Notice on Issuing the Guidelines for Introducing Independent Directors to the Board of Directors of Listed Companies

Zhengjianfa(2001) No. 102

All listed companies,

To further improve the governance structure of listed companies and standardize their operation, China Securities Regulatory Commission (CSRC) formulates the Guidelines for Introducing Independent Directors to the Board of Directors in Listed Companies. All listed companies are required to act in accordance with the Guideline.

16 August 2001
China Securities Regulatory Commission

To further improve the corporate governance structure and operation of listed companies, we propose the following Guidelines for introducing independent external director (hereinafter "independent director") system in listed companies.

I. Listed companies shall introduce independent directors to their boards of directors.

1. Independent directors of the listed company refer to the directors who hold no posts in the company other than the position of director, and who maintain no relations with the listed company and its major shareholder that might prevent them from making objective judgment independently.

2. The independent directors shall bear the duties of good faith and due diligence and care towards the listed company and all the shareholders. They shall earnestly perform their duties in accordance with laws, regulations and the company's articles of association, shall protect the overall interests of the company, and shall be especially concerned with protecting the interests of minority shareholders from being infringed. Independent directors shall carry out their duties independently and shall not subject themselves to the influence of the company's major shareholders, actual controllers, or other entities or persons who are interested parties of the listed company. In principle, independent directors can only hold concurrently the post of independent directors in five listed companies at maximum. They shall have enough time and energy to perform the duties of the independent directors effectively.

3. All domestically listed companies shall make necessary amendments to the articles of association in accordance with the requirements set in the Guidelines and appoint qualified persons to be independent directors. At least one of the independent directors should be an accounting professional (refers to personnel with senior professional title or certified public accountants). By June 30th, 2002, at least two members of the board of directors shall be independent directors; and by June 30th, 2003, at least one third of board shall be independent directors.

4. In case independent directors fail to meet the requirements for independence or are not qualified to perform the duties of independent directors, and as a result, the number of independent directors fail to reach the requirements stipulated in the Guidelines, the listed companies shall make up for the deficiency by electing new independent directors to the board in accordance with the requirements of the Guidelines.

5. Independent directors and nominees for independent directors shall take part in the training organized by CSRC and its authorized institutions in accordance with the requirements of CSRC.

II. 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.

III. Independent directors shall meet the "independence" requirements.

A person may not hold the position of the independent director in any of the following circumstances:

1. the person who holds a position in the listed company or its affiliated enterprises, their direct relatives and major social relations (direct relatives refer to their spouse, father, mother and children etc.; major social relations refer to their brothers, sisters, father-in-law, mother-in-law, daughter-in-law, son-in-law, spouse of their brothers, sisters, and their spouse's brothers and sisters etc.);

2. the person who holds more than 1% of the outstanding shares of the listed company directly or indirectly, or the natural person shareholders of the 10 largest shareholders of the listed company, or such shareholder's direct relative;

3. the person who holds a position in a unit which holds more than 5% of the outstanding shares of the listed company directly or indirectly, or of the unit which ranks as one of the 5 largest shareholders of the listed company, or such employee's direct relative;

4. the person meeting any of the three above-mentioned conditions in the immediate proceeding year;

5. the person providing financial, legal or consulting services to the listed company or its subsidiaries;

6. the person stipulated in the articles of association;

7. the person determined by the CSRC.

IV. The nomination, election and replacement of independent directors shall be made in accordance with the laws and regulations.

1. Board of directors, supervisory board and shareholders who independently or jointly hold more than 1% of the shares issued by the listed company may nominate independent directors, who will be voted at the shareholders' meeting;

2. The consent to the nomination shall be obtained from the nominee before the nomination. The nominator shall have the full knowledge of the nominee's general information such as profession, educational background, professional title, detailed working experience and all other posts he or she concurrently holds, and give opinion on the nominee's qualifications and the independence required as an independent director. The nominee shall make a statement that he/she has no relationship with the listed company that may affect his/her independent objective judgment.
Before convening the shareholders' meeting concerning the election of the independent director, the board of the directors shall make such statement public in accordance with relevant regulations.

3. Prior to convening the shareholders' meeting for the election of independent directors, listed companies shall submit the relevant materials of the nominees to the CSRC, local offices of the CSRC in the areas where the company is located and the stock exchange where the company is listed. If the company's board of directors raises objection to relevant conditions of the nominees, such opinions shall also be submitted in written.
Within 15 working days, the CSRC shall examine the qualifications and independence of the nominated independent directors. If the nominee is objected by the CSRC, he or she can still be a candidate for director but not independent director. At the general shareholders meeting where the independent directors are to be elected, the board of directors shall clarify whether the nominee has been objected by the CSRC. If the independent directors were elected prior to the issuing of the Guidelines, the listed company shall, within one month after the implementation of the Guidelines, submit the above-mentioned materials to CSRC, local offices of CSRC in the areas where the company is located and the stock exchange where the company is listed.

4. The term of office of the independent director shall be the same as that of others directors in the listed company. Upon the expiry of their term, he or she may serve another term if re-elected. However, their consecutive term shall not exceed 6 years.

