Governance Briefing — January 5, 2022
China’s updated CSRC Corporate Governance Code took effect 5 January 2022, compelling listed companies to sharpen board oversight, internal controls, and supplier transparency to meet Mainland capital market expectations.
Executive briefing: On 5 January 2022 the China Securities Regulatory Commission (CSRC) issued the revised Code of Corporate Governance for Listed Companies, replacing the 2018 version. The Code aims to strengthen party leadership alignment, enhance board effectiveness, tighten internal control expectations, and improve investor protection for companies listed on Shanghai, Shenzhen, and the Beijing Stock Exchange. Listed issuers must integrate the Code into governance charters, operational policies, and supplier oversight, with stock exchanges monitoring implementation through self-inspection campaigns and disclosure reviews.
Key regulatory themes
The 2022 Code emphasises five themes: party leadership integration, board structure, investor rights, information disclosure, and environmental and social responsibility. It underscores the requirement for party organisations within state-controlled enterprises to participate in decision-making while upholding board and supervisory committee duties. Independent directors gain clearer mandates to focus on minority shareholder interests, and listed companies must improve cumulative voting, online voting, and shareholder communication channels. The Code also references obligations to manage climate, environmental, and social risks, signalling alignment with China’s dual-carbon goals.
Operational priorities for listed companies
Executives should coordinate multi-year implementation programmes covering governance documentation, internal controls, and disclosure enhancements:
- Charter and policy updates. Revise articles of association, board charters, supervisory committee terms, and management rules to reflect new Code requirements. Ensure that party committee roles are articulated without undermining statutory governance bodies.
- Internal control integration. Align internal control manuals with the Code’s emphasis on compliance, risk management, and audit functions. Expand monitoring of related-party transactions, financial reporting, and capital operations.
- Disclosure readiness. Upgrade investor relations systems to support more frequent and transparent disclosures, including environmental and social risk information. Prepare narrative reporting templates capturing governance enhancements and stakeholder engagement outcomes.
- Training and cultural alignment. Conduct workshops for directors, supervisors, senior management, and party committee members on their respective responsibilities under the Code. Reinforce ethical conduct, anti-corruption measures, and information barrier requirements.
Operational teams should coordinate with listing exchange requirements, such as the Shanghai Stock Exchange’s guidelines on self-inspection and rectification. Document implementation steps and maintain evidence for periodic reporting to regulators.
Governance moves and oversight
Boards must demonstrate proactive adoption of the Code:
- Board structure. Evaluate the proportion and effectiveness of independent directors, ensuring compliance with minimum thresholds and specialised committees (audit, nomination, remuneration). Consider adding directors with expertise in emerging sectors, ESG, and digital governance.
- Supervisory committee activity. Supervisory boards should intensify oversight of financial reporting, internal controls, and executive conduct, documenting findings and recommendations for shareholders’ meetings.
- Party leadership coordination. For state-controlled entities, codify mechanisms by which party organisations review major decisions while respecting corporate governance procedures. Minutes should reflect how party deliberations inform board resolutions.
- Stakeholder engagement. Establish regular dialogue with minority shareholders, institutional investors, and employees. Boards should review feedback, integrate concerns into strategy, and disclose responses through annual reports.
Audit committees must ensure that internal audit departments have sufficient authority and resources to test compliance with the Code. Internal audit plans should prioritise high-risk areas such as related-party transactions, guarantee management, and capital occupation by controlling shareholders.
Sourcing and supply chain governance
The Code stresses responsibility across the value chain, urging companies to supervise suppliers and partners:
- Vendor due diligence. Implement supplier evaluation criteria covering legal compliance, environmental performance, labour standards, and data security. High-risk suppliers should provide certifications or third-party audit reports.
- Contractual controls. Update procurement contracts to include governance clauses on anti-corruption, ESG reporting, confidentiality, and conflict of interest disclosures. Define remedies for breaches, including termination and blacklisting.
- Monitoring mechanisms. Deploy digital platforms to track supplier performance, incident reports, and remediation activities. Integrate results into board-level supply chain risk dashboards.
Listed companies in sectors such as manufacturing, energy, and technology should align supplier governance with China’s carbon neutrality roadmap, including targets for emissions reductions and resource efficiency.
Information disclosure and investor communication
The Code requires timely, accurate, and fair disclosure. Investor relations teams should:
- Enhance periodic reporting. Provide comprehensive analysis of governance practices in annual and semi-annual reports, highlighting improvements in internal controls, stakeholder engagement, and ESG performance.
- Implement multi-channel communication. Use online roadshows, investor hotlines, and interactive platforms hosted by stock exchanges to engage shareholders. Track questions and publish responses to ensure transparency.
- Manage selective disclosure risk. Strengthen information disclosure controls to prevent leaks and insider trading. Establish pre-disclosure review committees including legal, finance, and investor relations representatives.
Companies should also monitor evolving disclosure guidelines, such as the Shanghai Stock Exchange’s guidelines on sustainability reporting, to anticipate future requirements.
Internal control and risk management alignment
The Code emphasises comprehensive risk management covering strategic, financial, compliance, and operational risks. Management should:
- Integrate risk assessments into strategic planning, mergers and acquisitions, and major investments.
- Establish early warning systems for liquidity, market, and credit risks, supported by data analytics and scenario analysis.
- Maintain robust whistleblower channels, protect informants, and ensure investigations are reported to the supervisory committee.
- Strengthen IT governance, including cybersecurity frameworks consistent with China’s Cybersecurity Law and Data Security Law.
Internal control evaluations should document remediation actions, timelines, and responsible owners. External auditors may review progress and highlight gaps in audit reports.
Performance measurement
Track progress using governance KPIs:
- Completion rate of charter and policy revisions.
- Training hours delivered to directors, supervisors, and senior executives.
- Number of independent director recommendations adopted by the board.
- Supplier compliance scores and incident counts.
- Timeliness and accuracy of regulatory disclosures.
Boards should review KPI dashboards quarterly and commission third-party assessments where necessary. Results can be summarised in corporate governance reports to reinforce accountability.
Forward look
The CSRC and stock exchanges are likely to issue supplementary guidance on ESG disclosures, carbon transition targets, and technology risk oversight. Listed companies should monitor enforcement actions to benchmark best practices and avoid common pitfalls, such as inadequate related-party transaction controls or failure to protect minority shareholder rights. Aligning governance programmes with China’s 14th Five-Year Plan priorities—innovation, green development, and regulatory compliance—will help companies attract capital and maintain listing compliance.
Key resources
- CSRC Announcement on the Revised Corporate Governance Code
- Shenzhen Stock Exchange Guidance on Implementing the 2022 Code
- Shanghai Stock Exchange Self-Inspection Notice
Zeph Tech supports China-listed issuers with governance roadmaps, supplier oversight analytics, and disclosure management aligned to the 2022 CSRC Code.
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