), Jie (2007), Huang (2008).

  5. For a systematic review of the literature in the area of finance, see Wang (2014).

  6. See the Guiding Opinions on the Articles of Incorporation of Listed Companies (Shangshi gongsi zhangcheng zhiyin 上 市 公 司 章 程 指 引) promulgated by the CSRC on 16 December 1997, available at http://www.csrc.gov.cn/pub/shenzhen/xxfw/tzzsyd/ssgs/sszl/ssgsfz/200902/t20090226_95511.htm (last visited on 2 February 2016).

  7. Such as stock exchange rules, some municipal government rules and central government rules; for a detailed introduction, see Huang (2008), at pp. 405–423.

  8. See Clarke (2006a), at p. 129, and Clarke (2006b), at p. 10.

  9. Xi described the influences of US law and practices on key policy-makers and how the official ideology, the policy agendas of the CSRC and the politics of other central government agencies and interest groups shaped the adoption of this institution in China. See Xi (2006), at pp. 36–37, and Xi (2009), at p. 200.

  10. See, e.g., Gao (2002), at p. 8; Ma (2002), at p. 61.

  11. See Clarke (2006a), at p. 128.

  12. Jiang and Liu (2010), at p. 61.

  13. See, for example, Tang and Zuo (2010); Xiao et al. (2009).

  14. For example, non-listed public insurance companies should also appoint independent directors, see the Opinions on Standardising the Articles of Associations of Insurance Companies (Guangyu guifan baoxian gongsi zhangcheng de yijian 关于规范保险公司章程的意见) promulgated by the China Insurance Regulatory Commission on 8 July 2008, available at http://www.circ.gov.cn/web/site0/tab5225/info76757.htm (last visited on 2 February 2016).

  15. Zhang (2012), at p. 41.

  16. See Howson (2014), at p. 678.

  17. Although the Company Law was further revised in 2013, the provisions on directors’ duties have remained the same.

  18. Duty of diligence here is equivalent to duty of care in common law jurisdictions. Pursuant to Article 127 of the Company Law (2013), senior executives include the general manager, the vice general manager(s), the secretary of the board of directors, the person in charge of the company’s financial affairs, and other staff as stipulated by the company’s articles of association.

  19. See the Administrative Measures for the Material Asset Reorganisation of Listed Companies (Shangshi gongsi zhongda zichan chongzu guanli banfa 上市公司重大资产重组管理办法) promulgated by the CSRC on 23 October 2014 and its previous versions, available at http://www.csrc.gov.cn/pub/zjhpublic/zjh/201410/t20141024_262340.htm (last visited on 2 February 2016).

  20. If a listed company is to be acquired, the independent directors should give independent opinions on the acquirer’s bid (if any) and on several affairs regarding the management buyout. See the Standards for the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public, No. 18 ‒ Report of the Board of the Target Company (Gongkai faxing zhengquan de gongsi xinxi pilu neirong yu geshi zhunze, di 18 hao, bei shougou gongsi dongshihui baogao 公开发行证券的公司信息披露内容与格式准则第18号-被收购公司董事会报告) promulgated by the CSRC in November 2002 and revised in August 2006, available at http://www.csrc.gov.cn/pub/shenzhen/xxfw/tzzsyd/ssgs/ssxxpl/ssplxx/201411/t20141107_263081.htm (last visited on 2 February 2016).

  21. The Provisions on Strengthening the Protection of the Rights and Interests of General Public Shareholders (Guanyu jiaqiang shehui gongzhonggu gudong quanyi baohu de ruogang guiding 关于加强社会公众股股东权益保护的若干规定), promulgated by the CSRC on 7 December 2004 stipulate that if the board does not propose to distribute cash dividends, the independent directors should give independent opinions (Section 3 of Article 4), available at http://www.csrc.gov.cn/pub/shenzhen/ztzl/ssgsjgxx/jgfg/sszl/201506/t20150612_278987.htm (last visited on 2 February 2016).

  22. See Article 36 of the Administrative Measures on the Pilot Scheme for Preference Shares (Youxiangu shidian guanli banfa 优先股试点管理办法) issued by the CSRC on 21 March 2014, available at http://www.csrc.gov.cn/pub/zjhpublic/G00306201/201403/t20140321_245908.htm (last visited on 2 February 2016), Cai (2016).

