CACG Released 2017 Chinese Corporate Governance Evaluation Report
In July 22nd, the 9th International Symposium on Corporate Governance was held at Nankai University. During this conference, Professor Li Wei’an, who is the president of Tianjin University of Finance and Economics and the Dean of China Academy of Corporate Governance in Nankai University, released 2017 Chinese Corporate Governance Evaluation Report.
Overall Analysis of Corporate Governance of China’s Listed Companies
The sample size of the latest Chinese Corporate Governance Evaluation Report released by the Evaluation Research Group of China Academy of Corporate Governance of Nankai University is 3,031, including 1579 samples of the main board, 815 of small and medium-sized board, 570 of the ChiNext and 67 of financial institutions.
The results show that the level of China’s listed corporate governance has gradually increased from 2003 to 2017 in general. After the drop in the financial crisis in 2009, it maintained a rising trend in the following years, hitting a new high of 62.67 in 2017 while the rate of improvement in 2017 is lower than last year. China’s listed corporate governance index from 2003 to 2017 was 49.62, 55.02, 55.28, 56.08, 56.85, 57.68, 57.62, 59.09, 60.28, 60.60, 60.76, 62.07, 62.49 and 62.67 respectively.
In 2017, five of the six dimensions of China’s listed company governance index are on the rise (excluding shareholder governance index) in which manager-level governance and information disclosure index increase most significantly. The decrease of associated trading index and the rights and interests protection of medium and small shareholders index is the main reason for the decline of shareholder governance. A significant rise can be seen in associated parties’ capital occupation and operation-type associated trading proportion. Percentage of cash dividends drop from 64.8% in 2016 to 44.2% in 2017. Cash dividends payment rate decrease from 27.4% in 2016 to 18.5% in 2017. From the perspective of grade distribution, the trend of moving towards a higher level of governance has emerged. In 2017, among the sampled companies, 21 companies reach CCGINKIII; 2370 companies reach CCGINKⅣ, accounting for 78.19% - a marked increase compared with 72.64% in 2016. There are 640 companies which reach CCGINKⅤ, accounting for 21.12% - a notable decrease compared with 25.90% in 2016. In addition, listed companies governance in our country shows a gradient upward trend from the coast to the inland. In 2017, the number of regions with an index higher than 61 has reached a new high, with an amount of 26, accounting for 83.87% of the total 31 regions, where there were 15 regions higher than 62 and 5 exceeding 63. From 2011 to 2017, the numbers of regions whose governance indexes are above 61 are accordingly 4, 6, 6, 13, 21, 22 and 26.
From the aspect of industry comparison analysis, the health and social work, scientific research and technology services, information transmission, software and information technology services and finance behave better in the 2017 industry ranking. However, the corporate governance levels of accommodation and catering, wholesale and retail, leasing and business services, real estate, synthesis and mining companies are relatively low. From the aspect of area comparison analysis, the means of governance index in Guangdong, Henan, Jiangsu, Beijing, Hunan, Hebei, Anhui and Shandong are relatively high; while the governance indexes of Heilongjiang, Hainan, Qinghai, Ningxia and Shanxi are below 61. From the aspect of the nature of controlling shareholders, there are differences in corporate governance levels. The governance index of privately-owned listed companies has been higher than that of state-owned listed companies for seven consecutive years. There are obvious differences among companies on different boards. The governance index of the Chi- Next is the highest, followed by small and medium-sized board, then financial institutions is the third one, and main board is the lowest.
Situation of Corporate Governance Analysis of China’s Listed Companies from Six Dimensions
This paper analyzes the governance situation of 3031 listed companies from the six dimensions of shareholder governance, board of directors governance, board of supervisors governance, manager-level management, information disclosure and stakeholder governance. In addition to the dimensions of shareholder governance, there are rising trend in other five dimensions, among which the improvement of manager-level governance and information disclosure isthe most significant.
