BOARDS OF DIRECTORS AT CHINA'S SOEs:

1
BOARDS OF DIRECTORS AT CHINA'S SOEs THE ROLE
OF, AND CONDITIONS FOR SERVING AS, DIRECTORS AND
RELATED ISSUES (KEY POINTS OF SPEECH)   STAT
E COUNCIL DEVELOPMENT RESEARCH CENTREENTERPRISE
RESEARCH INSTITUTECHEN XIAOHONG, DIRECTOR AND
RESEARCHER
2
CONTENTS
I CONDITIONS FOR DIRECTORS AND BOARDS OF
DIRECTORS TO EXERCISE THEIR FUNCTIONS
CLEAR RESPONSIBILITIES AND SYSTEMIC
IMPROVEMENTS II STRUCTURAL ADJUSTMENTS AND
CREATING THE STRUCTURAL CONDITIONS FOR
BOARDS OF DIRECTORS TO EXERCISE THEIR
FUNCTIONS III BOARDS OF DIRECTORS AT LARGE
SOLELY STATE-OWNED COMPANIES IV THE
RESPONSIBILITIES OF, AND CONDITIONS FOR SERVING
AS, DIRECTORS AT SOEs
3
?? I CONDITIONS FOR DIRECTORS AND BOARDS OF
DIRECTORS TO EXERCISE THEIR
FUNCTIONS CLEAR RESPONSIBILITIES AND SYSTEMIC
IMPROVEMENTS 1.DIRECTORS AND BOARDS OF DIRECTORS
HAVE AN IMPORTANT ROLE IN GOVERNANCE
REFORM DIRECTORS HAVE A FIDUCIARY
RESPONSIBILITY TOWARDS THE SHAREHOLDERS?
DIRECTORS AND BOARDS OF DIRECTORS CARRY OUT
SUPERVISION AND ADMINISTRATION AND OTHER
SUPPORT FUNCTIONS AT COMPANIES l   THEY EMBODY
THE ENTERPRISE AND ALSO HAVE A MONITORING
ROLE l        THEY SHOULD HAVE A COMPREHENSIVE
UNDERSTANDING OF THE COMPANY'S OPERATIONS,
WITHOUT INTERFERING IN THE RUNNING OF DAY-TO-DAY
OPERATIONS l        THEY SHOULD FOCUS ON
LONG-TERM TRENDS AND THE SHORT-TERM
SITUATION l        THEY SHOULD MONITOR THE
SITUATION LOCALLY AS WELL AS ELSEWHERE,
INCLUDING INTERNATIONALLY l        THEY SHOULD
FOCUS ON BUSINESS DEMAND, RETURN ON CAPITAL AS
WELL AS THEIR RESPONSIBILITIES TOWARDS THE
COMMUNITY AND THEIR STAFF?
4
2. SYSTEMIC CONSTRAINTS ON THE ROLE OF
DIRECTORS AND BOARDS OF DIRECTORS l  
DO THEY UNDERSTAND THE MEANING OF CORPORATE
GOVERNANCE, DIRECTORS'
RESPONSIBILITIES AND MUTUAL RELATIONSHIPS? l   
LEGISLATION THE STRUCTURE OF
GOVERNANCE AT SOEs DEPENDS ON DIFFERENT
LEGISLATIVE FRAMEWORKS ??
ENTERPRISES REGISTERED UNDER THE LAW ON
ENTERPRISES HAVE NO BOARDS
OF DIRECTORS ?? THOSE
REGISTERED UNDER COMPANY LAW DO HAVE BOARDS OF
DIRECTORS, LISTED
COMPANIES SUBJECT TO LEGAL CONSTRAINTS
?? THE INFLUENCE OF SPECIAL LAW,
RULES ON "DEBT FOR EQUITY COMPANIES"? l  
STRUCTURE, PERSONS SERVING ON BOARD OF
DIRECTORS DOUBLING AS SENIOR
MANAGERS , CONFLICT BETWEEN SOLELY STATE-OWNED
PARENT COMPANIES AND LISTED
SUBSIDIARIES l      ENVIRONMENT
?? BUSINESS CULTURE AND CREDIT,
?? MARKETS,ESPECIALLY THE
CAPITAL MARKET, ?? HUMAN
RESOURCES, MANAGERS AND DIRECTORS, ??
