7 August 2006
South China Morning Post
(c) 2006 South China Morning Post Publishers Limited, Hong Kong. All rights reserved.
Sharon Li, Raymond Huo, Annie Huang and Eagle Chen are studying at the China Europe International Business School. They will graduate next spring.
What is the state of corporate governance in China?
Huo: It has been hardest to change the system in the state companies and easier in non-state companies. The number one problem in state firms is the issue of ownership. The concept of "ownership by the whole people" is fake. It is not clear who the bosses of these firms represent. The only choice is to privatise them. But privatisation is not possible because it would change the nature of the socialist system.
Li: The Communist Party is like a father with three children. The oldest is the state sector. Would you experiment with your eldest son? The private sector is the second son. The private sector in Wenzhou is the best example. It has grown very fast.
The faults of corporate governance in the state sector were shown in the scandals of China Aviation Oil in Singapore and China National Cotton Reserves Corp.
(In 2004, China Aviation lost over US$500 million in trading on the oil derivatives market that nearly bankrupted the company, China's monopoly fuel trader. Six former CAO officials have been fined or sent to prison for offences connected to the scandal. China National Cotton Reserves Corp lost at least 500 million yuan making the wrong bets on cotton prices from late 2003 to early 2005. Both illustrated a failure in supervision, in allowing trading positions to be kept open, allowing ever increasing losses.)
Huang: There is a big contradiction between the liberalisation of the economic system which is helping to drive down prices and the political system in which power is concentrated in the Communist Party. If you reform the political system, you change the nature of socialism. I do not see any change.
Huo: We must follow the privatisation model used in Germany and Britain where shares in state firms were sold to the general public. The state must withdraw from these firms. Russia was a different model, in which the state shares were sold to conglomerates. It is a bad example. In East Germany, on the other hand, it was a good model - the firms were sold at a cheap price to the public.
Li: The top 190 state firms, which are under the control of the State-owned Assets Supervisory and Administration Commission (Sasac), have changed their corporate governance and have a board of directors, with independent directors and a supervisory board. They are well-managed, with the best managers. There will be less and less musical chairs among these firms, as in last year when the heads of the big telecommunications companies swapped their positions {hellip} In China, management buyouts were prevalent until the end of 2004 when the government stopped it. It is very difficult now.
The East German example is not applicable here. The Communist Party is reforming because it wants to stay in power. It feels threatened, so it is changing.
Instead of the Russian, British or German models, the government here has reformed the state firms by turning them into shareholding companies, with stakes held by state-owned entities that are shareholders. Is this a good model for corporate governance?
Li: This is a big step forward. These shareholders want a return on their investment; they want dividends and so put pressure on the managers. The wage system is improving but needs to be improved further. The managers receive three kinds of remuneration - basic wage, a bonus linked to performance and rewards linked to long-term performance. But there is still a big gap between their pay and what managers at foreign companies receive.
Chen: This gap is closing gradually and the system of bonuses is being improved. This is reducing the loss of good staff from state firms to foreign ones.
Does the system of independent directors work well in state firms?
Li: They are not independent enough and often do not understand the business. They are mostly academics or the heads of consulting companies. It is easy to pass the exam from an institution in Beijing, which issues the certificates needed to become such a director. They do not want to take risk and responsibility.
Huo: It is hard for an individual to confront a major state firm.
Li: The discipline committee in state firms is more efficient and can stand up to the board. The wages of its members are paid by the group company which picks high-ranking people to serve on it. This is a good system.
Or you can send your complaints to the China Securities Regulatory Commission.
How serious is the problem of corruption in business?
Li: The government is working very hard against it, with heavy sentences that are widely publicised in the media.
What is the level of corporate governance in Chinese private companies?
Li: The issues here are different. Most are family-run companies. If you look at the Fortune 500 companies, many are family-run. In the US, several generations of the same family have run the same firm but here the process has just began.
A good example is Ningbo Fotile Kitchen Ware, which the founding father passed to his son, with good results.
Another good example is Wenzhou shoemaker Kang Nai, which set up a joint venture with an Italian firm, forcing it to modernise. The best local governments can do is not to interfere.
A bad example is Jianlibao (a maker of soft drinks) in the city of Sanshui, Guangdong province that used to be a collective. When the manager wanted to move the plant to another city, the city sent the police to arrest him. You can always find some financial wrongdoing. Sanshui did not want to lose its biggest taxpayer.
Does the debate about Carlyle's bid for Xugong Group Construction Machinery mean a nationalist backlash?
Li: There will be less and less of this kind of debate. Nationalism will diminish. What Chinese firms need are strategic investors who will develop the business and not simply hold a stake for a while and then sell it on to someone else. So I wonder about Goldman Sachs taking a majority in Shineway. It is not a strategic investor.
(In May the Ministry of Commerce approved a deal under which Goldman Sachs Group and CDH China Fund paid two billion yuan for a majority stake in Henan-based Shineway, the country's largest meat-processing company.)
Peng Bingming, Liu Shenqiang (Jason Liu), Fu Qiang (Jery Fu) and Zhang Wenge attend the Guanghua School of Management MBA programme at Peking University.
