Corporate Governance in China: Current Developments Dr. Chen Xiao Hong Director of ERI / DRC: Director of ERI / DRC: OECD OECD Policy Dialogue on Corporate

Corporate Governance Corporate Governance in China:in China:

Current Developments Current Developments Dr. Chen Xiao HongDr. Chen Xiao Hong

Director of ERI / DRC:Director of ERI / DRC:

OECDOECD Policy Dialogue on Corporate Governance in China

BeijingMay 2005

2国务院发展研究中心企业研究所

Table of Contents

I. Corporate governance: Meaning and significanceCorporate governance: Meaning and significance

1.1 Implication and content of the structure of corporate goverImplication and content of the structure of corporate governancenance

1.2 Why attention is paid to corporate governance globallyWhy attention is paid to corporate governance globally

1.3 Why attention is paid to corporate governance by China’s Why attention is paid to corporate governance by China’s SOEsSOEs

II. Question one for the governance of SOCs: CQuestion one for the governance of SOCs: Corporate legal form and legal relationshiporporate legal form and legal relationship

III. Question two for the governance of SOCs: Question two for the governance of SOCs: The issue of system structureThe issue of system structure

IV. Question three for the governance of SOCs: Question three for the governance of SOCs: The issue of administrative system for SOAThe issue of administrative system for SOA

V.V. Revision of China’s Company Law Revision of China’s Company Law


I Corporate governance: Meaning and sI Corporate governance: Meaning and significance for SOEsignificance for SOEs

1.1 Implication and content of the structure of corporate gover1.1 Implication and content of the structure of corporate governancenance

1. Implication:1. Implication: System arrangement for the relationship between stakeholders to the companSystem arrangement for the relationship between stakeholders to the compan

y and corporate framework;y and corporate framework; Comprehensive arrangement of relevant concept system, commercial rules aComprehensive arrangement of relevant concept system, commercial rules a

nd laws;nd laws; ““Separating the operation from the ownership” in large companies makes thSeparating the operation from the ownership” in large companies makes th

e system of governance structure the core and the fundamental system in core system of governance structure the core and the fundamental system in corporate governance porate governance

2. Content of the system of corporate governance:2. Content of the system of corporate governance: System arrangement for stakeholders;System arrangement for stakeholders; Arrangement of decision-making (including supervisory) authority and correArrangement of decision-making (including supervisory) authority and corre

sponding rules;sponding rules; Encouragement system for the operator and the manager.Encouragement system for the operator and the manager.


1.2 Why attention is paid to corporate 1.2 Why attention is paid to corporate governance globallygovernance 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 1980~1990s 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.


1.3 Why attention is increasingly paid to 1.3 Why attention is increasingly paid to corporate governance in Chinacorporate 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 Amt. of enterpriseenterprise

Net assetsNet assets IncomeIncome ProfitProfit TaxTax EmploymentEmployment

17.517.5 55.555.5 40.540.5 46.146.1 61.261.2 37.637.6


1.3 Why attention is 1.3 Why attention is increasingly paid to corporate increasingly paid to corporate

governance in Chinagovernance in China2. Required by practice and policies2. Required by practice and policies

● ● Unsophisticated governance of SOEs and PLCs is a critical factor affecting Unsophisticated governance of SOEs and PLCs is a critical factor affecting the effective operation of China’s companies and the healthy developmthe effective operation of China’s companies and the healthy development of large companies with competitiveness and capital market.ent of large companies with competitiveness and capital market.

● ● It was set down in the document of CPC Central Committee’s DeterminatIt was set down in the document of CPC Central Committee’s Determination on Some Critical Issues Concerning the Reform and Development of Sion on Some Critical Issues Concerning the Reform and Development of SOEs from the Fourth Plenary Session of the 15th Central Committee of CPOEs from the Fourth Plenary Session of the 15th Central Committee of CPC that, normative reform of large- and medium-sized SOEs to adopt corpoC that, normative reform of large- and medium-sized SOEs to adopt corporate system shall be performed. Corporate system is an effective organizarate system shall be performed. Corporate system is an effective organizational form of modern enterprise system and the structure of corporate gtional form of modern enterprise system and the structure of corporate governance by legal person is the core of corporate system.overnance by legal person is the core of corporate system.

● ● Company Law and Securities Law etc. are gradually perfected.Company Law and Securities Law etc. are gradually perfected.

● ● The system of independent director and improving actions such as encourThe system of independent director and improving actions such as encouragement with stock options etc. are being implemented in China.agement with stock options etc. are being implemented in China.


