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Developing Effective Boards of Directors of SOEs

Prof.Lu TongChinese Center for Corporate Governance

Chinese Academy of Social SciencesMay 19,2005 Beijing

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Boards play a critical role in effective governance

• Serving as the fulcrum between shareholders and management;

• Board members should have a capacity for independent judgment;

• Monitor managerial performance;• Manage potential conflicts of interest;• Ensure the integrity of accounting and financial

system;• Guide overall corporate strategy.

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Outline of presentation

• Assessment of Corporate Governance for Top 100 Chinese Listed Companies 2005.

• Ideas on developing effective boards of directors of Chinese SOEs.

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Assessment of Corporate Governance for Top 100 Chinese Listed Companies

• Final report was recently released in April 8,2005 at China Securities Journal.

• Research Methodologies • Survey results based on publicly available

information;• FORTUNE CHINA 100 Chinese Listed Compan

ies(SOEs) constituent stocks(July2004);• Based on information disclosed in 2004;• Not dependent on companies’ willingness;• However, not as rich as an internal assessment.

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Encourage adoption of best practiceof corporate governance in China through a systematic evaluation of current practices

Define a methodology/ framework to assess corporate governancepractices in China

Develop specific criteria and a measurement tool to evaluate individual companies

Set up processes to evaluate corporate governance of Chinesecompanies on an annual basis

Objectives of Corporate Scorecard for Chinese Listed Companies

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Consistency

• Each company was rated by two different members

• The overall results were cross-checked by academics

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Scorecard Followed The Five OECD Corporate Governance Principle

OECD principle Number of questions & sub-questionsA. Rights of shareholders 15B. Equity of shareholders 10C. Role of stakeholders 4D. Disclosure and transparency 19E. Board responsibilities 21Total 69

•OECD is internationally

recognized

•CG guidelines

comprehensively covered

•100 public companies

surveyed

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30. 92%

27. 84%

41. 24%ShanghaiShenzhenHongKong

The distribution 0f 100 listed companies

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Summary of Findings(1)

• The general average score that all sample companies’ corporate governance get is 69.2 and that indicates the level of corporate governances by the top 100 listed companies of China is at medium level.

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61.54

69.1

76.52

Lowest score

Overall average score

Highest score

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Summary of Findings(2)

• The corporate governance of the top 100 listed companies in China differ greatly from the best practice in “the role of stakeholders”, “rights of shareholders” rank the second, “the disclosure of information and transparency” are relatively well, “equal treatment to the shareholders” and “the responsibilities of the board of directors” are at the medium level.

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69. 259. 1

70. 7

45

8264. 2

33. 3

53. 3

73. 3

93. 3

over

all

The

Righ

ts o

fSh

areh

olde

rs

Equi

tabl

eTre

atm

ent o

fSh

areh

olde

rsTh

e Ro

le o

fSt

akeh

olde

rs in

Corp

orat

eGo

vern

ance

the

disc

losu

reof

info

rmat

ion

and

trans

pare

ncy

Resp

onsib

ilitie

s of t

he B

oard

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Summary of Findings(3)

• There is no significant difference in the average level of corporate governance between the Chinese companies listed in Shanghai and Shenzhen and those listed in Hong Kong.

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33. 3

53. 3

73. 3

93. 3

score

l i sted i nShanghai and

Shenzhen

l i sted i nHongKong

sampl e compani es’ score break down by l i stedpl aces

the hi ghest scorethe medi um scorethe l owest score

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Summary of Findings(4)

• The correlation of the price premium in the capital market of the listed companies and the grading of their corporate governance .

• （ 1) Generally speaking, Tobin’s Q of the sample company has no prominent relationship with the evaluation grading on corporate governance. But, by making a comparison, the relations between the evaluation grading on corporate governances of companies listed in Hong Kong and the price premium in the capital market of the listed companies are a little bit higher than those of the companies listed in Shanghai and Shenzhen.

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Tobi n’ s Q of l i sted compani es i n Shanghai andShenzhen VS score of corporate governances

02468

101214

55 60 65 70 75 80 85 90eval uati on score of corporate governances

Tobi

n’s

Q

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Tobi n’ s Q of l i sted compani es i n Hong Kong VSscore of corporate governance

01234567

55 60 65 70 75 80 85 90eval uati on score of corporate governance

Tobi

n’s

Q

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Summary of Findings(5)

• General score get by Responsibilities of the Board

• Questions includes 4 subcategories with 21 evaluation indexes :

• (1)“supervision and control”;• (2)“interest conflicts”;• (3)“the composition of the board ”and

(4)“communication”

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Board Responsibilities

• Advantages of Chinese listed companies:• Regularly hold board meetings;• Separation Chairman and CEO;• Proper size of the board ;• Composition of the board;• Most of companies have board report.

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39. 3 43. 3

60. 7

94. 7

33. 3

66. 7

90

64. 2 69. 2

33. 3

53. 3

73. 3

93. 3

113. 3

E1-1

E1-2

E1-3 E2 E3 E4 E5

Resp

onsib

ilitie

sof

the

Boar

d over

all

scor

e

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E. Board Responsibilities

Improvements:• A set of written corporate

governance rules• Corporate moral rules and

vision/mission• The quality of the Audit Committee

Report in the Annual Report– Attendance– Internal control– Management control, etc.

79.4

47.6

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Board Responsibilities

• Chairmen of the board are not independent director;

• Less the companies have an option scheme which incentives top management.

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Results

• NOT finger-pointing exercise• Important input for policy-makers, companies,

and the public • Score for individual companies will not make

public• Feedback report can be obtained for individual

companies

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Ideas on Developing Effective Boards of Directors of Chinese SOEs

• The effectiveness and independence of the board is still the key to improve the level of corporate governance of Chinese listed companies .

• Recommendations:• (1)Strengthening the training of the board o

f directors by setting up IODs.

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Recommendations

• (2) The election of directors should fully reflect the opinions of minority shareholders.

• A cumulative voting system should be earnestly advanced in shareholders’ meeting for the election of directors especial for those companies with more than 30% controlling shareholders.

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Recommendations

• (3) Third, to establish fair and transparent standards and procedures for the assessment of the performance of directors. The qualifications for being a director should be strict, and the situation of sole form for the directors’ compensation should be changed.

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Recommendations

• (4)Regarding to the independent directors system in China,relevant laws and regulations should be complied with for matters such as the qualifications, procedure of election and replacement, and duties of independent directors.

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• Thank you!• E-mail:lutong0525@vip.sina.com• lutong0525@yahoo.com.cn• Fax:0086-10-65126105• Tel:0086-10-85195771