Why was the listing of China’s Ant Group dropped?

It would have been the world’s largest stock market IPO (initial public offer), raising $34 billion; but two days before Ant Financial Services Group was due to list on the Shanghai and Hong Kong Stock Exchanges, the listing was dropped. Why? Was corporate governance the reason, as the Shanghai Exchange suggested?

In the fourth edition of my Corporate Governance textbook, and my book on Corporate Governance in China, I tell the story of the Alibaba Group, one of China’s most successful companies, founded in 1999 by Jack Yun Ma, a teacher of English from Hangzhou.

In 2011, Alibaba spun off its financial arm into Ant Financial Services Group, including its vast electronic payment system, Alipay, keeping a controlling stake. In 2020, Jack Ma and his colleagues decided to float the Ant Group on the Shanghai and Hong Kong Stock Exchanges. The listing was planned for 5th November 2020; but two days before, on 3rd November, the Shanghai Exchange stopped the listing and the Hong Kong Exchange had little choice but do the same.


The Alibaba Group is China’s largest e-commerce group and processes more transactions than Amazon and eBay combined. Alibaba is a global leader in internet-based businesses, offering advertising and marketing services, electronic banking through Alipay, cloud-based computing, network services, and mobile communications. The Group also sells products, both wholesale and retail.

The Alibaba Group was listed in New York in 2014, raising US$22 billion, then the largest initial public offering, and was massively over-subscribed. Alibaba shares in New York fell dramatically when the Ant Group listing was aborted.

The governance of Alibaba

The company publishes a mission statement and emphasizes the importance of its values, with a code of ethics stating that the conduct of all employees should ‘reflect Alibaba Group’s values and promote a work environment that upholds and improves Alibaba Group’s reputation for integrity and trust’. The board has established corporate governance guidelines describing the principles and practices that it follows in carrying out its responsibilities. The board of directors had 9 members. Six executive or connected directors, 3 independent outside directors.

The shareholders in Alibaba Group Holding Ltd have few powers over the governance of the operating company. Alibaba shareholders do not own shares in the Alibaba company itself, but in a company incorporated in the Cayman Islands, tied to Alibaba by legal agreements.’ Power over Alibaba itself is exercised by an opaque and unaccountable entity called the ‘Alibaba Partnership. Shareholders’ interests are side-lined. In the words of the Economist[1]: ‘Alibaba’s legal structure is controversial’.’

The Alibaba Partnership has around 30 members, mainly top management, including a contingent from Ant Financial Services. The number of partners is not fixed and changes from time to time. All partnership decisions are made on a one-partner/one-vote basis. The ‘Partnership’ is governed by a partnership agreement

and operates under principles, policies, and procedures that have evolved over time.

The Group believes that the peer nature of the Partnership enables senior managers to collaborate and override bureaucracy and hierarchy. ‘Our partnership is a dynamic body that rejuvenates itself through admission of new partners each year, which we believe enhances our excellence, innovation and sustainability.’

Corporate governance control over the Alibaba Company, which is listed in New York as well as Shanghai, is maintained by dual-class shares, giving enhanced voting power to those shares held by dominant shareholders. Many prominent listed companies in the USA, including Silicon Valley high-tech companies, have similar dual-class shares to keep control in the hands of the founders.

Alibaba’s founder, Jack Ma, stood back from executive control in 2019 but remains a powerful presence behind the chair.

Ant Financial Services Group

Coming to the game later than the Western world, China was able to leap-frog the personal computer era, jumping to almost all electronic transactions being conducted over the cell phone network. Many cities in China now claim to be ‘smart cities,’ with super-fast communications and broadband handling most business and personal transactions electronically.

Alipay, which handles money transfer transactions electronically, became vast with the growth of Alibaba. Other financial services were added, including insurance, credit-rating, loans, and the sale of financial products. This entire financial enterprise became the Group. In 2020, Mr Ma and his colleagues decided to launch the Ant Group on the Shanghai and Hong Kong Stock Exchanges, keeping a dominant, controlling interest.

The floatation of the Ant Group

The proposed listing of the Ant Group was sponsored by Morgan Stanley, J. P. Morgan, and two Chinese financial institutions. The Hong Kong listing was detailed in a draft document, of more than 400 pages plus appendices, published by the Hong Kong Exchange, with due usual warnings to potential investors. For more information see HKSA Listing Document.

In this document, the Executive Chairman of Ant, Eric Jing, wrote a somewhat eulogistic letter, outlining his vision of the company. Although long, I have included it in full, given its significance.

