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In Part I (see Spring issue), we
introduced the Securities Law and the Company Law of the People's
Republic of China (PRC) (collectively known as the "Two Laws"),
issued in October 2005. These Two Laws lay down the foundation of
corporate governance for both listed and unlisted companies in the
PRC. In Part II (see Summer issue), we also looked into the internal
control guidelines for listed companies issued by the Shanghai Stock
Exchange and Shenzhen Stock Exchange in June 2006 and September 2006
respectively (Internal Control Guidelines). These internal control
guidelines mirror the principles in the US COSO framework to promote
comprehensive and effective internal control and risk management
system for listed companies. In this last issue (Part III) of the
series of articles, we are going to cover the third pillar of China development of good corporate governance. This is the Code of
Corporate Governance for listed companies.
Code of Corporate Governance for Listed
Companies
In conformity with the basic principles
of the Two Laws and other relevant laws and regulations, the Code of
Corporate Governance for Listed Companies (the "Code") was first
co-introduced in 2002 (by the China Securities and Regulatory
Commission (CSRC) and State Economic and Trade Commission (SETC)) to
promote better governance of listed companies. The Code does not
come with the same legal enforceability as the Two Laws, nor does it
outline the details of having an internal control system. The Code,
however, does spell out the benchmark of good corporate governance
for listed companies. Many of the provisions are particularly
relevant to those companies reformed from state-owned enterprises.
The Code sets forth, among other things,
the basic principles for corporate governance of listed companies in
China. The Code does not extend its applicability beyond the two
stock exchanges in Shanghai and Shenzhen. The Code is the primary
benchmark for CSRC or SETC to evaluate whether a listed company has
a good corporate governance structure. If major problems exist with
the corporate governance structure of a listed company, the
securities supervision and regulation authorities may instruct the
company to make corrections in accordance with the Code.
The Code is structured as follows:
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1.
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Shareholders' Equity and Protection of
their Rights; |
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2.
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Directors and their Fiduciary Duties;
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3.
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Roles and Responsibilities of the
Supervisory Committee; |
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4.
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Directors and Supervisors' Performance
Appraisal and Monitoring System;
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5.
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Protection of Stakeholders' Rights;
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6.
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Promotion of Transparency and
Information Disclosure.
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1.
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Shareholders' Equity and Protection of
their Rights
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The Code explicitly emphasises the
protection of minority and foreign shareholders and the equitable
treatment of the rights and obligations of the shareholders as a
whole. Shareholders' resolutions shall be equitable and transparent,
and shareholders' meetings shall be arranged in reasonable time and
at venues to facilitate maximum participation. Also, the
shareholders shall have sufficient room for discussion and enquiry
of the Board.
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2.
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Directors and their
Fiduciary Duties
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The Code encourages the
segregation of the chairman from the chief executive. In case the
same person is sitting in these two offices, the Code requires at
least half of the Board members to be independent directors in order
to promote objective judgement and decision making. A chairman shall
not be sitting on the Board of the parent and a listed subsidiary.
Both the audit committee and remuneration (and performance
appraisal) committee shall be constructed with a majority of
independent directors and with at least one of them being
financially competent.
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3.
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Roles and
Responsibilities of the Supervisory Committee
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Supervisory Committee is composed of
independent directors only. The committee is empowered to monitor
the Board operation and ensure they are acting to their fiduciary
duties. The committee may propose to hire external advisor for
assistance at the company's expenses and they may enquire directly
with the company's internal auditors, external auditors, and other
senior officers. The committee is required to report any finding to
the board of directors and shareholders' meeting. The Board should
consider their reported findings into the senior management's
performance appraisal. The committee may also elect to report to
other securities regulators without the consent of the Board.
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4.
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Directors and
Supervisors' Performance Appraisal and Monitoring System
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Independent directors should have annual
self-assessments to evaluate their performance. Other executive
directors and senior officers are subject to the annual assessment
by remuneration and nomination committee. A director/supervisor,
when he/she is the subject of the committees' assessment, shall
abstain from the discussion. The company shall maintain a stable
management; any change to the Board members or senior officers
should be announced to the public.
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5.
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Protection of
Stakeholders' Rights
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Stakeholders include banks, creditors,
workers, consumers/customers, suppliers, community and environment.
The listed company shall maintain harmonic relationship with
stakeholders while maximising its economic benefits. In case of any
foreseeable detriments to any stakeholders, the listed company shall
proactively resolve the conflicts for the long term well-being.
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6.
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Promotion of
Transparency and Information Disclosure
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Information shall be disclosed timely,
accurately, completely and reliably according to the relevant
disclosure requirements. The listed company shall disclose in their
annual report at least with the following - i. Board composition and
independency; ii. Board performance review; iii. Independent
directors assessment and results; iv. Committees accomplishments and
results; v. Composition of Supervisory Committee and its roles; vi.
Resolution voting mechanism; vii. Deviations from the Codes and
explanation; viii. Suggested remediation plan to improve the
corporate governance.
The Code, along with the Two Laws 2005 and the
Internal Control Guidelines from Shanghai and Shenzhen Exchanges,
sets out the entire framework and vision to build sound corporate
governance and internal control environment of the listed companies
in China. Altogether they mark the principal steps of China towards international standards. |
chris.tam@gthk.com.hk
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