On January 6, the 28th (2024) China Capital Market Forum, hosted by the China Capital Market Research Institute of Chinese University and Guorong Securities Co., Ltd., was held in Beijing.
The theme of this year's forum is "The Direction of China's Capital Market Reform: From Financing Market to Investment Market". Tian Xuan, deputy dean of PBC School of Finance, Tsinghua University, delivered a keynote speech at the meeting.
【Speech/Tian Xuan】
One
The theme of today's forum is "The Direction of China's Capital Market Reform: From Financing Market to Investment Market", which I think is a particularly relevant theme.
We also know that the Politburo meeting on July 24 last year proposed for the first time to boost investor confidence and activate the market. This is a very important shift because we used to be capital market-focused.
Last year's Politburo meeting began to say that we should activate the capital market, and the Central Financial Conference also put forward this point, and I also saw a series of policies issued by relevant departments. Do you think these policies are useful? Surely they are still useful, at least the stock market has risen for five minutes. But how useful is it? It doesn't seem to be very useful - if it were, we wouldn't have done four or five "3,000-point battles" now.
How to activate the capital market and how to boost investors' confidence, everyone's perspective is different, like Mr. He Qiang mainly talks about the "three highs" of the stock market, I agree. I would like to add a little from another angle today: How can we change from a financing market to an investment market, and really let investors invest in the capital market? I think it is very important to strengthen corporate governance and improve the quality of listed companies.
Forum site
Let me start with a brief overview of the current state of corporate governance.
First, the ownership of our businesses today is actually highly centralized.
I checked that in the past 20 years, more than 98% of listed companies have at least one controlling shareholder with more than 10% of the shares. In mature capital markets, such as the United States, a shareholder with more than 5% of the shares is very, very large, and more than 1% of the shares are generally considered to be major shareholders, while in China, we see that almost 98% of listed companies have at least one controlling shareholder with more than 10% of the shares.
Therefore, the conflict of interest in China is not like the western capital market, which is mainly a vast and scattered principal-agent relationship between small shareholders and management, and our country is mainly a principal-agent relationship between large shareholders and minority shareholders. In other words, major shareholders may exploit, encroach on, and squeeze small and medium-sized shareholders. This is the most prominent principal-agent issue in our country.
Second, the legal environment of corporate governance in our country and the direction of the capital market are market-oriented, legalized and internationalized.
From the perspective of the rule of law, because we have major shareholders, the dominant position of the controlling shareholder makes it impossible for the company's internal governance to operate effectively. This is based on the findings of an academic paper that if a company has a controlling shareholder, internal governance cannot be effectively carried out, and because of the high concentration of shareholdings, the mechanism of hostile acquirers such as "barbarians at the door" to force the chairman or senior management of a listed company to serve the minority shareholders conscientiously is also basically ineffective.
Therefore, the internal corporate governance of our country is ineffective, and the external corporate governance is actually ineffective. We mainly rely on the "visible hand" of the government, and law and regulation have become an important part of our corporate governance in China.
Third, China's state-owned enterprises are actually a very special existence, which plays a very important role in China's economy, and are also very different from private enterprises.
Fourth, the so-called ESG (note: the full name is "environmental, social, and corporate governance", an investment philosophy and corporate evaluation standard that focuses on the environmental, social, and governance performance of enterprises rather than financial performance), should we list ESG as the main factor in evaluating the development of enterprises?
For these four points, I will introduce them to you one by one.
Two
The first is the issue of principal-agent between the controlling shareholder and the minority shareholder in our country.
We have taken a look at it, and there are about two types of controlling shareholders: the first type is the government, and the government's goal is diversified, which is not only to make monetary gains, but also to implement national policies, such as economic growth, employment expansion, tax revenue and other non-monetary benefits, and at the same time, our controlling shareholders also have families and individuals, which of course aim to maximize monetary returns. Because of the existence of such a controlling shareholder, the majority shareholder will often obtain its own interests at the expense of the interests of minority shareholders - there is a lot of academic research on this, and I will not talk about it nonsense today, but all of them cite the literature published in top international journals to sort out.
The conflict of interest between major shareholders and minority shareholders is reflected in the following aspects: first, blatant theft or transfer of internal benefits. At the same time, the so-called "other accounts receivable" is actually a manifestation of the internal benefit transfer carried out by the major shareholders through capital lending, and most of the other accounts receivable belong to the controlling shareholders and their affiliated entities. This is an obvious evidence that major shareholders hollow out listed companies, or transfer interests, or exploit and defraud small and medium-sized shareholders.
Scholars have also found that when an enterprise is controlled by a controlling shareholder, related-party transactions will bring negative returns to the enterprise, and at the same time, it will also cover up its self-operation by manipulating information disclosure. Our country now implements the so-called registration system, and the core of the registration system is information disclosure, which requires truthfulness, accuracy, completeness and fairness. But we will find that many controlling shareholders will manipulate the market through information disclosure to cover up their insider trading.
