The New Development of Corporate Governance in China Prof. Lu Tong Director of Chinese Center for Corporate Governance Chinese Academy of Social Sciences 2002 May 16-17 , Seoul
China’s Economy:Dynamic Rapid Growth • During the past decade, China’s GDP grew at a rate of 9% annually , of which 7.3%in the year 2001 and 7.6% in the first quarter 2002 • Capital market play significant role to China’s economic development:by the end of 2001,1160 listed companies in Shanghai and Shenzhen Stock Exchanges.There are 1048 A shares, 112 B shares, 54H share companies, and 69 red chips • Total market capitalization reached US$580 billion in the year 2000, and US$520 billion at the year 2001. Market capitalization accounted for about 50% of GDP
China’s Capital Market: Potential vs Challenges • Potential: (1)High saving rate and large amount of savings, accounting for 40% of GDP (2)65million investors represent a mere 5% of total population in China, compared with 18% in Hong Kong and 49% in the USA (3)Entry into WTO will bring more opportunities in economic development
China’s Capital Market: Potential vs Challenges • Challenges: (1)a young capital market with short history; (2)inexperience in market regulation; (3)weak in enforcement of laws and rules; (4)quality of listed companies and need for better corporate governance;
The Main problem of Corporate Governance in Chinese Listed Companies • (a)Concentrated ownership structure with state as the controlling shareholder Among 1100 the listed companies 54% of shares are owned by state or state legal personal. At the moment,the Authorized Investment institutes (ie Holding company; National Assets Management Co;Group Co.)are on behalf of state. “Agent risks”; “insider control”.In some ways the situation in China is not that different from the rest the Asia.But the difference between those families and the Chinese state is that the interests of the former is usually aligned with their management
The Main problem of Corporate Governance in Chinese Listed Companies • (b)Lack of market for corporate control: till the end of 2000,63.4% shares of China listed company are non-tradable in capital market; and, the right of the state as a capital provider are not well protected because of the problem of state share vacancy; • (c) Lack of independence of the board and directors: most of the directors in board are executive directors and representatives of big share holders.Because most managers are former gov’t officials they still see the listed company as part of government.
The Main problem of Corporate Governance in Chinese Listed Companies • (d)Lack of accountability of the board and directors; • (e)Board of supervision could not play effective role because it is not independent; • (f) Lack of incentive mechanism and Checks & balance mechanism;
The new development of corporate governance in China • Codes and guidelines: (A)Shanghai Stock Exchange,March 2000; (B)China Securities Regulatory Commission(CSRC),January 2002; ·Set up Independent Directors System in 2001; ·Tighter reporting and disclosure;
The new development of corporate governance in China • Shareholders action; • Compulsory training for directors; • Regular check on the listed companies on the issues of accounting, disclosure, related party transactions, use of funds, etc. • Strong sanctions against violations on laws and regulations, including public criticism;
The new development of corporate governance in China • CSRC developed the first Code of Corporate Governance for Chinese Listed Companies according to the OECD Principles of Corporate Governance. • The Code is mandatory for all listed companies to follow and will be melt into listing rules.
Code of Corporate Governance • Apart from consisting with OECD Principle,some new factors to be included such as(1)Relationship between a listed company and its controlling shareholders.A listed company shall be independent from its controlling shareholders in such aspects as personnels, assets and financial affairs, shall practice independent business accounting and shall independently bear risks and obligations.(2)Related party transactions among a listed company and its shareholders or affiliates shall be fair and transparent.The price for connected party transaction shall not deviate from independent third party’s market price.
Code of Corporate Governance • (3)Protection of shareholders rights through civil proceedings; • (4)Performance assessment and incentive systems for the boards and the management.The performance assessment shall became a basis for determining the compensation and other rewarding arrangement for the person reviewed.The result should be explained at the shareholders meetings and shall be disclosed.
Code of Corporate Governance • (5)Information disclosure and transparency: besides disclosing mandatory information, a company shall also disclose all the other information that may have a material effect on the decisions of shareholders and stakeholder and shall ensure that information is disclosed in a timely, legitimate, and accurate manner. • In light of the special status of controlling shareholders, controlling shareholders shall take more obligations in disclosing their special influence on matters related to CG.
