CORPORATE

GOVERNANCE
GROUP MEMBERS
IRUM
BBA (HONS)
6th semester

CORPORATE GOVERNANCE
IN
CHINA

Defining Objective Corporate

Governance Standards
Defining corporate governance:
Corporate governance relates to the internal means by
which corporations are operated and controlled. It is
critically important to a countrys economic growth and
stability, because it provides the credibility and confidence
in management that is fundamental to capital markets.
Objective standards:
The corporate governance principles promulgated by the
Organization for Economic Cooperation and Development
(OECD) are recognized as an influential, objective set of
corporate governance principles and represent the first
initiative by an inter-governmental organization to develop
the core elements of a good corporate governance regime.

INTRODUCTION
Corporate governance in China has undergone significant
change during the past three decades as the Chinese
economy has liberalized and developed.
In the late 1970s, its GDP has been growing at an average
annual rate of 9.73 percent.
Today, there are more than 1,500 publicly traded Chinese
companies, and the total market capitalization surpassed 24.5
trillion renminbi (RMB) in August 2007.
In a survey by the World Economic Forum, China ranked 44
out of 49 studied countries in terms of corporate governance
(Liu, 2006).

FEATURES OF CHINESE CORPORATE

GOVERNANCE
Four distinctive features of Chinese corporate governance in
the
late 2000s are particularly notable:
1)
2)
3)
4)

highly concentrated ownership;

strong state ownership;
pyramid ownership structures;
weak markets for corporate control.

CONTINUE
Highly concentrated ownership
Of the 1,602 companies listed on the Shanghai and Shenzhen
stock exchanges in August 2008, the single largest owner held
36 per cent of an average companys shares, the top three
owned 49 per cent and the biggest five controlled 52 per cent.
Strong State Ownership
State-owned or state-controlled enterprises were responsible
for 31 percent of Chinas GDP in 2007, but the Shanghai Stock
Exchange reported that the government held 51 percent of its
listed shares.

Pyramid Ownership Structures

Pyramid ownership structure has opened the way for the
malfeasance of tunneling, in which a controlling firm extracts
resources from other firms in its pyramid whose minority
owners would disapprove if the transfer came to light. China
added pyramid misappropriations to its criminal code.
Weak Markets for Corporate Control
A CSRC study in 2008 found that among the 10 largest
market-cap companies on the exchanges, 8 of them had fewer
than 10 percent of their shares in active trading, and the other
2 had less than a third actively traded.

DEVELOPMENT OF CG IN CHINA
The historical development of CG in China has gone through
four stages.

First stage, from 1949 to 1983, (SOEs) dominated the Chinese

economy, and the state commanded and controlled almost
every aspect of the economy.

Second stage, from 1984 to 1993, involved the beginning of

the separation of government and enterprise in China.
.

Third stage, from 1994 to 2005, marked the beginning of

experimentation in modern enterprise structure, including
passage of the first Company Law the first comprehensive
law that fully delineated the rights and responsibilities for
modern companies in China.

Final stage, from 2006 onward, has witnessed the

continuing growth of CG in China, including legislation
aimed at balancing the power asymmetry between state
shareholders and individual shareholders in companies

CORPORATE GOVERNANCE FRAMEWORK

Many entities both inside and outside companies play a role in
shaping the behavior and governance of Chinese companies.

The inner circle of oversight consists of shareholders

general meetings, boards, and management personnel who
are engaged in operating the companies and are directly
responsible for their governance.

The outer circle is composed of regulators (chiefly, the

CSRC), stock exchanges (the SSE and SZSE), the Chinese
legal system, the auditing system, and institutional
investors.

Major players

These external and internal players have a significant

impact on a companys corporate governance, but they
mainly do this through

Regulations,
Codes of conducts,
Certification of financial reports ,
Legal enforcement, etc

Regulators

The central regulatory body for corporate governance of publicly

listed companies is the CSRC
SCSC enacted the macro policies, while the CSRC functioned as its
executive agency and oversaw the market in accordance with the
law
The CSRC is a matrix organization with one chairman,4 five vice
chairmen, 16 functional departments, and three supporting centres
. It also has 10 regional offices...... as well as a missionary office.....
Fulfilling its regulatory duties, the goal of the CSRC is to promote
transparency and good governance in the market and to create
conditions that inspire investor confidence
The CSRC has developed an international presence as the
regulatory body representing Chinas markets overseas

Qualifying Foreign Institutional Investor (QFII) program

The CSRC manages international cooperation and forms
relationships through bilateral memoranda of
understanding with regulatory bodies in other countries
CSRCs most important functions is to oversee the domestic
stock exchanges.
the CSRC is responsible for both developing and regulating
the capital market
The role of NGOs and self-regulation is very limited

The Chinese Governing Board

As the Chinese public equity market matured, the

organization, composition and practices of boards of
directors of some publicly listed companies in China came
to acquire some features similar to those of Anglo-American
firms
Chinese governing boards have nonetheless followed a
distinctive path in the areas as follows:

Board Structure

China has adopted a two-tier board structure similar to the

German convention of having a supervisory board
overseeing a board of directors.

