Corporate Governance and Chinese Public Companies

There is increasing pressure on Chinese public companies to improve their corporate governance standards.  With standards generally viewed as weak, see Qiao Liu, Corporate Governance in China:  Current Practices, Economic Effects and Institutional Determinants, CESifo Economic Studies 2006 52(2):415-453; doi:10.1093/cesifo/ifl001 ("We find that concentrated ownership structure, management-friendly boards, inadequate financial disclosure and inactive take-over markets have been the standard governance practice commonly observed among the Chinese listed firms."), the better Chinese companies need a way to advertise their higher standards. 

Some do so by listing overseas.  In a recent study by RateFinancials, described by the Financial Times as an "independent research firm," however, Chinese firms were found to have corporate governance standards "generally lower" than those for US companies.  "These companies are government-controlled enterprises masquerading as independent public companies and it is virtually impossible to assess their financial condition given their poor level of disclosures," said Victor Germack, founder and president of RateFinancials.  Moreover, Chinese NYSE listed firms "have very poor quality of earnings" and "serious accounting related issues." 

Another solution presented by regulators in mainland China is voluntary disclosure.  The securities indices provider in Shanghai, China Securities Index Co Ltd., has announced the creation of a corporate governance index, due to be launched January 1, 2008.  Specifics pertaining to the standard of review utilized by this public index remain sketchy.  Listing on the index is voluntary and the appraisal of corporate governance standards undetaken by "public and industry experts."  It is also important to note that listing on the governance index is voluntary and only available to firms listed on the Shanghai exchange.

A problem with Chinese and other nations with corporate governance standards in their infancy is enforcement.  The Shanghai proposal has the benefit of side-stepping ineffective enforcement through third-party review and disclosure.  An additional way to enforce corporate governance standards is an effective private right of action.  As discussed by David Clarke in 2003, there is no effective private right of action for Chinese shareholders to sue corporate directors or officers and thus norms promulgated by the Chinese Company law are rely "solely on administrative enforcement" by the feeble China Securities Regulatory Commision and are thus of "limited value, given the CSRC's resource constraints."  Such an approach would face its own difficulties, given disparate power imbalances between shareholder and corporation in most circumstances and the fact that, in China, as in many other similar nations, the corporations have deep and long-standing ties to political and, therefore, judicial officers. 

The creation of a public index of corporate governance standards, reviewed by outside, non-state auditors, has the benefit of side-stepping the problems presented by a state ambivalent, at best, to corporate governance.