The Independent Director System in Chinese Boards

Abstract

The purpose of this paper is to show whether the newly instituted independent director system implemented by the CSRC (China Securities Regulatory Commission) which took into force in 2002 has fulfilled its original objective of stopping misdeeds of controlling shareholders. This mandatory requirement demands that at least one-third of the entire board of each listed firm in China be independent directors. As to the question of whether or not this newly installed independent director system has made a difference in improving the prevailing corporate structure of listed firms in China, there has been no definitive affirmative or negative response among experts on corporate governance regime of China. Against this background, this paper argues that for effective transplant and workings of the independent director system in the context of the state-controlling shareholding structure, two supplementary legal systems such as court active guidance and regulation of the standard of fiduciary duties and derivative suits need to be developed further. Notwithstanding the urgent need of these legal supplementary institutions, in light of gaping failures in ensuring that Chinese courts and judges cope with and work as an effective judicial institution in applying standard of corporate fiduciary duties and using the derivative action as a vehicle for fiduciary claims, thus suppressing and deterring the illegalities of controlling shareholders that harm listed companies, the independent director system appears to have fallen short of its stated objective.