 ‘Ant Group is not a financial institution, nor simply a mobile payments company. We are a technology company using the best technologies and resources to empower banks and financial institutions to serve every consumer and small business. Sixteen years ago, Ant Group was founded on the dream that in the future, financial services would not only benefit a select few, but serve all ordinary people in their daily lives, all the time.

‘Today, we are privileged to provide one billion consumers and 80 million small businesses in China with the benefits and conveniences of technology-enabled finance to facilitate their living and business activities. We are motivated by this milestone, but we believe this is only the beginning. The financial system of the past 200 years was designed for the industrial era and served only 20% of the population and organizations. As we enter the digital age, we must better serve the remaining 80%.

‘Together with our like-minded partners, our vision is that consumers and businesses will no longer have to navigate inefficiencies to find capital, but rather, capital will be matched with consumers and businesses based on data-driven predictive technologies, which will enable every consumer and small business in the world to benefit from tailored financial services. This is our company’s responsibility and also the future we invite you to join.

Small is beautiful, small is powerful together – our business is built on three major pillars: digital payments, digital finance, and digital daily life services. That is today, but we will continue to evolve with a focus on the future. Our raison d’être is the pursuit of “the good life” by our customers – hundreds of millions of consumers and small businesses.

‘We believe that if we can enable ordinary people to enjoy the same financial services as the bank CEO and help mom and pop shops to obtain growth financing as easily as big firms, then we will be a company that belongs to the future.

‘We do not believe bigger is better. We aspire for our customers – consumers and small businesses – to become better and stronger. Our pursuit is sustainable development that lasts at least 102 years. We expect that because of our determination, every individual will enjoy inclusive and sustainable financial services; every small business will have equal opportunity to compete on a level playing field; and all aspects of life in the digital world can be accessible through open collaboration with service providers.

Solving trust issues is at the core of what we do. We have a track record of solving real problems for consumers and small businesses. Sixteen years ago, Alipay pioneered online escrow payments to solve the problem of settlement risk due to a lack of trust between online buyers and sellers. Ten years ago, we created “Quick Pay” to improve online transaction success rates. Seven years ago, we launched our money market fund, Yu’ebao, to provide ordinary people access to money management tools even if they only wanted to invest 1 renminbi. Three years ago, we made popular the Alipay’s QR merchant code, so that nearly every street vendor across all corners of China could enjoy the convenience of mobile payments. Our innovations are driven by how they fulfil our mission and vision over the long-term and not by the pursuit of short-term gains.

‘To better realize our mission “to make it easy to do business anywhere”, we are dedicated to solving the trust problem for our customers. Lack of trust is the biggest cost of doing business. Through innovations ranging from trusted online escrow to credit-underwriting based on data technology, we provide unsecured loans to small business

‘Now, AntChain is exploring the application of blockchain to establish trust in transactions among multiple parties. It would be safe to say that if we solved one core issue over the past sixteen years, it would be establishing trust. We always ask ourselves, what should we leave for the world if one day our company were no longer in business? We hope that it would be a system of trust.

We are firm believers in the future of digital inclusion. ‘The world is undergoing a holistic digital transformation in every respect. This is not exclusive to technology companies. The true era of digitization is heralded only when all industries and businesses participate. Today, the modern services industry including financial services is boosting domestic demand and employment. And the growth of the services industry will rely on digital infrastructure. This is also the expectation of consumers in their pursuit of good living. We are firmly committed to advancing the digital transformation of the modern services industry, including financial services, so that every small business can reap the dividends of digitization, and every individual can access services digitally at their fingertips.

‘We believe if you want to go fast, walk alone, but if you want to go far, walk together. We will join hands with our partners and welcome the future of digitalization together. Our aim is to leverage technology to develop incremental market opportunities by serving the long tail of small businesses and consumers. We choose to focus on enlarging the pie together with our partners rather than engaging in the zero-sum game of dividing up the existing pie. We believe that as long as we continue to leverage technological innovation to address problems, we can create even bigger markets and opportunities.

‘Today, more and more people in developing countries and regions urgently need inclusive services and their small businesses need more growth opportunities. We are committed to supporting ordinary citizens and small businesses because helping them helps ourselves by bringing the beauty of inclusion into this world.

