China corporate governance report: legal framework

Zou adds: “At this stage, the requirements only apply to listed companies, but at the same time the regulations also mention that private companies are encouraged to follow these guidelines as well.”

Most people feel that the framework is now largely in place, although lawyers do see further areas for development or greater clarity. “They have pretty much laid down the framework, but in talking to the authorities, and dealing with the daily corporate affairs of our clients, we can still see there are some gaps,” says Zou. “We understand the authorities are constantly looking at drafting new regulations in response to the inquiries they receive in their daily life. I would expect there would be more rules or implementing guidelines coming out in the near future.” An example of a gap is clarity about incentive schemes for board members. “In a foreign jurisdiction you would have some pretty well spelled out legislation on incentive schemes, but in China that’s still lacking.”

The bigger issue, though, is probably implementation and enforcement. “In China there is no lack of rules,” says one local banker. “It’s a matter of enforcement. Go down to the street to a zebra crossing and the cars do not stop. There’s a rule there, but whether the cars are being caught by the policemen, that’s a different issue.”

Jamie Allen, Secretary-General of the Asian Corporate Governance Association, feels that “the last year has not been so much about regulatory change, but more a matter of trying to focus on enforcement, and trying to improve the quality of the capital markets: trying not to allow low quality companies to list, for example.”

David Li, country head for China at UBS in Beijing, also feels that implementation rather than legislation is the next area for development. “The next step is how to really practice corporate governance and use it in their real work: how to structure the board, how to improve the quality of the members of the board, or the independent directors,” he says.

This brings about the issue of how regulators should position themselves as enforcers. “I they regulators are considering on a higher level what approach they should take in corporate governance,” says Jane Jiang, a financial lawyer at Allen & Overy in Beijing. “Should they be more hands on, tell you what to do, or adopt the western, principle-based approach – comply with these principles and do whatever you can to comply with them.” She errs towards the former. “It’s a constant debate, but – and personally I feel rightly – they feel it’s not the time yet to implement a principle-based regime, due to the lack of experience of these issues. The majority of financial institutions, and certainly the medium and small ones, do not have the capability of assessing how to comply with certain principles. For the foreseeable future I think anything on corporate governance will be very detailed.”

BOX: Laws and guidelines

To the outsider, the status of the guidelines that are often issued by ministries or regulators in China can be confusing. Is it a law? Should it be treated as a law? Or, if it’s really just a guideline, can it be ignored?

“A guideline is not legal – law is definitely more stringent – but there’s a very grey area,” says Clare Pearson, a lawyer at DLA Piper in Beijing. “Does a guideline have teeth? That’s your question if you’re a big bank, what does it mean to me?”

Pearson says it matters a great deal. “You might think it’s just a guideline, don’t worry about it, but that’s only if you’re from a rule of law background. If you’re from a centrally governed country like China, your first question is always: who says I should do this? Is that the same guy who gives me a licence to operate here?”  So for foreigners looking at corporate governance or CSR guidelines in China, the advice is simple: follow them.

This article was one of several chapters in a detailed guide to corporate governance in China published with the June 2009 edition of Euromoney