Comments on Independent Directors
-------Frederick Luo

This article presents an introduction to recent developments associated with the use of independent directors in China. While the use of outside directors is becoming more prevalent in publicly-traded Chinese companies, PRC law is now catching up with how such directors should be used and governed.

Although the Company Law does not specially address this issue of independent directors, the Guidelines for Publicly-Listed Companies' Articles of Association (promulgated by the China Securities Regulatory Commission "CSRC" in December, 1997) suggests that publicly-listed companies may retain independent directors at their option, and makes further clarification for disqualification of independent directors as well. Also, in March of 1999, two other opinions regarding overseas publicly-listed companies were issued by the CSRC. These also allow for the retention of independent directors by overseas publicly-listed companies and also sets forth step for their disqualification, number and powers. Later in 2000, the draft Guidelines for Publicly-Listed Companies' Governing System, prepared by the Shanghai Securities Exchange, also provides details for the retention and/or disqualification of independent directors. The newest development in this area is the draft Guidelines regarding Establishment of Independent Director in Publicly-listed Companies released by CSRC on May 31, 2001, which sets forth detailed provisions regarding independent directors. Thus, even though the PRC Company Law does not address their use, on the basis of the above descriptions elsewhere in Chinese regulation it can be reasonably expected that independent directors may appear in more and more publicly-listed companies in the foreseeable future.

There are however, still several reasons that the use of independent directors should not be viewed too optimistically, at least yet.

First, there is the issue of independence. Since state-owned stock and state-owned enterprises hold significant percentages of most PRC publicly-listed companies, the election, removal and remuneration of independent directors rely primarily on the consent of the controlling shareholder. This can cast a shadow on the true independence of those elected as independent directors.

Secondly, there is still an absence of consistency in regulatory application. Disqualification clauses for independent directors are currently fragmented and sometimes conflicting, and not uniformly and thoroughly described in any single statute.

Thirdly, internal conflicts of interest have not all been eliminated. Some powers of independent directors currently overlap with other organizations within their companies. There still needs to be some careful design to avoid causing internal conflicts with supervisory boards and the chairman.

Finally, there are still liability questions. Due to the lack of detailed provision on the duty of care, duty of faith, and business judgment rules under the Chinese Company Law, the liability of independent directors is still somewhat unclear under China's legal system.

Thus, although the use of independent directors can bring positive influences to PRC companies, the practice is still young, leaving some areas that need to be worked out before the process is clear.