State shareholders should become an active force in promoting the establishment of effective

corporate governance  Chen Qingtai

State Council Development Research

Centre （ DRC ）

（ Shanghai, 26 February 2004 ）

Part One

Long-term factors in the distortion of corporate

governance

DRC

The main features of the distortion of corporate governance

The system of authorized agents for state stockholder’s interests is not sound After the restructuring and listing of an SOE (State Owned Enterprise), resources

for solving the remaining problems of the “remainder company” are incorporated into the listed company, with the result that ：

（ 1 ） the board of directors loses independence（ 2 ） the independence of the company’s commercial interests is lost There is inappropriate government interference and dominance by a single

shareholder with a government background The state shareholder exceeds the level of intervention in personnel issues

permitted by the Company Law State-owned and legal person shares are not circulated on the capital markets The listed company has inappropriate connections with the parent company

“government background” and “dominance by a single shareholder” refer to poor corporate governance due to one stockholder's decisive majority of shares in a company and the fact that in China, the state often holds a decisive majority of shares of big companies. The management of many companies are appointed by the state rather than the board.

“government background” and “dominance by a single shareholder” refer to poor corporate governance due to one stockholder's decisive majority of shares in a company and the fact that in China, the state often holds a decisive majority of shares of big companies. The management of many companies are appointed by the state rather than the board.

Part 2

An important breakthrough in the reform of the state assets administration system

DRC

Principles for establishing and operating the new state-owned assets administration

system

The government at central, provincial and municipal levels carries out its responsibilities as investor on behalf of the state ；

Each level of government sets up a body specializing in the supervision and management of state-owned assets in order to carry out its responsibilities as investor ；

The supervisory body centralizes and unifies the exercise of ownership in relation to investment and shareholding enterprises, linking management of capital, personnel and business ；

Reform of the state assets management system is combined with adjustment to the distribution of state assets ；

In accordance with the Company Law the investor institution exercises shareholder rights and implements the division of ownership and management rights

“funder” – the word used here is similar to the Chinese word for “investor”. They are similar in the sense that both provide funds to a company. The former is closer to corporate partner, including both individuals and organizations, while the second is in the broad sense of investor.

“funder” – the word used here is similar to the Chinese word for “investor”. They are similar in the sense that both provide funds to a company. The former is closer to corporate partner, including both individuals and organizations, while the second is in the broad sense of investor.

The new system - the first breakthrough

With the state as owner, the object of supervision will switch from enterprise to capital

The state asset department’s “exercise of investor’s responsibilities” sends out several

important messages：

- capital, not enterprises, should be subject to supervision by the investor;

- the investor institute acts in accordance with its code of conduct, its focus of

concern is capital security and investment reports;

- the investor institute’s shareholder rights are exercised in accordance with

the Company Law. The main means of utilizing capital are participation in

corporate governance and the input and withdrawal of capital

The new system - the second breakthrough

The investor institution centralizes and unifies the exercise of ownership rights

This has important significance:

- a system and mechanism that can investigate property rights responsibilities has

been established;

- a body with well-defined responsibilities and rights that utilizes state-owned capital

has been formed

- the situation of too many managers and multiple objectives in state-owned assets has

been brought to an end

Part 3

State shareholders should become a positive force in promoting the

establishment of effective corporate governance

A corporate legal person governance structure is the core of

the corporate system

Switching from traditional, government-supervised enterprises to corporate

governance established under two separate authorities is a profound systematic

change

In modern, large-scale management organizations the supervision of policy making,

operations and management are all highly specialized areas

Since effective corporate governance largely concerns the protection of

shareholder rights and interests, the leading force in promoting effective corporate

governance is the shareholder

(the special nature of state capital requires two levels of authorized agents, namely authorized

agents within state property rights and authorized agents within corporate governance, before

the investor can be put in place)

Determining the two objectives necessary for reforming state enterprises by listing shares

Firstly, ensure that enterprises with excellent prospects have the

opportunity to raise capital, achieve development even more quickly and

benefit investors;

Secondly, through diversification of stockholder’s rights, change the

government/enterprise relationship, establish and standardize corporate

governance structures and switch to a management system

DRC

Three significant problems in relation to current enterprise structures after the

restructuring and listing of state-owned enterprises

The controlling shareholder is still the SOE, the company cannot become a “real boss”;

government departments always tend to interfere in listed companies

Secondly, the objectives of the controlling shareholder are too diversified

Thirdly, the controlling shareholder’s resources for solving continuing problems are all

within the listed company and the controlling shareholder also has too many

connections with the listed company

A key factor in enhancing corporate governance is changing the relationship between the

listed company and the controlling shareholder

State shareholders are becoming a positive force in promoting the establishment of effective corporate

governance

1st, intensify reform of the state-owned capital administration system

2nd, the regulation of state-owned capital should be split into two

3rd, promote diversification of stock rights 4th, explore new forms of restructuring and promote the

listing of SOEs as a whole 5th, the government should create an environment in which

effective corporate governance can be established

DRC

Closing statement

Thank you！

State Council Development Research Centre （ DRC ）