on corporate governance

I spent Friday reading about fertilizer compounds (for assignment), and the history of SOEs in China (for understanding why there's no goddamn accountability around here). While the article from Ethical Corporation, below, describes the phenomenon in business, the operating attitude of
Chinese folks can be pretty eloquently captured by watching the them purchase groceries in the fruit aisle of the supermarket. The produce is laid out in large bins (not unlike end-of-season sales at Express), which everybody paws through, selecting the choicest fructose. Since fruit costs by the weight, and most Shanghainese are not only extremely but also shamelessly frugal, if they're not in a hurry, they'll pause to peel the oranges and carve bruises out of bananas with personal penknives.

That's part one. Now, there are a lot of people in China. I know you know this, but it's extra-evident when you see how many employees have been crammed into every imaginable nook of a service. In the fruit aisle, for instance, there's an attendant standing besides every bin of fruit. There's a worker who distributes grocery sacks, and a team that manages a small scales and prints your receipt. There's a security guard who directs foot traffic (I love this, because everyone shoves and mobs everything anyway) in the produce section. There are at least four women wielding mops, and a station where you can bring your fruit to have it sliced and boxed for you.
Part two is that, with twenty-plus store employees standing watch at a fairly nice supermarket, not one will utter a word as a customer rips a hunk out of a browning pear with her fingernails and dumps the discarded flesh back into the bin.

Chinese corporate governance – Getting better, but still at the bottom: Interest in good business governance is on the up in China, albeit slowly

Corporate governance in China is as much about culture as it is about business practices. In China, concepts of good corporate governance all too often run counter to the prevailing business culture. Such is the conclusion of the annual “CG Watch” survey by CLSA Asia-Pacific Markets, an investment bank, produced in association with the Asian Corporate Governance Association. Despite accepting that corporate governance has improved immensely in China in the past few years, the country still ranked almost last in Asia. Only Indonesia scored lower. Jamie Allen of the ACGA, who compiles the annual survey and sits on the shareholder group of the Hong Kong Securities and Futures Commission, believes that at a regulatory level things in China are improving dramatically. Boards now have more control, rather than all the power lying with a single figurehead chairman. However, without a tradition of boardroom decision-making, many board members, most of whom are recent appointments and board-virgins, are unsure of their roles and responsibilities. This makes them weak and unsure about wielding their new-found power. The pace of change also overwhelms boards. Since China’s WTO entry, the necessary new legislation from the China Security Regulatory Commission (CSRC) has come thick and fast. To be fair, many at the CSRC are feeling just as overwhelmed when it comes to interpreting and enforcing all the new legislation.
Meanwhile, a growing group of lawyers are specialising in corporate litigation and representing small shareholders in claims against large companies. Generally, the chief executives of major Chinese companies have not traditionally thought they were accountable to shareholders, large or small. They thought that they had little to fear from the law or regulatory watchdogs and that telling anyone what their corporations were doing was a very bad idea. Consequently, disclosure, transparency and accountability have all been ignored.
Another report on corporate governance in China, this one issued by the International Finance Corporation, the private sector arm of the World Bank, generally supports the CLSA-ACGA findings. Companies are feeling swamped by new legislation and are doing the bare minimum rather than embracing a culture of accountability. As the IFC report says, “Too often they don’t know where to start”.
It is also the case, as borne out in any conversation with a senior executive at a Chinese company on the subject of accountability, that many in China do not feel they have much to learn from foreigners – the names Enron and WorldCom are well known among chief executives in China.

Dirty business, dirty governance
As more and more Chinese companies float on the stock exchange and gain new board members, and transparency and accounting demands, there is a need to assess risk from the investors’ point of view. David Webb, a former bank analyst turned scourge of Chinese and Asian listed companies through his governance web site www.webb-site.com, has raised the issue of voting power, or rather the lack of it. He also highlights the lack of clarity for investors when it comes to third-party transactions, soft lending between corporate divisions and deals within the same family that constantly raise issues of transparency. Still, some improvements have been noted. Major insurer China Life notably improved its disclosure last year while Hopson Development announced a new
and more independent board and better investor communications. The CLSA-ACGA report notes that both companies saw improved returns. When it comes to the general state of corporate governance in China, Jamie Allen says: “It can’t get worse. I’m fairly certain that it will continue to improve.”
The corporate governance issue in China clearly is not going to go away. A raft of new IPOs by Chinese companies is set for this year (including the long-awaited China Mobile launch in Shanghai). So it looks like the pressure for better governance will only be ratcheted up both at home and abroad.

Culture or strategy?
Corporate scandals keep occurring in China. The CLSA-ACGA report highlights some typical examples:
· Yangzhou Coal providing a loan to a third party in an attempt to generate a higher return on excess cash – the third party then defaulted.
· Beijing Media’s successful flotation being followed several months later by a reported loss.
· Appliance manufacturer Guangdong Kelon’s board members being arrested for fraud.
· Various Chinese state bank officials being detained for corruption.

What the CLSA report does not mention (because of its timing) is that many of these poor governance issues in companies have mirrored those in the latter half of 2006 in Shanghai’s pension fund scandal. This has led to mass arrests including that of the Shanghai party secretary. This sort of scandal adds to the belief that poor governance is as much a culture as a business strategy.