Recent listings have brought giants of Chinese industry to U.S. shores, from Twitter-like micro-blogging service Weibo to e-commerce sites such as Alibaba and JD.com. Back in China, the listings have also served to expose regulators and investors to U.S. governance standards. The resulting comparison highlights just how far behind the Chinese market is when it comes to shareholder protections and governance innovation – and has inspired Chinese regulators to try and close the gap.
That so many blue chip issuers decide to list overseas has raised concerns. China’s economy should continue to produce powerhouse companies. But if the Chinese market can’t overcome its corporate governance weakness, will those powerhouse companies continue to leave for more respected exchanges?
These concerns have prompted renewed focus on the country’s regulatory regime. On September 30, the China Securities Regulatory Commission (the “CSRC”) issued the revised “Code of Corporate Governance for Listed Companies” (the “New Code”). Some key changes under the New Code include:
- Requiring companies to establish Party organizations (representative units of the Communist Party intended to play a political role in the company and ensure implementation of state objectives and policies) and incorporating Party building work into the articles of association of state-controlled firms (Article 5);
- Establishing ESG requirements, such as green development and targeted poverty alleviation. Companies are encouraged to develop concepts of “innovation, coordination, green development, openness, sharing” and social responsibilities (Articles 3, 86, at el.);
- Encouraging cash dividend distribution (Article 10);
- Promoting board diversity (Article 25);
- Strengthening audit committee functions (Articles 38 and 39); and
- Restricting powers of controlling shareholders (Chapter 6).
Earlier this year, the CSRC sought public and stakeholder input on proposed changes to the draft New Code. After review, the final version of the New Code has not changed significantly from the draft version, aside from clarifications to some existing provisions (Article 43, for example, for the definition of “relevant” fees), an expanded interpretation of the term “new” development (Article 3), and the introduction of an additional article to embrace existing legal compliance requirements when senior management are separated from the firm.
Overseas investors should be mindful of state involvement, and the potential for conflicts between the interests of the Party and other stakeholders. Yet while Article 5’s Party building requirements highlight a fundamental difference between how companies operate in China and other markets, most other provisions of the New Code appear focused on improving Chinese regulation to provide flexibility and encourage innovation.
Katherine is an analyst covering the Chinese market.