Question

What events and conditions prompted the emergence of Corporate Governance in China? How has it developed and evolved (if any) over time?

Please provide sources if possible! Thank you!

Answer 1

Corporate governance refers to the set of systems, principles and processes by which a company is governed. They provide the guidelines as to how the company can be directed or controlled such that it can fulfil its goals and objectives in a manner that adds to the value of the company and is also beneficial for all stakeholders in the long term.

Corporate governance in China emerged when it shifted from a planned economy to a market economy. The establishment and growth of China’s capital market and the evolution of Chinese enterprises from government affiliates to modern companies made it necessary to establish a new corporate governance framework.

• The traditional Chinese governance model was a “State-owned, or a State-owned-and managed model. Corporate production plans were not decided by the market, but by the government according to a national plan and its sub-plan. Managers had no independence in business activities, nor could they share the fruits of successful business operations, and therefore lacked the drive to improve enterprise management.
• Limited success with a number of reforms introduced during the transition period led the State to embark on a more radical process of corporatisation.
• Economic reform progressed in China’s urban areas after the Third Plenary Session of the 11th Communist Party of China’s (CPC) National Congress in 1978. The centrepiece of the reform was the revitalisation of state-owned enterprises (SOEs) to make them more efficient by restructuring the old enterprise system. Spawned by the reform of SOEs, China’s attention to corporate governance grew as the SOEs strived to put a modern enterprise system in place.
• The program of ‘corporatisation’ started by the Chinese authorities in 1993 required the restructuring of largely inefficient State-owned enterprises, along with the development of supporting institutions and the establishment of new capital market.
• From 1992 to 2004, there were 200 scandals among China's 1,200 listed companies. For example, Oriental Century Corp, Shanghai AJ Corp and Sichuan Changhong Electric Corp.
• Corporate governance reform gained momentum in the late 1990s, but it was less a byproduct of the Asian Financial Crisis than a need to strengthen the governance of SOEs listing abroad.

Evolution of Corporate governance in China.

• In the 1990s, China took the first steps toward modern corporate governance by establishing the Shanghai and Shenzhen Stock Exchanges and by creating a new government body—the China Securities Regulatory Commission (CSRC)—to regulate its new stock market.
• The Company Law, was promulgated in December 1993, provided legal support to the establishment of a modern enterprise system and laid the groundwork for China’s corporate governance framework.
• The Accounting Law (2000) was introduced to standardise accounting behaviour, ensure the truthfulness and completeness of accounting materials, strengthen economic administration and financial management, improve economic performance and safeguard the order of the socialist market economy.
• In 2001, China joined the World Trade Organisation and undertook to adopt the OECD Principles of Corporate Governance and improve corporate governance of Chinese listed companies.
• The China Securities Regulatory Commission (CSRC) and the National Economic and Trade Commission jointly issued the Code of Corporate Governance of Listed Companies in early 2002.
  • It expounds on the basic principles of corporate governance, the means to achieve investor protection, and the basic code of conduct and professional ethics that need to be observed by directors, supervisors, managers and other executives of listed companies.
  • The code was further reviewed in 2011 and 2016.
• The Company Law (2006) was formulated to standardise the organisation and behaviour of companies, to protect the legitimate rights and interests of companies, shareholders and creditors, safeguard socioeconomic order and promote the development of a socialist market economy.
• The Securities Law (2006) was drawn up to standardise securities issues and transactions, protect the legitimate rights and interests of investors, safeguard socioeconomic order and public interests and promote the development of a socialist market economy.
• Amendment VI to the Criminal Law (2006) was designed to match the amended Securities Law and Company Law, to give a more complete definition of legal liabilities in the securities field, improve the laws governing the securities market and promote its healthy development.

Sources:

https://www.oecd.org/corporate/ca/corporategovernanceprinciples/48444985.pdf

https://pdfs.semanticscholar.org/1852/95e6c7b5c9c38abac8e3373a55a9d8463034.pdf