Independent directors in China and India: A

comparative assessment
Helen Wei Hu and On Kit Tam*
As the debate on convergence and divergence in corporate governance has
received considerable research interest, this study aims to explore whether
the recently developed independent director systems in China and India
could be characterised as convergent or divergent. More importantly, do the
independent directors in these two jurisdictions possess the core governance
attributes regarded as essential for performing their governance roles
effectively? Based on corporate governance guidelines and codes worldwide,
four core attributes are identified as influencing the capacity of independent
directors to successfully perform their role. A means test (t-test) is used to
compare the attributes of independent directors in the largest Chinese and
Indian companies. Additionally, these companies are benchmarked against
the largest companies in Hong Kong, as they are perceived to have achieved
better governance efficiency. Analyses show that while the regulatory
development of corporate governance in China and India has been improved,
there are still clear distinctions in the core attributes of Chinese and Indian
independent directors.
INTRODUCTION
The debate on convergence and divergence in corporate governance has received considerable
research interest. As corporate governance constantly evolves with new developments in legal and
regulatory systems being created, scholars argue that some degree of convergence in corporate
governance, especially towards the Anglo-American governance model, has been observed.1 This
trend has been identified as a result of the development of capital markets,2 the influence of the United
States legal and regulatory systems,3 initiatives and support from the international regulatory
institutions4 and the globalisation of corporations.5 Conversely, others argue that the institutional
diversity that lies beneath the legal and economic frameworks and distinctive social and political
*
Dr Helen Wei Hu, Lecturer, Faculty of Business and Economics, University of Melbourne; Professor On Kit Tam, Deputy
Pro-Vice-Chancellor (PVC), College of Business, RMIT University. Professor Tam was an independent director in a joint
venture fund management company set up by the First State Investment in China. The authors thank the Editor, Paul Ali, and an
anonymous reviewer for constructive and helpful comments. This research has been financially supported by a linkage research
grant (Linkage Grant No LP0776491) awarded by the Australian Research Council.
1
Goergen M et al, “Corporate Governance Convergence: Evidence from Takeover Regulation Reforms in Europe” (2005) 21
Oxford Review of Economic Policy 243; Hansmann H and Kraakman R, “The End of History for Corporate Law” (2001) 89
Georgetown Law Journal 439; Howson N and Khanna VS, “The Development of Modern Corporate Governance in China and
India” in Sornarajah M and Wang J (eds), China, India, and the International Economic Order (Cambridge University Press,
London, 2010) p 564.
2
Black B, “Agents Watching Agents: The Promise of Institutional Investor Voice” (1992) 39 UCLA Law Review 811; Coffee
Jr JC, “The Future as History: The Prospects for Global Convergence in Corporate Governance and Its Implications” (1999) 93
Northwestern University Law Review 641; Coffee Jr JC, “Racing Towards the Top? The Impact of Cross-listings and Stock
Market Competition on International Corporate Governance” (2002) 102 Columbia Law Review 641; Nestor S and
Thompson JK, “Corporate Governance Patterns in OECD Economies: Is Convergence Under Way?”, Organization for
Economic Cooperation and Development (2000), http://www.oecd.org/dataoecd/7/10/1931460.pdf viewed 22 May 2010.
3
Hansmann and Kraakman, n 1 at 439-442. See also Karmel R, “Tensions between Institutional Owners and Corporate
Managers: An International Perspective” (1991) 57 Brooklyn Law Review 90.
4
Nestor and Thompson, n 2, p 23. See also Gahan P et al, “Economic Globalisation and Convergence in Labour Market
Regulation: An Empirical Assessment” (2012) 60 American Journal of Comparative Law 703; Tricker B, Corporate
Governance: Principles, Policies and Practices (Oxford University Press, New York, 2009) pp 158-167.
5
Khanna T and Palepu KG, “Globalization and Convergence in Corporate Governance: Evidence from Infosys and the Indian
Software Industry” (2004) 35 Journal of International Business Studies 484.

