CORPORATE GOVERNANCE IN CHINA

CORPORATE GOVERNANCE IN CHINA: THEN AND NOW
Cindy A. Schipani Liu Junhai
Corporate governance has become a globally debated topic.[1] As multinational corporations enter new global markets, complications abound due to the myriad of corporate governance rules existing among the various legal systems.[2] One example of a new market becoming more available to American investment is the Chinese market. In light of both the grant of permanent normal trade relations (“PNTR”) to China,[3] and China's anticipated membership in the World Trade Organization (“WTO”),[4] the American business community is apt to find more opportunity for investment in China.[5] American investors will likely be increasingly interested in understanding the current Chinese corporate governance regime as they consider the Chinese market for investment of their assets. The goal of this paper is to provide an analysis of the corporate governance system in China and offer some suggestions for improvement to make the Chinese market more attractive to foreign investors. This paper is organized as follows: Part I provides general background information on the historical corporate governance structures prevalent in China. Part II analyzes current governance issues, in particular those occurring in the context of the corporatization of China's State-owned enterprises. Part III offers proposals for reform. Part IV contains our concluding remarks. I. A Historical Perspective - The State- Owned Enterprise (SOE) Traditionally, the production of goods and services in China has been conducted by State-owned enterprises (SOEs). The SOE has evolved in China from a model in which the State held all property ownership and managerial rights, to a contracting model where the enterprise became responsible for its own profits and losses, resulting in a model which resembles a U.S. corporation. These SOE governance models can be classified as follows: (1) the traditional model (1950s to 1984); (2) the transitional model (1984 to 1993); and (3) the modern corporate model (1993 to present). An understanding of the history of the SOE governance model is essential to identifying proposals for modern corporate governance requirements for corporatization of SOEs. Salient features of the traditional and transitional models are described below. The modern corporate model is the topic of Part II. A. Traditional Model (1950s to 1984) The traditional model of SOE governance could also be referred to as the State-ownership model, or the State-owned and managed model. This model was dominant from the 1950s through 1984. Under this model, State ownership was generally assumed to be the only legal form available to provide a safeguard for State property. Not only did the State have ownership of all the property of the SOEs, but it also enjoyed managerial powers. The backbone rationale behind this model was paramount State ownership of property.[6] Unfortunately, the concept of State ownership not only depressed the growth of the private sector in China,[7] but also deprived SOEs of economic and legal independence.[8] This concept, developed in a planned economy,[9] provided justification for State planners to mobilize human and financial resources and allowed them to assess production and distribution demands. The SOE executives were required to fulfill the production plans of the government rather than enhance profits for the State investor. In other words, SOEs were not real business enterprises. The terms "corporation" or "legal person" did not exist in China during the central-planning period. Most SOEs were simply referred to as "factories" (Gongchang), and merely functioned as government affiliates responsible for producing goods or rendering services.[10] Accordingly, the governance structure of SOEs was an integral part of the general governmental framework. SOE executives were appointed and dismissed by government agencies, and enjoyed the same political and economic treatment as government officials (so called "State cadres"—Guojia Ganbu).[11] The executives were responsible to government agencies. Their achievements were not evaluated by the enterprises' financial performance, but by the executives' ability to satisfy the plans made by government agencies. The traditional model not only served as an organizer of economic resources and activities, but also as a tool to firmly bind the State, SOEs and employees. State coffers were the sole source of SOEs’ input; SOEs and their employees effectively lived off of the SOE coffers. SOEs were thus both production units and social security units. Once a person entered an SOE, he or she gained an "iron rice bowl " which could be kept for life and which insured the individual's salary, housing, medical treatment and pension. The SOE as a State-owned Working Unit (gongzuo danwei) had a rich and unusual significance to Chinese employees, and could not easily be understood by their counterparts in the U.S.[12] Unfortunately, most SOEs were static and uncompetitive. B. Transitional Model (1984 to 1993) The transitional model of SOE governance is also referred to as the State-creditor's rights model, or the contracting model. This model was dominant from approximately 1984 through 1993, until the Chinese Corporate Law of 1993 was enacted. Since the late 1970s, SOE reform was the main strategy employed to encourage SOEs to expand production and earn profits.[13] The goal of the reform initiatives was to make SOEs responsible for their own gains and losses in the market. In its official language, "SOEs should become legal persons that enjoy full management authority and full responsibility for their own profits and losses."[14] One of the leading theories advocated by this reform initiative was "separation between the State ownership and the SOE management rights."[15] Policy-makers at the time believed that this was the best way to transform SOEs into legal entities, while simultaneously retaining State property ownership. To accomplish the reform objectives, the State-owned Industrial Enterprises Law of China was adopted in 1988 (SOEs Law). The SOEs Law of 1988 recognized that: The property of the enterprise shall be owned by the whole people (equivalent to the notation of "State"), and shall be operated and managed by the enterprise with the authorization of the State in line with the principle of the separation of ownership and managerial authority. The enterprise shall enjoy the rights to possess, use, and dispose of, according to law,[16] the property, which the state has authorized it to operate and manage. The enterprise shall obtain the status of a legal person in accordance with law and bear civil liability with the property, which the State has authorized it to operate and manage. The enterprise may, in accordance with the decision of competent government agencies, adopt contract, leasing or other forms of systems of managerial responsibility.[17] The corporate governance structure introduced by the SOEs Law of 1988 has three salient features. First, the factory director (manager) assumes overall responsibility for management of the enterprise.[18] This means that the factory director acts as the legal representative of the enterprise and exercises leadership in the production, operation and management of the enterprise. In other words, "the factory director shall occupy the central position in the enterprise."[19] The law also requires the establishment of a management committee or another consulting body to assist the factory director in making decisions on important issues.[20] Second, the SOEs Law provides that the local organization of the Chinese Communist Party guarantees and supervises the implementation of the Party and States' guiding principles and policies.[21] Third, the enterprise is allowed, through the employees' congress and other forms, to practice democratic management.[22] Trade unions are permitted to represent and safeguard the employees' interests and employees may organize and participate in democratic management and supervision.[23] Between 1987 and 1993, the contracting system (Cheng Bao Zhi) was adopted in many SOEs to govern their relationship with the State and factory director. In April 1987, the Central Committee of the Chinese Communist Party and the State Council adopted a contracting system in SOEs nationwide.[24] According to the contracting system, the two parties to the contract are the government agency and the SOE, as represented by its chief executive officer (CEO).[25] The CEOs of SOEs are selected through a competitive process.[26] They act as the legal representatives of the SOEs and take full responsibility for their management.[27] The basic principle of the contracting system was to "lock the minimum amount of profit for the SOEs to pay to the State" and entitle the SOEs "to keep the remaining profit, but [remain] liable for paying the fixed amount to the State even if [the] SOEs have not made [a] satisfactory profit."