Clear focus on supervision and balance in fulfilling duties, and new regulations for independent directors have been introduced! Establish a system for determining the qualifications of independent directors

The first major systemic reform of the independent director system in 22 years has officially been implemented.

On August 4th, the China Securities Regulatory Commission issued the "Management Measures for Independent Directors of Listed Companies", which will be officially implemented on September 4th.

The previous Kangmei Pharmaceutical case involving the accountability and compensation of independent directors has sparked a major discussion in the market about the independent director system, and the industry has also put forward many improvement suggestions. The introduction of this new regulation is precisely to provide systematic solutions to the long-standing problems of unclear positioning of independent directors, unequal distribution of rights, responsibilities, and benefits, insufficient supervision methods, and insufficient performance guarantee.

This round of reform will establish a system for determining the qualifications of independent directors, which will be reviewed by the securities exchange and strengthen the appointment management of independent directors. The China Association of Listed Companies will establish an information database to provide supplementary sources for independent director candidates.

The Measures have refined and clarified the responsibilities of independent directors, including participating in board decision-making, supervising potential major conflicts of interest, and providing professional advice for the company's business development. The second responsibility is the focus of their performance, which is also one of the most concerning aspects for market participants.

The reporter from First Financial News learned that during the period of soliciting opinions on the Measures, the China Securities Regulatory Commission received a total of 106 opinions and suggestions, among which some suggestions were made to clarify the scope of "potential major conflict matters". The latest rules have been revised to include 9 specific categories of matters.

Establish a qualification recognition system, and the exchange conducts prudent checks

The independent director system is crucial to the capital market, but it involves a wide range of interests and complex relationships. It is not easy to carry out systematic reforms and stimulate market constraints.

In 2001, the China Securities Regulatory Commission issued the Guiding Opinions on Establishing an Independent Director System in Listed Companies, requiring listed companies to establish an independent director system. The revised Company Law of 2005 stipulates at the legal level that listed companies should establish independent directors. After more than 20 years of operation, the General Office of the State Council issued the "Opinions on the Reform of the Independent Director System of Listed Companies" in April this year, marking the official launch of this round of reform of the independent director system.

This reform is the first major systemic reform of the independent director system in more than 20 years.

The revised and improved Measures mainly include five aspects. Firstly, clarify the qualifications and appointment and removal procedures for independent directors; Secondly, clarify the responsibilities and performance methods of independent directors; The third is to clarify the guarantee of job performance; Fourthly, clarify legal responsibilities; The fifth is to clarify the arrangements for the transition period.

Among them, in the selection process, the Measures refine the criteria for judging independence and make specific provisions on the professional knowledge, work experience, and good character required to serve as independent directors. Improve the selection system, optimize the independent director selection mechanism throughout the entire chain from nomination, qualification review, election, continuous management, dismissal, etc., establish nomination avoidance mechanism, independent director qualification recognition system, etc. Clearly define the requirement for independent directors to serve as part-time directors in a maximum of three domestic listed companies.

The reporter noticed that the "Measures" have very specific provisions on the criteria for judging independence, such as that personnel serving in listed companies or their affiliated enterprises, as well as their spouses, parents, children, and major social relationships, are not allowed to serve as independent directors of the company.

The "main social relationship" is also clearly defined, which refers to brothers and sisters, spouses of brothers and sisters, parents of spouses, brothers and sisters of spouses, spouses of children, parents of children's spouses, etc.

The selection and dismissal of an independent director are two key nodes in achieving independence.

This reform proposes to establish a system for determining the qualifications of independent directors, which will be carefully monitored by the exchange. Specifically, before the election of the shareholders' meeting, the securities exchange needs to review the candidates for independent directors, carefully judge whether they meet the qualifications for appointment, and have the right to raise objections. If the exchange raises objections, the listed company cannot submit to the general meeting of shareholders for election.

If a listed company wants to dismiss an independent director, it also faces certain constraints. Firstly, directors who do not meet the requirements for appointment or independence need to voluntarily suspend and resign. If they do not voluntarily resign, the listed company may dismiss them in accordance with regulations.

However, listed companies cannot dismiss employees at will. The dismissal of an independent director requires clear information disclosure to prevent listed companies from improperly dismissing an independent director and affecting their independent performance.

The reporter from First Financial News learned that the stock exchange will be responsible for determining the qualifications of independent directors. Moreover, due to the dynamic nature of independence, qualification review is required for every appointment. The China Association of Listed Companies will be responsible for building an information database as an important supplement to the resources of independent director candidates. The performance evaluation will also be the responsibility of the association, and how to establish mechanisms such as positive incentives and negative lists will be studied and promoted in the future.

