Reconsidering the Independent Director System in China: A Silver Lining Amidst Weaknesses?

Abstract

The independent director system in China has many weaknesses. Independent directors might not be truly independent, and they are not always equipped with the necessary information and expertise. The controlling shareholder ownership aggravates problems of the independent director system. Particularly, it is highly likely that the system based on rubber-stamp directors is used to justify corporate policies and transactions in favor of controlling shareholders. Nonetheless, independent directors in China can bring positive effects in society. Some of tainted proposals are screened out before corporate insiders submit to a formal board meeting, since independent directors sometimes raise objections during the informal session or private conversations (i.e., the “direct deterrence” of independent directors). Controlling shareholders, due to the concern of revealing negative information to a capital market and enforcement agencies, would not fully demand independent directors to approve egregious transactions (i.e., the “self-censorship” of a controlling shareholder). In this light, regulations on the business role of individuals with government/party or education experience should be carefully reviewed. On the one hand, these regulations can facilitate anti-corruption campaigns that the Chinese government currently pursues. On the other hand, there is no guarantee that alternative groups are more capable, independent, and ethical than the group with government/party or educational experience.