Corporate Governance in China: Recent Developments, Key Problems, and Suggested Solutions

Abstract

China started its economic reform in 1978. By 1995, China had become the world's third largest economic powerhouse after the United States and Japan, with a total GDP of $720 billion. The development of the securities market and a sound corporate governance system plays an important role in the progress of China's economic reform. Since 1992, China has made substantial progress in seven areas of corporate governance: (1) rights of shareholders and rules for shareholders' meetings, (2) duties and responsibilities of directors and independence of board of directors, (3) fiduciary duties, (4) performance assessments and incentive and disciplinary systems, (5) information disclosure and transparency, (6) insider information and related party transactions, and (7) the role of the auditor. This paper describes the recent developments in China's corporate governance. In particular, it addresses nine key corporate governance problems in China: (1) highly concentrated ownership structure, (2) insider control of corporate affairs, (3) weak protection of shareholders' rights, (4) frequent insider trading, self dealings and collusions in market manipulations, (5) falsification and fabrication of financial data, (6) weak independent board of directors and specialized committees, (7) weak supervisory board, (8) weak auditing profession, and (9) weak external governance structure. This paper also provides eleven suggested solutions to improve the quality of corporate governance in China: (1) gradually floating the un-tradable shares, (2) CEO certification, corporate governance guidelines, and code of business conduct and ethics, (3) improving disclosure and supervision of insider and related party transactions, (4) accelerating the reform of board of directors, (5) clearly defining the functions of the supervisory board, (6) improving internal controls, audit quality and independence, (7) requiring an independent audit committee and an internal audit function, (8) strengthening legal liabilities and enforcement, (9) strengthening shareholder rights, (10) developing a long-term focus incentive compensation system for directors and executives, and (11) improving the quality of the external governance structure.