Implementing Corporate Governance For PRC Companies - Post GITIC

The spectacular collapse of the Guangdong International Trust and Investment Corporation ("GITIC") in 1999 leaving over US$2 billion of irrevocable loans highlighted some of the deep-rooted problems of corporate governance in the PRC and the need for urgent reforms.  Among the reasons for GITIC's failure were poor management, rash investments, lack of risk management systems and inefficient operations.

Many of the systemic problems in the PRC came about because most listed companies were re-structured State-owned enterprises or were controlled by government agencies with directors and management chosen by bureaucrats.  There were difficulties in removing non-performing directors and the senior management had little incentive to improve performance or pay attention to the interests of minority shareholders.

The PRC has so far relied on a legalistic approach to corporate governance reform. 

The main requirements for private companies are set out in the PRC Company Law and include :-

• Capital contributions must be verified by an approved verification company

• Shareholders cannot withdraw capital once the company has been set up

• Directors cannot also be supervisors

• Directors cannot be appointed for more than 3 years unless they are re-elected

• Civil servants cannot be directors

• Directors cannot compete with the company's business

• There must be a separate supervisory board consisting of shareholders and representatives of the workers.

There are many additional requirements for listed companies.  Apart from laws and regulations, there are also many regulatory notices, codes and guidelines which have been issued by various regulatory bodies.

Based on the OECD's Principles of Corporate Governance, the Chinese Securities Regulatory Commission (CSRC) and the State Economic and Trade Committee (SETC) jointly issued the "Codes of Corporate Governance for Listed Companies" in January 2002.  This establishes the 5 key principles for corporate governance in the PRC, as follows: -

• Shareholder accountability

• Directors' duties of honesty, loyalty and diligence

• External audit must be independent and penetrating

• Disclosure and transparency are crucial to market integrity

• There must be an appropriate regime of regulatory discipline to back these obligations.

The Codes of Corporate Governance for Listed Companies sets out the main corporate governance requirements applying to listed companies in the PRC, including the following :-

• Equal status amongst all shareholders, especially minority shareholders

• Proper legal channels to protect lawful interests of shareholders

• Guidelines for general meetings

• Rules on disclosure of associated transactions

• Guidelines for controlling shareholders

• Selection process for directors

• Duties of directors, including the requirement for directors to devote sufficient time and commitment to discharge their duties

• Rules of procedure for board meetings

• The need for independent directors and their duties

• Role of the supervisory board

• Provisions regarding executive incentive compensation

• Provisions relating to disclosure and transparency

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.