# Presentation: 327568

## Corporate Governance of the State Controlled Listed Companies in China: Problems ,Progress and ProspectsDr. Ruyin  HUDirector of Research Center , Shanghai Stock Exchange

**Corporate Governance of the State Controlled Listed Companies in China: ****Problems ,Progress and Prospects****Dr. Ruyin  HU****Director of Research Center , Shanghai Stock Exchange**

## General Situation of Shanghai Securities Market

- Capital Stock and Market Value

- May 12th, 2005

- Total Capital Stock (a hundred million)

- Total Market Value (a hundred million)

- Negotiable Capital (a hundred million)

- Negotiable Market Capitalization (a hundred million)

- A Share

- B Share

- Total up

- Total Share

- A Share

- B Share

- Sampling

- PE Ratio

- Market Size

- May 13th, 2005

- Public Offering

- unity (unit)

- Securities Trader

- unity (unit)

- Investors

- unity( ten thousand)

- Total

- Total

- Total

- Accumulative Accounts Open

- Shares

- A Share
- B Share

- Member Companies

- Local Member Companies
- Nonlocal Member Companies

- Operating A Share

- Tangible
- Intangible

- Investors of A Share

- Retail Investor

- Institutional Investor

- National Debt
- Merchandise on Hand
- Buy-back

- Securities Traders of B Shre
- Domestic
- Abroad

- Operating B Share
- Domestic
- Abroad

- Investors of B Share
- Retail Investor
- Institutional Investor

- Securities Investment Fund

- New Account of Current Month

- New Account of Current year

- Other Funds

- Convertible Bond

- Enterprise Bond

- the Number of Listed Companies

- Unit:piece

- seat

## SSE Historical Data

## SSE Composite Index Movement(1990.12.19-2005.5.13)  

- SSE Index

- amplitude

- Ask
- Bid

- Susp.

- Up

- Down

- Unchanged (Share Price)

- Ls.

- Avg.

- Chg.

- Chg.%

- Amt.

- Vol.

- NowV

- PD Clo.

- Open

- High

- Low

- quantity ratio

- taken

- given

## Data of China Securities Market

##             Stat. Data of Chinese Securities Market

**            ****Stat. Data of Chinese Securities Market**

- Domestic Listing Companies
- A Share, B Share(home)

- Market Capitalization(RMB100 Mil.)

- Negotiable Market Capitalization (RMB100 Mil.)

- Total Capital Stock (RMB100 Mil.)

- Funding Sum (RMB100 Mil.)

- Turnover (RMB100 Mil.)

- No. of Investors Account Opened (Ten thousand)

- Stamp Duty (RMB100 Mil.)

## Highlights of China Equity Market

**                  ****(2005.4.19) **

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_
-   **Chinese listed companies have three types of shares****:**
** ****the state ****owned ****shares**
** ****the legal person shares**
** ****the public**** (tradable)**** shares**** **
**The state and legal person shares cannot be traded in the secondary market, and are called non-tradable shares. The tradable public shares include A shares (shares that are denominated in RMB and listed on mainland exchanges.), B shares (shares that are denominated in US Dollar or Hong Kong Dollar and listed on mainland exchanges).**

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_

**Shares of Chinese Listed Companies**

**Domestic Shares**

**Foreign Shares**

**The State Owned**
** ****Shares**

**The Legal Person**
** ****Shares**

**The Tradable **
**A Shares**

**B**
** ****Shares**

**H**
** ****Shares**

**N**
** ****Shares**

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_
-  _**Ownship**_** structure of Chinese companies have 4  charateristics:**
**    ****an overwhelmingly large percentage of non-tradable shares**
**    ****an excessive concentration of non-tradable shares in one big shareholder**
**    ****an overly dispersed ownership of tradable shares and a tiny percentage of   institutional investors**
**   ****usually the largest shareholder is a shareholding company instead of a natural person**