‘Technology must serve society as the biggest gift of our time. We have been persistent in doing what others refuse to do or cannot do well, because technology blesses us with this ability and opportunity. It is technology that makes inclusiveness as a sustainable model possible, and therefore technology exhibits the greatest potential to unlock social value. We will continue to invest in technology and ensure that it’s accessible to people. Whether it’s QR codes, AI, cloud computing, or blockchain, we must move these technologies from the lab to the community, so that every ordinary person can smile because we’ve made a difference to them.

‘At Ant Group, we have cared about our responsibility to society from the very beginning. We have dedicated 0.3% of our annual revenue to philanthropy and will continue to make this annual commitment. At the same time, we continue to increase our investments in green initiatives. Over the past four years, with the participation of 550 million users who support our Ant Forest carbon-reduction program, we planted over 200 million trees. We plan to plant one billion more trees over the next decade to make the Earth a greener place. We have and will continue to support advancement for women, including our programs to give girls in poverty-stricken areas a chance to go to school and broaden their choices.

‘We know that countless difficulties and challenges lay ahead, but we will continue on the path that we believe is right. We invite you to join us on this journey of conviction and hope. They say seeing is believing, but for me and my colleagues at Ant Group, just like sixteen years ago, we can see the future because we believe.’

The governance of the Ant Group

         The HKSE Listing Document (p157/8) provides a group-wide ownership family tree. Mr Ma is shown as owning 34% of the Hangzhou Yumbo Group, with three colleagues (Mr Eric Jing, Mr Simon Hu, and Ms. Fang Jiang) holding the balance equally. Hangzhou Yumbo then owns three companies:

Alibaba, which owns 32.65% of Ant,

Hangzhou Juhan/Junao, which owns 50.52% of Ant

Overseas Investors Group, which owns 16.83% of Ant.

These companies are all described as ‘onshore’ companies. They are then shown as controlling ‘offshore’ companies, including 100% of Alibaba, which together with the A, B, and C shareholders own the Ant Group. These ‘offshore’ companies are probably incorporated in an offshore tax haven.

The Hong Kong listing document for the Ant float also provides the names and details of the three executive directors, three non-executive directors, and three independent non-executive directors of Ant, together with three members of the supervisory board. The membership and chairs of an Audit Committee and a combined Nomination and Remuneration Committee are given, as follows:

Executive Directors

Mr Eric Xiandong JING,47, Hangzhou, Zhejiang

Executive Chair 2018, Executive Director 2013. Partner of the Alibaba Partnership, a limited partner of Hangzhou Junao and a shareholder of Hangzhou Yunbo. Joined Alipay 2009 and served as senior vice president and CFO, COO, President, and CEO; previously senior finance director and Vice-President Finance at Alibaba.

Mr Simon Xiaoming HU, 50, Hangzhou, Zhejiang

CEO 2019. President from 2018/19. A partner of the Alibaba Partnership, a limited partner of Hangzhou Junao and a shareholder of Hangzhou Yunbo. Joined Alipay 2005. Founder and President AliFinance 2009. Chief Risk Officer 2013 to 2014. President Alibaba Cloud 2014 to 2018.

Mr Xingjun NI, 43, Hangzhou, Zhejiang

Executive Director and Chief Technology Officer 2020. A partner of the Alibaba Partnership and an indirect limited partner of Hangzhou Junao. Joined Alipay a in 2004 and laid the foundations for the technical framework of Alipay. President of the business and technology groups of Alipay.

Non-executive Directors

Mr Joseph C. TSAI, 56, Hong Kong

Member Audit Committee. Non-executive Director 2019. A partner of the Alibaba Partnership. Tsai joined Alibaba 1999 as a founding member and served on Alibaba’s board of directors since its inception. Alibaba’s chief financial officer until 2013, has served as executive vice-chairman of Alibaba, and is a founding member of Alibaba Partnership. From 1995 to 1999, he was a private equity investor based in Asia with Investor AB, the main investment vehicle of Sweden’s Wallenberg family.

Mr Li CHENG, 45, Hangzhou, Zhejiang.

Joined company 2005, developer and chief architect Alipay, COO

 international business. Limited partner Hangzhou Junao.

Ms. Fang JIANG, 46, Hangzhou, Zhejiang,

Member Nomination and Remuneration Committee. Responsible for

 planning, international website integrity, global operations.

Non-executive Director since 2020. Partner Alibaba Partnership, Limited Partner Hangzhou Junao.

Independent Non-executive Directors

Ms. Quan HAO, 62, Beijing,

Chair Audit Committee. CPA California and PRC. Partner KPMG Huazhen. NED Best Inc., (listed NYSE), Legend Holdings (listed HKSE),

HSBC China.