[28] As a result of the contracting process, governmental intervention in the operation of SOEs was significantly diminished, such that SOEs gained more freedom to make their own business decisions. The SOEs were allowed to retain part of their profits after completing the government's assignments. As one economist commented, with the help of the contracting system, "the State fiscal revenue was reasonably increased. The loss-making SOEs only accounted for 10% among all the SOEs. There was no enterprise having difficulties in paying their employees, and there was no enterprise going bankrupt or laying off their employees."[29] For a number of reasons, the contracting system and the transitional model it represented failed to provide much in the way of SOE reform. First, it was very difficult to identify a reasonable minimum amount of profit for the SOEs to pay to the State.[30] Second, although most SOEs enjoyed benefits when they were profitable, they were unable to pay the fixed amounts required to the State when they sustained losses.[31] Third, there was a fair amount of exploitation of the assets of SOEs for personal use.[32] Finally, too little SOE profits were retained for development purposes, leaving insufficient resources for future expansion.[33] With these problems in mind, SOE reform in 1993 reflected a desire to build a modern enterprise system compatible with the market economy.[34] To achieve this goal, Chinese policy makers began to look to the modern corporation model in the Western world for possible solutions. II. Modern Corporate Model (1993 - Present) After China’s late paramount leader, Mr. Deng Xiaoping, called for an introduction of the market economy in China in 1992, one of the official goals of SOE reform was to "set up [a modern corporate system][35] in the majority of backbone large and medium-sized SOEs."[36] SOE reform policy also accelerated the process of corporate legislation, which was perceived as an essential legal instrument for corporatizing SOEs.[37] China is in the process of restructuring many traditional SOEs. The corporations in China that were restructured from once traditional SOEs are referred to as SOE-corporatized corporations. Compared with traditional SOEs, the ownership structure of SOE-corporatized corporations includes more well-defined shareholder rights than its traditional counterpart and promotes increased efficiency and accountability. When compared with corporations held by individuals or private institutions, SOE-corporatized corporations are expected to present more sophisticated and difficult governance issues during the current transition period from the planned economy to the market economy. The Corporate Law of 1993 provides solid legal foundations for the transformation of SOEs into different business corporations, including wholly State-owned corporations, closely held corporations and publicly held corporations. A. The Corporate Law In China today, the most important legal sources of corporate governance rules are the laws passed by the National People's Congress (NPC)[38] and its Standing Committee.[39] These laws include the Corporate Law of 1993 (Corporate Law)[40] and the Securities Law of 1998 (Securities Law).[41] In addition to legal sources, the memorandum of associations (Gongsi Zhangcheng)[42] of each corporation plays an active role in designing a corporation's governance structure. The Chinese memorandum of associations is comparable to a document that would combine both the articles of incorporation and bylaws of an American corporation.[43] The Corporate Law requires corporations to form three statutory and indispensable corporate governing bodies: (1) the shareholders, acting as a body at the general meeting; (2) the board of directors; and (3) the board of supervisors.[44] In addition, the Corporate Law introduced two new statutory corporate positions - the Chair of the board of directors (Chair) and the chief executive officer (CEO).[45] At first glance, the Chinese corporate governance structure may appear similar to the two-tier system of corporate governance in Germany. German corporations are similarly governed by a board of directors and a supervisory board.[46] There are substantial differences, however, between the German and Chinese systems of corporate governance. For example, in China, there is no hierarchical relation between the board of directors and the board of supervisors, and both directors and supervisors are appointed by, and may be dismissed by, shareholder action.[47] In contrast, the German supervisory board oversees the board of directors, and the members of the board of directors are appointed by, and may be dismissed by, the board of supervisors.[48] Chinese corporate law recognizes only two types of corporations: closely held corporations (Youxian Zeren Gongsi) and publicly held corporations (Gufen Youxian Gongsi).[49] Within each category of corporation, there are special provisions applicable to subcategories, organized according to the corporation's ownership structure. The governing bodies in closely and publicly held corporations are substantially the same.[50] 1. Closely Held Corporations Although governance rules for closely held corporations are similar to those of publicly held corporations, Chapter 2 of the Corporate Law contains a number of special provisions applicable only to closely held corporations. For example, a corporation with "few shareholders" and "small capital size" is not required to set up a board of directors, but rather is only required to have a single executive director who may serve concurrently as the manager. In addition, this type of corporation does not need an entire board of supervisors, as one or two supervisors will suffice.[51] In general, the voting rights of shareholders in closely held corporations are exercised in proportion to their capital contributions.[52] If a shareholder wishes to assign his capital contribution to non-shareholders, however, the consent of greater than 50% of the total number of shareholders is required.[53] The Corporate Law has different rules for closely held corporations wholly-owned by the State and those that include a foreign investor. These rules are discussed below. a. Wholly State-owned Corporations A wholly state-owned corporation is defined as "a limited liability corporation invested and established solely by the State-authorized investment institutions or government agencies."[54] Under the Corporate Law as originally enacted, there were only two corporate bodies statutorily required in wholly State-owned corporations: the board of directors and the CEO. Because there are no general meetings of shareholders and no board of supervisors in state-owned corporations, the board of directors and the CEO have more governing powers than their counterparts in other types of corporations. State-authorized investment institutions or government agencies have the power to make decisions on important corporate issues.[55] Certain types of transactions, such as corporate mergers, divisions, dissolutions, increases and reductions of capital, and issuances of corporate bonds, may only be decided by the State-authorized investment institutions or government agencies.[56] With generous powers in the hands of insiders of wholly State-owned corporations, many senior executives in SOEs prefer to transform their SOEs into wholly State-owned corporations.[57] Unfortunately, however, the generous powers provided to the management of wholly State-owned corporations have led to management irresponsibility in recent years.[58] In order to strengthen the supervisory mechanism in wholly State-owned corporations and to thereby address the problem of corruption, the Standing Committee of the NPC amended the Corporate Law on December 25, 1999, to require wholly State-owned corporations to establish boards of supervisors, whose members shall be chosen by the State Council, the State-authorized investment institutions or by government agencies.[59] Pursuant to this amendment, there shall be no less than three supervisors, and the board of supervisors should include at least one employee representative.[60] The board of supervisors enjoys a number of powers delegated by the State Council, in addition to its ability to examine corporate financial affairs and supervise directors and executives.[61] b. Foreign Invested Corporations Another special provision applicable to closely held corporations concerns those that are foreign-invested. In China, there are three types of foreign-invested corporations: (1) wholly foreign-invested enterprises; (2) Chinese-foreign equity joint ventures; and (3) Chinese-foreign contractual joint ventures. These types of foreign invested corporations are governed by three separate laws: the Wholly Foreign-Invested Enterprises Law of 1986,[62] the Chinese-Foreign Equity Joint Ventures Law of 1979,[63] and the Chinese-Foreign Contractual Joint Ventures Law of 1988.[64] These three statutes were enacted before that of the Corporate Law; thus the relationship between the foreign investment legislation and the Corporate Law is left unclear. The Corporate Law attempts to address this issue by providing that it "shall apply to limited liability corporations with foreign investment; where legislation on Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures and wholly foreign-invested enterprises provide otherwise, such provisions shall prevail."