Wu Jinglian

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The Role of Special Board Committees Chinas
Experience
Wu Jinglian State Council Development Research
Centre China Europe International Business School
26 February 2004
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The establishment of special committees
made up of independent directors has an important
role to play in improving the quality of the
boards work. In recent years, China has
implemented a series of reforms to enhance the
work of these committees and has achieved clear
successes. There are also still many issues that
have yet to be fully resolved.
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1. Board committees are an important framework
for corporate governance

• 1.1 The function of corporate governance
• Corporate governance consists of an entire
  system of constraints, incentives and balances
  the objective of which is to maximize company
  values. It is used to regulate relationships
  between the interests of the companys
  stakeholders including shareholders, creditors,
  management, staff, suppliers, retailers and
  consumers.
• The function of corporate governance is to
  manage conflicts of interest
• between stockholders and management
• between major shareholders and small
  shareholders and
• to consider the interests of other stakeholders

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1. Board committees are an important framework
for corporate governance

• 1.2 The two-tier structure of the German
  model of corporate governance

Shareholder Committee
Supervisory Board
Management Board
Trusteeship
Authorized Agent
Staff Election
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1. Board committees are an important framework
for corporate governance

• 1.3 The single-tier structure of US and British
  models of corporate governance

Shareholder Meeting
Board of Directors
Executive Organization
Shareholders
Non-executive directors (US External Directors)
Executive Directors (USInternal Directors)
Other High-level Executives
(functions are carried out collectively at
meetings)
(resolutions by vote)
(a tiered structure headed by a senior officer)
Utilizing the stock market to strengthen
supervision and incentives in relation to the the
board of directors
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1. Board committees are an important framework
for corporate governance

• 1.4 Comparing the advantages and disadvantages of
  the two structures
• The advantage of the two-tier structure is that
  the board of supervisors has greater independence
  in relation to the executive. Its disadvantage
  is that it is far away from the real business of
  the company and lacks information to carry out
  its functions
• The advantage of the single-tier structure is
  that it has more information in relation to the
  business of the company. The disadvantage is
  that is easily manipulated internally so that it
  simply becomes a rubber stamp

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1. Board committees are an important framework
for corporate governance

• 1.5 This does not signal the end of history
• In the latter part of the 20th century, corporate
  governance moved towards single-tier structures
  (OECD Principles of Corporate Governance)
• However, this does not mean the end of history
  for two-tier structures
• Internal improvements made to boards of directors
  with single-tier structures the Corporate
  Governance Movement, started in the 1990s

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1. Board committees are an important framework
for corporate governance

• 1.6 Positive measures for remedying internal
  control
• in single-tier structures
• Increase the ratio of external directors on
  boards
• Emphasize the independence of directors(independe
  nt directors)
• Hong Kong establish independent non-executive
  directors(independent directors)
• Establish committees for auditing, remuneration,
  nomination etc under the board of directors,
  managed by independent directors
• Enhance the work of these committees

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2. Chinas efforts and successes
2.1 Steps taken by the China Securities
Regulatory Commission

• Since the beginning of 2001 the China Securities
  Regulatory Commission has organized large-scale
  activities to publicize and promote the study of
  corporate governance
• In August 2001 it promulgated the Guidelines For
  Establishing A System Of Independent Directors
  For Listed Companies, requiring listed companies
  to establish a system of independent directors
• In January 2002 it promulgated the Standards Of
  Corporate Governance For Listed Companies,
  proposing that boards of directors can establish
  special committees, including committees for
  auditing, nomination, remuneration and
  assessment, with a majority of independent
  directors acting as conveners

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2. Chinas efforts and successes

• 2.2 The introduction of Hong Kongs system of
  independent directors

Shareholders General Meeting
External Directors
Internal directors
Other executive officers
Independent Directors
Utilizing the stock market to strengthen
supervision and incentives in relation to the
board of directors
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2. Chinas efforts and successes

• 2.3 Practical progress
• The majority of listed companies have established
  the system of an independent board of directors
• The majority of listed companies have established
  audit and remuneration committees, some companies
  have established nomination committees
• Audit committees have started to play quite a
  large role in carrying out audits of quarterly
  and yearly reports and related transactions

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2. Chinas efforts and successes

• 2.4 China Unicoms example
• This is a Hong Kong red chip company in which the
  state is controlling shareholder
• The companys board has 10 directors, 4 are
  independent non-executive directors
• The audit and remuneration assessment committees
  consist of independent directors
• The committees are conscientious and responsible,
  and have won the understanding and support of the
  internal directors
• Improvements in Unicoms corporate governance
  turned a small company made up of several
  departments into a competitive organization which
  in 2003 won an Euromoney award for best corporate
  governance in the greater China region, coming
  joint fourth with Sinopec

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2. Chinas efforts and successes

• 2.5 Standard Poors evaluation of Chinas
  corporate governance
• Reform of Chinas corporate governance has seen
  initial success
• Problems that still exist
• the structure of stock rights has not
  been sufficiently rationalized
• there is too much interference from large
  shareholders
• no transparency of information
• boards lack independence and their
  effectiveness is also inconsistent
• investors lack the initiative they should
  have as parties with rights and interests

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Developing the role of special committees

• 3.1 Establishing and perfecting the system of
  independent directors
• There is still debate whether independent
  directors have a role
• The experience of other countries indicates that
  they do
• The main issue as far as Chinese companies are
  concerned is not abolition. It is how to address
  poor quality and the lack of independent
  directors
• To activate the role of independent directors,
  coordination of elements such as equity
  structures, controlling shareholders, the
  executive code of conduct and the enhancement of
  supervision is necessary

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3. Developing the role of special committees

• 3.2 All listed companies should establish
  committees

• currently, not all listed company have
  established audit, salary, assessment and
  nomination committees
• some committees exist in name only
• all listed companies must set up audit
  committees (or carry out the relevant function
  through the supervisory board) and remuneration,
  assessment and nomination committees
• the composition and work of the committees must
  be disclosed in the annual report and inspected
  by the board of supervisors

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3. Developing the role of special committees

• 3.3 Enhancing the role of audit committees (board
  of supervisors)
• Make clear the functions, powers and
  responsibilities of the audit committee
  (supervisory board)
• Increase the number of committee members familiar
  with financial affairs
• Instruct the audit committee (supervisory board)
  to take responsibility for the overall planning
  of external and internal audits (financial
  control)

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3. Developing the role of special committees

• 3.4 Synthesize the experience of special
  committees and independent director committees,
  and improve working procedures
• Use the assessment of related transactions as an
  example, explaining the necessity of improving
  working procedures