The rebound of related party transactions and the decrease of minority shareholders' rights and interests have led to the decline of shareholder governance index, so it is necessary to be wary of the damage of minority shareholders’ rights in the name of anti-hostile takeover. The shareholder governance index in 2017 is 65.00, which has dropped by 1.04 when compared with 66.04 in 2016. Among the three secondary indicators, the independence has increased by 3.08, and the protection of minority shareholders' rights has decreased by 1.12, and the related transaction has decreased by 3.02. The main reason for the decrease of the minority shareholders' equity protection index is that some listed companies have overreacted the hostile takeover, and the anti-hostile purchase clause has restricted the rights of the minority shareholders to elect the directors. The decrease in the related transaction index is due to the significant decrease in the score of operating funds occupation of related parties and the operating related party transactions. In recent years, events of competition for the control of listed companies have led to a number of decentralized listed companies to amend the company's charter, the implementation of anti-hostile self-defense mechanism can improve the difficulty of hostile takeovers. However, some companies have overly defended, which not only increase the difficulty of hostile takeover to maintain the founder’s control, but also increase the difficulty of nominating the election of small and medium shareholders and damage the interests of small shareholders. For example, some companies limit the existing shareholders’ rights of director nominated by increasing the proportion of shares and holding time (There are 458 companies require shareholders to hold more than 5% of the shares eligible to nominate non-independent directors, which greatly exceed the 3% ruled by SFC listed company charter guidance. There are 192 companies require more than 180 days’ holding time). The founder of the listed company should be in the support of small and medium shareholders and establish the protection system to prevent hostile takeover in advance.
The level of board of directors governance has steadily improved, and the gap between the directors’ remuneration of private holding and state-controlled listed companies has been further widened. The average of the board of directors' governance index in 2017 is 64.28, which has increased by 0.17 when compared with 2016, the main reason is that the board directors' rights and obligations index, the board’s operational efficiency index, the board directors organization structure index, the compensation of board directors index have different degree of improvement, except the independent board director system index has dropped by 0.25 compared with 2016. The significant increase in rights and obligations of board directors index is mainly reflected in that the number of board members who have a management and economic background has greatly improved compared with last year, the average number rose from 1.95 in 2016 to 3.07 in 2017. Besides, the percentage of shareholders of directors has dropped by about 8% compared with last year. The board’s operational efficiency index and board directors organization structure index in recent years is relatively stable, and the decrease of the independent board director system index mainly is due to the decline in the index of independent directors’ allowance and so on. The aspect of the compensation of board directors has overall improved than last year. However, according to the classification of the controlling shareholder, it is found that the remuneration of directors of state-controlled listed companies has beenlower than that in 2016 years and the gap between private listed companies has been further widened. The compensation of board directors index of private listed companies is 5.17 which is higher than that of state-controlled listed companies. What’s more, the private holding listed companies also have certain advantages in terms of directors' rights and obligations, while the state-controlled listed companies have more advantages than the private holding listed companies in aspects of the board’s operational efficiency, the board directors organization structure and the independent board director system. Overall, the level of board directors governance of the private holding listed companies has been continuously higher than that of state-controlled listed companies for six years from 2012 to 2017.
The level of BoS governance is still low, and the structure and scale of most company's supervisory committees only reach the bottom line of compulsory compliance of the company law. Under the background of anti-corruption, the BoS governance of China’s listed companies is on the rise on the whole. However, among the six dimensions of corporate governance, the BoS governance is still at a low level. BoS governance index is 58.78 in 2017, with a slight increase compared to 2016. BoS operation and Supervisors’ competency index has increased slightly, mainly because the number of meetings of the supervisory committee was raised from 5.68 times in 2016 to 6.03 times in 2017, and the professional background and educational background of the supervisors has improved. The structure and scale of board of supervisors is a short board for BoS governance, and the scale of BoS and staff supervisor of the majority of listed companies only reach the bottom line of compulsory compliance of the company law.
The incentive effect of managers has improved, and the gap between increases of salary levels of state-owned and private listed companies have widen. In 2017, the maximum of manager-level governance index is 78, which has increased by 0.91 when compared with 2016. From the point of view of sub indexes, the means of the appointment and removal of the manager-level, execution guarantee, incentive and restraint are 60.74, 63.08 and 53.67 respectively. In 2017, the percentage of chief executives in listed companies has increased by more than 10% compared with the same period, and the percentage of posts without other management positions has increased by 1.49, which cause manager's appointment and dismissal system index in 2017 has increased by 1.42 compared with 59.32 in 2016. The average salary of executives has increased by 15.06% over the previous year, whilethe average salary of executives of state holding listed companies has risen by 8.68%, and the average salary of executives of non-state holding listed companies has risen by 19.35%. The executive incentive mechanism is affected by the limited salary system, and the average salary level of the executives of state holding listed companies is up to 10% lower than that of the non-state holding listed companies.
