What Does an Independent Director Do?

Independent directors are directors who are independent of the company's shareholders and who do not hold positions within the company, have no significant business or professional contact with the company or the company's operating managers, and make independent judgments on company affairs. The China Securities Regulatory Commission stated in the "Guiding Opinions on Establishing an Independent Director System in Listed Companies" (hereinafter referred to as the "Guiding Opinions of the Securities and Futures Commission"): "Independent directors of listed companies are those who do not hold positions other than directors in listed companies, and There are no directors with whom the listed company and its major shareholders are engaged that may prevent them from making independent and objective judgments. " ^[1]

Independent director

Independent director agency cost theory

After the company grows, it will inevitably face the separation of business ownership and management right. How to ensure that the operator does not deviate from the owner's goals, reduce the agency risk of the enterprise, and control the agency cost has become a very important issue in corporate governance. The theory holds that the reduction of agency costs will inevitably increase the efficiency of management and management, and at the same time prevent the problem of insider control. Therefore, it is hoped that by establishing an independent director system, operators will be changed.

(1) Independent directors of a listed company are those directors who do not hold any position other than directors in the company and do not have a relationship with the listed company and its major shareholders that may be employed to prevent them from making independent and objective judgments.

(2) Independent directors have the obligation to be honest and diligent to listed companies and all shareholders. Independent directors shall perform their duties conscientiously and safeguard the overall interests of the company in accordance with the requirements of relevant laws and regulations, this guidance and the articles of association of the company, and shall pay special attention to the legitimate rights and interests of small and medium shareholders not to be damaged. Independent directors shall perform their duties independently and shall not be affected by the major shareholders and actual controllers of listed companies, or other entities or individuals with a stake in listed companies. In principle, independent directors can concurrently serve as independent directors in up to five listed companies, and ensure that sufficient time and energy are effectively performed as independent directors.

(3) Each domestic listed company shall amend the articles of association in accordance with the requirements of the guidance, and hire appropriate personnel to serve as independent directors, including at least one accounting professional (accounting professionals refer to those with senior titles or qualifications as certified public accountants). Before June 30, 2002, the board of directors should include at least two independent directors; before June 30, 2003, the board of directors of listed companies should include at least one third of independent directors.

(4) When the independent directors do not meet the conditions of independence or are unsuitable to perform the duties of independent directors, which causes the number of independent directors of a listed company to fall short of the number required by the Guiding Opinions of the Securities Regulatory Commission of the Securities and Futures Commission, the listed company The number of independent directors shall be made up as required.

(5) Independent directors and persons who intend to serve as independent directors shall participate in the training organized by the CSRC and its authorized institutions in accordance with the requirements of the CSRC.

Independent directors can objectively supervise managers, safeguard the rights and interests of small and medium shareholders, and prevent insider control. Based on this consideration, in 1978, the New York Stock Exchange stipulated that all listed companies must have independent directors. Since then, many countries have followed suit and established independent director systems to improve corporate governance. When conflicts of interest occur between shareholders and management, independent directors stand in the position of small and medium shareholders and question, criticize and advise management. In extraordinary times, such as company mergers, restructurings, bankruptcies, and more, shareholders trust independent directors and are willing to listen to them. Their opinions have also become a hot topic, and they have been chased by the media. ^[5]

(1) A listed company shall ensure that independent directors enjoy the same rights as other directors.

Status and Problems of Independent Directors in China:

(I) The independence of independent directors is not strong

Since China's independent directors are nominated by the board of directors and elected by the shareholders' meeting, the controlling shareholders can fully use their own equity advantages to manipulate the selection of independent directors and choose people they know to enter the board of directors. Therefore, the independence of independent directors is difficult. It is inevitable to be guaranteed to become a director of human relationships. In addition, most of China's independent directors are experts and scholars in economic management. Although these people have a high theoretical level in economics and finance, they are not as familiar with the actual situation of the company's operating process as entrepreneurs such as directors and managers. With high sensitivity. Therefore, it is not realistic to expect that it can help the company's business decisions much.

(2) The organizational structure of independent directors is not sound

The role of independent directors needs to be fully played out to improve its organizational structure, especially the audit committee, nomination committee and remuneration committee under the board of directors. In listed companies in the UK, these three institutions are mandatory for the board of directors, and all or most of them are composed of independent directors. They are the basic conditions for independent directors to play a role. In China, these institutions are not mandatory for the board of directors. Whether to establish them or not is up to the company to decide on its own. Without these supporting institutions as guarantees, the role of independent directors is difficult to achieve. In addition, the lower limit for the number of independent directors in Chinese legislation is three, which appears too few on the board of directors of listed companies. The lack of advantages in numbers is also one of the reasons why independent directors have difficulty playing a role.

(3) Low actual status of independent directors

Although independent directors are also directors, they are still outsiders compared with the company's controlling shareholders and ordinary directors and other senior personnel. Therefore, their own status is subject to certain exclusions. In addition, the legal protection of independent directors' rights to exercise is insufficient. In practice, independent directors are often subject to many obstacles in exercising their rights. In this case, the long-term enthusiasm of independent directors for exercising their rights will not be very high.

