(NYSE) has required that independent directors constitute a Board majority in domestic companies only since 2004, as of 2001 approximately 75% of NYSE-listed companies already had such majorities. The modest role for independent directors contemplated in the listing rules of the NYSE a few years ago has given way, in the wake of Enron and other corporate scandals, to federal mandates for listed companies under the Sarbanes-Oxley Act (SOA). Under the current NYSE listing rules, the Board overall must have a majority of independent directors.

The experience of some emerging countries can be particularly enlightening. The interest of China in independent directors pre-dated the corporate scandals that led to federal-level corporate governance reforms in the United States, possibly because of the many similar scandals that had already occurred among companies listed on the two Chinese stock exchanges. Chinese policymakers and academics despaired of the power of the Supervisory Board to act effectively, and began promoting the institution of independent directors, particularly in publicly listed companies, as a way of strengthening supervision. In August of 2001, the China Securities Regulatory Commission (CSRC) issued its Guidance Opinion on the Establishment of an Independent Director System in Listed Companies. Covering all companies listed on Chinese stock exchanges it constituted the most comprehensive measure taken to that date, or since, by the CSRC to regulate internal corporate governance through the institution of the independent director. It was also borrowed from the United States corporate governance law and practice, and as such reveals the drawbacks relevant to legal transplants of corporate governance rules (see Box 3).

# **<mark>Box 3</mark>**

# **<mark>Legal Transplants of Corporate Governance – The Case of China</mark>**

<mark>The Independent Director Opinion in China seems to give special powers to independent directors by requiring that they constitute at least half of the members of a Board's audit, nomination, and compensation committees. On the other hand, there is no requirement that these committees be established, so a company could keep inside director control over such matters by having them decided by the entire board. In addition, independent directors have been endowed by several powers, including: i) to approve important transactions with affiliates; ii) to recommend engagement or dismissal of the company's accounting firm; iii) to recommend the holding of interim shareholders' meetings; and iv) to hire outside auditors and consultants (at the company's expense). Some of these powers are, however, ambiguous. For example, independent directors apparently do not have the power to actually call a meeting of shareholders or the Board; they have only the power to recommend to the Board that such a meeting be called. More importantly, the Opinion does not actually confer these powers on independent directors. It calls on companies to confer these powers, presumably through provisions in their articles of incorporation or other internal rules.</mark> _<mark>Source:</mark>_ <mark>Clarke (2006)</mark> In response to the 1997-1998 East Asian financial crisis, Korea adopted corporate governance rules in 1999, requiring "large" firms (assets > 2 trillion won, around U$2 billion) to have 50% outside directors. Smaller firms must have 25% outside directors. India’s also adopted major governance reforms in 1999, such as Clause 49 which requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls.

5