Fuxiu Jiang from the Renmin University and Kenneth Kim from the Tongji University have prepared a paper that drills down into the mechanisms that make corporate governance (CG) different in China.
They believe the arc of China’s CG progress will bend neither towards the Anglo-U.S. model nor to Japan-German practices. As the ‘China-Model’ is still a work in progress they analyze it from eight separate angles to provide a ‘thought leadership’ piece for further analysis.
Below I’ve provided a thumbnail summary of each of the topics and I think most lay readers can stop reading after this. [The paper is good work but constitutes a road-map for further study rather than a punchy analysis of strengths and weakness of the current system.
- Large Shareholders. Most Chinese companies are controlled by a single or multiple large shareholders. Understanding what these often hands-on owners want is key to understanding how managers operate.
- Institutional Investors. Due to the first point, unlike in the West, these are nearly always minorities, even in combination. They operate then as a very weak-force in terms of CG in China.
- Board of Directors/Supervisors. Due to the above points these are mostly stooges operating at the whim of the large shareholder. As for so-called ‘independent’ Directors, these are just regulatory necessities.
- Managerial Incentives. In 2002 the average CEO pay for an S+P-500 company was U$16.7m. In China in 2001 average CEO pay U$200k. You get the picture. It’s not money that motivates Chinese executives.
- Information Intermediaries. Sell-side analysts are influential and courted as a result. Their work has to be understood in this context. Auditors and the media however are surprisingly reliable observers.
- Laws and Regulations. The markets in China are young and so is the regulatory framework. It appears to be moving in a more shareholder friendly direction though.
- The Markets for Managers, Products and Corporate Control. Each one is a slower moving dynamic than Western norms. Things are changing but not that quickly.
- Corporate Social Responsibility. Great strides have been made in terms of environmental protection, but ESG scores overall lag a long way behind established Western best practice.
My own two pennyworth from 35-years of close observation; CG is constantly improving in China and fully navigable if you put in the work to understand some fairly obvious constraints.
You can access the full paper via this link Understanding Corporate Governance in China.
Happy Sunday.