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systems in individual countries shows strong resilience in the development of a “global” convergence
in corporate governance.6 Further, scholars such as Branson argue that “convergence in corporate
governance may occur in discrete areas, such as financial accounting or disclosure standards. The
convergence is far more likely to be regional rather than ‘global’.”7
To understand whether there is a convergence tendency in corporate governance in some Asian
countries where corporate governance is viewed as an “import”,8 the current study assesses and
compares China and India by reference to four core attributes of independent directors considered
essential for the effectiveness of their performance. Chinese and Indian independent directors were
chosen as the research context for several reasons. The world’s largest emerging economies are both
located in Asia; China and India have not only shown similarities in their economic and market
development but also present clear differences in cultural and social-political factors.9 Therefore, a
comparative analysis of China and India regarding their corporate governance development can
provide new insights into the debate surrounding convergence and divergence in corporate governance
in Asia.
“Independent directors” are a relatively new concept for China and India and they have gained
increasing significance in both countries.10 Given that core attributes in the forms of independence,
expertise, motivation, and commitment balance are generally regarded as essential for independent
directors to successfully exercise their governance roles,11 it becomes important to understand where
Chinese and Indian independent directors stand in relation to these core attributes and how similarly
or differently these attributes have been expressed. Addressing this research question can enhance our
knowledge of the convergence between China and India in terms of corporate governance in general
and independent directors in particular. Finally, with the rapidly intensifying trade and bilateral
investment relationships that Australia is forging with China and India, increased awareness of the
core attributes of Chinese and Indian independent directors can assist Australian firms to implement
appropriate governance systems when they engage in internationalisation.
The next section of the article outlines legal and corporate governance development in China and
India with specific emphasis on their independent director systems. After this, the four core attributes
6
Branson D, “The Very Uncertain Prospect of Global Convergence in Corporate Governance” (2001) 34 Cornell International
Law Journal 321 at 325; Chatterjee SR and Nakervis AR, “Convergence and Divergence – A Heritage, Transition and
Transformation Model of Management in Asia” in Chatterjee SR and Nakervis AR (eds), Asian Management in Transition:
Emerging Themes (Palgrave Macmillan, New York, 2007) pp 19-20; Clarke T, International Corporate Governance: A
Comparative Approach (Routledge, London, 2007) pp 255-265.
7
Branson, n 6 at 362. Several research studies on convergence in corporate governance in Europe have provided findings to
support this viewpoint: see Collier P and Zaman M, “Convergence in European Corporate Governance: The Audit Committee
Concept” (2005) 13 Corporate Governance: An International Review 753; Edwards T, “Corporate Governance, Industrial
Relations and Trends in Company-level Restructuring in Europe: Convergence Towards the Anglo-American Model?” (2004)
35 Industrial Relations Journal 518; Goergen et al, n 1 at 243-245.
8
Roche J, Corporate Governance in Asia (Routledge, New York, 2005) p 36.
9
Li S and Nair A, “Asian Corporate Governance or Corporate Governance in Asia?” (2009) 17 Corporate Governance: An
International Review 407.
10
The concept and definition of “independent director” was officially introduced to Chinese public corporations in August 2001
and Indian public corporations in February 2000 by their respective security regulators. See China Securities Regulatory
Commission, Guidelines for Introducing Independent Directors to the Board of Directors of Listed Companies (China Securities
Regulatory Commission, Beijing, 2001); Securities and Exchange Board of India, Clause 49 of the Listing Agreement
(Securities and Exchange Board of India, Mumbai, 2004), s A. Implementing an independent director sytem in China and India
is a pressing issue in both countries: see eg Chen JJ and Gong SXH, “Corporate Governance and Initial Public Offerings in
China” in Zattoni A and Judge W (eds), Corporate Governance and Initial Public Offerings: An International Perspective
(Cambridge University Press, New York, 2012) p 117; Kohli N, “Corporate Governance and Initial Public Offerings in India” in
Zattoni and Judge, n 10, p 171.
11
These four core attributes are based not only on key international corporate governance codes and guidelines across the world,
which are discussed below, but also on studies such as Fama EF and Jensen MC, “Separation of Ownership and Control” (1983)
26 Journal of Law and Economics 301; Hillman A and Dalziel T, “Boards of Directors and Firm Performance: Integrating
Agency and Resource Dependence Perspectives” (2003) 28 Academy of Management Review 383; Stephen P et al, “Too Busy to
Mind the Business? Monitoring by Directors with Multiple Appointments” (2003) 53 Journal of Finance 1087.

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 Independent directors in China and India: A comparative assessment

of independent directors in China and India are reviewed with reference to Australian practices, so that
a general understanding of the institutional conditions for independent directors in different contexts
can be built. An empirical comparison of the core attributes of Chinese and Indian independent
directors, benchmarked against Hong Kong independent directors, follows. This approach allows for a
better assessment of whether the practices of independent director systems in Asian economies,
including China, India and Hong Kong, have been more convergent or divergent, thus adding new
insights into the research of convergence in corporate governance in Asia. The article concludes by
highlighting the key findings of this empirical analysis and provides some implications arising from
the findings.

INDEPENDENT DIRECTORS UNDER CHINESE AND INDIAN CORPORATE GOVERNANCE

REGIMES

China
The development of corporate governance in China can be traced to the quickened pace of reform of
economic and state-owned enterprises since 1992. Two stock exchanges and a securities regulator, the
China Securities Regulatory Commission (CSRC), were established in the early 1990s. China’s
Company Law was introduced in 1994 and the Securities Law in 1999.12 Although China was not
seriously affected by the Asian financial crisis in 1997, the Chinese Government has recognised the
need to build a sound corporate governance system. Further, the influence of the OECD’s Principles of
Corporate Governance and domestic corporate scandals involving the falsification of financial
statements by management (eg Yin Guang Xia Co Ltd, Zhengzhou Baiwen Co Ltd and Lantian Co
Ltd) in the early 2000s have emphasised the importance of developing a well-functioning corporate
governance system.13
Major corporate governance regulations were subsequently introduced by the CSRC. In August
2001, the Chinese Government released the Guidelines for Introducing Independent Directors to the
Board of Directors of Listed Companies (the Guidelines).14 These regulations have comprehensively
discussed the definition, qualifications, selection process, duties and accountabilities of independent
directors. “Independent directors”, a group of directors that have critical roles to play in boardrooms in
the Anglo-American governance system, have been mandatorily implemented into the Chinese
corporate governance regime for the first time. To hasten the development of an independent director
system, the Code of Corporate Governance for Listed Companies in China was released in January
2002 (with a dedicated section (s 5(49-51)) for “independent directors”), further emphasising the
independence, duties and qualifications of independent directors.15
In 2006, the Company Law and the Securities Law were substantially amended to give greater
emphasis to corporate governance with the Company Law mandating the Guidelines.16 Today, the
concept of an “independent director”, although a new concept, has provided major progress in recent
corporate governance development in China. As with many other Asian countries, the global financial
crisis (GFC) has not severely affected China’s economy and no special corporate governance reform

12
See Nottle R, “The Development of Securities Markets in China in the 1990s” (1993) 11 C&SLJ 503 at 503-504.
13
China Securities Regulatory Commission, n 10, s I.2; Chen and Gong, n 10, p 118; see also http://www.cninfo.com.cn viewed
20 June 2009.
14
China Securities Regulatory Commission, n 10.
15
China Securities Regulatory Commission, Code of Corporate Governance for Listed Companies in China (China Securities
Regulatory Commission, Beijing, 2002), s 5(49-51).
16
The Company Law mandates the Guidelines that were released by the China Securities Regulatory Commission: see Tsui M,
“Corporate Governance in China” (2010) 20 Corporate Governance eJournal 7.

