Corporate (Non) Governance

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The risks of doing business in China range from intellectual property rights abuses and lack of enforcement of court awards, to fraud and theft (to name a few). I have covered corruption before (see here), but for investors seeking to share in the spoils of China’s economic success story, corporate governance (or lack of it) is also something to watch out for. Forbes highlights some recent cases:

    • Shanghai Electric, a Hong Kong-traded, state-controlled company making power equipment, was suspended after reports of a director taking US$400 million in illegal loans.

    • Ocean Grand Holding, a Hong Kong-listed chemical company with interests in China, was reported to be missing $100 from its accounts.

    • Skyworth Digital Holdings, a big television makers, had its founder sentenced to six years in prison for theft of $9 million of company funds.

    • Guangdong Kelon, the refrigerator maker, reported a loss of around $400 million following fraud investigations into its former Chairman.

    • Beijing Capital Land, a major developer, lost its chairman after corruption investigations.

Part of the problem is that many Chinese companies have a very flat management structure (the boss / founder at the top, and everyone else below), and that major shareholders (other than the boss in question) are either unengaged (e.g. state shareholders) or under the direct influence of the boss. Stephen Green (now China economist for Standard Chartered) notes in his book, “China’s Stockmarket”, that:

    “[Chinese] listed companies often suffer from what is sometimes referred to as ‘one-shareholder dictatorship’ (yigu duda) and the corporate governance problems that inevitably result”.

Green also points to other problems, such as:

    • Large amounts of cash from IPOs provide opportunity and incentive for theft (or theft disguised as loans).

    • Political connections often mean that firms can avoid legal or bankruptcy issues, so they have little incentive to use funds efficiently.

    • There are no effective institutions to monitor or discipline the legal person shareholders.

It is often said that there is no such thing as a (successful) passive investment in China. Any investor would therefore be well advised to conduct due diligence on the target companies and their owners, closely monitor their investments, engage with the management, and be aware of commercial and policy risks.

See news source:

    Corporate China’s Cancer
    Forbes – USA
    SHANGHAI–Foreign stock investors familiar with China’s five-star hotels, dazzling new skyscrapers and cheerful nightlife are getting a quick education this …

    China’s Stockmarket (see this and other China business books here.)
    Stephen Green

2 Responses to “Corporate (Non) Governance”

  1. Archive » Corporate Governance and a Party (Committee) in the Boardroom| China Business Blog Says:

    […] from the introduction of foreign investment (and the use of overseas listings) is improved corporate governance. However, this requires a big change in the way that Chinese companies oper […]

  2. Archive » Corporate Governance Needed Here, There, Everywhere| China Business Blog Says:

    […] there is…room for growth in corporate governance in China – as I outlined in an post on Corporate (Non)Governance. So, no surprises there! The report, based on 15 months work and over […]

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