Sinopec Corporation is one of the largest integrated energy and chemical companies in China with headquarters in Beijing. It is a well-known brand with an excellent reputation, listed in Hong Kong, Shanghai, New York and London. (Sinopec, Fact Sheet, 2009) Like every Joint Stock company in China, it consists of three main bodies: The shareholders general meeting as the highest authority which appoints the board of directors (executive) which in turn is being inspected by the supervisory board.
The gigantic China Petrochemical Corporation Group (Sinopec Group) has been established in 1998 based on the former China Petrochemical Corporation. The Group is completely state-owned and functions as a state-authorized investment organization. (Sinopec-Group, 2011). In February 2000, Sinopec Limited (also named Sinopec Corp. , hereinafter referred to as Sinopec) was founded as a majority-owned joint stock company under the state-owned Sinopec Group. The company was simultaneously listed in Hong Kong, New York and London in October 2000.
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In order to do this, Sinopec has made a total issuance of 16. 78 billion H-Shares . The Shanghai listing was completed in July 2001 after issuing 2. 8 billion A-Shares in the People’s Republic of China (PRC) and thereby diluting the state-owned stakes from 100 % to just over 64 %. (Sinopec, Our History, 2011) During the next couple of years, Sinopec constantly acquired companies and assets in order to foster its rapid growth. The first takeover took place in August 2001, when Sinopec bought China’s New Star Petroleum Company.
Three years later, in 2004, the company acquired chemical assets, catalyst assets and service stations from Sinopec Group. In 2006, Sinopec increased its capital in Hainan Petrochemical Co. , Ltd and after completion it held 75% of its equity interests. Later on, the oil production assets as well as five refineries were acquired from Sinopec Group. (Sinopec, Our History, 2011) 1. 2. Main business portfolios To put it briefly, Sinopec operates four main business portfolios. (see image 1) The entering wedge to every aspect of the company’s business is the exploration and production of oil.
The department is in charge of the management of oil and gas exploration, production, reserves and assets as well as the marketing of oil and gas (Sinopec, Exploration & Oil Production, 2011). This segment achieves a steady growth; by now, Sinopec is the second largest producer of crude oil and natural gas in China (Sinopec, Fact Sheet, 2009). After having produced the oil, the second business portfolio, namely refining, gets its chance. In fact, Sinopec is the largest oil refiner in China, producing gasoline, diesel, kerosene including jet fuel, fuel oil, chemical feedstock and other petroleum products.
After refining, the oil is either sold in service stations (29,000 stations by 2010), which involves marketing and distribution activities, or used to produce chemicals such as ethylene, synthetic resins, monomers and polymers for synthetic fibre and rubbers. Sinopec is the largest producer and distributor of chemical products in China. (Sinopec, Fact Sheet, 2009) Image 1: Sinopec's main operations 1. 3. Products ; Services Overall, Sinopec’s array of products contains nine main products and services. The subsequent graph shows an overview of the portfolio:
Image 2: Products and Services of Sinopec In the following, only the most important products and services will be outpointed. Namely the service stations, the lubricants and the equipment ; materials are further described. The one product everyone in China sees every day is the service stations. Sinopec acclaims the largest nationwide service station network, covering China's cities and countryside, on roads, expressways and waters. The stations offer gasoline, diesel, kerosene, lubricants, convenient store goods and non-fuel products which broadens the range of potential customers enormously.
