In an era of advancing capital markets, increasing levels of investment and greater awareness of shareholder rights, Beijing is busy developing corporate governance standards with Chinese characteristics.
The need for better governance is no longer in question. The debate is now focused on how best to mesh China’s unique needs – widespread government ownership – with calls for accountability and transparency.
For listed state-owned enterprises (SOEs), the motivation for strong governance is clear, but the government doesn’t want to stop there. To this end, the State-owned Assets Supervision and Administration Commission has put 18 non-listed SOEs in a pilot program that will see them operate with greater transparency.
The growing urgency for change was underlined in March when some of China’s top regulators met to discuss recent developments in an event sponsored by the Paris-based Organization for Economic Cooperation and Development (OECD).
“The debate seems more sophisticated now. We’re not talking about the basics any longer,” said Fianna Jesover, at the OECD. “Now it is a matter of fine-tuning and implementing.”
Beneath the barrage of rules and regulations intended to create legislative corporate framework, four factors are pushing forward this development: more investors are entering the market, SOEs are seeking listings, firms are issuing more bonds and there is a concerted push to raise awareness.
For Beijing, the main challenge is to balance its role as an owner and a regulator and keep politics out of management. To this end, it is appointing more independent directors, with the ultimate goal of creating a buffer zone between the government and corporate management.
The theory is fine, but the practice is flawed: Independent directors in China often have limited authority. Their role is more focused on asking the right questions, said representatives at the meeting in Shanghai.
Still, more companies are moving towards models that would lead to better governance. These include equity-linked compensation and stock options for executives, said Wang Jing, president of Institutional Investors Services, a company that tracks corporate governance in domestically listed companies. These practices, common in the West, represent a huge change from the SOEs’ original salary-for-life system.
“Nowadays a lot of companies pay attention to corporate governance,” said Wang.
But there are areas where company behavior still leaves much to be desired, notably on issues of disclosure and transparency.
Conflicts of interest are rampant and remuneration arrangements murky, while ownership patterns often tend to wind back to government-controlled interests. There is also concern at the related party transactions that result from business based on personal relationships. On the other hand, the number of bad apples may be on the way down.
For the OECD, the issue of transparency is more than an academic question – it wants to develop some policy options together with the government.
“That’s probably the issue we are going to tackle next,” said Jesover. “A strong disclosure regime is pivotal to market-based monitoring of companies. Disclosure is a powerful tool for influencing companies’ behavior and protecting investors.”
More and more, China will have to comply with international standards on transparency and shareholders rights – even those of minority shareholders.
If everything goes according to plan, the local systems it creates could well become the blueprint for building capital markets in other emerging markets.