For example, in order to realize the non-current shares held during the share split reform, the controlling shareholder will use its affiliated analysts to provide incorrect or unrealistic positive recommendations, so that the stock price will be at a high level during the lock-up period and make a profit. At the same time, the institutional factor of our principal-agent problem is also because the controlling shareholder sees that his stock liquidity is relatively low, and many of them cannot profit from stock trading before the reform of equity splitting, so as to obtain income from other channels.
The control of listed companies in our country is the so-called pyramid structure, that is to say, the control of the company is actually obtained through a series of value chains and enterprise chains.
For example, if the parent company owns 51% of the shares of the subsidiary, it will have to control the subsidiary, and the subsidiary will have 51% of the shares of the branch, and then control the branch, so that the parent company only has a little more than 25% of the equity of the branch, but it controls the branch; if there is another layer below the branch, and it has another 51% equity, the parent company may only have more than 10% ownership of the fourth-tier great-grandson company, but it firmly controls the enterprise.
Such a pyramid structure will make the general enterprise in a state of separation in terms of control and cash flow rights, which will exacerbate the contradiction between large shareholders and small and medium-sized shareholders.
Scholars have also found problems in the relationship between government and business. In fact, government-enterprise linkage is a common problem all over the world, and scholars have also found that government-enterprise enterprises are approved for listing without meeting the conditions, which will bring losses to minority shareholders. In addition, the disclosure content of government-enterprise related enterprises is relatively low, which will damage the value of enterprises. At the same time, when the relationship between the government and the enterprise is lost, it may have a negative impact on the stock price of the enterprise.
A typical example is that in 2013, the Organization Department of the Central Committee of the Communist Party of China issued a document requiring officials not to work part-time in enterprises. This provision has led to the resignation of a large number of official INEDs. Some scholars have found that when an official of an enterprise resigns, the company's stock price will fall excessively, which will have a negative impact on small and medium-sized investors.
Thirdly, in practice, the effectiveness of the internal oversight mechanism is very small.
As I have already said, because the majority shareholders are dominant, in mature capital markets, the board of directors mainly relies on internal supervision, and the board of directors mainly relies on independent directors. However, we have seen that basically the independent directors in mainland China are neither "independent" nor "sensible".
We will find that the appointment of independent directors is mainly decided by the controlling shareholders, and even if they have a voice on the board, they represent only a minority.
We checked and found that only 1.6% of companies in China have more than 50% of independent directors occupying board seats - that is, in the vast majority of listed companies, independent directors account for only a minority, basically maintaining a 1/3 ratio in accordance with the requirements of the China Securities Regulatory Commission. And I also checked, in the past 23 years, there have been more than 2.455 million votes of independent directors in China, of which 99.66% voted in favor, only 0.053% against, and only 0.082% abstained, less than 0.1%.
In other words, unless the independent directors and the controlling shareholder, major shareholder or chairman of the board of directors really tear their faces, the independent directors will not vote against or abstain from voting. That's what I mean by "independent directors in China are neither independent nor sensible." Of course, for the majority shareholders, our independent directors are very sensible, but not very sensible to the minority shareholders. At the same time, scholars have also found that board members with overseas backgrounds may play the role of one of the few effective supervisors.
On the mainland, another feature is that the board of supervisors is largely non-existent. As we all know, the unitary system of the United States and Britain has only a board of directors and no board of supervisors, while under the dual corporate governance structure of Germany and Japan, there is a board of supervisors, and the board of supervisors is above the board of directors, and the board of supervisors appoints the members of the board of directors. In our country, there is both a board of directors and a board of supervisors, but objectively speaking, the board of supervisors is basically non-existent. Therefore, you will see that the "Company Law" that has just been amended will come into force on July 1 this year, which means that enterprises can not set up a board of supervisors, because they are indeed more "vase" than independent directors, and it doesn't matter whether they are set up or not.
In addition, in the mature capital markets of the United States, institutional investors play a very important role in supervision, because they are very smart investors. The mainland's pension funds, the main investors, lack the motivation and power to supervise. Our institutional investors, due to their relatively short maturities and regulatory pressures, are unable to carry out effective supervisory functions, and our banks, which are mainly state-owned, are mainly responsible for helping enterprises ensure employment and provide macroeconomic bailouts, but they are also unable to play a role.
If the board of directors is unreliable, institutional investors are unreliable, and are financial information intermediaries reliable? In foreign countries, information intermediaries, such as analysts, auditors, accountants, and appraisers, can play a supervisory role; however, academic research has found that unfortunately, stock analysts and independent auditing institutions on the mainland are unable to play a supervisory role.
So in general, the oversight mechanism of corporate governance is actually missing.
Three
Let's look at the external rule of law environment. Objectively speaking, China's rule of law environment is improving.
We started from a low starting point. Four professors have done a very comprehensive study of law and economics, and scored the investor protection of various countries, which is the very famous "LLSV model". In the 90s of the last century, our country did score relatively low, out of 5, with only 3 points for shareholders' rights and 2 points for creditors' rights. Therefore, in the 80s and 90s of the last century, a series of laws were promulgated in mainland China, including the "Accounting Law", "Bankruptcy Law", "Company Law" (revised in 2005, revised six times, and the revision policy has just been issued recently), "Securities Law", "Contract Law", "Property Law" and so on.