[65] It is expected that China will join the WTO in the near future and thus will become obligated to provide national treatment to foreign investors coming from other WTO members. Once China joins the WTO, it is also expected that the statutes regulating foreign investments will be repealed, and Chinese-invested corporations and foreign-invested corporations will be governed by the same corporate governance norms. 1. Wholly Foreign-invested Enterprises Wholly foreign-invested enterprises may take different legal forms, such as a corporation, partnership or sole proprietorship. The Wholly Foreign-invested Enterprises Law[66] is generally silent on corporate governance structure. The corporate governance structure of these entities is therefore governed by the law applicable to their specific form of entity. 2. Chinese-foreign Equity Joint Ventures Chinese-foreign equity joint ventures must be organized as closely held corporations,[67] but neither a general meeting of shareholders nor a board of supervisors is required. The composition of the board of directors is to be stipulated in the contract and the memorandum of associations, after negotiation among the shareholders. The Chair and Vice-Chair shall be chosen through consultation by the parties to the venture or elected by the board of directors. If the Chinese or foreign parties take the office of the Chair, the other party shall assume the office of the Vice-Chair. The CEO and associate CEO shall be chosen from among the various shareholders.[68] 3. Chinese-foreign Contractual Joint Ventures Both equity joint ventures and contractual joint ventures are invested in by foreign corporations, enterprises, economic entities and individuals, in collaboration with Chinese corporations, enterprises and economic entities. There are, however, a number of differences between equity joint ventures and contractual joint ventures. First, equity joint ventures must take the form of closely held corporations.[69] This organizational form is not required for contractual joint ventures. Only contractual joint ventures may acquire the status of a Chinese legal person in accordance with the law.[70] Second, the investors of equity joint ventures share dividends and undertake risks and losses in accordance with the percentage of shareholders in the registered capital,[71] whereas the investors of contractual joint ventures do so as prescribed in the contractual joint venture contract.[72] Third, the investors of equity joint ventures usually receive monetary dividends,[73] while the investors of contractual joint ventures receive either monetary dividends or products as the form of investment return. Fourth, foreign investors of contractual joint ventures may seek return of their capital contribution before the company is wound up, if all of the fixed assets of the contractual joint venture belong to the Chinese party and it is agreed upon by both the Chinese and foreign parties.[74] In most other respects, contractual joint ventures organized as closely held corporations are governed in a similar manner to equity joint ventures.[75] 2. Publicly Held Corporations A publicly held corporation is also called a joint stock limited company (Gufen Youxian Gongsi). The Corporate Law defines a publicly held corporation as a corporation in which the "total capital shall be divided into equal shares, shareholders shall assume liability towards the company to the extent of their respective shareholdings, and the corporation shall be liable for its debts to the extent of all its assets.”[76] Publicly held corporations can be categorized into listed corporations and non-listed corporations. A listed corporation refers to "a joint stock limited corporation which has its issued shares listed and traded on stock exchanges with the approval of the State Council or the department of securities administration authorized by the State Council."[77] The shares of a non-listed corporation are not listed on a stock exchange. Publicly held corporations are governed by both the Corporate Law[78] and the Securities Law.[79] B. Modern SOEs The modern SOE is governed by both the SOEs Law of 1988 and the Corporate Law of 1993. The SOEs Law requires modern SOEs to: (1) clearly establish ownership; (2) provide well-defined rights and responsibilities; (3) separate the enterprise from government; and (4) employ principles of scientific management.[80] Pursuant to the Corporate Law of 1993, shareholders of modern SOEs are entitled to enjoy their shareholders' rights in proportion to their shares and are obligated to transfer ownership of their investment to the corporation.[81] Further, corporations enjoy full ownership over the capital contributed by shareholders, as well as ownership of the profits and properties subsequently acquired by the corporation. NEED CITATION Shareholders are also entitled to dividends after the dividends are declared, and to net assets when the corporation is liquidated. NEED CITATION Finally, the shareholder's personal property, including their capital investment, is separate and independent from the corporation's property. NEED CITATION The phrase "well-defined rights and responsibilities" refers to a clear and certain delineation of rights, obligations and liabilities between and among the corporation, shareholders, employees, creditors, consumers, and other stakeholders. Eight legal relationships are specifically enumerated: (1) the relationship between the corporation and its shareholders, including a corporate parent; (2) shareholder relationships among themselves; (3) the fiduciary relationship between a corporation and its directors, supervisors and top management; (4) the relationship between a corporation and its creditors; (5) the relationship between shareholders and creditors; (6) the legal relationship between a corporation and its employees; (7) the relationship between a corporation and its competitors; and (8) the relationship between the corporation and its consumers. NEED CITATION The SOEs Law also promotes a policy of separation of government from the enterprise. However, as will be discussed below, this goal has been somewhat difficult to achieve. The term "scientific management" was coined to tackle the problems of "random decision-making, relaxed management, undisciplined job performances and low-level managerial abilities"[82] inherent in SOEs. NEED CITATION Scientific management describes the goals of achieving democratic decision-making processes, efficient execution and strong supervision over decision-making. Reaching these goals requires establishment of effective mechanisms of incentive and restraint and the implementation of checks and balances inside the corporate governance structure. The Corporate Law of 1993 also provides generous privileges for SOE-corporatized corporations, which are unavailable to other businesses. For instance, "there must be five or more sponsors for incorporating a publicly held corporation, while a waiver is granted where a SOE is restructured into [a] publicly held corporation. . . ."[83] Another example of a privilege is that a "publicly held corporation, a wholly State-owned corporation, and a closely held corporation incorporated by two or more SOEs or State-owned investment entities may, for the purpose of raising funds for its production and operation, issue corporate bonds."[84] Other closely held corporations are not qualified to issue corporate bonds. Beginning in early 1992, some SOEs were corporatized on a pilot basis. After implementation of the Corporate Law in 1993, government agencies have been making greater efforts to push forward SOE corporatization. The Central government selected 100 SOEs for corporatization.[85] Based on a survey conducted by the Department of Enterprise Reforms,[86] ninety-eight SOEs had been corporatized by the end of 1998.[87] One SOE became bankrupt and the other failed to provide information for the survey. Among the corporatized SOEs, sixteen were transformed into publicly held corporations, sixteen were transformed into closely held corporations, and sixty-two were transformed into wholly State-owned corporations with various subsidiaries.[88] Four SOEs still operate under the traditional enterprise regime.[89] During the period between 1995 and 1998, forty-eight pilot SOEs were transformed into listed corporations, or parent corporations of listed subsidiaries, and raised funds of RMB 3.9 billion Yuan from overseas securities markets.[90] Corporate governance changes do not necessarily produce immediate profits, however. In a survey conducted by the China Confederation of Enterprises in 1999 (Confederation of Enterprises Survey),[91] only 14% of the 1,235 SOE managers reported better financial performance following the corporatization,[92] while 55% of the respondents reported better corporate governance.