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On August 4, 2023, the China Securities Regulatory Commission (“CSRC”) released the Measures for the Management of Independent Directors of Listed Companies. In accordance with the unified deployment of the CSRC, Shenzhen Stock Exchange (“SZSE”) issued the newly revised supporting self-regulation rules for the reform of the independent directors system (hereinafter referred to as the “Revised Rules”) on the same day, which will take effect on September 4, 2023.
The independent directors system of listed companies is an important part of the modern enterprise system with Chinese characteristics and a key component of the basic system of capital market. With the comprehensive deepening of the capital market reform, accelerating the construction of a more scientific and complete independent directors system of listed companies and giving better play to the positive role of independent directors in corporate governance are the inevitable requirements for promoting and standardizing the governance of listed companies, protecting the rights and interests of small and medium-sized investors, and improving the quality of listed companies.
The Revised Rules aims to implement the requirements of the Opinions of the General Office of the State Council on the Reform of Independent Directors System of Listed Companies and the Measures for the Management of Independent Directors of Listed Companies of the China Securities Regulatory Commission. On the basis of extensively soliciting opinions from all sectors of society and fully absorbing and adopting reasonable suggestions, we have enriched and improved the Revised Rules in the following aspects.
First, the role and positioning of independent directors are defined. The definition of “independent director” is added to the Stock Listing Rules to refine the criteria for judging the “independence” of independent directors, making it clear that independent directors should give full play to their roles in decision-making, supervision and counterbalance, and professional consultation in the board of directors. Meanwhile, independent directors are required to supervise the potential major conflicts of interest between controlling shareholders and de facto controllers or other entities, thus safeguarding the overall interests of listed companies and protecting the legitimate rights and interests of minority shareholders.
Second, the selection and appointment system of independent directors across the entire chain are optimized. The nomination committee is required to give full play to its role in examining the qualifications of candidates and forming a definitive opinion. The Revised Rules introduces a cumulative voting system in the election of independent directors, sets the time limit for listed companies to complete the by-election within 60 days after the removal of an independent director, and establishes a nomination withdrawal mechanism for independent directors.
Third, the appointment management of independent directors is strengthened. After the adjustment, independent directors may hold concurrent positions in up to three domestic listed companies, so that they have enough time and energy to perform their duties. The Revised Rules adds a provision for the continuous calculation of the tenure of independent directors who have already served prior to the IPO and extends the “desensitization period” for re-nominations. It also establishes a regular self-examination and evaluation mechanism for independence and improves the invalidity of voting by independent directors who do not meet the qualifications for office.
Fourth, the performance methods and requirements of independent directors are adjusted. The Revised Rules establishes a special meeting mechanism for independent directors, shifts forward the supervision of independent directors, clarifies the scope of responsibilities of the audit, nomination, compensation and other special committees of the board of directors, and builds an effective platform for independent directors to perform their duties. The expression of independent opinions is included in the special terms of reference of independent directors, while the specific matters for which independent opinions are expressed are no longer listed. It also adds the due diligence requirements such as on-site working hours and work records for independent directors so that they can better perform their supervisory functions.
Fifth, the guarantee for independent directors to perform their duties is fortified. A mechanism for pre-meeting communication and disclosure of objections is added, requiring companies to provide necessary conditions for independent directors to perform their duties and not interfere with their exercise of authority. The relief measures for independent directors when their performance is limited are clearly defined, and relevant personnel such as company directors and senior management should cooperate and grant independent directors the right to directly apply for disclosure when their disclosure is limited.
According to the Measures for the Management of Independent Directors of Listed Companies, the transitional period of the revised supporting rules is one year. During the transition, matters such as the setting of the board of directors of listed companies and its special committees and the special meeting mechanism of independent directors should be gradually adjusted to comply with relevant regulations.
Next, SZSE will continue to adhere to the guidance of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era and earnestly implement the spirit of the 20th CPC National Congress. We will, in accordance with the deployment and arrangement of the CSRC, deeply implement a new round of Three-Year Action Plan to improve the quality of listed companies, give full play to the self-regulation responsibilities of the exchange, and actively carry out relevant policy interpretation, rule training and reform publicity. We will also guide market participants to understand and master the new requirements on the reform of the independent directors system, promote the improvement of listed companies’ governance, and continuously cultivate and strengthen the group of listed companies that reflect the requirements of high-quality development.