5. If the independent director fails to attend the board meeting in person for three consecutive times, the board of directors may request the shareholders' meeting to replace the director.
The independent director shall not be dismissed from the listed company without proper reason before the term of his/her office expires, except for the above-mentioned reason or in those circumstances that a person may not be qualified to hold the position of a director stipulated in the Company Law. If an independent director is dismissed by the listed company before the term of his/her office expires, the listed company shall disclose the dismissal as special disclosure matter. If the dismissed independent director deems the reason for the dismissal improper, he/she shall be entitled to make a public statement.

6. The independent director may resign before the term of his/her office expires. He/She shall submit the written resignation report to the board of directors and spell out the circumstances related to the resignation or those that need the attention of the shareholders and the creditors of the listed company. If the resignation of the independent director causes the number of the independent directors in the board of directors to become less than the minimum number required by the Guidelines, the resignation report of the independent director shall take effect after the subsequent appointed independent director fills the vacancy.

V. The role of the independent director in listed companies shall be adequately activated.

1. In order to make the independent director play an active role, the independent director shall have the following special powers other than those stipulated in the Company Law and other relevant laws and regulations:

a. Major related party transactions (referring to transactions that the listed company intends to conclude with the related party and whose total value exceeds RMB three million or 5% of the company's net assets audited recently) should be approved by the independent director before being submitted to the board of directors for discussion; before the independent director makes his or her judgment, an intermediary agency can be employed to produce an independent financial advisory report, which will serve as the basis for his or her judgment.
b. The independent directors can put forward the proposal to the board of directors relating to the appointment or removal of the accounting firm;
c. can propose to the board of directors to call an interim shareholders' meeting;
d. can propose to call a meeting of the board of directors;
e. can appoint the outside auditing or consulting organization independently;
f. The independent directors can solicit the proxies before the convening of the shareholders' meeting.

2. Consent from over 1/2 of all the independent directors shall be obtained if an independent director desires to exercise the above-mentioned power.

3. If the above proposals are not adopted or the above power cannot be exercised, the listed company should disclose the related information.

4. A listed company shall have one-half or more independent directors in the subordinate committees of the board of directors in terms of remuneration, auditing or nomination committees, if such committees are set up.

VI. The independent director shall express the independent opinion on the major events occurred in the listed companies.

1. Apart from carrying out the above-mentioned duties, the independent director shall provide the independent opinion on the following matters to the board of the directors or to the shareholders' meeting:
 
a. Nomination, appointment or replacement of directors;
b. Appointment or dismissal of senior managers;
c. Remuneration for directors and senior managers;
d. Any existing or new loan borrowed from the listed company by or other funds transfer made by the company's shareholders, actual controllers or affiliated enterprises that exceeds RMB three million or 5% of the company's net assets audited recently, and whether the company has taken effective measures to collect the amount due;
e. Events that the independent director considers to be detrimental to the interests of minority shareholders;
f. Other matters stipulated by the articles of association.

2. With respect to the above-mentioned matters the independent director shall provide one of the following kinds of opinions: a consent opinion, a reserved opinion, a negative opinion, or a non-comment opinion and the respective reasons for giving such opinions.

3. If matters need to be disclosed, the listed company shall publish the opinion provided by the independent director. If the independent directors disagree themselves and are not able to reach the consensus, the board of directors shall disclose the independent directors' respective opinions separately.

VII. For the purpose of performing the duties effectively listed companies shall provide necessary working facilities for the independent director.

1. Listed companies shall ensure that the independent director has the same right to be kept informed as the other directors in the companies. With respect to the important matters necessary to be submitted to the board meeting for consideration, listed companies shall notify the independent director in advance within legally prescribed time and provide them sufficient material and documents. The independent directors may ask for supplementary material if they consider the given documents incomplete. While two or more independent directors consider that the material and documents provided to them are insufficient or unclear, they may jointly propose to postpone the meeting or to postpone the discussion of the related matter, which should be adopted by the board of the directors.
The material provided by the listed company shall be preserved by the listed company and the independent director him/herself for at least five years.

2. The company shall make the necessary working facilities available to the independent directors for them to perform their duties. The secretary of the board of directors shall actively provide assistance to the independent director by providing information, material and documents and etc. If the independent opinion, proposal and written statement given by the independent director shall be made public, the secretary of the board of directors shall handle the matters concerning the announcement at the stock exchange without delay.

3. When the independent director exercises his/her power, the persons concerned in the listed company shall cooperate actively and shall not turn down the independent director's proper request, nor shall they hinder the independent director's work or conceal the information. The independence of the independent director shall not be intervened.

4. The reasonable expenses incurred from the engagement of intermediary agencies and other expenses relating to the performing of duties by the independent director shall be borne by the company.

5. Listed companies shall grant the appropriate allowance to the independent director. The standard of the allowance shall be proposed by the board of directors' meeting, approved by the shareholders' meeting, and be disclosed in the company's annual report.
The independent director shall not receive any extra non-disclosed interests and compensation from the listed company, its major shareholders, or other interested entities and individuals other than the above-mentioned allowance.

6. The listed company may purchase liability insurance for independent directors to lower the risks that may occur during the performance of duties by the independent director.