Special Section:
Corporate Governance in a Global Economy

New Rules for a Tiger

As China privatizes, corporate governance will be critical, says a key player

Photograph of Bo Li

Sea Change coming: Bo Li ’99 studied corporate governance with Lucian Bebchuk. Today he is a key player in the privatization of China’s banking sector.


In the past, state-owned Chinese banks were known for bad loans and poor corporate governance. Recently, four of these institutions went public, with one IPO raising a record $21.9 billion. International investors have proved eager to buy shares, although the government retains a controlling interest.

For a take on these financial institutions’ transformation, the Bulletin went to an HLS alumnus (and a former student of Professor Lucian Bebchuk’s) who has an insider’s perspective. Bo Li ’99 serves as deputy director general of the Legal Affairs Department of the People’s Bank of China, the country’s central bank and the coordinating agency in state banking reform.

As government-owned banks become publicly traded, how are corporate governance factors taken into account?

In the past two decades, China has been promoting joint-stock reforms in state-owned enterprises with corporate governance at its core aimed at maximizing shareholders’ value. Reforms of state-owned banks are no exception. The reforms usually follow the same sequence. First, a state-owned bank is financially restructured by receiving additional capital from the government and stripping off nonperforming loans with the government’s assistance. Second, the bank is corporatized by becoming a joint-stock company with shareholders, a board of directors, a board of supervisors and management. Third, international and domestic strategic investors are invited to invest in the bank. Fourth, the bank is listed in Hong Kong (with simultaneous private placement in the U.S. and Europe) and, in some cases, listed in the domestic A-share market in Shanghai. Establishing and improving corporate governance is a crucial aspect of the second, third and fourth steps. Fifth, throughout (and after) the above process, the bank goes through various organizational, operational, cultural and other restructurings and reforms, with the goal of becoming a truly well-managed, market-oriented and profit-making entity. The fifth step, still under way for all such banks, is the hardest and may take the longest time. Corporate governance reform is still ongoing.

In this process, we have been facing several challenges. First, how to distinguish between the government’s role as an owner-shareholder of the bank and its role as a regulator of the bank. Second, how should the government, as an owner-shareholder of the bank, exercise its shareholder rights? Third, how to make the bank a truly market-oriented institution. We see a proper system of corporate governance as an important part of the solution to the challenges.

More broadly, what are the biggest corporate governance challenges facing publicly traded companies in China? How could the situation be improved?

Generally, there is a lack of appreciation of shareholders’ value in publicly traded companies. Board and management do not pay enough attention to shareholders’ value, and minority shareholders are particularly vulnerable to abuses of controlling shareholders and management. The stock market as a means of corporate governance is not well-developed. There is a lack of effective legal remedies for wronged shareholders.

China’s company law was substantially amended in 2005. Several legal mechanisms designed to protect minority shareholders and creditors, including derivative suits, piercing the corporate veil and cumulative voting, have been incorporated into the amended company law. The effectiveness of such mechanisms remains to be seen. China is also in the process of drafting its first property law, which is expected to be enacted in 2007. These new laws will help build a good legal foundation for sound corporate governance practices in China. In addition to the legislative efforts, government agencies and market participants are helping improve corporate governance in public companies. Market forces will play an important role.

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