Corporate Governance in China:
Current Developments
Dr. Chen Xiao Hong
Director of ERI / DRC:
OECD Policy Dialogue on Corporate Governance in China
Beijing
May 2005
Table of Contents
I.
Corporate governance: Meaning and significance
1.1 Implication and content of the structure of corporate
governance
1.2 Why attention is paid to corporate governance globally
1.3 Why attention is paid to corporate governance by China’s
SOEs
Question one for the governance of SOCs:
Corporate legal form and legal relationship
II.
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
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I Corporate governance: Meaning and
significance for SOEs
1.1 Implication and content of the structure of corporate
governance
1. Implication:
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System arrangement for the relationship between stakeholders to the
company and corporate framework;
Comprehensive arrangement of relevant concept system, commercial rules
and laws;
“Separating the operation from the ownership” in large companies makes the
system of governance structure the core and the fundamental system in
corporate governance
2. Content of the system of corporate governance:
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System arrangement for stakeholders;
Arrangement of decision-making (including supervisory) authority and
corresponding rules;
Encouragement system for the operator and the manager.
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1.2 Why attention is paid to corporate
governance 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:
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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.
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1.3 Why attention is increasingly paid to
corporate 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
Net assets Income
Profit
Tax
enterprise
Employment
17.5
37.6
55.5
40.5
46.1
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1.3 Why attention is increasingly paid to
corporate governance in China
2. Required by practice and policies
● Unsophisticated governance of SOEs and PLCs is a critical factor affecting the
effective operation of China’s companies and the healthy development of large
companies with competitiveness and capital market.
● It was set down in the document of CPC Central Committee’s Determination on Some
Critical Issues Concerning the Reform and Development of SOEs from the Fourth
Plenary Session of the 15th Central Committee of CPC that, normative reform of
large- and medium-sized SOEs to adopt corporate system shall be performed.
Corporate system is an effective organizational form of modern enterprise system and
the structure of corporate governance by legal person is the core of corporate system.
● Company Law and Securities Law etc. are gradually perfected.
● The system of independent director and improving actions such as encouragement
with stock options etc. are being implemented in China.
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Table of Contents
I.
Corporate governance: Meaning and significance to SOEs
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
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2.1 Legal forms of SOCs and problems
1. There are 4 legal forms
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Enterprises registered according to the
Enterprise Law;
Solely state-owned companies;
Diversified companies;
State holding (including relatively holding)
PLCs
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2.1 Legal forms of SOCs and problems
2.
Problems of significance:
There is no BOD for enterprises registered per the Enterprise Law:
-- or the general manager assumes duties of BOD, and the company
may go out of control,
-- or state-owned assets authority assumes duties of BOD, and over
intervention is likely.
There is BOD for SOCs registered per the Company Law:
-- all directors are insiders,
-- problems of unclear rights and obligations, insufficient supervision
and insufficient authorization for state-owned assets authority
coexist.
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2.1 Legal forms of SOCs and problems
2.
Problems of significance:
There is BOD for state holding companies with diversified shares:
-- overcontrol of company by dominant shareholders
-- improvement of governance is needed, but the system is
unsound
There is BOD for state holding listed companies:
-- violation of public shareholders’ benefits exists
-- how to reasonably regulate “dominant shareholder”?
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2.2 Two special legal issues for companies
1. Unsound legal system for special companies
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The monopoly of for-profit and not for-profit and the sector
of commonweal enterprises
National defense enterprises etc
No Special Company Law, and the relationship between
Company Law and industrial laws is not well dealt with
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2.2 Two special legal issues for companies
2. Project companies to which attention shall be paid
● Companies engaged in the sector of infrastructure
● Companies engaged in public services such as water supply and
environmental protection etc. (a new question after the
diversification of stock right)
● The relationship with the creditor, “excessive loan” and the bank
related issues
● The relationship with policies is unclear, unjustified regulation and
overregulation coexist
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2.3 Problem-solving ideas and approaches
● In most cases, SOEs registered per the Enterprise Law shall be
transformed into companies registered per Company Law;
● Sophisticated BOD shall be established in SOCs;
● Revising Company Law to sophisticate corporate governance;
● Sophisticating Securities Law to strengthen the reasonable
supervision of company controller;
● Special company law shall be researched, or improving the
relationship between the governance of special companies and the
administration of public policies by legal means such as company
charter etc.;
● Improving the administration of project companies by PFI and
intensified competition etc.
