Ethical Issues in the Evolution of Corporate Governance in China

Dr. Choong Y. Lee, Pittsburg State University, U.S.A. Ms. Ha Sook Kim, Pittsburg State University, U.S.A.

ABSTRACT

In the last two decades, there have been significant changes in China regarding its economic system and business environment. As a result of the rapid pace of corporatization and privatization of state owned enterprises since the early 1990s, corporate governance has assumed an increasing prominence in China as the Chinese government tried to promote enterprise performance and to look after its ownership stakes in various forms. This article will talk about ethical issues associated with China's corporate governance and its critical factors on them. The article will examine what corporate governance development is all about in China and its related features and major trends. It outlines the recent history of the creation of corporations, and investigates the meaning of corporate governance and its relevance for China's reform and development. Also, this article identifies and explains the emerging ethical issues in the context of China's evolving macro environment as well as its corporate governance arrangements. Finally, it discusses the Chinese government's policy responses to resolving such issues and evaluates their effectiveness. Some conclusions are also provided.

INTRODUCTION

Since the early 1990’s, the Chinese economic system and its business environment have been changed dramatically in many ways. The price mechanism has been allowed to replace the centralized system of resource allocation, and there has also been a fundamental transformation of how production, consumption, investment and saving are organized in China according to the new system. Completely new forms of economic institutions and organizations have emerged, both at the macro and micro level. One of the most important creations is in fact the firm as a business entity. The emergence of the firm as an independent economic agent and the development of the incorporated form of business organization have profound implications for the shape and dynamics of the society and economy in China. In a country where the state had owned and operated work units that encompassed nearly every aspect of the daily life, this transformation changes the rules and incentives governing the actions and interactions among all economic agents including the state and its instrumentalities at various levels (Blackman, 2000). Although all facets of modern market instruments have now been adopted from free market economies, they have to operate under an environment where the social and economic preconditions for their effective functioning are at times lacking or underdeveloped. This may be an inevitable consequence of China's gradual approach to economic reform, but the asymmetrical progress has also paved the ground for the emergence of various issues in business ethics. Corruption, stock market manipulation, tax cheating, fraudulent dealings, all manners of plundering of state assets and the lack of shareholders' rights are some of the more conspicuous manifestations. In many ways, nowhere are such new ethical issues brought into sharper focus than in the development of corporate governance in China's listed companies, the country's supposedly most modern and market-oriented business organizations. This study will examine the key corporate governance and ethics issues associated with this type of companies. Similar problems will certainly be faced by participants in other areas of the country's transforming social-economic landscape (Blackman, 2000; Chen and Culderson, 2003; Chen, 2004, 2005) This article shows that the business ethics issues associated with China's corporate governance arrangements are the product of several interacting factors. They come mainly from the struggle between the desire to install "modern" institutions and instruments, and the unbalanced progress in the development of complementary social, political, legal and economic infrastructures. Another equally important factor can be attributed to the approach taken by the Chinese government to establish a corporate governance system based on the stylized Anglo-American model. In investigating

the key ethical issues in the context of China's corporate governance development, the paper aims to examine how they can be addressed to produce more desirable outcomes.

