On April 14, 2023, the General Office of the State Council issued the “Opinions on Reforming the Independent Director System of Listed Companies” (hereinafter referred to as the “Opinions”). The Opinions point out that the independent director system, as an important part of the governance structure of listed companies, has played a positive role in promoting standardized company operations, protecting the legitimate rights and interests of minority investors, and facilitating the development of the capital market. However, as the comprehensive deepening of capital market reform advances, the existing system can no longer meet the inherent requirements for high-quality development of the capital market. The Opinions propose multiple reform measures targeting systemic issues in practice, such as unclear positioning of independent directors, imbalance of rights and responsibilities, insufficient supervisory means, and lack of guarantee for duty performance.

The Opinions explicitly require adherence to a systemic approach, balancing the relationships among various governance entities in the enterprise, coordinating institutional supply and market cultivation, ensuring interface between legislative, enforcement, and judicial aspects, and enhancing the systematic, holistic, and synergistic nature of the reform.

This article, based on legal practice in the capital market and corporate governance of listed companies, reviews and interprets relevant legal issues from the perspectives of legislation, enforcement, and judicature.

I. Specific Measures of the Opinions on Reforming the Independent Director System of Listed Companies

According to the Opinions, the fundamental positioning of the reform is to treat the independent director system as an important institutional arrangement for listed company governance, more effectively leveraging the independent directors’ roles in decision-making, supervision, and consultation. This reform requires institutional norms concerning the status, role, selection, management, and supervision of independent directors to effectively address prominent issues restricting independent directors from playing their role and enhance their supervisory effectiveness.

The Opinions propose reform measures in eight aspects, summarized as follows:

(I) Clarifying the Role and Positioning of Independent Directors

Systemic Issue to Address:

Unclear positioning of independent directors, ambiguous legal status and responsibility boundaries in listed company governance, and insufficient role in key areas that should be subject to supervision.

(Note: Financial fraud, major shareholders using related-party transactions to harm listed company interests remain prominent issues in China’s capital market)

Specific Measures to Improve the System:

1. As members of the board of directors of a listed company, independent directors owe duties of loyalty and diligence to the listed company and all shareholders, playing roles in decision-making participation, supervisory checks and balances, and professional consultation within the board, helping to better realize the board’s functions of setting strategy, making decisions, and preventing risks.

>> Interpretation: Clarifying the legal status and responsibility boundaries of independent directors in listed company governance.

2. More fully leverage the supervisory role of independent directors. Based on the characteristics of independence and professionalism, clarify that independent directors should pay special attention to matters involving potential significant conflicts of interest between the company and its controlling shareholders, de facto controllers, directors, and senior management (“conflict of interest matters”), focusing supervision on key areas such as related-party transactions, financial accounting reports, appointment and removal of directors and senior management, and compensation, to ensure board decisions align with the overall interests of the company, especially protecting the legitimate rights of minority shareholders.

3. Strengthen the supervisory duties of independent directors, setting strict performance requirements for independent directors reviewing potential significant conflict of interest matters.

>> Interpretation: The supervisory role is the core objective of the independent director system. Supervision focus is on matters involving potential significant conflicts of interest.

4. Promote the amendment of the Company Law to improve provisions related to independent directors.

>> Interpretation: Improving institutional supply.

(II) Strengthening Management of Independent Director Qualifications

Systemic Issue to Address:

Independence is a distinctive feature and the most basic qualification requirement for independent directors. However, there are currently shortcomings in the supervision and management of independent director qualification conditions and determination.

Specific Measures to Improve the System:

1. Independent directors should possess the necessary professional knowledge, work experience, and good personal character required to perform their duties.
2. Independent directors must meet independence requirements. Persons with interests such as family relationships, shareholding, positions, or significant business dealings with the listed company, its major shareholders, or de facto controllers shall not serve as independent directors.
3. Establish an independent director qualification determination system, clarify the requirements for application, review, and disclosure of independent director qualifications, prudently determine whether proposed independent directors of listed companies meet requirements, and securities regulatory authorities shall strengthen oversight of the qualification determination process.
4. State-owned assets regulatory authorities shall strengthen supervision of the selection and appointment management of independent directors in state-controlled listed companies.
5. Expand sources of outstanding independent directors, to meet market development needs, explore the establishment of an independent director information database, and encourage individuals with rich industry experience, enterprise management experience, and expertise in finance, accounting, law, etc., and with high reputation in their fields to serve as independent directors.
6. Formulate a code of professional ethics for independent directors, advocating that independent directors cultivate a professional image of integrity, fairness, independence, and active duty performance.
7. Enhance the targeting of independent director training, set minimum time requirements, and strengthen independent directors’ awareness of compliance.

