Questions & Discussions
Prof. Ruyin HU
Director of Research Center
Shanghai Stock Exchange
Questions 1
Can independent non-executive directors
who do not have specific knowledge about the
company be really useful? How about those
directors who do not even have specific
knowledge about the business the company is
operating (industry-specific knowledge) or
directors who do not have business experience
at all?
Comments
APEC GUIDELINES FOR BOARDS OF DIRECTORS
Board responsibilities include :
1. Exercise leadership, enterprise and integrity in directing the corporation
towards sustained progress over the long term.
2. Act in the best interest of the corporation in a manner characterized by
transparency, accountability and fairness.
3. Install a process of selection to ensure a mix of competent directors, each
of whom can add value and contribute independent judgment to the
formulation of strategy and policy.
4. Determine the corporation’s purpose and values as well as its strategies
and general policies to ensure that it survives and thrives and its assets
and reputation are adequately protected.
5. Evaluate and monitor implementation of strategies and policies, business
plans and operating budgets as well as management’s over-all
performance.
6. Ensure that the corporation complies with all relevant laws, regulations
and codes of best business practice.
7. Ensure that the corporation communicates with shareholders and other
stakeholders accurately, effectively and sufficiently.
Comments
8. Serve the legitimate interests of all shareholders and render an
account to them regularly and fully.
9. Identify the corporation’s major stakeholders and formulate a clear
policy determining how the corporation should relate with them.
10. Put in place a system of checks and balances, which applies in the
first instance to the board, where power and authority are
properly distributed, and the process is free and open, with
sufficient and meaningful participation by independent, outside
directors.
11. Review regularly the effectiveness of internal control mechanisms
so that the decision-making capability and the integrity of
corporate operations and reporting systems are maintained at a
high level at all times.
12. Assess regularly its performance and effectiveness as a whole,
and that of the individual directors, including the chief executive
officer.
Comments
13. Appoint the chief executive officer and senior management, ensure
that their motivation, integrity, competence and professionalism
are maintained at a very high level, and put in place a professional
development program for employees and officers, and
succession planning particularly for senior management.
14. Provide for appropriate technology and systems that ensure for
the corporation a position as a strong and meaningful competitor.
15. Identify key risk areas and key performance indicators and monitor
these factors with due diligence.
16. In sum, provide strategic guidance to the corporation, decide on
major capital expenditures, and determine important policies that
bear on the character of the corporation with a view towards
ensuring its long-term viability and strength.
Comments
 Directors perform their duties diligently, both individually and collectively as a
board.
 Directors must act honestly and in good faith with a view to the best interests of the
corporation and apply care, diligence and skill in discharging their responsibilities.
 The core competencies of Directors(Hong Kong IOD):
Five groups of skills, knowledge and qualities have been identified as being
necessary for anyone serving or aspiring to serve as an effective Director:
Group 1:Corporate Business Functions(AT A STRATEGIC, RATHER THAN
OPERATIONAL, LEVEL )
Group 2:Power, Responsibility and Liability of the Board and the Individual
Director.
Group 3:Board Development and Boardroom Practice.
Group 4:Individual Attributes and Qualities.
Group 5:Business Ethics.
Comments
Group 1:Corporate Business Functions(AT A STRATEGIC,
RATHER THAN OPERATIONAL, LEVEL )
Strategic Planning:
1.1 Change management: vision of change and to align the company accordingly, downsizing or right-sizing, merger and acquisition, corporate restructuring, IPO, policy
development.
1.2 Monitoring and follow-through from strategic planning to implementation.
1.3 Managing performance: installing performance appraisals and instilling confidence.
1.4 Evaluation of results.
1.5 Contingency planning, risk management and crisis management.
Finance:
2.1 Interpretation of financial statements.
2.2 Evaluation and monitoring of the financial health of a business and identifying warning
signals.
2.3 Determining the level of details and frequency of reporting for effective direction.
2.4 Financing alternatives.
2.5 Business/project planning and appraisal.
Comments
Group 1:Corporate Business Functions(AT A
STRATEGIC, RATHER THAN OPERATIONAL,
LEVEL )
Organization and Human Resources:
3.1 Organization development, culture and structure.
3.2 Directing and motivating senior management.
3.3 Compensation tools.
3.4 Continued training and education.
3.5 Succession planning.
3.6 Evaluation of organization effectiveness and HR strategy.
Comments
The Code of Professional Conduct (UK IoD)
A Chartered Director ("director") shall:
Article 1 Exercise leadership, enterprise and judgement in directing the company so as
to achieve its continuing prosperity and act in the best interests of the company as a
whole.
Article 2 Follow the standards of good practice set out in the Institute's 'Good Practice
for Directors - Standards for the Board' and act accordingly and diligently.
Article 3 Serve the legitimate interests of the company’s shareholders.
Article 4 Exercise responsibilities to employees, customers, suppliers and other
relevant stakeholders, including the wider community.
Article 5 Comply with relevant laws, regulations and Codes of practice, refrain from
anti-competitive practices, and honour obligations and commitments.
Article 6 At all times have a duty to respect the truth and act honestly in his business
dealings and in the exercise of all his responsibilities as a director.
Comments
Article 7 Avoid conflict between his personal interests, or the
interests of any associated company or person, and his duties to
the company.
