Policies

Risks Down, Compliance Up

2018-11-2 9:41:39

The 2017 reports on the indices of legal risks and compliance of Chinese listed companies were published at a press conference the other day.

The past few years have borne witness to the surging number of Chinese listed companies with international business, yet from time to time they might be embroiled in anti-monopoly probe or trade remedy survey.

The good thing is, legal risks of the companies are at a new low across the board, according to Shi Zhiwei, President of Senior Legal Affair Management and head of legal risk research.

The legal risk report shows that the 2017 index drops 2.05% YoY. To be specific, the five heavily weighted indicators, including the incidences of irregularities, the numbers of lawsuits and the size of assets involved, have all fallen to a certain degree.

The reasons for the overall decline in legal risks are threefold:

First, the “new normal” of the Chinese economy in the new era is typified by higher flexibility and better-than-expected performance. Consequently, the listed companies are less exposed to litigation risks, and the size of assets involved is smaller.

Second, given the increasingly rigorous control of capital markets in recent years, the listed companies have fewer incidences of irregularities and lower exposure to risks in related transactions and guarantee business. The legal awareness of their employees and the proportion of executives with a legal background are both higher.

Third, the index dips as a lot more IPOs took place over the year. After all, the legal risks of newly listed companies are lower. In 2017, they accounted for 14.5% of the listed companies, up from 8.3% in 2016.

When it comes to irregularities, the hotspots - and therefore the foci for watchdogs - are finance, mining, agriculture, accommodation, catering, and construction. Listed companies in health, social work, agriculture and construction sectors are highly expected to enhance legal governance and executives’ awareness. In point of lawsuits, financial, leasing, commercial service, mining, wholesale and retail sectors, in particular, should further prevent litigation risks and assist the companies concerned with internal control and compliance management.

Meanwhile, the report alerts that risks in corporate governance might rebound if the Board is constantly slimmed down and the number of legal-savvy executives scaled back, as is the case of the past five years .

“Decision making and implementation depends largely upon the professional skills of the management, especially the Board as the backbone of corporate governance. Listed companies with a stronger line-up of legal-savvy executives are more likely to prevent legal risks at the source and enhance compliance management,” said Shi Zhiwei.

The simultaneously issued compliance report reveals that compliance of listed companies on the whole continued in the uptrend in 2017, as the result of their higher awareness and stronger external control.

“Compliance management, risk control and corporate governance have become the prerequisites for the core competitiveness and value of listed companies. The former two, in particular, hold power over the companies’ life and death,” said Shao Bingfang, Party Chief and President of Legal Daily. He added that compliance management could help increase the overall efficiency of resource allocation within the domestic capital market.

“The capital market is the barometer of the Chinese economy.” So claimed Chang Baoguo, Deputy Party Chief and Vice President of the China University of Political Science and Law. For the 3,850-odd listed companies, success in legal governance has a direct bearing on investor interests and their own future. Since they are the public faces of China Inc., such success also means a highly regulated domestic business and legal environment. As global trade frictions are escalating with each passing day, the companies should pay greater heed to the risks arising from internationalization.