CHALLENGES OF CORPORATE GOVERNANCE DEVELOPMENT

Introduction -The Birth of Companies and Stock Exchanges In China's economic reform, the government has certainly tackled these issues in a fundamental way but has also persisted with a desire to preserve its perceived essential trait of socialism by means of maintaining the prominence state ownership in several key sectors of the economy. This state ownership structure has complicated economic policy making and its outcomes (Tam, 1991). Since the Chinese government allowed productive enterprises, including state owned ones, to become separate legal persons in 1987, the substance of what constitutes corporate governance in the West has become increasingly important in China although the notion of corporate governance was little known then. Under the central planning regime before the reform, China's industrial and commercial enterprises were not autonomous economic entity but were really workshops and production units with no independent decision making power (Tam, 1991). The emergence of the company as a basic economic entity was accompanied by a process of financial reform that has turned the newly created or reorganized state-owned banks into the primary provider of finance for Chinese enterprises, replacing the old system of state budgetary grants. Shareholding companies were soon formed when grass-root efforts to develop China's capital market began spontaneously in the mid 1980’s. China's first securities and brokerage company was established in Shenzhen in 1987. In the following year, securities companies were set up in every province under the auspices of the local branches of China's central bank. By 1991, China's two official stock exchanges in Shanghai and Shenzhen were ready for full operation. The country's corporate finance and development henceforth entered a new era since then (Blackman, 2000; Chrisman and Carroll, 1984; Chen, 2004, 2005; Kronick, 2005). Chinese listed companies, the focus of study in this paper, are mainly privatized state owned enterprises (SOEs). That is, their major shareholders are the state in its various forms including other state owned enterprises. Another important characteristic of China's listed companies is that approval for a company to obtain listing has been determined by the government on the basis of an annual quota broken down to each province and ministries which then select the companies to fill their allocated quotas. Therefore the listing of a company is usually decided not on commercial merits but on political and sectional considerations. Clearly this aspect alone has created fertile grounds for many forms of rent-seeking activities that could give rise to significant ethical issues (Chen, 2004, 2005; Peng and Luo, 2000;Tam, 1999). In contrast to the privatization experiences in former centrally planned economies, such as Russia and most of the former Eastern European countries, there was no mass privatization in China. Indeed the Chinese government has for ideological reason eschewed the use of the terminology. Nevertheless, the number of listed companies, many of which are partially privatized SOEs, has grown quite rapidly in China. Expropriation by the insider controlling interest could and has led to the collapse of the securities market as happened in Russia and those Eastern European countries. It is argued that managers and controlling shareholders tend to steal more in bad times than in good times. In China's case, the country's relative good fortune in overall economic performance may have kept such potential and actual plundering to a more bearable level in the eye of the investors. However, this does not mean an absence of corporate governance issues and problems of business ethics in China's corporate development. On the contrary, the way China has developed its public companies and the approach by the government to establish corporate governance arrangement has contributed to the country's own set of issues. The Chinese authorities, such as the China Securities Regulatory Commission (CSRC), have now taken some steps to tackle them in a more determined manner that is compatible with the market orientation of the country's reform (Blackman, 2000; Chen, 2004, 2005; Kronick, 2005;Tam, 1999).

Chinese Approach to Corporate Governance Development There is no doubt that China's economic and business landscape was transformed in a short span of time. This has resulted in new economic and social relationships that necessitated the development of new sets of the rules of the

game, property rights arrangements, and incentive system, etc. The quest of getting the prices right and installing the right formal institutions must be extended to getting the corporate governance right at the same time. However, the equally important task of getting the informal institutions right has hardly been started. Since 1993, the Chinese government has made the development of a modern corporate system, which is a focus of its SOE reform. A modern corporate system is generally understood among Chinese policy makers and commentators to possess the following attributes: (1) clearly clarified property rights; (2) designated authorities and responsibilities; (3) separated functions between government and enterprise; and (4) scientific management (Blackman, 2000; Kronick, 2005; Tam, 1999). The first three items above truly reflect the transitional nature of China's reform from a centrally planned economic system to a market oriented economy. In practice, the modern corporate system is often equated to the incorporated joint stock company form, particularly companies that are publicly listed. The joint stock company of course represents the most common form of business organization in the industrialized economies, and public companies dominate the key economic sectors there. Their corporate governance arrangements, primarily in the form of the stylized Anglo-American model, have accordingly been held up as the governance paradigm. China's Company Law has indeed enshrined many stylized features of the corporate governance arrangements of that model. As far as government policies are concerned, the development of corporate governance in China is guided by a desire to install the stylized features of that model, primarily through a prescriptive and legalistic approach. It is interesting to note that this approach is a significant departure from China's general approach to economic reform that has been based on a decentralized process of experimentation (Chrisman and Carroll, 1984; Coffee, 1999; Peng and Luo, 2000). However, there have also been considerable confusions over what corporate governance is in the Chinese context. It is not uncommon to find that corporate governance is understood by many Chinese managers and officials as being just a modern way of organizational management, or a set of structures and procedures for regulators and owners of enterprise to supervise managers. The reasons are multifaceted. Partly, the Chinese translation for corporate governance may convey a notion more focused on administering and supervision. Another problem may be the tendency among some commentators and practitioners in China to simply view corporate governance as one of the "modern" management tools that could be applied independent of the social-economic, regulatory and financial context (Kronick, 2005; Zhou, 1999). It is not the purpose of this paper to present a complete taxonomy of the world's major systems of corporate governance. It is however important to cast China's attempt to develop its corporate governance arrangements against the model which it emulates. It is therefore instructive to contrast the salient features of the stylized Anglo-American corporate governance models with the characteristics of China's present corporate governance arrangements. The analysis of these contrasting features provides a basis for examining the questions of what and how key ethical issues have been created or exasperated (Kronick, 2005; Peng and Luo, 2000; Zhou, 1999). The current Chinese situation is that the state is the major shareholder in the highly concentrated ownership pattern from the country's partial privatization. However, despite its majority ownership, the state does not exercise effective control over their companies. Whereas the mass privatization in other transitional economies such as Czech Republic and Russia has led eventually to the insider gaining control of the companies through their success in raising their concentrated ownership stake, Chinese insiders normally have insignificant share ownership (Coffee, 1999). Because shares owned by the state and by state-owned enterprises are not permitted to be traded, movements in stock price are generated mainly by the trading of shares among individual shareholders. Because of the high rate of saving and the very limited range of investment instruments available in China, individual investors in the stock market have from the beginning exhibited a highly speculative tendency with very short investment horizon. Listed companies in China, in spite of the fact that they are independent legal entities subject to the country's Company Law, still operate under the strong influence of the government. Although the idea of offering stock options as executive compensation has been the subject of debate in the late 2000, the conditions for this to take effect are not available and managerial remuneration in China is generally not linked to performance (Blackman, 2000; Chen, 2004, 2005; Kronick, 2005; Peng and Luo, 2000). China has adopted the stylized features from the Anglo-American model of corporate governance, but it does not yet have an active market for corporate control. There have been a few sporadic episodes of takeover battles since the