Article 8 Not make improper use of information acquired as a director
or disclose, or allow to be disclosed, information confidential to the
company.
Article 9 Not recklessly or maliciously injure the professional
reputation of another member of the Institute of Directors and not
engage in any practice detrimental to the reputation and interests
of the Institute or of the profession of director.
Article 10 Ensure that he keeps himself abreast of current good
practice.
Article 11 Set high personal standards by keeping aware of and
adhering to this Code, both in the spirit and in the letter, and
promoting it to other directors.
Article 12 Apply the principles of this Code appropriately when acting
as a director of a non-commercial organisation.
Comments
 Directors,including non-executive directors as well as executive
directors, are impossible to be omniscient and omnipotent( not allrounders),but each of them can be an expert in a specific area.
 They should communicate,collaborate and complement each other
in order to make a well-functioning board.
 To be fully competent,all directors should be properly trained from
the very beginning of becoming a director. Furthermore,a
continuing director development program is definitely necessary.
 The board should consider consulting outside advisors in
appropriate circumstances, particularly whenever the corporation
proposes a major transaction such as an acquisition, divestiture,
reorganization or financing.
Comments
 The main role of non-executive directors is to provide
independent judgement and outside experience and
objectivity on all issues which come before the board.
 Independent directors are perceived to be in a better
position than inside directors to make objective
decisions and to assess management
recommendations because they have less personal
interest in those decisions and recommendations.
Comments
Independent directors shall have the qualifications required to
perform their duties
An independent director shall meet the following basic requirements:
1. With qualifications required to be a director of listed companies according
to laws and regulations;
2. Meet the independence requirements as stated in the Guidelines;
3. With basic knowledge on the operation of listed companies and familiar
with the relevant laws and regulations;
4. With more than five years' work experience in law, economics or other
fields required by his or her performance of the duties of an independent
director;
5. Other requirements set forth in the articles of association.
——CSRC,2001, “Guidelines for Introducing Independent
Directors to the Board of Directors of Listed Companies .”
Comments
 In practice,corporations look for a number of qualities in
their independent directors. Experience and judgment
are foremost among those qualities. Independent
directors are often successful business people, with
experience either spanning a number of industries or in
an area relevant to the corporation. They may also be
from government, politics or academia, depending on
the needs and interests of the corporation. Although
directors are not expected to have the necessary
expertise to directly manage the business themselves, it
is important that some, if not most, have some
background in the issues which face the corporation.
Comments
 Non-executive directors should acquire and maintain a
sufficiently detailed knowledge of the company’s
business activities and on-going performance to enable
them to make informed decisions on the issues before
the board. At the same time they should recognize the
division between the board and management and
ordinarily not become involved in management issues
or in managing the implementation of board policy.
 The information must be detailed enough to give the director the
complete picture, but not so detailed that the director cannot absorb it.
The information must be provided far enough in advance of board
meetings to allow the director time to review and consider it.
Comments
 As an important element for new directors, the TSE Corporate
Governance Committee recommended that every corporation
provide an orientation and education program for new recruits to
the board. Such a program could be a one- or two-day event which
would familiarize the director with the nature of the business,
current issues within the company, the corporation’s strategy, the
company’s expectations concerning input from directors, and
directors’ general responsibilities. The Committee suggested that
such a program should also include the opportunity to discuss with
experts a director’s responsibilities and those of the board as a
whole, as well as the opportunity to visit facilities and to meet with
corporate officers in order to develop a better appreciation for the
business. The Committee was of the view that these measures
would allow directors to contribute effectively from the outset of
their appointment.
Comments
At a minimum, lessons we have learnt in the past 12 months include:
• Business structures and transactions can be highly complex, and their purpose not always readily
apparent. However, Directors must understand their company, its structure, activities, and the risks
associated with those activities.
• Management, Boards of Directors and the Audit Committee should determine whether internal
controls are appropriate to achieve the company’s operating, financial reporting, and compliance
objectives. The control environment needs to be conducive to effective operation of control
activities, and risks should be identified and managed within the context of an enterprise-wide risk
management process.
• Audit Committees are now seen as key to effective corporate governance. However the
implementation of ‘best practice’ recommendations for Audit Committees must be done rigorously
and with continual review.
• A common failure of organisations is a lack of communication between the key players in the
corporate governance process: the board, the audit committee, internal audit, management and
the external auditors. Within these groups is the means to address and resolve the major risks
facing an organisation; however without regular discussion of risks, review of internal audit
reports, discussions with the external auditors, this knowledge will not ultimately be passed to
the Board.
This publication’s aim is to focus directors’ attention on how they can perform their duties in
accordance with New Zealand’s legal requirements and the Institute of Director’s standards. This
is achieved by asking questions about themselves and the role and activities they perform, or
intend to play, in their companies.
Comments
Some conclusions:
1.A proper structure of the board is very important.Each nonexecutive director should be an expert in a relevant area,and at
the same time they shall have the minimum qualifications
required to perform their duties.
2. An orientation and education program for new recruits
to the board and a continuing director development
program are necessary.
3.It is an ideal situation that every non-executive director
can acquire and maintain a sufficiently detailed
knowledge of the company’s business activities and
on-going performance to enable them to make
informed decisions on the issues before the board.