Table of Contents

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 China’s Company Law

I. Corporate governance: Meaning and significance to SOEs


2.1 Legal forms of SOCs and problems2.1 Legal forms of SOCs and problems

1.1. There are 4 legal formsThere are 4 legal forms

Enterprises registered according to the EnterprisEnterprises registered according to the Enterprise Law;e Law;

Solely state-owned companies;Solely state-owned companies; Diversified companies;Diversified companies; State holding (including relatively holding) PLCState holding (including relatively holding) PLC

s s



2. 2. Problems of significance:Problems of significance:

There is no BOD for enterprises registered per the Enterprise Law:There is no BOD for enterprises registered per the Enterprise Law:---- or the general manager assumes duties of BOD, and the company mor the general manager assumes duties of BOD, and the company m

ay go out of control,ay go out of control,---- or state-owned assets authority assumes duties of BOD, and over intor state-owned assets authority assumes duties of BOD, and over int

ervention is likely.ervention is likely.

There is BOD for SOCs registered per the Company Law:There is BOD for SOCs registered per the Company Law:---- all directors are insiders,all directors are insiders,---- problems of unclear rights and obligations, insufficient supervision problems of unclear rights and obligations, insufficient supervision

and insufficient authorization for state-owned assets authority coexiand insufficient authorization for state-owned assets authority coexist.st.



2. 2. Problems of significance:Problems of significance:

There is BOD for state holding companies with diversified shares:There is BOD for state holding companies with diversified shares:---- overcontrol of company by dominant shareholdersovercontrol of company by dominant shareholders---- improvement of governance is needed, but the system is unsimprovement of governance is needed, but the system is uns

oundound

There is BOD for state holding listed companies:There is BOD for state holding listed companies:---- violation of public shareholders’ benefits existsviolation of public shareholders’ benefits exists---- how to reasonably regulate “dominant shareholder”?how to reasonably regulate “dominant shareholder”?


2.2 Two special legal issues for companies2.2 Two special legal issues for companies

1. Unsound legal system for special companies1. Unsound legal system for special companies

The monopoly of for-profit and not for-profit and the sector The monopoly of for-profit and not for-profit and the sector of commonweal enterprisesof commonweal enterprises

National defense enterprises etcNational defense enterprises etc

No Special Company Law, and the relationship between No Special Company Law, and the relationship between Company Law and industrial laws is not well dealt withCompany Law and industrial laws is not well dealt with


2.2 Two special legal issues for companies2.2 Two special legal issues for companies

2. Project companies to which attention shall be paid2. Project companies to which attention shall be paid

●● Companies engaged in the sector of infrastructureCompanies engaged in the sector of infrastructure

●● Companies engaged in public services such as water supply and Companies engaged in public services such as water supply and environmental protection etc. (a new question after the environmental protection etc. (a new question after the diversification of stock right)diversification of stock right)

●● The relationship with the creditor, “excessive loan” and the bank The relationship with the creditor, “excessive loan” and the bank related issuesrelated issues

●● The relationship with policies is unclear, unjustified regulation and The relationship with policies is unclear, unjustified regulation and overregulation coexistoverregulation coexist


2.3 Problem-solving ideas and approaches2.3 Problem-solving ideas and approaches

● ● In most cases, SOEs registered per the Enterprise Law shall be transforIn most cases, SOEs registered per the Enterprise Law shall be transformed into companies registered per Company Law;med into companies registered per Company Law;

● ● Sophisticated BOD shall be established in SOCs;Sophisticated BOD shall be established in SOCs;● ● Revising Company Law to sophisticate corporate governance;Revising Company Law to sophisticate corporate governance;● ● Sophisticating Securities Law to strengthen the reasonable supervision Sophisticating Securities Law to strengthen the reasonable supervision

of company controller;of company controller;● ● Special company law shall be researched, or improving the relationshiSpecial company law shall be researched, or improving the relationshi

p between the governance of special companies and the administratiop between the governance of special companies and the administration of public policies by legal means such as company charter etc.;n of public policies by legal means such as company charter etc.;

● ● Improving the administration of project companies by PFI and intensifImproving the administration of project companies by PFI and intensified competition etc.ied competition etc.


