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Mainland China

Overview of Corporate Governance

China's rapid economic development has demanded increased attention to corporate governance from regulatory bodies, companies, academics, professionals, investors and a host of other parties.  In order to promote effective and comprehensive governance for listed-companies in Mainland China, the China Securities Regulatory Commission released a Code of Corporate Governance for Listed Companies in 2002.

The Code of Corporate Governance promotes basic governance principles, details methods for safeguarding shareholder rights and sets out a basic code of conduct and professional ethics for directors, supervisors and senior management of listed companies. The Code of Corporate Governance applies to all listed companies in Mainland China and has become the standard measure in China with which to evaluate whether or not a listed company has established strong corporate governance practices.

Shareholder Rights

Shareholder rights are important for listed companies in Mainland China and are protected by law, administrative regulations and the company’s own articles of association. In practice, listed companies should ensure all shareholders, especially minority holders, enjoy the same status as majority owners. Each share should be entitled to the same rights and responsibilities as any other share. In China, minority and majority shareholders enjoy the same legal status and a one-share, one-vote standard is observed at annual general meetings (AGMs). With respect to transactions with related shareholders, in China, a listed company's assets are solely owned by the company. A listed company should take measures to prevent shareholders or related parties from transferring funds, fixed assets or other resources. Listed companies are not allowed to provide guarantees to shareholders or related parties.

Shareholder Meetings

Shareholders can nominate representatives to attend AGMs on their behalf. In turn, representatives may submit a power of attorney to the company in order to exercise their voting rights. All resolutions must be approved by a majority vote of those shareholders attending the meeting. However, a number of resolutions must be approved by at least two-third of all votes: amendments to the articles of association; an increase or decrease in registered capital; change a merger, spin-off or dissolution. In the case of state-owned enterprises that do not convene shareholder meetings, the State-Owned Assets Supervision and Administration Commission and/or its branch organizations exercise the rights of shareholders.

Boards of Directors

Boards of Directors for limited liability companies generally consist of 5 to 19 members. Directors' terms are determined by the Articles of Association and do not exceed three years, though terms may be renewed.  Boards of directors are directly accountable to shareholders.  Board meetings are held at least twice each year with a quorum of at least half its members. Board resolutions must be passed by a majority of directors. A one-share, one vote standard prevails for board resolutions on general matters or on appointment or termination of management. Boards may decide to appoint a director to act as management. Listed companies are expected to appoint independent directors, each of whom should be independent from the company's operations and its major shareholders, and should not play a role other than that of director. Independent directors have fiduciary obligations to the company which should be fulfilled with due care while paying attention to the legitimate rights and interests of minority shareholders.

For listed companies, the board secretary is responsible for the preparation of board and/or shareholder meetings, for maintaining documents relating to governance, as well as maintenance and disclosure of information to shareholders.

For state-owned enterprises, directors are elected for terms of not more than three years. Board members consist of representatives assigned by the State-Owned Assets Supervision and Administration Commission and/or its branch organizations as well as employee representatives elected by the company’s employees.

Audit Committees

All listed companies in Mainland China are expected to establish an audit committee, subject to shareholder approval. Audit committee members are directors, and independent directors should form a majority of its members. At least one independent director of each audit committee should have relevant accounting qualifications. China's Code of Corporate Governance defines the main roles and responsibilities of an audit committee.

Supervisory Committees

Supervisory committees, required at all limited companies, should have at least three members. Members consist of shareholder and employee representatives. The proportion of employee representatives should not be less than one third of the total. Directors and senior management may not serve as supervisors. Supervisory committees meet at least once every six months. Meetings operate by majority vote. Supervisory committees have fiduciary obligations to the company which should be fulfilled with due care while paying attention to the legitimate rights and interests of minority shareholders.

Supervisory committees of state-owned enterprises are composed of at least five members, with at least one-third of its members comprised of employee representatives elected by the company’s employees. Other supervisory committee members are assigned by the State-Owned Assets Supervision and Administration Commission and/or its branch organizations to three year terms, though terms may be renewed.

Remuneration and Evaluation

Listed companies are expected to establish remuneration and incentive systems as well as a mechanism to evaluate the performance of directors, supervisors and managers. Evaluation of directors and management should be led by the board of directors or a remuneration committee of the board of directors. For independent directors and supervisors, evaluation can be conducted by a combination of self-assessment and collaborative evaluation. The terms of directors' remuneration are proposed by the board and are submitted to shareholders for approval. Executive remuneration is approved by the board and disclosed at the AGM.

Stakeholders

Stakeholders include banks, creditors, employees, customers, suppliers, and communities. Listed companies are expected to safeguard the interests of stakeholders and to concern themselves with the welfare of the communities in which they operate, with environmental protection, public welfare and social responsibility in general.

Transparency and Disclosure

Continuous disclosure of information is a key responsibility of a listed company in Mainland China. Listed companies should disclose all information that has substantial impact on shareholders and stakeholders in a fair, accurate, complete and timely manner in accordance with laws, regulations and their own articles of association. Companies should also ensure all shareholders have equal right of access to such information. Listed companies should establish mechanisms for disclosing information, handling visit requests, answering public queries, and connecting with shareholders.

Listed companies should disclose relevant corporate governance information, including but not limited to: (1) the structure of its board of directors and supervisory committee; (2) the work and evaluation of its board and supervisors; (3) the performance evaluation of independent directors, including their attendance at board meetings; the presentation of an independent opinion; the opinion on related party transactions, appointment and removal of directors or senior management; (4) the structure and performance of special committees; (5) their corporate governance practices, with an analysis of any discrepancies; (6) any specific plans and measures to improve corporate governance.

