Group

Members Anjali Chauhan  Avishek Avik Chattopadhyay  Deepti K.S.  Mukul Attri  Sahil  Swapnil Bhosale

DOES CORPORATE GOVERNANCE MATTER IN CHINA'S CAPITAL MARKETS?
Before we begin, let us take a look at the latest lawsuit filed against PetroChina by US for not complying with the corporate government practices. The lawsuit alleges PetroChina failed to disclose that some of its senior officials were in non-compliance with its corporate governance directives and code of ethics, and that PetroChina was subject to investigation by the Chinese authorities.

Banks did not provide sufficient oversight of the governance of corporate creditors. Ownership concentration in most companies was high.WHY CORPORATE GOVERNANCE WAS REQUIRED IN CHINA’S CAPITAL MARKETS Managers had wide discretion in running firms. Shareholders had limited legal remedies against exploitation by company management or a controlling shareholder. insider trading and other factors. Directors did not understand their duties. China’s legal framework was still at a nascent stage. its intrinsic value and governance. no significant correlation existed between the market value of a company. Because of state ownership. . Supervisory board lacked the power to appoint or dismiss directors and managers. However. their decisions might not have been in the best interests of the firms or the shareholders.

Delisting of certain companies that did not follow corporate governance and were not transparent in their operational and financial policies. Independent non-executive directors ensured that the small groups of individuals did not dominate the board’s decision making.AFFECT OF CORPORATE GOVERNANCE IN CHINA Transparency of information disclosure. They also ensured that industry expertise was brought to the board. . The dominance of party was reduced substantially in small private companies.

 The CPC( Communist Party Of China) still retains firm control of all political matters which unavoidably involves state control of major chinese industries. .  In the current stage China has mixed private and state-owned economic structure. Business formation and Management in China has a long and winding history tracing back thousands of years.

meaning personal connections. the characteristics of Chinese business management are quite different from the western world.  Example: 1) Confucianism. 2) Preeminence placed on the superior person in the relationship. 3) Rule of Game ‘ GuanXi ’. Having developed against against the backdrop of unique Chinese culture. .

 The major regulations are as follows: 1) The Company Law. 3) The Sole Proprietorship Enterprise Law. A comparison of Chinese Company Law with its American counterpart will give us better understanding of the Chinese Corporate Governance system. . The chinese government has adopted several regulations regarding business management and corporate governance. 2) The Partnership Law.

2) A listed company is under the regulation & monitoring of State Security Regulatory Authority. 3) Registering the Articles of Association with the state authorities. Similarities: 1) Criteria for establishing both LLC & Joint stock limited company. . Chinese Company Law also includes sections on piercing the corporate veil.S Corporate Law . 4) As in U.

eg: 1.00. . Differences: 1) Application of such principles like piercing the corporate veil.000.000 RMB -> LLC. 2) China’s Company Law mandates more stringent minimum capital requirement for both LLC and Joint Stock Listed Companies. 1. This results in the less protection of corporate identity in China as compared to U.000 RMB-> Joint Stock Listed Com.S.S courts are often reluctant to pierce the corporate veil but chinese courts are more eager to do so. U.

.  American Corporate governance has function called ‘ Outside Counsel ‘. Mandatory appointment of the General Manager by the Board of Directors for implementing its resolutions.  Shareholders in the Limited company with exceptions in small companies should elect Board Of Supervisors in charge of reviewing and monitoring the activities of the BOD.  The General Manager is responsible for the day-today affairs of the company.

.  In China.S . Chinese system states that the Shareholders committee is the authoritative organ of a limited company.  In U.  Resolution approved by the BOD should be approved by the committee before it can be adopted.  The General Manager is accountable to the Board of Directors and Supervisory board is a monitoring agency. shareholders only get involved in the major business decisions like M&A etc. Shareholders committee gets involved in Boards decision making process.

