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Policy Dialogue on Corporate Governance in China

Policy Dialogue on Corporate Governance in China. The Independence of the Board – Why and Where Independence Matters?. Clarence Kwan February 25-26, 2004. Where & Why Independence Matters?. Independence  Balance of Power  Potential Structural Conflicts

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Policy Dialogue on Corporate Governance in China

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  1. Policy Dialogue on Corporate Governance in China The Independence of the Board – Why and Where Independence Matters? Clarence Kwan February 25-26, 2004

  2. Where & Why Independence Matters? • Independence  Balance of Power  • Potential Structural Conflicts • Independent in Fact ≠ Independence in Action • Independent Directors ≠ Independent Board • Independent Board ≠ Effective Board

  3. Independence  Balance of Power  The Corporate Governance Triangle BOARD OF DIRECTORS MEDIATION & CONFLICT RESOLUTION * COMMUNICATION OVERSIGHT POLICY & LONG TERM PLANNING ELECTION REPRESENTATION BUSINESS STRATEGY & PERFORMANCE INVESTMENT DIVIDENDS & GROWTH MANAGEMENT SHAREHOLDERS DISCLOSURE INVESTOR RELATIONS ©2004 Deloitte & Touche Tohmatsu 3

  4. Potential Structural Conflicts Independent check and balance is necessary.

  5. Independent in Fact ≠Independence in Action Peers Review Organized by an association of Independent Directors Voluntary  Comply or Explain  Mandatory

  6. 法(feng) Legality 情 Relationship 理Reasonableness 理(li) Reasonableness 情(qing) Relationship 法 Legality Independent Directors ≠ Independent BoardCulturalDifference in Decision Making Priorities

  7. Independent Directors ≠ Independent BoardCulturalDifference in Group behaviors 會而不議 hui er bu yi Meet but not discuss (Face saving) 議而不決 yi er bu jue Discuss but not decide (Guanxi not clear) 決而不行 jue er bu xing Decide but not act (Passive resistance) 會議= Meeting = Meet (hui) & discuss (yi)

  8. Independent Board ≠ Effective BoardBalancing Compliance with Performance • “Bad corporate governance, i.e. a lack of board independence, can ruin a company, but cannot, on its own, ensure its success.” • An effective board must also focus on corporate performance in terms of strategy and value creation. It must address four key strategic issues to insure success: • Choice and clarity of strategy • Strategy execution • Ability to respond to abrupt changes • Ability to undertake successful M&A Source: Enterprise Governance – International Federation of Accountants 2003

  9. Closing • Board independence is essential for maintaining the balance between the interests of management and shareholders • We must create an enabling environment for independent directors to truly act independently • We must balance corporate governance with value creation. ©2004 Deloitte & Touche Tohmatsu 9

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