If you have a practitioner or academic interest in the issue of Corporate Governance in China you need to review the paper highlighted today in full; but, to warn you, it’s a dry old read. For those with merely a general interest I’ll do my best to summarize the main points below.
Fuxiu Jiang and Kenneth Kim from the Renmin and Tongji universities respectively have performed a meta-study of the academic literature to date to both summarize this work and, in so doing, make some suggestions about a way forward for future study. Their main points are as follows:
1) Because Chinese companies are nearly all controlled by a single (be it public or private) shareholder Western notions of how to progress good corporate governance are inappropriate. [Wrong? Ed.]
2) Shareholders in ‘Western’ companies should be concerned about agency problems such as getting ripped off by managers. Investors in Chinese companies need to consider the problem of getting ripped off by owners. [Luckin anyone?]
3) As China is now home to (combined) the world’s second largest stock market the issue of governance there has become a world business issue. Established practices in China will likely influence other markets where control is also concentrated.
4) It’s important to draw a distinction between China’s privately controlled companies and SOEs. SOEs are roughly 1/3 of all listed companies but make up around 2/3 of market capitalization. What motivates SOE managers should be understood by investors seeking improvement in operations (hint, it’s not always profitability).
5) With an average institutional holding of only 6% of Chinese companies (the average controlling shareholder has 36%) big institutions are unlikely to exercise any useful monitoring function. Stock analysts and (also regularly jockeyed) auditors have also been unreliable critics. Ditto the media. [Consider yourself fully warned on this now!]
6) Better regulation, tighter legal controls and a generally more muscular legal system are likely to be most effective in the longer term in producing better governance outcomes. Progress has been made but more remains to be done.
[N.B. investors can, via careful diligence, protect themselves from the most egregious practices. Luckin, for example, was an accident waiting to happen which even a superficial diligence would have revealed.]
7) There seems to be, as yet, no widespread understanding in China of why better Corporate Social Responsibility (CSR) is desirable (go to P. 45 for the CSR discussion in detail). Where people acknowledge its benefit it’s believed the government should absorb costs, not consumers directly.
This is an important subject and I noticed this paper has already received more downloads and views than is usual for a paper on the subject. For anybody investing in Chinese companies and not up to speed I’d say, despite it being a bit of a slog, it’s an essential read.
You can access the work in full via the following link Corporate Governance in China.
Happy Sunday.