Dr. Fred Zuliu HU, 57, Hong Kong

Chair Nomination and Remuneration Committee, member Audit

Committee. Founder and Chair Primavera Capital Group. Previously MD Goldman Sachs China, and IMF. Director UBS Group (listed NYSE), NED IC Bank of China (listed Shanghai), Hong Kong Stock Exchange (listed HKSE).

Dr. Yiping HUANG, 56, Beijing

Member Nomination and Remuneration Committee. Professor and Director Institute of Digital Finance Peking University. Director Citicorp Asia.

Supervisory Committee

According to the listing document, the Supervisory Committee has three supervisors – one employee representative and two non-employee representatives. The non-employee representative supervisors are elected at the shareholders’ general meetings. The employee representative supervisor is elected by the employee representatives’ general meeting.

The three supervisors are shown as:

 Mr Hang JIA,48, Supervisor since 2016. Chair of the Supervisory

Committee 2020. Previously, with China UnionPay Co., Ltd. as

representative for its American office, and the general manager of the

operations division of UnionPay International.

Mr Hong XU, 47, appointed Supervisor 2020. Joined Alibaba 2018, Alibaba Deputy Chief Financial Officer 2020. Previously, with

PricewaterhouseCoopers 1996 to 2018. Non-executive director of

Other companies listed oi Hong Kong, Shanghai, Shenzen, and

Singapore Stock Exchanges. A member of the Chinese Institute of

Certified Public Accountants.

Ms. Quan YU, Supervisor since January 2020. Joined Ant in 2016,

 and served as a senior director. Previously, Ms. Yu was a senior

director Capital One Financial Corporation, an American bank holding company, 2002 to 2016.

The market’s reaction to the Ant IPO

The proposed floatation was well received by markets around the world. Some commentators questioned whether the company should be valued as a high-tech company, in which case it had the largest customer base imaginable with almost every business in China and large swathes of the population (over 1.4 billion) needing an Alipay account: or should Ant be valued as a financial institution, recognising that Ant was a vast bank even by global standards, and was at the heart of facilitating the shift from printed currency notes to electronic transactions? Either way, the broad conclusion was that the IPO was favourable and the launch price reasonable.

Concerns were expressed about the political and regulatory risk. It was recognised that all listed companies in China had to be acceptable to the leaders of the CCP (Chinese Communist Party) as well as satisfying government and stock exchange regulators.

The possibility of competition was also raised. As a high-tech platform, competitors included the powerful TenCent Group (another vast Chinese company listed abrad). But, given Alipay’s user base, Ant seemed well entrenched. As a financial institution, the competitors were China’s traditional banks, but it would be hard to displace Ant, because of its massive financial electronic base and scale.

The listing is dropped

On 3 November 2020, two days before launch, the Shanghai Exchange stopped the Ant listing, citing ‘corporate governance failures.’ The Economist (2.1.21) suggested that Jack Ma had been told by the Financial Authorities to ‘rectify the Ant financial institutions.’ Anti-trust investigations had already begun into Alibaba.

In October 2020, Mr Ma took the opportunity, when addressing a conference in Shanghai, to rail against financial regulation that he thought was inhibiting the development of e-based transactions. His comments must have concerned the Beijing authorities; a reaction was predictable.

The last-minute decision to intervene by the authorities in Beijing suggests that when the floatation value (the world’s largest public offering) was announced, they suddenly realised the implications. The company that dominated the entire country’s electronic payments systems and e-commerce activities was in private hands and about to be floated on the stock markets: anyone, anywhere in the world, could buy shares through the Hong Kong Stock Market.

Moreover, this company would be one of the world’s largest financial institutions. Maybe the Politburo realised they were holding a tiger by the tail: time for more government control.

The concerns of China’s corporate and financial regulators

         China is a one-party state, run for the benefit of ‘the people’ by the Chinese Communist Party (CCP). During 2020, among the issues concerning the CCP authorities were the control of ‘big-tech,’ the private companies that dominated the provision of electronic communication,

e-transactions, and e-commerce; and the growth of electronic money transactions associated with the provision of credit, which challenged traditional banking systems and was not susceptible to existing banking controls.

         To appreciate the implications of such concerns about the Ant flotation, it is necessary to understand something of the Beijing regulatory apparatus.

