Introduction
1.1 Research Background
In recent decades, China is witness a dramatic growth in its social and economic development. As a developing country, it has been regarded as a driving force in economic globalization. Nowadays, China becomes on the most attractive investment market. According to World Investment Report (2009) released by United Nations Conference on Trade on Trade and Development (UNCTAD), ‘ China, with inflows reaching a historic high ($ 108 billion), became the third largest foreign direct investment (FDI) recipient in the world (UNCTAD, P 16).’ It also indicates that despite the global financial crisis, the inflow of China is inevitably influenced. Its ‘medium- to long- term prospects remain promising (UNCTAD, P 16).’
As the rapid economic growth in global economic restructuring, China emerges its enormous market potential. According to the record in World Bank Database, the Stock Traded Value as percentage of GDP (Gross Domestic Product) of China increased dramatically from 60.2% in 2000 to 237.5% in 2007, which was nearly four times. Hence, China stock market plays an influential role in domestic economy. Across China stock market, since 2000, the large-scale mergers and restructurings of Chinese enterprises and companies, Chinese stock market are gradually operating access to the right track. In 2005, China also launched a new type of locally listed shares for Chinese companies that only have an overseas listing in order to enhance the competitiveness of its domestic stock market (Dyer G, 2005). Until now, there are more than 1700 stocks in Shanghai and Shenzhen Stock Exchange in total in China stock market.
However, compared with other long history stock markets such as London Stock Exchange and New York Stock Exchange, China is just a beginner. Since 1980s, the state-planned system was transited to the market-oriented system, Chinese economy started to recovery and the pace of economic reform is accelerated. ‘In the early 1990s, the government introduced a wide range of reforms into the state-owned sector with the objective of privatization. Many state-owned enterprises have since been transformed into corporations and listed on the Chinese and Hong Kong stock exchanges. However, the government remains the major shareholder of State-Owned-Enterprises (SOEs) through state-owned shares and state-owned legal person shares that account for two-thirds of the total shareholding’ (Cheung Y. L etc, 2008:461), in such circumstance, the conflict between stakeholders in the privatization of SOEs result in a poor corporate governance. As China is on the initial step, majority of current theories, rules and regulation are transplanted from developing countries; the Chinese corporate governance standard is expected to be accordant with international standard. Accompanied by such fast pace of expansion, there must be much shortage and leak in operation and governance either for government or directors of companies. ‘ A series of significant financial and market-manipulation scandals, inspired by a stock market boom in the late 1990s, caused officials and regulators to look to improved corporate governance regulation as the solution’ ( Roche, 2005:36). The fundamental restrains are ‘the lack of independent directors, Byzantine share-ownership structures and poor regulations and disclosure’ for the investors in China stock market (Tucker S, 2006). Tucker also emphasized that majority of investors in China thinks corporate governance is a vital ‘building block for successful capital market’ (2006). Moreover, China’s corporate governance provision on its stock markets is also considered as ‘untested’ (Jonhson S, 2008) and gets poor reputation from its foreign investors (Woodin A, 2008). Consequently, the high requirement of effective and efficient corporate governance system draws focus from Chinese government and listed companies; and the level of corporate governance disclosure also draw attentions which has interaction with the implement of corporate governance, such as audit, improvement of the system.
‘Corporate governance is the relationship among various participants in determining the direction and performance of corporations. The primary participants are the shareholders, managers (led by CEO), and board of directors. And other participants include the employees, customers, suppliers, creditors and the community’ (Monks and Minow, 1995: 1). ‘Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation development and exploration) and provide accountability and control systems commensurate with the risks involved’ (ASX, 2003). Regarding to stock market, corporate governance is a significant factor in investment decision making process and generating the public interest which stimulates the stock exchanges. Thus, corporate governance disclosures of listed companies are highly required by regulator to take an insight of companies’ governance mechanism that reveals accuracy and its corporate governance transparency (Yu M, 2010:1-2). ‘Generally speaking, corporate governance disclosures involve information on corporate governance mechanisms and policies, including the concentration of ownership, the voting and shareholder meeting procedures, accounting policies, and board structure’ (Yu M, 2010:1).
Problem statement
‘Demonstrably good corporate governance practices are increasingly important in determining the cost of capital in a global capital market (ASX, 2003:7)’. It is an important mechanism to govern activities in management. Compared with developed countries, Chinese listed companies reveal relatively poor performance on corporate governance. In order to compete in global market, China must adjust its corporate governance standard to be accordant with international standard, and seek ways to improve its corporate governance in country.
Research question and objectives
Based on the Chinese unique background, what is the current practice of corporate governance and governance disclosure in Chinese listed companies?
Regarding to the research question, two objectives are summarized as blow:
- By comparison the development and characteristics of corporate governance with developed countries, the chief differences will be illustrated.
- To identify the current dominant practice and main problems of corporate governance model in Chinese listed companies and provide critical analysis on it.
Literature review
What is corporate governance?
Corporate governance is an important instrument to involve in the interaction between regulators and investors. To finance the domestic economy and achieve the increasing international requirements by raising fund in global capital market, so that do not make investors’ stock devalued (LaPorta, etc, 2000: 4).
Board of control
Japan
As a developed country in Asia, Japan has similar culture and closed history as China. However, Japan’s R&D (Research and Development) capability and many unique production and managerial model are very famous all over the world. In corporate governance perspective, Japan also developed its unique structure distinguished from American model. Some of the impressive characteristics generalized by Monks and Minow (1995:271-272) are listed below:
l‘Powerful government intervention, dominated by the Japanese Ministry of Finance (MOF) (1995:271)’. MOF takes strong regulatory control over all Japanese business and industries and supervises all the activities.
‘A pattern of crossing-shareholdings by affiliated companies, often including customers and suppliers (1995:271)’. A “main” bank (which plays a leading role in financial activities) or a keiretsupartner (Keiretsuis an industry group. Many large of Japanese companies belonged toKeiretsu) always be the stakeholder of Japanese company.
‘The existence of very close relationships between the corporate and government sectors that has often bordered on corruption.
Corporate priorities are focused on growth and market share, not shareholder returns (except through share price appreciation).
An all but non-existent market for corporate control with minimal takeover activity (1995:272).’
With this corporate model, Japan obtains its remarkable economic success.
Corporate governance in China
As above background states, the majority shares are held by Chinese government agencies. ‘Legal-person (LP) shares are held by domestic corporations and other non-individual entities such as collectively owned enterprises, township and village enterprises, non-bank financial institutions, private companies, or joint stock companies (Wang J.W, 2009:24).’ In spite of the mixture of ownership of Chinese listed companies, Chinese government still takes the dominant control on them.
Governance disclosure and transparency
‘The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company’ (OECD, 2004:49).
With respect to different culture, social and economic development and political environment, the theories and practices of corporate governance will be illustrated by the level of economic development:
Corporate governance in developing countries
Corporate governance in china
Chapter Three
Methodology
The overall purpose of this research is to investigate the current dominant practices of development of corporate governance and its disclosure situation in Chinese listed companies, and also focus on identifying the key problem and provide an insight of current model, the mixture research methods are conducted by taking both qualitative research and quantitative research.