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Questions & Discussions Prof. Ruyin HU Director of Research Center Shanghai Stock Exchange

Questions & Discussions Prof. Ruyin HU Director of Research Center Shanghai Stock Exchange.

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Questions & Discussions Prof. Ruyin HU Director of Research Center Shanghai Stock Exchange

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  1. Questions & DiscussionsProf. Ruyin HUDirector of Research CenterShanghai Stock Exchange

  2. Questions 1Can 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?

  3. 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 corporation’s 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 management’s 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.

  4. Comments 8. Serve the legitimate interests of all shareholders and render an account to them regularly and fully. 9. Identify the corporation’s 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.

  5. Comments 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.

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

  7. Comments Group 1:Corporate 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.

  8. Comments Group 1:Corporate 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.

  9. Comments 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 company’s 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.

  10. Comments 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.

  11. 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.

  12. 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.

  13. Comments 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 .”

  14. 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.

  15. Comments • Non-executive directors should acquire and maintain a sufficiently detailed knowledge of the company’s 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.

  16. 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 corporation’s strategy, the company’s 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 director’s 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.

  17. 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 company’s 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 publication’s aim is to focus directors’ attention on how they can perform their duties in accordance with New Zealand’s legal requirements and the Institute of Director’s standards. This is achieved by asking questions about themselves and the role and activities they perform, or intend to play, in their companies.

  18. 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 company’s business activities and on-going performance to enable them to make informed decisions on the issues before the board.

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