On the surface, there is no big difference of the code of corporate governance raised by Chinese securities regulator and securities regulator of other countries. This may indicate that the Chinese listing companies and corporate governance system of security companies are almost as same as the one in mature market economy. However, Clarke（2003）thinks that fundamental contradiction of state owned enterprise comes from the requirement that certain industry need to be remain state-controlled. On one hand, the country hopes the state owned company could operate effectively, while the maximum of vale is not the only objective of state owned company otherwise it will not remain state controlled. Claessns&Fan also point out that when state become the controlling shareholder, the objective of the company will no longer simply the maximum of value but more complex goal systems. First, the state is not the ultimate owner of the company, but the agency of the ultimate owner of the company which is the whole Chinese people. While out of consideration of several political factors such as social stability and ideology and some obvious corruption of officials, maximum of value is not the sole object of state owned company. Secondly, government agency government to control company shares are in various forms. For example, the management objectives of companies controlled by central government are different from the companies controlled by local governments. Thirdly, it is not easy to figure out the relationship of state-run stock right and performance of the company, for it needs the consideration of fundamental system structure. Faccio (2006) finds out that the company with more political relationship will have higher leverage ratio, lower tax rate and higher market share. But from the perspective accounting indicators, the performance of companies with political relationship is not as good as those without political relationship. She further indicates that this phenomenon is more common in those countries of high corruption, setting more obstacles for oversee investment and with less transparent of administration, legal, and accounting systems.
Many scholars have pointed out several key problems of Chinese corporate governance. The first one is highly centralized ownership structure. Relatively high dispersion of shareholder structure with individual control shares is highly rare. While, Hess(2008) finds out that the infringement to medium and small investors is pretty common in listing companies of individual controlled. Since the state owned shares and legal person share can not distributed to the share market, only 35% of the rest shares can be exchanged on the market. This hugely weaken the liquidity of the company and effected the efficiency of the market. The big share holders, whether stately of privately, often take advantage of and hurt the interest of medium and small shareholders by occupying capitals and connected transaction.
Another important problem is insider trading, market manipulation and conspiracy. Although governmental authorities have put out relative regulation policy. The fundamental reason of these problems is that there is lack of effective inspection and monitor to relative staffs of the company by the board of directors and board of supervisors of the company. The monitor and inspection duties are not fully carried out by the government authorities. And the chain of supervision,the supervisor do not have enough motivation to supervise the companies because the ultimate owner of most of listing companies and state owned enterprise is the country. Furthermore, to attract outside investors, listing companies provide false financial reports to public to hide its poor performance of management. This severely injured the reputation of Chinese share market.
The second major problem is the dereliction of duty of board of directors, board of supervisors and other committee. Since one share one vote system, big shareholders have larger influence to the appointment of the member of the board of directors. Only a small part of the directors represents the interest of medium and small investors. One reason is due to high centralized state-owned equity structure, government officials occupied more seats in board of directors and other committees. Thus, these board and committees are lack of independence. Chen finds out that almost 80% of board members have close relationship with government or government organization, only a few are professionals like lawyers, accountants and financial expert.
Another important problem is the legal system(Tam, 2002). La Porta points out that strong and executive force of legal is more effective then the formulation of legal terms and monitor of government. Allen thinks that the low efficiency of Chinese market is due to extremely incomplete supervision and legal system. Lin points out the four main weakness of Chinese corporate governance is lack of transparency of information and professional manager, the executive force of legal is weak, supervision by banks, fund company and media is not strong, individual and small investment organization do not have a role to play.
All of these factors lead to the features of Chinese security market: the scale of the market is large with high volatility, high degree of intervention from government, low transparency of information and low protection to investors.
Faccio M..Politically Connected Firms[J].American Economic Review,2006,96( 2): 369-386
Clarke, T. 2004.Theories of Corporate Governance[M], London: Routledge.
Fan J., Wong T. J., and Zhang T., 2007, “Politically Connected CEOs, Corporate Governance, and Post-IPO Performance of China’s Newly Partially Privatized Firms”, Journal of Financial Economics 84: 265-590. r