Corporate governance in china

1. Corporate governance in china

2. Back Ground • Transition economy • Plan economy to market economy • Traditional government to modern government • Social democracy tradition • Weak law protection and strong implicit contracts • Transition economy • Learning process • How to privatize SOEs? • Ideology lag

3. SOCIAL DEMOCRACY TRADITION • Public interest • Local and/or central gov’t interests may penetrate firm interests. • Local protection/collusion between local gov’t and firms • Soft-budget constrain

4. Weak law protection and strong implicit contracts • Reputation • An important way to facilitate long-term co-operation • Tight-relationship-based groups • Firm groups • Groups between different persons • Family codes

5. IN ABSENCE OF C.G If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country suffer the consequences

6. Why CG is important in China? • The focus of CG • “Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” (Shleifer and Vishny,1997） • Protect investors and/or stakeholders’ interests • To assure the inside controller to maximize firm value not at expense of any investor and/or stakeholder’s interests.

7. Why CG is important in China? • Weak CG may slow the stock market development.

8. General Observations About Corporate Governance in China • government influences management appointment and corporation operations; • too much power is concentrated in the hands of a few shareholders; and • at times, a lack of accountability for corporate actions or omissions

9. History of Chinese companies Prior to the 1978 economic reforms all companies were State-Owned Enterprises (SOEs). Due to reforms throughout the 1980s and 1990s the Chinese government started to relinquish control of the SOEs, in an attempt to improve their low productivity and financial problems China’s current corporate governance situation The concept of corporate governance was non-existent in China until 1987, when the Chinese government undertook reform of State-Owned Enterprises (SOEs) and they became separate legal entities.

10. China’s current corporate governance system China has progressed relatively well in a short period of time and has adopted the idea of corporate governance into its ‘modern enterprise system’. The Chinese government has been making forceful efforts to tackle the flaws in China’s institutional framework, through the corporatization of SOEs, and the introduction of the CSRC to regulate the securities market and listed firms.

11. Development of corporate governance in China • Codes and guidelines: • (A)Shanghai Stock Exchange, March 2000; • (B)China Securities Regulatory Commission(CSRC),January 2002; • ·Set up Independent Directors System in 2001; • ·Tighter reporting and disclosure

12. The new development of corporate governance in China • Shareholders action; • Compulsory training for directors; • Strong sanctions against violations on laws and regulations, including public criticism.

13. The new development of corporate governance in China • CSRC developed the first Code of Corporate Governance for Chinese Listed Companies according to the OECD Principles of Corporate Governance. • The Code is mandatory for all listed companies to follow and will be melt into listing rules

14. Substantial Progress In Seven Areas Of Corporate Governance • Rights of shareholders and rules for shareholders’ meetings, • Duties and responsibilities of directors and independence of board of directors, • Fiduciary duties, • Performance assessments and incentive and disciplinary systems, • Information disclosure and transparency, • Insider information and related party transactions, and • The role of the auditor.

15. BENEFITS OF CORPORATE GOVERNANCE • Improve access to capital and financial markets; • Help to survive in an increasingly competitive environment through mergers, acquisitions, partnerships, and risk reduction through asset diversification; • Leads to a better system of internal control, thus leading to greater accountability and better profit margins. • Increases the confidence of investors and potential partners to invest in or expand the company’s operations.

16. PRINCIPLES OF CORPORATE GOVERNANCE • Rights and equitable treatment of shareholders. • Interests of other stakeholders. • Role and responsibilities of the board. • Integrity and ethical behavior. • Disclosure and transparency

17. INDIA

18. HISTORY OF CORPORATE GOVERNANCE IN INDIA • PRE-LIBERALIZATION • When India attained independence from British rule in 1947: • the country was poor • average per-capita annual income under thirty dollars • However, it still possessed sophisticated laws regarding "listing, trading, and settlements.“ • It even had four fully operational stock exchanges.

19. HISTORY OF CORPORATE GOVERNANCE IN INDIA • In the decades following India's independence from Great Britain, the country turned away from its capitalist past and embraced socialism • The 1951 Industries Act was a step in this direction, requiring "that all industrial units obtain licenses from the central government." • ) The 1956 Industrial Policy Resolution (56) "stipulated that the public sector would dominate the economy." • India steadily moved toward a culture of "corruption, nepotism and inefficiency."

20. HISTORY OF CORPORATE GOVERNANCE IN INDIA • POST-LIBERALIZATION • In 1999, in a defining moment in India's corporate-governance history, the Indian Parliament created the Securities and Exchange Board of India ("SEBI") to "protect the interests of investors . • However, since the Code's adoption was voluntary, few firms embraced it. • In 2000, SEBI introduced Clause 49 into the Listing Agreement of Stock Exchanges

21. Steps taken by SEBI for strengthening corporate governance • Strengthening of disclosure norms for IPOs • Providing information in directors’ report for utilization and variation of funds of the company including the cash flow and fund flow statements in the annual reports. • Declaration of unaudited quarterly results • Mandatory appointment of compliance officer for monitoring the share transfer process and ensuring compliance with various rules, regulations

22. Steps taken by SEBI for strengthening corporate governance • Timely disclosure of material and price sensitive information including details of all material events having a bearing on the performance of the company; • Dispatch of one copy of complete balance sheet to every household and abridged balance sheet to all shareholders. • Issue of guidelines for preferential allotment of shares at market related prices and

23. Independent Directors under Listing Agreement in India • Composition of the Board • Not less than 50% of the board to be non-executive directors • Independent Directors • If the chairman executive • At least half of the board should comprise of independent directors

24. Independent Directors under Listing Agreement in India • Chairman non-executive At least one- third of the board should comprise of independent directors • Non-executive directors’ remuneration to be approved by shareholders • Board meetings – to meet at least 4 times, with gap not exceeding 3 months. Minimum information for board meetings laid down • Committees of Directors

25. Independent Directors under Listing Agreement in India • Audit Committee: requirements other than those u/s 292A • shall have minimum 3 members all of them being non-executive and majority of them being independent • Chairman of the committee shall be an independent director • To meet at least thrice a year • Company Secretary to act as secretary to the committee • Remuneration Committee • Shareholders/Investors Grievance Committee • Limits on committee memberships and chairmanships

26. Benefits of C.G • Good governance leads to good performance•It creates an open and transparent system•It improves communication and breaks down systematic barriers to flow of information • Good governance allows decision making based on data. It reduces risk. • Good governance helps in creating a brandand creates comfort for all stakeholders andsociety

27. National Award for Excellence inCorporate Governance