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action was initiated as a result. Overall, China has adopted a top-down approach to corporate
governance development and the role of independent directors has been prioritised in the last
10 years.17
India
India’s approach to the development of corporate governance is similar to China’s in several ways,
although it operates in a very different legal and political environment. Whereas Chinese corporate
governance is based on a civil legal system, India’s is built on a common law system with a long
history of capital market development.18 Over the last century, corporate governance in India was
initially shaped by capitalism under British rule, followed by the embrace of socialism and the Soviet
central-planning model after independence and the launch of the country’s most important commercial
legislation, the Companies Act, in 1956.19 With more recent economic liberalisation in the early 1990s,
a series of corporate governance scandals were reported, leading to the creation of a securities
regulator, the Securities and Exchange Board of India (SEBI), and the launch of the first corporate
legislation with provisions on corporate governance, the Securities and Exchange Board of India Act
1992 (India) (SEBI Act) in 1992.20
The first voluntary code of corporate governance for listed companies was released by the
Confederation of Indian Industry (CII) in 1998.21 Introduced in the midst of the Asian crisis,
Desirable Corporate Governance: A Code reflected an increasing recognition of the important role of
corporate governance for Indian firms and introduced the idea of independent directors.22 In 2000,
Clause 49 of the Listing Agreement (Clause 49) was released by SEBI in an effort to regulate the listed
companies for compliance with its corporate governance requirements. Clause 49 is regarded as a
milestone of corporate governance development in India.23 The definition of an “independent director”
was provided for the first time in Clause 49, s A, and subsequently restricted in the 2004 revised
version of Clause 49, s A.24
The Ministry of Corporate Affairs (MCA) regulates both listed and non-listed companies,
establishing several committees to draft amendments to the Companies Act with the aim of raising
governance standards for the Indian corporate sector as a whole.25 In 2009, another major corporate
governance reform with a great emphasis on independent directors was triggered by the largest
corporate scandal in India, the Satyam computer scandal,26 and, to a lesser extent, the GFC, leading to
the release of the Corporate Governance Voluntary Guidelines by the MCA.27 The MCA’s corporate
governance guidelines apply to all Indian companies, so these guidelines are voluntary, in contrast
with SEBI’s mandatory Clause 49.
17
Tam OK, The Development of Corporate Governance in China (Edward Elgar, Cheltenham, 1999) p 89; Tam OK and Yu C,
“China’s Corporate Governance Development” in Mallin C (ed), Handbook of International Corporate Governance (Edward
Elgar, Cheltenham, 2011) pp 223-236.
18
The Bombay Stock Exchange (BSE) was established as early as 1875: see Howson and Khanna, n 1, pp 521-531.
19
Companies Act 1956 (India); Rajagopalan N and Zhang Y, “Corporate Governance Reforms in India and China: Challenges
and Opportunities” (2008) 51 Business Horizons 55 at 55-56; Sharma JP, Corporate Governance, Business Ethics and CSR:
With Case Studies and Major Corporate Scandals (Ane Books, New Delhi, 2010) pp 417-423.
20
Sharma, n 19, Ch 10.
21
Confederation of Indian Industry, Desirable Corporate Governance: A Code (CII, New Delhi, 1998), Recommendation 2,
p 2.
22
Afsharipour A, “A Brief Overview of Corporate Governance Reforms in India” (December 2010) Director Notes 3.
23
Kohli, n 10, p 168.
24
Securities and Exchange Board of India, n 10, s A.
25
Companies Amendment Act 1996 (India); Companies Amendment Act 2006 (India).
26
Sharma, n 19, pp 417-423.
27
Ministry of Corporate Affairs, Corporate Governance Voluntary Guidelines (MCA, New Delhi, 2009).

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 Independent directors in China and India: A comparative assessment

FIGURE 1 A comparison of corporate governance development path in China and

India (1947 – present)

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Hu and Tam

Further, the MCA has continuously introduced Bills to replace the half-century-old Companies
Act, the latest of which is the Companies Bill 2011 that is currently before the Indian Parliament.28
Chapters XI and XII of the Companies Bill 2011 contain regulations relating to boards of directors
with a substantial focus on independent directors. For instance, cl 149 of the Companies Bill 2011
obligates all listed companies to have boards with independent directors making up at least one-third
of the board. The criteria for who constitutes an “independent director” are also provided in this
clause, and, to a certain degree, are stricter than those set out in Clause 49.29 Clause 150 of this Bill
specifies the selection and appointment process of independent directors. Additionally, Sch IV of this
Bill introduces a Code for Independent Directors that provides comprehensive guidelines in respect of
the conduct required of independent directors.30
Overall, both Chinese and Indian regulators are determined to improve the governance standards
of their corporate sectors through greater emphasis on the importance of independent directors,
disclosure and transparency, as highlighted in major corporate regulations.31 A comparison of the
development paths of corporate governance in China and India is presented in Figure 1.
Figure 1 succinctly demonstrates how there are some degrees of convergence in the development
of corporate governance in China and India. Both countries became independent in the late 1940s and
established their securities regulators (the China Securities Regulatory Commission in China and the
Securities and Exchange Board of India in India) around the same time. They have introduced and
promoted independent directors and their roles and responsibilities. Given the similarities in the
regulatory development of independent director systems in both countries, it is important to assess
how the core attributes of independent directors in China and India are expressed in practice.

CORE ATTRIBUTES OF INDEPENDENT DIRECTORS

The competence of board members is a prerequisite to promoting good corporate governance and firm
performance.32 In the global development of corporate governance, there are four core attributes of
independent directors, namely:
• independence;
• expertise;
• motivation; and
• commitment balance.
These attributes have been specifically stipulated in various corporate governance guidelines and
codes. These include the OECD’s Principles of Corporate Governance, the NYSE Corporate
Governance Rules in the United States, the United Kingdom’s Combined Code on Corporate
Governance and the Higgs Review of the Role and Effectiveness of Non-executive Directors, the ASX
Corporate Governance Principles and Recommendations in Australia (the ASX Principles), and Hong
Kong’s HKEx Corporate Governance Code.33 See Table 1.

