Financial governance is an index covering 30 specific standards such as whether related transactions are approved by shareholders, whether the posts of chairman and chief executive officer are held by two different people, whether boards or shareholders' meetings evaluate internal controls, and whether information on how special committees under the board are run is disclosed.

The report found that current financial governance of listed companies "emphasizes supervision" and "ignores incentives".

Though "supervision" is emphasized, the "form" of supervision, rather than "substance" is emphasized, the report said.

"Most listed companies in China have a 'pretty' governance structure, which calls for shareholders' meetings, a board of supervisors, executives and so on. But the relationships among them have many gray areas," Gao said.

Worst ever

One example cited by the report is that of Xi'An Hongsheng Technology Co Ltd, an A-share company that was dubbed "the worst public company in history".

At first glimpse, the company meets all the requirements of standard financial governance: independent board members, the separation of the chairman and CEO posts, regular information disclosure.

But there's no substance, the report found. The CEO isn't also the chairman, but he does work in another company established by the chairman; a major restructuring failed but the company's report barely mentioned it and so on.

Gao's team also examined the management of companies' boards. The average board management quality index was just 51.95 on a scale of 100. Only 11.54 percent of companies achieved a score of more than 60.

"The boards of Chinese companies are structured according to the practice in developed countries. However, they function poorly in terms of clear incentives and penalties, transparency, the supervision of independent directors etc," said the report.

The report suggested that the amount of shares held by the largest stakeholder should be kept to a reasonable level.

If the proportion is too small, the study found, share ownership will be diluted, subjecting the board to the control of the management. But an overly high stake for the largest shareholder may impair the interests of smaller stakeholders.