[93] As a pillar of China's national economy, SOEs have significant social and political implications for contemporary China. However, due in large part to the side effects of several decades of a highly centralized economy and radical changes in market conditions, many SOEs have run into serious financial difficulties. According to the Ministry of Finance, "there were 238,000 non-commercial SOEs with RMB 13,500 billion Yuan [$1,626.5 billion in USD] of State assets in 1998. The number of large SOEs is only 9,357, and medium-sized and small SOEs account for 96% of the total number of SOEs. However, more than 45% of the assets are owned by the smaller firms, which in many cases engage in low-level repetitive production and are not highly competitive."[94] In early 1999, "about 49% of Chinese large and medium-sized SOEs were suffering the loss."[95] Moreover, it appears that internal corporate governance itself is in need of improvement in most SOEs. For instance, although the governing corporate bodies in many SOE-corporatized corporations have been established, they do not function very well. According to a survey conducted by the State Committee of Economy and Trade, only twenty-two of ninety-eight corporations have been conducting shareholder meetings.[96] Among the twenty-two corporations that have been holding shareholder meetings, the meetings have been properly conducted in only eleven of these corporations.[97] The shareholder meetings in seven corporations have been relatively effective, and the shareholder meetings in four corporations have been moderately effective.[98] On the other hand, ninety of ninety-eight corporations have set up boards of directors. NEED CITATION Most boards of directors (seventy-five) have been functioning very well, while in the other fifteen corporations, boards play a limited role. NEED CITATION Seventy-eight of the ninety-eight corporations have set up boards of supervisors. NEED CITATION Two-thirds of the boards of supervisors have been functioning well. NEED CITATION As far as the appointment of executives is concerned, government agencies have been playing decisive roles in fifty-two corporations, and boards of directors have been playing decisive roles in thirty-five corporations. Other approaches have been adopted in ten corporations. In short, twenty-nine pilot corporations admit that their corporate bodies have been functioning irregularly.[99] In addition to the 100 pilot samples mentioned above, other SOE-corporatized corporations, as well as listed corporations, have been facing similar governance problems. Although many SOEs have been transformed into business corporations, their managements still tend to avoid the corporate governance requirements imposed by the Corporate Law and retain the traditional SOE governance model.[100] Some listed corporations do not convene regular board of director meetings, thus there is little check on managerial power.[101] There are also some directors who do not take the board meeting rules seriously.[102] In some corporations, all directors act as managers and executives.[103] The excessive overlap between directors and executives frequently causes problems of insider control and managerial corruption.[104] In some cases, executives are employed in both the parent corporation and the subsidiary, which greatly threatens and weakens the shareholders' power. In corporations with highly centralized shareholding structures, the controlling shareholders are extremely dominant and, therefore, minority shareholders are unable to enjoy proper protection.[105] Although several listed corporations, including Zhongxing Communication Co., Jiangnan Heavy Industry Co. and Xiaoya Electricity Co., have attempted to introduce independent directors and supervisors, the reality is that serious governance problems still exist.[106] III. Proposals for Governance Reform As noted above, in spite of current efforts at reform, improvements are needed in Chinese corporate governance. This Part identifies some of the issues that need to be addressed in order to achieve further governance reform in SOE-corporatized corporations and offers some modest suggestions. A. Repeal of the SOEs Law The SOEs Law of 1988 was enacted in connection with the transitional model of corporate governance whereas the Corporate Law of 1993 is aimed at governing modern corporations. Today, however, many SOEs are still governed by the SOEs Law and its regulations. In many cases, provisions of the Corporate Law and the SOEs Law and regulations conflict.[107] As a first step in reform, we propose that as China corporatizes its SOEs, the SOEs Law and its subordinate regulations should be repealed. Rather, all SOEs should be governed by the Corporate Law. This not only simplifies corporate governance but also applies the most current Chinese thinking to all Chinese corporate enterprises. B. Build Autonomy Historically, the government has played a key role in corporate governance. In the period of the planned economy, the civil society was almost replaced by the political state, and SOEs and government agencies were commingled to a great extent. Moreover, SOEs were generally regarded as government branches. Although some people described the relationship between the government and an SOE as "the relationship between a father and his son," it is more accurate to describe it as the relationship between "a father and his hand,"[108] because an SOE, like a hand, did not have its own legal independence. China is in a transition period from a planned economy to a market economy. Some government agencies still treat SOE-corporatized corporations like traditional SOEs, and control them in traditional ways using excessive administrative power. Such control includes requiring approval of decisions already made by the board of directors, bypassing the general meeting of shareholders, directly appointing directors and executives and interfering with daily operations. For example, a survey in early 1999 reveals that "of the enterprises which are undergoing the reform of establishing a modern enterprise system, officials are still nominated by government departments instead of the board of directors."[109] In the survey conducted by China Confederation of Enterprises, 46% of the respondent managers replied that they preferred to be selected by the board of directors, and only 7% said that they prefer to be selected by government agencies.[110] Approximately 51% of the respondents believe that their most difficult job is to maintain a good relationship with government agencies.[111] Although 56% of the managers said that excessive fee collection and excessive fine and donation solicitation from the government agencies have been mitigated, 11% of them believe that the problem is still very serious, and 33% believe that it is serious.[112] The survey also reveals that most managers are so busy dealing with unlimited and repeated inspections and examinations organized by government agencies, that their business management is compromised.[113] The survey conducted by the Confederation of Enterprises also reveals that only 8% of the managers are fully satisfied with the government restructuring progress which began in 1998, 66% are basically satisfied with the process, and 25% are not satisfied.[114] Approximately 13% of the respondents said that corporations were unable to be independent from the government following the occurrence of the government restructuring and SOE corporatization; 59% of the respondents are not sure about this question, and 28% said that the corporations will become independent from the government.[115] With respect to management activities, over 50% of respondent managers reported that their SOEs have the right to buy materials, to sell products or services, to set up internal bodies, to decide employees' salaries and bonuses, and to dispose of the SOE-owned funds.[116] Approximately 25% of the respondent managers reported that their SOEs were unable to resist improper donation requests from the government or other organizations, or to resist governmental decisions with respect to joint ventures, mergers, or disposition of enterprise assets. Approximately 81% of the respondent managers said that they are appointed by government agencies. The main reason for the absence of comprehensive business autonomy in many SOEs is the old system of inseparability or commingling that occurs between the government and the enterprises.[117] As these surveys demonstrate, there is still a long way to go before SOEs and SOE-corporatized corporations become truly independent from government agencies. In order to build sound corporate governance and corporate autonomy, it is imperative to disassociate business corporations from government agencies, to reduce government intervention in business affairs, and to substantially liberalize corporate business activities from government control. In fact, the Chinese government has recently recognized this principle and promised to separate the government from corporate functions.