28
Companies Bill 2008 (India); Companies Bill 2009 (India); Companies Bill 2011 (India).
29
See Companies Bill, 2011 (India), s 149(5) at 91.
30
See Companies Bill, 2011 (India), Sch IV at 282-285.
31
Howson and Khanna, n 1, p 568; Kohli, n 10, pp 187-188; Shen S and Jia J, “Will the Independent Director Institution Work
in China?” (2005) 27 Loyola of Los Angeles International and Comparative Law Review 223 at 225.
32
See eg Barton D et al, “A Chinese View of Governance and the Financial Crisis: An Interview with ICBC’s Chairman”
(March 2009) McKinsey Quarterly pp 111-117.
33
See OECD, Principles of Corporate Governance, s VI (E, E1, E3, D4, D5) (Organisation for Economic Co-operation and
Development, Paris, 2004); NYSE Corporate Governance Rules, s 303A (1, 9) (New York Stock Exchange, New York, 2003);
United Kingdom, Combined Code on Corporate Governance, ss A3, A4 (5), B1 (Financial Reporting Council, London, 2008);
Department of Trade and Industry, Review of the Role and Effectiveness of Non-executive Directors, ss 6, 9(5), 12(15, 19, 20-30)
(Department of Trade and Industry, London, 2003) (Higgs Review); ASX, Corporate Governance Principles and
Recommendations, ss 2, 8 (ASX Corporate Governance Council, Sydney, 2007) (ASX Principles); Hong Kong Exchanges and
Clearing Ltd, HKEx Corporate Governance Code, ss A3, 6(3, 6, 7), B1 (Hong Kong Exchanges and Clearing Ltd, Hong Kong,
2012).

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According to these guidelines (among others), the four core attributes are regarded as critical in
affecting an independent director’s capability to be vigilant and effective in performing oversight
duties and fiduciary responsibilities. Consequently, the rationales and practices of these four attributes
of independent directors in China and India are discussed, with some consideration of Australian
practices, enabling a better assessment of the commonalities or differences of these core attributes in a
global landscape.34

Attribute 1: Independence
The independence of a board is perceived to be the most important factor for the board’s effective
exercise of its governance role. The NYSE Corporate Governance Rules, s 303A.1, states that
“effective boards of directors exercise independent judgment in carrying out their responsibilities”.
Generally, independent directors should not be related to the executives or controlling shareholders to
ensure that they remain independent and objective in monitoring and evaluating the performance of
management.35 To realise this expectation, two key components of independence are required: (i) strict
criteria for “independence”, and (ii) a high percentage of independent directors on the board. These
two components are considered to constitute the independence attribute for independent directors.
However, the criteria for director independence stipulated by Chinese and Indian law and
regulators have been criticised for lack of clarity, making independence inherently constrained.36 For
example, the Chinese independent directors’ Guidelines, s 3(4), requires only a one-year “cooling-off”
period before a substantial ex-shareholder or a former executive of the company can become an
independent director, compared with the three-year cooling-off period adopted in India and
Australia.37 With the importance of business networks underpinning Chinese business dealings,
researchers argue that a one-year cooling-off period is clearly insufficient.38 Ex-employees and
ex-bureaucrats acting as independent directors are unlikely to actively challenge the board or take a
tough stand against management because strong loyalties and connections continue to exist among
them.39
In India’s case, there was a loose legal definition of “independent directors” in the initial version
of Clause 49. Although the 2004 revision provides a more detailed, strict definition, controversy
remains over the definition of independent directors. Clause 49, s III(IV), states that “nominee
directors appointed by an institution which has invested in or lent to the company shall be deemed to
be independent directors”. This statement is often criticised because nominee directors of state-owned
financial institutions cannot be considered independent. Research on independent directors has found
that these directors have little interest in oversight roles and are unlikely to perform their monitoring

34
Krishnaprasad KV, “Comparative Contractarianism: A Reassessment for the Insider Model” in “Directors’ Duties and
Corporate Governance” (2011) 29 C&SLJ 178.
35
Jensen MC and Meckling WH, “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure” (1976) 3
Journal of Financial Economics 305; Lipton M and Lorsch JW, “A Modest Proposal for Improved Corporate Governance”
(1992) 48 Business Lawyer 59.
36
Shen and Jia, n 31 at 224; Tong L, “Development of System of Independent Directors and the Chinese Experience” in Tong L
(ed), Corporate Governance Reform: China and World (Economic Management Publishing House, Beijing, 2002) Ch 8;
Chandra Committee, Naresh Chandra Committee Report (Department of Company Affairs, New Delhi, 2002) Executive
Summary, p 61.
37
See China Securities Regulatory Commission,, CSRC Guidelines, n 10, s 3(4); Securities and Exchange Board of India, n 10,
Clause 49, s III(c); ASX Principles, n 33, p 17, Box 2.1.
38
Lin L, The Independence of Independent Directors: A Comparative Study (National University of Singapore, Singapore,
2005) p 61; Hu HW, “Independent Directors: A New Chapter of the Development of Corporate Governance in China”, 15th
Annual Conference of the Association for Chinese Economic Studies Australia, 2-3 October 2003, p 9.
39
Shen and Jia, n 31 at 235-238; Chen G et al, “Ownership Structure, Corporate Governance and Fraud: Evidence from China”
(2006) 12 Journal of Corporate Finance 424.

