That Corporate Governance (CG) differs in China from both the Anglo-American and German-Japanese models is not news; but the how and why of this is the subject of a paper from Fuxiu Jiang of the Renmin University of China – School of Business and Kenneth A. Kim of the Tongji University – School of Economics and Management (State University of New York (SUNY) School of Management.
The purpose of the paper is not to provide a critique of the China model but by breaking the model down into component parts provide a differences guide for those approaching the landscape for a first time.
The paper focuses on eight areas of CG and how China differs:
- Large shareholders. Most Chinese companies are dominated by a single shareholder, be they State Owned Enterprises (SOEs) or private companies. Generally, minorities are better off in proportion to the size of the largest holder’s stake.
- Institutional investors. Due to the large shareholder effect these can’t have much of an effect on how companies are run. So they tend not to stick around and turn over portfolios frequently.
- Board of directors. Back to the first point. These are mostly a formality and de facto exercise little or no control. As for Independent Directors, they’re less effective than even the weak full timers.
- Managerial incentives. Chinese managers, on average, are paid fractions of their peers elsewhere in the world. CG is unlikely to be related therefore to direct monetary compensation.
- Information intermediaries. Stock analysts have a lot of sway on stock prices and as a result are listened to by managers. External auditors have gotten a lot better and the media are also influential. In aggregate this group have helped improve CG in recent years.
- Laws and regulations. China’s securities markets are only 30-years old and for nearly 20-years the government was promulgating a suite of laws to deal with it. The CSRC does now a good job of enforcement and has contributed significantly to better CG.
- Markets for managers, products and corporate control. Each of these has developed in recent years and in different ways these developments have all contributed to better practices.
- Corporate social responsibility (CSR). A good way to track this is via ESG scoring and in this regard Chinese companies have made progress. SOEs led the charge and for a time had much better records than non SOEs, but the two groups now rank very similarly.
The researchers sign off noting CG in China still has plenty of room for improvement but they also suggest some of China’s practices may have applications in more developed markets.
You’ll find the full paper here Understanding Corporate Governance in China.
Happy Sunday.