Another part of Sinopec’s main products are the lubricants. The company produces automotive, special synthetic, industrial and marine lubricants as well as different greases. And last but not least another very important product is surely equipment & materials. Sinopec International, as the trading arm of Sinopec, exports drilling rigs, pipes, towers, reactors, heat exchangers and other products to the USA, Canada, Russia, Poland, India, Brazil, Thailand, South Africa and Middle Eastern countries. For their equipment & materials department,
Sinopec has established long-term cooperation with leading oil companies such as BP, Shell, ExxonMobil and global engineering companies such as Technip, Aker Kvaerner, Saipam and CBI. (Sinopec, Products & Services, 2011) 2. Sinopec Corporate Governance: Benchmark in China? “Good corporate governance is essential to the sustainable development of Sinopec Corp. We commit to balance the obligations between shareholders, customers, employees and stakeholders, and improve the capacity of decision-making and risk prevention to ensure the Company to operate more efficiently. ” Sinopec Sustainable Development Report 2009
‘Best Corporate Governance Among Mainland Chinese Companies’ (Asset; Hong Kong based monthly magazine) and ‘The Best Corporate Governance in Emerging Market’ both in 2003 (Euromoney), ‘Best IR Practice in the oil & natural gas industry in Asia’ and ‘Best overall IR Practice in China (including Hong Kong)’ in 2004 (Institutional Investor Magazine), ‘Best Annual Report and Other Corporate Literature’ in 2005 (IR Magazine), ‘Best Investor Relationship’ 2009 (IR Magazine), ‘Shanghai Stock Exchange Information Disclosure Award’ in 2010 – The list of Sinopec’s corporate governance related awards over the last years is impressive.
In order to comprehend why Sinopec’s corporate governance has been that successful in the past, it is necessary to take a closer look at the structure of the company’s corporate governance system. Therefore, measures, positions, functions, responsibilities and interdependencies within Sinopec’s corporate governance concept will be further described and analyzed in the following. Sinopec’s corporate governance structure basically consists of three main organizational units: The shareholder’s general meeting, the supervisory committee and the board of directors (see image 3).
Image 3: Overview of Sinopec’s corporate governance structure 2. 1. The Shareholder’s General Meeting The shareholder’s general meeting (SGM) is a main structural element of corporate governance according to the Chinese law. The SGM has to make significant decisions regarding Sinopec’s operational policies and future investments. Furthermore, the SGM has to elect and displace the directors and supervisors representing shareholders. The SGM has to examine and approve reports from the board of directors and the supervisory committee and plans related to the profit distribution and loss recovery.
Additionally, the SGM has to pass resolutions on changes in the company’s registered capital, on mergers and acquisitions, on dissolution, liquidations and the company’s debentures, decide on objections by the supervisory committee or shareholders representing at least 5% of the total voting shares and lastly amend Sinopec’s so-called Articles of Association. The Articles of Association are an international set of rules for the establishment of a company in many countries of the world. In general, resolutions are performed by a show-of-hands, if not the chairman or at least two shareholders request a ballot.
Ultimately, the chairman of the SGM has the final decision power. The shareholder’s general meeting is divided into the annual general meetings (AGM) and extraordinary general meetings (EGM), both commonly convened by the board of directors. The annual general meeting is held, as the name indicates, once a year in the last 6 months before the closing of the preceding business year. The AGM is responsible for the verification of the annual reports of the directors and the supervisory committee and the verification of the profit distribution proposal and last financial year’s final budget.
As stated above, shareholders or members of the supervisory committee representing more than 5% of Sinopec’s voting shares can raise objections which also have to be resolved in the AGM. On the other hand, the EGM at Sinopec can be convened by the board of directors on special occasions according to the Articles of Association – for example, if the number of directors is below the requirement of the Chinese company law or if a shareholder, holding more than 10% of Sinopec’s voting shares, formally requests a meeting.
Sinopec’s ‘Rules and Procedures for the shareholder’s general meeting’ precisely determine the SGM’s functions, the authorities given to the board of directors (see chapter I. 2) and the convening of the general meeting (including resolutions, votings and all procedures within the meeting). 2. 2. The Supervisory Committee The second element of Sinopec’s corporate governance is the supervisory committee (SC). Sinopec’s supervisory committee oversees the upper management and the board of directors, including the board’s secretariat, the (vice) president of Sinopec and the chief financial officer.
The SC ensures that the management adheres to laws and regulations and that the shareholder’s interests are appropriately taken into account. Moreover, the SC is responsible to supervise Sinopec’s financial issues. The SC has to give account of its activities to the shareholder’s general meeting. Sinopec’s SC is composed out of 12 members – one third of the members are Sinopec employees, the other two thirds are shareholder representatives. Every supervisor is elected for three years. However as re-election is possible, the tenure of the SC members is therefore practically not restricted.
