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Recent developments in corporate governance in Hong Kong and the PRC

Recent developments in corporate governance in Hong Kong and the PRC


Corporate Governance in the PRC

Regulators and policy makers in the PRC have come a long way since the PRC’s implementation of the Company Law which went into effect on 1 July 1994. The year 2002 – “The Year of Corporate Governance’, was a title bestowed by the Chinese Securities Regulation Committee (CSRC). This underlines the increased importance given by the authorities to the improvement of corporate governance practices in China. As China begins to implement its commitments under the WTO, the policy focus on corporate governance in China sends a strong signal that the government is committed to further market reforms with intensified efforts to develop modern corporate governance practices.

China with its background of a state-owned planned economy, has followed a unique path in market reforms, it enjoys the learning advantage of a late starter, taking best practices from other economies to avoid pitfalls. It has creatively borrowed and applied market concepts and lessons from the experience of other countries

Evolution of Corporate Culture in China

China in modern times has a relatively short history of corporate culture.

The period of transition to a more market – orientated economy:

Period Events
1978 to 1984

1. Reform of SOEs by giving SOEs more autonomy in management;

2. Further decision-making power is granted by the government to these SOEs;

3. SOEs are given the ability to retain some profits.

1984 to 1987

1. SOEs started paying income tax rather than turning over profits to the State;

2. However there was still little distinction between the functions of the government and those of the SOEs.

1987 to 1992

1. There was a gradual separation of ownership and management in SOEs when the contractual system was implemented (where some SOEs were contracted by the State to manufacture or provides services in return for fees);

2. SOEs were required to assume own responsibilities for profits and losses.

3. The early 1990s saw the establishment of the Shanghai and Shenzhen Stock Exchanges and 1993 saw the listing of the first mainland companies on the Hong Kong Stock Exchange.

1993 until present

1. Implementation of the PRC Company Law in 1 July 1994 which provides a legal framework for the structure of modern PRC enterprises;

2. Creation of PRC capital markets allowed SOEs to become listed companies;

3. Current rapid growth of the non-State sector, including private enterprise and foreign investment companies.

4. China now has the second largest equity capital market in Asia (after Japan) in terms of market capitalisation.

Major corporate governance issues for listed companies in China

  • State ownership: the state owns about 50% of all the shares of listed companies leading to a lack of clarity as to who represents the state as a shareholder in the listed companies during the transition;
  • Concentrated ownership: the largest shareholder, which is usually the state, holds on average about 45% of the total shares in a listed company;
  • Related party transactions between a controlling shareholder or a group company and the listed company are often detrimental to minority shareholders;
  • Boards consist of mainly executive directors. They are few independent directors, leading to “insider control”;
  • Executives underpaid – the management of major listed State Owned Enterprises are still chosen by the government. There lacks a market for professional managers and proper incentives; and
  • Information disclosure is in many cases not timely and accurate, and not easily understandable by investors.

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