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Model of corporate governance in practice
According to diagram 1,we can see ideal governance with satisfied prerequisite and combination of inside governance and outside governance.
Prerequisite Clear separation of ownership rights and legal personal property rights leads to clear division of the functions of the organs in corporate governance .In addition, well-proportioned shareholding structure leads to well-balanced benefit in shareholders general meeting. Therefore, clear separation of property rights and well-proportioned shareholding structure is the prerequisite of real corporate governance. Only the two conditions have been satisfied, The power triangle composed by the balanced relationships between shareholders, directors and supervisors can operate well on the base.
Inside governance As the center of benefit, the board of directors—the center of management rights, should safeguard shareholders` benefit. Who can assess the duty of directors and their internal balanced mechanisms respectively? It is independent supervisory board. The executive organ ----management also is effectively supervised by supervisory board and is directed by the strong board of directors but has comparative independence in decision-making process. In a word, the balanced mechanisms compose of inside governance.
Outside governance The capital market, the takeover market, the management market and the medium market consist of outside governance to restrain and impel the organs of inside governance respectively.
Overview of the laws and regulations of corporate governance of publicly listed companies, there is a clear commitment in them to what might optimistically be described as rule of law principles. Whether this approach will be effective in enforcement is, however, another matter.
In diagram 2 We can see China’s publicly listed companies have not met the prerequisite demands and have not clear separation between ownership rights and corporate property rights. So they inevitably have unclear separation of functions and weak balance of powers. Moreover, there are some problems to follow with the distortion of corporate governance such as personal overlap mingled with inside control and etc.
Another question is majority shareholders take advantage of the mono-composition ownership structure. Once they manipulate the management, the opinions of minority shareholders will be ignored. Then shareholders` general meeting turns to be majority shareholders meeting. In a listed company reconstructed from a state-owned one, the representatives of state-own stock as majority shareholders step into the control of the company with administrative intervention. It also is not rare in non-state –own listed companies that the biggest shareholder dominates shareholders general meeting and go further into decision-making monopoly.
The inside corporate governance has been distorted and the power triangle can not operate its function, which leads to the following situation: shareholders` general meeting exists in name only ;or the board of directors lacks of independence; or the supervisory board is too weak to accomplish its task; or the management makes puppet show or hoodwink the public; or one problem is mingled with another one.
Generally, inside corporate governance should operate in the context of outside corporate governance. Presumably shareholders can vote by foot in capital market, the management has more pressure to be fired and more chances to be hired, the directors feel obliged to undertake their duties while they face the pressure from takeover market, we know so many advantages a mature market will brings as stated above. Observing our outside governance, however, we cannot wait for a mature market appears before building up corporate governance. Because the factors in our market will need more time to form than inside governance.
5.Assessment of the Laws and Proposals of The Legislation
We are in a situation in which “what works” is more important than “what looks right in the
Long run” .So I will draw more attention on inside governance while outside governance is last but not least. However, corporate governance is still a system engineering, which demands that laws and regulations run well in the all around aspects of corporate governance.
Personally, my assessment of the laws and proposal are hereunder:
1 unifying the regulations of varieties of publicly listed companies
Laws of corporate governance of Chinas publicly listed company’s lack of unified base.
Article 130 of company law says, “…The same shares must carry the same rights and the same benefit.” This is an important principle applying to the issue of shares.
In fact, however, that state –owned companies generally enjoy monopolies licensed to them by the state and state-owned stock is not negotiable in securities market. Therefore we can see a strange situation that most of capital comes from minority shareholders while most of benefit is contributed to majority shareholders (sometimes the representatives of state-owned shares) .The holder of a strategic block of shares (say 30%) is likely to wield greater influence than many other individual shareholders whose total shareholding adds up to a similar amount.
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