Questions

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Questions DiscussionsProf. Ruyin HUDirector
of Research CenterShanghai Stock Exchange
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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?
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Comments

• APEC GUIDELINES FOR BOARDS OF DIRECTORS
• Board responsibilities include
• Exercise leadership, enterprise and integrity in
  directing the corporation towards sustained
  progress over the long term.
• Act in the best interest of the corporation in a
  manner characterized by transparency,
  accountability and fairness.
• 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.
• Determine the corporations 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.
• Evaluate and monitor implementation of strategies
  and policies, business plans and operating
  budgets as well as managements over-all
  performance.
• Ensure that the corporation complies with all
  relevant laws, regulations and codes of best
  business practice.
• Ensure that the corporation communicates with
  shareholders and other stakeholders accurately,
  effectively and sufficiently.

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• 8. Serve the legitimate interests of all
  shareholders and render an account to them
  regularly and fully.
• 9. Identify the corporations 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.

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• 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.

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• 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 1Corporate Business Functions(AT A
  STRATEGIC, RATHER THAN OPERATIONAL, LEVEL )
• Group 2Power, Responsibility and Liability of
  the Board and the Individual Director.
• Group 3Board Development and Boardroom Practice.
• Group 4Individual Attributes and Qualities.
• Group 5Business Ethics.

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• Group 1Corporate Business Functions(AT A
  STRATEGIC, RATHER THAN OPERATIONAL, LEVEL )
•   Strategic Planning
• 1.1 Change management vision of change and to
  align the company accordingly, down-sizing 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.

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• Group 1Corporate 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.

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• 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
  companys 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.

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• 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.

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Comments

• Directors,including non-executive directors as
  well as executive directors, are impossible to be
  omniscient and omnipotent( not all-rounders),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.

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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.

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• 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 .

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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.

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Comments

• Non-executive directors should acquire and
  maintain a sufficiently detailed knowledge of the
  companys 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.

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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 corporations strategy, the
  companys 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 directors
  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.

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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 companys
  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 publications aim is to focus directors
  attention on how they can perform their duties in
  accordance with New Zealands legal requirements
  and the Institute of Directors standards. This
  is achieved by asking questions about themselves
  and the role and activities they perform, or
  intend to play, in their companies.

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Comments

• Some conclusions
• 1.A proper structure of the board is very
  important.Each non-executive 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 companys
  business activities and on-going performance to
  enable them to make informed decisions on the
  issues before the board.