PetroChina: International

Corporate Governance

Compliance Group 6

Akanksha

Ankit

Arun

Pankaj

Nishigandha

Taranpreet

Zeeshan

Corporate Governance in Chinese Market

Since 1949: China was a state owned economy – CGS- different degrees of

political influence

1978 - Reduction of local party committee involvement

Enterprise Law, 1988- Factory Director(Manager) responsibility system

1993- Company Law- no longer gave local party committee overall supervisory

power over SOE’ but at the same time allowed party committees to keep their

organizational presence

Management of the company affected

Influence the investment decisions

Clash between duty towards shareholders and obligations towards party

Overhearing the voice of staff members

Interests of minority shareholders not protected

1997- “Grasping the large and freeing the small”- state retained controlling

ownership

Legal System- The rule of man

Shareholders had limited remedies against exploitation(e.g. difficulty in forecasting legal outcomes)

Enforcement Mechanism- Low pay in govt position- bending of rules and corruption

Rampant Accounting frauds

Weak Corporate Control

Shares held by the state or bureaucrats could not be traded insecondary market

Mergers and acquisition was rare

State majority shareholder

Many state owned banks

The focus of CG Protect investors and/or stakeholders’ interests

To assure the inside controller to maximize firm value not atexpense of any investor and/or stakeholder’s interests.

CHINA THEN

Lack of accountability of the board and directors

Board of supervision could not play effective role

Lack of market for corporate control

Concentrated ownership structure with state as the controlling shareholder

CHINA NOW

Corporatization of SOEs, and the introduction of the CSRC

Tighter reporting and disclosure

Set up Independent Directors System in 2001

Strong sanctions against violations on laws and regulations

Why does it matter??

Improves access to capital and financial markets

Help to survive in an increasingly competitive

environment through mergers, acquisitions,

partnerships, and risk reduction through asset

diversification

Leads to a better system of internal control, thus

leading to greater accountability and better profit

margins.

Increases the confidence of investors and

potential partners to invest in or expand the

company’s operations.

IntermediariesAffected the efficiency of CG of

the listed companies

The basic structure of the Chinese corporate

governance is consistent with the theoretical framework

and practices as in developed countries

Internal Mechanism

Ownership

Structure

Dispersed Ownership Concentrated

Shareholder Type Institutional Investors Govt and Govt Authorised

organizations

Board Structure Single Tier (BOD) Two Tier (BOD and

Supervisory Board)

Independent Dir. Professional Experts Appointed by State controlling

shareholder

External Mechanisms

Legal System Sufficient Shareholder

Protection

Insufficient shareholder

Protection.

Corporate Control

Market

Efficient Capital mkts (Mergers

and Takeovers, adequate

Transparency)

Immature Capital Markets

Governance Environment

Economic Regime Capitalist Societies Government Dominated

Governance

Culture

Individualism Collectivism

Major Problems

Lack of protection for minority shareholders

Paucity of Independent directors

Absence of transparency and inadequate Financial disclosures.

Proposed Solutions

Allow companies to use cumulative voting, thereby empowering minority

shareholders to appoint directors and/or supervisors.

Increasing minority shareholder protection by granting shareholders the right

to check and copy the company’s account books and meeting minutes,

allowing share buybacks, and granting shareholders the right to petition for

liquidation of a company

Granting shareholders the right to bring a derivative suit or direct suit against

directors, supervisors, and senior management

Introducing the concept of ‘piercing the corporate veil,’ enabling courts to

look beyond the principle of limited liability

PetroChina’s Governance model

PetroChina was a joint stock company.

The management structure consisted of:

Board of Directors

Supervisory Board

Senior Management team

And four committees

Audit Committee

Investment and development committee

Health, safety and environment committee

Evaluation and remuneration committee

Risks

Dividend and Capital Investment policy

• China National Petroleum Corp, state owned enterprise held 90% of PetroChina.

• Max income earned by PetroChina was shared by CNPC.

• So, investors were afraid that CNPC might influence PetroChina’s dividend and capital investment policy.

Appointment of Directors and

Corporate Officers

• 2 out of 3 independent non executive Directors of PetroChina had ties with Chinese govt.

• The Chinese govt. had the authority to appoint and dismiss Officers of both PetroChina and CNPC.

• Hence, people feared that the management decisions could be made under political consideration.

Legal protection for outside investors

• Shareholders found difficulty in finding independent arbitrator.

• Hence were unable to submit any disputes with the company to arbitration in Mainland China or in Hong Kong.

Special Features

• Compensation linked to performance.

• Share options to the Directors, Supervisors and members of the management team.

• Future plan to extend the share option policy for remaining employees.

Management Incentive

programme

• High level of transparency.

• Delivered financial reports to public every quarter.

• Used to conduct Audit in accordance with the International Auditing Standards (IAS).

Information Disclosure

• 7 members including 2 independent supervisors.

• Duties of the board:

• Meetings of Supervisory committee

• Inspection of company’s financial position

• Operation of the company in compliance with the law

• Fulfillment of duties by Directors and senior management

Supervisory Board

• PetroChina formulated a set of policies and procedures regarding shareholder’s general and extraordinary meetings.

Policies and procedures

Proposals for Governance Reform

Universal Governance Guidelines

PetroChina should incorporate Universal Corporate Governance

Guidelines which are widely accepted all over the world.

Companies can voluntary follow universal corporate governance

guidelines.

Build Autonomy

SOEs generally regarded as government branches it did not

have its own legal independence.

In order to build sound corporate governance, CNPC need to be

independent from the Company in all aspects, including personnel deployment, assets, finance,

organization and business operations.

Improve function of the Gen meet. of Shareholders

Proper meetings with meaningful discussion.

Oppression of minority shareholders.

Avoidance of unnecessary power struggles between the

corporate bodies

Restraint and Incentive for Directors and Executives

Necessary to employ mechanisms to hold the management of SOEs

accountable for their behavior.

Open and transparent manner of appointment and dismissal

of senior management

Improve the compensation mechanism for directors and

executives.

Improve the role of the board of supervisors

Board of supervisors should obtain meaningful tools & authority to take legal

actions for confronting problems associated with insider control.

Supervisors should be completely independent from the directors and

executives.

Supervisors should have strong expertise in essential matters.

Code of ethics for senior management

Code should applies to all the management members of the Company.

Required Business Conduct so the Senior Management shall act honestly and diligently in the performance of their

duties

Compliance with Laws, Regulations and Rules.

Director Independence

Must have a majority of independent directors on its

board of directors where there is no such ties with Chinese govt.

Separate corporate governance committee composed entirely of independent directors.

Director qualification standards and responsibilities need to be

clear.

Improvement in role of Board of Directors

Company has to elected its Directors in strict compliance with the directors election procedures.

There need to be Procedures for Nomination of Directors

Compliance with Laws, Regulations and Rules.

Thank You