Our legal system has been continuously strengthened, and the enforcement of the law has also been continuously improved, but objectively speaking, there is still a lot of room for improvement in our country's legal environment.
Our costs of breach of contract are very, very low. In the United States, if a company commits financial fraud, the internal transaction of bookkeeping and issuance will actually face the punishment of combination rights, the first of which is a sky-high administrative penalty. Although after the revision of the new "Securities Law" in our country, from the original 300,000 and 600,000 to the top 10 million and 20 million, the financial fraud is more than 100 million yuan or even several billion profits, and in the end only 20 million yuan is fined.
The second is that the class litigant system is not yet perfect, and the majority of small and medium-sized shareholders are not yet able to protect their rights and interests from the class litigant system.
The third is that the Criminal Law and the Securities Law have not been fully connected. If you steal something or defraud someone out of a large amount of money, you may be imprisoned, but in the capital market, fraudulent issuance may escape legal sanctions, and many of them are just warnings.
Therefore, our rule of law still needs to be improved.
Four
For the sake of time, I would like to quickly talk about state-owned enterprises.
In fact, state-owned enterprises are different from private enterprises, not only have the monetary function of production and investment, but also have the non-monetary function of ensuring employment, stabilizing society, and promoting economic growth. There are about three pairs of principal-agent issues or conflicts of interest: the first is the conflict of interest between state-owned shareholders and small and medium-sized shareholders, the second is the conflict of interest between state-owned enterprise managers and state-owned shareholders, and the third is the conflict of interest between state-owned enterprise managers and small and medium-sized shareholders.
On the whole, of course, our country has gone through a lot of reform of state-owned enterprises. I have roughly sorted out several stages: from 1978, the earliest was decentralization, including decentralization, profit to tax, package to loan, contract system, to partial privatization in the 1990s, further clarification in the mid-1990s, until the reform of equity division in 2005, our state-owned enterprise reform has actually made great achievements.
However, we will find that the problem of corporate governance is actually quite serious. Because of the promotion mechanism, state-owned enterprises often put the interests of state-owned shareholders above the interests of small and medium-sized shareholders, and there will be the problem of over-investment; at the same time, because they have a very small proportion of shares, they will sacrifice the interests of the state and give more consideration to their own interests.
From the perspective of incentive mechanism, we also found that the managers of state-owned enterprises are not for money, objectively speaking, they are government officials, and their incentive mechanism cannot be exactly the same as that of the management of private enterprises, and more consideration is the opportunity for job promotion, so there may be things that harm the interests of small investors. There is still a lot of debate in the academic community about whether the State-owned Assets Supervision and Administration Commission (SASAC) can effectively assess state-owned enterprises, and the jury is still inconclusive.
Five
Finally, about ESG.
In fact, ESG is essentially "new wine in old bottles", which was originally called CSR (corporate social responsibility), which means "corporate social responsibility". Disclose that many institutional targets are not green enough to invest. In fact, if we go back and think about it, what exactly is ESG, does it represent another principal-agent issue?
Because logically, the sole purpose of a business is to maximize financial returns for investors, what a business should do is maximize enterprise value. However, some scholars have found that the purpose of ESG is not to maximize corporate value, but to gain personal prestige and profit. For example, if you donate to a local library or school, you find that your child goes to the best donated school in the local school district, spending the investor's money, but profiting from his child.
Is ESG so important, is it beneficial to shareholders, and is it basically based on policy and social factors, not entirely economic considerations, so it is likely to harm the interests of shareholders. How do we promote ESG in China? For now, we still have to go through government regulation.
Six
Today, I will mainly sort out the problem of corporate governance, and the general logic is that the internal governance mechanism of corporate governance, supervision and incentives are basically ineffective, and the external corporate governance mechanism, such as the "barbarian at the door", has a very active control market, such as short-selling institutions, such as analysts, accountants, and information intermediaries, which are basically ineffective. Therefore, our current domestic corporate governance basically relies on the big government, which guarantees the corporate governance of the mainland through strict supervision and various laws and regulations.
Therefore, in the future, corporate governance in mainland China can focus on several points:
For example, the market of control. The control market in our country is still very inactive, especially the market with listed companies as the subject is particularly small, especially in 2015 and 2016, there were very few hostile takeovers. There is a very active market for control, which is very important for corporate governance. It is precisely because of the existence of "barbarians at the door" that the chairman of a listed company can be forced to conscientiously serve the value of small and medium-sized shareholders.
At the same time, we can pay attention to the role of banks in corporate governance, the corporate governance of non-listed companies, the role of law, the heterogeneity of controlling shareholders, and how corporate governance has promoted the development of Chinese enterprises and China's economy in the past few decades.
Corporate governance is a very important starting point for the reform of China's capital market. By improving corporate governance, the quality of listed companies can be improved, and investors can truly have the confidence to invest in good assets and good targets, thereby activating the capital market and enabling China's capital market to achieve so-called sustainable development.
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