[118] Yet, as agents of the State shareholder, government agencies should be permitted to exercise shareholders' rights on behalf of the State shareholder, but not interfere in the daily corporate management and operations of the business, or intervene in lawful corporate decision-making processes. The State shareholder should enjoy the same shareholder rights as do the private investors. In terms of personnel and financial controls, however, government agencies should fully disassociate themselves from the SOE-corporatized corporations under their control.[119] In light of their public role, it is appropriate for government agencies to intervene in the market in some ways, however. Governmental intervention can be useful for providing: (1) respect for corporate autonomy; (2) protection of fair competition; (3) guidance of the micro-economy; (4) facilitation of achievement of corporate goals; and (5) fulfillment of business opportunities and other legitimate interests, including government procurement.[120] Micro-control legislation should give equal attention to the controller and the controlled and principles of legitimacy, efficiency and fairness should be respected when government intervention is introduced. Given the difference in the legal nature between private rights and public power, the shareholders' rights enjoyed by the State and the administrative powers possessed by government agencies should be separated and exercised by different entities. In this regard, it is extremely important to identify the proper institutions or organizations acting as agents of the State shareholder. C. Redefine the Relationship Between Old and New Corporate Bodies Prior to adoption of the Corporate Law, the main governance bodies in the traditional SOEs were the committee of the Communist Party, the trade union and the meeting of employees' representatives. As noted above, modern Chinese corporations are now governed by the general meeting of shareholders, the board of directors and the board of supervisors. However, the old corporate bodies continue to play a role. It has been held that (CITATION) "[p]arty organizations should perform duties according to the Party Constitution, and trade unions and employees' congresses should carry out their respective duties in accordance with relevant laws and regulations."[121] Yet overlap between the new and the old corporate bodies is still possible. As stated in the Decision on SOEs Reform, "Party committee leaders of wholly State-owned corporations and State share-holding corporations can be included in [the] board of directors and [the] board of supervisors in accordance with legal procedures, and employees' representatives should be included in the boards of directors and supervisors."[122] Moreover, "[t]he Party secretary and the Chair of [the] board of directors can be the same person, but in principle, the Chair of [the] board of directors and [the] chief executive officer should be two separate people."[123] Despite the roles of the old governing bodies, "it is necessary to give full play to the role of [the] board of directors in making unified decisions on major issues and the effective supervisory role of [the] board of supervisors."[124] To achieve the objectives of the Corporate Law reforms, the three new corporate bodies created by the Corporate Law should be permitted to function independently. D. Improve the Function of the General Meeting of Shareholders The general meeting of shareholders in China is considered the supreme sovereignty in corporate governance, or "the organ of power of the corporation."[125] By statute, the shareholders are provided the following comprehensive decision-making powers at the general meeting: (1) to make decisions regarding corporate policies on business operation and investment plans; (2) to elect and replace directors and to determine their remuneration; (3) to elect and replace shareholder supervisors and to determine their remuneration; (4) to examine and approve the board of directors' and board of supervisors' reports; (5) to examine and approve the corporate fiscal financial budget and final account plans; (6) to examine and approve the corporate profit distribution and making up of loss plans; (7) to make resolutions on the increase or the reduction of the corporation's registered capital; (8) to decide whether to issue corporate bonds; (9) to make decisions regarding corporate mergers, divisions, dissolution and liquidation; and (10) to amend the corporate memorandum of associations.[126] In the United States, some of these powers, such as the power to approve plans of corporate profit distribution and the power to determine the directors' remuneration, are reserved to the board of directors rather than to the shareholders. The rationale behind the institutional arrangement in China is that the shareholders are considered the ultimate source of authority. In other words, the powers enjoyed by the board of directors and the board of supervisors are derived from the shareholders rather than from the legislature. This corporate governance philosophy resembles the political governance philosophy expressed by the Chinese Constitution. Pursuant to the Constitution, the "NPC. . .is the highest organ of State power."[127] “All the executive branches, judiciary branches and procurator branches shall be elected by [the] people's congress, responsible to [the] people's congress, and are subject to supervision by [the] people's congress.”[128] In other words, the NPC is the supreme power center in the Chinese political life. All other state bodies derive their powers from the NPC. Given the similarities between the governance structure in the political states and that in business corporations, it was natural for the Chinese legislature to extend the rationale of the political governance regime into corporate life, and to compare the meeting of shareholders to the NPC. As Chinese Corporate Law undergoes further revision, the question remains whether shareholders should keep their current powers, or whether certain powers, particularly substantial managerial powers, should be transferred to the board of directors. It is reasonable to maintain the status quo in order to deal with excessive managerial power, particularly during a transitional period. However, it may be wise to consider the corporate governance arrangements in other legal systems, and perhaps reduce some powers currently possessed by the shareholders in order to harmonize the Chinese system of corporate governance with global investment requirements. We propose some refinement in the Corporate Law. The current Corporate Law lists statutory powers enjoyed by the shareholders and the board of directors. By granting various powers to both bodies, it is unclear which body prevails in the case of conflict. For example, if the board of directors exercises a power not prescribed by the legislature and makes a decision, it will become an open question of whether the shareholders will have the power to repeal the decision. Another question under Chinese law concerns whether the shareholders may exercise the powers provided exclusively to the board of directors. Under current Chinese legislation, the answer to each of these questions is that the shareholders may repeal decisions of the board of directors and even exercise powers purportedly reserved exclusively to the board. To avoid unnecessary power struggles between the corporate bodies, one option is to limit the power of shareholders to the items prescribed by the legislature, while reserving all other managerial powers to the board of directors and all other supervisory powers to the board of supervisors. Another issue concerns the practical realities of the general meeting of the shareholders. For example, although legally the general meeting of shareholders is very powerful in China, in reality, the meeting is often simply a rubber stamp for the wishes of the majority of shareholders. There is little or no opportunity for minority shareholders to be heard. Oppression of minority shareholders is a serious issue. As noted by a reporter from the China Securities Daily, shareholder meetings can be quite boring.[129] First, the reporter observed that there is an increasing number of inside shareholders attending the meetings, particularly employee shareholders who are amicable to management, and that the number of minority shareholders and outside shareholders attending the meetings is declining.[130] The reporter cited one example of a shareholders meeting where seven auditing reporters attended the meeting, while only six participating shareholders were in attendance.[131] Second, the reporter found that the proceedings were often very mechanical—the Chair or the CEO always read the already published annual report, without adding any meaningful discussion regarding development, planning, the budget or management goals for the upcoming year. After reading the report, the Chair or CEO usually asked the shareholders to vote without offering them an opportunity to ask questions. Finally, shareholders rarely asked questions during the meetings. For instance, in five of the seven shareholder meetings audited by this reporter, no shareholder asked a single question.