Heidrick & Struggles Report on Corporate Governance in China

Thursday, October 4, 2007 0:23
Posted in category The Big Picture

Heidrick & Struggles and Fudan University have just put out what is one of the best pieces I have seen on corporate governance and boards of directors in China. Part of its Asia Pacific Thought Leadership Collection the Benchmarking Corporate Governance in China report (PDF Here) highlights findings of more than 100 companies in China (State-owned, private, and foreign invested)…

The motivation for the study:

Corporate governance is a hot topic in China. As the nation opens to foreign investment and privatizes industries that used to be solely under state control, investors around the world are placing large bets on the country’s future. As the influx of capital grows, so does the pressure on Chinese corporate boards to make sure those investments pay off.

And like other markets worldwide, China has had its fair share of corporate scandal in recent years. Despite the growing importance of corporate governance, so far there has been little investigation into how Chinese corporate boards are formed and operated. A review of existing studies on Chinese corporate governance revealed little about the actual makeup of company boards among state-owned, private and foreign-invested companies.

So we decided to find out for ourselves.

and what they have found is very interesting.

One of the first things that caught my eye (see from the above image) is the underlying criteria by which boards are evaluated have some big differences. for SOEs, the primary measure of performance is return on assets/ equity where as both private and FIE are judged on profitability and market penetration… . More interesting than that though is the fact that while 50% of private enterprises are evaluated on public comments, SPE and FIE are in the 20s.

Another interesting image, series of image, deals with the presence of foreign board members. As you can see, over 50% of domestic enterprises are not open to foreign oversight at all (FIE are 180 degree opposite).

Further to that, the compensation of foreigners is also really interesting as well. More than 60% of foreign presence in SOE and Private Chinese firms is represented by Taiwan and HK members, where as FIE have a much more balanced board .. to be hoenst, I really expected a higher western presence in FIEs, but overall the balance is pretty even.

In the end, H&R and Fudan came to one conslusion:

“Our study shows there remain significant differences among State-Owned Enterprises, Private Enterprises and Foreign-Invested Enterprises in terms of function and role of company boards”

And while that might be qualify as the biggest understatement of the year, their study is the only one I have seen to date that clearly shows where the differences originate from and how the make up and evaluation of these boards contibutes to these differences.

For those interested in getting more of a behind the scene, you can also read an interview (PDF Here) where Steve Mullinjer discusses the report

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