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_
**A prominent characteristic of Chinese listed companies is an overwhelmingly large percentage of non-tradable shares, which represents about 2/3 of all the listed companies’ combined equity. The tradable shares represent the remaining 1/3. A majority of listed companies’ non-tradable shares are 60%-80% of their total number of shares. A few companies even have more than 90% shares not tradable. About 6% of all the listed companies have more than 40% of their total equity in tradable shares. Only 0.4% of all listed companies have only tradable shares. ****On average, the larger the size of the company, the higher the percentage of state shares, which demonstrates that large listed companies are essentially state-owned.**** **

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies in SSE Market **__(2004.12.31)_

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**O**__**wnership Structure of Chinese Listed Companies(1999)**_

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_
**The second characteristic of the shareholding structure is an excessive concentration of non-tradable shares. In the end of 2001, ****the average largest shareholder of an A share company owns 44.26% of all the company’s shares****; above 40% of the largest shareholders owns more than 50% of their companies’ shares; in 74.4% of all the A share companies, the top five shareholders own more than 50% of their company’s shares. According to statistics based on the 2002 annual report of 734 companies listed on the Shanghai Stock Exchange as of June 20, 2003, in the end of 2002, in 40.9% of all the companies (a total of 300 companies) the largest shareholder owns more than 50% of the company’s shares; in 32.8% of all the companies (a total of 241 companies) the largest shareholder owns between 30% to 50% of the companies’ shares; the average largest shareholder owns 44.3% of its company’s shares.**** **

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_
**The third characteristic of the shareholding structure is an overly ****dispersed ownership of tradable shares and a tiny percentage of institutional investors.**** In the end of 2002, the number of accounts opened at Shanghai Stock Exchange stands at 35 million, of which 99.5% belongs to individual investor and only 0.5% belongs to institutional accounts.**** **

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownership Structure of Listed Companies**_
**The above mentioned ownership structure of Chinese listed companies is problematic:     **
**The  institution for implementing state shareholder’s rights is unsatisfactory. Either the government exerts too much influence on listed companies, or there is a lack of monitoring on management. **
**The parallel or pyramid shareholding structure induces and facilitates related-party transactions that impair the interest of listed companies.**
**Lack of direct control of public shareholders on the listed companies**
**Hostile takeover is nearly impossible.**
**The stock prices in the secondary market are distorted**

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownship Structure of Listed Companies in SZE Market**_

**Notes:**
2004年投资者持有流通股结构:Ownership Structure of Negotiable Capital of Investors in2004
证券投资基金:Securities Investment Fund
社保基金:National Social Security Fund    
一般机构:Common Organizations
券商自营; Dual Trader 
个人:Retail Investor

## The Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies

_**Ownship Structure of Listed Companies in SZE Market**_

**Notes:**
2004年投资者股票交易结构:Structure of Stock Exchange of Investors in 2004
证券投资基金:Securities Investment Fund
社保基金:National Social Security Fund    
一般机构:Common Organizations
券商自营; Dual Trader 
个人:Retail Investor

## Current Corporate Governance Environments in China

Insider control in corporate affairs and the key person model
Insider control, or the key shareholder control, is one of the main characteristics of China’s corporate governance.
If the controlling shareholders are individuals or other enterprises, the insider control problem is frequently associated with the phenomenon of family-type enterprises; if the controlling shareholder is the state, the problem is associated with conflicting political and enterprise objectives.
Insider controller is a synonym for the key person. The key person has a large discretionary power and is frequently endowed with the power of control, execution, and supervision. He or she easily controls and manipulates the company’s general shareholder’s meeting, board meeting, and the supervisory board meeting, making them essentially “rubber stamps”

**     **
**Insider control in corporate affairs and the key person model**
**Insider control, or the key shareholder control, is one of the main characteristics of China’s corporate governance.**
**If the controlling shareholders are individuals or other enterprises, the insider control problem is frequently associated with the phenomenon of family-type enterprises; if the controlling shareholder is the state, the problem is associated with conflicting political and enterprise objectives.**
**Insider controller is a synonym for the ****key person****. The key person has a large discretionary power and is frequently endowed with the power of control, execution, and supervision. He or she easily controls and manipulates the company’s general shareholder’s meeting, board meeting, and the supervisory board meeting, making them essentially “rubber stamps”**
**           **