The supervisors are proposed by the board of directors, shareholders who hold more than 1% of Sinopec’s voting shares or the supervisory committee itself. The Sinopec representing supervisors can only be elected or displaced by Sinopec’s staff. Similarly, the supervisors representing the shareholders can only be selected or removed at the shareholder’s general meeting. The supervisors elect and displace a chairman by the majority of two-thirds. As representative in the shareholder’s general meeting the chairman is responsible for the committee’s activities, convenes the SC meetings and has to oversee and answer for the committee’s reports.
Because they may be influenced due to their position, Sinopec’s directors, presidents and vice presidents as well as other finance employees are not allowed to join the supervisory committee. This ensures the committee’s ability to freely supervise the financial operations and management. It is in turn the top management’s duty to report all required information to the supervisory committee, in order to guarantee proper supervision. For example, the president of Sinopec has to attest the validity of all company documents and reports if requested by the supervisory committee.
Moreover, the president has to inform the SC about decisions involving the use of Sinopec’s capital. In case of violations against laws and regulations the Sinopec’s supervisory committee may report to the board of directors or shareholder’s general meeting or directly to the responsible government authority. Being the central authority of supervision in Sinopec’s corporate government structure, the supervisory committee has to report all breaches committed by the directors, the board’s secretary, the (vice) president of Sinopec or the CFO.
All in all, the SC is responsible to examine Sinopec’s financial statements, consult external auditing partners if a lack of clarity remains, propose extraordinary general meetings and provisional board meetings, attend meetings of the board of directors, oversee the upper management and the directors that their actions are in the interest of Sinopec and within the law and report, punish the senior management if necessary and collect all required information in case of potential breaches.
The supervisory committee meets four times a year, including an interim results meeting, a year-end scrutiny meeting, a meeting for the planning of the upcoming year and a financial management meeting. In addition, the chairman of the supervisory committee may also call a special SC meeting because one of the following reasons: The chairman himself requests a special meeting, at least two-third of the members of the SC call for a meeting, Sinopec’s assets are strongly diminished or finally, there has been a violation of laws or a violation is expected in the near future.
Both regular and special meetings of the supervisory committee and meetings of the board share the same rules and methods (see chapter ‘The Board of Directors’). 2. 3. The Board of Directors and the Committees The board of directors (BoD) is the central executive body in Sinopec’s corporate governance structure. The board consists of 13 members, the directors. Four of the directors are independent directors, two directors are act as chairman and vice chairman, elected displaced by the other directors.
Similar with the supervisors of the supervisory committee, directors are elected for a period of three years; however, re-election is possible without a limited tenure. On the contrary, independent director’s tenure is limited to a maximum of six years. The election of the directors takes place at Sinopec’s SGM. Again, quite similar to the method of election of supervisors, the board of directors itself, the supervisory committee or shareholders holding more than five percent of Sinopec’s voting shares are able to propose candidates for the position of the (non-independent) director.
Independent directors are contrariwise only nominated by Sinopec shareholders holding a stake of one percent of the company. It is not compulsory for directors of Sinopec to buy shares of their own company. To elect the directors, Sinopec applies the so-called ‘Accumulative Voting System’. According to the Articles of Association (see also chapter ‘The Shareholder’s General Meeting’), the accumulative voting systems is used under the proposition that firstly, the company’s controlling shareholder holds a stake of more than 30% and secondly, two or more directors are being determined at the same general meeting.
The accumulative voting system means, that every share grants exactly the number of votes that are equal to the number of directors being elected. Shareholders can choose from the accumulating their votes on one candidate to allocating their votes to several candidates. Eventually, the candidates with the highest numbers of votes are being elected as directors. This voting method motivates minority shareholders to give their votes to their favored candidates and avoids the situation that majority shareholders single-handedly determine the choice of directors.
Sinopec’s system of corporate governance allows dismissing members of the board with a resolution at the shareholder’s general meeting before the end of their tenure. Additionally, if a director repeatedly fails to attend board meetings (and fails to send a proxy) he can be dismissed at the next SGM on request of the board of directors. For non-independent directors two successive times of absence are required, for independent directors the requirement is three times in succession.