The quality of information disclosure has further improved, but the oercentage of violations and financial restatements has also increased. The level of information disclosure of China’s listed companies has shown a steady upward trend in the past six years. In 2017, the information disclosure index is 65.04, which has increased by 0.51 when compared with 2016, and the reliability, relevance and timeliness index has increased by 0.40, 0.44 and 0.93 respectively. In terms of reliability, the standard unqualified audit opinions during the reporting period has risen from 96.48% to 99.01%, and the number of company with false penalties has reduced by over 2.58% in 2016. But in the last three years, the increase of percentage of firms with irregularities and financial restatements has been partially offset by earlier reliability improvements. Correlation index has risen mainly reflected in the main business or product description, R & D investment details, executives assessment and incentive disclosure and other aspects. The increase in timeliness is mainly due to the fact that the percentage of listed companies in the actual reporting date of the year has been lower than that of the initial disclosure date from 13.29% to 11.61%, and the percentage of listed companies whose date of disclosure is the last two days of the deadline has decreased from 6.66% to 3.99%. The information disclosure index of private holding listed companies is 0.59 higher than that of state holding listed companies in 2017, and it has been better than state holding listed companies for four consecutive years.
The level of stakeholder governance in listed companies has continuously improved, and the mechanism of online voting has been popularized. The meanof the stakeholder governance index in 2017 is 62.92, up slightly by 0.24 in 2016, and the governance mechanism of stakeholders has become increasingly mature and stable on the whole. From the point of view of sub indexes, the participation of stakeholders in 2017 is 51.27, up 0.84 from last year, mainly because of the development of information technology. In 2017, 99.7% of listed companies open internet voting, and shareholder participation in corporate governance through online voting has gained popularity. In addition, listed companies continue to strengthen site maintenance and updating, with a view to building good communication channels with investors. The level of coordination is 77.18, up 0.13 from last year mainly because listed companies have paid more attention to strengthening the construction of environmental protection system, and increased the relevant inputs.
Situation of Corporate Governance Analysis of China’s Listed Companies from Different Boards
Information disclosure index of the main board has improved distinctively, while shareholder governance index and stakeholder governance index have reduced. Among the 2017 corporate governance samples, 1579 companies are listed on the main board, accounting for 52.10% of the total sample. The mean of governance index in 2017 is 63.18. Compared with the levels in 2016, the level of the board of director governance, board of supervisors governance, manager-levels governance and information disclosure have improved distinctively, while that of shareholder governance and stakeholder governance have reduced slightly. In the several sub-indexes, the information disclosure index is 63.48, which has a significant increase compared with 60.96 in 2016; and the manager-levels governance index is 56.87, which has an increase compared with 55.94 in 2016. As the core of corporate governance, the building of the BoD has been strengthened, and the BoD corporate governance index is 64.05. The BoS governance status has gradually improved compared with 2016, but it is still a deficiency in six dimensions. The shareholder governance index has dropsped significantly from 63.64 in 2016 to 62.56 in 2017, and the decrease is mainly due to the greatly reduced associated trading index - the increase in operating related associated trading and asset related associated trading resulted in a decrease of 5.69 of the sub-indexed. Stakeholder governance index has fallen from 60.78 in 2016 to 59.95 in 2017.
Governance index of small and medium board has been stable on the whole, while the protection of the interests of small and medium shareholders and information disclosure reliability has decreased significantly. In 2017, the mean of corporate governance index of 815 companies in SME boards is 63.90, which has a decrease compared with 2016. It is due to the obvious decrease of shareholder governance index, supervisory governance index and information disclosure index, and the great decrease of interests protection of minority shareholders. The index of the composition of board of supervisors has declined. The reliability index of information disclosure has declined greatly. In addition, the board of director governance index, manager-levels governance index and stakeholder governance index has increased differently.
