Corporate governance in china

Transition economyPlan economy to market economyTraditional government to modern government

Social democracy traditionWeak law protection and strong implicit contractsTransition economy

Learning processHow to privatize SOEs?

Ideology lag

SOCIAL DEMOCRACY TRADITION

Public interestLocal and/or central gov’t interests may penetrate firm interests.Local protection/collusion between local gov’t and firmsSoft-budget constrain

Weak law protection and strong implicit

contracts

ReputationAn important way to facilitate long-term co-operation

Tight-relationship-based groupsFirm groupsGroups between different personsFamily codes

IN ABSENCE OF C.G

If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country suffer the consequences

The focus of CG“Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” (Shleifer and Vishny,1997）Protect investors and/or stakeholders’ interestsTo assure the inside controller to maximize firm value not at expense of any investor and/or stakeholder’s interests.

Why CG is important in China?

Why CG is important in China?

Weak CG may slow the stock market development.

2001 GDP年转型与新兴国家或地区上市公司市值占 的比重

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General Observations About Corporate Governance in China

government influences management appointment and corporation operations;

too much power is concentrated in the hands of a few shareholders; and

at times, a lack of accountability for corporate actions or omissions

History of Chinese companies

Prior to the 1978 economic reforms all companies were State-Owned Enterprises (SOEs). Due to reforms throughout the 1980s and 1990s the Chinese government started to relinquish control of the SOEs, in an attempt to improve their low productivity and financial problems

China’s current corporate governance situation

The concept of corporate governance was non-existent in China until 1987, when the Chinese government undertook reform of State-Owned Enterprises (SOEs) and they became separate legal entities.

China’s current corporate governance system

China has progressed relatively well in a short period of time and has adopted the idea of corporate governance into its ‘modern enterprise system’. The Chinese government has been making forceful efforts to tackle the flaws in China’s institutional framework, through the corporatization of SOEs, and the introduction of the CSRC to regulate the securities market and listed firms.

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;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

Substantial Progress In Seven Areas Of Corporate Governance

Rights of shareholders and rules for shareholders’ meetings,

Duties and responsibilities of directors and independence of board of directors,

Fiduciary duties, Performance assessments and incentive and

disciplinary systems, Information disclosure and transparency, Insider information and related party

transactions, and The role of the auditor.

BENEFITS OF CORPORATE GOVERNANCE

Improve access to capital and financial markets; Help to survive in an increasingly competitive

environment through mergers, acquisitions, partnerships, and risk reduction through asset diversification;

Leads to a better system of internal control, thus leading to greater accountability and better profit margins.

Increases the confidence of investors and potential partners to invest in or expand the company’s operations.

PRINCIPLES OF CORPORATE GOVERNANCE

Rights and equitable treatment of shareholders.Interests of other stakeholders.Role and responsibilities of the board.Integrity and ethical behavior.Disclosure and transparency

INDIA

HISTORY OF CORPORATE GOVERNANCE IN INDIA

PRE-LIBERALIZATION• When India attained independence from

British rule in 1947:the country was pooraverage per-capita annual income under

thirty dollarsHowever, it still possessed sophisticated laws

regarding "listing, trading, and settlements.“It even had four fully operational stock

exchanges.

HISTORY OF CORPORATE GOVERNANCE IN INDIA

In the decades following India's independence from Great Britain, the country turned away from its capitalist past and embraced socialism

The 1951 Industries Act was a step in this direction, requiring "that all industrial units obtain licenses from the central government."

) The 1956 Industrial Policy Resolution (56) "stipulated that the public sector would dominate the economy."

India steadily moved toward a culture of "corruption, nepotism and inefficiency."

HISTORY OF CORPORATE GOVERNANCE IN INDIA

POST-LIBERALIZATIONIn 1999, in a defining moment in India's

corporate-governance history, the Indian Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the interests of investors .

However, since the Code's adoption was voluntary, few firms embraced it.

In 2000, SEBI introduced Clause 49 into the Listing Agreement of Stock Exchanges

Steps taken by SEBI for strengthening corporate governance

Strengthening of disclosure norms for IPOs

Providing information in directors’ report for utilization and variation of funds of the company including the cash flow and fund flow statements in the annual reports.

Declaration of unaudited quarterly results

Mandatory appointment of compliance officer for monitoring the share transfer process and ensuring compliance with various rules, regulations

Steps taken by SEBI for strengthening corporate governance

Timely disclosure of material and price sensitive information including details of all material events having a bearing on the performance of the company;

Dispatch of one copy of complete balance sheet to every household and abridged balance sheet to all shareholders.

Issue of guidelines for preferential allotment of shares at market related prices and

Independent Directors under Listing Agreement in India

Composition of the Board• Not less than 50% of the board to be non-

executive directorsIndependent Directors

• If the chairman executiveAt least half of the board should

comprise of independent directors

Independent Directors under Listing Agreement in India

Chairman non-executiveAt least one- third of the board should

comprise of independent directors • Non-executive directors’ remuneration to be approved by shareholders• Board meetings – to meet at least 4 times, with

gap not exceeding 3 months. Minimum information for board meetings laid down

• Committees of Directors

Independent Directors under Listing Agreement in India

Audit Committee: requirements other than those u/s 292A

• shall have minimum 3 members all of them being non-executive and majority of them being independent

• Chairman of the committee shall be an independent director

• To meet at least thrice a year• Company Secretary to act as secretary to the

committeeRemuneration CommitteeShareholders/Investors Grievance CommitteeLimits on committee memberships and

chairmanships

Benefits of C.G

Good governance leads to good performance•It creates an open and transparent system•It improves communication and breaks down systematic barriers to flow of information

Good governance allows decision making

based on data. It reduces risk. Good governance helps in creating a brand

and creates comfort for all stakeholders andsociety

National Award for Excellence inCorporate Governance