China puts spotlight on retired senior bureaucrats on listed firms' boards

Concerns raised in state media put spotlight on the role of retired senior bureaucrats as independent directors at top listed firms

PUBLISHED : Monday, 28 April, 2014, 4:43am
UPDATED : Monday, 28 April, 2014, 4:43am

More than 40 retired senior government officials serving as independent directors at China's top listed firms have found themselves under the spotlight after a mainland flagship newspaper questioned whether they had carried out their responsibilities to protect small investors.

The People's Daily, the Communist Party's mouthpiece, reported that 41 former civil servants were hired as independent directors by the country's 100 largest public A-share companies after retirement by April, sending an ominous warning to them that they may be blamed for bad corporate governance.

The article comes at a time when millions of minority shareholders have shunned the stock market amid deep disappointment with regulators and the listed companies following heavy losses from equity investments.

About 7.4 million retail investors have exited the stock market since 2010, according to data provider iFind.

The People's Daily article received rave reviews in internet postings as some individual investors accused the former officials of failing to protect their interests and colluding with the listed firms to short-change minority investors.

"Just take a look at the weak stock market, and you will know to whom our lost money has gone," said a comment posted on the People's Daily website.

The benchmark A-share index has been among the world's worst-performing indicators since 2010 as the majority of retail investors remain stuck with paper losses.

A beleaguered stock market on the mainland poses risks of social unrest because millions of small investors are retired workers who spent much of their life savings to bet on the volatility of stocks.

The central government introduced the system of independent directors in 2001, aiming to enhance corporate governance when a number of firms were found to have overstated their earnings or fabricated business deals to cheat minority shareholders.

The role of an independent director is to put pressure on the controlling shareholders to give explanations for major corporate decisions such as executive reshuffles and the distribution of cash dividends.

On the mainland, listed firms routinely would not distribute enough dividends to reward investors whose only option was to then bet on swings in the share price to try to make a profit.

"The government officials became independent directors because they could get a new source of income," said retail investor Wan Li. "They don't fight in our corner. This is the reality."

Some incumbent government officials are also assuming the role of independent director at listed firms, most of which are state-controlled.

According to Xinhua, 8.5 per cent of the independent directors at all mainland-listed firms, or 642 people, were government officials at the end of 2012.

"Most of the independent directors are just unqualified since they have little knowledge about accounting, let alone company operations," said an independent director with a Shanghai-listed property developer. "Government officials and celebrities in various fields are used to fill the vacancy."

The retired senior government officials cited by the People's Daily included two former China Securities Regulatory Commission chairmen, Liu Hongru and Zhou Daojiong, and Liu Tinghua, a former vice-governor of the central bank.

The newspaper said that Liu Hongru, at 82, was too old to assume the role.