Nov 12, 2008
|PDF file||0.1 MB|
|PDF file||0.4 MB|
|PDF file||0.5 MB|
Although China's economy has grown rapidly in recent years and investment in its stock markets has soared, corporate governance institutions remain nascent. A RAND report analyzes the evolution of Chinese corporate governance, describing recent reforms that have created Western-style oversight mechanisms. It also identifies obstacles to reform that stem from the continued prevalence of state ownership, and recommends policies that will help address those obstacles so that China can move toward international standards of corporate governance.
China's economic reforms have fueled rapid economic growth in the past three decades. At the same time, the Chinese have developed policies to create Western-style oversight mechanisms and corporate governance, in an effort to improve public confidence in their markets at home and abroad. Despite this progress, however, corporate governance mechanisms in China remain weak. A 2003 study by the World Economic Forum ranked China 44th out of 49 countries surveyed in terms of quality of corporate governance.
A 2008 RAND report titled Chinese Corporate Governance: History and Institutional Framework describes the recent history of corporate governance institutions in China, identifies obstacles to the evolution of best practices in this area, and recommends policies to promote improvement.
Until recently, the government controlled almost every aspect of China's economy, and most enterprises were state-owned. 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 next 10 years saw the emergence of a modern enterprise structure, as China passed its first Company Law, delineating the rights and responsibilities of corporations. Notably, investments in Chinese stock markets surged during this period (see figure). But despite these reforms, state shareholders still enjoyed overwhelming favoritism over individual investors. In 2006, China implemented the first of several new policies intended to address the continuing power imbalance between state and individual shareholders.
To describe the current status of corporate governance in China, the report identifies two sets of institutional entities: those internal to companies and those external to them. The inner circle of governance consists of shareholders' general meetings, boards of directors and boards of supervisors, and management personnel. The outer circle includes regulators (primarily the CSRC), the stock exchanges, the Chinese legal system, the auditing system, and institutional investors. The report describes the roles of each of these entities in shaping corporate governance in modern China.
Despite these problems, the report's authors are optimistic about the evolution of corporate governance in China. They point to the increasing globalization of listed companies, such as those listed in Hong Kong, as a trend that has helped align those companies with international standards of governance. They also point to the new government policy allowing mainland Chinese citizens to invest in non-mainland stock markets, a move that will force mainland enterprises to compete with their Hong Kong counterparts for investors. Also, as China's market economy matures, it will stimulate the development of more experienced personnel who are badly needed to serve as company managers, independent directors, and certified public accountants.
To overcome the obstacles to better corporate governance, the authors recommended a number of policy options. These include better defining the functions of supervisory boards, making it easier for investors to sue management, and toughening the punishment for insider trading—all steps that have been recommended by other experts. The authors also suggest reviving the now-banned regional over-the-counter markets, establishing an incentive mechanism to encourage reporting of insider trading, and promulgating the concept of fiduciary responsibility.