ASSESSMENT 3

ASSESSMENT 3

ASSESSMENT 3

Introduction

The importance of institutions to transition economies is now widely accepted. This is particularly true of the institutions covering property rights and the legal and regulatory environment. This reflects these institutions' roles as enabling factors in the reform of state-owned enterprises (SOEs) and through their impact on the costs of transactions and the efficiency of production. Appropriate institutional choices encourage the separation of government from the management of SOEs assisting in the restructuring of SOEs in corporate form. Inappropriate institutional choices enable former SOEs, now privatized and listed, to engage in practices associated with inefficient use or the misappropriation of corporate assets. This is to the detriment of the state and groups of private shareholders. Thus, in restructuring SOEs into corporate entities in transition economies, the forms for the governance and ownership structures of these enterprises are of significance. The impact of governance on the internal efficiency with which individual firms utilize resources means that market-based governance is often accorded priority. This reflects its positive association with productivity improvement and through this growth in real output.

Currently, many well-known companies have been revealed financial fraud scandals such as Enron, World-Com, Xerox, Guangxia and China Aviation Oil. One of the important reasons of financial fraud is the failure of internal control and the lack of related information disclosure. Effective corporate governance can ensure the truthfulness and reliability of financial information. Information disclosure can contribute to the constant improvement of corporate governance policies, offering data for decision-making to information users. The establishment and effective implementation of corporate governance policies can assure the corporate continuing operating and developing healthily. Information disclosure quality of a listed company is subjected to its corporate governance. Different corporate governance structures will bring different governance efficiency.

Purpose of the study

To study how corporate governance is moving and changing with time under the government policy and market in China.

Objectives of the study

To explain the policy of the Chinese government regarding the non-tradable shares reform.

To show how the credit contraction policies of the government pose hurdles for companies in building corporate governance.

To calculate the impact of the 2007 financial crisis on the Chinese market, and how companies dealt with that challenge of corporate governance.

Literature review

The German-Japanese and Chinese models of corporate governance are based on the use of two-tiered board structures that, ideally, improve the potential to achieve effective corporate governance outcomes for shareholders and other relevant stakeholders. Each of these models may be described as providing a mechanism to delineate each group of stakeholders' rights and responsibilities, where transparency is important but problematic to its effective functioning (Ho & Wong 2001). The Anglo-American model provides an alternative form of corporate governance mechanisms, both institutional and market based, which are intended to induce the self-interested controllers of a firm to make decisions that maximize the value of the firm to its owners (Dennis & McConnell 2003). Both sets of corporate governance models provide a structure in which to manage the agency problems arising when professional managers ...