two stock exchanges were established in 19991. There has even been a recent spate of takeovers bids for ailing companies. However, most of these takeover attempts are by enterprises seeking a backdoor listing to obtain the benefits of cashing in on the buoyant market and China's version of high tech boom. China will not have an active market for corporate control until more non-state controlled enterprises are listed in the stock exchanges and until full privatization is implemented. For listed companies with the state as a majority shareholder, the pool for appointment to the positions of chief executive, most senior managers and a high proportion of the directors on the company board is restricted and subject to government influence or direct intervention. The role of a competitive market for managerial manpower to complement the function of an active market for corporate control is not yet available in China. The actual influence over the company would more likely come from the party organization or the company's previous supervising ministry (Blackman, 2000; Chen and Culderson, 2003; Chen, 2004, 2005; Tam, 1999). In the Chinese system, companies operating under the country's Company Law have a two-tier board. In addition to the board of directors, which in theory carries similar responsibilities as a board in the Anglo-American system, Chinese companies also have a supervisory board. The supervisory board is small in size and usually has labor union and major shareholder representation. However, it only has a loosely defined monitoring role over the board of directors and managers. Though being part of a two-tier board structure, the establishment of Chinese supervisory board shares no common social and philosophical considerations that underlay the supervisory board in the German codetermination model of corporate governance. The supervisory board in China has so far not played any effective governance role (Chen, 2004, 2005; Tam, 1999). The rule of law and the principle of arms length transactions provide a cornerstone for the Anglo-American model of corporate governance. The legal system based on common law is often considered to be superior to the more prescriptive continental civil law system in governance outcomes because the former is seen as more efficient and enabling although such a belief is not without challenge. In China, rampant government interventions in commercial activities particularly at the sub-national level, and the importance of personal network relationships in business are well known (Blackman, 2000; Coffee, 1999; Kronick, 2005). In addition to the effective enforcement of laws and regulations, high standards in corporate transparency and accountability in the Anglo-American model are backed by a highly developed securities industry with independent professional organizations such as accounting and brokerage firms as well as a watchful and independent mass media sector. They help reduce the cost of monitoring for shareholders and put pressure on company directors and managers to disclose timely and accurate information on corporate performance. While there has been progress in developing accounting standards, professional organizations and media reports on company activities in China, it is still a long way from achieving the degree of effectiveness and independence that is required for the Anglo-American model to work (Blackman, 2000; Coffee, 1999; Lieberthal and Lieberthal, 2003). In summary, China's listed companies face a very different ownership, business and financial environment from the Anglo-American system. The institutional conditions for the successful operation of that model are either absent or undeveloped. China's corporate governance has more in common with Germany and Japan than with the Anglo- American model. The business environment and the social and economic conditions are seemingly similar. Yet China has patterned its corporate governance system primarily on the Anglo-American system. Some may have argued that the Anglo-American model is indeed the paradigm to which all others corporate governance system will converge. Nevertheless the differences between the Chinese environment and the Anglo-American conditions are substantive (Blackman, 2000; Hansmann, 2000; Peng and Luo, 2000).