(III) Improving the Selection and Appointment System for Independent Directors

Systemic Issue to Address:

Against the backdrop of concentrated ownership by major shareholders in Chinese listed companies and insufficient participation of minority shareholders in corporate governance, there exist “relationship directors” and varying quality among independent directors.

Specific Measures to Improve the System:

1. Optimize the nomination mechanism, support nominations of independent directors by the board of directors, board of supervisors, and qualified shareholders of listed companies, encourage investor protection institutions and other entities to nominate independent directors through the public solicitation of shareholder rights.
2. Establish a nomination recusal mechanism; nominators of listed companies shall not nominate persons who have interests with them or other closely related persons who may affect independent duty performance as independent director candidates.
3. The board’s nomination committee shall review the qualifications of candidates, and listed companies shall publicly disclose the qualifications of the nominator, the nominee, and the candidate prior to the shareholders’ meeting election.
4. Listed companies shall adopt cumulative voting for electing independent directors at shareholders’ meetings, encourage cumulative voting through competitive elections, and promote active exercise of shareholder rights by minority investors.
5. Establish a regular independent director independence testing mechanism, through self-inspection by the independent director, evaluation by the listed company, and public information disclosure, to ensure the independent director continues to perform duties independently without influence from the listed company, its major shareholders, or de facto controllers. If an independent director no longer meets independence requirements, the listed company shall immediately cease their duties and dismiss them in accordance with legal procedures.

(IV) Optimizing the Means of Performing Duties by Independent Directors

Systemic Issue to Address (1):

The key to independent directors playing a role is their external independent status. However, this identity characteristic leads to a lack of leverage within the company, no organizational support for performing duties, and often leaves them in the困境 of “fighting alone.”

Specific Measures to Improve the System:

1. Encourage listed companies to optimize the composition of their board of directors. Independent directors shall account for at least one-third of the board of directors of listed companies. In state-controlled listed companies, external directors (including independent directors) shall constitute the majority of the board.
2. Listed companies shall establish an audit committee, with all members being non-executive directors, with independent directors constituting the majority. The audit committee is responsible for reviewing the company’s financial information and its disclosure, supervising and evaluating internal and external audit work and the company’s internal control. Major matters such as financial accounting reports and their disclosure shall be pre-approved by the audit committee before submission to the board for consideration.
3. Gradually promote the establishment of nomination committees and compensation and assessment committees, with independent directors constituting the majority, in the boards of directors of listed companies, responsible for reviewing and making recommendations to the board on matters such as the appointment and removal of directors and senior management, and compensation.

>> Interpretation: Building an effective platform for independent directors to perform their duties, promoting the transition from individual duty performance to organization-based duty performance.

Systemic Issue to Address (2):

Currently, independent directors lack effective前置 review mechanisms. In a board structure where independent directors are not the majority, even if independent directors object, they cannot influence the final decision outcome, which hinders the提前 prevention of risks in key areas of the capital market.

Specific Measures to Improve the System:

1. Establish a dedicated meeting mechanism attended solely by independent directors. Matters involving potential significant conflicts of interest, such as related-party transactions, require pre-approval by a dedicated meeting of independent directors before submission to the board for consideration.
2. Improve information disclosure requirements for independent directors’ participation in board committees and dedicated meetings, enhancing the transparency of independent directors’ duty performance.
3. Improve the special powers of independent directors, promoting the reasonable exercise of powers such as independently engaging intermediary agencies and soliciting shareholder rights, to better fulfill supervisory duties.
4. Improve the communication and exchange mechanism between independent directors and minority investors.

>> Interpretation: Moving the supervisory checkpoint forward.

(V) Strengthening Guarantees for Independent Directors’ Duty Performance

Systemic Issue to Address:

Insufficient guarantees for independent directors to perform their duties.