The Politburo

The Politburo comprises the top officials of the Chinese Communist Party (CCP) and meets monthly. The policy concerns of the Politburo can often be deduced from commentaries in the People’s Daily, the main newspaper of the CCP. Both the concerns about the implications of ‘big-tech and the effect of electronic money on the banking system were apparent.

Regulators in Washington, London, and Brussels have voiced similar concerns about the unaccountable power and influence of Western internet powerhouses, such as Google and Facebook.

State Administration for Market Regulation

China’s authoritarian government initially seemed to take a laissez-faire approach to big-tech, allowing the unfettered growth of country-wide internet communication and internet platforms to thrive. Indeed, the internet companies were celebrated as icons of the nation’s

technological lead, with its ‘smart cities,’ electronic money transfer, and e-commerce.

Eventually, Alibaba and Alipay began to dominate their markets. Now, it seems, the big-tech companies have attracted the

regulator’s attention. In 2020, the State Administration for Market Regulation instituted an investigation into whether the e-commerce group Alibaba had engaged in monopolistic practices, such as requiring vendors not to sell goods on other platforms.

The week after the Ant listing failed, the market regulator issued rules to combat anti-competitive behaviour by internet companies.

China Securities Regulatory Commission (CSRC)

China Securities Regulatory Commission (CSRC) is a ministerial-level public institution, directly under the State Council, which performs a unified regulatory function on China’s securities and futures markets, and ensures the legal operation of the capital market. The CSRC oversees the operation of the China Company Law (1993 and subsequent updates) and regulates state-owned and private companies.

The Peoples’ Bank of China (PBOC)

PBOC is the central bank of China, responsible for carrying out monetary policy and regulating the banking laws of mainland China (not Hong Kong Special Administrative Region). It is an executive department of the State Council. Its asset holdings are the largest in the world.

The digital yuan, now dominated by Alipay, is a potential threat to the traditional bank notes and the banking system’s money handling regime.

Ministry of Finance of the PRC

The Ministry of Finance handles fiscal policy, economic regulations, and government expenditure. It is also the national

executive agency for macro-economic policies and the national annual budget. The Ministry publishes the country’s macroeconomic data.

            During 2020, while Ant was preparing its IPO, China’s financial regulatory authorities, including the Ministry of Finance, the Peoples’ Bank of China, and possibly the CSRC, called for a meeting with Ant to discuss its financial supervision.

Bank of China (BOC)

A large commercial bank founded in 1912, Bank of China survived the vicissitudes of China’s history, to become the dominant financial institution in the country, with a global service network. The Bank was a wholly state-owned enterprise, until floated in 2006 on the Shanghai and Hong Kong Stock Exchanges. The Bank developed China’s international trade settlement system, overseas fund transfer, and other non-trade foreign exchange services. The Bank now offers business and personal banking, loans, investment fund and securities management, insurance, aircraft leasing, and other financial services. The Bank claims to relate its strategies to leader Xi Jinping’s ‘Thoughts on Socialism with Chinese Characteristics for a New Era.’

Why was the listing of Ant Group Stopped?

         It would have been the world’s largest IPO. The withdrawal of the listing by the Shanghai Stock Exchange, two days before the planned launch, was dramatic. Something significant had obviously happened.

         The Shanghai Exchange spoke of ‘corporate governance irregularities’ and, certainly, there were some unanswered questions about the information provided in the listing documents; although the proposed listing had obviously satisfied the listing rules of the Hong Kong Stock Exchange, which embrace the Hong Kong Corporate Governance Code, itself modelled on the original UK Cadbury code.

         Corporate governance commentators had previously raised concerns about the role of the ‘partnership’ of executive directors and top management in Alibaba: similar concerns were expressed about the ‘partnership in Ant, which seemed to wield considerable, but unaccountable, power. Others were dubious about the offshore nature of the companies whose shares were to be listed and offered to investors, while power over the onshore operating companies was wielded by Mr Ma and his immediate colleagues. The Supervisors, also, all seemed to be senior executives of the company, mainly with a financial orientation: no obvious representative of the workers or a member of the CCP, with a link to the Party, which is found in many Chinese supervisory boards.

