Analysis of the Obstacles to Chinese Corporate Governance Finance Essay

QuestionA¼Å¡What obstacles face the further improvement of corporate governance practices in China’s large companies? Introduction With the popularity of the globalisation and increase of international transaction, China is trying its best to adopt the trend of this development. Since the economic reform in 19**, China has changed its model of company governance step by step, all with the purpose of raising the standard of Chinese people’s living. The reform of China’s “socialist market economy” stimulates the transform from state-owned enterprises to corporatise to shareholding companies. China’s efforts to re-establish a market-oriented economy mainly expresses in the aspects of the transform of the ownership of companies, rule-based approach to its securities market and laws and regulations of corporate governance. (CL 1) Corporate Governance is commonly viewed as “a system that delineates the rights and responsibilities of each major group of stakeholders in company, and sets rules and procedures for making decisions about company affairs” (OECD, 1998). Overall, Chinese definition of corporate governance is described in 1999, as “the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined” (OECD 1999, P2) Although with these great progress in the reform of the economic system and the structure of corporate governance of China, these are still some problems hinder the economic development. As accepted, the most effective solution for adopting the modern economic development is improving the structure of corporate governance to suite the new re-established market-oriented economy. (CL 1) This essay aims at assessing the obstacles existing in the further improvement of corporate governance practices. In order to analyze this convincingly, at first this essay gives a general background knowledge about the present structure of corporate governance in China. In this section it introduces the modern characteristics and governance model. It then assesses the obvious and crucial problems in China which hinder the development of further improvement of corporate governance practices. It mainly talks about the issues in eight aspects:A¢â‚¬A¦A¢â‚¬A¦A¢â‚¬A¦.. Finally, this paper gives out some prevalent perspective of how to conquer the barrier holding in the modern society, with relevant to the current form of economic development. Background knowledge about the CG A good model of CG should provide “proper motivation for the board and management to pursue their goals that are in the profits of the corporate and shareholders, furthermore, stimulating effective supervising, with the result that encouraging firms to use resources more efficiently.” (OECD 1999, P2) Principles and Modern model The main principle existing behind corporate governance is that companies ought not to only aim on its own profits; they also ought to share their interests with their investors as well. That means all the stakeholders should have the right to be allocated with the interests. (http) On the base of this element principle, some specific standards and regulations are still needed in the firms. (http) With the main principle described above, it could be concluded that the corporate governance could be understood in two terms: a structure to direct a company and a method to coordinate the interests of managers and shareholders and reduce the costs. (TRACK 4) Generally in the international world, there are mainly two models of corporate governance in practice. One is shareholder value model and the other one is the codetermination model. The former one, also called a market-oriented model, has the main characteristic that selling shares directly to decentralized distribution of shares, with an active market for hostile takeovers. (T 5) Its main purpose is to increase the value of corporate for the benefits of shareholders’. The latter one, with few hostile takeovers, prefers a network-oriented approach. It takes the measures of improving loyalty and motivation of employees, which has a name of participation theory. The main difference between the two models is that the former one takes its measure of cost advantage and radical innovation to direct firms to win in competition, whereby the latter one aims on the method of improving quality and innovation. (T 5) A Chinese corporate governance system Chinese corporate governance system has combination characteristics of the two models. However the most significant feature of it is that state plays a controlling role in the method of direct or indirect ownership to manipulate the company. It is usually expressed in the form of private shareholders or stakeholders and creditors to control the enterprise. China has the three main models of corporate governance structures. (Chen and Strange, 2004) (T 11) The first model is the most common one. Its non-tradable shares are hold by solely state-owned institutional investors and other institutional investors at the same time. They take this method to apply their indirect control of the firm. (T 11) However, in the second model, the state masters the enterprises directly through the way of holding controlling voting shares. In other words, the governmental departments have direct ownership of non-tradable shares. (T 11) According to the third model, it is a characteristic of an assemblage of various other shareholders, which contain private shareholders, enterprises with foreign investors and Collectively Owned Enterprises (COEs). (T 11) The Current corporate governance practices in China Current Legal Framework Maximizing the shareholder value and productivity of companies are the main purpose of corporate governance. Since in 1992 the first China Securities Regulatory Commission (CSRC) was established, more and more laws, regulations and directives (more than 300) relating to securities and futures market have been promulgated to maintain the economic order. (USC 2) The Chinese legal framework for corporate governance contains the laws of Company Law, the Securities Law and the Code of Corporate Governance for Listed Companies. (USC 2) It is in 1993 that the first legislative force, the Company Law, come into force. After that, the Company Law was revised in 2005, and then came into force in 2006, with the goal of expanding the legislation. (Directing 2) The Securities Law as well as the Company Law affects the structure of corporate governance in its own way. (D 2) The Code of Corporate Governance by CSRC sets out the most important assessment standard of evaluating whether it is good corporate governance inside a listed enterprise, with the aim to have a more efficiently running economic market. (D 2) Recent development Rights of shareholders and rules for shareholder’s meeting Since China has established its Securities Regulatory Commission in 1992, it has made essential and abundant progress of corporate governance in many areas. Among all, the significant one is the adjustment of the rights of shareholders and rules for shareholder’s meeting. It stipulates in Chapter 1 of the Code