Specific Measures to Improve the System:

1. Improve the guarantee mechanism for independent directors’ duty performance in listed companies. Listed companies shall provide necessary conditions for independent directors to perform their duties in terms of organization, personnel, resources, information, and funding, ensuring independent directors can fully perform their duties in accordance with the law.
2. Encourage listed companies to facilitate independent directors’ early participation in the research and论证 of major complex projects, promoting the effective integration of independent directors’ duty performance with the company’s internal decision-making process.
3. Clarify the responsibility of listed companies and related entities in guaranteeing independent directors’ duty performance, enrich the regulatory means of securities regulatory authorities, and strengthen supervision over listed companies and related entities that fail to cooperate with or obstruct independent directors’ duty performance.
4. Establish畅通 communication channels between independent directors and securities regulatory authorities and stock exchanges, and improve the relief mechanism for independent directors when their duty performance is受限.

>> Interpretation: The external identity characteristic of independent directors means they are not involved in daily operations and management, information asymmetry exists, and their duty performance depends on company cooperation and assistance. Necessary support and conditions should be provided to compensate for the limitations of independent directors’ external status.

5. Encourage listed companies to purchase director liability insurance for independent directors, support insurance companies in developing relevant liability insurance products that meet the needs of listed companies, and reduce the risks of independent directors’ normal duty performance.

>> Interpretation: Reducing risks of independent directors’ normal duty performance.

(VI) Strict Supervision and Management of Independent Directors’ Duty Performance

Systemic Issue to Address:

Insufficient supervisory means and incentive/constraint mechanisms for independent directors’ duty performance.

Specific Measures to Improve the System:

1. Strengthen and solidify the duty performance responsibility of independent directors, further regulate the daily duty performance of independent directors, clarify minimum working hours, require work records and periodic reports, determine a reasonable number of listed company positions an independent director may concurrently hold, and enhance independent directors’ investment in duty performance.
2. Securities regulatory authorities and stock exchanges shall strengthen supervision over independent directors’ duty performance through on-site inspections, off-site supervision, and self-regulation management, urging independent directors to be diligent and conscientious.
3. Leverage the role of self-regulatory organizations, continuously optimize self-management and services, and strengthen professional norms and support for independent directors’ duty performance.
4. Improve the independent director duty performance evaluation system, research and establish evaluation standards covering scientific decision-making, supervisory effectiveness, and contribution of suggestions. State-owned assets regulatory authorities shall strengthen tracking guidance for independent directors’ duty performance in state-controlled listed companies.
5. Establish a reputation incentive and constraint mechanism for independent directors, incorporate duty performance into the capital market integrity档案, promote the co-existence of positive incentives and negative warnings, and enhance independent directors’ professional identity and sense of honor.

>> Interpretation: Strengthening supervision, urging independent directors to diligently and conscientiously perform their duties.

(VII) Improving the Liability Constraint Mechanism for Independent Directors

Systemic Issue to Address:

Imbalance of rights, responsibilities, and interests for independent directors; incomplete liability system.

Specific Measures to Improve the System:

1. Adhere to “zero tolerance” in cracking down on securities violations, increase accountability for independent directors failing to perform their duties, and independent directors who do not diligently perform statutory duties, harming the company or shareholders’ legitimate rights and interests, shall be seriously held accountable according to law.
2. In accordance with the principle of matching rights, responsibilities, and interests, taking into account both the director status and external identity characteristics of independent directors, clarify that independent directors and non-independent directors bear shared but differentiated legal responsibilities. Based on directors’ statutory liability for company board resolutions and information disclosure, promote the targeted setting of standards for determining independent directors’ administrative and civil liability, reflecting proportionality of punishment and precise accountability.
3. Comprehensively assess factors including the independent director’s subjective fault, role in the decision-making process, channels for obtaining information, and measures taken to verify information, reasonably determine the form, proportion, and amount of independent directors’ civil compensation liability, achieving an organic unity of legal and social effects.
4. Promote amendments to relevant laws and regulations to build a complete independent director liability system.

(VIII) Improving Collaborative and Efficient Internal and External Oversight Systems

Systemic Issue to Address:

Incomplete internal and external oversight systems.