ETHICAL ISSUES IN CHINA’S CORPORATE GOVERNANCE

China's attempt to develop a modern corporate sector in the last two decades has been conducted under the government's primary goal of raising productivity and maintaining political stability and economic growth. Despite the fact that the traditional SOEs provided nearly cradle-to-grave services to most urban workers and their families, their transformation into corporate entities to compete in open markets has basically been a technical exercise of getting the

prices right and making the enterprises financially viable. Hence, the narrow instrumentalist view of corporate governance is not a surprise (Blackman, 2000; Hansmann, 2000; Peng and Luo, 2000). In opting for the stylized features of the Anglo-American model of corporate governance, the Chinese government has not given priorities to such "soft" issues as corporate culture or business ethics. It has placed the party organization as the means to exercise influence over the newly emerged corporations but the concern is perhaps more with political power and control than how a company should behave. The neglect in developing the right informal institutions and behavioral norms however raises the transaction cost of all parties involved in the governance of a company (Chrisman and Carroll, 1984; Kronick, 2005; Hansmann, 2000). In the Anglo-American system, fiduciary duties are not specified in complete details as there could be an infinite repertoire of events and responses, and because their fulfillment has to rely on trust and judgments albeit on the basis of an appropriate set of incentive and regulatory mandates. China clearly does not yet have such a corporate history, commercial environment and business culture for such duties to be an integral part of the governance routine and be effectively performed. Furthermore, the Anglo-American model of corporate governance requires certain conditions which include for example a high level of transparency and accountability, protection for minority shareholders, an active market for corporate control, and independent board of directors and professional organizations. A key element of that model is to protect shareholders wealth by reducing the agency cost from having professional managers by way of aligning their interest with the company and by the threat of the consequence of merger or takeover by another company. The presence of these conditions in the system does not by itself eliminate unethical and fraudulent activities. However, their absence will certainly raise serious concerns over the system's efficacy to deal with such issues (Chen and Culderson, 2003, Chen, 2004, 2005; Chrisman and Carroll, 1984; Hansmann, 2000).

Protection of Shareholders Rights The current ownership structure of China's listed companies, the constraints and interventions exerted by the state on them, and the inability of the government to effectively exercise its rights as the majority shareholder combine to produce a multitude of governance and ethical issues for policy makers, investors as well as company board chairman and chief executives. First, the state is the majority shareholder but is not exercising its ownership rights effectively. Instead the insider managers and their party-ministerial associates who personally have negligible shareholding keep the control of the company. Thus, in reality the governance and the purpose of the firm are determined by the insiders, often involving government agencies other than the designated holder of the state shares (Blackman, 2000; Hansmann, 2000). In the Russian privatization process, the insiders rapidly gained concentrated ownership. This has not happened in China. However, the corporate regulatory regime in China is in principle geared to accommodate diverse share ownership as the Anglo-American model is the object of emulation. Unfortunately, it has been shown that the primary purpose for Chinese state enterprises going public is to raise capital, not to transfer ownership from state to private citizens. Indeed raising capital from the capital market can mean survival for many of the SOEs that have been partially privatized in this manner (Chen, 2004, 2005; Lieberthal and Lieberthal, 2003; Su, 2000). The result is that, even if there were no self-serving strategic behavior on the part of directors and managers, there will be the difficult issue of resolving the different interests and pursuits of the central and sub-national levels of government in setting the goal and direction of a company's business and governance aspirations. Examples of such conflicting interests may include employment creation and maintenance, welfare for workers, social stability, and government revenue collection. The actual reality in China where the rights of the numerous individual minority shareholders are often disregarded does not help in providing directors and executives a basis for the resolution of this issue (Chen, 2004, 2005; Su, 2000).