The governance level of leading listed companies on the GEM shows a slight decline. In 2017, 570 GEM listed companies, which has an increase of 78 over 2016. The mean of corporate governance index is 64.49 with a slight decrease from 2016, but still higher than the main board, small and medium-sized board. Among the sub-indexes, the index of information disclosure has fallen most significantly, while the shareholder governance index, the board of supervisor governance index and stakeholder governance index have decreased slightly. Manager-levels governance index has an obvious increase, but it is still relatively low, and it is the short board of GEM to enhancing the governance level.
The governance quality of financial institutions has rebounded slightly, and the gap between private and state-owned financial institutions has widened. In 2017, the number of China's listed financial institutions has increased from 50 in the previous year to 67. The mean of corporate governance index is 63.62, up 0.55 from 2016. In the sub-indexes, manager-levels governance, information disclosure and stakeholder governance index have increased, while the other sub-indexes have declined slightly. Among them, the information disclosure index, showing the most obvious increase, is the main reason for enhancing the total governance index of financial institutions. In 2017, the mean of corporate governance index of state-owned holding listed financial institutions is 63.88, up by 0.82 from the previous year. The mean of private holding financial institutions is 60.51, down by 2.43 over the previous year. The gap between them has widened, mainly due to the relatively low governance level of the new private holdings of listed financial institutions.
Suggestions on Promoting the Transformation of Governance and the Introduction of Green Governance
To promote the transformation of governance and introduce the green governance:
First, further regulate the behavior of controlling shareholders to protect the interests of small and medium shareholders. In order to effectively protect the interests of small shareholders, we should strictly regulate the reduction behaviors of controlling shareholders, and standardize the reorganization of listed companies, and strengthen the management of company's cash dividends and market value. We should develop the system of shareholder class action to broaden the approaches to safeguard rights and interests for small and medium shareholders, and improve the relevant laws and regulations to lower the cost of safeguarding. In the process of amendment to companies’ articles of association to the hostile takeover, "excessive defense" is forbidden, which may damage the interests of small shareholders.
Second, start the pilot work of "the preferred stock with controlling power ". First of all, starting the pilot in the network-based high-tech enterprises, it can protect the reasonable controlling of company's founder, and become a self-defense mechanism against hostile takeover and so on, without any damage to the interests of small and medium shareholders.
Third, increase the promotion of the compensation marketization reform of state-owned enterprises executives. Speed up the compensation reform of the executives of the state-owned enterprises and the financial institutions. Under the premise of canceling the administrative level, strengthen the identity of their entrepreneurs and professional managers, so as to establish the corresponding market-oriented compensation mechanism and reduce the brain drain of the state-owned enterprises.
Fourth, improve the governance of financial institutions to prevent the financial risks caused by the accumulation of governance risk. Attach importance to the self-governance of "governor". Regulate the behavior of controlling shareholders. Improve the incentive system of managers. Strengthen the corporate governance regulatory requirements of listed financial institutions. Focus on the listed financial institutions which main business is changed via approaches like asset restructuring, mergers and acquisitions, etc.
Fifth, further standardize the company's external governance behavior such as leveraged buyouts. On the one hand, it is necessary to standardize the acquisition behavior and strengthen the risk control. On the other hand, we need promote the "corporate governance contest" under the rule of the market by means of the market rules, and promote the external governance of the listed companies from the "exercise " to "combat ".
Sixth, speed up the revision of "corporate governance guidelines for listed companies". Judging from the results of corporate governance evaluation of listed companies, many governance chaos are largely due to the lag and imperfect governance rules. The existing governance rules are behind the international standards, and cannot meet the needs of domestic governance development. We need to improve the governance rules, so that corporate governance in China can move from the "event to promote" into a new stage--the "rule lead".
Seventh, establish and promote the concept of green governance. Listed companies as a benchmark for Chinese companies, should introduce the green governance as soon as possible, establish a green governance concept, develop the green governance guidelines so as to promote the green transformation of enterprises and promote the whole society of green development.
Eighth, speed up the mixed ownership reform, and promote the transfer of administrative to economic governance. Through the development of mixed ownership reform, we should absorb the operation and governance vitality of private enterprises and weaken the government intervention in the enterprise to achieve the true fulfillment of corporate functions in place.