A look on the Corporate Governance in PetroChina from an outsider's point of view.

1. PetroChina: International
Corporate Governance
Compliance
Group 6
Akanksha
Ankit
Arun
Pankaj
Nishigandha
Taranpreet
Zeeshan

2. Corporate Governance in Chinese Market
 Since 1949: China was a state owned economy – CGS- different degrees of
political influence
 1978 - Reduction of local party committee involvement
 Enterprise Law, 1988- Factory Director(Manager) responsibility system
 1993- Company Law- no longer gave local party committee overall supervisory
power over SOE’ but at the same time allowed party committees to keep their
organizational presence
 Management of the company affected
 Influence the investment decisions
 Clash between duty towards shareholders and obligations towards party
 Overhearing the voice of staff members
 Interests of minority shareholders not protected
 1997- “Grasping the large and freeing the small”- state retained controlling
ownership

3.  Legal System-
 The rule of man
 Shareholders had limited remedies against exploitation
(e.g. difficulty in forecasting legal outcomes)
 Enforcement Mechanism-
 Low pay in govt position- bending of rules and corruption
 Rampant Accounting frauds
 Weak Corporate Control
 Shares held by the state or bureaucrats could not be traded in
secondary market
 Mergers and acquisition was rare
 State majority shareholder
 Many state owned banks

4.  The focus of CG
 Protect investors and/or stakeholders’ interests
 To assure the inside controller to maximize firm value not at
expense of any investor and/or stakeholder’s interests.
CHINA THEN
Lack of accountability of the board and
directors
Board of supervision could not play effective
role
Lack of market for corporate control
Concentrated ownership structure with state
as the controlling shareholder
CHINA NOW
Corporatization of SOEs, and the introduction
of the CSRC
Tighter reporting and disclosure
Set up Independent Directors System in 2001
Strong sanctions against violations on laws and
regulations

5. Why does it matter??
 Improves access to capital and financial markets
 Help to survive in an increasingly competitive
environment through mergers, acquisitions,
partnerships, and risk reduction through asset
diversification
 Leads to a better system of internal control, thus
leading to greater accountability and better profit
margins.
 Increases the confidence of investors and
potential partners to invest in or expand the
company’s operations.

6. Intermediaries
Affected the efficiency of CG of
the listed companies
The basic structure of the Chinese corporate
governance is consistent with the theoretical framework
and practices as in developed countries

7. Internal Mechanism
Ownership
Structure
Dispersed Ownership Concentrated
Shareholder Type Institutional Investors Govt and Govt Authorised
organizations
Board Structure Single Tier (BOD) Two Tier (BOD and
Supervisory Board)
Independent Dir. Professional Experts Appointed by State controlling
shareholder
External Mechanisms
Legal System Sufficient Shareholder
Protection
Insufficient shareholder
Protection.
Corporate Control
Market
Efficient Capital mkts (Mergers
and Takeovers, adequate
Transparency)
Immature Capital Markets
Governance Environment
Economic Regime Capitalist Societies Government Dominated
Governance
Culture
Individualism Collectivism

8. Major Problems
 Lack of protection for minority shareholders
 Paucity of Independent directors
 Absence of transparency and inadequate Financial disclosures.
Proposed Solutions
 Allow companies to use cumulative voting, thereby empowering minority
shareholders to appoint directors and/or supervisors.
 Increasing minority shareholder protection by granting shareholders the right
to check and copy the company’s account books and meeting minutes,
allowing share buybacks, and granting shareholders the right to petition for
liquidation of a company
 Granting shareholders the right to bring a derivative suit or direct suit against
directors, supervisors, and senior management
 Introducing the concept of ‘piercing the corporate veil,’ enabling courts to
look beyond the principle of limited liability

9. PetroChina’s Governance model
PetroChina was a joint stock company.
The management structure consisted of:
 Board of Directors
 Supervisory Board
 Senior Management team
And four committees
 Audit Committee
 Investment and development committee
 Health, safety and environment committee
 Evaluation and remuneration committee

10. Risks
Dividend and Capital
Investment policy
• China National
Petroleum Corp, state
owned enterprise held
90% of PetroChina.
• Max income earned
by PetroChina was
shared by CNPC.
• So, investors were
afraid that CNPC
might influence
PetroChina’s dividend
and capital
investment policy.
Appointment of
Directors and
Corporate Officers
• 2 out of 3
independent non
executive Directors of
PetroChina had ties
with Chinese govt.
• The Chinese govt.
had the authority to
appoint and dismiss
Officers of both
PetroChina and
CNPC.
• Hence, people feared
that the management
decisions could be
made under political
consideration.
Legal protection for
outside investors
• Shareholders found
difficulty in finding
independent
arbitrator.
• Hence were unable
to submit any
disputes with the
company to
arbitration in Mainland
China or in Hong
Kong.

11. Special Features
• Compensation linked to performance.
• Share options to the Directors, Supervisors
and members of the management team.
• Future plan to extend the share option policy
for remaining employees.
Management
Incentive
programme
• High level of transparency.
• Delivered financial reports to public every
quarter.
• Used to conduct Audit in accordance with the
International Auditing Standards (IAS).
Information
Disclosure

12. • 7 members including 2 independent
supervisors.
• Duties of the board:
• Meetings of Supervisory committee
• Inspection of company’s financial position
• Operation of the company in compliance with
the law
• Fulfillment of duties by Directors and senior
management
Supervisory
Board
• PetroChina formulated a set of policies and
procedures regarding shareholder’s general
and extraordinary meetings.
Policies and
procedures

13. Proposals for Governance Reform
Universal Governance Guidelines
PetroChina should incorporate
Universal Corporate Governance
Guidelines which are widely
accepted all over the world.
Companies can voluntary follow
universal corporate governance
guidelines.
Build Autonomy
SOEs generally regarded as
government branches it did not
have its own legal
independence.
In order to build sound corporate
governance, CNPC need to be
independent from the Company in all
aspects, including personnel
deployment, assets, finance,
organization and business operations.

14. Improve function of the Gen meet. of
Shareholders
Proper meetings with
meaningful discussion.
Oppression of minority
shareholders.
Avoidance of unnecessary
power struggles between the
corporate bodies
Restraint and Incentive for Directors
and Executives
Necessary to employ
mechanisms to hold the
management of SOEs
accountable for their behavior.
Open and transparent manner
of appointment and dismissal
of senior management
Improve the compensation
mechanism for directors and
executives.

15. Improve the role of the board of
supervisors
Board of supervisors should obtain
meaningful tools & authority to take legal
actions for confronting problems
associated with insider control.
Supervisors should be completely
independent from the directors and
executives.
Supervisors should have strong expertise
in essential matters.
Code of ethics for senior
management
Code should applies to all the
management members of the Company.
Required Business Conduct so the Senior
Management shall act honestly and
diligently in the performance of their
duties
Compliance with Laws, Regulations and
Rules.

16. Director Independence
Must have a majority of
independent directors on its
board of directors where there is
no such ties with Chinese govt.
Separate corporate
governance committee composed
entirely of independent directors.
Director qualification standards
and responsibilities need to be
clear.
Improvement in role of Board of
Directors
Company has to elected its
Directors in strict compliance with
the directors election procedures.
There need to be Procedures for
Nomination of Directors
Compliance with Laws,
Regulations and Rules.

17. Thank You