Corporate Governance & Directors� Duties

							     Corporate Governance
       & Directors’ Duties

           刘 俊 海 教授
• Prof. Liu Junhai, School of Law,
• Renmin University of China (RUC)
• Director, RUC Business Law Center
    1.Three key points of the concept
       of Corporate Governance
•   1.1 Philosophy
•   2.1 Institutional arrangements
•   3.1 Commercial practice：
•   Scandal case of CAO, a listed corporation in
    Singapore;
•   Mr. Chen Jiulin’s salary of over 29 million CNY;
•   Risk control committee
•   Independent directors
•   Fine risk control manual
   2.Two factors of Good CG
• Good institutional arrangements：UK CG
  reports
• Good people: nice shareholders, nice
  directors and executives. French
  experience
• Good institutional arrangements & Good
  people are equally critical in China
       3. Value of good CG
• Foundation of core competitiveness
• Key to the corporate fortune
• CG premium indicated by Report of Baker
  & Mackenzie（2002）
• North American & West Europe ： 10%-
  12%
• South-East Asia：20%-22%
• Africa & East Europe：30-35%
   4. 3 “A”s+C problems in US
• Insider control in corporations with highly
  dispersed shareholding
• AUDIT COMMITTEE,
• ATTORNEY
• ACCOUNTANT
• CEO ：greedy, selfish, too self-confident
     5. CG problems in China
• Abuse of controlling power by paramount
  controlling shareholders
• Insider control in the pretext of controlling
  shareholder: wolf-tiger dialogue
• Weak incentive mechanisms & restraints
  on senior executives
• Lack of useful disclosure of information
• Insufficient protection of minority
  shareholder: telephone story of May 2003
    6. Characteristics of good CG
•   Transparency
•   Respect to shareholder value
•   Shareholder equality
•   Corporate social responsibility
•   Accountability
•   Democracy
               7. Transparency
• Broaden shareholder’s right to information: resolutions of
  board and general meeting of shareholders, name list of
  shareholders, financial reports, audit reports, books and
  records (Article 34(1));
• disclosure requirements to listed corporations (securities
  law);
• shareholders litigation against the misleading
  presentations;
• accountants’ liability for misleading audit reports
• Unresolved issues: usefulness, easy understanding and
  fairness
8. Respect of shareholder values (1)

• Securities market should serve not
  only as a vehicle for raising capital for
  issuers but also as a egg-laying
  goose for investors
• Governance powers shall be from the
  shareholders, for the shareholders, by
  the shareholders
 Respect of shareholder values (2)
• Encouraging Shareholder’s actions
  against legally defective resolutions of
  board & general meetings of shareholders
• Accumulative voting
• Shareholder activism: Funds for
  shareholders’ protection, proposal for
  shareholders’ association
 Respect of shareholder values (3)
• Encouraging Shareholder’s derivative
  actions against controlling shareholders,
  directors and other senior executives,
  Article 152
• Encouraging Shareholder’s direct actions
  against controlling shareholders, directors
  for safeguarding their own individual
  interests, Article 152
      9. Shareholder equality
• Protection of minority shareholders
• Pay special attention to the vulnerable
  groups is contrary to the idea of equality?
• formal equality v. substantial equality
10.Corporate social responsibility(1)
• Weak awareness of CSR among business
  community in the past
• Crisis of consumer relations in some
  corporations
• Certification of SA 8000 in China
• Forthcoming ISO 26000
                 CSR(2)
• Legal & ethical requirements of CSR,
  Article 5
• Employee representative on board of
  supervisors
• Discretion of the board to consider the
  interests of stakeholders
                 CSR(3)
• Increasing CSR reports and their defects
• CSR policy, including consumer policy
• Future business competition will be
  centered around the CSR reputation, and
  no longer the competition over talents, hi-
  tech or funds
• Market has eyes, law has teeth
           11.Accountability
• Clear difference of duties
• Clear liabilities for breach of the duties
• Clear and easy channels to hold the
  breaching party liable
           12. Democracy
• Similarity of economic democracy &
  political democracy
• Check and balance between and among
  the general meetings of shareholders, the
  board of directors and the board of
  supervisors
• Democracy does not necessarily mean
  freedom, therefore minority protection is
  still indispensable
   13. Golden key to good CG
• Due Process
• Legitimate and justified resolutions
14. Corporate governance structure
•   The general meetings of shareholders,
•   The board of directors
•   The board of supervisors
•   Chairman of board of directors
•    CEO
•   Independent directors
       15. Primacy of the general
       meetings of shareholders
• The background for the general meetings of
  shareholders to be considered the supreme decision-
  maker inside the corporation
• no authorized capital
• the allocation of the residual powers falling in between
  the general meetings of shareholders and the board of
  directors
• autonomy of the memorandum of incorporation
• the majority shareholders should influence the
  corporation via the general meetings of shareholders,
  and should not intervene the corporate management
  affairs
     16. The board of directors
• Inactivity of the board of directors in many
  corporations
• Advantages & disadvantages of active meetings
  of the board of directors
• Efficient dissemination of information between
  board members reduces the misunderstanding
• Correct and intelligent decisions
• Decentralization and transferring of legal risks
17. Powers of chairman of board of
            directors
• Chair the general meeting of shareholders
• Convene and chair the meetings of the
  board
• One-vote at the meetings of the board,
  exceptional double votes to break up the
  deadlock
• Supervise the performance of the
  resolutions of the board by the
  management
    Decentralization of the
 Chairman of board of directors
• No paramount leader in corporate board
• The legal validity of refusal to call and
  chair the board meetings by the chairman,
  Article 48
• Smart chairman could make himself
  number one person by proper exercise of
  his legitimate powers
  18. Independent directors (1)
• Minimum percentage: 1/3, or 1/2?
• Qualification: definition of independence
• Who appoint the independent directors? Is
  it possible to expect the independent
  directors to supervise the majority
  shareholders who have appointed them?
     Independent directors (2)
• Improving the supplying of information from the
  corporations: good idea of secretary of
  independent directors?
• Allowing independent directors’ shareholdings
  below 1% individually
• For whom the independent directors to be
  accountable:
• (1) corporate interest;
• (2) interest of minority shareholders;
• (3) interest of all stakeholders?
      Independent directors(3)
• Role of independent directors: monitor (majority
  shareholders & insiders) & advisor
• Special rules regarding independent directors in
  terms of duty of diligence
• Relations between independent directors and
  supervisors: one-tier system & two-tier system;
  optional model of France, Japan & Korea
• Communication between independent directors
  and minority shareholders
             19. CEO(1)
• agent of the corporation
• senior employee
• accountable for the whole management
  affairs
• sources of agency powers: legislation,
  memorandum of associations, board of
  directors
  CEO(2) Different Chairman and
              CEO?
• One powerful Chairman and CEO?
• Duty of CEO is to implement the board
  decision in collaboration with his
  management team
• Duty of Chairman is to make the board
  decision in collaboration with his fellow
  members
                 CEO(3)