JUDICIAL SYSTEM . STATE SHAREHOLDER
BEHAVIOUR AND DECISION-MAKING AT SOEs, WITHOUT
EFFECTIVE SHAREHOLDERS THERE ARE NO EFFECTIVE
BOARDS OF DIRECTORS?
5
3. IMPROVING GOVERNANCE OF SOEs AND
EXERCISING DIRECTORS' FUNCTIONS,
NEED FOR SYSTEMATIC PROJECTS
SYSTEMATIC PROJECTS ARE NECESSARY BECAUSE MANY
ISSUES ARE INVOLVED PARTICULAR
ISSUES TO PROMOTE, LISTED COMPANIES AND SOLELY
STATE-OWNED ENTERPRISES
AMENDING THE LAW
IMPROVING THE ENVIRONMENT, INCLUDING EDUCATION
AND TRAINING.  
6
II? STRUCTURAL ADJUSTMENTS AND CREATING THE
STRUCTURAL CONDITIONS FOR BOARDS OF
DIRECTORS TO EXERCISE THEIR FUNCTIONS 1.IF
CORPORATE STRUCTURES ARE COMPLEX AND
CONTRADICTORY, IT IS VERY DIFFICULT
FOR BOARDS OF DIRECTORS TO EXERCISE THEIR
FUNCTIONS. 2.IMPORTANT WAYS OF RESOLVING
CONFLICTS BETWEEN SOLELY STATE-OWNED PARENT
COMPANIES AND LISTED COMPANIES MARKET
FLOTATION OF THE PARENT COMPANY SERIOUS
CONFLICTS BETWEEN SOEs WHICH HAVE STRATEGIC OR
MANAGERIAL RESPONSIBILITIES IN
CERTAIN SECTORS AND LISTED COMPANIES OF WHICH
THEY ARE THE CONTROLLING
SHAREHOLDER, MAKING IT DIFFICULT TO IMPROVE THE
GOVERNANCE STRUCTURE OF PARENT
COMPANY AND LISTED SUBSIDIARY REASONS FOR
"SEPARATING LEVELS", REDUCING ADMINISTRATIVE
INTERFERENCE, MANAGING RESIDUAL
NON-PERFORMING ASSETS ETC
7
POSSIBLE SOLUTIONS CHANGE FROM MARKET FLOTATION
OF SUBSIDIARY COMPANY TO MARKET FLOTATION
OF PARENT COMPANY CONDITIONS ? PARENT
COMPANY MUST TAKE STRATEGIC RESPONSIBILITY FOR
BUSINESS DEVELOPMENT
? SIGNIFCANT NUMBER OF BUSINESS LINKS RETAINED
BETWEEN LISTED SUBSIDIARY AND
ENTERPRISES WITH RESIDUAL ASSETS AND PARENT
COMPANY, THE COORDINATION
EFFECT? NECESSARY POLICY DIVESTMENT OF
NON-PERFORMING ASSETS, CENTRALISED TRUSTEESHIP,
STATE'S SHAREHOLDING AT LISTED COMPANIES
SHOULD BE DIVIDED BETWEEN DIFFERENT
AGENCIES (CF. JAPAN NATIONAL RAILWAYS)
8
3.CLARIFICATION OF STATUS, STRUCTURAL
ADJUSTMENT, CREATING EFFECTIVE STATE
ASSET MANAGEMENT COMPANIES AT CENTRAL
AND PROVINCIAL/CITY LEVEL, SOME STATE ASSET
MANAGEMENT COMPANIES WILL REMAIN
?? OFTEN OWING TO NEED FOR GOVERNMENT TO
MANAGE MANY SOEs OR STATE
SHAREHOLDINGS ?? THE ENTERPRISES IN WHICH
THEY HOLD SHARES OPERATE IN VERY DIVERSE
SECTORS ?? AT THE COMPANIES IN WHICH THEY
HOLD SHARES THEY ONLY ASSUME RESPONSIBILITY
FOR FINANCIAL SUPERVISION AND
ADMINISTRATION, ASSET STRUCTURE, ADJUSTMENT
AND THE PROMOTION OF REFORM ??