[132] Moreover, the voting results were almost always 100% in favor of the resolutions proposed by management.[133] There are several possible explanations for the inactivity of shareholders at the general meeting. In addition to factors such as time, travel expenses and inability to influence results, the main explanation may be that management appears indifferent to the concerns of minority shareholders. Some directors refuse to disclose more information than published in the annual reports, believing that they will have fewer difficulties with shareholders if they present them with minimal information.[134] However, in recent years, some minority shareholders have begun taking their rights more seriously. For instance, when Shengli Co. convened its shareholders' meeting in the year 2000, many minority shareholders attended either personally or sent agents or representatives to attend.[135] Fifteen hundred shareholders representing 26,260,000 shares appointed their agents to cast votes on their behalf.[136] At least twenty shareholders, each holding fewer than 100 shares, attended the shareholders' meeting.[137] In order to provide guidelines for shareholder meetings in listed corporations, the Chinese Securities Regulatory Commission (CSRC) issued the Standard Opinions on Meeting of Shareholders in Listed Corporations (Standard Opinions) on February 23, 1998, and amended it on May 18, 2000.[138] This document has enhanced the Corporate Law in a number of respects. For example, the Standard Opinions recognizes the minority shareholders' right to request that the board of directors hold a special shareholders' meeting.[139] If the board of directors denies the request, the qualified shareholder may notify the other shareholders and convene the special meeting. Unfortunately, the purpose of the Standard Opinions, as evident from inclusion of the word "opinions" in its name, is to "guide the listed corporations to convene meetings of shareholders."[140] Thus, it is very difficult to classify its requirements as mandatory or even legally binding. Given the sophisticated problems associated with meetings of shareholders and the insufficiency of regulations governing this issue, it is necessary to further improve these rules. We therefore propose a number of amendments to the Corporate Law to address the issues presented above. Our first proposal is to incorporate the Standard Opinions into the Corporate Law which would make the requirements of the regulations more consistent and coherent. After the revision of the Standard Opinions in May 2000, the shareholders of Xingfu Shiye Corporation convened a special shareholders' meeting. This was the first reported case of a special meeting of shareholders convened by the shareholders rather than by the board of directors.[141] Mingliu Investment Limited Corporation owned 60 million of 312.8 million outstanding shares of Xingfu Shiye Corporation. After Mingliu's proposal to convene a special meeting of shareholders was denied by the board of directors, Mingliu proceeded to send out notices and convened the meeting as provided by the Standard Opinions.[142] Some commentators considered this a positive event because it meant that the board of directors was not the sole decision-maker regarding the convention of special meetings of shareholders.[143] Second, shareholders should be excluded from voting on issues in which they are interested parties so as to curb the increasing number of interest-conflicting transactions in listed corporations. This is also provided for in the Standard Opinions. Current legal rules focus only on information disclosure and make it easy for parent corporations to allocate their profits from business transactions with their subsidiaries. The Standard Opinions provide that "the shareholders who are the parties to the business transactions between themselves and the listed corporations, should not cast their votes on such transactions, and the votes held by such shareholders should not be included in the total votes represented by the shareholders at the meeting of shareholders."[144] Further, the shareholder's right to question management and to offer proposals should be strengthened. These two rights, along with the right to information, are mentioned in the Corporate Law only generally.[145] To make the rules more workable, they should delineate appropriate procedures for shareholder submission of proposals and requests for information. A cumulative voting mechanism for the election of directors might also be made available to provide minority shareholders a voice in corporate governance. The current Corporate Law is silent on this point. This provision could be made optional, as is true generally throughout the United States.[146] Finally, detailed provisions should cover issues such as solicitation of proxies, the validity of voting agreements and exceptions to the general rule of "one share, one vote" (for example, non-voting shares, multiple voting shares, corporate self-owned shares, interlocking shares, etc.). Additionally, modern telecommunication technologies, especially Internet services and video conference technologies, might be considered as alternative ways to provide for the meetings of shareholders in order to make it easier for minority shareholders to participate in the corporate decision-making process. Modern telecommunication technologies could be employed along with the traditional face-to-face general meetings of shareholders. E. Recognition of Multiple Legal Representatives Both the Chair of the board of directors and the CEO are statutory and indispensable corporate positions in China. The Chair holds the following statutory powers: (1) to chair the meetings of shareholders and to convene and chair the meetings of the board of directors;[147] (2) to examine the implementation of resolutions passed by the board of directors;[148] (3) to sign shares and bonds issued by the corporation;[149] (4) to act as the sole corporate legal representative;[150] and (5) to exercise some powers of the board of directors under the authorization of the board when the board is not in session.[151] In addition, the Chair, as a member of the board of directors, may cast one vote at board meetings.[152] Decisions are made by majority rule.[153] The position of the CEO can be described as follows. The CEO is an agent of the corporation and enjoys the rights conferred by the Corporate Law[154] and the corporate memorandum of associations. As an employee, the CEO enjoys the rights and interests recognized through the employment contract and by labor laws. Under the Corporate Law, the CEO takes general responsibility for daily corporate operations.[155] Furthermore, the CEO is hired and dismissed by the board of directors,[156] and therefore is responsible to the board.[157] Because the Corporate Law recognizes the Chair as the sole corporate legal representative, some Chairs believe that they are the paramount corporate leaders and usurp the authority of the shareholders and directors.[158] In other words, they confuse the position of legal representative recognized by the SOEs Law with that of the Corporate Law. Under the SOEs Law, the manager, as the only legal representative in the SOEs, not only has the authority to represent the SOE in transactions with third parties, but also enjoys paramount decision-making and executive power. One fundamental change introduced by the Corporate Law is that managerial powers have been redistributed between several corporate bodies. The power to represent the corporation under the SOEs Law is held by the Chair of the board of directors. The general meeting of shareholders holds the most fundamental decision-making power. The CEO holds the detailed daily decision-making power. The board of directors holds the mid-level decision making power. The traditional internal executive powers are divided between the board of directors and CEO. Therefore, the power attached to the legal representative, namely, the Chair of the board of directors, has been greatly reduced. Under current legislation, however, the Chair is the only corporate legal representative authorized to execute contracts and other legal documents on behalf of the corporation. If other directors are required to represent the corporation in legal relationships with third parties, they must receive a special authorization from the Chair to do so. It is thus inconvenient for a corporation to enter transactions when the legislation permits only a single legal representative. Law reform, therefore, should include recognition of multiple corporate legal representatives in order to achieve transaction efficiency and to provide safeguards for third parties in the market. F. Improve the Role of the Board of Directors 1. The Function of the Board of Directors As mentioned above, the general meeting of shareholders is intended to be the power center in corporations under the Corporate Law. This institutional arrangement may be reasonable and feasible for closely held corporations with few shareholders. However, it is time consuming, expensive and inflexible for corporations to respond to frequent market changes and other business environments if shareholders are required to meet regarding every significant managerial decision. In the U.S., corporate power is generally delegated to senior officers. NEED CITATION Although, the Model Business Corporation Act requires that "all corporate powers shall be exercised by or under the authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation,"[159] According to the U.S. Model Business Corporation Act, "the management of the business of a publicly held corporation should be conducted by or under the supervision of such principal senior executives as are designated by the board of directors, and by those other executives and employees to whom the management function is delegated by the board or those executives, subject to the functions and powers of the board . . . ."