Specific Measures to Improve the System:

1. Establish and improve an internal oversight system coordinated with independent director supervision, forming an internal oversight mechanism for listed companies with comprehensive coverage, differentiated focus, and organic interaction among various types of supervision, comprehensively improving corporate governance.
2. Promote the accelerated establishment and improvement of law enforcement and judicial systems and mechanisms for strict crackdown on securities violations in accordance with the law, effectively leverage the supervisory role of securities service agencies and public opinion, forming a strong synergy of oversight over listed companies, their controlling shareholders, de facto controllers, and other entities.
3. Improve the oversight mechanism for state-owned enterprises with Chinese characteristics, promote the coordinated integration of disciplinary inspection supervision, inspection supervision, state-owned asset supervision, audit supervision, fiscal and accounting supervision, and social supervision, further improving the overall oversight efficiency of state-controlled listed companies.

>> Interpretation: Establishing a collaborative internal and external oversight system.

From the above reform measures, it can be seen that the Opinions confront prominent real-world issues and propose a series of comprehensive solutions.

II. Analysis of the Impact of Listed Company Independent Director Reform on Legislation

The Opinions have clearly stated that this reform aims to optimize the existing independent director system of listed companies and build an independent director system that suits China’s national conditions. Therefore, this reform will inevitably have a profound impact on institutional supply, including the legislative level.

(I) Promoting Amendments to Foundational Laws such as the Company Law

First, the Opinions explicitly require promoting amendments to the Company Law and other laws to improve provisions related to independent directors, clarifying fundamental legal provisions on the establishment and responsibilities of independent directors.

From the perspective of the Company Law itself, the currently effective Company Law in Article 122 provides for independent directors of listed companies: “Listed companies shall have independent directors. Specific measures shall be formulated by the State Council.”

China is currently in the process of revising the Company Law. The Company Law (Revised Draft for Second Review) (hereinafter referred to as the “Company Law Second Draft”)[2] modifies the above article of the current Company Law and adds other articles. Among them, Article 121 of the Company Law Second Draft provides: “A joint stock limited company may, in accordance with its articles of association, establish an audit committee within its board of directors… The audit committee mentioned in the preceding paragraph shall consist of at least three directors, with independent directors constituting the majority, and at least one independent director shall be an accounting professional. Independent directors shall not hold any other position in the company other than director, and shall not have any relationship with the company that may affect their independent and objective judgment.” Article 136 provides: “Listed companies shall have independent directors. Specific management measures shall be formulated by the securities regulatory authority of the State Council.”[3] Furthermore, Article 190 of the Company Law Second Draft improves provisions on director liability, clarifying that if a director causes damage to others during the performance of their duties, in addition to the company bearing compensation liability, the director shall also bear compensation liability if they acted with intent or gross negligence. Article 192 also provides for director liability insurance: “A company may purchase liability insurance for directors during their tenure to cover compensation liabilities arising from the performance of their company duties. After a company purchases or renews liability insurance for directors, the board of directors shall report the insured amount, coverage scope, and premium rate to the shareholders’ meeting.”

Even from these revisions alone, it is evident that the Company Law amendments will certainly respond to the legislative requirements of this reform.

(II) Promoting the Formulation and Amendment of Supporting Rules

Currently, in addition to the Company Law and the Securities Law, supporting rules under these laws and other regulations also contain provisions concerning independent directors of listed companies. These rules include, but are not limited to, the “Rules for Independent Directors of Listed Companies,” “Implementation Rules for Training of Independent Directors of Listed Companies,” “Guidelines for the Articles of Association of Listed Companies,” “Rules for Shareholders’ Meetings of Listed Companies,” “Interim Provisions on the Management of Public Solicitation of Shareholder Rights in Listed Companies,” and “Code of Corporate Governance for Listed Companies.”

Regarding this reform, the Opinions explicitly require the improvement of institutional supply, including: improving the independent director system of listed companies, formulating regulations on the supervision and administration of listed companies, and implementing institutional measures on the role positioning, selection and appointment management, duty performance methods, duty performance guarantees, and administrative supervision of independent directors. Improve supporting rules of securities regulatory authorities and stock exchanges,细化 specific requirements for each aspect of the independent director system of listed companies, and build a scientific, reasonable, and interconnected rule system. At the same time, the Opinions also require state-owned assets regulatory authorities, financial regulatory authorities, and other units and departments to coordinate the interface between the independent director system of listed companies and corporate governance regulations for state-controlled listed companies, financial listed companies, etc.