SOMETIMES THEY TAKE ON TASKS ASSIGNED TO THEM BY
THE GOVERNMENT. OTHER COUNTRIES HAVE
SIMILAR COMPANIES, E.G. ÖIAG IN AUSTRIA?
9
PROPER STATUS FOR COMPANIES,
STRUCTURAL ADJUSTMENT, EITHER TOO MUCH OR TOO
LITTLE POWER UNSATISFACTORY l   WILL
NORMALLY BE A SOLELY STATE-OWNED COMPANY
REGISTERED UNDER COMPANY LAW l  
CLARIFICATION, IN THE LAW OR REGULATIONS, THAT
THEY ARE ONLY RESPONSIBLE FOR FINANCIAL
SUPERVISION AND ADMINISTRATION AND ADJUSTING THE
ASSET STRUCTURE AT THE SUBSIDIARIES l  
ASSIGNED FULL POWERS AT THE COMPANY, ENABLING
THEM TO PROPERLY ASSUME THEIR
RESPONSIBILITIES l   CLARIFICATION THAT
COMPANIES ARE RESPONSIBLE FOR THE RETURN OF
ASSETS, IMPLEMENTING A SYSTEM THAT ENCOURAGES
THE ADOPTION OF MARKET PRINCIPLES. WHEN
THERE ARE MANY ASSET MANAGEMENT COMPANIES, SOME
CAN BE MERGED AS PART OF THE REFORM OF THE
SOEs.
10
4.SPECIAL STRUCTURAL PLAN FOR SPECIAL COMPANIES
IF A SPACE COMPANY, PARENT COMPANY SOLELY
STATE-OWNED, ITS SUBSIDIARIES
COULD BE WHOLLY-OWNED SPACE INDUSTRY COMPANIES OR
DIVISIONAL ORGANISATIONS, WHILE THE
LISTED COMPANIES WOULD BE ENGAGED IN
COMPETITIVE BUSINESS.  
11
III BOARDS OF DIRECTORS AT LARGE SOLELY
STATE-OWNED COMPANIES 1. ALL LARGE SOLELY
STATE-OWNED ENTERPRISES MUST SET UP BOARDS OF
DIRECTORS THOSE OF CHINA'S LARGE
SOLELY STATE-OWNED ENTERPRISES THAT ARE
REGISTERED UNDER THE LAW ON ENTERPRISES AND
OPERATE A "MANAGING DIRECTOR
RESPONSIBILITY SYSTEM" DO NOT HAVE BOARDS OF
DIRECTORS THOSE THAT ARE REGISTERED
UNDER COMPANY LAW DO HAVE BOARDS OF
DIRECTORS, BUT BECAUSE THE FUNCTIONS OF THE BOARD
CHAIRMAN AND THE MANAGING DIRECTOR ARE
CONFUSED AND THE BOARD CHAIRMAN ACTS AS
CORPORATE REPRESENTATIVE, THE BOARD OF DIRECTORS
OFTEN CANNOT PERFORM EFFECTIVELY.
12
REASONS WHY LARGE SOLELY STATE-OWNED
COMPANIES SHOULD SET UP BOARDS OF
DIRECTORS l  THE RESPONSIBILITIES AT LARGE
COMPANIES ARE GREAT AND THE ENVIRONMENT IS
COMPLEX AND SUBJECT TO CHANGE l   BOARD
DECISIONS ARE TAKEN COLLECTIVELY ON THE BASIS OF
INDIVIDUAL ACCOUNTABILITY l   THE
MANAGING DIRECTOR IS MONITORED BY THE BOARD, BUT
IS ALSO VESTED WITH FULL POWERS, WHICH IS
GOOD FOR EFFICIENCY l  IF THE FIDUCIARY
RESPONSIBILITY TOWARDS THE STATE AS OWNER
OPERATES PROPERLY, THIS HELPS TO CREATE A
MECHANISM OF INCENTIVES AND
CONSTRAINTS THAT REFLECTS THE CORPORATE
REALITY l  ACCORDING TO THE "REGULATIONS",
THE COMMISSION IS MAINLY RESPONSIBLE FOR
SUPERVISING AND ADMINISTERING STATE ASSETS, IT IS
NOT RESPONSIBLE FOR OPERATIONAL
MANAGEMENT. l   IT ACCORDS WITH INTERNATIONAL
PRACTICE. ? IT IS RECOMMENDED THAT
ENTERPRISES REGISTERED UNDER THE LAW ON
ENTERPRISES SHOULD, IN PRINCIPLE, GRADUALLY
CONVERT TO SOLELY STATE- OWNED COMPANIES.
