Will the Independent Director Institution Work in China?(3)


Sibao Shen


V. A SPECIAL ISSUE: THE SUPERVISORY BOARD
The independent director institution is the legacy of common law countries, where corporations are usually controlled by boards of directors. In contrast, civil law countries, such as Germany and France, have developed a supervisory board institution. China has also adopted a model similar to that of civil law countries, where the board of directors is under the supervision of a supervisory board. Following the introduction of the independent director institution, China is among the few nations which have established both the independent director and supervisory board institutions. Some commentators argue that it is more cost-effective to choose between the two institutions because their oversight functions overlap.[124] Under the existing corporate law in China, however, a more effective way toward good corporate governance is to regard the supervisory board as a supplementary institution, rather than add the institution of independent director and to place all hope upon it.[125]
In China, however, the supervisory board institution did not function well from day one.[126] Supervisory boards have quite limited powers compared to their counterparts in Germany and France.[127] The supervisors in China are appointed by shareholders and recommended by employees. Their supervisory role is not "external[]" in nature.[128] Furthermore, under the current legal structure, the supervisory board does not have any substantial power. The board is unable to directly veto the decisions made by the board of directors and management.[129] As Gu states, "[f]or example, when directors or managers have done something that is not in their corporations, best interest, supervisors [can] only demand that they remedy the harm."[130] Furthermore, "[i]f this demand does not work, supervisors [can] propose to hold an interim shareholders, meeting and report the misconduct to shareholders."[131] The proposal to hold an interim shareholders, meeting, however, can be rejected, because the power to convene an interim shareholders, meeting is vested in the board of directors.[132] Moreover, Chinese supervisory boards do not have the power to dismiss directors, unlike the supervisory boards in Germany,[133] nor do they have the right to sue directors or management. #p#分页标题#e#
Most of the supervisory board members are trade union presidents and employees, representatives. In China, trade unions are not independent of corporations and not as powerful as their counterparts in western countries.[135] Instead, trade union presidents are employees of corporations and their stature within the corporation is low, while employee representatives are usually chosen from junior managers.[136] It is doubtful that such a supervisory board could challenge the decisions made by the boards of directors and senior management.
Since both the supervisory board and independent directors serve as mortitors, their role and function overlap, thereby increasing the cost of corporate operation. Some commentators thus argue that it is more cost-effective to choose between independent directors and supervisors.[137]
The CSRC also suggests that the supervisory board institution will eventually be replaced by the independent director institution.[138] However, the monitoring roles of independent directors and supervisors are distinct. Independent directors function during the decision-making process while supervisors play their roles after the decisions have been made. Independent directors work more closely with insiders while supervisors are more akin to outsiders. The independent director institution can co-exist with the supervisory board institution well if some improvements are made.
First, supervisory boards should consist of only independent supervisors. Only if supervisory boards maintain their independence can they play the monitoring role effectively.
Second, the relevant laws and regulations should clearly state the different powers and functions of supervisors and independent directors. For example, the supervisory board should be given the power to nominate independent directors. Supervisory boards should also have the power to sue directors or management if internal remedies are exhausted. The supervisory board institution may be able to remedy or at least alleviate the defects of the independent director institution. For example, to ensure the independence and qualifications of independent directors, independent supervisors should have the power to nominate or even appoint independent directors. To maintain the incentive of being an independent director, independent supervisors should have the power to set the compensation level and bring actions against independent directors if necessary. In this situation, the additional supervisory board institution will be like "adding wings to a tiger," and corporate governance will be substantially perfected. #p#分页标题#e#
Therefore, an effective method to improve corporate governance in China is to regard the supervisory board institution as a supplementary institution to the independent director institution. Ignoring this important matter and shifting the attention to the newly created independent director institution will give people a false image that the new independent director institution is a panacea to cure all the problems of corporate governance. Chinese regulators are missing the lessons as they hurry from creating one institution to another. Compared with the supervisory board institution, the independent director institution is not inherently better. The regulators need to get to the root of the problems, which include the irrational share structure and immature legal environment.
V. CONCLUSION
It is unrealistic to expect too much from independent directors. How much can outsiders--who devote a total of perhaps two weeks in a year to the corporation--uncover, particularly as they are selected by and their information mainly comes from controlling shareholders and the management whose performance they are supposed to be monitoring. A basic presumption of the independent director institution is that directors who keep some distance from controlling shareholders and management are better able to ask the right questions and evaluate the answers than those who are closer to the corporation. So long as independent directors do not actually manage the corporation, and so long as they rely on insiders for their information, it is unrealistic to expect that the independent director institution will necessarily lead to dramatic improvements in corporate governance.
An independent director is an important part of the corporate governance structure, but it does not complete it. To improve corporate governance in China, the independent director institution is only the first step. Also necessary are a fully developed market economy, a sound legal institution, and a fair judiciary, as well as a fine cultural environment for corporate governance. It is unrealistic to expect the independent director institution alone to solve all the corporate governance problems in China. #p#分页标题#e#
At present, the overly concentrated shareholding structure in listed corporations is one of the root causes of the corporate governance problem. To address this issue, the key appears to be eliminating, or at least decreasing, state ownership of listed corporations. Chinese regulators should first try to alter the imbalanced shareholding structure and proscribe insiders (i.e., controlling shareholders and their agents) from exerting disproportionate influences on the business of listed corporations. They should also impose fiduciary duties on those people in control. Only with this primary objective in mind can corporate governance in China be approached in the right direction. Another issue confronting listed corporate governance is the lack of efficient and effective judicial intervention. Legal mechanisms, such as derivative suits, appraisal rights, and class actions, are often the last line of defense for the interests of investors. They have undergone a long journey of development and have become meaningful choices and powerful weapons for investors in western countries. But they are still not viable options in China. It is necessary to formulate a sound legal institution for the independent director institution to wo