To implement the Opinions, the CSRC issued a notice on the same day the Opinions were published, soliciting public comments on the “Measures for the Administration of Independent Directors of Listed Companies (Exposure Draft).”

From the above, it is foreseeable that this reform will simultaneously promote the formulation and amendment of a series of supporting rules.

In summary, the reform of the independent director system of listed companies will have a significant impact on China’s future legislation and the formulation and improvement of supporting rules.

III. Analysis of the Impact of Listed Company Independent Director Reform on Administrative Enforcement

In terms of administrative enforcement, the currently effective Securities Law (2019 Revision) stipulates corresponding administrative legal liability for securities violations in Chapter 13.

From the content of the Opinions, the reform of the independent director system of listed companies may have the following impacts at the level of administrative supervision and enforcement:

(I) A More Robust Enforcement System for Combating Securities Violations

The eighth reform measure of the Opinions explicitly states the need to promote the accelerated establishment and improvement of law enforcement and judicial systems and mechanisms for strict crackdown on securities violations, forming a strong synergy of oversight over listed companies, their controlling shareholders, de facto controllers, and other entities. The CSRC’s recently issued “Measures for the Administration of Independent Directors of Listed Companies (Exposure Draft)” has already clearly stipulated supervisory measures and legal liabilities for independent directors of listed companies.

(II) Securities Regulatory Authorities May Strengthen Supervision over Independent Directors’ Duty Performance

The seventh reform measure of the Opinions explicitly states that securities regulatory authorities shall strengthen supervision over independent directors’ duty performance through on-site inspections, off-site supervision, and self-regulation management, urging independent directors to be diligent and conscientious.

(III) Determination of Independent Directors’ Administrative Liability Will Better Reflect the Principle of Matching Rights and Responsibilities

The Opinions require that, in accordance with the principle of matching rights, responsibilities, and interests, taking into account both the director status and external identity characteristics of independent directors, clarify that independent directors and non-independent directors bear shared but differentiated legal responsibilities. Based on directors’ statutory liability for company board resolutions and information disclosure, promote the targeted setting of standards for determining independent directors’ administrative liability, reflecting proportionality of punishment and precise accountability. In fact, the CSRC’s recently issued “Measures for the Administration of Independent Directors of Listed Companies (Exposure Draft)” has already reflected the spirit of matching rights and responsibilities.

In summary, the implementation of the Opinions should bring about changes at the level of administrative supervision and law enforcement.

IV. Analysis of the Impact of Listed Company Independent Director Reform on the Judiciary

In recent years, the issue of independent directors’ civil compensation liability in securities misrepresentation liability disputes has attracted significant attention. Especially after the Kangmei Pharmaceutical case, where independent directors were held jointly and severally liable, a wave of resignations by independent directors occurred, sparking热议 about their liability bearing.

(I) Review of Existing Provisions on Determining Independent Directors’ Compensation Liability

Existing systems provide for the circumstances and grounds for exemption of independent directors’ civil compensation liability. This article summarizes the main content of relevant legal provisions, judicial interpretations, and judicial documents as follows.

In 2016, the Supreme People’s Court, in its “Reply to Suggestion No. 6393 of the Fourth Session of the Twelfth National People’s Congress,” emphasized the trade-off between investor protection and capital formation. The Reply stated: “According to Articles 69 and 173 of the Securities Law[4], anyone who has played a role in the information disclosure documents shall bear legal liability for false information disclosure, and each infringer shall bear joint and several liability. … We believe … if the civil liability system overly favors investor protection, a harsh liability system may have a chilling effect on accountants, external directors, and independent directors, hindering capital formation. Therefore, fair liability allocation among defendants in securities infringement cases should reflect the legal policy of ‘each performing its own duties, distinguishing internal from external, proportionate punishment, and liability commensurate with assets,’ to achieve fairness in liability allocation among tortfeasors. In terms of system design, we must adhere to (balanced severity and leniency) the principle that liability matches the nature of the conduct and the degree of fault, preventing harsh or severe outcomes, and provide for defenses and exemptions.”