13
2. ISSUES RELATING TO THE STRUCTURE,
FUNCTIONS AND RESPONSIBILITIES OF BOARDS
OF DIRECTORS AT SOLELY STATE-OWNED COMPANIES
COMPOSITION OF THE DIRECTORS
THE MAIN COMPONENTS ARE THE OUTSIDE OR
NON-EXECUTUVE DIRECTORS
THE STATE AGENCIES COULD NOMINATE DIRECTORS TO
THE BOARD, WHO WOULD HAVE SPECIAL
RESPONSIBILITIES TO THE STATE AGENCIES, IN THE
SAME WAY THAT NOMINATED OR RELATED
DIRECTORS HAVE A SPECIAL RELATIONSHIP WITH
THE SHAREHOLDERS. NOT ALL DIRECTORS
RECOMMENDED OR APPROVED BY THE STATE
AGENCIES WILL BE NOMINATED DIRECTORS.
RESPONSIBILITIES OF DIRECTORS   
LOYALTY AND CONSCIENTIOUSNESS (DUTY OF CARE)
NOMINATED DIRECTORS HAVE EVEN MORE
RESPONSIBILITIES TOWARDS THE STATE
AGENCIES, BUT THIS MUST NOT LEAD THEM TO NEGLECT
THEIR BASIC RESPONSIBILITIES.
14
THE FUNCTIONS OF A BOARD OF DIRECTORS
l  IN ACCORDANCE WITH THE AUTHORITY
CONFERRED ON IT BY THE STATE AGENCY, TO MAKE
IMPORTANT POLICY DECISIONS FOR THE COMPANY l   
TO COOPERATE WITH AND EXERCISE CHECKS AND
BALANCES WITH RESPECT TO THE HIGHER-ECHELON
STAFF TO PROVIDE GUIDANCE AND SUPERVISION
IN MONITORING AND SETTING UP SYSTEMS IN SUCH
AREAS AS CORPORATE STRATEGY, APPRAISAL, PERSONNEL
MANAGEMENT AND SALARIES, AUDITING, RISK
CONTROLS, COMMUNITY RELATIONS AND INFORMATION
DISCLOSURE. ESTABLISHING A SYSTEM OF
BOARD OF DIRECTORS' COMMITTEES, INCLUDING
AUDIT AND SALARIES COMMITTEES MADE UP MAINLY OF
OUTSIDE DIRECTORS.
15

• ESTABLISHING THE IDEA OF GOVERNANCE, CLARIFYING
  RESPONSIBILITIES, CONFERRING FULL POWERS,
  STRENGTHENING THE SYSTEMS
• CONFERRING FULL POWERS ON BOARDS OF
  DIRECTORS AND STRENGTHENING THE SYSTEMS AND
  RULES ARE THE BASIS FOR ENABLING A BOARD OF
  DIRECTORS TO EXERCISE ITS FUNCTIONS EFFECTIVELY.