In addition, the Measures also provide institutional guarantees for the performance of independent directors. For example, listed companies are required to provide necessary working conditions and personnel support for independent directors to fulfill their duties. At the same time, a sound relief mechanism for restricted performance of independent directors should be established. If independent directors encounter obstacles in their performance, they can explain the situation to the board of directors and request the cooperation of directors, senior management, etc. If the obstacles cannot be eliminated, they can report to the China Securities Regulatory Commission and the stock exchange.

Clarify the focus of performance and refine "major conflicts of interest"

The Measures clarify the three responsibilities of independent directors, with supervision and balance being the focus.

According to regulations, independent directors fulfill three responsibilities: participating in board decision-making, supervising potential major conflicts of interest, and providing professional advice for the company's business development. They can also exercise special powers such as independently hiring intermediary agencies.

At the same time, the new regulations focus on decision-making responsibilities, proposing relevant requirements for independent directors to participate in board meetings from pre meeting, during meeting, and post meeting stages. Clearly, independent directors supervise potential significant conflicts of interest through platforms such as independent director meetings and board committees. Independent directors are required to work on-site at the listed company for no less than 15 days per year, and work records should be made.

It is also clear that the focus of the independent director's performance is to "pay attention to potential significant conflicts of interest between the listed company and its controlling shareholders, actual controllers, directors, and senior management personnel.".

At the beginning of the publication of the draft for soliciting opinions, this content attracted market attention. During the solicitation of opinions, the China Securities Regulatory Commission also received relevant opinions and suggestions, which were studied and adopted by the Commission.

The latest Measures have a clearer scope of "potential major conflict matters" compared to the draft for soliciting opinions, listing 9 very specific categories of matters, which are specifically reflected in Articles 23, 26, 27, and 28.

For example, Article 23 stipulates that "the following matters shall be submitted to the board of directors for review after being approved by more than half of all independent directors of the listed company.". Including related party transactions that should be disclosed; Plans for listed companies and related parties to change or waive commitments; The decisions and measures taken by the board of directors of the acquired listed company regarding the acquisition; Other matters stipulated by laws, administrative regulations, provisions of the China Securities Regulatory Commission, and the company's articles of association.

Article 26 stipulates that "the audit committee of the board of directors of a listed company is responsible for reviewing the company's financial information, its disclosure, supervision, and evaluation of internal and external audit work and internal control. The following matters shall be submitted to the board of directors for review after being approved by more than half of all members of the audit committee.". Specifically, it includes disclosing financial information in financial accounting reports and periodic reports, as well as internal control evaluation reports; Hiring or dismissing accounting firms that undertake audit services for listed companies; Hiring or dismissing the financial manager of a listed company; Changes in accounting policies, estimates, or significant accounting errors due to reasons other than changes in accounting standards; Other matters stipulated by laws, administrative regulations, the China Securities Regulatory Commission, and the company's articles of association.

No more than 3 part-time jobs, with a transitional period of 1 year

The reform of the independent director system involves a wide range of aspects, not only involving more than 5000 listed companies, but also involving tens of thousands of independent directors.

The reporter from First Financial News learned that since the solicitation of opinions on the new regulations in April, the phenomenon of independent directors resigning from A-share listed companies has been similar to previous years, and the issue of concentrated resignations has not been particularly prominent. The total number of currently employed independent directors exceeds 10000, with most of them working part-time in less than 3 companies.

According to the reporter's understanding, during the consultation period, some opinions suggested that reducing the number of part-time independent directors from 5 to 3 would be too strict, and it was suggested to relax it. However, there were also suggestions to tighten it to 2. In the investigation conducted by the China Securities Regulatory Commission, some independent directors have reported that it is difficult to ensure time and energy when there are more than three part-time positions. From the actual situation, as of the end of 2022, nearly 80% of the number of independent directors holding part-time positions is 3 or less.

According to the arrangement, the Measures will officially come into effect on September 4th, and a transitional period of one year will be set up for the establishment of the board of directors and specialized committees of listed companies, the mechanism for special meetings of independent directors, the independence of independent directors, the conditions for appointment, the term of appointment, and the number of part-time positions. During the transition period, if the above matters are inconsistent with the Measures, they need to be gradually adjusted to comply with the regulations.

On August 4th, the China Securities Regulatory Commission announced that the next step will be to guide stock exchanges and the China Association of Listed Companies to establish and improve supporting mechanisms such as independent director qualification recognition, information database, and performance evaluation, increase training efforts, and guide various entities to master the new requirements of reform. At the same time, we will continue to strengthen the supervision of independent directors of listed companies, supervise and ensure that independent directors play their due roles.