The corporate straight and narrow

Proper governance is a milestone on corporate China’s road to modernised management. Its practical significance – and classic governance missteps – are broken down by vice chairman of Juneyao Medical, Hang Dongxia

AS CHINA NAVIGATES its journey of economic reform, many companies remain unfamiliar with the concept of corporate governance. For many readers engaged in this critical sphere, the immediate encounter is often characterised by a perception that corporate governance work is too difficult.

More than a century ago, Colombia University president Nicholas Butler proclaimed: “The limited liability corporation is the greatest single discovery of modern times.” But it is only with effective corporate governance that Butler’s “discovery” can continue to uphold its greatness.

Effective governance is the means for fulfilling vital functions such as power allocation, balancing interests, incentivising all parties and supervised constraint. These are the elements that enable any company to evolve, steering clear of pitfalls and structural vulnerabilities.

The perceived difficulty of embracing effective corporate governance stems not only from its paramount significance, but also from the inherent complexity of the task. Achieving it demands adept navigation of multifaceted dynamics and intricate systems.

First, corporate governance is critical. It is not only the institutional cornerstone that ensures a company’s sound operation, but it is also a focus of attention for regulators and a key area of inspection. Additionally, it serves as the foundation of rights and the source of solutions for resolving shareholder disputes and conflicts of interest.

Second, corporate governance poses great difficulties. It involves all levels of a company, from shareholders to employees and even external collaborating companies and regulators. A high degree of consensus is necessary for a harmonious corporate governance atmosphere.

Operating within the boundaries of a company’s existing framework documents, such as articles of association, corporate governance officers must consider and balance the opinions of all parties, promoting consensus on corporate decisions and opinions.

The job of a corporate governance officer places great demands on the holder’s individual capabilities. In current corporate practice, corporate governance responsibilities are generally assigned to the securities department’s board office or the legal department responsible for the routine work and implementation of specific projects.

Corporate governance entails formulating or drafting many corporate mechanisms, decision documents and meeting materials. At first glance, this might appear to be a simple task for the legal department. In practice, chief legal officers and legal departments regularly face challenges from corporate governance duties.

Documents on corporate governance must have a legal basis and link in a systematic document structure that provides a sound corporate governance system. These documents must be logical, interconnected and consistent, and conform to the system they are intended to support.

For example, a shareholders’ agreement and articles of association will necessarily have their respective content focuses. The shareholders’ agreement generally seeks to achieve a consensus among shareholders about major decisions on corporate strategy, operations, financial targets and shareholders’ rights and obligations. There will be solutions in advance for any sub-par operation of the company.

Therefore, to produce a robust shareholders’ agreement and articles of association, in-house counsel need detailed knowledge of their company’s industry and a thorough understanding of their company’s strategy. They must comprehend the shareholders’ visions and varied shareholder expectations – mere familiarity with the provisions of the Company Law is not enough.

Let’s look at the rules and procedures for the three top governance bodies: the shareholders’ meeting; the board of directors; and the supervisory board. As a broad statement, it is highly likely that an in-house counsel’s familiarity with these rules will fall below that of their familiarity with bilateral contracts, yet these rules are the main basis for the three bodies’ operation.