Independent directors at Sinopec serve special purposes and have rather limited powers: They mainly provide assistance on decisions regarding the consultation of external financial and auditing firms. Therefore, independent directors may independently approach an external financial advisor or auditor; or propose extraordinary general meetings or meetings of the board of directors. Furthermore, independent directors are allowed to directly report to shareholder’s general meetings or government authorities and departments.
Independent directors can only be removed for the reasons stated above. In case of a dismissal Sinopec has to communicate the reasons that led to the decision and allow the displaced independent director to give an ‘open declaration’, if he or her finds the reasons to be inappropriate. The chairman presides over the board of directors meetings and the shareholder’s general meeting. It is his field of responsibility to manage and guide the activities of the board of directors and assure the proper implementation of measures within Sinopec initiated by the board.
Moreover, the chairman has represent Sinopec if needed and sign documents of importance on behalf of the company. The vice chairman may act in place of the chairman if the latter is unable to exercise his duties. An interim results meeting, an annual meeting and two quarterly meetings: At Sinopec, forementioned regular board meetings are called up four times a year. Extraordinary board meetings can be held via telephone, video conference or written resolutions. The physical attendance of all directors is required in a meeting conducted twice a year.
The members of the board are given at least 10 days in advance for preparation for a meeting. If the provided material is found to be insufficient to reach a decision, the meeting can be deferred on the request of one-fourth of the directors. The chairman, more than one-third of the directors, at least the majority of the independent directors, the company’s president or the supervisory committee are eligible to request a provisional board meeting. The chairman has to inform the participants of a provisional board meeting within a week after the request has been made.
Whereas the secretary of the board is responsible to collect all director’s proposals and hand them to the chairman, both the secretary and chairman jointly decide the time, place and agenda of the meeting. However, the directors, the supervisory committee, the board’s committees and all subsidiaries of Sinopec are eligible to add subjects to the agenda of the meeting. Board meetings are generally held on the premises of Sinopec and require the attendance of at least 50% of the directors. Directors can excuse themselves and delegate a proxy. The proxy is only able to vote according to the director’s wish.
Directors that fail to send a proxy lose their right to vote. Ordinary resolutions require a simple majority whereas special resolutions require the affirmation of two-thirds of the directors. For example, special resolutions comprise all credit and finance-related decisions. Whether resolutions are adopted by ballot or show-of-hands, directors have one single vote. The board of directors may consult three committees for assistance on certain issues: The ‘Strategic Committee’, the ‘Auditing Committee’ and the ‘Remuneration & Performance Examination Committee’.
The strategic committee focuses on the development and evaluation of Sinopec’s long-term business strategies and investments and is staffed with the 13 members of the board. In contrast, only seven directors form the auditing committee, which is responsible for the choice of external auditors, the supervision of Sinopec’s financial statements and internal control and audit mechanisms, as well as the communication between the external auditor and the company. Due to their special purpose, independent directors have to represent the majority of the seven members of the committee.
The chairman is also required to be a member of the auditing committee. The remuneration and performance examination committee consist of nine members. Again, the chairman and a majority of independent directors have to be members. The committee develops appropriate criteria for the evaluation of the president’s and board’s performance and examines the legitimacy of the salaries of Sinopec’s top management, namely the directors, president, vice president, CFO, secretary of the board and supervisors. 2. 4. The Secretary of the Board
The secretary of the board is a higher representative of the company. The position of the secretary is required according to Sinopec’s Articles of Association. Directors, the president, vice president, or CFO are allowed to fill the position of the secretary in addition to their main responsibility within Sinopec. With the ‘Work Regulations for the Secretary of the Board’ Sinopec designed guidelines for the position of the secretary. The secretary is elected and removed by the board of directors. The chairman of the board is responsible for the nomination.
The functions of the secretary comprise the assistance of the directors in all daily activities, the preparation of necessary documents for the shareholder’s general meetings and the board meetings, to ensure the correctness of all disclosure-related decisions and procedures, partly the coordination of Sinopec’s external financing and eventually relationship management. 2. 5. The President and Vice-Presidents The president of Sinopec is a mandatory element of corporate governance according to the Articles of Association.
