*2.2. Why Governance Quality Matters in China*

In 2001, China became a member of the World Trade Organization (WTO) and adopted the Organization for Economic Co-operation and Development (OECD) principles of corporate governance and started improving the corporate governance of its listed companies. CSRC, in cooperation with National Trade and Economic Commission, issued the code of corporate governance in 2002. The laws were based on the principles of investor protection and the code of conduct of the directors and managers. A continuous improvement took place that led the listed companies to shift the reporting from Chinese Accounting Standards to the International Accounting Standards in 2006. A two-tier board system is a unique aspect of the Chinese corporate governance mechanism. A one-tiered system such as that of USA has all the directors (executives and non-executives) being part of one Board, known as the Board of directors. In the two-tier board system, there is an executive board (consisting of all executive directors) and a supervisory board (consisting of all non-executive directors). The CSRC has taken many steps for the good of corporate governance in listed companies and to protect minority shareholders. Now companies are being encouraged to have at least one third independent directors on Board, the information disclosure act (2007) was explicitly introduced during IPO, and rules relating to shareholder meetings (2006) related to the convening of shareholder meetings and their resolution were introduced. Most of the state and legal person companies were either fully or partially privatized during this transition period.

The steps taken by CSRC to improve the corporate governance mechanism in China are remarkable. They can be used as one of the tools to curtail the opportunistic behavior of the managers. As an emerging economy, the Chinese market is still in the earliest steps of adopting good corporate governance practices.