【Exprss】
[124]Lu,supra note9.
[125]See Gu, supra note 1,at 74.
[126]See id.
[127] Id. at 66-67.
[128]See CO. L. OFTHE P.R.C. (1993), art. 124, reprinted in LEGIS. AFFAIRS COMM'N OF THE STANDING COMM. OF THE NAT'L PEOPLE'S CONG., THE LAWS OF THE PEOPLE'S REPUBLIC OF CHINA 1993, at 296 (1995).
[129]See id. art. 126 (3), at 296.
[130]Gu, supra note 1, at 66.
[131] Id.
[132]See CO. L. OF THE P.R.C. (1993), arts. 47, 112, reprinted in LEGIS. AFFAIRS COMM'N OF THE STANDING COMM. OF THE NAT'L PEOPLE'S CONG., THE LAWS OF THE PEOPLE'S REPUBLIC OF CHINA 1993, at 279, 293 (1995).
[133]Gu, supra note 1, at 66.
[134]Gu, supra note 1, at 66.
[135]See generally Lei Jiang, Min Jian Shi You Shang Hui Cheng Yuan Sheng Xian Xi -Can Ye Ji Jin Ji Hua Shou Cuo [Disputes Arise Among Members of an Oil Trade Union -Plan for Accumulating Industrial Investment Fund ls Set Back], FIN. & ECON. TIMES (Dec.18, 2004), http://www.ce.cn/newhgjj/guonei/cyjj/200412/18/t20041218_2610520.shtml. #p#分页标题#e#
[136]See generally Dong Hu Gao )(in (600133) arian Shi Hui Huan Jiai De Jue Yi Gong Gao [Re-election Notice of the Supervisory Committee of Donghu Gaoxin], NEGOTIABLE SECURITIES TIMES (Jan. 13, 2005), http://finance.sina.com.cn/stock/shannounce/20050113/09081291106.shtml.
[137]Lu,supra note9.
[138]Guidelines for Introducing Directors, supra note 2.