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duties effectively.40 In practice, family business groups with high ownership concentrations often
dominate the selection of independent directors, with boards stacked with friends, former employees,
employees of associated companies and handpicked “independent” directors.41
The proportion of independent directors in board membership also affects the level of
independence of the board. A board with more independent directors can better exercise its
governance power and challenge management. Although findings on the effects of independent
directors on firm performance are often inconclusive, studies have found that firms with a higher
proportion of independent directors have fewer incidents of corporate fraud.42 A board composed of a
majority of independent directors is recommended by most existing corporate governance codes
worldwide, including the ASX Principles in Australia.43 Given that both Chinese and Indian
companies have high ownership concentration, it is even more critical for their boards to become
independent, especially from their controlling shareholders. At present, one-third of board members
are required to be independent for Chinese listed companies, and similarly for Indian listed companies
when the board chair is a non-executive director. A greater presence of independent directors should
be encouraged to enhance the power of independent directors to lead to a more independent and active
board.
Attribute 2: Expertise
The presence of independent directors with appropriate expertise can actively contribute to the overall
effectiveness of the board.44 According to Recommendation 2.4 of the ASX Principles, “in order to be
able to discharge its mandate effectively the board should comprise directors possessing an appropriate
range of skills and expertise”. Further, in HKEx Corporate Governance Code, s A6.7, specifies that
Independent non-executive directors and other non-executive directors, as equal board members, should
give the board and any committees on which they serve the benefit of their skills, expertise and varied
backgrounds and qualifications through regular attendance and active participation.
The concept of independent directors is relatively new to both China and India and these countries
have severe shortages in the numbers of qualified candidates. Independent directors in both countries
have traditionally been government officials, university professors or persons nominated by controlling
shareholders who have little interest in an oversight role.45
In contrast, in developed markets such as Australia and Hong Kong, independent directors are
often current and former corporate leaders, senior executives, legal and financial professionals and
industry experts. For example, the Australian Securities and Investments Commission expects
non-executive directors to possess business knowledge and basic financial skills.46 Studies of
Australian listed companies have shown that, in addition to accounting and financial professionals,
industry experts are particularly popular candidates for independent directors because of their
40
Mukherjee D and Ghosh T, “An Analysis of Corporate Performance and Governance in India: Study of Some Selected
Industries”, Discussion Papers in Economics (Indian Statistical Institute, Delhi, 2004) p 32; Sarkar J and Sarkar S, “Large
Shareholder Activism in Corporate Governance in Developing Countries: Evidence from India” (2000) 1 International Review
of Finance 161.
41
Bhat V, “Corporate Governance in India: Past, Present and Suggestions for the Future” (2007) 92 Iowa Law Review 1429;
Kumar Mangalam Birla Committee, Report of the Kumar Mangalam Birla Committee (SEBI, Mumbai, 2002); Chakrabarti R,
“Corporate Governance in India – Evolution and Challenges”, Social Science Research Network Working Paper (2005)
pp 14-17.
42
Chen et al, n 39; Yeh YH and Woidtke T, “Commitment or Entrenchment? Controlling Shareholders and Board Composition”
(2005) 29 Journal of Banking and Finance 1857.
43
See ASX Principles, n 33.
44
Kroll M et al, “Board Vigilance, Director Experience, and Corporate Outcomes” (2008) 29 Strategic Management Journal
363.
45
Rajagopalan and Zhang, n 19 at 60; Roche, n 8, p 83.
46
ASX Principles, n 33, Recommendations 2.4-2.5.

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managerial experience and business knowledge of the relevant industry.47 Therefore, professional
expertise in the areas of accounting and finance, law, and core business have been identified when
defining the “expertise” attribute for independent directors.
In China, the most popular candidates for independent directors are not CEOs or business
executives but rather former government officials and academics. A study of Chinese listed companies
found that among a total of 3,839 independent directors as of June 2003, 44% were academics, 24%
were consultants and analysts and a small number were company managers, including CEOs (13%).48
Another study that examined 5,727 independent directors over the period 2001-2007 reported that
41% of independent directors were academics while 28% were current or former government
officials.49 Unlike corporate managers, government civil servants and academics are usually not
business savvy and they often lack practical experience in dealing with major business activities, such
as mergers and acquisitions.50 Likewise, in India, a large proportion of independent directors originate
from state-owned financial institutions or are government appointees. These independent directors are
unlikely to hold appropriate qualifications and may lack relevant business expertise. In contrast,
reputable industrialists are considered more suitable candidates who can contribute to a company
requiring public stature for investor support and who have the capacity to contest management.51
Attribute 3: Motivation
According to the Higgs Review, s 12(20-30), “the remuneration of a non-executive director should be
sufficient to attract and fairly compensate high quality individuals”. Although independent directors
usually do not rely on their director fees to earn a living, to attract highly talented people many
corporate governance guidelines have recommended fair and sufficient compensation for independent
directors as motivation towards long-term shareholder value.52 In Australia, the 2010 amendments to
the ASX Principles further emphasised the importance of disclosure of compensation packages for
directors.53 Therefore, director compensation is considered as a key element of the “motivation”
attribute for independent directors.
The compensation of independent directors often involves two parts: a fixed fee and
compensation linked to long-term shareholder value or firm performance, such as stock options or
superannuation contributions.54 In emerging economies such as China and India, inadequate
compensation may be one of the main obstacles to the effective functioning of independent directors.
Although corporate governance rules in both countries have recognised the need to appropriately
compensate independent directors, research suggests that current levels of compensation are
inadequate.55 In China, companies often pay independent directors an annual fee with no other form of
compensation. In fact, in Chinese firms, it is uncommon to grant stock options to company CEOs and
47
Suchard JA, “The Impact of Venture Capital Backing on the Corporate Governance of Australian Initial Public Offerings”
(2009) 33 Journal of Banking and Finance 767; Kelly C and Dimovski W, “Professional Accounting Qualifications of Audit
Committee Membership: Implications for Curriculum and Learning” (2007) 14 International Journal of Learning 97 at 99-100.
48
Li Z, Zhongguo Gushi Fazhang Baogao [China Stock Market Development Year Book] (China Financial and Economic
Publishing House, Beijing, 2005) p 1.
49
Lin K et al, “Exit as Voice: The (Un)intended Consequence of Independent Director Resignations in an Emerging Economy”,
Working Paper (2011), http://www.hbs.edu/units/am/pdf/Independent%20Directors.pdf viewed 15 March 2012.
50
Su Y et al, “Principal-Principal Conflict in the Governance of the Chinese Public Corporation” (2008) 4 Management and
Organization Review 17; Kakabadse NK et al, “The Effectiveness of Non-executive Directors in Chinese State-owned
Enterprises” (2010) 48 Management Decision 1063.
51
Douma S et al, “Foreign and Domestic Ownership, Business Groups, and Firm Performance: Evidence from a Large
Emerging Market” (2006) 27 Strategic Management Journal 637 at 638-639; Mukherjee and Ghosh, n 40, p 2.
52
ASX Principles, n 33; Business Roundtable, Principles of Corporate Governance (Business Roundtable, Washington DC,
2002); United Kingdom, Combined Code on Corporate Governance, n 33.
53
Australian Stock Exchange, Corporate Governance Principles and Recommendations with 2010 Amendments (ASX
Corporate Governance Council, Sydney, 2010).
54
Stock option is not recommended by the ASX Corporate Governance Council: see ASX Principles, n 33, p 37, Box 8.2.
55
See Confederation of Indian Industry, n 21; Rajagopalan and Zhang, n 19 at 55-56.

