China corporate governance report: Haier case study

Euromoney guides, June 2009

Chinese corporate structures tend to come down to state-owned or private sector. And then there’s Haier. The Qingdao-based white goods heavyweight is something different again. “We are not a private company and we are not a public company,” says Philip Carmichael, President of Haier Pacific and the company’s most senior non-Chinese executive.

Haier is a cooperative enterprise, whose original foundation was as a municipality cooperative venture back in the early 1980s. It does have listings in both Hong Kong and Shanghai, “but they are only very thin slices of individual product categories so we’re not really a listed company,” says Carmichael. It’s a large and powerful presence despite that: Haier’s renveues in 2008  reached US$17.5 billion, 70 to 80% of it from China.

So where does governance and transparency fit in a company like this? There’s no quarterly reports, just annual figures, and even then only consolidated revenue and profitability percentages, with growth rates on a year on year basis. The statutory requirements that come with the Hong Kong and Shanghai listings are met, but “it’s very difficult to extrapolate that to the whole company,” he says. “It’s very complicated. The form we started as no longer actually exists in China today. We’re a legacy of something that’s been changed.”

Structurally, the management takes the model of a strategic thinker CEO, and a COO who executes that vision. A complicated matrix system separates the various businesses. While that doesn’t seem much of a corporate governance model to follow, on the other hand an internal audit department is run by a Korean 30-year Samsung veteran “who looks at all our overseas subsidiaries pretty much the same way as you would see any other internal auditor do anywhere in the world. Although we don’t have an outside board of directors, we do have very tight controls internally and they are consistent with GAAP.”

Like many Chinese companies Haier has been closely involved in corporate giving, and it made a striking promise ahead of the Beijing Olympics: that for every gold medal won by a Chinese, Haier would build a new primary school in the earthquake-hit areas of Sichuan. That’s over 80 schools.

Carmichael has a remarkable finding that sheds some light on the challenges Chinese companies sometimes have when acquiring or growing overseas. Haier’s financial department conducted some research indicating that Chinese companies operating outside China have a 10 times greater problem with uncollectible receivables from their customers overseas than the average in any particular country. “If you want to say it in a less polite way, it seems there are people who try to take advantage of these guys from China because they think we are less sophisticated.”

“Sometimes people in the west don’t realise the degree of sophistication here because it doesn’t come through in the translation,” Carmichael says. “To borrow a phrase from a former Chinese leader, we think of ourselves as a Chinese company with international characteristics.”

This article was one of several chapters in a detailed guide to corporate governance in China published with the June 2009 edition of Euromoney