[160] If China were to follow the American approach, the Chinese legislature would need to reallocate the powers between the meeting of shareholders and the board of directors, and thus transfer all the ordinary business managerial powers from the shareholders to the board of directors. Because the CEO also enjoys substantial managerial power under the current system, it is possible that there will be a conflict between the board of directors and CEO when both attempt to perform their statutory powers. To avoid these power struggles, it is essential that the legislation define the powers of the CEO in a coherent way. Thus, the board of directors instead of the shareholders should become the power center in the future Chinese corporate governance, and the board should have the authority to delegate some managerial powers to the CEO or to other senior executives. The board of directors should also have the authority to supervise the performance of individual directors, the CEO and other executives. In the U.S., committees of the board of directors, including executive committees, audit committees, nominating committees and compensation committees "assum[e] increasingly important roles in the governance of publicly held corporations."[161] However, the Corporate Law is silent on whether a Chinese board of directors is authorized to appoint committees to assist the board in making informed and conscientious decisions. No Chinese corporation, except for overseas listed corporations, maintains appointed committees. Nevertheless, the board of directors in overseas-listed corporations are encouraged to set up necessary professional committees with respect to matters such as strategic decision-making, auditing, and other issues, in order to improve corporate long-term development strategies.[162] In light of U.S. experience, it may be efficient to authorize boards of directors to act through committees of directors, while specifying the nondelegable powers to be exclusively exercised by the full board. This will protect shareholders' rights from being injured by excessive committee powers. As the Corporate Law recognizes the board of supervisors as a comprehensive corporate body, the audit committee, under the board of directors (similar to that in the U.S.), should serve under the supervision of the board of supervisors. To hold directors accountable and diligent, it may also be advisable to adopt a provision in the Corporate Law similar to section 8.25(f) of the U.S. Model Business Corporation Act, to provide that "the creation of, delegation of authority to, or action by a committee does not alone constitute compliance by a director with the standards of conduct."[163] 2. Independence In the U.S., as well as in other legal systems, outside directors play active and decisive roles in the governance of large publicly held corporations. According to a 1999 survey conducted by the Organization for Economic Cooperation and Development (OECD), the average percentage of independent directors on the board of directors is 62% in the U.S., 34% in the United Kingdom, and 29% in France.[164] Corporate Law in China has no mandatory requirements for appointing outside directors in large publicly held corporations. Since March 29, 1999, the CSRC has required overseas-listed corporations to "increase the number of outside directors. When the board of directors concludes its term of service, outside directors should hold more than half the board seats with at least two independent directors."[165] In order to prevent outside directors from becoming figureheads, the CSRC provided that "an outside director should have sufficient time and necessary knowledge to perform his/her duties. [To assist the] outside director [in] perform[ing] his/her duties, the corporation must supply [all] necessary information and materials."[166] In addition to imposing qualification requirements for outside directors, the CSRC also granted substantial power to outside directors. For example, according to the CSRC, "the views of an independent director should be specified in the board resolution." Moreover, a related transaction of the corporation may not take effect until approved by an independent director. Two or more independent directors may propose that the board of directors call for a special meeting of shareholders. Independent directors may directly report to the meeting of shareholders, the CSRC and other relevant agencies.[167] These CSRC requirements apply only to overseas-listed corporations. As far as domestically-listed corporations are concerned, the Guidelines on Memorandum of Associations in Listed Corporations provides an optional article according to which "the listed corporations may appoint independent directors when it deems it necessary."[168] However, the guideline has no requirement for a minimum number of outside directors, nor requirements regarding their duties. In October 2000, the State Committee of Economy and Trade permitted SOE-corporatized corporations to "have independent directors, who are independent from the shareholders, [that] take no position in the corporation."[169] In reality, some listed corporations voluntarily elect independent scholars to serve as outside directors and encourage them to play active roles. For example, in Xiao Tian'e Corporation, six out of the twelve members of the board are independent directors, and three directors may act together to veto board resolutions.[170] However, many independent directors find it difficult to exert any substantial influence, other than symbolic, on the board.[171] According to a senior Chinese economist and a former independent director in Lanzhou-based Huanghe Co., the independent outside directors are dispensable and only play a very limited role on the boards of most Chinese listed corporations.[172] This former director personally served as an independent director for approximately six months in Lanzhou-based Huanghe Co.[173] When the Chair and CEO of the company ran into serious confrontations, the independent outside directors could not function, and this director felt he had no choice but to resign.[174] Moreover, during his six months of service, he only had one opportunity to attend the meeting of the board of directors.[175] The indispensable position of outside and independent directors in listed corporations should be recognized by the Corporate Law on a mandatory basis. In order to provide outside directors with increased power, the legislature should determine a statutory minimum percentage of independent and outside directors in listed corporations. Nevertheless, a significant challenge will be balancing the need to encourage independent directors to play a more significant role in listed corporations, while avoiding corruption. For this purpose, both sufficient remuneration and enforcement of legal duties are essential for independent directors. G. Provide Restraint and Incentive Mechanisms for Directors and Executives Unfortunately, in Chinese SOEs and SOE-corporatized corporations, it is common for directors and executives to misuse their powers to seek personal gain or even to seize corporate property.[176] For instance, some SOE directors and managers control the power to appoint and dismiss treasurers, and therefore have the means to force treasurers to keep several different accounting books for fraudulent purposes.[177] For example, in one case, some perfect machines were sold as steel rubbish, while the corporation purchased more raw materials than it could use in the next several hundred years.[178] Some directors and executives made great personal profits during the process of corporate asset restructuring.[179] In one typical case, a former CEO of Anqing Paper Industry Corporation decided to establish three branches within the corporation, costing the corporation approximately $1,000,000 and generating no profit.[180] He also invested over $1,000,000 in technology innovation, but the company has yet to produce a qualified product.[181] In addition, he purchased waste paper, at an extremely high price, from someone with whom he had a personal relationship.