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On August 6, 2001, the China Securities Regulatory Commission issued the Guiding Opinion on Establishing the Independent Director Institution in Listed Corporations. This landmark document formally established the independent director institution in China under which a minimum of one-third of each listed corporation's board members shall be independent directors. Despite insufficient practical and theoretical bases, many people hope the independent director institution will be a panacea to the corporate governance problems entangling chinese listed corporations. Independent directors first appeared in the United States to cure the corporate governance problems of public corporations, which have widely dispersed shareholders. Independent directors were created to monitor the integrity and performance of management in order to make public corporations a more effective wealth-maximizing instrument for shareholders and a more socially responsible instrument for the public. The rationale behind the independent director institution in China differs from that in the United States: the institution in China primarily targets controlling shareholders rather than management. Instead of dispersed share ownership, the ownership structure of listed corporations in china is highly concentrated. The major corporate governance problem is that controlling shareholders use their advantageous position positions to expropriate the assets of listed corporations to the detriment of minority shareholders. This Article argues that the importation of the independent director institution to China is an important step toward improving corporate governance. Unfortunately it is unrealistic to count on independent directors to completely prevent exploitation by controlling shareholders and management, especially when listed corporations have not yet solved their structuring problems, and China has yet to formulate a sound legal environment. Under these circumstances, the independent director institution in China cannot avoid the same defects existing in independent director institution in the United States: namely, an inability to monitor and a lack of independence and incentive to remain objective. This Article discusses the defects of the independent director institution and provides some suggestions for its improvement in China.


On August 6, 2001, the China Securities Regulatory Commission issued the Guiding Opinion on Establishing the Independent Director Institution in Listed Corporations. This landmark document formally established the independent director institution in China under which a minimum of one-third of each listed corporation's board members shall be independent directors. Despite insufficient practical and theoretical bases, many people hope the independent director institution will be a panacea to the corporate governance problems entangling chinese listed corporations. Independent directors first appeared in the United States to cure the corporate governance problems of public corporations, which have widely dispersed shareholders. Independent directors were created to monitor the integrity and performance of management in order to make public corporations a more effective wealth-maximizing instrument for shareholders and a more socially responsible instrument for the public. The rationale behind the independent director institution in China differs from that in the United States: the institution in China primarily targets controlling shareholders rather than management. Instead of dispersed share ownership, the ownership structure of listed corporations in china is highly concentrated. The major corporate governance problem is that controlling shareholders use their advantageous position positions to expropriate the assets of listed corporations to the detriment of minority shareholders. This Article argues that the importation of the independent director institution to China is an important step toward improving corporate governance. Unfortunately it is unrealistic to count on independent directors to completely prevent exploitation by controlling shareholders and management, especially when listed corporations have not yet solved their structuring problems, and China has yet to formulate a sound legal environment. Under these circumstances, the independent director institution in China cannot avoid the same defects existing in independent director institution in the United States: namely, an inability to monitor and a lack of independence and incentive to remain objective. This Article discusses the defects of the independent director institution and provides some suggestions for its improvement in China.