China corporate governance report: structures

He sees a difference in the way they appoint board members too. In private firms, he says, “the controlling shareholders tend to be more selective when it comes to board members, because this is their own business: they want 100% control over it. They want to search for people who they feel comfortable with.” At state owned enterprises, he argues, “sometimes they have to balance and pick up people from different professions. Private firms are aggressive and pick up the people they trust.”

Some argue that the arrival of private equity capital in China has helped things. “The Chinese private sector has some very good companies with very good concepts, and with competitive strength,” says Guy Cui at Hopu Investment in Beijing, which runs a $2.5 billion China fund and recently took on some of Bank of America’s stake in China Construction Bank. “But normally this company is dominated by one person, the entrepreneur. You find that as soon as they have been bought into by private equity investment, the management has been strengthened: you’ve got a proper board, rather than a rubber stamp board with family members. And in most cases there’s no argument – they welcome these arrangements, for the security of investors’ money and also because they themselves feel there is a need to do so, especially if they want to do an IPO in future.”

Most of the big state-owned blue chips have partnered with foreign groups as strategic shareholders, often at the time of an international IPO. A handful of examples would include Bank of America in China Construction Bank, Goldman Sachs in ICBC, and BP in Petrochina. These partnerships have a big impact on approaches to corporate governance, with a transfer of techniques from western companies into those on the mainland. This is sometimes true in the private sector too. At Ping An, Jin Shaoliang, head of the group board of directors, says that “in addition to aiming for best market practice, we learn from good companies like our largest shareholder, HSBC.” In Ping An’s case it’s not the first foreign stakeholder they’ve learned from: Morgan Stanley and Goldman Sachs were strategic shareholders back in 1994, “and they brought us a lot of ideas about the practice of corporate governance. Later in 2002 when HSBC became our shareholder, that also brought us a lot of practices regarding corporate governance, especially in the areas of compliance and internal risk controls.”

The Ping An shareholding structure is highly distinctive. Jin says: “A lot of companies have a very unbalanced shareholding structure, and therefore there are a lot of times when big controlling shareholders exercise their interest against that of smaller shareholders.” HSBC, the largest shareholder in Ping An, controls just 16% of the stock. Similarly more than one third of the board of directors are independent non-executives, while like many blue chips, there are also established special committees covering audit, remuneration and other areas; these are chiefly occupied by independents. And the most distinctive thing about the Ping An structure is the absence of the state (although Jin says people widely believe it is a state-owned company).

The future will see management structures and governance techniques move closer together among state and private-backed companies. The articles in this guide look further at how these techniques will evolve.

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