Insider Trading, Self-dealing and Collusion in Market Manipulation It was after the Securities Law came into effect in July 1999 that the Chinese authorities, notably the China Securities Regulatory Commission (CSRC), began a more active campaign to investigate cases of insider trading and market manipulation. Although details are not always readily available, such activities seem rampant and persistent as

evidenced by the revelations made in recent prosecutions and by the popularity of books on how individuals can take advantage of such activities. The common practice seems to involve a company, either acting on its own or in collusion with others. Borrowed or own funds are channeled through a large number of factitious or personal investor accounts to engage in buying and selling of its own shares (i.e., self dealing) or other companies' shares to influence market prices and trading volume to attain personal financial gains. Clearly such activities would have been detected quite easily should there be effective corporate governance arrangements and regulatory surveillance and enforcement mechanisms (Blackman, 2000; Kronick, 2005; Su, 2000). More significant is the fact that some of the securities firms actually engaged on their own in similar kind of activities on an even greater scale. The recently reported case of the alleged market manipulation and corruption by a provincial branch head of a major securities and brokerage firm is indicative of the problem. The manager in question was alleged to have opened 900 factitious investor accounts in the name of her associate to apply for new scribes from IPOs, using company funds and unauthorized mortgage credits. Since most IPOs in China are underpriced, success in getting scribes is therefore almost a certain way of making quick profits. This may indeed be an important factor that has contributed to the tendency of some companies to falsify financial statements to gain new listing or to expand share issues (Blackman, 2000; Chen, 2004, 2005; Su, 2000).

Falsification and Fabrication of Financial Data As discussed earlier, obtaining a public listing for many companies can mean survival. More importantly, it is often regarded, quite accurately under China's current conditions, as a cheap way of finance that will also bestow enormous legitimate and illegitimate benefits to a company's managers and employees. Because the listing procedures are based on a national quota system, regional and sectional interests may dominate commercial considerations in the selection of companies. The standards and integrity of professionals such as accounting, legal and securities firms are seriously compromised when falsification of a company's financial performance occurs. China's formal and informal institutions needed to support its corporate governance system are still at a very early stage of development. Because of the asymmetrical nature of these institutions to the needed development of some of the prerequisites of the Anglo- American corporate governance model, such issues above are bound to inflict damages (Kronick, 2005; Su, 2000). The formal governance structures have been widely ignored in China. As the above case has demonstrated, it is not just the company management but also a wide spectrum of professional and government organizations that had colluded in making such activities happen. This outcome is perhaps not surprising as it really affirms the weakness of the state as the majority shareholder and controller of a company. The failure to delineate property rights and accountability for the key participants has contributed to this outcome. It is also the consequence from the absence or ineffectiveness of the complementary formal and informal institutions that are needed to support the functioning of an Anglo-American model of corporate governance system geared towards the protection of minority shareholders (Kronick, 2005; Peng and Luo, 2000; Su, 2000).

Policy Responses Corporate governance structures in the Anglo-American system are already highly developed and the standards of practice and enforcement are usually high. Corporate governance may not make much difference in corporate performance among firms operating in those mature market economies under that system, but in times of corporate crisis, corporate governance has mattered even there. For China, given the severity of financial distress afflicting many state firms and the problems discussed in the preceding sections, getting the corporate governance right is clearly critical (Blackman, 2000; Kronick, 2005). The Chinese government has taken a variety of responses and measures to counter some of the major ethical and governance issues that have emerged in recent years. Until recently, most of the initiatives are reactive in nature to given problems, or replicas of practices in the West that are perceived to be modern and effective. As argued earlier, there are certain complementary formal and informal institutions and market infrastructure that constituted the functioning Anglo-American model of corporate governance, and many of these are yet to be developed in China. Some of the measures of the Chinese government have gone beyond the technical and administrative to the more