In principle the supervisory board monitors the directors

and management.

The board of directors in the Anglo-American system sits at

the hub of company governance, while in China the annual
shareholders meeting has emerged more to the front and
centre.

The board of directors in China, for instance, is required to

develop and formulate the companys annual budget and
investment plan, but not approve the budget and plan, as is
common in the Anglo-American world

Most of the real decision-making power remains in the

hands of the directors and management.

Chinese regulations require a firm to designate one

individual as the legal person representative to act on
behalf of the firm. This position is normally assumed by the
chairman of the board, and this rule has had the effect of
investing greater power in the board chair

Corporate Responsibility

China has placed formal emphasis on corporate social

responsibility more than any western country

The Company Law of 2006, for instance, has required that a

company observe social norms and business ethics
standards, operate honestly, accept monitoring by
government and the general public, and assume its social
responsibility.

Shenzhen demands of its listed companies that in the

process of maximizing shareholder value, they must also
consider the interests of their creditors

Shenzhen companies must also commit themselves to

social welfare services like environmental protection and
community development in order to achieve social harmony

companies have often fallen short of properly combining

company ownership and social responsibilities.

because of pressures for rapid growth, many companies

were failing to protect the environment properly, ensure
safe working conditions, assure product quality and prevent
fraud.

Information Disclosure and

Transparency

China has made many efforts in recent years to increase

transparency and strengthen enforcement in the public equity
market

China Securities Regulatory Commission has offered even more

specific guidelines through its Listed Company Disclosure
Requirement Implementation Rules.

Listed Companies' Ongoing Information

Disclosure :

1. A listed company shall truthfully, accurately, completely and

timely disclose information as required by laws, regulations and
the company's articles of association.

2.

3.

a company shall also voluntarily and timely disclose all

other information that may have a material effect on the
decisions of shareholders and stakeholders
The secretary of the board of directors shall be in charge
of information disclosure, including formulating rules for
information disclosure, receiving visits, providing
consultation, contacting shareholders and providing
publicly disclosed information about the company to
investors

Disclosure of Information Regarding Corporate

Governance

A listed company shall disclose information regarding its

corporate governance in accordance with laws, relevant
rules, including but not limited to:
(1) the members and structure of the board of directors
and the supervisory board;
(2) the performance and evaluation of the board of
directors and the supervisor board;
(3) the performance and evaluation of the independent
directors

(4) the composition and work of the specialized

committees of the board of directors,
(5) the actual state of corporate governance of the
company, the gap
between the company's corporate governance and the
Code, and the reasons for the gap
(6) specific plans and measures to improve corporate
governance.

Executive Compensation

Executive compensation in China has been substantially

lower than that in the West, though it has been rising
rapidly.

average compensation of the highest-paid executive of

listed firms in 2003 was close to RMB 200,000 (16,800),
but in 2008 the largest executive pay cheque had soared to
RMB 66 million (5.5 million).

in Chinese listed firms, according to a study in 2006, fully

97 per cent was still paid in the form of a fixed salary

Shareholder and Shareholders Meeting

RIGHTS OF SHAREHOLDERS:
As the owner of a company, the shareholders shall enjoy
the legal rights stipulated by laws, administrative
regulations and the company's articles of association.

Shareholders elect directors and vote at shareholder

meetings, but they also have access to company charters,
shareholder lists and the minutes of meetings

It is now mandatory, for instance, that shareholders

approve a companys transactions with a controlling
company, and the controlling company cannot vote its
shares on such transactions

Rules for Shareholders Meeting

The board of directors shall study and arrange the agenda for
a shareholders meeting

A listed company shall state in its articles of association the

principles for the shareholders' meeting to grant authorization
to the board of directors.

The time and location of the shareholders' meetings shall be

set so as to allow the maximum number of shareholders to
participate.

The shareholders can either be present at the shareholders'

meetings in person or they may appoint a proxy to vote on
their behalf

The board of directors, independent directors and qualified

shareholders of a listed company may solicit for the
shareholders' right to vote in a shareholders' meeting.

Duties of Directors
Prior to 2001, no law or regulation required that any directors be
independent of management. The CSRC now requires that a
third of the seats on a publicly listed company board be held by
independent directors, and many companies have reached that
threshold

The 2006 Company Law strengthened the obligations of directors to

include both duty of loyalty and duty of care, though neither is
defined very clearly

It also held directors personally liable if director decisions violated

state regulations or the company charter.

Directors shall faithfully, honestly and diligently perform their duties

for the best interests of the company and all the shareholders.

Directors shall earnestly attend relevant trainings to learn

about the rights, obligations and duties of a director.

After approval by the shareholders' meeting, a listed

company may purchase liability insurance for directors.

Directors shall ensure adequate time and energy for the

performance of their duties.

Directors shall attend the board of directors meetings in a

diligent and responsible manner

Scandals