         But there must have been other, underlying issues to cause such a significant, last-minute cancellation of the listing. Three major issues can be deduced from the case:

  • Failure of Mr Ma and his colleagues to appreciate the political context and regulatory risk they faced

         In recent comments to a Shanghai conference, Mr Ma had publicly criticised the Beijing authorities for what he claimed was their failure to recognise the significance of modern electronic banking and adapt financial regulations accordingly. Such a statement would have been totally acceptable in Western democracies, even welcomed: but not in China. Confucian beliefs demanded respect for hierarchy: children respected the head of the family, who respected the head of the village or family clan, ultimately respect was expected for the Emperor and his learned advisers. Today, the Emperor and his court have been replaced by the leaders of the PCC – the President and the Politburo. Respect, not criticism, is expected. In Chinese society and particularly in business, much effort is made to build close, lasting personal relationships (guanxi): it seems Mr Ma might not have cultivated such relationships with Beijing.

  • Failure of the Beijing financial authorities to appreciate the implications of Ant’s domination of electronic systems throughout China

For years, Beijing had promoted the country-wide development of electronic transactions and money transfer as a sign of China’s technological and economic leadership. Too late, they seem to have realised the likely corollary that the organisation providing those services would become very large and powerful.

  • Failure of the Beijing authorities to appreciate the scale and dominance of Ant as a financial institution

The vast size of the Ant IPO, the largest in history, probably staggered the Beijing authorities. Too late, they may have realised that the Ant organisation had become a major banking institution.

Hundreds of millions of ordinary people now held Ant accounts, and banked electronically, outside the conventional banking system. Ant had enfranchised hundreds of millions of businesses, merchants, and shop keepers as customers, offering them deposit accounts, credit options, as well as money collection and transfer facilities.

Electronic banking, and Ant’s domination of it, was a challenge to traditional banking practices and to existing banking regulation in China. The lack of Government oversight and control of the sector had become apparent.

         In China, awareness of regulatory risk ought to be a prerequisite in all strategy formulation. Ant’s directors may have become over-confident, encouraged by the lack of Government interest to date, despite the staggering growth of their electronic and financial enterprise.

         As Gregg Li and I emphasise in our book, China’s authorities expect and encourage corporate governance practices to evolve, contributing to economic growth and social stability, rather than to see corporate governance as the way to regulate and control, as in the West.

But, in an authoritarian, one-party state, political and regulatory risk remain high and need to be understood in every board room.

On the news of the stopping of the Ant listing, Alibaba’s shares in New York fell significantly. Mr Ma, who had met with the authorities in Beijing immediately before the listing was stopped, made no statement and did not appear in public for the next ten weeks: when he did, Alibaba’s New York shares rose.

Bob Tricker

January 2021

The evolution of corporate governance

Both Professor Mallin and I briefly mention the corporate governance backstory in our textbooks. However, I have long felt that the way a subject has evolved may highlight current issues and controversies. When invited by Professor Thomas Clarke, the editor of the corporate governance ‘Elements’ monograph series, published by Cambridge University Press, I decided to explore the evolution of corporate governance more fully.

         In this Element, I look at the origins of corporate governance, recognizing that all corporate entities have always needed to be governed, that important developments took place in the 17th and 18th centuries, and the huge significance of the invention of the joint-stock limited liability company in the mid-19th century.

         The development of corporate governance, around the world, in the 20th century is explored, with the arrival of private companies, complex corporate groups, and the Securities and Exchange Commission in the United States, with executive management usurping shareholder power during the Inter-war years.

         Corporate collapses in the mid-’80s led to the Cadbury code of best practice in corporate governance and the arrival of the phrase ‘corporate governance’ itself.  Whilst the United States maintained federal and state corporate control through law and regulation, the Cadbury principle of voluntary adherence to a code quickly spread around the rest of the world.

The monograph identifies some unresolved issues in both principle and practice, and compares and contrasts theories of corporate governance. The subject is seen to be in search of its paradigm and a systems theoretical relationship between the theories is suggested. The need to rethink the concept of the limited liability company is argued, and a call is made for the development of a philosophy of corporate governance.

Bob Tricker, December 2020


The future of the independent auditor

Audit market dominated by the Big Four

A fundamental tenet of corporate governance is the need for independent, external audit of the financial records and the accounts presented by boards to their members. This applies to every corporate entity, but particularly to listed public companies. Consequently, the provision of reliable audit services is vital.

A recent report from the U.K.’s Financial Reporting Council[1] (FRC) showed that in 2019 the Big Four audit firms[2] continued to audit all of the FTSE 100 companies.  The Big Four also audited all but 10 of the FTSE 250 companies—the other 10 being audited by the two largest firms outside the Big Four[3]. Audit fee income for the Big Four firms increased by 6.9% from 2018 to 2019, compared to 1.7% from 2017 to 2018.

