WHEN Liu Hongru of the China Securities Regulatory Commission threatened to throw companies which flout compliance standards off the Shenzhen exchange last year, his threat fell on deaf ears. When he repeated the threat in a talk last month, representatives of Shenzhen-listed companies brazenly turned the tutorials which he had organised into small gossip groups. It went without saying that the warning went unheeded. But one fine day recently, a Shenzhen brokerage, J&A Securities, decided that enough was enough; it did not like the way Shenzhen-listed China Vanke was run. The brokerage went on to propose a massive corporate overhaul of China Vanke in an unprecedented move that sent alarm bells ringing throughout the securities industry and forced many to sit up and take notice. An official of a Shenzhen-listed company said: ''Poorly run companies are afraid, while the better ones are troubled by the Vanke issue, which is threatening the management of the companies.'' To ward off having ''a J&A pulled on them'', companies have assured their shareholders of their sound management and correct corporate strategy. The securities community's differing reactions to Mr Liu's warning and J&A's move did not suggest that the latter's managing director, Zhang Guoqing, was more influential in Shenzhen, although he was a securities regulator in the early days. It did, however, mean that threats to punish companies which misbehaved have so far proven ineffective in a fledgling securities market where regulatory rules are lax and enforcement is poor. A landmark regulation - the Securities Law - has yet to be announced, although the law is expected to be passed by the first half of this year. The lesson from the highly publicised battle between J&A and China Vanke's management, headed by chairman Wang Shi, suggests that a more effective method of keeping companies on their toes is for shareholders to take a greater interest in the companies inwhich they have shares. Indeed, the restructuring proposal has highlighted the hitherto unpublicised role of shareholders in governing the management of companies under China's existing securities regulations. Companies learned from the Vanke experience that shareholders could be even more powerful than Supremo Liu in that the former could change the way the company is run and, more important, the management is formed. Shareholders of publicly owned companies in China are now aware of their influential rights, in addition to their voting rights at shareholders' meetings and the receipt of annual dividends. Whatever the motive of J&A Securities, and the legality of the corporate overhaul, the revolt sent out a stronger signal to the securities sector than even the Shenzhen brokerage expected. Indeed, the Vanke revolt demolished once and for all the commonly held idea among listed companies that fund-raising is the sole function of flotation and also opened shareholders' eyes to the potentially powerful role they can assume in the management of the companies. In more ways than one, the move is a vital development in China's securities industry. It is significant because it helps to educate mainland shareholders of a powerful right in an emerging market where the regulations to protect shareholders are far from stringent and comprehensive. Whether they choose to exercise this is another matter. It is all the more significant because the first case of shareholder revolt attracted national publicity and debate which, in turn, helped to educate a nation of generally passive shareholders. Since the formation of stock exchanges on the mainland, the apparently lukewarm and limp attitude of the shareholding public towards listed companies has been a barrier to the securities industry's development. Shareholders tend to be passive in monitoring companies because company chairmen of state enterprises are traditionally appointed by the government. Despite the acceleration of share reforms in enterprises, the belief that the management could not easily be replaced is firmly entrenched in the public mind. A Shenzhen observer says: ''Shareholders tend to think that even if a bad chairman is thrown out, the new one could be worse. So, they want the chairman to stay so long as he is not that bad.'' This, of course, has to do with the short history of the mainland securities sector, which directly affects the standards of listed companies and the maturity of shareholders' behaviour. Despite the useful lessons from the Vanke revolt, there is a concern that shareholders or the general public may be misled by predators who criticise companies for failing to live up to expectations for ulterior motives. It is not easy for the public to weigh the allegations, and companies may have to pay a high price if they come under unwarranted attacks. Most mainland companies seem to think that the only motive for them going to the public is to raise funds without having to pay interests. Many apparently are not sincere in fulfilling their promises to improve their operations, even if they have promised shareholders this in the prospectus. In other words, the management treat their companies as if they are not listed, but treat them as listed when they want money from shareholders. In this regard, shareholders are not their bosses, but instead creditors. Re-paying them will be in the form of annual payouts. An official of a Shenzhen-listed company said: ''It is not easy to change the way companies think, as listing has long been taken as a way only to raise cash.'' He clearly hit the nail on the head. But companies will have to pay a little more attention to how they run their operations if they do not want the Vanke nightmare to happen to them.