To perfect China's listed companies' governance mechanism and promote the long-term healthy development of the capital market, the Shanghai Stock Exchange (SSE) has officially introduced the "SSE Corporate Governance Sector".
The introduction of the sector is after a long-term preparation. As early as in 2002, the SSE, with a careful study of international experience, planned to introduce the sector. In 2005, the SSE devised a complete plan to establish the sector. In September 2007, the Expert Consultative Committee for Corporate Governance Sector Appraisal was officially founded. In the same month, the "Appraisal Measures of SSE Corporate Governance Sector (Draft Version)" was published for opinions of all parties. On October 9, the "Appraisal Measures of SSE Corporate Governance Sector" came out officially and voluntary applications of listed companies began. By November 2, 2007, the SSE had received valid application materials from 255 companies, published the materials and welcomed public comment. So far, the Expert Consultative Committee has completed the appraisal and the list of constituents of 199 companies in the sector (see the attachment) has been fixed. Taking the 199 companies as constituents, China Securities Index Co., Ltd. (CSI) will formulate the SSE Corporate Governance Index and release the index in early 2008.
To precisely and objectively appraise China's corporate governance and motivate the participation of the public, the SSE carefully designed the appraisal measures for Corporate Governance Sector with the following characteristics:- The SSE designed the appraisal indicator system in line with China's corporate governance practices. Based on the basic principles of the "Corporation Law", the "Securities Law" and the "Rules for Listed Companies Governance" as well as the best reform practices of domestic and overseas corporate governance, the SSE fixed on 4 categories of indicators, namely, the operational compliance indicators, the shareholders' behavior ones, the directors and senior management ones and the information disclosure ones. The 4 categories are subdivided into 20 indicators, covering the main aspects of corporate governance. The special appraisal units and the Expert Consultative Committee select the constituents of the sector according to these 20 indicators.
- The SSE adopts the principle of voluntary application. In the past, listed companies were very passive in improving their governance improvement. Therefore, the voluntary application by listed companies for entering the sector is a big change. It will make listed companies to voluntarily examine their own governance, thus adopting a more regulated corporate governance structure. The companies in the sector, formed with the principle of "raising hands to promise good behaviors", will have stronger self-regulation and a better marker image. Thus, they will be easily recognized by the market and supported by policies in re-financing, acquisition and merger.
- The public is motivated to join in the appraisal of the Corporate Governance Sector. Upon preliminary examination of the application qualification of the listed companies, the appraisal work group of the Corporate Governance Sector will publish the application materials of qualified ones on the website for public appraisal. All this aims to get the public investors involved in the process and make all the market participants pay attention to the corporate governance. Besides, the SSE invites professional research institutions as the special units to appraise the SSE Corporate Governance and to judge the governance of the applying companies. Among the research institutions are CITIC Securities Co., Ltd., Guotai Junan Securities Co. Ltd., Shenyin & Wanguo Securities Co., Ltd., Haitong Securities Co., Ltd., Changjiang Securities Co., Ltd., Everbright Securities Co., Ltd., GF Securities Co., Ltd., China Galaxy Securities Co., Ltd., China Asset Management Co., Ltd., Harvest Fund Management Co., Ltd., GTJA Allianz Fund Management Limited Company, Ping An Insurance (Group) Company of China, Ltd., China Chengxin International Credit Rating Co., Ltd, Pengyuan Credit Rating Co., Ltd., RepuTex, and Graduate School of Management Science and Engineering of Nanjing University. Experts and scholars are also invited to form an Expert Consultative Committee for Appraisal of Corporate Governance Sector. The committee discusses the appraisal method, process and results, thus ensuring the objectivity and regularization of the appraisal process.
The Corporate Governance Sector, introduced by the SSE, aims to improve the governance of listed companies and promote the rational investment of investors. On the one hand, listed companies' voluntary application for joining in the sector means they are willing to meet stricter requirements for corporate governance and welcome comment and supervision from investors and the public. So, participating in the sector will impel listed companies to further enhance their governance.
On the other hand, based on domestic and foreign empirical researches, there is a strong positive correlation between corporate governance and operational performance. Investors are willing to pay a higher premium for corporate stocks with better governance. But on China's capital market, investors and the market don't have much control over corporate governance. Besides, they give little consideration to corporate governance when making investment decisions. After the introduction of the SSE Corporate Governance Sector and the Governance Index, fund companies and securities dealers can actively develop related products, including index funds and ETFs, to provide investors with long-term investment instruments highlighting quality of corporate governance. The introduction of these investment products will further intensify the correlation between stock prices and corporate governance and establish the positive interaction between the market and corporate governance, thus impelling shareholders to play active roles and strengthening the supervision function of investors over corporate governance.