An Analytical Examination of the Inefficacy of China’s Independent Director System: A Comparative Perspective

Authors

Nanzhu WangFollow

Abstract

This paper analyzes the effectiveness of China’s independent director (ID) system in listed companies following the 2023 regulatory reforms enacted by the China Securities Regulatory Commission (CSRC). These reforms raised the independence standards for IDs by broadening disqualification criteria and modifying the appointment mechanisms. Despite the establishment of an ID system this century and the recent enhanced standards, empirical evidence indicates persistent shortcomings in China’s ID mechanism. Many of the positive outcomes initially attributed to IDs—such as improved internal control or better firm performance—cannot conclusively isolate IDs’ independence or expertise as the true cause. In contrast, negative evidence, which specifically targets directors’ independence and decision-making behavior, suggests IDs often fail to effectively monitor and hold management accountable due to deeply ingrained social ties.

To explain this persistent ineffectiveness, the paper explores structural differences between the Chinese and U.S. legal systems. China’s civil law framework relies heavily on bright-line rules, limiting flexibility and adaptability in determining director independence. As a contrast, the U.S. common law system, particularly exemplified by Delaware’s jurisprudence, adopts flexible judicial assessments of directors’ relationships, allowing an individualized response to evolving corporate governance issues. Furthermore, the enforcement mechanisms in China are significantly weaker, further impairing the deterrence power of regulations.

Ultimately, the paper concludes that due to fundamental divergences in legal enforcement, cultural context, and judicial flexibility, the ID system in China remains largely symbolic, with only a limited effect of improving corporate governance. This comparative examination suggests that simply transplanting a regulatory model from a different legal and cultural setting without sufficient adjustments may result in limited practical effectiveness.

Recommended Citation

Nanzhu Wang, An Analytical Examination of the Inefficacy of China’s Independent Director System: A Comparative Perspective, 45 Nw. J. Int'l L. & Bus. 103 (2024).
https://scholarlycommons.law.northwestern.edu/njilb/vol45/iss1/4