Listed companies should disclose the following information related to shareholder's equity: detailed information about major or controlling shareholders; changes to the company's shares or upcoming changes to shares; any increase, decrease or pledge of shares made by controlling shareholders or any transfer of control rights.

Corporate Governance Law and Regulation

The main regulator for securities and futures in Mainland China is the China Securities Regulatory Commission (CSRC). The CSRC, which manages and monitors the national securities and futures markets, is directly under the State Council. The CSRC is responsible for studying and establishing guidelines and policies, overseeing development of these markets; and drafting, revising and monitoring laws and regulations. In addition, the China Banking Regulatory Commission, the China Insurance Regulatory Commission and the State-owned Assets Supervision and Administration Commission are responsible for drafting, revising and monitoring regulations and rules within their respective areas of jurisdiction. Other corporate governance regulatory bodies include: the National People's Congress, the State Council, the Ministry of Finance, the People's Bank of China, Shanghai Stock Exchange and Shenzhen Stock Exchange etc.

Hong Kong SAR

Overview of Corporate Governance

The Stock Exchange of Hong Kong Ltd. (HKSE) published the Corporate Governance Code and the Corporate Governance Report (the "Code"), which was included into the Appendix of the Main Board Listing Rules and the Growth Enterprise Market ("GEM") Listing Rules. Listed companies are required to confirm their compliance with the Code, where they do not comply, to provide explanations for any variation in practice.

Boards of Directors

Board of directors should have a balance of skills, and diversity of perspective appropriate to the requirements of the listed entity's business. It should include a balanced composition of executive and non-executive directors (including independent non-executive directors "NED") so that there is a strong independent element on the board, which can effectively exercise independent judgment. Every board of directors of a listed company must include at least three independent NEDs and at least one of the independent NEDs must have appropriate professional qualifications or accounting or related financial management expertise. Hong Kong’s Corporate Governance Code requires that NEDs have the same duties of care and skill and fiduciary duties as executive directors. The Code also requires a clear division of the responsibilities of the management of the board and the day-to-day management of the company's business. In this respect, the Code requires that the roles of chairman and chief executive officer should be separate and should not be performed by the same individual. Board meetings should be held at least four times a year.

Audit Committees

Hong Kong listed companies must establish an audit committee. The Code includes details of the minimum functions of the audit committee. The Listing Rules also specify the composition of the audit committee. The committee must be wholly comprised of NEDs and it must have at least three members. At least one of the members must be an independent NED with sufficient and appropriate financial experience.

Risk Management

In Hong Kong, boards rely on audit committees to provide oversight of risk management, internal audit functions and the work of the external auditor. While the board provides oversight of the process, the process of risk management itself involves understanding organizational objectives; identifying risks associated with achieving or not achieving them and assessing the likelihood and potential impact of particular risks; developing programmes to address the identified risks; and monitoring and evaluating the risks and the arrangements in place to address them. Risk management is essential for reducing the probability that corporate objectives will be jeopardized by unforeseen events. The board must determine the type and extent of risks that are acceptable to the company, and strive to maintain risk within these levels. Internal control is one of the principal means by which risk is managed.

The Stock Exchange of Hong Kong issued a "Consultation Conclusion on Risk Management and Internal Control: Review of the Corporate Governance Code and Corporate Governance Report" in December 2014.  The relevant consultation paper sought comments on proposed changes to the Code relating to internal controls (Sections C.2 and C.3). Implementation of the Code amendments will apply to the accounting periods beginning on or after 1 January 2016. In summary, the main changes include:

  • incorporating risk management into the Code where appropriate;
  • revising Principle C.2 to define the roles and responsibilities of the board and management;
  • clarifying that the board has an ongoing responsibility to oversee the listed entity's risk management and internal control systems;
  • upgrading to Code Provisions (“CPs”) the recommendations in relation to the annual review and disclosures in the Corporate Governance Report; and
  • upgrading to a CP the recommendation that issuers should have an internal audit function, and those without to review the need for one on an annual basis.

For details, please refer to 

Consultation Conclusions on Risk Management and Internal Control: Review of the Corporate Governance Code and Corporate Governance Report

Remuneration

Hong Kong listed companies should disclose its directors' remuneration policy and other remuneration related matters. A formal and transparent procedure for setting policy on executive directors' remuneration and for fixing the remuneration packages for all directors should be in place. The Code also requires that a remuneration committee with specific written terms of reference should be established.

Nomination Committee

Hong Kong listed companies should establish a nomination committee and a majority of its members should be independent non-executive directors. The nomination committee should be chaired by the chairman of the board or an independent non-executive director. The nomination committee of a listed company is mainly responsible for reviewing the structure, and composition of the board at least annually and making recommendations to the board to complement the its corporate strategy.

Regulation

The principal regulator of Hong Kong's securities and futures markets is the Securities and Futures Commission, or SFC, an independent statutory body established in 1989 by the Securities and Futures Commission Ordinance (SFCO). The SFCO and nine other securities and futures related ordinances were consolidated into the Securities and Futures Ordinance (SFO), which came into operation in April 2003. The SFC is responsible for administering the laws governing the securities and futures markets in Hong Kong and facilitating and encouraging the development of these markets. The Corporate Governance Code and the Corporate Governance Report is part of rules and guidance governing the listing of securities on the Stock Exchange of Hong Kong Limited.