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Board’s new mandate in China: managing market value

by Lake Wang, ACGA

21 November 2024

On 15 November 2024, the China Securities Regulatory Commission (CSRC) released its “Regulatory Guidelines for Listed Companies No. 10 – Market Value Management.” The Guidelines explicitly charge boards with actively managing market capitalisation and underscore the role directors play in investor communication.

The concept of market value management (or market cap management) isn’t novel in China. It emerged in a key State Council document on capital markets in May 2014. However, a formal, precise definition remained elusive. The CSRC itself acknowledged in 2015 that market participants had different interpretations regarding its “essence and meaning.”

The new Guidelines now define market value management as “strategic management actions” undertaken to boost a company's “investment value” and its ability to deliver shareholder value. This is in line with the broader regulatory push over the past four years to elevate the quality of listed companies.

Notably, the Guidelines provide a toolkit of measures for market value management, including but not limited to cash dividends, share buybacks, investor communication, information disclosure, mergers and acquisitions (M&A), stock options, and employee stock ownership plans. Again, many of these measures were previously highlighted in the April 2024 State Council document (known as the new “National Nine Articles”) and other regulations.

Expanded board responsibilities

At the core of the Guidelines lies the delineation of board responsibilities in market value management, covering both required and encouraged actions.

First, boards must “fully consider” investor interests when making key decisions regarding corporate governance, daily operations, M&A, and financing. They are also required to take proactive measures when market value “clearly” diverges from the company’s intrinsic value.

Although the Guidelines do not mention the lead INED concept, they require directors and executives to participate in investor relations events. The board secretary, in particular, should establish robust communication channels with investors.

Secondly, boards are encouraged to formulate mid- and long-term dividend plans and incorporate long-term incentives into executive remuneration. They are also advised to specify share buyback policies in their corporate documents such as the articles of association, with the cancellation of repurchased shares considered optimal practice.

Who is impacted?

Two groups of companies are required to create market value management plans:

  • Major index constituents: this includes companies listed on the CSI 300, CSI 500, STAR 50 & 100, ChiNext, ChiNext Mid-cap 200, and BSE 50
  • Companies with a P/B ratio below 1 for a full year

While companies in the first group only need to disclose their plan development process, those in the second group must make their plans publicly available. Both groups are required to report on plan implementation during their annual earnings briefings.

Moreover, plans for companies on major indices should include contingent measures for significant price drops, defined as a 20% decline over 20 trading days or a 50% decline from the highest closing price within one year. They should also monitor market capitalisation, P/E ratio, and P/B ratio against industry averages.

In contrast, there are no detailed requirements for plans created by companies with low P/B ratios. However, their plans should be clear, actionable, and free from potentially misleading language.

Historically, some issuers pursued what the CSRC called “pseudo market value management” – camouflaging market manipulation and insider trading as legitimate market value management. The Guidelines draw a line in the sand: false disclosure, insider trading, and price guarantees on stocks and derivatives are prohibited. 

About the Author(s)


Lake Wang
Research Head, Greater China, ACGA

Lake Wang
 joined ACGA in October 2023. He supports ACGA’s research on corporate governance and ESG development in 12 Asia-Pacific markets, with a focus on Greater China. Before joining ACGA, Lake worked for an equity hedge fund for over five years. Additionally, he conducted research at global professional services firms and in academia.

 

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