Special Report

CG Watch – China Reforms

by Charles Yonts, CLSA & Jamie Allen, ACGA / Dec 1, 2018


China’s reform agenda still leaves room for tighter CG rules and practices
When it comes to corporate governance, China still loses out when it comes to transparency around the investigation of officials and executive remuneration policies. As a result, the country ranks 10th out of 12 Asia Pacific jurisdictions, according to our latest CG Watch report, but there are signs Beijing is committed to efforts to improve corporate governance.

CG reform changes
For a start, China is improving its information disclosure standards. Last year, the China Securities Regulatory Commission (CSRC) issued a new Code on Corporate Governance (CG code). This first amendment since 2002, placed new emphasis on the role of institutional investors in corporate governance. It also highlighted the growing importance of environmental, social and governance (ESG) factors in both corporate management and investing.

The most significant change in the code was the addition of a clause (Article 5) stating that all listed state-owned enterprises (SOEs) must form a Party Committee (PC).

While it marked a step forward, it fell short of market expectations by not introducing additional best practices around board governance, board composition/diversity and director independence. In addition, it did not elaborate on how PCs should relate to the board of directors, nor require companies to disclose any information about the membership or activities of their PCs. This in turn suggests more action to enhance the level of disclosure around PCs.

Lack of clear stewardship code
Clearly, China has made some progress in overhauling governance practices at its corporations. However, in order to expedite these reforms it needs champions or stewards at the level of the institutional investor.

China lags its peers in this regard. In top markets such as Australia, Japan and Malaysia, regulators or other national bodies are actively promoting their adoption of stewardship codes. China, however, lacks this type of advocacy.

Over the past two years, more institutional investors have started to talk about responsible investment or ESG following the Asset Management Association of China (AMAC)’s promotion of these concepts. Some have strived to incorporate ESG factors into their investment decision-making processes.

But without a defined stewardship code to define these terms, and a major asset owner to take the lead on responsible investment, it will be challenging for institutional investors to maintain momentum.

Key audit matters (KAMs)
Meanwhile, one of the important developments has been the adoption of the new long-form auditor reports with a focus on “key audit matters” (KAMs).

China, which comes in second last in the auditors & audit regulators category, has fully adopted the new long-form audit report with KAMs since the beginning of 2018 – it became effective for dual-listed A+H firms one year earlier. And while for the first year, most auditors chose to state the obvious and not disclose much substantial information, China deserves credit for its adoption before Asian markets including India, Indonesia and Japan.

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