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China economy
OpinionComment
Ni Tao
Ni Tao

The View | How learning from US best practices can aid China’s corporate fraud fight

  • The trial over Kangmei Pharmaceutical’s financial practices and subsequent mass resignation of external directors from 24 listed companies shows the need for reform
  • Capital markets remains one area where China can and should emulate the US despite all their tensions

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A Kangmei Pharmaceutical booth is seen during a trade and service fair in Beijing on May 31, 2018. A recent trial over the company’s financial practices has raised fresh concerns about the role of independent directors on Chinese boards. Photo: Reuters
Ni Tao
The dust might have settled inside the court on the Kangmei Pharmaceutical case, China’s first class-action lawsuit against corporate fraud, but aftershocks continue to reverberate across the business world.

Twelve Kangmei executives, including former chairman and general manager Ma Xingtian, were found guilty of doctoring financial statements, among other charges. Ma was sentenced to 12 years in prison.

In addition to the ruling that Kangmei must pay 55,326 investors a total of 2.46 billion yuan (US$384.8 million) to reimburse their losses, the court dropped a bombshell when it ruled that five independent directors, four of whom teach at universities, were each liable for between 5 and 10 per cent of the penalty. This is equivalent to 123 million to 246 million yuan, an amount that far exceeds their director fees or teaching salaries.

In a dramatic twist, 25 external directors resigned between November 12 and 20 from the boards of 24 companies listed on the Shanghai and Shenzhen bourses. The mass departure has called into question the vitality of China’s independent director system.

The system was introduced in 2001 as part of a plan to improve governance of public companies. China’s securities regulator then published a set of guidelines making independent directors a mandatory component of public companies’ governance structure.

The system got a leg-up in 2005 with its inclusion in the country’s amended corporate law. It was hoped this move would lay the legal groundwork for efforts to stem corporate fraud and protect investor interests.
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