  23. See the standard format provided by the Memorandum on Daily Information Disclosure of Listed Companies No. 1 ‒Guideline on the Format of Interim Reports (Shangshi gongsi richang xinxi pilu gongzuo beiwanlu di 1 hao linshi gonggao geshi zhiyin 上市公司日常信息披露工作备忘录第一号临时公告格式指引), available at http://www.sse.com.cn/lawandrules/guide/disclosure/dailymemo/ (last visited on 2 February 2016), and the Standards for the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public, No. 2 – Content and Format of Annual Report (Gongkai faxing zhengquan de gongsi xinxi pilu neirong yu geshi zhunze, di 2 hao, niandu baogao de neirong yu geshi 公开发行证券的公司信息披露内容与格式准则第二号年度报告的内容与格式), available at http://www.csrc.gov.cn/pub/shenzhen/xxfw/tzzsyd/ssgs/ssxxpl/ssplxx/201410/t20141031_262730.htm (last visited on 2 February 2016).

  24. See La Porta et al. (2006), Jackson and Roe (2009), Du Plessis et al. (2011).

  25. See Huang (2013), at p. 763.

  26. In China, since there is no single, comprehensive source of data on securities civil cases, it is very difficult to conduct an exhaustive search on private securities litigation. Professor Huang has illustrated well the difficulties of searching for private securities litigation and has suggested possible measures to address such difficulties in China. See Huang (2013), at p. 763. I have used my best endeavours in searching various resources, including legal cases databases, the internet, interviews with experienced legal professionals, and the stock exchange, to find such cases.

  27. See the verdict by the Shangxin High People’s Court, Shang Min Er Zhong Zi, No. 00059 (陕西 省 高 级 人 民 法 院 民 事 判 决 书, [2014] 陕 民 二 终 字 第 00059 号), see http://www.court.gov.cn/zgcpwsw/shanxi/ms/201409/t20140922_3088240.htm (last visited on 2 February 2016).

  28. For an analysis of reasons for insufficient private securities litigations in China, see Huang (2013).

  29. See http://www.csrc.gov.cn/pub/csrc_en/about/intro/200811/t20081130_67718.html (last visited on 2 February 2016).

  30. See Articles 22–23 of the Securities Law (2005).

  31. See Article 96 of the Securities Law (2005); see also Cai (2011).

  32. See Article 122 of the Securities Law (2005).

  33. For example, disputes arise from the unclear validity of several kinds of anti-takeover provisions in the articles of associations of listed companies, because such provisions have not been clearly addressed by the law. In this context, the CSRC is responsible for deciding on their validity and settling the disputes. See Cai (2012).

  34. See Articles 80, 83, 84, 85 and 86 of the 2015 version. It was enacted in 2000 and revised in 2015.

  35. See, for example, Weng and Jia (2016).

  36. Paler (2005), at p. 307.

  37. Chen (1999), at p. 103.

  38. Zhou (2015), at p. 378.

  39. Tang (2015), at p. 29.

  40. See Xu et al. (2013).

  41. See Chapter 11 (Articles 188–235) of the Securities Law (2005).

  42. Article 27 of the Rules of Listed Companies’ On-site Inspection (Shangshi gongsi xianchan jiancha banfa 上市公司现场检查办法) promulgated by the CSRC on 13 April 2010 contains provisions for such measures as, e.g.: requirements for correction (zeling gaizheng 责令改正), conducting a supervisory interview (jianguan tanhua, yuetan 监管谈话,约谈), issuing a warning letter (jingshi han 警示函), requiring a publicly available explanation for alleged misconduct (zeling gongkai shuoming 责令公开说明), mandating officers to attend training (zeling canjia peixun 责令参加培训), requiring a response within a specific period of time (zeling dingqi baogao 责令定期报告), stating that certain people are not suitable for certain positions (rending wei bu shidang renxuan 认定为不适当人选), available at http://www.csrc.gov.cn/pub/newsite/flb/flfg/bmgf/zh/jcth/201012/t20101231_189844.html (last visited on 2 February 2016).