Introducing Independent Directors • By June 30th,2002, at least 2 members of the boards of directors shall be independent directors; and three or up to 1/3 of the board by June 30th, 2003, which means we need more than 3000 Nids • Independent directors have the special power other than stipulated in the Company Law and other relevant laws and regulation: major related party transaction;the appointment or removal of the accounting firm; to call an interim shareholder’s meeting;to appoint the outside auditing;to solicit the proxies before the convening of the shareholders’meeting, etc.
Tighter Reporting and Disclosure • Start to internationalize Chinese accounting standards.(Ministry of Finance and CSRC) • Stipulate necessary disclosure requirements with four layers including standard of content and formation, rules of disclosure, etc. • Regular disclosure through audited annual report, mid-year report and un-audited quarterly report • Listed companies are required to include in their annual reports a narrative statement of how they apply the Code of corporate governance to their particular circumstances.
Compulsory training for directors of Public Listed Companies • Objective of training: to equip directors with a broad knowledge & understanding of rules and regulation; to keep directors informed on the latest changes in securities industry • So far CSRC and Tsinghua University has organized 8 training programs for independent directors and investors. • Certificate of attendance issued upon completion
Incentive system for managers • Market for professional managers • Performance assessment of executives and managers • Performance related incentive devices: stock options, salary packages,etc.
Enforcement • Regular check on the listed companies on the issues of accounting, disclosure, related party transactions, use of funds, etc. In 2001, about 300 companies went through regular check, special check on about 80 firms, and 32 firms were under legal investigation • Sanctions against violations on laws and regulations, including public criticism
Need more changes in the following areas • Proper legal mechanism in the legislation, enforcement, and jurisdiction for supporting corporate governance Civil compensation in Securities Law violation: Legal basis for action by investors against law violator on stock market: The Securities Law;The Companies Law.In December 1998,Hongguang Industries touched off a civil compensation case due to false.Other cases of Zheng zhou Baiwen,ST Monkey King, Yian Tech and Yin Guangxia, which have been uncovered by CSRC, have all caused property lasses to investors.
Need more changes in the following areas • The victim of the cases brought the cases to demand the start of judicial procedures. • On Set 24, 2001, the Supreme People’s Court issued a circular No.406 to the local people’s courts, demanding them not to accept cases involving civil compensation on the stock market.Two reasons for refusing to accept such cases: (1) is that there are only principled rather than specific stipulations concerning civil responsibilities on the stock market; (2) is that the quality of judges cannot meet the requirement for handling such cases.
Need more changes in the following areas • Stronger sanctions against breaches • Clear rules and regulations • Fair and consistent enforcement • Training and education: a significant challenge for the corporate sector is to expand the pool of qualified persons, namely directors to undertake the responsibilities expected of them.
Need more changes in the following areas • Intermediaries need governance too. By this I mean investment funds and brokerage houses. We have found there are issues in some of the smaller firms that find themselves in financial trouble, particularly in times of market downfall.You find it is because they did not have good risk management or internal control, or good corporate governance structure.
Need more changes in the following areas • A culture of awareness about the importance of corporate governance. China is still in its initial stage in term of corporate governance. It is a big task in China to increase the awareness of the importance of corporate governance.But we must take the first step through education, setting up Codes & rules and enforcement.
The challenge of corporate governance reforms is systemic • Corporate governance rests on three basic disciplines:market discipline, regulatory discipline and self-discipline • Establishing sound legal institutions is an issue of paramount importance in ensuring the proper conduct of directors in China. • The biggest challenge in improving corporate governance in China is the extensive involvement of government in business. CSRC currently stresses “three separations” the separation of personnel, assets and finance between a controlling shareholder and a listed company.
The current wave of globalization is creating very fluid competitive environment • No nations and companies can formulate strategies in isolation or ignorance of global business and best practices. • Corporate governance essentially provides rules, frameworks and incentives to help us make correct choice • It will end up with our personal values of integrity and accountability
Chinese Center for Corporate Governance(CCCG) • A non-profit research organization under CASS, serving specially to promote of corporate governance in China , which was set up in 2000 • Functions of CCCG: organizing information exchange forums; conducting research projects; organizing training program; providing policy consulting service; building an international network with our counterpart worldwide.
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