A $391 million fine led to the withdrawal of Chinese board members from En Masse

(Bloomberg) — China’s independent directors have resigned from coveted seats on the boards of listed companies, frightened by hundreds of millions of dollars in fines imposed on five Kangmi Pharmaceutical company directors.

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Independent directors of at least 20 companies listed on the Shanghai and Shenzhen stock exchanges resigned after a Guangzhou court ruled on November 12 that some Kangmei executives and outside accountants were responsible for fabricating its financial statements. They were asked to jointly compensate investors for 2.5 billion yuan ($391 million) in losses.

Each of Kangme’s five independent directors is responsible for between 5% and 10% of the amount, equivalent to 123 million yuan to 246 million yuan, according to the exchange filing. They collected less than 200,000 yuan in annual manager fees from the company.

It is rare for independent directors to be ordered to compensate investors in a civil lawsuit in China. The mass departures highlight growing caution among corporate executives as Chinese regulators crack down on the country’s private sector, targeting industries from technology to education and more.

The Securities Regulatory Authority said it upheld the court’s decision in one of China’s biggest fraud cases, which also sentenced former Kangmei chairman to 12 years in prison. The agency had earlier pledged a “zero tolerance” for market misconduct at its mid-year meeting.

Kangmei revealed in 2019 that it had exaggerated its cash positions by $4.3 billion using false documents and transaction records – an amount one lawyer said was unprecedented in China. The company admitted “serious” deficiencies in corporate governance and internal control.

Most companies have cited personal reasons in recent filings for the resignation of their independent directors. In some cases, this has resulted in companies not meeting the mandatory requirement to have at least one-third of board members as independent directors.

In an earlier crackdown in 2016, China targeted academics who sit on the boards of listed companies. This followed a 2013 ban on senior government officials from holding paid positions in companies as part of the country’s anti-corruption drive. Local media reported that four out of five independent principals from Kangmi teach at local universities.

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