Whereas the board of directors is responsible to elect and remove the president, the board’s chairman is eligible to nominate a candidate. In turn, Sinopec’s president has to report to the board of directors. Moreover, Sinopec has several vice-presidents. Again, the vice-presidents are appointed and dismissed by the board but nominated by the president. Both the president and vice-presidents can at the same time be members of the board of directors. However, the number of double staffing should be lower than Sinopec’s total number of directors.
The tasks of Sinopec’s president relate to the company’s operations and the implementation of decisions made by executive committees like the board of directors. In Sinopec’s corporate governance structure the president’s duties are to coordinate the realization of the annual business and investment plans, to design plans concerning internal regulations and Sinopec’s internal management structure and to set wages, rewards and punishments of the staff. Presidents or vice-presidents who are not directors at the same time can participate in the board meetings, but are not eligible to vote.
Moreover, the president is allowed to design and conduct so-called ‘Work Regulations for the President’, after they have been confirmed by the board of directors he also has to report to. The regulations, for example, include a guideline concerning the use of Sinopec’s liquid funds. If approved by the board, the president has to abide by the regulations and of course, along with the vice-presidents, act entirely in the interest of Sinopec. 3. Sinopec’s ‘Executive Compensation Plan’ The executive compensation plan (ECP) is a major element of Sinopec’s system of corporate governance.
In the year 2000 Sinopec’s board of directors confirmed the ECP which was beforehand developed by an external consultancy. The implementation of the ECP affected the whole upper management of Sinopec and also its affiliated companies. Since then, the salaries of the top management are connected to the operational performance, profit and development of the stock price of the company. The executive compensation plan divides the top manager’s salaries into three major parts: The basic salary, performance bonus and lastly, the share appreciation rights (SAR).
The basic salary for every executive equals Sinopec’s average staff salary multiplied with a factor according to the manager’s position within the company’s hierarchy. On the contrary, the performance bonus equals the executive’s position in the company multiplied with a factor determined by the ECP. Lastly, the share appreciation rights basically represent a stock option. However, unlike to stock options, the share appreciation rights do not alter the number of Sinopec’s outstanding shares and only award the managers with the appreciation in value of the stock.
If Sinopec’s share price exceeds the SAR exercise price, managers have the right to receive the appreciation value of their stock in cash. The percentage of the share appreciation rights in a manger’s compensation package increases with his seniority. Furthermore, Sinopec’s top management yearly signs a ‘self-appraisal performance agreement’ which partly allows the evaluation of management performance on certain key performance indicators. The SARs could change with regard to the result of the performance evaluation.
Sinopec’s system of corporate governance limits the amount of SARs that can be encashed in the first years after their issuance. Both variable elements, the performance bonus and stock appreciation rights, account for almost three-thirds of the compensation of Sinopec’s executives. 4. Inferences and Future Development What makes the Sinopec’s corporate Governance stand out? There is no simple answer to this decisive question - The effectiveness of Sinopec’s corporate governance is the outcome of Sinopec’s whole structure of corporate governance as examined in the previous chapters.
According to analyst’s comments the decentralized decision-making process is one of the factors setting Sinopec apart. The power of decision and authority has been delegated from top management to mid-level and lower management. As a consequence, it is the strategic business units that handle Sinopec’s operations – supervised by Sinopec’s president. The president in turn is supervised by the board of directors, which is again answerable to the supervisory committee and the shareholder’s general meeting.
Moreover does the company abide by all notable international regulations and laws concerning its corporate governance measures: Sinopec follows the ‘Code of Corporate Governance for Listed Company’ (CCGLC) in China, which in turn requires the company to abide by the Chinese company law, the laws of the state economic and trade commission, the requirements of the Articles of Association (see chapter ‘The Shareholder’s General Meeting’) and others. The CCGLC and further necessary regulations mentioned above set the legal framework for Sinopec’s code of corporate governance.
Sinopec’s system of corporate governance undergoes constant progress. In 2010, the company started several measures to further improve the company’s corporate governance in various fields: Regarding compliance, Sinopec started the ‘Walking with Laws’ contest which was entered by thousands of employees. To improve internal control, Sinopec focuses on the development of a guideline in form of an ‘internal control manual’ (by the end of 2009, the manual already included a total of 1331 controlling points and 59 business flows).