(IV) Insufficient incentive and protection mechanisms for independent directors

The SFC's "Guiding Opinions" only provides some principles for the incentive and protection mechanisms of independent directors, and independent directors are part-time jobs by people with their own jobs, which is difficult to stimulate the enthusiasm of independent directors. At the same time, with the improvement of shareholder derivative lawsuits and other systems, the possibility of independent directors being sued has greatly increased, which has made more and more people worry about serving as independent directors. ^[4]

(I) Standards for Improving the Independence of Independent Directors: The Guiding Opinions of the Securities and Futures Commission on the independence of independent directors

Comparison of Independent Director Systems in Chinese and American Companies:

(I) Comparison of macroeconomic backgrounds

1. Corporate governance in the United States adopts a unitary structure. There is no board of supervisors, and the internal supervision of the board of directors alone cannot achieve the effect of supervision. In order to improve the confidence of shareholders in long-term investment and the credibility of the board of directors, the establishment of independent directors becomes a need. Independent directors actually play the role of the supervisory board of Chinese company law in American companies, supervising the management. However, China's corporate governance adopts a dual system structure, and the board of supervisors is a traditional supervisory authority. It was just because of obstacles that it did not fully function.

2. The independent director system in the United States is based on the equity revolution. The shares of listed companies are extremely dispersed. Shareholders as institutional investors also hold up to 1% of shares in certain companies. Because the shareholding is scattered and there is no "one share" phenomenon, the will of a listed company is often the consensus of many shareholders; because all the shares are tradable, it is easy to realise and it is in a state of decline, so there are few Long-term stable stockholders; regardless of whether they are investors in the primary or secondary market, profit-oriented adjustments to the shareholding structure can form a market-based social evaluation mechanism and "vote with your feet" and " Equity check and balance mechanism combined with "voting by hand". In China, the shareholding structure of listed companies is excessively concentrated, the first largest shareholder has excessively infiltrated the board of directors, and the phenomenon of mixing with the listed company is more common. According to the survey, the largest shareholder in China's listed companies holds an absolute controlling position of 63%, of which 87% are state-owned shareholders. The purpose of introducing the independent director system is to solve the serious situation of insider control of listed companies, but the actual situation in China is the "insider control" of listed companies, which is actually the controlling shareholder's control. The state-owned shares are basically under administrative control and there is no established one. Given the market goals and profit targets, how the independent directors deal with such a strong administrative force and administrative mechanism is indeed a difficult problem.

3. The effective functioning of the independent director system in the United States is based on an obvious group advantage. Externally, there is a long-established manager market that, on the one hand, ensures the smooth selection of independent directors, on the other hand, market selection and market competition enable the formation and function of the reputation mechanism, and promote independent directors to be bound by these mechanisms. To perform its functions faithfully and discreetly, and serve the company diligently. Internally, independent directors have advantages in terms of number and voting rights, which enables independent directors to objectively express their wishes and play a supervisory role. However, the independent director system in China has just begun. The "Guiding Opinions" of the China Securities Regulatory Commission requires that listed companies must be in a disadvantaged group when the company s board of directors and shareholders general meeting and the board of directors have an equity advantage and a number of advantages before June 30, 2003. , It is difficult to effectively function.

(II) Comparison of micro-institutional design

From the "Supervisory Opinions" of the China Securities Regulatory Commission, China's independent director system is similar to the United States in terms of specific system design, but there are still some differences due to different national conditions and company practices.

1. Judging from the criteria for judging the independence of independent directors, the independence judgment stipulated in the "Guiding Opinions" of the China Securities Regulatory Commission favors the independence of independent directors in social relations, such as Article 3, paragraph 1, of the "Guiding Opinions" of the China Securities Regulatory Commission. 2, 3 items. Relevant rules in the United States have emphasized the independence of independent directors in the relationship of interests. For example, independent directors must not be senior employees of the company or have a significant transaction relationship with the company. This is precisely what the Securities and Futures Commission's "Guiding Opinions" lack. However, the CSRC's "Guiding Opinions" have two similar provisions, the company's articles of association may stipulate that persons who cannot become independent directors, and give the company certain autonomy. At the same time, the CSRC, as an auditing body, can exclude people who it considers unsuitable to be independent directors, which to a certain extent makes up for this shortcoming.

2. From the perspective of the exercise of the functions and powers of independent directors, the Guiding Opinions of the China Securities Regulatory Commission has given considerable powers to independent directors. This can be seen from Articles 5, 6, and 7 of the Guiding Opinions of the Securities and Futures Commission, but Whether independent directors can fully exercise their power is still unknown. The board of directors in the United States has a clear division of labor. The remuneration, nomination, and audit committees are common subcommittees of the board of directors. Independent directors constitute most or all of these committees, so independent directors can give full play to their role. The situation in China is just the opposite. Although Article 5 (4) of the Guiding Opinions of the China Securities Regulatory Commission stipulates that if a board of directors of a listed company has a remuneration, audit, and nomination committee, independent directors should occupy more than half of the committee In fact, the board of directors of a listed company has a very limited professional division of labor. Independent directors are also a vulnerable group in a listed company, and the prospects are excellent. Therefore, the exercise of the functions and functions of independent directors cannot rely solely on the improvement of the independent director system itself. The continuous development and improvement of the structure of listed companies in China is also an important factor.

In addition, the independent directors of American companies have also played an important role in consulting and consulting on the company's strategic planning and business development. In this regard, the "Guiding Opinions" of the China Securities Regulatory Commission did not provide for this. The author believes that this is a flaw. The role of independent directors should be described in the "Guiding Opinions" of the China Securities Regulatory Commission, and should not be limited to supervision. ^[7]