This Report looks at the institutional framework of corporate governance in China through the prism of the OECD Principles of Corporate Governance and is a product of the ongoing OECD-China Policy Dialogue on Corporate Governance. By assessing a broad range of laws, regulations and codes, it provides a valuable reference for understanding how much has been achieved in Chinese corporate governance and the main ambition of future reform efforts. The Report shows that 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.
Preface by SHANG Fulin
This year marks the 20th anniversary of the Chinese capital market. In the past two decades, it has started from scratch and experienced an extraordinary growth with market size increasing from small to big and market coverage from regional to nationwide, playing an important role in the national economic and social development. The development of the capital market has promoted the establishment of a modern enterprise system in China. Listed companies, outstanding representatives of Chinese enterprises, are the corner stone of sound capital market development. The improved governance system and higher governance level of listed companies have consolidated the foundation of the capital market, increased its attractiveness and vitality, given an effective boost to the capital market's role in optimising resource allocation and promoted the healthy and steady development of the Chinese capital market.
Preface by Richard Boucher
For more than twenty years, Chinese authorities have worked hard to build a stronger corporate governance framework as part of accelerated enterprise reform and capital market development. Indeed, since the stock market was established in 1990, the corporate governance framework has been transformed and capital markets have developed dynamically. New institutions have been created and many new laws and regulations have been adopted – and this process continues.
The corporate governance framework in China
Corporate governance in China has emerged and developed as China has shifted from a planned economy to a market economy. The establishment and growth of China’s capital market and the evolution of Chinese enterprises from government affiliates to modern companies have made it necessary to establish a new corporate governance framework.
A common practice of Chinese company law theorists is to divide the rights of shareholders into "self-benefit rights" and "co-benefit rights" according to the purposes of exercising the relevant right. The self-benefit right can also be called a beneficiary right, referring to the shareholders’ right to seek to acquire economic benefits. These are manifested as rights in economic benefits. Co-benefit rights can also be called shareholders’ rights to govern or participate in the relevant company’s governance, and are manifested as a number of shareholders’ rights to participate in the company’s decision-making, operations, management, supervision and control.
The equitable treatment of shareholders
There are two types of conflict of interest in corporate governance, one between majority and minority shareholders and the other between management and shareholders. These two types of conflicts of interest are manifested in different ways in different ownership structures. Generally, when ownership is spread among many shareholders, the conflict of interest between management and shareholders is more prominent. When the ownership is relatively more concentrated, the conflict of interest between majority and minority shareholders becomes comparatively more prominent. Although the level of ownership concentration decreased after the 2005 non-tradable share reform of the capital market, when Chinese listed companies are compared with those in the UK and the US, they show fairly concentrated ownership structures. Consequently, dealing with conflicts of interest between majority and minority shareholders is a core corporate governance question in China, in order to ensure that shareholders are treated equitably.
Disclosing information is a legal obligation for listed companies. This does not only directly influence transparency and pricing efficiency – the critical basis upon which investors make investment decisions – on the securities market, but also serves as the lawful foundation of its principles "openness, fairness and impartialness" and the core of supervision over the market. In the course of capital market development and corporate governance reform, all the Chinese legislative bodies and relevant government agencies, regulatory institutions and self-regulatory organisations have attached great importance to the development of corporate information disclosure, and actively promoted its improvement in terms of quality and transparency.
Board and supervisory board
The Company Law governing listed companies in China was promulgated in 1993. It introduced boards of directors and supervisory boards, and clearly provided that companies limited by shares should set up shareholders’ meetings, a board of directors and a supervisory board. Since then, Chinese listed companies have made great progress in the establishment of a board system, gradually introducing an independent director system and a specialised committee system and laying the foundations for the board’s independence and effective operations. Meanwhile, the establishment of mechanisms such as the election, terms of reference and responsibility investigation has paved the way for the board to provide strategic guidance, effective supervision over management and protection of the interests of companies and shareholders.
Stakeholders and corporate social responsibility
After the Chinese government released the Scientific Outlook on Development which puts people’s interests first and stresses an all-round, balanced and sustainable development model, and defined the strategic mission of building a harmonious socialist society, Corporate Social Responsibility (CSR) has drawn increasing attention from different sectors across the country. This indicates a crucial transformation in China’s development model, a shift from a one-sided focus on the economic growth rate to a scientific development model that stresses balance among economic, social and environmental development and sustainable growth. At the micro-economic level, instead of maximising shareholders’ interests alone, companies now take a more holistic view of how their decisions and actions might affect stakeholders and make compensation or repayments accordingly. They have begun to undertake varied forms of social responsibilities across economic, legal, moral and charity issues, resulting in a beneficial interaction with stakeholders and an internal and external environment favourable to their own long-term operations.
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