Corporate Governance in Chinese SOEs

1. Corporate Governance in Chinese SOEs By Mr. Chen Dongliang, Bureau of Enterprise Restructuring, SASAC NOV 19, 2016

2. 1 Basic Information of Corporate Governance Structure in Chinese SOEs

3. Changes in Property Right Structure and Management 03 01 02 1.Most SOEs have been corporatized or transformed into listed companies. 2. There are 167,000 SOEs in China, among which 90% are incorporated according to “Company Law” or with diversified shareholders. 1.Prime assets of Chinese SOEs are listed in domestic and overseas market. 2.Altogether there are 1060 listed state-owned companies, among which 378 are subsidiaries of central SOEs. 1.High quality assets have been injected into the listed companies. 2.60% of the total assets, 70% of the sales revenue, and 80% of the profit are in the listed companies.

4. Legal System of Corporate Governance 1 ★“Company Law", “Enterprise State-owned Assets Law”, “Property Law”, “Securities Law” ★SOEs have independent corporate capacity. ★Clear right to limit between SOEs and State shareholders. ★SOEs enjoy the property right of legal person and autonomy in management. ★State-owned assets supervision and administration organization will shoulder investors’ responsibilities according to following principles:1)separate SOEs from the general government, separate ownership functions from public management functions; 2)not interfere in SOEs daily operation. ★Strengthen state-owned assets oversight with capital management at the core and through corporate governance. 2 ★Set clear right and responsibility for shareholders meeting, board of directors, management team, supervisory board and workers congress, based on laws and articles of associations. ★Rules and regulations that we formulate: 1)relationship between board of directors and state-owned assets supervision and administration organization; 2)responsibility of the board and different committees; 3)relationship between the board and the management team; 4)performance evaluation of the board and board members; 5) the requirements of employee director. 3

5. 2 Basic Principles to Improve Corporate Governance in Chinese SOEs

6. Basic Principles • Separate decision-making power to executive power in order to keep balance. • Separate decision-making team to executive team in SOEs • Keep balance among directors • Keep balance between the board management team • Manage SOEs according to law. • Rules and regulations • Continuity of strategies Equal rights and responsibilities. -Consistency between rights, duties and obligations - Evaluation and accountability • Deepen SOEs reform. • Fully respect SOEs as independent market player. • Give full play to entrepreneurs’ initiative

7. 3 Operating Mechanism of Corporate Governance in Chinese SOEs

8. Operating Mechanism Optimize the structure of the Board 1.Specialty, knowledge, quality, competence and experience of directors 2.On average, the board is consist of 8 members 3.External directors accounting for more than half of the board 4.Chair of the board and General manager are different persons 5.Integrate CPC leadership into SOE corporate governance 6.Employee director Operating Mechanism 1.Organization. 1) office and full time staff work for the board and its committees; 2) make rules on times of board meeting, committees’ meeting, proposal, resolution, execution and outcome feedback. 2.Communication. 1) fully communicate between chair of the board and directors, among different directors; 2) fully communicate between the board and management team, respect their advices and debrief the working report; 3) fully communicate between investors and the board (especially external directors and committee members) 3.Director Training Program. Every year SASAC 1) organized training program together with Singapore Temasek for directors of SOEs; 2) conducted regular workshop together with universities; 3) invited experts to give speech on industrial development and macro economy; 4) national policy, rules and regulations. 4.Accountability Mechanism.1) Oversight by The National Audit Office and China Securities Regulatory Commission; 2) Oversight by Supervisory panels for SOEs on the aspect of enterprise finance, major policy decisions and key link, performance of duties; 3) Oversight by employee director and supervisor; 4)Estabish SOEs information disclosure system on major events.

9. Policies with Chinese Characteristic • Ensure party organization’s position in SOEs; Integrate CPC leadership into corporate governance of SOEs. Clear rights and responsibilities of party organization in the process of decision-making, execution and supervision. • Each board of SOEs will have at least one employee director elected by workers congress, and senior executives could not be elected as employee director. • Supervisory board (supervisory panels) for SOEs are dispatched by organization which performs investors’ responsibilities on behalf of the state council.

10. 4 Further Steps on Corporate Governance in Chinese SOEs

11. 1. Change the way of management. Further clarify the principal-agent relationship between state-owner and operator; enhance oversight by appointing directors, authorizing board of directors and formulating corporate governance system and procedure. • 2. Enhance capacity building of external directors. Broaden the source of qualified candidates, select some SOE leaders to become full time external directors. • 3. Improve incentive mechanism for directors. Increase directors’ salary and attendance allowance, especially for external director; increase correlation between directors’ interest and shareholders’ interest by stock option and annual bonus.

12. Thank You!