  43. See Article 27 of the Rules of Listed Companies’ On-site Inspection (shangshi gongsi xianchang jiancha banfa 上市公司现场检查办法) promulgated by the CSRC on 13 April 2010.

  44. See the Tentative Implementation Details of Self-regulatory Measures and Disciplinary Actions (Shenzhen zhengquan jiaoyisuo zilv jianguan cuoshi he jilv chufen shishi xize shixing 深圳证券交易所自律监管措施和纪律处分措施实施细则[试行]) promulgated by the Shenzhen Stock Exchange on 2 June 2009, available at http://www.szse.cn/main/rule/bsywgz/zhl_front/39744146.shtml (last visited on 2 February 2016), and Implementation Details of Disciplinary Actions and Self-regulatory Measures (Shanghai zhengquan jiaoyisuo jilv chufen he jianguan cuoshi shishi banfa 上海证券交易所纪律处分和监管措施实施办法) promulgated by the Shanghai Stock Exchange on 20 June 2013, available at http://www.sse.com.cn/lawandrules/sserules/organization/c/c_20130620_3722134.shtml (last visited on 2 February 2016).

  45. Liebman and Milhaupt (2008), at p. 975.

  46. See Ringe (2013), at p. 418.

  47. See, for example, Dent (1981); Black et al. (2006b), at p. 6. As to the term ‘outside director’, Clarke suggested that ‘[d]ifferent jurisdictions and corporate governance norms speak variously of directors who are “non-interested,” “independent,” “outside,” “non-executive,” “non-employee,” and “disinterested.” Each of these terms is defined differently and implies a different role for the director it describes, yet they are frequently discussed together as if they were all describing the same thing. Moreover, conclusions about directors of one type are often applied to directors of another.’ See Clarke (2007), at p. 78.

  48. Article 177 of the Securities Law (1998) and Article 193 of its revised versions of 2005 and 2013.

  49. Kahan and Posner (1999), at p. 368.

  50. See Liebman and Milhaupt, at p. 929.

  51. Jiang et al. (2015).

  52. For a comprehensive summarisation, see Corporate Laws Committee, ABA Section of Business Law (2011) Corporate Director’s Guidebook ‒ Sixth Edition, at pp. 1043–1049.

  53. O’Kelley and Thompson (1999), at p. 156.

  54. Karmel (2013), at p. 791.

  55. See Clarke (2006a), at p. 157.

  56. Clarke (2007), at pp. 80–82. In his article, Professor Clarke uses the term ‘non-management directors’ rather than ‘independent directors’. For consistency purposes, this article still uses ‘independent directors’ in the citations from Clarke’s article. See also Velikonja (2014), at p. 882.

  57. Brudney (1982), at p. 632.

  58. Pan (2011), at p. 209.

  59. See Karmel (2013), at p. 791.

  60. Black (2001), at p. 5.

  61. Ibid., at p. 3.

  62. Jones and Welsh (2012).

  63. Ibid., at p. 347.

  64. See Pan (2011), at pp. 209–210.

  65. See Jones and Welsh (2012), at p. 347.

  66. Ibid.

  67. Sale (2006), at pp. 1378, 1382, 1384.

  68. Ibid., at p. 1378, footnote 14.

  69. See Armour et al. (2009), at p. 709. See also Black et al. (2006b), at pp. 11–12.

  70. See Brudney (1982) at p. 638.

  71. See Armour et al. (2009).

  72. Black et al. (2006a), at pp. 1064–1074.

  73. Securities and Exchange Commission, Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002 (24 January 2003), available at http://www.sec.gov/news/studies/sox704report.pdf (last visited on 2 February 2016), at pp. 1–3.

  74. See Sale (2006), at pp. 1377–1378.

  75. Quoted from Sale (2006), at p. 1378 (emphasis added by the author of the present article).

  76. Solomon (1978), at p. 585.

  77. Tung (2011), at p. 1190.

  78. Brown (1976), at p. 31.

  79. Fisch (1997), at pp. 280–281.

  80. Ibid., at p. 281.

  81. Karmel (2013), at pp. 789–790.

  82. Brudney (1982), at p. 633.

  83. Karmel (2013), at p. 790.

  84. Ringe (2013), at pp. 417–418.

  85. Brudney (1982), at p. 632.

  86. See, for example, Tung (2011), Hwang and Kim (2009), Fisch (1997), at p. 270.

  87. Because of antitrust or competitive constraints, the most informed outsiders may not be able to sit on a board. See Karmel (2013), at p. 790.