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senior managers. As several researchers have noted, the high incidence of absence among independent
directors during board meetings may be attributed to a lack of incentive.56
It is also rare for independent directors in India to receive stock options with only a few large
organisations, such as Infosys Technologies Ltd and ITC Ltd, offering stock options in compensation
packages. Indian regulators appear to have taken an interventionist approach in setting limits on the
amount of director compensation.
Generally, Indian firms compensate independent directors with a small sitting fee and a portion of
the board’s commission, which may be up to 1% of the firm’s net profit.57 In 1998, the Working
Group on the Companies Act recommended raising the maximum sitting fee per meeting for
non-executive directors from $A75.60 (Rs 2,000) to $A189 (Rs 5,000). In 2003, the regulator
increased the maximum limit for compensation to non-executive directors per annum from A$596
(Rs 20,000) to A$5,960 (Rs 200,000) in an effort to recruit qualified professionals to boards.58
The existing compensation levels in both countries are considered inadequate to compensate
independent directors for the time and effort devoted to their work.59
Attribute 4: Commitment balance
An appropriate level of commitment balance is essential for independent directors to have sufficient
time and energy to perform their duties.60 In Australia, Recommendation 2.4 of the ASX Principles
states:
Individual board members should devote the necessary time to the tasks entrusted to them. All directors
should consider the number and nature of their directorships and calls on their time from other
commitments.
As a result of the emphasis on balancing directors’ commitments, multiple directorships are quite
uncommon in Australia. For example, previous research has revealed that among 5,468 directors in
Australian listed companies, nearly 80% did not hold multiple directorships, 13% held two
directorships, and only 1% of the directors had five or more directorships.61 In contrast, multiple
directorships are common in both China and India due to the very limited pool of qualified candidates
and a general shortage of professionals. Some studies argue that skilled and high-calibre candidates
naturally attract multiple directorships and that such candidates can remain highly effective in their
roles, although other studies hold the opposite view.62 Directors with multiple directorships are
regarded as having a wider scope of knowledge, experience and networking external to the firm that is
beneficial to firm growth. These directors may also have a greater incentive to monitor corporate
performance because they have a personal investment in maintaining their reputations as
decision-making experts.63
Conversely, when directors are overcommitted by serving on too many boards, they may not be
able to effectively perform their monitoring roles. Prior research has demonstrated that many
56
Zhong P, “Duli Dongshi Xuyao Jili He Yueshu Ma?” [Do Independent Directors Need to Be Compensated and Controlled?],
Zhongwai Guangli [Sino-Foreign Management] (China, 2001).
57
Companies Act 1956 (India), s 139; Ghosh A, “Determination of Executive Compensation in an Emerging Economy:
Evidence from India” (2006) 4 Emerging Markets Finance and Trade 69.
58
Ghosh, n 57 at 73-77.
59
ICRA Rating Feature, Emerging Board Practices – A Survey (ICRA, New Delhi, 2005); Lu X, “Woguo Duli Dongshi you Liu
Da Yituan” [Six Issues with Chinese Independent Directors], Shanghai Zhengquan Bao [Shanghai Security] (2002).
60
See HKEx Corporate Governance Code, n 33, s 6 at 9.
61
Kiel GC and Nicholson GJ, “Multiple Directorships and Corporate Performance in Australian Listed Companies” (2006) 14
Corporate Governance: An International Review 540.
62
Bhat, n 41 at 1436; Sarkar J and Sarkar S, “Multiple Board Appointments and Firm Performance in Emerging Economies:
Evidence from India” (2009) 2 Pacific-Basin Finance Journal 271.
63
Fama and Jensen, n 11 at 301; Ferris SP et al, “Too Busy to Mind the Business? Monitoring by Directors with Multiple
Appointments” (2003) 53 Journal of Finance 1087.

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 Independent directors in China and India: A comparative assessment

independent directors are overburdened with multiple directorships, resulting in poor performance.64
Further, multiple directorships may deter healthy challenges of board matters because relationship-
building plays an important part in gaining contacts and reciprocity is expected among directors who
sit on each other’s boards.65
In respect of relevant regulations, upper limits to the number of multiple directorships have been
set in both countries. In China, a maximum of five directorships per director has been stipulated in the
Guidelines in an attempt to ensure that directors have sufficient time and energy to perform their
duties.66 In significant contrast, the Indian Companies Act grants a director a maximum of 15 board
memberships.67 However, many government bodies, quite rightly, have argued that this number should
be reduced substantially because directors are unlikely to perform their duties effectively, given the
current standard.68

EXAMINATION OF THE LARGEST LISTED COMPANIES IN CHINA AND INDIA

To understand the convergence or divergence of core attributes of Chinese and Indian independent
directors, a two-step comparison has been conducted. First, core attributes of independent directors of
300 of the largest Chinese publicly listed companies (the Hushen 300 Index) and the 200 largest
Indian publicly listed companies (the BSE 200 Index) have been compared using data from the year
2007.
Secondly, core attributes of the Chinese and Indian independent directors were compared by
benchmarking against independent directors of the largest publicly listed companies in Hong Kong
(the Hang Seng 43 Index) for the same period. Hong Kong was rated as having the best corporate
governance quality in Asia in 2007 according to the Asian Corporate Governance Association,69 and
using the same attributes to compare against Hong Kong companies enables better access to the
convergence of corporate governance at a regional level. 2007 was used as a data point because it
provides the latest comparable data covering the same areas for the Asian three economies under
discussion.
Additionally, governance research has suggested that ownership and board structures are
relatively stable and that data on boards of directors do not change significantly over time.70 Given an
average tenure of 6.8 years for independent directors in Asian countries as a result of corporate
governance guidelines,71 the 2007 data is considered to appropriately reflect the current practices of
independent directors in these three economies.

