Research On The Independence Of The Board Of Directors In Solely State-Owned Company

In 2004, the SASAC began to promote the pilot work of the board of directors in large state-owned enterprises. So far, the pilot work of the board of directors has operated nearly 11 years. However, the effect is not satisfactory. There are still many problems in corporate governance structure of the solely state-owned companies. The main problem is that the board of directors lack independence. The board of directors is easily intervened by SASAC and controlled by the managers, and can not play the core role in the corporate governance. So, this thesis will take the independence of the board of directors as the research object, analyze the reasons why the board lack independence and how to keep the independence of the board. I hope this thesis can provide the theoretical support for the improvement of the board and the corporate governance structure of the solely state-owned company.Except of the introduction and the conclusion, This thesis include five chapters.Chapter One: “Connotation and Value of the Independence of the Board of Directors in Solely State-owned Company.” The solely state-owned company is a limited liability company, but compared with the ordinary limited liability company, it has its own particularity. So the independence of the board of the solely state-owned company is also different from the ordinary company. The independence of the board of directors in the solely state-owned company include three aspects. First of all, the board shall not be subjected to arbitrary interference by the SASAC. Secondly, the board of directors shall not be controlled by the managers. Finally, the directors should keep independent. To keep the independence of the board of directors in solely state-owned company is conducive to the exercise the authority of the board of directors, but also has great influence on the governance structure of solely state-owned company. At the same time, an independent board of directors can establish a "buffer zone" between the SASAC and the solely state-owned company, effectively reduce the interference from the government or the SASAC to the solely state-owned company. So it is beneficial to avoid the government intervening the enterprise.Chapter Two: “Present Situation of the Independence of the Board of Directors in Solely State-owned Company: Problems and Reason Analysis”. At present, the main problem existing in governance mechanism of the solely state-owned company is the lack of independence of the board of the directors. It displays in two aspects. Firstly, the SASAC can easily intervene the board when it exercise the authority. For example, the SASAC recruit the senior executives for the solely state-owned company on a global scale. Secondly, insider control problem in the solely state-owned company is serious. The managers are high coincidence of the directors. The general manager and the chairman of the board is taken by one person. The functions of the board of directors are undermined by the managers. The managers use their powers misappropriate the state assets, set up private accounts and so on. The board of directors in solely state-owned companies lack independence is caused by many reasons. First of all, the role of the SASAC is unclear and it is lacked of legal supervision. In practice, the SASAC has double identity: the investor and the regulator. So the SASAC likes to use administrative ways to manage the solely state-owned company. The board of directors is restricted and intervened by the SASAC. On the other hand, due to the lack of effective legal supervision to the SASAC, the cost of the intervention of the SASAC is cut down, it increases the risk of abuse of power of the SASAC. Secondly,the board of directors lacks the rights of hiring and dismissing the managers and supervise the managers. In the solely state-owned companies, the appointment and remuneration of managers are determined by the SASAC. The board doesn’t have the right to hire and dismiss the managers. So the managers are directly responsible to the SASAC. And the SASAC becomes the regulator. This increase the possibility of the SASAC intervene the board and the board fails to supervise the mangers. On the other hand, the managers are high coincidence of the directors in the solely state-owned company, and the general manager and the chairman of the board is taken by one person. So the managers control the board of directors and the company, the board of directors lost the independence. Thirdly, the internal management mechanism of the board of directors is not complete. Most insider directors are from the administrative organization, they lack the management experience and professional background. So they can’t make the scientific decisions. And due to the lack of supporting measures, the outsider directors can only play a limited role in making decisions. The special committee also can’t fully play the role in the board of directors.Chapter Three: “The Premise of Keep the Independence of the Board of Directors in Solely State-owned Company: The SASAC should be Positioned as the Investor”. In practice, Owing to the role of the SASAC is unclear, the SASAC can easily intervene the authority of the board of directors in solely state-owned company. Therefore, in order to keep the independence of the board of directors in solely state-owned companies, the SASAC should be positioned as the investor,not regulator. As an investor, in addition to the important matters that concerns the survival of the company and the direct interests of the shareholder, other matters can be delegated to the board of directors to exercise. The board of directors enjoy the authority prescribed by the laws and the articles of association and delegated by the SASAC. The SASAC can not veto and revoke the decisions which are made by the board of directors through legal procedures. At the same time, the SASAC should be positioned as investor does not mean that the SASAC can not supervise the company. As an investor, the SASAC has the right to supervise the company, but it must be different from the administrative supervision. In order to prevent the SASAC from intervening the board of directors, it is necessary to strengthen the supervision to the SASAC. The government, the NPC and the judiciary should play the role of supervising the SASAC, prevent the SASAC from abusing the power and intervening the authority of the board of directors.Chapter Four: “How to keep the Independence of the Board of Directors in Solely State-owned Company: Distribution of Authority between the Board of Directors and the Manager in Solely State-owned Company”. In order to keep the independence of the board of directors in solely state-owned company, we must distribute the authority between the board and the managers reasonably. The manager should be the assisting agency, rather than the company’s decision-making agency. We must make sure the board of directors exercise the authorities of management and decision-making, making decisions on hiring or dismissing the company’s manager and his remuneration, and supervise the manager. The manager should execute the decision of the board of directors, and report the performance to the board of directors, not to the SASAC. The board of directors is responsible for the supervision of the manager. In addition to the authority of the board of directors as we said, the board of directors could delegate some authorities to the manager according to the management of the company. In order to guarantee the board of directors could supervise the manager, prevent the board of directors from being controlled by the manager, the SASAC should return the rights of making decisions on hiring or dismissing the company’s manager and remuneration to the board of directors. At the same time, the solely state-owned companies should try to avoid the general manager and the chairman of the board being taken by one person.Chapter Five: “How to keep the Independence of the Board of Directors in Solely State-owned Company: Improvement of the Internal Structure of the Board of Directors in Solely State-owned Company”. The improvement of the internal structure of the board of directors in Solely State-owned Company mainly includes four aspects: Firstly, we should improve the selection mechanism of directors. We must change phenomenon that the SASAC appoints the directors with the administrative way, and expand the scope of selection, ensure the diversities and complementarities of the directors.This selection mechanism must be open, transparent and impartial. We also need improve the assessment mechanism of the directors. Secondly, we should improve the outside directors system. The law must clearly stipulate the conditions and procedure that dismiss the outside directors, prevent the SASAC from dismissing the outside directors arbitrarily. The SASAC could hire directors from the private enterprises or foreign companies or corporate governance experts. In order to ensure the right to know of the outside directors, the company needs to establish good communicate channels for the outside directors and the senior executives, and provide the real information of the operation of the company. The law must improve the system of personal responsibility of the outsider directors. Thirdly, we should improve the system of special committee. The company need make detailed provisions about the composition, rules of procedure of the special committee. The directors of the nominating committee and the compensation committee should be constituted by outside directors. At the same time, the company can establish the professional group to support the special committee to carry out the work. The solely state-owned company needs to set up an audit committee. Fourthly, the board of the directors should regulate the authority of the chairman of the board. The legal status of the chairman and other directors shall be equal. The chairman of the board should be elected by the board of directors, the chairman can’t exceed the scope of the authority of the board of directors and the law and the regulations. In order to avoid the chairman controlling the board of directors, the chairman should be elected by the board of directors, not by the SASAC. For the sake of ensuring the chairman exercise the authority in accordance with the laws and regulations, the board of directors must strengthen supervision to the chairman.