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Table of Contents
I. Corporate governance: Meaning and significance to SOEs
II. Question one for the governance of SOCs: Legal form and legal
relationship
III. Question two for the governance of SOCs: The issue of
system structure
3.1 Sophisticating internal governance system
3.2 Solving the long existed issue of structure
IV. Question three for the governance of SOCs: The issue of administrative
system for SOA
V.
Revision of China’s Company Law
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3.1 Sophisticating internal governance
system
1. Sophisticated duties under the basis framework:
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Clarifying duties of various organs
Shareholders/shareholder meeting
Directors/BOD/committees
CEO
Internal monitoring system
Clarifying duties of various organs
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3.1 Sophisticating internal governance
system
2. Sophisticated system:
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Organizational structure and composition
Operation of BOD and outcome
Strategy and monitoring
Human resources
Internal control and risk control
Information disclosure and transparency
Company obligations
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3.1 Sophisticating internal governance
system
3. The relationship between the governance of parent
company and that of subsidiaries
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Special attention shall be paid to this issue
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Out of control and manipulation shall be avoided
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3.1 Sophisticating internal governance
system
4. Two problems of significance
 Unclear organizational duties (between state-owned assets
authority and companies, and between BOD and the
management)
 Coverage system of the governance is incomplete
 Governance and management are blurred in terms of system,
unfavorable for an effective management by the manager
5. Problem-solving ideas and approaches
 Building the concept of governance
 Establishing sophisticated governance system
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3.2 Solving the long existed issue of structure
1. The long existed issue of structure is a critical reason for
unsmooth relationship in governance of SOEs
Inheriting Co.
Solely state-owned co.
Inferior assets
PLC
2. Problem-solving approaches
 The state assumes responsibilities
 Separating the inheriting companies from the listed companies
 Establishing trust companies (by experience from Japan)
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Table of Contents
I.
Corporate governance: Meaning and significance to SOEs
II.
Question one for the governance of SOCs: Legal form and legal relationship
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
4.1 Features of the existing SOA system
4.2 Understanding and suggestions
V.
Revision of China’s Company Law
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4.1 Features of the existing SOA system
The basic framework of existing system for SOA
administration was formed in 2003:
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Fulfillment of financers’ duties in levels is clarified
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Ownership functions are unified
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Main efforts are given to the promotion of system
construction, “personnel” and assessment
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4.2 Understanding and suggestions
1. Understanding and evaluation
 Basic directions for SASAC:
 Clarifying shareholder’s duties and orientation
 Strengthening the construction of governance system
 Some actions are transitional: “first tightened and then
released”
2. Some suggestions
 Strengthening governance construction
 Transparent rules and open information
 Independent evaluation by a third party
 Clarified responsibilities and more sufficient authorization
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Table of Contents
I.
Corporate governance: Meaning and significance to SOEs
II.
Question one for the governance of SOCs: Legal form and legal
relationship
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
5.1 Basic facts about Company Law
5.2 Revision of Company Law: favorable for governance
reform and self-administration
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5.1 Basic facts about Company Law
Company Law is a basic law critical to corporate
governance in China
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Going effective in 1994
Two revisions in 1999
Significant revision by National Congress in 2004
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5.2 Revision of Company Law will help
improve corporate governance
Strengthening corporate self-administration, for instance
-- establishment and investment etc., reducing compulsory
stipulations
-- self-formulated rules such as company charter etc. play more
important roles
Improving corporate governance, for instance
-- clarified director’s responsibilities
-- responsibilities of the dominant shareholder
-- intensified supervision
Strengthening the protection of shareholder’s benefits
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Thank You!
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