China Securities RegulatoryCommission

Globalization and CorporateGovernance

Mr. Andrew ShengChairman

Securities and Futures Commission10 September 2001

Globalization and CorporateGovernance

Meet international standards, e.g.accounting standards

Meet international competition Meet international disclosure requirements Meet international corporate governance

standards Those who meet these standards gain

the confidence of investors (institutionaland retail), issuers and intermediaries

OECD Principles of CorporateGovernance

The right to shareholders protect shareholders’ rights

The equitable treatment of shareholders ensure the equitable treatment of all shareholders, including minority &

foreign shareholders The role of stakeholders in corporate governance

recognize the rights of stakeholders as established by law andencourage active cooperation between corporations & stakeholders increating wealth, jobs & the sustainability of financially sound enterprises

Disclosure and transparency ensure that timely & accurate disclosure is made on all material matters

regarding the corporation, including the financial situation,performance, ownership, & governance of the company

The responsibility of the board ensure the strategic guidance of the company, the effective monitoring

of management by the board, & the board’s accountability to thecompany and the shareholders

Source: OECD

Asian Corporations still Family-led

In mature markets, institutional investor-ledcompanies dominate the corporate horizon morethan the family tradition: In Asia, 60% of total market cap held by family-

led firms holding more than 20% of the equityof listed companies

Compare this with US - 18.3% Australia - 12.2% Japan - 9.7% UK - 0%

Investors are Willing to Payfor Good Corporate Governance

18%

18%

18%

19%

20%

20%

20%

20%

22%

24%

25%

26%

27%

0% 5% 10% 15% 20% 25% 30%

United States

United Kingdom

Switzerland

Spain

Germany

France

Taiwan

Japan

Italy

South Korea

Malaysia

Thailand

Indonesia

Average premiumthat investors arewilling to pay for awell-governedcompany (%)

Source : McKinsey & Co.

Returns Improve with the Quality ofCorporate Governance (1-Year returns)

30 35 40 45 50 55 60 65

1-10

11-20

21-30

31-50

51-70

Ranking of companies incorporate governance

Returns (%)

Source： CLSA

Family-

led HSI

29%

Others

15%

HK Listed Companiesby Market Cap

Institutional-led :international standards

Mainland : improvingcorporate governance,but needs to work withCSRC

Family-led HSI :improvement needed,but prudent

Others : monitoringrequired

Institutional-led 25%

Mainland31%

Remarks: Data is as of end June2001 Source: HKEx & Reuters

Problems of CorporateGovernance Reform

Corporate Reforms mean Institutional Reforms Corporate Governance is all about three key

disciplines: Self discipline - internal codes and controls; Regulatory discipline - maintaining a transparent

and level playing field Market discipline - high level of transparency,

accountability & competition Corporate Governance helps ensuring shareholders’

and investors’ rights and benefits are being takencare of

Importance of the Board

The Board is responsible for overseeing the long-term development strategy

and business plan the selection, evaluation and remuneration of

the top management A well-functioned Board based on

the Board’s composition - for the majority ofsmaller companies, it is not easy to appointindependents to their boards

the Board’s candidates - professionals and non-professionals

Internal Board checks & balances

Board Committee system enables the division oflabour among directors

3 major Committees Audit Committee - reviewing the risks that the

company’s investments and operations areexposed to and reporting to the board

Compensation Committee - focusing on thetop management’s remuneration

Nominating Committee - nominating newdirectors

Governance needs transparency& effective communication

Companies need not only better corporategovernance, but must be seen to be embracingcorporate governance effective communication of good corporate

governance helps project a good public imageand inspire confidence of shareholders,investors, regulatory bodies and the media

High time that Asia wake up to the importance ofcorporate governance and learn how to practiseand communicate it to the rest of the world

Some Concluding Thoughts

Changing Corporate Governance and Marketsare all about institutional change

This involves multi-dimensional and mindsetchanges - much more difficult when you had awinning formula/legacy of increasingly obsoleteprocesses

Reliable, accurate information is a marketfundamental

Changing market infrastructure - particularly thesoftware - laws, regulatory approaches andincreasing competition and transparency -cannot be achieved overnight

Thank You Very Much