Article 85 of the Securities Law (2019 Revision) provides: “If an information disclosure obligor fails to disclose information as required, or if the securities issuance documents, periodic reports, interim reports, or other information disclosure materials announced contain false records, misleading statements, or major omissions, causing losses to investors in securities transactions, the information disclosure obligor shall bear compensation liability; directors and other personnel of the issuer shall bear joint and several compensation liability with the issuer, unless they can prove they have no fault.”

In July 2020, the Supreme People’s Court issued the “Minutes of the National Conference on the Trial of Bond Dispute Cases.” Article 27 explicitly states that directors may be exempted if they have no fault: “If the controlling shareholders, de facto controllers, directors, supervisors, senior management, or persons performing equivalent duties of the issuer have false records, misleading statements, or major omissions in the information disclosure documents they prepare or issue, sufficient to affect investors’ judgment of the issuer’s solvency, they shall bear joint and several compensation liability with the issuer for losses of bondholders and bond investors, unless they can prove they have no fault.” Article 28 further clarifies the method and standard for determining fault.

In January 2022, the Supreme People’s Court issued the “Several Provisions on the Trial of Civil Compensation Cases for False Statements in the Securities Market,” which further clarifies the standard for determining independent directors’ fault. If an independent director can prove any of the circumstances in Article 16(1) of this Provision, the people’s court shall determine that they have no fault.

From the above provisions, it can be seen that regarding securities misrepresentation liability disputes, the existing system provides for circumstances where independent directors shall bear joint and several compensation liability, but independent directors may be exempted if they have no fault.

(II) Impact of the Opinions on Determining Independent Directors’ Civil Liability

The implementation of the Opinions may have the following impacts on determining the civil liability of independent directors in securities misrepresentation liability disputes.

First, from a legal application perspective, the rule system for determining independent directors’ liability will be more complete.

The seventh measure of the Opinions requires improving the liability constraint mechanism for independent directors and promoting amendments to relevant laws and regulations to build a complete independent director liability system. In fact, as mentioned above, the ongoing revision of the Company Law and supporting rules has already responded to the requirements of this reform. Therefore, in terms of legal application, the rule system for determining independent directors’ liability is expected to be further improved.

Second, in terms of liability determination, accountability for independent directors’ failure to perform duties may increase.

The seventh reform measure of the Opinions has explicitly stated the need to “adhere to ‘zero tolerance’ in cracking down on securities violations, increase accountability for independent directors failing to perform their duties, and independent directors who do not diligently perform statutory duties, harming the company or shareholders’ legitimate rights and interests, shall be seriously held accountable according to law.” Therefore, it cannot be ruled out that at the judicial level, accountability for independent directors’ failure to perform duties may increase.

Finally, judicial practice should pay more attention to the principle of matching rights and responsibilities, pursuing proportional punishment and precise accountability.

On the one hand, the Opinions explicitly require that, in accordance with the principle of matching rights, responsibilities, and interests, taking into account both the director status and external identity characteristics of independent directors, clarify that independent directors and non-independent directors bear shared but differentiated legal responsibilities. Based on directors’ statutory liability for company board resolutions and information disclosure, promote the targeted setting of standards for determining independent directors’ civil liability, reflecting proportionality of punishment and precise accountability. On the other hand, the Opinions also explicitly require comprehensive assessment of factors including the independent director’s subjective fault, role in the decision-making process, channels for obtaining information, and measures taken to verify information, to reasonably determine the form, proportion, and amount of independent directors’ civil compensation liability, achieving an organic unity of legal and social effects. Therefore, in future judicial practice, with the implementation of the Opinions, the determination of independent directors’ liability should increasingly pursue precise accountability.

In conclusion, the recently issued “Opinions on Reforming the Independent Director System of Listed Companies” propose systemic reform opinions and measures targeting the existing independent director system of listed companies. The implementation of these measures will inevitably have a profound impact on China’s legislation, enforcement, and judicial processes.

V. Conclusion and Outlook

Against the backdrop of the comprehensive implementation of the registration system in China’s capital market[5], especially in the real-world context of the Kangmei Pharmaceutical case sparking热议 about independent director liability issues, the issuance of the “Opinions on Reforming the Independent Director System of Listed Companies” is of milestone significance. It is hoped that the above reform measures will effectively promote standardized operations of listed companies, protect the legitimate rights and interests of minority investors, and facilitate further high-quality development of the capital market.