Efforts to Improve Corporate Governance in China

1. Efforts to Improve Corporate Governance in China Dr. Ruyin Hu Director of Research Centre Shanghai Stock Exchange

2. Introduction • Development of Stock Companies and Stock Market in China • The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies • The Model and Problems of the Present Chinese Corporate Governance • The Next Steps to Improve Governance in China • Conclusion

3. Development of Stock Companies and Stock Market in China • The Emergence of Stock Companies and Stock Market The Impetus of the Establishment Stock Market . Separate Management from Ownership to restructure SOEs Channel Household Savings to SOEs to Set Up Direct Financing System In 1984, A Department Store in Beijing Issued Shares. In December 1990, The Shanghai Stock Exchange was Inaugurated. In April 1991, The Shenzhen Stock Exchange Opened.

4. Development of Stock Companies and Stock Market in China • One of the Fastest Growing Emerging Markets in the World

5. Development of Stock Companies and Stock Market in China • One of the Fastest Growing Emerging Markets in the World

6. The Chinese characteristics of Ownership Structure and Organizational Structure of Listed Companies • Different Types of Shares • Different Types of Shares Shares of Chinese Listed Companies Domestic Shares Foreign Shares The State Shares The Legal Person Shares The Tradable A Shares B Shares H Shares N Shares

7. The Chinese Characters of Ownership Structure and Organizational Structure of Listed Companies • Ownership Structure of Chinese Listed Companies(1999)

8. The Chinese Characters of Ownership Structure and Organizational Structure of Listed Companies • The Organizational Structure of a Typical Listed Company Shareholders Board of Directors Supervisory Committee General Manager VGM1 VGM2 CFO CTO

9. The Keyman Model The Model and Problems of Present Chinese Corporate Governance • Corporate Governance Environments in China • A Legal Framework with Poor Shareholder Protection • The Predominance of Closely Held Corporations • Weak Takeover Market and Few Hostile Offers • The Small Shareholder’ s Inactivism and Free-Rider Behavior • Government Intervention in the Management Appointment and Corporation Operations

10. The Model and Problems of Present Chinese Corporate Governance • The Characteristics of“ Keyman Model” Chinese Listed Companies High Ownership Concentration Diversified Ownership Strong Blockholders Weak Minority Interest Strong Executives Weak Outside Shareholders The Blockholder Representative Controls the Corporation The Insider Controls the Corporation

11. The Model and Problems of Present Chinese Corporate Governance • The Characteristics of“ Keyman Model” The Keyman: • Too Much Power: Management and Control Powers Held in One Person’ s Hands • Lack of Accountability • Pursue One’ s Own Interest Instead of Maximizing Shareholder Value

12. The Model and Problems of Present Chinese Corporate Governance • Serious Problem of “ Keyman Model” Interest Conflicts between Blockholders/Managers and Minority Shareholders • Blockholders Expropriate Interest of Minority Shareholders through Related-Party Transactions • Political Utilitarianism and Self-Interest Behavior Replace the Shareholder Value as the Implicit Criterion of Management • Prevailing Soft Budget Constraints in Former SOEs

13. The Model and Problems of Present Chinese Corporate Governance • Steps Taken to Improve Governance in China • Better Rules and Practices of Disclosure • Safeguard Conflicts of Interest : Rules of Related-Party Transactions Disclosure; the Use of Human,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

14. The Next Steps to Improve Governance in China • 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

15. The Next Steps to Improve Governance in China • Three Steps to Improve the Corporate Governance • Strengthen Legal Rules and Enforcement • Diversify the Ownership • Maintain the Independence of Board of Directors

16. The Next Steps to Improve Governance in China • 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”

17. The Next Steps to Improve Governance in China • Diversify the Ownership • Reduce or Sell Off the Shares held by the Governments • Introduce other Forms of Sizeable Outside Shareholders Including Closed-End & Open-End Mutual Funds,Insurance Companies,Pension Funds and Other Institutional Investors

18. The Next Steps to Improve Governance in China • Maintain the Independence of Board of Directors • Encourage More Independent Directors to Enter the Board of Directors • Establish Audit Committee,Nominate Committee etc.to Curb the Power of Blockholders/Executives

19. Conclusion • 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 • To Predict: China’ s Governance Model Will Approach the Anglo-American Model

20. Thank You Correspondence Concerning this Presentation Should be Sent To: ryhu@sse.com.cn