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Questions & DiscussionsProf. Ruyin HU

Director of Research Center

Shanghai Stock Exchange

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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) ordirectors who do not have business experience

at all?

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CommentsAPEC GUIDELINES FOR BOARDS OF DIRECTORS

Board responsibilities include :

1. Exercise leadership, enterprise and integrity in directing the corporationtowards sustained progress over the long term.

2. Act in the best interest of the corporation in a manner characterized bytransparency, accountability and fairness.

3. Install a process of selection to ensure a mix of competent directors, eachof whom can add value and contribute independent judgment to the

formulation of strategy and policy.4. Determine the corporations purpose and values as well as its strategiesand general policies to ensure that it survives and thrives and its assetsand reputation are adequately protected.

5. Evaluate and monitor implementation of strategies and policies, businessplans and operating budgets as well as managements over-allperformance.

6. Ensure that the corporation complies with all relevant laws, regulationsand codes of best business practice.

7. Ensure that the corporation communicates with shareholders and otherstakeholders accurately, effectively and sufficiently.

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Comments8. Serve the legitimate interests of all shareholders and render an

account to them regularly and fully.

9. Identify the corporations major stakeholders and formulate a clearpolicy 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, outsidedirectors.

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.

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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 forappropriate technology and systems that ensure forthe 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.

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Comments

Directors perform 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.

http://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asp

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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.

http://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asp

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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.

http://hkiod.com/eng/cpd_core.asphttp://hkiod.com/eng/cpd_core.asp

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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 Practicefor Directors - Standards for the Board' and act accordingly and diligently.

Article 3 Serve the legitimate interests of the companys 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.

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CommentsArticle 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 thecompany.

Article 9 Not recklessly or maliciously injure the professionalreputation of another member of the Institute of Directors and notengage in any practice detrimental to the reputation and interestsof the Institute or of the profession of director.

Article 10 Ensure that he keeps himself abreast of current goodpractice.

Article 11 Set high personal standards by keeping aware of and

adhering to this Code, both in the spirit and in the letter, andpromoting it to other directors.

Article 12 Apply the principles of this Code appropriately when actingas a director of a non-commercial organisation.

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Comments

Directors,including non-executive directors as well as executivedirectors, 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 fromthe 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.

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Comments

The main role of non-executive directors is to provide

independent judgement and outside experience andobjectivity 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 managementrecommendations because they have less personal

interest in those decisions and recommendations.

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Comments

Independent directors shall have the qualifications required to

perform their dutiesAn 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 familiarwith 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.

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Comments

In practice,corporations look for a number of qualities in

their independent directors. Experience and judgmentare foremost among those qualities. Independentdirectors are often successful business people, withexperience either spanning a number of industries or inan area relevant to the corporation. They may also be

from government, politics or academia, depending onthe needs and interests of the corporation. Althoughdirectors are not expected to have the necessaryexpertise to directly manage the business themselves, itis important that some, if not most, have some

background in the issues which face the corporation.

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Comments

Non-executive directors should acquire and maintain a

sufficiently detailed knowledge of the companys

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 andordinarily 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.

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Comments As an important element for new directors, the TSE Corporate

Governance Committee recommended that every corporationprovide an orientation and education program for new recruits tothe board. Such a program could be a one- or two-day event whichwould familiarize the director with the nature of the business,current issues within the company, the corporations strategy, thecompanys expectations concerning input from directors, and

directors general responsibilities. The Committee suggested thatsuch a program should also include the opportunity to discuss withexperts a directors responsibilities and those of the board as awhole, as well as the opportunity to visit facilities and to meet withcorporate officers in order to develop a better appreciation for thebusiness. The Committee was of the view that these measures

would allow directors to contribute effectively from the outset oftheir appointment.

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CommentsAt 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 risksassociated with those activities.

Management, Boards of Directors and the Audit Committee should determine whether internal

controls are appropriate to achieve the companys 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 rigorouslyand 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 publications aim is to focus directors attention on how they can perform their duties in

accordance with New Zealands legal requirements and the Institute of Directors standards. Thisis achieved by asking questions about themselves and the role and activities they perform, orintend to play, in their companies.

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CommentsSome conclusions:

1.A proper structure of the board is very important.Each non-executive director should be an expert in a relevant area,and atthe same time they shall have the minimum qualificationsrequired to perform their duties.

2. An orientation and education program for new recruitsto the board and a continuing director developmentprogram are necessary.

3.It is an ideal situation that every non-executive directorcan acquire and maintain a sufficiently detailed

knowledge of the companys business activities andon-going performance to enable them to makeinformed decisions on the issues before the board.