Expert Review: Supporting Active Investors to Boost Governance of Listed Companies

By Du Hengfeng, a commentator for Eachang Daily

Recently, the General Office of the Communist Party of China and the National Development and Reform Commission issued the "Opinions on Improving the System of Modern Enterprises with Chinese Characteristics" (hereinafter referred to as the "Opinions"). The Opinions explicitly propose to leverage the capital market to improve corporate governance. Strengthening the fiduciary duties of controlling shareholders towards companies, supporting listed companies in introducing institutional investors with a stake of over 5% as active investors. In my opinion, this measure is crucial for enhancing the governance level and investment value of listed companies.

From the current market analysis, external shareholders holding more than 5% stakes in listed companies can constitute a controlling shareholder. However, during 2022-2024, there were only 85, 49, and 71 cases of shareholding changes, respectively, which is a relatively rare phenomenon compared to the massive number of listed companies (over 5,000). This situation leads to dominant control by large shareholders in corporate governance matters such as board appointments, capital operations, and major decision-making, resulting in benefits often being distributed disproportionately towards large shareholders. The legal rights of small shareholders are thus difficult to protect effectively. Small shareholders tend to have a lower sense of belonging and invest more in short-term operations, which is inconsistent with the long-term investment and value investing philosophy advocated by the capital market.

To become an active investor, one must meet two key conditions.

The first condition is a long-term capital foundation. Holding a stake of over 5% is a critical threshold. When shareholders reach this threshold, they must disclose their funding sources, the actual controller after share transfers, and the purpose of increasing their stakes. These disclosures provide important references for other investors' decision-making, making the controlling shareholder equivalent to providing "free rides" for others, yet not benefiting from it themselves. Only by actively participating in corporate governance can one achieve ideal investment returns. Moreover, once a stake reaches the controlling threshold, shares are subject to lock-up periods of at least 6 months, and any changes to shareholding ratios must be promptly announced. Only investors with a long-term mindset can accept these restrictions.

The second condition is the ability and willingness to actively govern. Compared to individual investors, controlling shareholders often possess professional research capabilities and resource integration advantages. Voting rights are a key channel for shareholders to participate in corporate governance, but for individual investors, their influence on shareholder meeting resolutions is minimal, leading many to give up exercising their voting rights, resulting in some shareholder meetings becoming "big shareholder meetings". In contrast, active investors typically have more expertise and richer resources, enabling them to actively participate in voting. When encountering proposals that do not align with the interests of small shareholders, active investors can mobilize a large number of small shareholders based on their own influence, making a significant impact on the outcome.

However, to better support listed companies in introducing active investors, more favorable policies are needed at the institutional level. On one hand, measures should be taken to strengthen the protection of shareholder proposal rights and board nomination rights, effectively addressing issues related to proposal submissions and nominations; on the other hand, channels for collecting shareholder votes should be optimized to reduce the cost of active shareholders participating in corporate governance. Additionally, policies can be adjusted on tax rates, transaction costs, etc.