China Tightens Regulation of Independent Director System

Image Source : China Visual

BEIJING, April 14 (TMTPOST) —— The General Office of the State Council issued the Notice on the Reform of the Independent Director System of Listed Companies on Friday in a bid to protect the interests of minority shareholders and secure a healthy stock market. 

The document proposes to speed up the formation of a more scientific independent director system of listed companies through reform. It’s going to promote independent directors’ powers to be in line with their responsibilities, optimize their functions to realize better supervision, and more scientific selection and management. The independent director system of listed companies will be used to improve the corporate governance system with Chinese characteristics, refine the enterprise supervision system, and promote the healthy and stable development of the capital market.

As an important institutional arrangement in the governance of listed companies, the independent director system will play the role of independent directors in decision-making, supervision, and consultation. It will reflect the Chinese characteristics and the characteristics of the development stage of the capital market, to establish an independent director system of listed companies in line with China’s national conditions. It’s important to balance the relationship between enterprises and coordinate the supply of institutions with the cultivation of the market. A problem-oriented approach will be adopted to form institutional norms and conduct supervision of independent directors to effectively solve the prominent problems that restrict the role of independent directors.

The responsibilities of independent directors will be defined to clarify the legal status and responsibility boundaries of independent directors in the governance of listed companies.  As members of the board of directors of listed companies, independent directors have obligations of loyalty and diligence to the listed companies and all shareholders. They need to provide decision-making, supervision and checks and balances, and professional consultation in the board of directors, to promote the better realization of the board’s functions of strategy setting, decision-making, and risk prevention, and give full play to the supervisory role of independent directors.

The way independent directors perform their duties will be optimized. Listed companies are encouraged to optimize the composition of the board of directors. Independent directors should account for more than one-third of the board of directors of listed companies, and external directors (including independent directors) should account for a majority of the board of directors of state-owned listed companies.

The management of independent directors should be strengthened. An independent director shall have the professional knowledge, work experience, and good personality to meet the requirements of independence, and shall not serve as an independent director if there is any interest relationship with the listed company and its main shareholders and actual controllers.

The system for selecting and appointing independent directors needs to be improved to optimize the nomination mechanism, support the nomination of independent directors by boards of directors, boards of supervisors, and qualified shareholders of listed companies, and encourage investor protection agencies and other entities to nominate independent directors through public solicitation of shareholders’ rights by the law. A nomination and withdrawal mechanism shall be established. The nominees of the listed company shall not nominate as independent director candidates who have an interesting relationship with them or other closely related personnel who may affect the independent performance of their duties.

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