Corporate Governance in China: Current Developments

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Corporate Governance in ChinaCurrent
Developments

• Dr. Chen Xiao Hong
• Director of ERI / DRC
• OECD Policy Dialogue on Corporate Governance in
  China
• Beijing
• May 2005

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Table of Contents
I. Corporate governance Meaning and
significance 1.1 Implication and content of the
structure of corporate governance 1.2 Why
attention is paid to corporate governance
globally 1.3 Why attention is paid to corporate
governance by Chinas SOEs
II. Question one for the governance of SOCs
Corporate legal form and legal relationship
III. Question two for the governance of SOCs
The issue of system structure
IV. Question three for the governance of SOCs
The issue of administrative system for SOA

• V. Revision of Chinas Company Law

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I Corporate governance Meaning and significance
for SOEs

• 1.1 Implication and content of the structure of
  corporate governance
• 1. Implication
• System arrangement for the relationship between
  stakeholders to the company and corporate
  framework
• Comprehensive arrangement of relevant concept
  system, commercial rules and laws
• Separating the operation from the ownership in
  large companies makes the system of governance
  structure the core and the fundamental system in
  corporate governance
• 2. Content of the system of corporate governance
• System arrangement for stakeholders
• Arrangement of decision-making (including
  supervisory) authority and corresponding rules
• Encouragement system for the operator and the
  manager.

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1.2 Why attention is paid to corporate governance
globally

• Historically, attention is paid to corporate
  governance by the theoretical and the
• industrial circles and since the 1980s attention
  has been paid to it once again
• Many problems occurred to companies in countries
  such as USA, UK and Japan etc. in the 1980s
• Organizational investors with enhanced power
  kicked off the campaign for sophistication of
  corporate governance
• SOEs were reformed and listed during 19801990s
  and the capital market was expanded
• Economic development is globalized and countries
  in the world compete for foreign investment
• Technological revolution and innovations in
  financial instruments make investment in huge
  amount earlier, but raising higher requirement
  for corporate governance
• A range of research accomplishments such as
  Campbell Report etc. were turned out.

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1.3 Why attention is increasingly paid to
corporate governance in China

• 1. SOEs are critical to national economy
• The main body for the majority of service
  industries and the key sector for industry
  (covering a heavy proportion in basic industries)
• A key source for employment in cities and towns
• The main source of financial revenues
• The proportion of SOEs in industrial sector (in
  2003, )

Amt. of enterprise Net assets Income Profit Tax Employment
17.5 55.5 40.5 46.1 61.2 37.6
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1.3 Why attention is increasingly paid to
corporate governance in China

• 2. Required by practice and policies
• ? Unsophisticated governance of SOEs and PLCs is
  a critical factor affecting the effective
  operation of Chinas companies and the healthy
  development of large companies with
  competitiveness and capital market.
• ? It was set down in the document of CPC Central
  Committees Determination on Some Critical Issues
  Concerning the Reform and Development of SOEs
  from the Fourth Plenary Session of the 15th
  Central Committee of CPC that, normative reform
  of large- and medium-sized SOEs to adopt
  corporate system shall be performed. Corporate
  system is an effective organizational form of
  modern enterprise system and the structure of
  corporate governance by legal person is the core
  of corporate system.
• ? Company Law and Securities Law etc. are
  gradually perfected.
• ? The system of independent director and
  improving actions such as encouragement with
  stock options etc. are being implemented in China.

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Table of Contents
I. Corporate governance Meaning and significance
to SOEs
II. Question one for the governance of SOCs
Legal form and legal relationship 2.1
Basic forms of and questions for SOEs
2.2 Design of SASAC and issues to be researched
III. Question two for the governance of SOCs The
issue of system structure
IV. Question three for the governance of SOCs
The issue of administrative system for
SOA V. Revision of Chinas Company Law
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2.1 Legal forms of SOCs and problems

• 1. There are 4 legal forms
• Enterprises registered according to the
  Enterprise Law
• Solely state-owned companies
• Diversified companies
• State holding (including relatively holding) PLCs

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2.1 Legal forms of SOCs and problems

• 2. Problems of significance
• There is no BOD for enterprises registered per
  the Enterprise Law
• -- or the general manager assumes duties of BOD,
  and the company may go out of control,
• -- or state-owned assets authority assumes duties
  of BOD, and over intervention is likely.
• There is BOD for SOCs registered per the Company
  Law
• -- all directors are insiders,
• -- problems of unclear rights and obligations,
  insufficient supervision and insufficient
  authorization for state-owned assets authority
  coexist.

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2.1 Legal forms of SOCs and problems

• 2. Problems of significance
• There is BOD for state holding companies with
  diversified shares
• -- overcontrol of company by dominant
  shareholders
• -- improvement of governance is needed, but the
  system is unsound
• There is BOD for state holding listed companies
• -- violation of public shareholders benefits
  exists
• -- how to reasonably regulate dominant
  shareholder?

