Chapter 1 Origin and Development of Independent Director System in US 1
Introduction 1
1．Background of initiating independent director system in US 2
1.1 From shareholder dominance to board of director dominance 2
1.2 From board of director dominance to managerial dominance 5
2．Expected function of independent director system in US 7
3．Adoption of independent director system in US 8
3.1 Regulatory rules'influence 8
3.2 Institutional shareholder activism 12
3.3 ALI Corporate Governance Project 14
3.4 Market participants'internal incentive 14
4．Effectiveness of independent director system in US 18
4.1 Positive views on effectiveness of independent director system 18
4.2 Negative views on effectiveness of independent director system 19
4.3 Other mechanisms'monitoring 20
5．Corporate scandals：failure of gatekeepers in corporate governance 21
5.1 Case of Enron's collapse 22
5.2 Case of Adelphia Communications 23
5.3 Case of Tyco International 24
5.4 Case of Global Crossing Ltd． 24
5.5 Case of World Com's bankruptcy 24
6．New rules after the ENRON collapse 25
6.1 Sarbanes-Oxley Act of 2002 25
6.2 New Stock Exchange Rules：NYSE（the New York Stock Exchange）and NASD（the National Association of Securities Dealers） 26
Summary 28
Chapter 2 Adoption of Independent Director System in China 32
Introduction 32
1．Shareholding structure in Chinese listed corporations 33
1.1 Transformation from State-owned enterprises to modern corporations 33
1.2 Shareholding structure in Chinese listed corporations 38
2．Motivation of introducing independent director system in China 40
2.1 Invalidity of board of supervisors 40
2.2 Exploitation of small shareholders by large shareholders 43
2.3 Influence from government 46
3．Expected role of independent director system in China 48
4．Regulations of independent director system in China 50
4.1 Process of introducing independent director system into China 50
4.2 Substantial rules of independent director system in China 55
5．Differences in rules regarding independent director system between China and the US 63
5.1 Different expected roles 64
5.2 Different requirements on proportion 65
5.3 Different definition of independence 66
5.4 Different requirement on committee structure 67
5.5 Different requirement on nomination 69
5.6 Necessity to reconcile independent director and board of supervisors 69
Summary 70
Chapter 3 Actual Effect of Independent Director System in China 73
Introduction 73
1．Appointment of independent directors in China 74
2．Nomination of independent directors in China 77
3．Composition of independent directors in China 78
4．Participation of independent directors in China 80
5．Working environment of independent directors in China 83
6．Replacement of independent directors in China 85
7．Link between independent directors and corporate performance 86
8．Two cases about independent directors in China 87
Summary 94
Chapter 4 Inherent Weaknesses of Independent Director System 98
Introduction 98
1．Rationale in independent director system 99
2．Competence problem in independent director system 100
2.1 Delimitation of“independence” 100
2.2 Capacity and nomination of independent director 109
2.3 Tenure and proportion of independent director 114
3．Incentive problem in independent director system 117
3.1 Compensation of independent director 117
3.2 Duties and liabilities of independent director 138
3.3 Concern for reputation 154
Summary 154
Chapter 5 Board of Supervision vs.Independent Director System 160
Introduction 160
1．Analysis of Board of Supervision in Germany 160
1.1 Arrangement of Board of Supervision in Germany 160
1.2 Analysis of Board of Supervision 161
1.3 Marked traits of board of supervision in Germany 168
2．Appraisal of Board of Supervision in Germany 170
2.1 The merits of board of supervision 170
2.2 The weakness of board of supervision 174
3．Comparison between the two internal monitoring systems in Germany and US 181
3.1 Structural differences in the two internal monitoring systems 181
3.2 Endogenetic differences derived from the local forces 183
3.3 Special concerns on efficiency of internal control 187
4．Trend of functional convergence 190
4.1 Evidence of convergence from American side 191
4.2 Evidence of convergence from German side 193
Summary 197
Chapter 6 Coexistence of Two Internal Monitoring Systems in One Company 200
Introduction 200
1．Different opinions on the coexistence of two internal monitors 201
2．Arguments for supporting coexistence of two internal monitors 202
3．Coexistence causes conflicts in regulation 205
3.1 Overlapped powers and duties between board of supervisors and independent directors under Chinese regulations 205
3.2 Conflicting legal status of independent director system and board of supervisors 209
4．Coexistence causes conflicts in practice 212
4.1 Overlapped role of independent director system and board of supervisors in practical view 212
4.2 Functional similarity between independent director system and board of supervisors 213
4.3 Criticism on certain proposals 218
4.4 Competition for power on oversight 221
4.5 Weakening of actual effect on oversight 222
4.6 Free-riding problem 222
4.7 Increased cost for the company 224
4.8 Cost and benefit analysis 224
Summary 227
Chapter 7 Mandatory approach or Optional approach 229
Introduction 229
1．Different approaches to implementing independent director system 230
1.1 Mandatory approach 230
1.2 Recommendatory approach 231
1.3 Optional approach—a hybrid solution 234
2．Government regulation theory and market-oriented theory 235
2.1 Government regulation theory 236
2.2 Contractual or market-oriented theory 238
3．Appraisal of mandatory approach 240
3.1 The values of mandatory approach 240
3.2 Problems with mandatory approach 242
4．Appraisal of recommendatory approach 248
4.1 Advantages of recommendatory approach 248
4.2 Disadvantages of recommendatory approach 249
5．Evidence from Japanese experience 251
5.1 Amendment of Japanese Commercial Code in 2002 251
5.2 Actual effect ofthe amendment in 2002 257
5.3 Indications from Japanese experience 270
6．Values of optional approach 273
6.1 Overcome the detriments of mandatory approach 273
6.2 Overcome the detriments of recommendatory approach 274
6.3 Provide competition among corporate governance rules 275
Summary 276
Chapter 8 Which Approach is Suitable for China 278
Introduction 278
1．Chinese market needs governmental intervention 278
1.1 Lack of mature free market in China 278
1.2 Special concern on protecting minority shareholders 280
2．Improper to mandate independent director system in China 281
2.1 Inherent problems in the independent director system 281
2.2 Problems with“transplant effect” 281
2.3 Doubts on best practice debate 287
2.4 Weakness of mandatory rules 289
2.5 A one-size-fits-all approach is both costly and unnecessary 290
3．Suitable and feasible for China to make independent director system optional 292
3.1 Wasteful to abandon the independent director system in China 293
3.2 Improper to mandate the coexistence of independent director system and supervisory board system in one company 298
3.3 Feasible to make independent director system optional 300
Conclusion 305
Bibliography 312