Moreover, Sinopec constantly emphasizes the importance of standardized auditing processes within the company. The extensive investigation of the case of Sinopec’s Anyang Subsidiary (Henan Province) shows that the company also strengthens its efforts in investigating breaches. In the field of anti-corruption, Sinopec and several suppliers recently signed the ‘Agreement on Adhering to Business Ethics’, which counters corruption and bribery. Finally, Sinopec promotes the market principles and adheres to the Chinese laws against unfair competition.
5. Sinopec’s Corporate Governance in comparison Sinopec and some other modern Chinese enterprises are now governed by the general meeting of shareholders, the board of directors and the board of supervisors. However, the old corporate bodies still continue to play an important role in Chinese corporate systems and are not easy to remove. We asked us, what makes Sinopec corporate governance so unique compared to Chinese ordinary or unreformed companies. Board of directors
The board of directors has the central position in the legal structure outlined in the Company Law, but the majority of firms recognized under the Company Law do not actually have a functioning board of directors. All firms listed on the Chinese stock exchanges were supposed to have a board of directors with one-third independent directors by May 2003, but among these firms only 62% met that requirement. Party organization It has been held that party organizations should perform duties according to the Party Constitution.
Moreover, trade unions and employees' congresses should carry out their respective duties in accordance with relevant laws and regulations. Nevertheless, overlap between the old corporate bodies is still common. Party committee leaders of wholly state-owned corporations and also state shareholding corporations can still be included in the board of directors and the board of supervisors in accordance with legal procedures. That is not really reasonable being your own supervisor.
Therefore, employees' representatives should be included in the boards of directors and supervisors like at Sinopec. Moreover, the Party secretary and the Chair of board of directors can be the same person. In principle, the Chair of board of directors and chief executive officer should be two separate people. Chairman Under current legislation the Chair is the only corporate legal representative authorized to execute contracts and other legal documents on behalf of the corporation.
If other directors are required to represent the corporation in legal relationships with third parties, they must receive a special authorization from the Chair. It is thus inconvenient for a corporation to enter transactions when the legislation permits only a single legal representative. Thus, law reform should include recognition of multiple corporate legal representatives like Sinopec does, in order to achieve transaction efficiency and to provide safeguards for third parties in the market.
Power of the meeting of shareholders In the Chinese legislature, that concerns also Sinopec, the power between the meeting of shareholder and the board of directors should get reallocated. Thus all the ordinary business managerial power could be transferred from the shareholders to the board of directors. Because the CEO also enjoys substantial managerial power under the current Corporate Law, it is possible that there will be a conflict between the board of directors and the CEO when both of them perform statutory power.
To avoid these power struggles, it is essential that the legislation define the power of the CEO in a coherent way. Thus, the board of directors, instead of the shareholders, should become the center of power in the future Chinese corporate governance and the board should have the authority to delegate some managerial power to the CEO or to other senior executives. The board of directors should also have the authority to supervise the performance of individual directors, the CEO and other executives.
Board of Supervisors Having outside supervisors in the board of supervisors should be mandatory for large publicly held corporations. To achieve impartial supervision, the supervisors should be completely independent from the directors and executives. Supervisors should have strong expertise in essential matters, such as corporate management, corporate finance or business law. This is still not given at most of the current Chinese enterprises. Furthermore, the powers possessed by the board of supervisors should be redefined. The current supervisory powers recognized by the Corporate Law are of a postmortem and passive nature.
To enable supervisors to obtain relevant and crucial information, the board of directors should be obligated to report to the board of supervisors on a regular basis. Moreover, the board of supervisors should have authority to take legal actions against directors or executives on behalf of the corporation. The board of supervisors should become a corporate body between the shareholders and the board of directors in the corporate hierarchy, and should hold the power to appoint and dismiss directors. The board of supervisors should also hold statutory decision-making power with respect to fundamental investment decisions or transaction plans.
In addition to comprehensive supervision over managerial activity, the board of supervisors should be required to supervise the financial and accounting activities. Chinese state ownership The China Confederation of Enterprises Survey showed that 61,33% of respondent managers say that government and corporations need to be further separated, 59,67% of respondent managers say that the establishment and duties of state shareholder’s agents need further improvement. In China, the State acts as a majority shareholder in many
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