of Corporate Governance that all shareholders enjoy equal rights and burden the equivalent responsibilities based on the shares they hold. Furthermore, they have the right to prevent their right from encroaching by the way of applying for law. As the rules for shareholders’ meetings, there are stated two forms of meeting: general one and interim one. It also has been described in the Code that Every shareholder has the right to attend the meetings in person at present, however if he would like, he could assign a representative on their behalf. Both patterns should have the same legal effect, as stated in the Code. (USC 3) regulation about the directors and board of directors The progresses also are expressed in the aspects of establishing the relevant regulation about the directors and board of directors. As Chapter 3 of the Code states, it stipulates the issues about directors and board of directors in six areas. It contains election procedures, duties and responsibilities, composition of the board, rules, independent directors and specialized committees. (USC 4) According to Chapter 5, for encouraging the employees more effectively, it states some rules about performance assessments and incentive and disciplinary systems. It talks about the issue with the main principle of fair and transparent standards objecting to the directors, supervisors and management personnel. (USC 5) Fiduciary Duties Another impressive expression of the progress is about the aspect of fiduciary duties. The Company Law requires protecting the company’s interests by the directors, supervisors and managers in the way of applying their official duties. In other words, they are not allowed to exploit their positions and power within the enterprise. (USC 4) What’s more, it also forbids its employees from engaging personally work, which is the same with the one he operates in the company, in relevant business. (USC 4) On the other hand, the Securities Law has some regulations about insider information and related party transactions. As Doe and Chan concluded in 2001, persons, who hold the insider information relating to securities trading, are forbidden to use the relevant information to do the securities trading activities. (USC 6) Information Disclosure and Transparency Last but not least, the part about information disclosure and transparency is an attracting progress as well. It is the CSRC that established the basic framework for information disclosure in China’s securities markets. As Liu and Zhang described in 1996, the frame could be separated into four levels, which involves securities trading legislation, implementing securities legislation, content, form, and criterion of it and the interpretation and explanation of the specific provisions. (USC 5) What’s more, for matching this aim of information disclosure, the Securities Law has some regulations about the right of auditors. It states that auditors have the right to review the company’s financial statements and records and to request relevant information for the purpose of guarantee the effectively running of the company. (USC 7) The obstacles Highly concentrated Ownership Structure State’s over control Government assigning persons (Insider control of corporate affair) Weak protection of the Shareholders’ right Issues about directors and board of directors Executive of the directors Independent directors and committees Assessment and incentive system Weak Supervisory Board Insider Trading and control Insider information trading Collusions in Market manipulations Horizontal competition Information Disclosure The part of information disclosure is such important with so many reasons. Firstly, it is necessary for the government and public to get the knowledge about the governance of the company to set a practical policy and supervise their deed in the modern world. (A¤A¸A­A¦-”¡2) SecondlyA¼Å’the public could get more information about the company through the information disclosure companies provided. This could improve the trust to the company from the public and help the company establish a good corporate image. Furthermore, a good policy of information disclosure will provide a general management strategy and profit running of the company to a potential investor, therefore, it could help the company to get a low-cost financing, which of course improve its competitiveness. (A¤A¸A­A¦-”¡ 2) (A¦”A¹A¥” â„¢)A¼Å¡ In the modern corporate governance system, the main obstacles that exist in the part of information disclosure are lack of timeliness, lack of integrity and falsification of financial data. In many cases, the most typical expression of the drawbacks is without providing information timely and accurate. As widely accepted, timeliness is vital dimension of the effects of information disclosure. Only the timely and accurate information could provide the value knowledge to the public and relevant parties. But in the current society of China, it rarely provides the useful information timely. Further speaking, the present information disclosure policy in China is far from sufficiency. On the one hand, despite the mandatory disclosure of company information is designed according to laws, regulations and industry standards, companies rarely adopt the requirement. On the other hand, the autonomic requirements of disclosure that from ethics and values are always been ignored. Furthermore, the information that most enterprises disclosed is far to satisfy the relevant party to get the whole running situation of the enterprises. Another obstacle is that although Chinese laws on corporate governance follow international standards in general in its documents, mandatory disclosure of company information does not lead to a greater transparency. Because no one could guarantee the information provided is with truthfulness and accuracy. One of the persuadable evidences is that as reported in China Reform Daily 2001, approximately 98.7% of Chinese companies falsified their earnings in annual reports for the past accounting year. Solution Suggestion: China should draw lessons from many existing examples, such as the major directing rules of CSRC 2002, the major Sarbanes-Oxley Act (2002) rules and the NYSE (2003) requirements. The first one gives the rules that regulating an ongoing responsibility of listed companies and recommend the secretary of the board of directors shall be in charge of information disclosure. The Sarbanes-Oxley Act states that “each annual and quarterly financial reportA¢â‚¬A¦shall disclose all material off-balance sheet transactions” and “directors, officers and owners of 10% or more must report designated transactions by the end of the second business day following the day which the transaction was executed”. As well as the NYSE requires each listed enterprises to adopt and disclose corporate governance guidelines, and to adopt and disclose a code of business conduct and ethics for directors, officers, and employees, and to promptly disclose any waivers of the code for directors or executive officers at the same time. Conclusion

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