The No.172 online seminar of the “Macro-Finance Salon”, also the 15th of the “Finance Supports the Grand Start of the 14th Five-Year Plan” serial salon, jointly organized by the Department of Money and Finance of School of Finance of Renmin University of China (RUC), International Monetary Institute (IMI) of RUC, and Finance EMBA Center, was successfully held on December 26th, 2021, with the theme of “Incentives, Penalties and Protection of Independent Directors”. Xu Rong, Professor at School of Finance of RUC, Researcher at Research Institute of Capital Market and at Research Institute of Insurance; Hu Yuyue, Director of Research Institute of Securities and Futures of Beijing Technology and Business University; Li Shoushuang, Senior Partner of Dentons Law Firm, Beijing; and Yu shijin, Founding Partner of Jia Chuan Law Firm, Beijing, attended the seminar. The salon was presided by Hu Bo, IMI Researcher, Director of EMBA Center and Deputy Director of Insurance Department of School of Finance of RUC.

Professor Xu Rong delivered a keynote report titled “Incentives, Penalties and Protection of Independent Directors”. He pointed out that the board system, especially the independent director system, is a core part of the incentive and constraint system of the macro financial system. The independent director system is related to the core functions of the entire financial system. The board needs to supervise management on behalf of major shareholders, while supervise major shareholders and the ultimate controller on behalf of minor shareholders. The board also needs to regulate corporate behavior on behalf of all stakeholders including creditors. Independent directors are supposed to reach a balance among multiple stakeholders and achieve effective incentive and constraint. The approaches were discussed from the following four aspects:

First, the selection of independent directors. Independent directors should be independent and capable. It is important to have the ability to supervise based on independence. Independent directors should have a strong capability to perform their duties and supervise the management. Through empirical research, we found that scientists as independent directors are likely to alleviate the over-investment in the company. The research also shows that scientists serving on committees on the board can perform their supervisory duty more effectively.

Second, how to effectively motivate independent directors. First of all, excessive financial incentives for independent directors can affect their independence while present potential adverse selection and moral hazard. Second, empirical studies have also shown that reputational incentives can play a role in the Chinese market. For example, some empirical studies have shown that independent directors who vote against the company have more opportunities to serve in public companies in the future. Finally, if a company acts fraudulently or if an independent director signs documents that are potentially fraudulent, the securities authority will impose administrative penalties. The threat of penalties will push other affiliated companies or affiliated independent directors to better perform their duties.

Third, the increase of independent directors’ responsibilities and the trend of departures. The departures of independent directors of listed companies were mainly in two periods. One was in 2014 when the CSRC stipulated that government officials could not serve as independent directors. Many independent directors were forced to resign due to the impact of regulation; the second was between 2019 and 2020, after the promulgation of the new securities law, higher litigation risks also prompted an increase in the departure rate of independent directors. The departure rate of independent directors of listed companies with higher litigation risks was even higher.

Fourth, the role of executive liability insurance of independent directors. After a company purchased liability insurance, the corresponding insurance company will conduct more research on and interviews with the company, improve the company’s information disclosure, and reduce the opacity of the company. These methods can effectively manage the reduction of stakes and will inhibit a wide range of other violations such as pollution. At the same time, an event study focusing on the impact of the new securities law shows that the more serious the company’s past violations and the greater the risk of litigation, the stronger the positive value effect of executive liability insurance.