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Director of Research Center , Shanghai Stock Exchange. May 19,2005 Beijing ... General Situation of Shanghai Securities Market. Capital Stock and Market ... – PowerPoint PPT presentation

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Title: Geen diatitel


1
Corporate Governance of the State Controlled
Listed Companies in China Problems ,Progress
and ProspectsDr. Ruyin HUDirector of
Research Center , Shanghai Stock Exchange
May 19 , 2005 Beijing
2
  • General Situation of Shanghai Securities Market

May 12th, 2005
  • Capital Stock and Market Value

Negotiable Market Capitalization (a hundred
million)
Total Market Value (a hundred million)
Negotiable Capital (a hundred million)
Total Capital Stock (a hundred million)
A Share
B Share
Total up
Total Share
Sampling
A Share
B Share
PE Ratio
May 13th, 2005
Market Size
Public Offering
unity (unit)
unity (unit)
Securities Trader
Investors
unity( ten thousand)
Unitpiece
seat
Accumulative Accounts Open
Total
Total
Total
Member Companies
Operating A Share
Shares
Investors of A Share
A Share B Share
Local Member Companies Nonlocal Member Companies
Tangible Intangible
Retail Investor
Institutional Investor
Investors of B Share Retail Investor Institutional
Investor
National Debt Merchandise on Hand Buy-back
Operating B Share Domestic Abroad
Securities Traders of B Shre Domestic Abroad
Securities Investment Fund
New Account of Current Month
Other Funds
New Account of Current year
Convertible Bond
Enterprise Bond
the Number of Listed Companies
3
  • SSE Historical Data

4
  • SSE Composite Index Movement(1990.12.19-2005.5.13)
  • SSE Index

amplitude
Ask Bid
Susp.
Up
Down
Unchanged (Share Price)
Avg.
Ls.
Chg.
PD Clo.
Chg.
Open
High
Amt.
Vol.
Low
quantity ratio
NowV
taken
given
5
Data of China Securities Market
6
Stat. Data of Chinese Securities
Market
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.)
Domestic Listing Companies A Share, B Share(home)
Market Capitalization(RMB100 Mil.)
7
Highlights of China Equity Market
(2005.4.19)
8
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).

9
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
10
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

11
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.
12
The Chinese Characteristics of Ownership
Structure and Organizational Structure of Listed
Companies
Ownership Structure of Listed Companies in SSE
Market (2004.12.31)
13
The Chinese Characteristics of Ownership
Structure and Organizational Structure of Listed
Companies
  • Ownership Structure of Chinese Listed
    Companies(1999)

14
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 companys 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 companys 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 companys 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 companys shares.
15
The Chinese Characteristics of Ownership
Structure and Organizational Structure of Listed
Companies
Ownership Structure of Listed Companies
16
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.
17
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
    shareholders 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

18
The Chinese Characteristics of Ownership
Structure and Organizational Structure of Listed
Companies
Ownship Structure of Listed Companies in SZE
Market
19
The Chinese Characteristics of Ownership
Structure and Organizational Structure of Listed
Companies
Ownship Structure of Listed Companies in SZE
Market
20
  • 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 Chinas
    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 companys
    general shareholders meeting, board meeting, and
    the supervisory board meeting, making them
    essentially rubber stamps

21
  • 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
22
  • Serious Problem of Key Person Model
  • Interest Conflicts between Blockholders/Manager
    s 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

23
  • 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 countrys 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.

24
  • 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 dont 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.

25
  • 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

26
Steps Taken to Improve Governance in China
  • Today,through SSEs initiatives and persevere
    effort,Corporate governance has been very high
    in Chinas 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.

27
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

28
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 Directorsthe 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 institutionalshare
    holders right (2004)
  • Cumulative voting rules, online SGM and voting
  • Training

29
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 .

30
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

31
Steps Taken to Improve Governance in China
  • SSE Guidelines for Corporate Governance(2000)

32
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

33
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
  • Online disclosing

34
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.

35
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.

36
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 bya 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.

37
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.

38
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 banks reference system
    (records of reprimand receivers).

39
Steps Taken to Improve Governance in China
  • Experimentation reform of equity division kicked
    off
  • From May 9th,2005, 4 listed companies have been
    put into trial scheduled for non-tradable shares
    to resume sales

40
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

41
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.

42
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 Tobins 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.

43
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 boards trust and
    responsibility.

44
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
    companiesenhance 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
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