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Interests erode impartiality for independent directors

By Fu Weigang (Global Times)

07:27, June 01, 2012

According to regulations issued by the China Securities Regulatory Commission in 2001, all listed companies trading on the Chinese mainland's bourses are required to have an independent director; that is, an individual who possesses little or no financial interest in the company and thus can supposedly provide unbiased judgments and market-oriented strategies for the business.

Yet, as local media reports have recently uncovered, the majority of independent directors serve in several companies at the same time, which has aroused concern nationwide about their role in corporate governance.

The fact is, independent directors are often more of a liability than an asset for the firms they are meant to guide and the position should be better regulated, if not outright abolished, in order to protect the interests of shareholders and investors.

Supposedly, a company's independent director is chosen by its inside directors based on the candidate's expertise in business operations. In practice though, close relations with a company's board of directors and substantial shareholders usually play a much more important factor in recruiting an independent director rather than the individual's management skills.

Moreover, the annual sitting fees of independent directors are controlled by inside directors, who may be enticed to use financial compensation to sway the opinions of one who should be a disinterested party.

Even if an independent director can avoid the snares of undue monetary inducement, ironically, when it comes to making a decision for the company, the relevant information and data that would be needed to offer an informed opinion on a particular matter would be provided by the inside directors. In other words, inside directors with vested interests could easily pick and choose what to present to their independent director in order to stack the deck.

Complicating matters is the fact that many independent directors are often involved with several different companies at once. Of course, the real danger here is that independent directors could serve for two competing companies, presenting a clear conflict of interest and running counter to the goals of the position. The odds of this happening would naturally increase as independent directors spread themselves thin over a number of different firms.

At the very least, if independent directors take on responsibilities at multiple companies, this would reduce the time they have to spend studying operations at any enterprise.

Without better oversight as well as more effective regulations to promote objectivity and curb biased judgments, little stands in the way of independent directors pursuing their own interests, to the detriment of shareholders and the nation's securities market as a whole.

The article was compiled by Global Times reporter Wang Fei'er, based on an interview with Fu Weigang, a research fellow at the Shanghai Institute of Finance and Law.

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