• CEO should be able to take small decision
  as serious mission
• Chairman should be able to make tough
  decisions as easy as possible
• CEO should be focused on the near term
  management issues
• Chairman should be look beyond the long-
  term corporate decision
    20. Empowering the Board Of
           Supervisors
• Story of weak supervision and new legislation reform
• Impeach the directors or executives
• Convene and chair the general meetings of shareholders
• Make proposals to the general meetings of shareholders
• Take litigaitions against the directors and officers
• Employ the attorneys and CPAs to investigate the
  corporations at the expense of the corporation
     21. Increasingly active
     corporate control market
• Active corporate control market is helpful
  for the good CG
• CSRC   regulations   of   M&A   in   listed
  corporations
• Innumerable Anti-take over measures: white
  knight, unreasonable hard qualification for
  candidates of directors
• Fiduciary duties of board of directors in
  target corporations
  22. Do Institutional shareholders
      have a soul of good CG?
• Securities investment funds law of 2003
• Types of Institutional shareholders: insurance
  corporations, mutual funds management
  corporations and social security funds
• Rare cases for the funds management
  corporations to sue misleading presentation
  parties
• Active shareholders, or passive shareholders?
• Selfish shareholders, or socially accountable
  shareholders?
• Informal communication with the management
     23.FIDUCIARY DUTIES OF
           DIRECTORS
• Directors are considered as trustees
  of    the    corporation    and    its
  shareholders as a whole
• Chapter 6 has special requirements
  regarding the duties of the directors
               24. Article 148
• A director, supervisor, or the general manager
  shall abide by laws, administrative regulations
  and articles of association of the company and
  shall have the fiduciary and diligent duties to the
  company.
• A director, supervisor, or the senior officer may
  not abuse their authorities by accepting bribes or
  generating other illegal income, and may not
  convert company property.
 25. TWO FORMS OF FIDUCIRY
           DUTIES
• Duty of loyalty of directors and senior
  executives
• Duty of diligence of directors and senior
  executives
• Controversy of fiduciary duties of
  controlling shareholders towards the
  corporations and the shareholders as a
  whole
        26. Duty of loyalty (1)
• Article 149
• The director and senior officer:
• (1) may not misappropriate
  company funds;
• (2) may not deposit company
  assets into an account in his own
  name or in any other individual's
  name;
            Duty of loyalty (2)
• (3) may not loan company funds to other people
  or give company assets as security for the debt
  of any other individual without the approval of
  the shareholders meeting, general meeting of
  shareholders or the board of directors in
  violation of the articles of association;
• (4) may not execute any contract or engage in
  any transaction with the company in violation of
  the articles of association or without the approval
  of the shareholders meeting or the general
  meeting of shareholders;
           Duty of loyalty (3)
• (5) may not use the favorable conditions and
  conveniences to seek the business opportunities
  that shall belong to the company to engage in
  the same business as the company in which he
  serves as a director or the senior officer either
  for his own account or for any other person's
  account without the approval of the shareholders
  meeting or the general meeting of shareholders;
• (6) may not accept and possess the
  commissions paid by others for transactions
  conducted with the company; BRIBERY
       Duty of loyalty (4)

• (7) may not disclose company
  confidential information without
  authorization;
• (8) may not engage in other
  activities in violation of his
  fiduciary.
    27.DUTY OF DILLGENCE
• The test for diligence: Reasonable director
  test
• Adoption of business judgment rule
    28.Sanctions on the breaching
              directors
• Article 149(2): any profits realized by the
  breaching directors shall be deemed as
  corporate property
• Article 150: If a director, supervisor or the senior
  officer causes detriment to the company while
  performing his duties in violation of laws,
  administrative regulations or the articles of
  association, he shall be liable for the loss so
  caused. corporate claim against the breaching
  directors
• Corporate litigation V. actions
         Q&A


•Thanks！
•jhliu@cass.org.cn