China Corporate Governance Code

The Chinese economy is experiencing a period of unparalleled wealth and growth opportunities. The mandate to improve the corporate governance (“CG”) of Chinese companies as part of the government’s efforts to develop the financial market has become a top priority for the Chinese national agenda.

To understand CG in China, one has to take into consideration that China has been undergoing a transition from a planned economy to a market-oriented economy.

The Company Law and the Securities Law, both introduced in 2006, provide the foundation for drawing up and developing a corporate governance framework in China.

The revised Company Law improved companies’ governance structure and mechanisms to protect lawful shareholders’ rights and public interests.

The revised Securities Law improved the system governing the issuance, trading, registration and settlement of securities and provided for the establishment of multi-tiered capital-market architecture.

The Code of Corporate Governance (“the Code”) for Listed Companies (2002) was drawn up in line with the basic principles established by the original Company Law, Securities Law and other relevant laws and regulations and has made a positive contribution to promoting listed companies in China to establish and improve a modern enterprise system, standardize their operations and promote the healthy development of the securities market.

The Code sets forth, the basic principles for corporate governance of listed companies in China, the means for the protection of investors’ interests and rights, the basic behavior rules and moral standards for directors, supervisors, managers and other senior management members of listed companies.

Corporate Governance Reforms:

The challenge with Corporate Governance reforms is that China started its CG reform efforts in an environment where most of the elements of a well functioning financial market were not in place.

A key component of China’s CG reform is the privatisation of state-owned enterprises (SOEs). The restructuring of SOEs, which started in the 1980s, has seen more than 80 percent of the SOEs being transformed into corporate entities.

1. In 2005, the CSRC announced the initiative to convert non-tradable shares16 into tradable shares. The new initiative (called “Administrative Measures on the Split Share Structure Reform of Listed Companies”) provides the ground rules to allow for the conversion of the shares Conversion of Non tradable Shares into Freely Tradable Shares.
2. In February 2006, the Ministry of Finance released the Basic Accounting Standards for Business Enterprises (ASBE), consisting of 38 standards to be applied to all listed Chinese companies. The aim of this initiative is to facilitate further development of a market-like economy in China.
3. In March 2003, the CSRC released an amended directive on quarterly reporting (replacing its original directive of April 2001). This new directive focuses on the form and content of such reports and requires listed companies to deliver them within one month after the end of the first and third quarters.
4. The QFII programme, introduced in 2002, was aimed at opening the doors for foreign capital into China’s financial market.

Governance Structure:

Concerning allocation and balance of company powers, four specific company organs with power and work division are set up to form the organizational structure:

1. The General Shareholders’ meeting is the power and decision-making organ of the company and has decision making power concerning major issues.

2. The Board of directors is the operational implementation organ of the company, being responsible to the General Shareholders’ meeting and has the decision making power concerning management issues under the authority of General Shareholders’ meeting.

3. The Management is responsible to the Board of directors, and is in charge of the daily operation and management of the company.

4. The Supervisory board is the supervision organ of the company, which supervises whether directors and managers violate laws or articles of association of the company when accomplishing corporate duties, and is entitled to inspect Company’s finance.

Shareholders’ Rights:

A common practice of Chinese company law theorists is to divide the rights of shareholders into “self-benefit rights”(beneficiary rights) and “co-benefit rights”( shareholders’ rights to govern) according to the purposes of exercising the relevant right.

Basic shareholder rights should include the right to:

(1) Secure methods of ownership registration:

The Securities Registration and Clearing institution performs the functions of custody and transfer of ownership of securities and registration of the names of the security holders and preserve the original evidence relating to registration for a period of no less than 20 years.

(2) Convey or transfer shares:

Shareholders can transfer shares in accordance with the law. Article 39 of the Securities Law provides that shares that have been lawfully approved for trading shall be traded on Chinese stock exchanges or other stock exchanges approved by the State Council.

For a shareholder of a listed company, shares may be transferred directly through

stock exchanges’ automatic bidding system within trading hours and according to stock exchange trading rules

(3) Obtain relevant and material information on the corporation on a timely and regular basis:

Shareholder is entitled to inspect the Articles of Association, the record of Shareholders, the corporate bond counterfoils, the minutes of General Shareholders’ meetings, the minutes of Board of directors’ and Board of supervisors’ meetings, and the financial and accounting reports of the company, and is entitled to make a proposal or enquiry concerning the company’s operations.

(4) Participate and vote in general shareholders’ meetings:

The Company Law has no restriction on shareholders’ participation in General Shareholders’ meetings. When a shareholder attends a General Shareholders’ meeting, each share he or she holds is entitled to one vote.

(5) Elect and remove members of the board:

Shareholders may exercise their right to elect or remove members of the Board through participation in General Shareholders’ meetings. Furthermore, according to the relevant provisions of the Company Law, Shareholders holding over 3% of shares (individually or collectively) have the right to propose candidates for the Board of Directors

At the General Shareholders’ meeting, Shareholders are entitled to elect Directors and Supervisors, decide their remuneration, put forward proposals, vote on their proposals, put enquiries to the board of directors and executives, appoint and remove external auditors, and amend the Articles of Association.

(6) Share in the profits of the Corporation:

Shareholder is entitled to dividends on the basis of his or her proportion of ownership.

The main features of the Chinese board system:

1. Strengthening the board’s loyalty, due diligence and protection of the benefits of companies and Shareholders.
2. Establishing mechanisms for Board’s supervision and restraints over management.
3. The Code of Listed Companies in China stipulates that independent directors shall account for more than one-third of the board in a listed company.
4. The Code of Listed Companies in China stipulates that according to the resolution of the General Shareholders’ meeting, a listed company’s board may set up special committees on strategy, audit, nomination, remuneration and appraisal, etc.
5. The Code of Listed Companies provide that a listed company shall establish an incentive mechanism linking the managerial personnel’s remuneration with the company’s performance and the individuals’ performance.
6. The Code requires the listed Companies to disclose Information ongoing basis. Listed companies shall truthfully, accurately, completely and timely disclose information as required by laws, regulations and the company’s articles of association

Conclusion:

Corporate Governance has improved significantly since the Chinese stock market was created in 1990, with important achievements in establishing and developing the legal and regulatory framework.

The issue of fund misappropriation by major shareholders and other related parties was a problem that seriously affected the healthy development of listed companies. To address this issue effectively, the China Securities Regulatory Commission (CSRC) drafted regulations imposing a strict limitation on fund misappropriation in listed companies by controlling shareholders and other related parties.