The survey also shows that more than 55% of the interviewed independent directors in Taiwan had personally known their own firm’s controlling shareholders, other directors or CEOs for more than ten years. In other words, more than half of the independent directors had personally known their own firm’s major corporate insiders for a long time before deciding to join the firm. Independent directors’ trust in major corporate insiders appears to have rested on a long-standing acquaintanceship or even friendship between them. It can be inferred from the interview results that independent directors’ strong personal trust in their own firm’s corporate insiders alleviates independent directors’ concerns about transparency and information asymmetry.
115 Interview No. 14 (Nov. 11, 2008), at 2. See also Interview No. 7 (Oct. 12, 2008), at 1 (“How do I decide whether to take on the position? The first thing is the integrity of the leader. If the leader or the management team always follows the rules, the job of the independent director becomes easier because the cost of monitoring isn’t high.”).
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If you doubt every report presented to you, the job of an independent director would be endless... I think that independent directors’ trust in the firm should rest on long-term personal familiarity with and trust in the integrity of the major corporate insiders. In addition, the company should perform well. On the basis of these two assumptions, independent directors can monitor [the company] and make reasonable judgments.
[116]The strong social ties between independent directors and controlling shareholders may be an inevitable result of introducing a new outside institution to a closed and dominated board because an independent director eventually needs the support of controlling shareholders in order to be elected. Yet the close personal relationships raise concerns over the impartiality and independence of the independent directors.
Firms also screen potential independent director candidates before nomination. A firm that believes in good corporate governance seeks independent directors who are truly independent and would help them to do their job satisfactorily by providing them with abundant resources. For example, Taiwan Semiconductor Manufacturing Company (TSMC) has searched for candidates in law firms and accounting firms, rather than candidates whom the executives know personally. TSMC places considerable value on candidates who are established in their respective fields of practice and have expertise that is helpful to the company. In contrast, a firm that only wants a window-dressing director looks for someone who is willing to be a rubber stamp for board decisions.
Except in a few large companies, most leaders of public companies in Taiwan seek independent directors with whom these leaders have personal relationships. As mentioned,
116 Interview No. 7 (Oct. 12, 2008), at 3.
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controlling shareholders seek suitable independent directors. There also exists information asymmetry between candidates and controlling shareholders about the qualification and integrity of independent director candidates. Guanxi has been an important source of reliable information in Chinese society. It is no surprise that controlling shareholders seeking to fill a vacant board position would first invite someone with whom they have already established guanxi.
Nevertheless, guanxi might compromise independence. Commentators in several Asian regions, such as China, India, South Korea and Taiwan, have cast doubt on the independence of independent directors.117Many of the independent directors in this region are nominated by controlling shareholders.118 Their close relationship with controlling shareholders is also definitely one of the major concerns:
In many companies, it is the controlling shareholders [, rather than an independent nomination committee,] who invite someone to be nominated as independent director. In addition, many of them maintain good relationships with the major shareholders and executives. They [the independent directors] might politely remind the management [of potential pitfalls] to a certain point. However, I think the role of these [independent] directors is limited.