  
• BASIC SYSTEMS TO BE HIGHLIGHTED
• l   DUTIES OF THE DIRECTORS, BOARD OF
  DIRECTORS, DIRECTORS' COMMITTEES, AND BOARD
  SECRETARIAT,
• l   AGENDA FOR MEETINGS AND RESOLUTIONS
  AND THE RULES ON RESOLUTIONS,
• l   CONDITIONS FOR SERVING AS A DIRECTOR,
  SALARIES/ BONUSES SYSTEM OF APPRAISAL FOR
  DIRECTORS AND THE BOARD OF DIRECTORS
• 4.4. PREVENTING BOARDS OF DIRECTORS FROM
  BECOMING INEFFECTIVE, THE KEY LIES WITH THE
  COMMISSION
•  

16
IV THE RESPONSIBILITIES OF, AND
CONDITIONS FOR SERVING AS, DIRECTORS AT SOEs
1.RESPONSIBILITIES THE
RESPONSIBILITIES OF DIRECTORS AT STATE-OWNED
COMPANIES ARE THE SAME AS THE BASIC
RESPONSIBILITIES OF DIRECTORS AT OTHER COMPANIES,
THOUGH THERE ARE SPECIAL FEATURES
l   NEED TO FOCUS ON HELPING
COMPANIES ESTABLISH AND IMPROVE THEIR SYSTEM
OF RESPONSIBILITIES FOR CORPORATE
GOVERNANCE ?? IF THE BOARD CHAIRMAN
DOUBLES AS MANAGING DIRECTOR, THEIR DUTIES ARE
EASILY CONFUSED AND ??
BOARD MEETINGS CANNOT BE PROPERLY ARRANGED l  
RESPONSIBILITY FOR ENSURING A
BALANCEED RELATIONSHIP BETWEEN STAFF,
SHAREHOLDERS AND CREDITORS ?? STAFF
INTERESTS CAN EASILY BE OVEREMPHASISED, THIS HAS
TO DO WITH CONDITIONS AND
STATUS. IMPROVING THE KNOWLEDGE OF
THE COMPANY'S HIGHER-ECHELON STAFF AND
RESOURCES STRUCTURE, A PRIORITY TASK FOR
HIGHER-ECHELON STAFF
17
2. CONDITIONS FOR SERVING AS
DIRECTORS ? DUE DILIGENCE AND CARE
(DUTY OF CARE),E.G. l   EXERCISING
DILIGENCE AND CARE TO THE BEST OF ONE'S ABILITY
l  THOSE WITH PARTICULAR SKILLS AND
PROFESSIONAL QUALIFICATIONS NEED TO
EXERCISE EVEN GREATER DILIGENCE (PRINCIPLE OF
DIVISION OF RESPONSIBILITIES). ?
DUTY OF LOYALTY OR PROBITY, E.G.
l   ABIDING BY THE LAW AND REGULATIONS,
l   WHERE AN ISSUE NOT COVERED BY THE LAW,
NEED TO BEHAVE HONESTLY
18
(3) KNOWLEDGE AND SKILLS l
STRATEGIC JUDGEMENT, SENSITIVITY TO CHANGES,
ORGANISATIONAL AWARENESS, STRATEGIC
AWARENESS. l    DECISION-MAKING
ABILITY, SKILL IN IDENTIFYING PROBLEMS, COMMON
SENSE, SKILL AT PROPOSING SOLUTIONS.
l  INFORMATION GATHERING ABILITY,
RESOURCEFULNESS, DISCERNMENT IN
EVALUATING INFORMATION. l    ABILITY
TO COMMUNICATE, ABILITY TO LISTEN AND SPEAKING
SKILLS, LITERACY, RECEPTIVENESS TO
FEEDBACK.    l   
ACCESSIBILITY, SELF-CONFIDENCE, ABILITY TO
COORDINATE, FLEXIBILITY WILLINGNESS TO
LEARN, SENSITIVITY. ACHIEVES RESULTS,
SENSITIVE, WILLING TO DELEGATE, SETS AN EXAMPLE,
MOTIVATED, SHOWS PATIENCE ETC.
OF THE ABOVE SIX POINTS, THE
FIRST TWO HAVE MOST TO DO WITH
PROFESSIONAL KNOWLEDGE?
19
3. RESOLVING THE PROBLEM OF THE
SHORTAGE OF POTENTIAL DIRECTORS
DEFINING THE SPECIFIC
RESPONSIBILITIES OF, AND
CONDITIONS FOR SERVING AS, DIRECTORS l  
ENSURING A SUITABLE COMPOSITION OF THE BOARD
OF DIRECTORS
EDUCATION AND TRAINING  
20
THANK YOU!