Transparency In China - Brief Article

Internal Auditor, Oct, 2001 by J. Hodges

ON THE HEELS OF A highly publicized market scandal involving fraudulent financial statements by a Shenzhen-listed company, the China Securities Regulatory Commission recently issued rules to improve corporate governance in the country's public firms. The market watchdog established an independent director system that requires the 1,100 domestically listed companies to hire at least two independent board directors by June 30, 2002.

The new rules stipulate that at least one of the two directors be a professional accountant and authorize board members to give independent opinions on major transactions with affiliated institutions as well as on management's remuneration. The regulations also allow the directors to submit proposals to assemble shareholder meetings, recruit or dismiss accounting firms doing business with the company, invite independent auditors to review company functions, and offer independent financial reports apart from the directors' normal duties as board members. Overall, the new board members are charged with protecting the interests of the company's small and medium shareholders and encouraged to object in cases where those interests are at risk.

Although the new regulations are expected to enhance company transparency, they cannot totally resolve the country's corporate governance problems, says Dong Fureng, the senior economist and deputy director of Economic Committee under the Chinese People's Political Consultative Conference. Another problem voiced by analysts suggests that anyone eligible For the independent director's position would have to come From China's academic arena, whereas, in most other nations, the directors are company executives.