[119]
117Hui-Hsin Wang &Guo-Dong Huang, Lai Yin-Zhao: DuliDongshiWeibiDuli [Independent Directors Are Not Necessarily Independent], JINGJIRIBAO [ECONOMIC DAILY], Feb. 5, 2007 (Taiwan),
http://pro.udnjob.com/mag2/fn/storypage.jsp?f_ART_ID=31087. Editorial,
WanshanShangshiGongsiDuliDongshiZhidu de Jianyi [Suggestions for the Institution of Independent Directors for Public Companies], ZHANGQUANSHIBAO [SECURITIES TIMES], April 18, 2009 (China),
http://news.cnyes.com/dspnewsS.asp?cls=listnews24hr&fi=\NEWSBASE\20090418\WEB357. D. Murali, Truly Independent Directors, A Rarity, THE HINDU BUSINESS LINE, Jan. 22, 2009 (India),
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B. China
a. Corporate Governance in China
The two most prominent corporate-governance issues in Chinese corporate governance are single-shareholder dominance (yigududa) and insider control (neiburenkongzhi).120 The ownership of Chinese listed companies is highly concentrated and the single most important dominant shareholder of listed companies is the state. Within the share-split mechanism, most state shares are not transferable. In 2008, the largest shareholders of over 63% of listed companies owned more than 50% of their respective companies’ shares, which means that in each of the 63% of listed companies, the largest shareholder had absolute control over the corresponding company. Among these largest shareholders, 89% were the state.121 In a survey of over 1,104 companies listed on the Shanghai and Shenzhen stock exchanges, the largest shareholder of each listed company on average owned 44.86% of shares and the second largest shareholder owned 8.22%. The average percentage of total shareholdings held by the first three largest shareholders was close to 60%.122
While the presence of a controlling shareholder reduces both the likelihood and the severity of managerial agency problems, it nevertheless suffers from private benefits agency problems, where controlling shareholders extract private benefits at a cost to minority shareholders.123 Dominant control wielded by a single shareholder can further exacerbate the
120YuanTan,JingjifaShiyexia de DuliDongshiZhiduWanshanYanjiu [Research on the Institution of Independent Directorsfrom the Perspective of Economic Law], HUAZHONGSHIFANGDAXUEXUEBAO (RENWENSHEHUIKEXUEBAN) [JOURNAL OF HUAZHONG NORMAL UNIVERSITY (HUMANITIES AND SOCIAL SCIENCES)], No. 3, 2011, at 18 (2011).
121Shaolong Jiang, ChurangGuoyouguyingJianguGefangLiyi [Interest Balances in the Sale of State Shares], ZhengquanShibao [Securities Times], Apr. 17, 2008, available at
http://www.cnetnews.com.cn/2008/0417/819760.shtml (last visited Sept. 20, 2012).
122 Ying Chen, Research on the Independent Director Institution in China, 2005(7)
ZHONGYANGCAIJINGDAXUEXUEBAO [JOURNAL OF CENTRAL UNIVERSITY OF FINANCE&ECONOMICS]55, 58 (2005).
123See Ronald J. Gilson & Jeffrey N. Gordon, Controlling Controlling Shareholders, 152 U.PA.L.REV. 785, 785-86
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problem of “private benefits of control.” Having the state as the largest shareholder further complicates the problem. The prominent issue of insider control is related to the “private benefits of control” problem in China, where Chinese listed companies suffer harshly from the problem under the country’s extremely distorted ownership structure, which allows for inefficient monitoring control by the country’s single largest shareholder, the state.124 With dominant control, insiders could easily siphon out corporate assets and resources through related party transactions or other means.125
b. The Reform
Introducing the institution of Independent directors to the boards of Chinese listed companies is one of the major regulatory measures that the Chinese government has taken to address single-shareholder dominance and insider control. On August 16, 2001, the CSRC issued its Guidance Opinion on the Establishment of an Independent Director System in Listed
Companies (the “CSRC Independent Director Opinion”), which is the most comprehensive
regulatory measure taken by the Chinese government so far regarding its imposition of independent directors on listed companies. According to the CSRC Independent Director Opinion, all listed companies were required to have at least two independent directors by June 30, 2002 and such directors were to constitute at least one-third of each board by June 30, 2003.126 The CSRC further provides detailed regulation of the qualifications, independence, nomination,(2003).
124 Wen-Chieh Wang, Corporate Governance of China Listed Companies under Share Splitting: An Examination of Controlling Shareholders, 122 CHENGCHI L.REV. 201, 219-220 (2011).
125Clarke, supra note2, at 147-148.
126China Securities Regulatory Commission, GuanyuZaiShangshiGongsiJianliDuli
DongshiZhidu de ZhidaoYijian [Guidance Opinions on the Establishment of an Independent
Director System for Listed Companies] art. 1(3), issued Aug. 16, 2001 [hereinafter CSRC Independent
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election, obligations, and responsibilities of independent directors.
Following the CSRC Independent Director Opinion, the CSRC issued several regulatory rules guiding the operation of the independent-director mechanism in Chinese listed companies.127 A 2005 amendment to the PRC Company Law formally stipulated that all listed companies should have independent directors on their boards.128 Although the 2005 amendment did not identify specific requirements and responsibilities of independent directors, it confirmed the requirement for independent directors in Chinese listed companies.129