Limitation of Chinese Corporate Governance.
This entry was posted on 8/22/2006 12:35 PM and is filed under Chinese Equity Investments.
First Published on the FT.com website Lex
Chinese Corporate Governance
by William Gamble |
 21 Aug 2006 03:10 PM |
The idea of Chinese corporate governance is itself an oxymoron. A better ‘crib sheet’ for analyzing Chinese, Asian or any other emerging markets would be concepts from law and economics and game theory. The problems of Shanghai Electric, Euro-Asia, Moulin Global Eyecare, and Ocean Grand Holdings are predictable results of a system that is relation based as opposed to rule based. Good corporate governance requires a rule based system regulated by a regulator without conflicts and with jurisdiction.
Companies in China are almost without exception controlled by the government or families. In law and economics there are five criteria that determine whether management will act in the best interests of shareholders. These do not exist in government or family run corporations in China. Any government controlled corporation anywhere functions according to political not necessarily economic directives. Family run corporations operate in the best interests of the family.
Some of these problems can be ameliorated by a well funded, neutral regulator. The CSRC is a government regulator regulating government corporations. As I pointed out in my letter to the FT (Hong Kong Exchange cannot meet protection standards, Financial Times, December 7, which was denied by HK Ex), the Hong Kong financial regulators “lacks teeth to pursue fraud in the territory and its capacity to take action against local-listed Chinese companies is "seriously impaired." (Hong Kong regulator admits weakness, Financial Times, May 11 2006).
What is surprising is that investors and analysts around the world apply a quantitative and research based approach to these companies as if they were listed on the NYSE. They are not. Assuming the same rules apply is the real crime.
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