What is the state of corporate governance in China?
Peng: I personally think corporate governance in China is still in a very initial stage. The government wants foreign countries to grant China market economy status but we are still very much in the initial stage of building a market economy.
In this period of the so-called "socialist market economy" our corporations and companies are mostly still formally owned by the state or maverick entrepreneurs.
Corporate governance did not exist 10 years ago but in recent years scholars, professionals and officials have realised there is a need for it.
In the near future, things will change drastically, thanks to the stock reforms and privatisation, as well as offshore listings.
Liu: Just now we talked about domestic corporate governance in private companies, family companies and state-owned companies. The private and family companies are governed through blood relations and might not need real corporate governance. For the state-owned companies and joint ventures wanting to be listed, they are forced to comply with corporate governance standards.
Many American companies are also deficient in corporate governance and are having trouble meeting the conditions of the Sarbanes-Oxley legislation.
State-owned companies will gradually become mature. Corporate governance is necessary but a big challenge to implement.
Do you think corporate governance is improving in China?
Fu: We can see from news reports and national policies that high-level management and officials in companies and government all pay close attention to establishing corporate governance systems. After China's entry into WTO, companies have been pressured to meet international standards and have more regulated operations. If companies want to be listed, they must be up to international standards. It is a very big challenge for companies to adjust their internal structures.
How big is the problem of corruption in China?
Peng: Corruption as an issue is not as important as overall structural reforms.
For instance, how Sasac effectively supervises and manages these companies is a big and important issue. Sasac has implemented some important reforms.
More internal democracy is not a solution, centralisation is better in the Oriental context. I was surprised to learn that Japanese companies often have as many as 50 members on their board of directors, compared with 10 in American companies and fewer in Chinese companies. The only way those 50 members agree on decisions is through a non-democratic culture that listens to authority. Then the whole company carries out those decisions.
Liu: Corruption is inevitable during the process of company and market development, both at home and abroad, in both joint ventures and foreign-funded companies. There are some holes in the system and it will take time for [these to be plugged]. I agree with Mr Peng that democracy is not suitable for China.
Zhang: Is corruption in China due to lax laws? I think internal controls are the most effective way to deter corruption.
What can other countries learn from China in terms of corporate governance?
Peng: Chinese businesspeople believe harmony brings wealth. In China's business culture, everybody tries to always address a problem in a friendly way, even though both sides have serious [disagreements].
I am engaged in legal consultation and you can see this from the big contrast between the company numbers and the relatively few legal cases. Human relations and kindness are much more important in Oriental companies. Of course when conflict cannot be settled through negotiation, it has to be taken before the law.
It is very rare to see managers resign abruptly in China but you see it very often in foreign companies.
Fu: Compared with Chinese companies, Western companies' systems and regulations are very helpful in terms of company operation. There is a standard to measure when problems emerge.
Just as Mr Peng says, the harmony among and within Chinese enterprises can reduce the in-fighting costs and avoid the sudden departure of managers.
The Chinese culture suits companies as they develop into medium-sized companies. But when they try to develop into large, mature companies, they must rely on systems and regulations.
What would you cite as examples of good corporate governance in China?
Zhang: I think China Netcom is a great example of a Chinese company, a state-owned company, with good corporate governance.
China Netcom's successful reforms to comply with Sarbanes-Oxley surprised the American securities regulator. Many US firms seemed to find it much harder than Netcom to comply.
Peng: I think Lenovo is a great example of a company with good corporate governance in China.
[Former president] Liu Chuanzhi retired at the right time even though he could have gone on for another 10 years. He gave his post to Yang Yuanqing, a young man of around 40 years old.
Chinese with traditional mindsets would guess Yang is Liu's son but he isn't.
Yang implemented some very important reforms after he took the post, including mergers, strategic adjustments and staff reductions which do not fit with traditional Chinese management practice.
Liu: Tsingtao Beer is a good example. The company was originally controlled by the Qingdao branch of Sasac but now US company Anheuser-Busch owns 27.3 per cent and the Qingdao Sasac has 30 per cent. We used to worry about the loss of state-owned assets. But Tsingtao Beer has overtaken Beijing Yanjing and Huarun to regain the No1 position in the beer market after co-operating with Anheuser-Busch.
Is an MBA education useful for establishing corporate governance in China?
Liu: It's extremely useful. Western economic theory is useful but needs time to be adapted to China.
Zhang: The problem with MBA education in China is that many teachers come from overseas and they cannot adapt what they teach to China's actual situation. They are lacking in business practice. They start to teach MBA students after graduating with a PhD. And they teach bachelors, post-graduate and PhD students. Sometimes it's hard for them to focus on different topics.
I also think there is some disconnect between MBA education and company management. The education is either ahead of or left behind by company practice. Companies such as Alibaba have abundant experience but they haven't collected their experience in textbooks.
Peng: Perhaps China's MBA education and corporate governance courses are not very comprehensive but I am very honoured to study at the Guanghua Management Institute of Peking University.
