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Corporate Governance Structure
Corporate governance is an innovation of western developed countries, and in particular the corporate system of America. It is generally acknowledged that good corporate governance structure is the foundation of a corporation’s competitiveness. Corporate governance is a system originated within the market-oriented economy to offer a series of solutions to problems which cannot be properly settled by traditional corporate law.
Generally speaking, corporate governance structure is the management system of a corporation. Governance models differ from corporation to corporation and will be primarily based on a corporation’s perceived legal risks. For instance, if the protection of shareholders’ interests is emphasized, the core rules and strategies of corporate governance will be formulated to achieve that goal. For listed companies which are required by the China Securities Regulatory Commission to pay attention to the protection of the interests of minority shareholders, the rules corporate governance must fulfill those requirements. It is not enough to have systematic and specific rules of corporate governance, the actual operation and implementation of these rules should also be emphasized. For example, a company should take steps to ensure the separation of decision-making bodies and management organs.
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Corporate Governance Models in China
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System of Overall Responsibility of Factory Manager (State-Owned Enterprises)
The system of overall responsibility by factory manager/manager is provided in the Laws of State-Owned Industrial Enterprises promulgated in 1988. The factory manager/manager is in charge of the production and management under the direction of the party committees. The factory manager/manager can be terminated, recruited, removed or dismissed (under the employee representative’s advice) by the competent governmental authority, or elected or removed by the congress of workers (which shall be approved by the competent governmental authority). The congress of workers is granted democratic management of workers. Under this kind of governance model, no real corporate governance system is established and there is no representative of state-owned enterprise. It is not clear that the factory manager/manager is the representative of the owner or the operator. The fate of an enterprise depends on the capacity of the factory manager/manager and there is no scientific and democratic decision-making mechanism and effective risk control and management system.
The appointment of factory manager may depends on the conditions and situations of the enterprise:
1) Delegated and appointed by the competent authority of the enterprise or the cadre management in accordance with administrative privilege; or
2) According to the arrangement of the competent authority, elected or recommended by the congress of workers, and then approved or appointed by the competent authority of the enterprise or the cadre management in accordance with the administrative privilege; or
3) Recruited or named by the competent authority of the enterprise, and agreed upon by the congress of workers, then appointed by the competent authority of the enterprise or the cadre management.
A tenure system is adopted for the factory manager/manager. The term of office for a factory manager/manager is three to five years, when the term of office expires; he or she may be reelected.
The factory manager/manager is granted decision-making power over management and operations and is in charge of production.
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Corporate System
Corporate governance structure is the core of the corporate system. A scientific corporate governance structure shall be a series of arrangements guaranteeing separation of powers and internal checks and balances, as governed by the Corporate Law and articles of association. The corporate structure will be determined by the Shareholders, the Board of Directors (including managers recruited and nominated by the board of directors), and board of supervisors.
The key to a normative corporate governance structure is an efficiently functioning Board of Directors. The Board of Directors is composed of Directors elected by the general meeting of shareholders, and is the executive organ which manages internal corporate affairs and externally represents the corporation. In following the principle of good corporate governance the board of directors should function as the trustee of a trust, operating under a duty of loyalty to the company. As representatives elected by the shareholders, the board of directors is expected to develop corporate strategies and plans, and approve major business decisions for the corporation. The Board of directors is responsible for simultaneously directing and supervising the management team of the corporation on behalf of the shareholders and the public. Therefore, a good corporate governance structure of any modern corporate must contain a well informed board of directors devoted to the business of the company
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Under the Corporate Law of China, a Board of Directors and a board of supervisors are established under the authority of the general assembly of shareholders, and the Board of Directors decides the material matters under the supervision of the board of supervisors. The two boards function with mutual checks and balances. In China, these forms apply only in the context of a Limited Liability Company and for a company limited by shares. There is another special company type, also limited liability, which is the wholly state-owned company. There is no meeting of shareholders in this type of company and the power of corporate decision-making is executed by the institution or department authorized by the state to form the company.
The proprietary rights of wholly state-owned enterprises and state controlled enterprises are mostly reserved to the state-owned shareholders, and therefore these corporations have relatively few investors. Authority and liabilities with regard to corporate governance are undertaken by the main leaders of the corporation. To date it is unclear how best to develop an effective corporate governance system of mutual checks and balances within this type of wholly state owned company.