Abstract: In view of the complexity of company management and decision-making, the actual implementation of many decisions and proposals is affected by various factors such as the contextual behavior of the management team, so there may not be a single correct method to many events. Therefore, we evaluate decisions or proposals more on the basis of just motive, legal procedure and fair process. As independent directors with a scholarly background, we should always remind ourselves not to impose my own ideal understanding or conclusion on others.

On April 18th, 2016, two independent directors of China National Chemical Engineering Group Corporation voted against several proposals on the grounds that “the PTA project of the company has latent losses, making some financial data inaccurate”. This aroused wide attention from Shanghai Stock Exchange, the media and the society. Under the influence of the factors such as traditional culture, institution, etc., independent directors of listed companies in China seldom cast negative votes. However, in the U.S., the independent or outside directors often cast negative votes; it is even common that they, together with other directors, remove from office the chairman of the board of directors. The author believes that “casting negative votes against proposals they cannot accept” is a statutory function of independent directors, a sincere expression of their will, and an important form to keep their independence. Admittedly, we cannot equal “casting negative votes” to responsibility or dedication, neither can we think there must be something wrong with the management or information disclosure of a company if some independent directors cast negative votes. The society and all the relevant parties should be rational about independent directors’ negative votes.

The society should be rational. Here the society not only includes the general public, the media, the trading or supervision department, etc., but also includes medium and small investors and social shareholders. The reasons why we emphasize the rationality of the society are: first, if independent directors often cast negative votes, it means that the company is badly managed, which is not good for both investors and the society. Admittedly, through years of development and management, listed companies are becoming more and more aware of abiding by laws and regulations, and information disclosure, risk control, standardized management, etc. have been considerably improved, so there should not be many cases in which independent directors cast negative votes. Second, “the doctrine of the mean” and “harmony being most precious” are very important ideas in Chinese culture, so in social administration and company management we speak highly of negotiation, especially communication and negotiation in advance. Listed companies are public companies, whose image will be damaged if they publicize through “negative votes” the disagreements or conflicts that can be settled or even avoided in advance. In the author’s opinion, there are four areas where independent directors of listed companies in China tend to cast negative votes: first, the companies’ information disclosure is unreal, inaccurate, or wrong, which may mislead the society, especially the medium or small investors; second, unreasonable connected transactions make it easy for the company’s controller to encroach on the interests of social public shareholders, especially those of small shareholders; third, listed companies infringe the regulations to offer guarantees to projects with much uncertainty, which may cause damage to the company’s finance and reputation; fourth, the low profit distribution easily discourages public shareholders and also harms the image of the company in the long run. In more than ten years of performing the duties as an independent director, I have encountered some cases in which some connected transactions proposed by the company wouldn’t really help the company but would probably arouse suspicion and arguments on the part of the social shareholders, so we, through a sincere negotiation with the actual controllers of the company, dismissed the proposals of connected transactions that were planned to be put to vote at the board meetings.

The company should be rational. Here by company we mean the actual controller and its management team of listed companies. When independent directors express disagreement or cast negative votes, companies should first analyze the reasons instead of overreacting to it, or even irrationally dismissing independent directors from their post. Generally speaking, the self-interests of independent directors are not affected by whether a proposal passes or not, so their support for and their opposition against a proposal depend more on whether it complies with the regulations and whether it is beneficial to the long-term interests of the company. However, what decision conforms to the interests of the company cannot be known well through subjective sentiment or direct experience, but through an in-depth professional analysis based on the contextual features. In practice, more often than not we may find that the spectators see the chess game better than the players. For example, in order to alleviate the cash pressure or something, some listed companies tend less or even not to give bonuses in cash. But actually this would not benefit the company in the long run; in turn, it may project the company as a miser, which will cause difficulties for the company in financing and increasing issues in stocks, etc. Independent directors can often know the long-term and essential interests of the company from an on-looker’s perspective. Secondly, most independent directors are experts in the fields of technology, finance, law, management, etc., whose opinions can benefit the company a lot. Many rational entrepreneurs feel that an expert’s casual remarks can often bring unexpectedly tremendous benefit to the enterprise. When independent directors raise different opinions, the actual controller of the company and its management team should show their respect for expertise and science. Fortunately, the bosses of the company where I work are open-minded and rational. They respect the opinions of independent directors very much and they usually have a deep communication with us on some important issues of the company. The mutual trust based on rational understanding has laid a solid foundation for our sincere negotiation.

The independent director should be rational. Firstly, independent directors should have a rational understanding of the role they can play in the management of the company. Some people think that independent directors are spokesmen for medium and small shareholders or they are entrusted with the task of supervising the company. Actually there is a logic mistake in this understanding: medium and small shareholders have their own voting mechanism, not needing others’ representation; entrustment requires a definite entrusting party and in practice it is difficult to make clear the entrusting party and there is no legal foundation either. In years of practice, I have felt that independent directors are independent people invited to participate in the decision-making in a company according to the social needs and relevant regulations, and maintaining their independence is at the core of performing their duties correctly. While the essence of maintaining independence doesn’t lie in the authorization of any organization or the entrustment of representing the shareholders’ interests, but in their quality and determination to stick to two principles: one is the principle of truth, which means that they need to base their judgment on facts and truth and make independent thinking; the other is the principle of morality, which means that they need to be conscientious and honest and have an independent personality. Therefore, independent directors, with their expertise, personality, etc. to take responsibility for the society and the public, to protect the overall interests of the company and make sure that social shareholders’ interests not to be violated.

Secondly, independent directors should have even more behavioral rationality. In view of the complexity of company management and decision-making, the actual implementation of many decisions and proposals is affected by various factors such as the contextual behavior of the management team, so there may not be a single correct method to many events. Therefore, we evaluate decisions or proposals more on the basis of just motive, legal procedure and fair process. As independent directors with a scholarly background, we should always remind ourselves not to impose my own ideal understanding or conclusion on others.

Thirdly, independent directors should view entrepreneurs rationally. Undoubtedly, the founders of some listed companies have a strong motive to earn money and some even resort to cheating. However, most entrepreneurs and their management teams are admirable and respectable with a high sense of enterprise and social responsibility. A correct understanding of the management team of an enterprise can not only lay an ideological foundation for independent directors rationally fulfilling their obligation but also provide a reasonable judgment for the behaviors of the company and its management.

Note: This article is written by Zhang Yuchen, a professor with Tongji University, and it first appeared in Directors & Boards on the following website https://mp.weixin.qq.com/s?__biz=MjM5Mjk4NTg4MA==&mid=2650275066&idx=3&sn=11c11fa39ee9e157dfa27d291592e689&scene=1&srcid=0621GjVtyuGwuJ5uDTXoqWe5.