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2.2 Two special legal issues for companies

• 1. Unsound legal system for special companies
• The monopoly of for-profit and not for-profit and
  the sector of commonweal enterprises
• National defense enterprises etc
• No Special Company Law, and the relationship
  between Company Law and industrial laws is not
  well dealt with

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2.2 Two special legal issues for companies

• 2. Project companies to which attention shall be
  paid
• ? Companies engaged in the sector of
  infrastructure
• ? Companies engaged in public services such as
  water supply and environmental protection etc. (a
  new question after the diversification of stock
  right)
• ? The relationship with the creditor, excessive
  loan and the bank related issues
• ? The relationship with policies is unclear,
  unjustified regulation and overregulation coexist

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2.3 Problem-solving ideas and approaches

• ? In most cases, SOEs registered per the
  Enterprise Law shall be transformed into
  companies registered per Company Law
• ? Sophisticated BOD shall be established in SOCs
• ? Revising Company Law to sophisticate corporate
  governance
• ? Sophisticating Securities Law to strengthen the
  reasonable supervision of company controller
• ? Special company law shall be researched, or
  improving the relationship between the governance
  of special companies and the administration of
  public policies by legal means such as company
  charter etc.
• ? Improving the administration of project
  companies by PFI and intensified competition etc.

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Table of Contents
I. Corporate governance Meaning and significance
to SOEs
II. Question one for the governance of SOCs
Legal form and legal relationship
III. Question two for the governance of SOCs The
issue of system structure 3.1 Sophisticating
internal governance system 3.2 Solving the
long existed issue of structure
IV. Question three for the governance of
SOCs The issue of administrative system for
SOA V. Revision of Chinas Company Law
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3.1 Sophisticating internal governance system

• 1. Sophisticated duties under the basis
  framework
• Clarifying duties of various organs
• Shareholders/shareholder meeting
• Directors/BOD/committees
• CEO
• Internal monitoring system
• Clarifying duties of various organs

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3.1 Sophisticating internal governance system

• 2. Sophisticated system
• Organizational structure and composition
• Operation of BOD and outcome
• Strategy and monitoring
• Human resources
• Internal control and risk control
• Information disclosure and transparency
• Company obligations

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3.1 Sophisticating internal governance system

• 3. The relationship between the governance of
  parent company and that of subsidiaries
• Special attention shall be paid to this issue
• Out of control and manipulation shall be avoided

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3.1 Sophisticating internal governance system

• 4. Two problems of significance
• Unclear organizational duties (between
  state-owned assets authority and companies, and
  between BOD and the management)
• Coverage system of the governance is incomplete
• Governance and management are blurred in terms of
  system, unfavorable for an effective management
  by the manager
• 5. Problem-solving ideas and approaches
• Building the concept of governance
• Establishing sophisticated governance system

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1. The long existed issue of structure is a
critical reason for unsmooth relationship in
governance of SOEs
3.2 Solving the long existed issue of structure
Inheriting Co.

• 2. Problem-solving approaches
• The state assumes responsibilities
• Separating the inheriting companies from the
  listed companies
• Establishing trust companies (by experience from
  Japan)

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Table of Contents
I. Corporate governance Meaning and significance
to SOEs
II. Question one for the governance of SOCs
Legal form and legal relationship
III. Question two for the governance of SOCs The
issue of system structure
IV. Question three for the governance of
SOCs The issue of administrative system for SOA
4.1 Features of the existing SOA
system 4.2 Understanding and
suggestions V. Revision of Chinas
Company Law
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4.1 Features of the existing SOA system

• The basic framework of existing system for SOA
• administration was formed in 2003
• Fulfillment of financers duties in levels is
  clarified
• Ownership functions are unified
• Main efforts are given to the promotion of system
  construction, personnel and assessment

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4.2 Understanding and suggestions

• 1. Understanding and evaluation
• Basic directions for SASAC
• Clarifying shareholders duties and orientation
• Strengthening the construction of governance
  system
• Some actions are transitional first tightened
  and then released
• 2. Some suggestions
• Strengthening governance construction
• Transparent rules and open information
• Independent evaluation by a third party
• Clarified responsibilities and more sufficient
  authorization

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Table of Contents
I. Corporate governance Meaning and significance
to SOEs
II. Question one for the governance of SOCs
Legal form and legal relationship
III. Question two for the governance of SOCs The
issue of system structure

• IV. Question three for the governance of SOCs
  The issue of administrative system for SOA
  
• V. Revision of Chinas Company Law
• 5.1 Basic facts about Company Law
• 5.2 Revision of Company Law favorable for
  governance reform and self-administration

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5.1 Basic facts about Company Law

• Company Law is a basic law critical to corporate
• governance in China
• Going effective in 1994
• Two revisions in 1999
• Significant revision by National Congress in 2004
  

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5.2 Revision of Company Law will help improve
corporate governance

• Strengthening corporate self-administration, for
  instance
• -- establishment and investment etc., reducing
  compulsory stipulations
• -- self-formulated rules such as company charter
  etc. play more important roles
• Improving corporate governance, for instance
• -- clarified directors responsibilities
• -- responsibilities of the dominant shareholder
• -- intensified supervision
• Strengthening the protection of shareholders
  benefits

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Thank You!