Independent voices

In corporate China, a small dose of star quality can go a long way. When the big state-owned banks were preparing stock market listings, not only did they bring in high-profile foreign investors as a source of expertise and credibility, they also stuffed their boards with top talent from overseas.

John Thornton, former Goldman Sachs president, is an independent director for Industrial and Commercial Bank of China along with former Hong Kong Financial Secretary Anthony Leung. Bank of China has Peter Cooke, who was once head of supervision at the Bank of England, and Anthony Neoh, former head of Hong Kong’s Securities and Futures Commission. Ian Wilson, once chief executive for Standard Chartered in Hong Kong, and Tom Manning, formerly chairman and CEO of Cap Gemini Asia Pacific, serve on the board of Bank of Communications.

The list stretches beyond state-owned firms and into China’s private sector.

“Many companies in China are now paying greater heed to the need for good corporate governance and the fact that things like transparency can increase shareholder value,” said Manning, who also serves as an independent director of telecom software and security provider Asia Info Holdings.

In 2005, Manning set up China Board Directors (CBD) which serves as a platform for discussion between non-executive board members of Chinese companies. He believes there are still less than 50 Western independent directors with the top 50 or so Chinese firms but CBD is increasingly involved in finding suitable candidates.

Source of knowledge

This rise in demand is largely due to a new listing requirement to appoint non-executive independent directors – they must occupy at least three board seats in Hong Kong while in the US independent directors must form an overall majority.

These directors can be more than just a required presence, said Davin Mackenzie, Beijing-based managing director of private equity firm Peak Capital, who serves on the boards of five overseas-listed companies, including Asia Info and online games operator The9.

“If the executive partner has majority control they still treat the board as a resource,” Mackenzie said. “It is a group of people who can help the company from an industry perspective or from a financial perspective.”

Usually, independent directors are important members of key committees, notably the audit committee. But, depending upon their individual areas of expertise, directors can also find themselves on any number of committees covering areas such as compensation, innovation, strategy, and risk management.

In addition to bringing their own experience to the table, the most effective directors are those who make the effort to understand the company and the challenges and opportunities it faces.

“It’s very useful to know the managers and make visits outside of board meeting dates,” said Manning. “If you can establish a dialogue with managers and understand their concerns it gives you more credibility as a director.”

This is especially important with Chinese companies. Aside from complaints from many directors that board meetings are not scheduled in advance and can take place in as little as a week’s notice, the boardroom culture in China remains somewhat ceremonial.
“The Western, debate-oriented style of bringing up any issue at any time isn’t there yet,” said Manning.

“In some cases, there are so many people present at meetings – assistants as well as board members – that it’s easier to sort things out beforehand.”

And when it comes to getting a sense of the tone behind the pomp and circumstance, foreign independent directors who don’t speak Chinese – and therefore rely on translators – face an even greater challenge, although not an insurmountable one.

Party policy

No matter what language they speak and strategy they employ, when it comes to state-run firms, issues such as executive appointments are largely beyond the control of independent directors.

Speaking to the McKinsey Quarterly earlier this year, Thornton explained how he developed a corporate governance committee at China Netcom, where he is a board member.

What has emerged is a more transparent system for nominating CEO and CFO candidates. But the system still allows the Communist Party delegates – a majority – to control the nominations and have the final say on appointments.

Manning sees this is entirely proper as the state is the major shareholder and wants a say in who represents its interests. For many foreign investors, though, such arrangements remain worrying.

“It’s the biggest risk of investing in Chinese entities,” said one executive with a bank that has invested in China, who asked not to be named.

“Nobody talks about it – it is something I have flagged internally. We need to recognize that we can wake up one morning and find that the party has replaced all the senior management.”

New reality

For larger state-owned enterprises such as the banks, that appreciate the need for independent directors and are indeed under pressure from the regulators to improve governance, this is a corporate reality rather than a time bomb.

Jamie Allen, secretary-general of the Asian Corporate Governance Association, is more concerned about the smaller companies that come to Hong Kong as H-shares, as well as private firms incorporated in Hong Kong or tax havens like the Cayman Islands.

“Most of these companies see the requirement for independent directors as a compliance issue,” he said.

“They appoint these people often just a month or two before the listing. I find it quite appalling that companies appoint directors who are very inexperienced or ignorant of what corporate governance is,” he added.

The bottom line is that badly governed companies are more likely to break rules and become caught up in disciplinary proceedings.

There is a general awareness of this in China but, while significant progress has been made, the system currently in place is by no means the finished article.

“It is still very early days,” said Manning. “Of all the situations that might benefit most from the greater role of independent directors, we are still in low single digits in terms of penetration.”