[182] Some SOE officers behave appropriately during most of the SOEs life but become corrupted just before their retirement.[183] Because many corrupted directors and executives are approximately fifty-nine years old, their "sunset misbehavior" is referred to as the "phenomenon of fifty-nine."[184] Moreover, many corrupted directors and executives are famous figures who serve in several leadership positions at the same time, including Chair, CEO, secretary of the Communist Party Committee, chief of government agencies, etc.[185] In some SOEs, the Chairs and CEOs hold supreme managerial power so that other corporate bodies are unable to successfully challenge their authority.[186] The irresponsibility of directors and executives has resulted in the insolvency or bankruptcy of many SOEs. A survey conducted by the Anhui Province authorities in 1997 revealed that directors and executives were responsible for more than half of the insolvency or bankruptcy cases in 110 SOEs.[187] In addition, many managers in SOEs and SOE-corporatized corporations are unhappy with their current situation. In the Confederation of Enterprises Survey, 83% of the respondent managers said that the biggest obstacle to the growth of first rate directors and executives in China is the lack of an effective incentive and disciplinary mechanism; and 77% of the managers prefer more generous annual salaries as their major form of compensation.[188] Thus, current managers are almost as equally concerned about sound incentives and disciplinary rules for Chinese directors and executives. 1. Accountability In the U.S., directors and officers are deemed fiduciaries of the corporation because their relationship with the corporation and its shareholders is one of trust and confidence. As fiduciaries, directors and officers owe legal duties to the corporation and the shareholders. These fiduciary duties include the duty of care and the duty of loyalty,[189] and directors and officers are held personally accountable for breach of these duties. In contrast, in the Chinese traditional planned economy, the legislation is silent with respect to the duties and obligations of directors and executives. It has been common for directors and executives who have caused damage to one enterprise to be appointed by government agencies to serve in another enterprise.[190] Legal liability, including civil liability, has rarely been imposed on wrongdoers or corrupted directors and executives. In light of the significant deficiencies in the traditional governance structure of SOEs, the Corporate Law provides for a number of provisions relating to the duties of directors, supervisors and officers.[191] It also introduced some provisions dealing with the legal liabilities against them, including civil, criminal and administrative liabilities.[192] Unfortunately, the Chinese Corporate Law is silent on the director's duty of care and does not provide a workable test for monitoring directors' performance. In order to curb the incidents of misuse of corporate powers, it is necessary to employ mechanisms to hold the management of SOEs accountable for their behavior. China might, therefore, consider the U.S. approach to the duty of care, requiring directors and officers to exercise the degree of care in accordance with the knowledge, diligence and experience expected from an ordinarily prudent director in a similar position and under similar circumstances, and hold them personally accountable if they fail to do so.[193] The governing corporate bodies should assert claims whenever the corporate interest is damaged or threatened by directors' or executives' breach of duties. However, it is possible that the board of directors may refuse or fail to do so due to the amicable relationship between the wrongdoing directors and the remaining directors. The same phenomenon may occur with respect to the board of supervisors when some supervisors are close friends of the wrongdoing director. In the U.S., shareholders have a right, under certain circumstances, to bring a derivative action when the corporation suffers a wrong not redressed by the corporate directors.[194] Influenced by U.S. experience, Japan introduced derivative actions in 1950, with revisions in 1993.[195] Currently, the Chinese Corporate Law is silent on the issue of shareholder derivative suits. However, this silence has not prevented the Chinese courts from hearing shareholders' derivative actions. Nevertheless, Chinese shareholders are not very active in pursuing derivative actions. If China wishes to make derivative actions available to shareholders to provide a check on managerial abuse, it is necessary that the Chinese legislature provide some clear procedural rules. 2. Compensation One of the most serious problems with corporate governance in China is that many directors and executives are underpaid. In the forty-nine published annual reports of listed corporations for the financial year of 1998, forty-five listed corporations reported the salary of their directors and senior executives.[196] According to the report, 47% of the directors and senior executives received annual compensation below RMB 30,000 Yuan (about $3,500 in USD); 29% received annual compensation ranging from RMB 30,000 Yuan (about $3,500 in USD) to RMB 50,000 Yuan (about $6,000 in USD); 13% earned annual compensation ranging from RMB 50,000 Yuan (about $6,000 in USD) to RMB 100,000 Yuan (about $12,000 in USD); and 11% received over RMB 100,000 Yuan (about $12,000 in USD) in annual compensation. For instance, the Chair of the board of directors of China Light Motor Group Co. earned 40,000 Yuan (about $4,500 in USD) as annual compensation in 1998, while his corporation sold 1.5 million motorcycles that year. The Chair of another corporation, Houjian, earned only RMB 39,000 Yuan (about $4,400 in USD) as annual compensation in 1998, while his corporation sold RMB 8.2 billion (about $ 1 billion in USD) worth of products that year.[197] Since many Chinese directors and executives are underpaid, some of them are tempted to seek illegal income. Unreasonable compensation is likely to be one of the major reasons for the "phenomenon of fifty-nine." For instance, the former Chair and CEO of Hongta Tobacco Corporation embezzled $1.7 million (in USD) in corporate funds. His total lawful compensation during the seventeen years of serving his corporation was RMB 800,000 Yuan (about $96,000 in USD), while the corporation made profits of RMB 80 billion Yuan (about $9.6 billion in USD). In other words, his lawful income accounted for a mere 0.001 percentage of the corporation's total income.[198] It is essential to improve the compensation mechanism for directors and executives. To help attain this objective, innovative compensation mechanisms, such as stock option programs, should be made available to directors and executives in most SOE-corporatized corporations. In spite of their adoption by foreign-invested enterprises in China, stock option programs are relatively new to many SOEs and SOE-corporatized corporations. In Beijing, ten enterprises have been attempting to implement the stock option contract system, including Bofei Instrument-Making Corporation, Beijing Switch Gear Share-holding Limited Corporation, Tongzhou Subsidiary Corporation of Tongrentang, Shuangqiao Pharmaceutical Factory, Zhongguancun Real Estate Corporation, and Caishikou Department Store.[199] Among these corporations, Zhongguancun Real Estate Corporation and Caishikou Department Store have recently cancelled the project because their managers were concerned about the project's value.[200] According to a typical stock ownership plan, SOE managers receive a certain amount of stocks in installments at a fixed price during their tenure and can earn profits on these stocks in the future.[201] The managers must reinvest the profits in the enterprise by transferring them into new shares during the first three years.[202] The managers are also responsible for losses incurred during that period.[203] Only after the managers' performance is considered satisfactory may they cash in their stocks, or reinvest their profits in the enterprise two years after they leave the post.[204] Shanghai also carried out a trial reform rewarding senior executives of enterprises with stock options. "Directors of listed companies . . . are given a certain number of shares, but they can only be cashed in years later, sometimes even after their retirement. Passing a strict and comprehensive long-term assessment of the director's working performance is the prerequisite for obtaining the reward."[205] Stock option programs should be implemented nationwide. The legislature should offer guidelines for the content and validity of stock option contracts. For example, the legislature should provide guidelines on methods for determining proper rewards. Relatively moderate rewards may be unattractive to the directors and executives, while overly generous ones may be unfair to shareholders and employees. In assessing the performance of directors and executives, strong supervision is also necessary to ensure the objectivity and impartiality of the appraisal process.