Developing Effective Boards of Directors of SOEs

1. Developing Effective Boards of Directors of SOEs Prof.Lu Tong Chinese Center for Corporate Governance Chinese Academy of Social Sciences May 19,2005 Beijing

2. Boards play a critical role in effective governance • Serving as the fulcrum between shareholders and management; • Board members should have a capacity for independent judgment; • Monitor managerial performance; • Manage potential conflicts of interest; • Ensure the integrity of accounting and financial system; • Guide overall corporate strategy.

3. Outline of presentation • Assessment of Corporate Governance for Top 100 Chinese Listed Companies 2005. • Ideas on developing effective boards of directors of Chinese SOEs.

4. Assessment of Corporate Governance for Top 100 Chinese Listed Companies • Final report was recently released in April 8,2005 at China Securities Journal. • Research Methodologies • Survey results based on publicly available information; • FORTUNE CHINA 100 Chinese Listed Companies(SOEs)constituent stocks(July2004); • Based on information disclosed in 2004; • Not dependent on companies’ willingness; • However, not as rich as an internal assessment.

5. Objectives of Corporate Scorecard for Chinese Listed Companies

6. Consistency • Each company was rated by two different members • The overall results were cross-checked by academics

7. Scorecard Followed The Five OECD Corporate Governance Principle OECD principle Number of questions & sub-questions • Rights of shareholders 15 • Equity of shareholders 10 • Role of stakeholders 4 • Disclosure and transparency 19 • Board responsibilities 21 Total 69 • OECD is internationally • recognized • CG guidelines • comprehensively covered • 100 public companies • surveyed

8. The distribution 0f 100 listed companies

9. Summary of Findings(1) • The general average score that all sample companies’ corporate governance get is 69.2 and that indicates the level of corporate governances by the top 100 listed companies of China is at medium level.

10. Highest score 76.52 69.1 Overall average score 61.54 Lowest score

11. Summary of Findings(2) • The corporate governance of the top 100 listed companies in China differ greatly from the best practice in “the role of stakeholders”, “rights of shareholders” rank the second, “the disclosure of information and transparency” are relatively well, “equal treatment to the shareholders” and “the responsibilities of the board of directors” are at the medium level.

13. Summary of Findings(3) • There is no significant difference in the average level of corporate governance between the Chinese companies listed in Shanghai and Shenzhen and those listed in Hong Kong.

15. Summary of Findings(4) • The correlation of the price premium in the capital market of the listed companies and the grading of their corporate governance . • （1)Generally speaking, Tobin’s Q of the sample company has no prominent relationship with the evaluation grading on corporate governance. But, by making a comparison, the relations between the evaluation grading on corporate governances of companies listed in Hong Kong and the price premium in the capital market of the listed companies are a little bit higher than those of the companies listed in Shanghai and Shenzhen.

18. Summary of Findings(5) • General score get by Responsibilities of the Board • Questions includes 4 subcategories with 21 evaluation indexes : • (1)“supervision and control”; • (2)“interest conflicts”; • (3)“the composition of the board ”and (4)“communication”

19. Board Responsibilities • Advantages of Chinese listed companies: • Regularly hold board meetings; • Separation Chairman and CEO; • Proper size of the board ; • Composition of the board; • Most of companies have board report.

21. E. Board Responsibilities • Improvements: • A set of written corporate governance rules • Corporate moral rules and vision/mission • The quality of the Audit Committee Report in the Annual Report • Attendance • Internal control • Management control, etc. 79.4 47.6

22. Board Responsibilities • Chairmen of the board are not independent director; • Less the companies have an option scheme which incentives top management.

23. Results • NOT finger-pointing exercise • Important input for policy-makers, companies, and the public • Score for individual companies will not make public • Feedback report can be obtained for individual companies

24. Ideas on Developing Effective Boards of Directors of Chinese SOEs • The effectiveness and independence of the board is still the key to improve the level of corporate governance of Chinese listed companies . • Recommendations: • (1)Strengthening the training of the board of directors by setting up IODs.

25. Recommendations • (2) The election of directors should fully reflect the opinions of minority shareholders. • A cumulative voting system should be earnestly advanced in shareholders’ meeting for the election of directors especial for those companies with more than 30% controlling shareholders.

26. Recommendations • (3) Third, to establish fair and transparent standards and procedures for the assessment of the performance of directors. The qualifications for being a director should be strict, and the situation of sole form for the directors’ compensation should be changed.

27. Recommendations • (4)Regarding to the independent directors system in China,relevant laws and regulations should be complied with for matters such as the qualifications, procedure of election and replacement, and duties of independent directors.

28. Thank you! • E-mail:lutong0525@vip.sina.com • lutong0525@yahoo.com.cn • Fax:0086-10-65126105 • Tel:0086-10-85195771