BOARDS OF DIRECTORS AT CHINA'S SOEs: THE ROLE OF, AND CONDITIONS FOR SERVING AS, DIRECTORS AND RELATED ISSUES （ KEY POINTS OF SPEECH ） STATE COUNCIL DEVELOPMENT RESEARCH CENTRE ENTERPRISE RESEARCH INSTITUTE CHEN XIAOHONG, DIRECTOR AND RESEARCHER

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

一、 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: 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 。

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 。

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.

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

POSSIBLE SOLUTIONS: CHANGE FROM MARKET FLOTATION OF SUBSIDIARY COMPANY TO MARKET FLOTATION OF PARENT COMPANY CONDITIONS: ① PARENT COMPANY MUST TAKE STRATEGIC RESPONSIBILITY FOR BUSINESS DEVELOPMENT ② 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)

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 。

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.

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.

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.

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. 建 IT IS RECOMMENDED THAT ENTERPRISES REGISTERED UNDER THE LAW ON ENTERPRISES SHOULD, IN PRINCIPLE, GRADUALLY CONVERT TO SOLELY STATE- OWNED COMPANIES.

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.

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.

3.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

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

2. CONDITIONS FOR SERVING AS DIRECTORS ⑴ 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). ⑵ 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

(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 。

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

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