The FRC recently questioned the procedures of the Big Four, following the highly visible collapse of some of their major audit clients including DHS and Carillion.

Separation of audit from consultancy

The dramatic collapse of the energy company Enron (case 1.2 in the fourth edition of my textbook) resulted in its Finance Director being jailed for sophisticated financial maneuvering, and drew attention to the extent of non-audit consultancy work carried out by its auditor, Arthur Andersen. This fiasco and other problems led to the collapse of the global Andersen firm, and the reappearance of its consultancy arm as Accenture.

It also produced the Sarbanes-Oxley Act (2002), which forever enshrined the names of Senator Sarbanes and Congressman Oxley in the annals of corporate governance. This act imposed stringent and expensive regulation on the American audit profession at the Federal level.

According to the FRC report, the Big Four’s fees, for non-audit work for their UK audit clients, declined 20.8% in 2019. This probably reflects the cap imposed by the government on non-audit services for public interest entities. It may also be a response to the operational separation of audit work from consultancy and other non-audit work by accountancy forms, which the FRC has demanded by 2024.

The regulation of the UK accountancy profession

When I served on the Council of the Institute of Chartered Accountants[1] (1979 to 1983), the accountancy profession regulated itself. Committees of the Institute disciplined members and their firms for misdemeanours and breaking the rules. At the time, self-regulation of professions was considered appropriate. But, as the trade guilds of the Middle Ages had already shown, self-regulation can be self-serving.

Regulation of the accountancy profession has shifted towards oversight by independent bodies authorised by the state. The number of audit firms registered with the Recognised Supervisory Bodies (RSBs) is declining: 5,660 in 2017, 5,394 in 2018, and 5,127 at the end of 2019.

Given current global problems, the need for financial and strategic advice by organizations (both profit and not-for-profit) is likely to be dramatic. The challenge of how such consultancy services are overseen and regulated, world-wide, has yet to be met. Some will respond that the market will winnow the wheat from the chaff, others might find this flailing process too cumbersome.

Bob Tricker

November 2020

[1] The Institute of chartered accountants in England and Wales

[1] Financial Reporting Council, 16 October 2020. https://www.frc.org.uk/news

[2]  As discussed in a recent blog (30 January 2020) the big four are: Deloitte (comprising Deloitte, Touche, and Tohmatsu); EY (resulting from the 1989 merger of Ernst and Whiney and Arthur Young);KPMG (Klynveld, Peat Marwick, Goerdeler (formed from Peat Marwick International – previously Peat, Marwick); PwC (Price Waterhouse and Coopers)

[3].The five largest second-tier UK audit firms are: Baker Tilly, BDO, Grant Thornton, Mazars, PKF (a grouping of independent firms),

The modern board meeting

My recent blog (30 July 2020), ‘New approaches to corporate governance communication’, brought the suggestion that more changes had occurred in board-level meetings than just the widespread use of virtual meetings, which I had discussed.

I must admit that in the fourth edition of my corporate governance textbook, I do parody the old-fashioned board meeting of the ‘country club’-style board, with its older, mainly Anglo-Saxon men meeting in their formal boardroom, with its pictures of past chairman on the walls; a room used only for the monthly board meeting and occasionally somewhere to put the auditors. The agenda for such board meetings seldom varied, starting with ‘apologies’ and ‘matters arising’ through to ‘any other business.’ The agenda, prepared by the company secretary and approved by the chairman, was sent to all directors shortly before the meeting, supported by a pack of printed board papers­—financial and other routine reports. Few companies with country-club boards have survived in today’s business climate. The traditional pack of board papers has been replaced by an electronic version. Software for such applications have been available for some years.[1] in these board rooms, it is quite normal for directors to have their laptops or tablets in front of them on the boardroom table. But the use of electronic communicating devices during board meetings goes much further today.

Multiple sources of information

As well as accessing the set of formal board papers, directors may use their devices to explore other sites relevant to the topic under discussion, obtaining, for example, economic, financial, or market data and charts, or ‘googling’ other websites.

In addition to the tablet or laptop, directors may also have their smart phones in front of them. Some chairs insist that such devices be turned off, or switched to silent, to avoid disruption. Directors can then communicate with the outside world, during the meeting, at the same time as participating in it. Directors in virtual meetings will also have access to communication devices, while they participate in the meeting.