64
Garg AK, “Influence of Board Size and Independence on Firm Performance: A Study of Indian Companies” (2007) 32
Vikalpa 39; Jackling B and Johl S, “Board Structure and Firm Performance: Evidence from India’s Top Companies” (2009) 17
Corporate Governance: An International Review 492.
65
Byrd J et al, “Stockholder-Manager Conflicts and Firm Value” (1998) 54 Financial Analysts Journal 14; Core JE et al,
“Corporate Governance, Chief Executive Officer Compensation, and Firm Performance” (1999) 51 Journal of Financial
Economics 371.
66
China Securities Regulatory Commission, n 10, s I.2.
67
Companies Act 1956 (India), s II, 275.
68
Confederation of Indian Industry, n 21, pp 2-3; Sarkar and Sarkar, n 62 at 272.
69
Credit Lyonnais Securities Asia, CG Watch 2007 – Corporate Governance in Asia (CLSA Asia-Pacific Markets, Singapore,
2007).
70
La Porta R et al, “Corporate Ownership Around the World” (1999) 54 Journal of Finance 475; Rechner PL and Dalton DR,
“CEO Duality and Organizational Performance: A Longitudinal Analysis” (1991) 12 Strategic Management Journal 155;
Hu HW et al, “Internal Governance Mechanisms and Firm Performance in China” (2010) 27 Asia Pacific Journal of
Management 727 at 737.
71
According to the China Securities Regulatory Commission, independent directors can have a tenure not exceeding an
aggregate period of six years (CSRC, 2001, s IV-4), whereas an aggregate period of nine years is recommended for Indian
independent directors (Securities and Exchange Board of India Act 1992 (India), cl 49, s ID-1) and Hong Kong independent
directors (HKEx, 2004, s A4.3; HKEx, 2012, s A4.3). Also see Eversheds, Eversheds Board Report: Measuring the Impact of
Board Composition on Company Performance (Eversheds LLP, London, 2011).

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 Independent directors in China and India: A comparative assessment

Table 2 provides a summary of statistics on Chinese and Indian independent directors and their
governance structures, benchmarking against Hong Kong. Ownership concentration is high in all three
economies, with Indian firms having the highest level of ownership concentration (OCChina = 43.22;
OCIndia = 49.92; OCHK = 44.88). This finding supports a study by Claessens, Djankov and Lang that
ownership is typically concentrated in Asian countries where large shareholders often resort to high
ownership concentration to attain control and influence over the affairs of the companies.72 The
average board size is quite similar, with 11 in China, 10 in India and 14 in Hong Kong.
However, the proportions of independent directors on a board among the three economies are
quite different. Indian boards have more independent directors than their Chinese and Hong Kong
counterparts. The average number of independent directors on Indian boards is five, representing 53%
board membership, versus four on Chinese boards, accounting for 33% (IDHK = 5.14, ID%HK =
36.67). These numbers are a reflection of the regulatory requirements in the two countries. In terms of
gender diversity, boards in all economies have an overwhelming number of male independent
directors compared with females.
An examination of the expertise of the independent directors reveals that 87% of the independent
directors in Hong Kong possess expertise in one or more professional fields, which is much higher
than the 52% and 34% in China and India, respectively. Further, from a study of all the independent
directors on every board in Hong Kong’s publicly listed companies, there are three independent
directors with core business knowledge, or 60%, compared with 10 and 3% in Chinese and Indian
publicly listed companies, respectively. A lack of deep and relevant business knowledge is clearly a
shortcoming of independent directors in China and India, limiting their capability to provide advisory
and resource roles. Unlike core business knowledge, Table 2 illustrates that the number of directors
with expertise in law, accounting and finance is comparable across all three economies.
Table 2 also reveals that the compensation levels for independent directors in Hong Kong are
almost six times higher than those in China and India, whereas the average level of independent
directors’ compensation between China and India is comparable (IDPayChina = A$12,931;
IDPayIndia = A$11,973; IDPayHK = A$77,400). The median values of the Chinese and Indian
independent directors are also similar, but the maximum compensation level of Chinese independent
directors is almost twice that of their Indian counterparts. This finding partly reflects the divergence of
GDP per capita between these economies. Interestingly, a large number of Chinese listed firms do not
pay their independent directors at all, with several companies indicating that they are in the process of
finalising their compensation packages.
Table 2 indicates that independent directors in Indian and Hong Kong publicly listed companies
hold more multiple directorships than do their Chinese counterparts. On average, an Indian or Hong
Kong independent director sits on four boards, compared with two boards for a Chinese independent
director. However, the average maximum number of boards served by Indian independent directors is
15, which is nearly twice that of their Chinese and Hong Kong counterparts.
Figure 2 presents a further analysis of each level of multiple directorships. These results suggest
that overall, one-third of Indian independent directors serve on a single board, whereas almost half of
Chinese independent directors have no multiple directorships. In contrast, almost three-quarters of
independent directors in Hong Kong sit on multiple boards. The results also demonstrate that,
coincidentally, almost identical numbers (14%) of independent directors serve on two boards in China,
India and Hong Kong. Despite the conventional wisdom that directors who concurrently serve on
three boards are too “busy” to effectively perform their duties, many directors juggle multiple
directorships. For example, 183 (19%) Indian independent directors serve on six to 10 boards, and
another 83 (9%) sit on more than 10 boards. These numbers are substantially higher than the numbers
in China and Hong Kong.
72
Claessens S et al, “The Separation of Ownership and Control in East Asian Corporations” (2000) 58 Journal of Financial
Economics 81.

