Former officials now independent directors

The employment of retired government officials as independent directors has become a trend among China's listed companies, but a target of criticism among the public.

The issue did not come under the spotlight until Sinotruk Hong Kong Ltd. announced the appointment of three former senior officials as its independent directors this July. They were promised annual pay of 180,000 yuan (about 29,000 U.S. dollars).

The three officials, including the governor of east China's coastal Shandong Province and the deputy head of the State Taxation Administration, resigned amid public and media queries on Aug. 14, 20 days after their appointment.

The public was worried about possible corruption and unfair market competition due to the influence of the former officials.

Xinhua reporters found that currently seven of 48 independent directors at the top 10 A-share companies by market value are retired senior officials.

Former officials who are now independent directors, or outside directors, are also common among central government-administered state-owned enterprises. For example, Liu Hongru, former deputy governor of China's central bank, holds an independent director post at PetroChina.

Statistics from the financial information server 10jqka.com.cn show that there are about 5,760 independent directors employed in companies listed on China's Shanghai and Shenzhen stock exchanges, among whom 2,590, or 44.9 percent, have political backgrounds, according to a Monday report in the China Youth Daily.

They had mainly worked in government departments related to auditing, taxation, finance, law and human resources, according to the report.

More than 30 of them were retired officials at the ministerial level, and more than 100 used to be mayors. More than 720 had assumed posts equivalent to head of a county, the report said.

Independent directors not "independent"

The independent director system was introduced by the China Securities Regulatory Commission in 2001 to restrict the power of major company shareholders.

"The system is aimed at constraining the power of management and better protecting the interests of minority shareholders. But its role has not been fulfilled well as China's listed companies are usually controlled by a single majority shareholder," said Liu Jipeng, director of the capital research center at the China University of Political Science and Law.0 By convention, to become an independent director, one should first be examined for qualifications for the post and then be nominated by the company and voted in at the stockholders' meeting, said Liu Guohua, head of the Guangzhou-based Benben Law Firm.

However, most independent directors in China are in fact recommended by the largest shareholder, which cannot ensure the independence of independent directors.

Xinhua found almost all public companies did not elaborate who nominated the candidates and why they were nominated.

After the resignation of the three former officials, Sinotruk said it "respects and accepts their decision," but declined to reveal why it employed the three.

Xinhua reporters contacted three other companies with former officials as independent directors, but all of them said the reasons for employment involve the companies' "major affairs" and are not suitable for further explanation.

"Connections with the government have been regarded by many companies as important corporate resources," said Gao Minghua, an economics professor at Beijing Normal University.

"We tend to choose those who are well-connected and can be helpful to the company," a secretary of a Shanghai-based listed company, surnamed Dong, told a reporter.

A public company manager, who refused to be named, said companies employ former officials as independent directors for their influence and "coordination abilities" in business circles.

Independent directors not effective

Despite years of political experience, these former officials, some in their 70s, may not have sufficient energy and economic expertise to perform their duties as independent directors.

Referring to the annual reports of a number of listed state-owned companies, reporters found some aging independent directors failed to always be present at board meetings.

An unnamed independent director said he indeed attended the company's board meetings and has some knowledge about the company, but as far as specific issues, such as the company's development strategy and financial planning, he "does not have much time to do thorough research."

It is believed that the independent director system at many of China's listed companies are just formalities.

According to a report from the Shanghai Stock Exchanges, only 38 independent directors of 26 companies raised objections to relevant company matters in 2011.

"The ideology of officials is to obey and implement, while what independent directors need to do is oppose," said Gan Peizhong, professor at Peking University's Law School.

Noted Chinese independent director Wang Pu believes the public should be more tolerant of officials who become non-executive directors if they are acting legitimately.

Some experts suggest transparency in the independent directors' work and more supervision from the media and the public.

Zhu Lijia, a professor with the Chinese Academy of Governance, said retired officials must not assume such posts in the same industries and places they worked before in order to avoid nepotism.