The move, announced earlier this year but formalized this week, requires all domestically listed companies to hire at least two independent board directors by next June 30, according to a circular from the China Securities Regulatory Commission (CSRC).

By June 30, 2003, no less than one-third of the boards of directors of listed companies should have independent directors who "take no position other than as a board director and have no relationship with the company or its major shareholders that may affect independent and objective decision-making," the stockmarket watchdog said.

At least one of the independent directors should be a professional accountant, it said.

A system of independent directors will improve corporate governance, protect the interests of small and medium shareholders and enhance transparency in listed companies, it said.

The new regulation came just weeks after a major market scandal worsened long-standing worries about poor corporate governance among China's listed companies. Regulators are still investigating Shenzhen-listed Guangxia (Yinchuan) Industry Co for alleged false financial statements by a wholly owned subsidiary.

China's listed companies "have many salient problems in the area of corporate governance," the CSRC said, making it an urgent task to establish an independent director system.

In the new regulation, the independent directors are authorized to submit proposals to assemble shareholders meetings, recruit or dismiss accounting firms, invite in independent auditors and offer independent financial reports apart from their normal duties as board members.

They also are free to give independent opinions on major transactions with affiliated institutions, on assignment and payment of the managerial staff and to object in cases where the interests of the smaller shareholders might be hurt.

But economists warn that an independent director system alone cannot make China's wayward listed firms clean up their acts.

"This alone cannot resolve the problem of poor corporate governance in China," said Dong Fureng, senior economist and deputy director of Economic Committee under the Chinese People's Political Consultative Conference. "We'll see how well it works."

Also, some say the influence of independent directors may not be huge because their advanced knowledge of certain aspects may be too complicated for some of their peers to grasp.

Analysts say that China still lacks a qualified pool of candidates to be independent directors. In other nations, many of these are company executives, but China's independent directors are often scholars.

(People's Daily 08/22/2001)