2. Efforts to Improve Corporate Governance in China Dr. Ruyin Hu Director of Research Centre Shanghai Stock Exchange

3. Introduction zDevelopment of Stock Companies and Stock Market in China zThe Chinese Characteristics of Ownership Structure and Organizational Structure of Listed Companies zThe Model and Problems of the Present Chinese Corporate Governance zThe Next Steps to Improve Governance in China zConclusion

4. Development of Stock Companies and Stock Market in China zThe Emergence of Stock Companies and Stock Market The Impetus of the Establishment Stock Market. Separate Management from Ownership to restructure SOEs Channel Household Savings to SOEs to Set Up Direct Financing System In 1984, A Department Store in Beijing Issued Shares. In December 1990, The Shanghai Stock Exchange was Inaugurated. In April 1991, The Shenzhen Stock Exchange Opened.

5. Development of Stock Companies and Stock Market in China zOne of the Fastest Growing Emerging Markets in the World

6. Development of Stock Companies and Stock Market in China zOne of the Fastest Growing Emerging Markets in the World

7. The Chinese characteristics of Ownership Structure and Organizational Structure of Listed Companies zDifferent Types of Shares Shares of Chinese Listed Companies  Different Types of Shares Domestic SharesForeign Shares The State Shares The Legal Person Shares The Tradable A Shares B Shares H Shares N Shares

8. The Chinese Characters of Ownership Structure and Organizational Structure of Listed Companies zOwnership Structure of Chinese Listed Companies(1999)

9. The Chinese Characters of Ownership Structure and Organizational Structure of Listed Companies zThe Organizational Structure of a Typical Listed Company Shareholders Board of DirectorsSupervisory Committee General Manager VGM1VGM2CFOCTO

10. The Model and Problems of Present Chinese Corporate Governance zCorporate Governance Environments in China A Legal Framework with Poor Shareholder Protection The Predominance of Closely Held Corporations Weak Takeover Market and Few Hostile Offers The Small Shareholder’ s Inactivism and Free-Rider Behavior Government Intervention in the Management Appointment and Corporation Operations The Keyman Model

11. The Model and Problems of Present Chinese Corporate Governance zThe Characteristics of“ Keyman Model” Chinese Listed Companies High Ownership ConcentrationDiversified Ownership Strong Blockholders Weak Minority Interest Strong Executives Weak Outside Shareholders The Blockholder Representative Controls the Corporation The Insider Controls the Corporation

12. The Model and Problems of Present Chinese Corporate Governance zThe Characteristics of“ Keyman Model” The Keyman: Too Much Power: Management and Control Powers Held in One Person’ s Hands Lack of Accountability Pursue One’ s Own Interest Instead of Maximizing Shareholder Value

13. The Model and Problems of Present Chinese Corporate Governance zSerious Problem of “ Keyman Model” Interest Conflicts between Blockholders/Managers and Minority Shareholders Blockholders Expropriate Interest of Minority Shareholders through Related-Party Transactions Political Utilitarianism and Self-Interest Behavior Replace the Shareholder Value as the Implicit Criterion of Management Prevailing Soft Budget Constraints in Former SOEs

14. The Model and Problems of Present Chinese Corporate Governance zSteps Taken to Improve Governance in China zBetter Rules and Practices of Disclosure zSafeguard Conflicts of Interest : Rules of Related-Party Transactions Disclosure; the Use of Human,Financial and Physical Resources of a Listed Company Is Separated from That of Its Controlling Company zHigher Standards of Ethics of Directors:the New Listing Rules Require Each Director to Have a Formal Declaration and Undertaking in the Performance of His Duties

15. The Next Steps to Improve Governance in China zA Dominant Policy Issue to Develop Market Economy in China Re-construct Thousands of SOEs Improve the Performance of Stock Markets Establish the Foundation of the Market Economy

16. The Next Steps to Improve Governance in China zThree Steps to Improve the Corporate Governance Strengthen Legal Rules and Enforcement Diversify the Ownership Maintain the Independence of Board of Directors

17. The Next Steps to Improve Governance in China zStrengthen Legal Rules and Enforcement Legislate to Improve Minority Shareholders Protection and Make Preparations for the Setting up of the Investor Protection Centre Adopt More International Accounting Rules Strengthen Disclosure Requirement Issue the “ SSE Guidelines for Corporate Governance”

18. The Next Steps to Improve Governance in China zDiversify the Ownership Reduce or Sell Off the Shares held by the Governments Introduce other Forms of Sizeable Outside Shareholders Including Closed-End & Open-End Mutual Funds,Insurance Companies,Pension Funds and Other Institutional Investors

19. The Next Steps to Improve Governance in China zMaintain the Independence of Board of Directors Encourage More Independent Directors to Enter the Board of Directors Establish Audit Committee,Nominate Committee etc.to Curb the Power of Blockholders/Executives

20. Conclusion zCorporate Governance Reform are Very Complicated in China, the Solution May Lie on the Interactions among Economic Performance,Available Governance Resources and the Political System Reform zTo Predict: China’ s Governance Model Will Approach the Anglo-American Model

21. Thank You Correspondence Concerning this Presentation Should be Sent To: ryhu@sse.com.cn