  88. See Brudney (1982), at p. 632.

  89. Ibid., at p. 638.

  90. See, e.g., Pistor and Xu (2003), at p. 77. Hamermesh (2006), at p. 1777.

  91. Zhang (2005), at p. 214.

  92. Goo and Carver (2008).

  93. See Clarke (2006b), at p. 1.

  94. See Lee (2007), at pp. 908–909.

  95. See Howson (2014), at p. 676.

  96. See Xu et al. (2013).

  97. See Howson (2014), at p. 697.

  98. See Huang (2013), at p. 794.

  99. See Karmel (2013), at p. 789.

  100. See Pan (2011), at p. 209.

  101. See Tung (2011), at p. 1185.

  102. When reviewing the cases, this study also found that in some cases the supervisors held the same secondary responsibilities for information disclosure misconduct as the independent directors (see, for example, CSRC Administrative Sanction Decision [2013] No. 61).

  103. See, for example, CSRC Administrative Sanction Decisions [2014] No. 76, [2014] No. 92, [2012] No. 18, [2012] No. 20, [2012] No. 29 and [2012] No. 42.

  104. Ramsay (1999), at p. 261.

  105. See Black et al. (2006b), at p. 6.

  106. Johanson and Østergren (2010).

  107. Baysinger and Butler (1984).

  108. See Gordon (2007), at pp. 1511–1515.

  109. Ibid., at pp. 1514–1515.

  110. See Gutiérrez and Sáez (2013), at pp. 70–71. Vo (2010), at p. 70.

  111. Bebchuk and Hamdani (2009), at pp. 1301–1304.

  112. See 303A.00, Introduction of List, NYSE Listed Company Manual.

  113. See Clarke (2006a), at p. 159.

  114. Ibid.

  115. However, Professor Ringe noted that, compared with other jurisdictions, ‘the US approach is mandatory in the sense that the NYSE listing authority will scrutinise their own criteria objectively’. See Ringe (2013), at p. 412.

  116. See Clarke (2007), at p. 83.

  117. Ibid.

  118. Ibid.

  119. See Xia and Fang (2005).

  120. See Tang et al. (2013), at p. 90, Cai (2009).

  121. See for example, Huang (2006), at p. 84; Jiang et al. (2008), at p. 2; Chen et al. (2009), at pp. 209–210, Berkman et al. (2009), Jiang et al. (2010), Ying and Wang (2013), Howson (2014).

  122. See Article 192 of Guidelines on Articles of Associations of Listed Companies (Shangshi gongsi zhangcheng zhiyi 上市公司章程指引) revised by the CSRC in 2014.

  123. See La Porta et al. (1999), at p. 511; Claessens et al. (2000).

  124. Tong (2004).

  125. Li (2004), at p. 73.

  126. Qiu (2007).

  127. See Clarke (2006a), at p. 210.

  128. See Tang (2015), at pp. 16–17.

  129. Li (2013), at pp. 567–576.

  130. Liu (2003), at p. 48.

  131. See Liao et al. (2009).

  132. See Ma and Khanna (2013).

  133. See the news reports at http://finance.sina.com.cn/nz/ldfengb/ (last visited on 2 February 2016).

  134. A typical example of this practice is available from a statement by independent directors, see http://stock.huagu.com/f10/000609/notices/6554689.html (last visited on 2 February 2016).

  135. See statement by the independent directors of Air China Limited (stock number 601111) on related party transactions at http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/CNSESH_STOCK/2015/2015-10/2015-10-30/2034726.PDF (last visited on 2 February 2016).

  136. See Karmel (2013), at p. 789.

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  1. Graduate School of Business and Law, RMIT University, Melbourne, VIC, Australia

    Wei Cai

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Cai, W. The Dilemmas of Independent Directors in China: An Empirical and Comparative Study. Eur Bus Org Law Rev 18, 123–154 (2017). https://doi.org/10.1007/s40804-017-0062-6

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