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FIGURE 2 Multiple directorships of independent directors

To examine the convergence in the core attributes of independent directors among the three
economies, a one-way, between-groups analysis of variance (ANOVA) was used. The Tukey-Kramer
multiple comparisons test of means was employed to address the issue of unequal sample sizes among
the economies. Table 3 lists the means for each attribute based on the economy pairwise comparison
(each economy is compared with the other two, and China and India were used together in comparison
with Hong Kong for the last group, “China & India v HK”) and notes whether their differences were
statistically significant.
For the first attribute, independence by ID%, significant differences were found for the
percentages of independent directors between the Chinese and Indian companies, among all groups
and when comparing China and India with Hong Kong. These results suggest a divergent practice in
board independence and, in particular, that board independence is weakest in China.
Similar results were found for the second attribute, expertise by ID Expertise%. Chinese publicly
listed companies have a statistically higher percentage of independent directors with related areas of
expertise than is found among Indian independent directors, but a lower percentage than among Hong
Kong independent directors. Clearly, both China and India are substantially lacking in qualified
independent directors compared to Hong Kong, which may partially explain why the boards in these
emerging economies are still far from effective.
For the third attribute, motivation by ID Pay, the findings suggest a convergence practice between
China and India in compensating their independent directors. However, the compensation of
independent directors in both countries is significantly lower than in Hong Kong, although it is
believed that this gap will be reduced over time. For the last attribute, commitment balance by ID
Directorship, it was found that the number of independent directors holding concurrent directorships
in China is significantly lower than in both India and Hong Kong. However, some similarities of ID
Directorship were observed between the Indian and Hong Kong independent directors, suggesting a
convergence practice in these two economies.

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CONCLUSION
The purpose of this study was to assess and compare China and India by referring to four core
attributes that are regarded as essential for the effectiveness of independent directors, and to offer
some insights on the convergence in corporate governance between China and India. From a formal
regulatory perspective, some degree of convergence in the development of corporate governance in
general and an independent director system in particular in both countries has been observed.
However, when it comes to the actual practice of core attributes of independent directors, clear
differences between the two countries have been found. Compared to the better-regarded governance
practice in Hong Kong, these findings suggest that improvements in all four attributes of independent
directors are required in China and India.
First, a more rigorously stipulated definition of “independent directors” should be developed and
enforced in both countries, and a higher percentage of independent directors are needed in China to
strengthen board independence and improve effectiveness. Further development and clarification of
the existing Indian and Chinese governance regulations and an ongoing reappraisal of the true
independence of these directors are also important considerations.
Secondly, recruiting high-calibre independent directors is a challenge in both China and India.
Given the rapid economic development in both countries, the demand for such appointments,
particularly for independent directors with core business expertise, will continue to rise. Consistent
with recommendations by the World Bank and the International Monetary Fund,73 it is believed that
formal training is essential to equip independent directors with the necessary knowledge and expertise
to expand the pool of suitable candidates. Although China and India have taken several steps in this
direction, specialist training for independent directors is lacking and must be developed to a significant
extent.
Thirdly, an appropriate level of compensation is fundamental to maintain the motivation and
preserve the independence of these directors. Independent directors in China and India are paid much
less than their peers in Hong Kong. Although it is argued that excessive compensation packages may
73
World Bank and International Monetary Fund, “Corporate Governance Country Assessment: India”, Report on the
Observance of Standards and Codes (ROSC) (World Bank and IMF, Washington DC, 2004).

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negatively affect the independence of these directors, given the limited pool of qualified independent
directors, insufficient incentives can also hamper the recruitment of talent. Therefore, an appropriate
compensation package is essential to facilitate the full functioning of this internal governance
mechanism. Additionally, although it is currently an uncommon practice in both countries, offering
other forms of compensation such as superannuation could be used to actively promote the market for
management talent.
Finally, serving on multiple boards appears to be a very common practice in both countries due to
the shortage of capable independent directors. Multiple directorships signal both independent
directors’ market popularity and their commitment to the companies they serve. However, when
directors do not have an appropriate commitment balance, they are less likely to contribute effectively
to their boards. Therefore, the circumstances of overburdened independent directors raise concerns
about their ability to perform their governance roles effectively.
In summary, both China and India have, to varying extents, revealed some convergence in the
regulatory infrastructure and formal institutions for the development of a more effective board with a
significant role for the independent directors. China has relied more on a top-down approach in
instituting corporate governance changes whereas industry initiatives in India have played a significant
role. Nevertheless, on the basis of this examination of independent directors’ key attributes, clear
divergent practices between the two countries have been found, as well as against those from Hong
Kong. Although the core attributes only reflect one aspect of the corporate governance development
that can affect directors’ abilities to perform their governance roles effectively, the results suggest that
compared to Hong Kong, important steps need to be taken to improve the quality of these core
attributes of Chinese and Indian independent directors.
In particular, it is suggested that to enhance the effectiveness of the independent director systems
in China and India, some initiatives in a diverse range of areas are needed. These include steps to
tighten the formal rules and regulations on the independence and expertise of independent directors, a
change in social and political attitudes towards directors’ compensation, the development of an
appropriate corporate culture to foster such notions as arm’s length transactions and reducing conflicts
of interest to combat cronyism and corruption, among others. On the whole, this study shows that
while much progress has been made in the development of independent director systems in China and
India, divergences in core attributes between the Hong Kong and Chinese/Indian independent directors
are still noticeable and suggest that considerable work on these aspects remains to be done.

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