The Role of Special Board
Committees —— China’s
Experience
Wu Jinglian
State Council Development Research Centre
China Europe International Business School
26 February 2004
The establishment of special committees
made up of independent directors has an important
role to play in improving the quality of the board’s
work. In recent years, China has implemented a
series of reforms to enhance the work of these
committees and has achieved clear successes.
There are also still many issues that have yet to be
fully resolved.
2
1. Board committees are an important framework for
corporate governance
1.1 The function of corporate governance
Corporate governance consists of an entire system of constraints,
incentives and balances the objective of which is to maximize
company values. It is used to regulate relationships between the
interests of the company’s stakeholders including shareholders,
creditors, management, staff, suppliers, retailers and consumers.
The function of corporate governance is to manage conflicts of interest:
•
between stockholders and management;
•
between major shareholders and small shareholders; and
•
to consider the interests of other stakeholders
3
1. Board committees are an important framework for
corporate governance
1.2 The two-tier structure of the German
model of corporate governance
Shareholder Trusteeship Supervisory
Committee
Board
Authorized
Agent
Management
Board
Staff
Election
4
1. Board committees are an important framework for
corporate governance
1.3 The single-tier structure of US and British models of
corporate governance
Shareholder
Meeting
Shareholders
(resolutions
by vote)
Board of
Directors
Non-executive
directors
(US: External
Directors)
Executive
Directors
(US：Internal
Directors)
(functions are carried out
collectively at meetings)
Executive
Organization
Other High-level
Executives
(a tiered structure
headed by a senior officer)
Utilizing the stock market to strengthen
supervision and incentives in relation to the
the board of directors
5
1. Board committees are an important framework for
corporate governance
1.4 Comparing the advantages and disadvantages of the two
structures
• The advantage of the two-tier structure is that the board of
supervisors has greater independence in relation to the
executive. Its disadvantage is that it is far away from the real
business of the company and lacks information to carry out its
functions
• The advantage of the single-tier structure is that it has more
information in relation to the business of the company. The
disadvantage is that is easily manipulated internally so that it
simply becomes a “rubber stamp”
6
1. Board committees are an important framework for
corporate governance
1.5 This does not signal the “end of
history”
• In the latter part of the 20th century, corporate
governance moved towards single-tier structures
(“OECD Principles of Corporate Governance”）
• However, this does not mean the “end of history” for
two-tier structures
• Internal improvements made to boards of directors
with single-tier structures: the “Corporate
Governance Movement”, started in the 1990s
7
1. Board committees are an important framework for
corporate governance
1.6 Positive measures for remedying “internal control”
in single-tier structures
•
Increase the ratio of external directors on boards
•
Emphasize the independence of directors（“independent directors”）
•
Hong Kong: establish “independent non-executive directors”
（“independent directors”）
•
Establish committees for auditing, remuneration, nomination etc under
the board of directors, managed by independent directors
•
Enhance the work of these committees
8
2. China’s efforts and successes
2.1 Steps taken by the China Securities Regulatory
Commission
•
Since the beginning of 2001 the China Securities Regulatory Commission
has organized large-scale activities to publicize and promote the study of
corporate governance
• In August 2001 it promulgated the Guidelines For Establishing A System Of
Independent Directors For Listed Companies, requiring listed companies to
establish a system of independent directors
• In January 2002 it promulgated the Standards Of Corporate Governance For
Listed Companies, proposing that boards of directors can establish special
committees, including committees for auditing, nomination, remuneration and
assessment, with a majority of independent directors acting as conveners
9
2. China’s efforts and successes
2.2 The introduction of Hong Kong’s system
of independent directors
Shareholders
General Meeting
External
Directors
Independent
Directors
Internal
directors
Other executive
officers
Utilizing the stock market to strengthen
supervision and incentives in relation to
the board of directors
10
2. China’s efforts and successes
2.3 Practical progress
•
The majority of listed companies have established the system of
an independent board of directors
•
The majority of listed companies have established audit and
remuneration committees, some companies have established
nomination committees
•
Audit committees have started to play quite a large role in
carrying out audits of quarterly and yearly reports and related
transactions
11
2. China’s efforts and successes
2.4 China Unicom’s example
•
This is a Hong Kong red chip company in which the state is controlling
shareholder
•
The company’s board has 10 directors, 4 are independent non-executive
directors
•
The audit and remuneration assessment committees consist of independent
directors
•
The committees are conscientious and responsible, and have won the
understanding and support of the internal directors
•
Improvements in Unicom’s corporate governance turned a small company
made up of several departments into a competitive organization which in
2003 won an Euromoney award for best corporate governance in the greater
China region, coming joint fourth with Sinopec
12
2. China’s efforts and successes
2.5 Standard & Poor’s evaluation of China’s
corporate governance
•
Reform of China’s corporate governance has seen initial success
•
Problems that still exist:
the structure of stock rights has not been sufficiently rationalized
there is too much interference from large shareholders
no transparency of information
boards lack independence and their effectiveness is also inconsistent
investors lack the initiative they should have as parties with rights and
interests
13
Developing the role of special committees
3.1 Establishing and perfecting the system of independent
directors
• There is still debate whether independent directors have a role
• The experience of other countries indicates that they do
• The main issue as far as Chinese companies are concerned is
not abolition. It is how to address poor quality and the lack of
independent directors
• To activate the role of independent directors, coordination of
elements such as equity structures, controlling shareholders, the
executive code of conduct and the enhancement of supervision
is necessary
14
3. Developing the role of special committees
3.2 All listed companies should establish committees
• currently, not all listed company have established audit, salary,
assessment and nomination committees
• some committees exist in name only
• all listed companies must set up audit committees (or carry out the
relevant function through the supervisory board) and remuneration,
assessment and nomination committees
• the composition and work of the committees must be disclosed in
the annual report and inspected by the board of supervisors
15
3. Developing the role of special committees
3.3 Enhancing the role of audit committees (board of
supervisors)
• Make clear the functions, powers and responsibilities of the
audit committee (supervisory board)
• Increase the number of committee members familiar with
financial affairs
• Instruct the audit committee (supervisory board) to take
responsibility for the overall planning of external and internal
audits (financial control)
16
3. Developing the role of special committees
3.4
Synthesize the experience of special
committees and independent director
committees, and improve working
procedures
• Use the assessment of related transactions as
an example, explaining the necessity of
improving working procedures
17