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China Business Knowledge @ CUHK Luncheon Series: Improving Corporate Governance: Lessons from China and Hong Kong
By China Business Knowledge @ CUHK
Corporate governance is of paramount importance to any business in the world. Good corporate governance can help prevent an organization from committing wrong doings, increase its accountability in the public eye, and appeal to potential investors to sustain the business. In the tenth talk of the Chinese Business Knowledge @ CUHK Luncheon Series: Improving Corporate Governance: Lessons from China and Hong Kong, Prof. Xie Jin and Mr. Wong Kim-man shared their valuable insights based on research and hands-on experiences.
Assistant Professor Xie Jin from the School of Accountancy at CUHK Business School began the talk with a well-known Chinese proverb “Punish One, Teach a Hundred”, which is also the title of his recent research study on the sobering effect of punishment on the unpunished state-owned enterprises in China. In his presentation, Prof. Xie shared with the audience an alternative strategy for the Chinese government to manage State-Owned Enterprises (SOEs) which are regarded as less disciplined than non-SOEs in China.
In his study, Prof. Xie and his collaborators compiled a list of 254 corporate fraud events of irregular loan guarantees involving public companies and related parties from 1997 to 2014. The found that SOEs in the same location with a punished peer firm are 43 percent more likely to adopt a more independent board structure, meaning the CEO of the firm does not also serve as the president of the board of directors. According to Prof. Xie, the more ‘bloody’ and wide spread of the punishment, the stronger the sobering effect on unpunished firms.
He further explained that the China Securities Regulatory Commission (CSRC) and the media are effective platforms in spreading the news of punished firms.
“The CSRC started to punish listed companies for fraud in inter-group loan guarantees heavily after 2000 and the announcement is made to the personal level with names of people,” he said. And the media would pick up the news and reported it further.
The effect of punishment is particularly salient for SOEs as “these firms are often living in a ‘peaceful world’ protected by the government. They probably don’t even have the word ‘punishment’ in their mind. So when they see their peer enterprises get punished, they will feel very shocked,” Prof. Xie said.
Chinese SOEs are notorious in terms of corporate governance due to their intricate ties with the Chinese government. These firms often lacks external governance mechanism and are perceived as difficult to regulate. According to Prof. Xie, this “punish one, teach a hundred” strategy has proved to offer the Chinese government a cheap alternative way to discipline its SOEs in a non-confrontational way.
“The Chinese authorities do not want to confront the SOEs because these firms also serve many purposes for the government, such as addressing the unemployment issue, contributing to the country’s GDP and taxation revenue. Hence, the indirect way of governing them through the effect of punished firms can actually help to make governance better,” he said.
Hong Kong, on the other hand, has a relatively more mature and transparent corporate governance system. However, according to Mr. Wong Kim-man, Chief Financial Officer of HK Electric Investments, the city still has a lot of room for improvement, given its status as one of the leading financial hubs in the world.
“Hong Kong’s corporate governance system is keeping up with international best practice in most areas,” said Mr. Wong.
He explained that listed companies on Hong Kong Stock Exchange have to follow its Listing Rules Appendix 14 which laid out the principles of good governance, code provisions and recommended best practices on various areas including directors, remuneration of directors and senior management, accountability and audit, delegation by the board and communication with shareholders, etc.
Mr. Wong shared with the audience that the most important feature of the current corporate governance code is that it requires Hong Kong listed firms to “comply or explain” if they choose to deviate from the code provisions.
“Honestly, who would want to give explanations to the public on why their deviation is necessary?” he said. “For those firms that cannot come up with satisfactory explanations, they will have no option but comply.”
When it comes to improving corporate governance system in a financial market, one should also look at its overall ecology which is shaped by its own historical, political, legal, social & even cultural environment.
“In Hong Kong, why do we want our companies to be listed in HKEX?” he asked. “It is because we want people to buy our shares. So when you try to deviate from the code provisions, you are risking that investors will move out from your company’s share which is something the Board does not want to see. This is why everybody will try their best to comply with it,” he said.
As Chairman of the Hong Kong Institute of Certified Public Accountants (HKICPA) Corporate Governance Working Group, Mr. Wong was instrumental in commissioning a comparative study to review Hong Kong’s corporate governance framework for listed companies versus UK, US, mainland China and Singapore in 2015. Commenced in 2016, the project was finalized in 2017 with a comprehensive report covering various aspects of corporate governance in these key markets, including policy, legislations, regulations, enforcements, shareholders rights & protections, etc.
“In Hong Kong, the rights of shareholders under statutory law to director misfeasance and mis-disclosure are generally on par with other key markets. But, the lack of availability of collective redress and the standing of the listing rules still remain areas of concern,” he said.
Going forward, Mr. Wong also supported that Hong Kong firms strengthen their transparency and accountability of board and/or nomination committee on election of directors, including independent non-executive directors (INEDs). Firms should also improve transparency of their relationship with INEDs, enhance the independence criteria in assessing potential INED candidates as well as promoting gender and other diversity among board members.
“We are not leading but just following other countries in corporate governance. As one of the major financial centers globally, with our IPO listings leading the world in the past couple of years, Hong Kong should do much better. It is a great opportunity for us to move up and sharpen our edge in corporate governance,” he concluded.
The luncheon talk generated a vibrant discussion between the speakers and the audience. Stay tuned for our next luncheon talk on April 12.
China Business Knowledge @ CUHK is the knowledge platform of CUHK Business School. It showcases top-notch research by the faculty at CUHK Business School and offers thought leadership and insights into the ongoing developments and modern business environment of China and the world.
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