The Development of Corporate Governance in China

The history and legal framework of corporate governance for listed companies in China

Prior to 1978, most Chinese companies were state owned enterprises with strong government influence. The government set targets and an agenda and the individual business and managers were measured against those targets. In 1978, the government decided to reform the state owned enterprises and focus on the process to improve corporate governance measures and allow for a market based system. The first wave of changes happened from 1978-1984 resulting in loosening up the administrative management and inserting economic incentives for individual businesses. The second wave of changes happened from 1984-1992. The government implemented taxes on medium to large corporations and distributed them to less profitable companies and the state. In addition, the CPC Central Committee began the transition of management from the state to contracting professional managers, provided for bonuses that misaligned incentives. The third wave, from1993-2003, instituted changes in developing structures to support development of a market based economy. First, the government implemented a more structured legal framework for corporate management and registration through the greater significance of the capital markets. Second was that the non-state owed companies were elevated in stature, reducing the obstacles to creating more non-state firms. Both of these lead to increased focus on corporate governance reform and resulted in China joining the WTO and adoption of the OECD Principles of Corporate Governance. The fourth wave has been focused on setting regulation and rules to improve governance and resolve many of the issues of a transitioning economy. This has led to greater formalization of laws and regulations that manage the various stakeholder interests and promote a growing economy. In addition, the companies themselves have looked for ways to improve their effectiveness and operations by formalizing processes and increasing stakeholder voice.

Legal requirements with respect to shareholders’ rights

In China, corporate law theorists break up shareholder rights into two main buckets, “self-benefit rights” and “co-benefit rights”. The self-benefit right allows for shareholders to seek economic benefit, which include, the right to request dividends, distribution of residual assets, to transfer shares and request share purchases. The co-benefit rights are designed to give shareholders the rights to govern through voting rights, ability to call or convene shareholder meetings, proposal and enquiry rights, the right to revoke shareholder meeting and board decisions, inspection rights and cumulative voting rights. The two main laws that provide the basis for shareholder rights are the Company Law and Securities Law. The Company Law governs the incorporation and organizational structure