Table of Contents



3.1 Sophisticating internal governance system

3.2 Solving the long existed issue of structure





3.1 Sophisticating internal governance 3.1 Sophisticating internal governance systemsystem

1. Sophisticated duties under the basis framework:1. Sophisticated duties under the basis framework:

Clarifying duties of various organsClarifying duties of various organs Shareholders/shareholder meetingShareholders/shareholder meeting Directors/BOD/committeesDirectors/BOD/committees CEOCEO Internal monitoring systemInternal monitoring system Clarifying duties of various organsClarifying duties of various organs


3.1 Sophisticating internal governance sy3.1 Sophisticating internal governance systemstem

2. Sophisticated system:2. Sophisticated system:

Organizational structure and compositionOrganizational structure and composition Operation of BOD and outcomeOperation of BOD and outcome Strategy and monitoringStrategy and monitoring Human resourcesHuman resources Internal control and risk controlInternal control and risk control Information disclosure and transparencyInformation disclosure and transparency Company obligationsCompany obligations


3.1 Sophisticating internal governance sy3.1 Sophisticating internal governance systemstem

3. The relationship between the governance of parent 3. The relationship between the governance of parent company and that of subsidiariescompany and that of subsidiaries

Special attention shall be paid to this issueSpecial attention shall be paid to this issue

Out of control and manipulation shall be avoidedOut of control and manipulation shall be avoided


3.1 Sophisticating internal governance 3.1 Sophisticating internal governance

systemsystem

4. Two problems of significance4. Two problems of significance Unclear organizational duties (between state-owned assets autUnclear organizational duties (between state-owned assets aut

hority and companies, and between BOD and the managemenhority and companies, and between BOD and the management)t)

Coverage system of the governance is incompleteCoverage system of the governance is incomplete Governance and management are blurred in terms of system, Governance and management are blurred in terms of system,

unfavorable for an effective management by the managerunfavorable for an effective management by the manager

5. Problem-solving ideas and approaches5. Problem-solving ideas and approaches Building the concept of governanceBuilding the concept of governance Establishing sophisticated governance system Establishing sophisticated governance system


1. 1. The long existed issue of structure is a critical reason for unsmThe long existed issue of structure is a critical reason for unsmooth relationship in governance of SOEsooth relationship in governance of SOEs

Solely state-owned co.

Inferior assets PLC

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

Inheriting Co.

3.2 Solving the long existed issue of structure3.2 Solving the long existed issue of structure


Table of Contents




4.1 Features of the existing SOA system 4.2 Understanding and suggestions V. Revision of China’s Company Law



4.1 Features of the existing SOA system4.1 Features of the existing SOA system

The basic framework of existing system for SOA The basic framework of existing system for SOA administration was formed in 2003:administration was formed in 2003:

Fulfillment of financers’ duties in levels is clarifiedFulfillment of financers’ duties in levels is clarified

Ownership functions are unifiedOwnership functions are unified

Main efforts are given to the promotion of system construction, “personnel” Main efforts are given to the promotion of system construction, “personnel” and assessmentand assessment


4.2 Understanding and suggestions4.2 Understanding and suggestions

1. Understanding and evaluation1. Understanding and evaluation Basic directions for SASAC:Basic directions for SASAC: Clarifying shareholder’s duties and orientationClarifying shareholder’s duties and orientation Strengthening the construction of governance systemStrengthening the construction of governance system Some actions are transitional: “first tightened and then Some actions are transitional: “first tightened and then

released”released”

2. Some suggestions2. Some suggestions Strengthening governance constructionStrengthening governance construction Transparent rules and open informationTransparent rules and open information Independent evaluation by a third partyIndependent evaluation by a third party Clarified responsibilities and more sufficient authorizationClarified responsibilities and more sufficient authorization


Table of Contents





5.1 Basic facts about Company Law 5.2 Revision of Company Law: favorable for governance re

form and self-administration



5.1 Basic facts about Company Law5.1 Basic facts about Company Law

Company Law is a basic law critical to corporate Company Law is a basic law critical to corporate

governance in Chinagovernance in China

Going effective in 1994Going effective in 1994 Two revisions in 1999Two revisions in 1999 Significant revision by National Congress in 2004Significant revision by National Congress in 2004


5.2 Revision of Company Law will help i5.2 Revision of Company Law will help i

mprove corporate governancemprove corporate governance Strengthening corporate self-administration, for instanceStrengthening corporate self-administration, for instance---- establishment and investment etc., reducing compulsory stipulestablishment and investment etc., reducing compulsory stipul

ationsations---- self-formulated rules such as company charter etc. play more iself-formulated rules such as company charter etc. play more i

mportant rolesmportant roles

Improving corporate governance, for instanceImproving corporate governance, for instance---- clarified director’s responsibilitiesclarified director’s responsibilities---- responsibilities of the dominant shareholderresponsibilities of the dominant shareholder---- intensified supervisionintensified supervision

Strengthening the protection of shareholder’s benefitsStrengthening the protection of shareholder’s benefits


Thank You!

Documents

Corporate Governance in China: Current Developments Dr. Chen Xiao Hong Director of ERI / DRC: Director of ERI / DRC: OECD OECD Policy Dialogue on Corporate