## The Characteristics of“  Key Person 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**

** ****Insiders Control    the Corporation**

## Serious Problem of “  Key Person Model”
   Interest Conflicts between Blockholders/Managers and Minority Shareholders
  Insiders,Including Blockholders, Expropriate Interest of Minority Shareholders through Related-Party Transactions
   Lack of effective monitoring
   Poor decision making and risk controlling

**   ****Interest Conflicts between Blockholders/Managers and Minority Shareholders**
**  ****Insiders,Including**** ****Blockholders, Expropriate Interest of Minority Shareholders through Related-Party Transactions**
**   ****Lack of effective monitoring**
**   ****Poor decision making and risk controlling**

## Current Corporate Governance Environments in China

A Legal Framework with Poor Shareholder Protection
Lack of effective legal punishment on wrongdoers.
Legal self-enforcement is inadequate, and investors face obstacles in seeking legal protection
Laws and regulations stress the use of administrative and criminal punishment on violators in securities market. They relatively neglect the civil liability and compensation. 
In the punishment of securities market violation, administrative orders often replace legal discipline.  
The country’s legal system has not adopted the highly effective class action widely used in the US and the derivative suits in the hearing of civil compensation cases related to securities market violations.

**     **
**A Legal Framework with Poor Shareholder Protection**
**Lack of effective legal ****punishment on wrongdoers.**
**Legal self-enforcement is inadequate, and investors face obstacles in seeking legal protection**
**Laws and regulations stress the use of administrative and criminal punishment on violators in securities market. They relatively neglect the civil liability and compensation. **
**In the punishment of securities market violation, administrative orders often replace legal discipline.  **
**The country’s legal system has not adopted the highly effective class action widely used in the US and the derivative suits in the hearing of civil compensation cases related to securities market violations.**

## Current Corporate Governance Environments in China

The quality of disclosure not guaranteed
From the perspective of majority public shareholders, the information disclosed by Chinese listed companies is not reliable enough. For the listed companies, the form of disclosure is far more important than the substance. Some even don’t bother to comply with the form and  they may falsify financial statements. 
The main reasons for poor quality disclosures are: 
lack of effective legal punishment for disclosers; 
improper administrative intervention and lack of competition in the capital market; 
 lack of proper internal control system for disclosure within the companies.

**     **
**The quality of disclosure not guaranteed**
**From the perspective of majority public shareholders, the information disclosed by Chinese listed companies is not reliable enough. For the listed companies, the form of disclosure is far more important than the substance. Some even don’t bother to comply with the form and  they may falsify financial statements. **
**The main reasons for poor quality disclosures are: **
**lack of effective legal punishment for disclosers; **
**improper administrative intervention and lack of competition in the capital market; **
** ****lack of proper internal control system for disclosure within the companies.**

## Current Corporate Governance Environments in China

Direct or indirect Party appointment of the chairmen and CEOs of the state controlled listed companies
Each state controlled listed company and its chairman and CEO have a specific  official grade or rank 
Strong political incentives,weak business incentives: to serve the desire of  higher rank party officials other than the best interests of investors

**     **
**Direct or indirect Party appointment of the chairmen and CEOs of the state controlled listed companies**
**Each state controlled listed company and its chairman and CEO have a specific  official grade or rank**** **
**Strong political incentives,weak business incentives: to serve the desire of  higher rank party officials other than the best interests of investors**

## Steps Taken to Improve Governance in   China

**Today,through SSE’s initiatives and persevere effort,Corporate governance has been  very high in China’s policy agenda.  There has been a remarkable progress both in the regulatory framework and implementations over a few years*****.  A mandatory independent director system***** has been introduced and will be strengthened.  *****The Chinese code of corporate governance***** was successfully formulated in early 2002 and a series of educational initiatives have been taken for the better understanding of corporate directors. The authorities have also been taking a severe attitude to impose sanctions on wrong-doings of the listed companies. **

