China corporate governance report: structures

Her experience on both sides of the line – government and corporate – gives her a pragmatic perspective. “As a former state owned enterprise minister, the government does make it clear to companies that overseeing an asset is in the public interest and does make clear what’s expected of them,” she says. “That is true in China but I have seen the same thing in my own country which is viewed as liberal and progressive. I don’t see anything philosophically or inherently wrong with governments having a stake in these major assets if they view it as strategically important from their point of view.”

Many blue chips report that they consider the state to be only passively involved in the company. Fun Chengyu, the chairman and CEO of CNOOC, addresses this in detail in the interview on page xx, but one remark summarises his view: “A lot of people from outside China think all our business decisions are based on government requirements, which is not true,” he says. “When we make a decision to do anything, it’s purely business.”

From a corporate governance perspective, though, there are naturally some differences between state and private companies. For a start, as the majority shareholder in most of the country’s biggest enterprises, the state clearly maintains an interest in what is going on, and this can occasionally look like a distinctively close involvement in management. For example, at least one bank with government representatives on its board has offices within the bank itself for those directors. Also, many investors remember a situation around 2004 when the chief executives of a number of state-owned telcos were swapped at the state’s behest, with investors feeling they were the last to know about the switch.

Also, state-owned enterprises have tended to evolve in a way that can leave them with some legacy assets or obligations that can jar with free market ideas (not that this is necessarily unusual either: look at Telstra’s obligations to serve uneconomical parts of outback Australia, for example). “When the state started listing of some of its companies, they gave quotas to provinces and districts,” says Kha Loon Lee, Asia Pacific head of the CFA Institute Centre for Financial Market Integrity. “They were formally state-owned enterprises, they put up some of the more profitable ones and got them listed, but they still have a responsibility to support less profitable enterprises that are not listed as well. That’s something that’s not going to go away.” That said, the usual pattern is for the best assets to be put into the listed subsidiary; the question for investors then becomes the degree of interaction, both financial and in management, with the unlisted parent (see the third article in this guide for more on this).

“SOEs are really not difficult in the sense that the government doesn’t interfere,” says Gene Bennett, who among other roles is an independent non-executive director at China Pharma, a private sector company. “The difference in SOEs is the need to be able to change the attitude of the workers. Most are not efficiently run.” As he outlines in the article on page xx, in private companies the challenge is different: getting an entrepreneur who is used to ruling the roost to accept that other people, like a board, should have a say in how the company is run.

“You’ve only got about 200, 250 listed private enterprises in China, that’s the big difference,” says Marshall Meyer, professor of management and sociology at Wharton Business School in the University of Pennsylvania. “Most private enterprises are small individual or family owned, and the rules of the game for them are very different: they’re looking for continuity rather than short term shareholder value.”

There can be structural differences too. “I have found that private firms tend to use more complicated structures, in terms of the number of layers used to control listed companies,” says Qiao Liu, associate professor in finance at the University of Hong Kong, who has a working paper in progress on the subject. “They also tend to use complicated designs such as cross-holding structures to control listed companies. For state owned companies, it is not so obvious.” Why? “Private companies are subject to all sorts of financing constraints,” he suggests. “By using complicated ownership structures, that provides some freedom for the controlling shareholders of companies or firms to move capital around to dissolve some of these financing constraints.”