 In wholly state-owned companies. All decision making power lies with the state authority.  All employees of the limited companies that have more than 3 employees must have labour union memberships and elect union representatives. The Chinese Company Law also mandates that all limited companies establish a Chinese Communist Party organization in the company for the purpose of state monitoring.  No public servant is allowed to serve as the Director. supervisor or the General Manager of the limited company. no shareholders committee is allowed. .

Germany Banks Japan Bank-based financial and corporate governance structure Powerful government intervention CEOs of public and private companies receive similar levels of compensation China exercise significant power as a source of financing for firms.S. In many private German firms. the owner and manager may be the same individual Two-tiered board structures. required for larger employers The state is imposing social goals on these firms Firms with higher state ownership have lower market value and more volatility Corporate Governance structures are moving closer to the U. corporate governance model .

It started only when they realized they required international exposure. In spite of PetroChina mentioning only 10% would be given to CNPC. shareholders were not sure. PetroChina Corporate Governance in spite of being one of few companies in China that had more transparency. Any income generated through it would go to CNPC.  Shareholders were not sure if any income generated would be turned towards their favor.• • China had been a communist government and following the corporate governance standards started very late. CNPC ownership being SOE.  Dividends decisions would be indirectly taken by CNPC. had many risks inherently. • . Dividend and Capital Investment Policy:  CNPC held 90% of PetroChina.

as they were some how related to Government)  Many people were part of CNPC and PetroChina which raised suspicions.  CNPC and other government bodies were actually having a major say in electing the Board which was not a good sign. Legal Protection for Outside Investors:  Other countries laws are not applicable in China which was a major concern for investors outside China. in that 2 of their credibility was questioned. Appointment of Directors and Corporate Officers:  13 board of Directors ( 3 were independent. .

General Meetings etc. Used to give information about Operating Stats. Delivered financials every quarter. Audit as per IAS got a clean auditors report. . Management  Incentive Programme:  Managers compensation was dependent on their performance (30-70% bonus dependent on their performance) PetroChina granted share options and rights to officers and directors.  Information   Disclosure:  Relatively high level of transparency. Stock Information. promised to extend the same to remaining employees.

. Formulated set of policies regarding shareholders general and other meetings.. compliancy of operations etc. Supervisory  Board:  It consisted of 7 members including 2 independent Supervisors.  Policies  and Procedures:  Complied with the Code of Best Practice governing companies listed on HKSE. Inspection of company’s financial position. Meetings.

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   Steps Taken to Improve Governance in China Better Rules and Practices of Disclosure Safeguard Conflicts of Interest : Rules of Related-Party Transactions Disclosure.Financial and Physical Resources of a Listed Company Is Separated from That of Its Controlling Company Higher Standards of Ethics of Directors:the New Listing Rules Require Each Director to Have a Formal Declaration and Undertaking in the Performance of His Duties  . the Use of Human.

A Dominant Policy Issue to Develop Market Economy in China Re-construct Thousands of SOEs Improve the Performance of Stock Markets Establish the Foundation of the Market Economy    .

 Three Steps to Improve the Corporate Governance    Strengthen Legal Rules and Enforcement Diversify the Ownership Maintain the Independence of Board of Directors .

  Strengthen Legal Rules and Enforcement Legislate to Improve Minority Shareholders Protection and Make Preparations for the Setting up of the Investor Protection Centre Adopt More International Accounting Rules Strengthen Disclosure Requirement Issue the “ SSE Guidelines for Corporate Governance”    .

Insurance Companies.   Diversify the Ownership Reduce or Sell Off the Shares held by the Governments Introduce other Forms of Sizeable Outside Shareholders Including Closed-End & OpenEnd Mutual Funds.Pension Funds and Other Institutional Investors .

Nominate Committee etc. Maintain the Independence of Board of Directors   Encourage More Independent Directors to Enter the Board of Directors Establish Audit Committee.to Curb the Power of Blockholders/Executives .

 Corporate Governance Reform are Very Complicated in China. the Solution May Lie on the Interactions among Economic Performance.Available Governance Resources and the Political System Reform .