## Steps Taken to Improve Governance in   China

**SSE and CSRC has been in the forefront of promoting corporate governance in China and has taken vigorous actions to improve corporate governance of listed companies **
**Independent directors on board**
**SSE Guidelines for Corporate Governance(2000)**
**Code of Corporate Governance****: **_**The Binding Code of Corporate Governance for Listed Companies issued by CSRC and State Economic and Trade Commission on January 7, 2002. **_
**Better Rules and Practices of Disclosure **
**Take-over Code and market for corporate control**
**Enhancing Legal reform to protect shareholder through lawsuits**
**Stronger Enforcement**

## Steps Taken to Improve Governance in   China

**SSE and CSRC has been in the forefront of promoting corporate governance in China and has taken vigorous actions to improve corporate governance of listed companies **
**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****/****Her Duties**
**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**
**CSRC: Regulations on enhancing ****institutional****shareholders right ****(2004)**
**Cumulative voting rules, online SGM and voting**
**Training**

## Steps Taken to Improve Governance in   China

**Independent Directors**
**Overhaul the insider-controlled board structure by promulgating a regulation requiring each listed company to have at least **one-third of the board to be independent** directors by June 2003. The regulation was issued in August 2001.**
**About one-third of the independent directors are accounting profession, and almost all companies have at least one accounting professional to be independent director .**

## Steps Taken to Improve Governance in   China

**Independent Directors**
**The specific Roles and Responsibilities of Independent Directors**
**Protect shareholder rights and the interests of the company, paying particular attention to minority shareholders protection**
**Major related party transactions have to be approved by independent directors**
**Serve as chairs of the auditing, compensation, and nomination committees. Independent directors must consist of a majority of these committees**

## Steps Taken to Improve Governance in   China

**SSE Guidelines for Corporate Governance(2000)**

## Steps Taken to Improve Governance in   China

**Code of Corporate Governance for Listed Companies in China**
**Mandatory for all listed companies **
_**Issued and **_**Enforced**_** by CSRC and State Economic and Trade Commission on January 7, 2002.**_
**Proxy voting is encouraged in the Code**

## Steps Taken to Improve Governance in   China

**Disclosure**
**Listed companies required to publish an audited annual report as well as half-year report. Starting in 2002, listed companies required to disclose unaudited quarterly reports**
**Disclosing the controlling shareholder or the actual controller of the company**
**O****nline disclosing**

## Steps Taken to Improve Governance in   China

**Enhance Legal Reform**
**Lawsuit against directors and management: the Supreme Court issued an Ordinance last year on the the procedures for shareholders suing directors and management in case of losses due to false disclosure by the company. The Courts have accepted cases**
**SSE: Suggestions to the Governance Lawmaking and Reform of Listing Companies. ****(2004)**
**SSE Helps to revise the Company Law****,****the  Securities Law****, ****the Restructure Plan for the Proposed Listing Company, Code of Practice for High Management in Listing Company (Drafting),  Oversighting Ordinance of Listing Company.**
**SSE emended and issued the Exchange Listing Rules.**

## Steps Taken to Improve Governance in   China

**Stronger Enforcement and Frontline Regulation**
**SSE Makes public reprimands of listed companies for violations of their listing rules**
**In the year of 2002, SSE strengthen supervising on listing companies; made format guidelines for listing companies temporary bulletin, regulated disclosure, and further implemented the questioning supervision. SSE sent listing companies  over 500 Afterwards Auditing Advices and 105 Supervision Letters. Made public reprimands to 19 companies, inside ****notice of criticism to 49 companies or high managers. had SCRC special audited or checked 21 companies. Established inside information knower database. Checked the share-holding situation and illegal close-out among high managers. Advocated 37 companies to announce a proposal letter on perfecting corporate governance, actively advanced listing companies for regulating disclosure of governance structure,  and strengthened the legal system training and trust education of directors and auditors. **

## Steps Taken to Improve Governance in   China

**Stronger Enforcement and Frontline Regulation**
**SSE MakeS public reprimands of listed companies for violations of their listing rules**
**2003****, ****SSE made further implementation of questioning supervision and strictly managed listing companies which have violation activities:**
**  ****	****33 companies were ****circulated by****a notice of criticism****, ****11 companies were made public reprimand, 10 listing companies were put to SCRC for special check. In the period of check after the ****periodically report, SSE issued 480 Afterwards Auditing Advice Report and 142 Regulatory Letter , and urged listing companies to publish 169 the Complementarity to Periodical Reports or Correct Announcement. On regulating the secondary market, SSE tried best to survey and stop the suspecting controlling market activity and insider trade (even the sign )by high technical support and soft & hard means.**** **