market oriented initiatives to induce systemic changes. Irregular and unethical practices are expected to diminish with the growth of institutional investors who will take an active governance role. After all, institutional investors are now the dominant type of shareholders in the world's largest capital market in the United States and some of them have been active participants in the governance of companies they have invested in. The rise of shareholders activism is closely associated with these institutional investors. They are therefore regarded as a desirable symbol of modernity and market maturity in China. Unfortunately these expectations are yet to be fully realized in China. However, regardless of the validity of the specific claims and counterclaims, a number of useful observations can be made. First, managed funds have become an important investor in China's stock market. Second, contrary to the expectations by many in China, this new form of institutional investors have not been able to play the anticipated role in lifting corporate performance nor instilling an element of stability in China's often volatile stock market activities. Third, the Chinese mass media is increasingly showing that it is willing and capable of utilizing its potential as an outside monitor on the corporate governance performance of listed companies, a role that the Western counterpart has played to support the viability of the Anglo-American system of corporate governance (Blackman, 2000; Chen and Culderson, 2003; Chen, 2004, 2005; Kronick, 2005; Peng and Luo, 2000; Su, 2000). Another major development may be the recent increase in merger and takeover activities. Certainly the existence of an active market for corporate control is integral to the Anglo-American model of corporate governance. However, in China, since full privatization is not an immediate policy objective and the state continues to hold majority shares that are not allowed to be traded, the development of a market for corporate control is inevitably retarded. An encouraging sign in terms of new policy development is perhaps the emerging redirection in the Chinese government's approach to regulatory administration and development of the securities market, and in its focus on promoting corporate governance standards. Various pronouncements and actions by the CSRC in recent days suggest that the Chinese government is slowly moving away from a highly centralized interventionist approach to one that puts more emphasis on enhancing the protection of shareholders rights, and installing and enforcing the rules of the game for market participants (Coffee, 1999; Kronick, 2005; Su, 2000). One of the most important new initiatives is the planned discontinuation of the quota system for selecting firms for listing on the stock exchanges. Provided the listing procedures to be administered by the stock exchanges are transparent and independent. This move will remove much of the grounds for non-productive rent seeking activities and will have a positive effect on the quality of companies that will go public. Equally significant is the broad intention that the government will allow more private enterprises to be listed on China's stock exchanges. An increasing proportion of non-state owned companies will eventually help the development of a more balanced and liquid securities market in which property rights are more clearly delineated and corporate governance practices can be more standardized and market oriented. However, unless state owned shareholdings can also be freely traded on the market, the stranglehold on such a development will remain for some time (Coffee, 1999; Su, 2000; Tam, 1999).

CONCLUSIONS

It is clear that specific ethical issues such as protection of shareholders and other stakeholders rights, corruption, plundering of state and company assets, and fraudulent dealings are the product of weaknesses in China's corporate governance structures as well the asymmetrical development in formal and informal institutions under which all companies have to operate. China has patterned its formal corporate governance structures on the Anglo-American model but lacks the required institutional and market conditions. These institutions will take some time to develop to suit the country's particular economic, financial and political circumstances. Ethical issues that have arisen in the process of the country's reform and development are path dependent and intertwined with the formal and informal aspects of the economy, society and state (Black, 2000; Chen, 2004, 2005; Su, 2000). To make the formal governance structures work better, improving the effectiveness of the regulatory regime by itself can deliver some desirable outcomes. As the corporate governance system has been developed in a prescriptive topdown manner, a similar approach to induce more long term and market-compatible changes and development may

indeed be needed to set the process on the right course. However, it is also true that merely relying on improving the formal regulatory system will not be sufficient. Effective corporate governance will require all the complementary conditions to be in place, which are integral to the Anglo-American model as well as those that are needed for China's own set of social and economic circumstances. For the latter, they need to include for example the resolution of the issue of full privatization, a redefinition of the role of the government and the Party as major stakeholders, the establishment of truly independent judiciary and professional framework and mechanisms, the balancing of equity and efficiency concerns, and the fostering of a business culture that is consistent with the demand of marketization and internationalization. For instance, it is not clear if the compensation for managers and government official were significantly lifted, would the kind of dysfunctional and unethical behaviour now prevalent be vastly reduced? Or is strengthening the formal disclosure and accountability procedures a more effective and immediate alternative? Obviously improving shareholders rights protection and civil liberty can also significantly reduce whatever negative impacts from the ethical issues that have emerged in the development of the country's corporate governance and economic systems. All these represent areas that require more research to come up with some answers (Blackman, 2000; Chen, 2003, 2004; Coffee, 1999; Kronick, 2005; Peng and Luo, 2000; Su, 2000). Given China's social, political and economic conditions, it is necessary to continually assess and reconsider what kind of corporate governance arrangements are best suited to achieve which economic and social priorities. Before any governance or its associated ethical issue can be addressed properly, there is also a need to examine the purpose of a firm and how it can account for what its does and who it serves with respect to its major stakeholders, including the shareholders. Therefore the future development of corporate governance in China presents many economic, political and ethical issues for policy makers, shareholders, managers, key stakeholders and the community as a whole. The basically strong performance of the Chinese economy and the overall upward trend of its securities market have combined to mask the severity and negative impacts of the problems and issues discussed in this paper. However, the expected further opening up of the economy and the financial sector will no doubt increase the urgency of resolving those problems. Only through a better understanding of how they arise in the proper context will effective policy response be identified and formulated (Blackman, 2000; Chen, 2003, 2004; Coffee, 1999; Kronick, 2005; Peng and Luo, 2000; Su, 2000).

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