## Steps Taken to Improve Governance in   China

**Stronger Enforcement and Frontline Regulation**
**SSE MakeS public reprimands of listed companies for violations of their listing rules**
**SSE continued to promote listing companies for improving their corporate:**
**SSE strongly punished violation and illegal activities by totally issued 42 inside reporting comments, 21 public condemns, 143 oversighting letters.**** ****There are 11 listing companies suspended for continuous loss. And *ST Beeda Technology, *ST Goldenstar and *ST Anshan Co-operation was suspended in Dec.2004. Other 8 companies was recovered.**** ****SSE made special treatment to 19 listing companies, made special treatment suspension to 7 companies; implemented The regulations of the caution of risks in backing from the market on 28 companies, and 19 companies suspended; issued the Report of Chinese corporate governance (2004), and the Suggestions to Chinese corporate governance; held successfully the Policy Dialogue on Corporate Governance in China**** and the International Conference on ****corporate governance **** in China; and great promoted trust-building of listing company. Worked out the ****Implementing Rules of Net-Voting for Listing Company Shareholder Meeting to promote listing companies perfecting their corporate governance.**** **

## Steps Taken to Improve Governance in   China

**Stronger Enforcement and Frontline Regulation**
**SSE Makes public reprimands of listed companies for violations of their listing rules**
**In the year of 2005:**
**SSE ****Net-Voting System for Listing Company Shareholder Meeting**** has been in well-running.**** **
**SSE has connected with bank’s reference system**** **(records of  reprimand receivers).

## Steps Taken to Improve Governance in   China

**Experimentation reform of equity division kicked off**
**From May 9****th****,2005, 4 listed companies have been put into trial scheduled for  non-tradable shares to resume sales**

## The Next Steps to Improve Governance in China

_**Four Steps to Improve the Corporate Governance**_
**Strengthen Legal Rules and Enforcement**
**Diversify the Ownership**
**Maintain the Independence and Effectiveness**** ****of Board of Directors**
**Make the Market Efficient**

## The Next Steps to Improve Governance in China

_**Strengthen Legal Rules and Enforcement**_
**Legislate to Improve Minority Shareholders Protection**
**Stronger sanctions against violations on laws and regulations(revising Criminal Act,Company Law and Securities Law)**
**Strengthen directors’ civil and criminal responsibilities and reinforce the oversight on majority shareholders. **

## 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,QFII and Other Institutional Investors **
**Our empirical studies show that  there is a positive relationship between Tobin’s  q ratio and level of concentration of the largest five shareholders (also the largest ten shareholders), but not in the case of the single largest shareholder. In addition, we find strong impacts of balanced power sharing among a few large owners on firm value. Our results suggest that the institutional concentrated ownership may provide an efficient way of resolving agency problem in firms with less investor protections and outside legal enforcement.****  **

## The Next Steps to Improve Governance in China

_**Maintain the Independence and Effectiveness of Board of Directors **_
**Encourage More Independent Directors to Enter the Board of Directors  **
**Strengthen Audit Committee,Nominate Committee etc. to Curb the Power of Blockholders/Executives**
**Enhance Duties and Liabilities of Directors**
**On the basis of reinforcing the disclosure regulatory, SSE will establish the Code of Conduct for  Board Chairman (has been drafted out) and strengthen board’s trust and responsibility.  **

## The Next Steps to Improve Governance in China

**Make the Market Efficient**
**Enhance management market and avoid direct political interference**** into it: depoliticized the ****management market for the state controlled listed companies;enhance ****managerial ownership by equity-based incentive or remuneration  system**
**Our empirical studies show that  ****the executives shareholdings in the ****state controlled listed companies**** are positively related to firm value.**
**Building up effective price discovery mechanism in equity market**
**Stop market manipulation and insider trading**
**Deregulation of the market**
**Developing the market for corporate control**** **