Moreover, should the need arise for more information, an executive director might say, ‘I’ll have my staff produce that information in the next three or four minutes,’ rather than, ‘I’ll have a report ready for the next board meeting.’

Directors need multi-tasking skills

As a result, directors today need multi-tasking skills, able to listen and contribute to ongoing discussions, whilst reading from a screen and texting for data. This multi-tasking ability may well come more readily to younger board members: older members may not have acquired those skills.

Meetings with more fluid agendas

Standing agendas, which follow the same month-by month pattern, now seem to be a thing of the past. Meetings are more fluid, responsive to emerging issues, with directors raising matters of concern as the meeting progresses. While still receiving financial, marketing, personnel, and other progress reports, the chair might ask, ‘what must we cover in this meeting?’ This enables rapid responses to emerging situations. It also runs the risk of the board spending time ‘fire-fighting,’ rather than focusing on vital longer-term strategic matters.

Performance issues outweigh conformance

In conventional board meetings, a well-known danger is domination by short-term trouble-shooting matters, arising from the supervision of management. Discussion of strategic issues are postponed or, worse, overlooked. In other words, conformance and compliance issues crowd out strategic thinking and policy making. However, with multiple sources of information and more fluid agendas, that failing can be overcome. However, that also needs skilful leadership from the chair.

New challenges and opportunities for the board chair

More fluid, responsive meetings raise new challenges for the chair. They also create more opportunities for leadership. As a meeting progresses, the chair must decide whether to allow or postpone discussion on issues as they arise. No longer sticking doggedly to the agenda, the chair must determine the best use of board time.

In the modern board meeting, the chair needs to ask:

  • Am I spending board time effectively?
  • Is the balance between performance and conformance issues appropriate?
  • Should more time or specific meetings be allocated to discuss longer-term strategic issues?
  • Do we need to review board policies?
  • Do I give every director, including the outside directors, the opportunity to raise matters for discussion before or during meetings?
  • are all board members able to multi-task in the way now needed? If not, what should be done about it?
  • In recent board meetings, what have we not addressed that we should have covered?
  • Does the board need to meet so often or so formally?

In the modern board meeting, directors have access to various devices to obtain information. Consequently, they need multi-tasking skills. Agendas have become more fluid, as issues emerge and are discussed. Strategic and policy matters need no longer be dominated by short-term issues, with the emphasis on performance not conformance and compliance. But these developments present new challenges and opportunities to the board chair.

Bob Tricker

September 2020

[1] for example see https://www.decisiontime.co.uk/board-software/, https://info.ibabs.eu/board-portal/, htps://www.boardtimeintelligence.com

New approaches to corporate governance communication

At the height of the coronavirus pandemic, it was hard to imagine that any good could come from it. Yet history suggests otherwise: the horrors of the Second World War promoted the development of penicillin, modern air traffic control, and atomic energy. During the pandemic, many companies discovered new opportunities for interacting with management, their board members, and the shareholders. It now seems unlikely that most organizations will return fully to their previous patterns of communication.
With the cessation of international air travel, lockdown in most economically advanced countries, and people working from home, conventional meetings were replaced with their virtual counterpart, using electronic communication and video-conferencing software such as Microsoft Teams, Skype, or Zoom. Conferences and meetings, large and small, went online. The webinar replaced the seminar.
People and organizations seem to have adopted this new approach to communication with alacrity. However, virtual meetings can raise some interesting corporate governance issues. Consider the range of meetings in any corporate entity that could raise corporate governance issues:

  •  formal meetings of the governing body
  •  meetings of board committees
  • ad hoc meetings between directors
  • meetings of non-executive directors
  • meetings between directors, the CEO, and executive management
  • formal shareholder meetings
  • ad hoc shareholder communications
  • management meetings

Virtual interactions eliminate participants’ travel time, enabling better use of their time, as well as reducing costs. Virtual meetings can also improve board effectiveness. But these meetings have a different cultural dimension from face-to-face interaction.

The culture of virtual meetings

Virtual meetings are subtly different from conventional face-to-face meetings. They involve different communication processes. In physical meetings, the chair can look round at the faces, observe body language, and sense the ‘feel’ of the meeting, making it easier to wield authority.
The chair can maintain control by calling on people to speak, taking the lead, and insisting that comments are made ‘through the chair.’ Similarly, participants can see everyone in the room and act accordingly.
In virtual meetings, it is not so straightforward. Participants may be located anywhere in the world. Each is likely to be facing a split screen, which might be showing a whole gallery of those taking part, with the person speaking highlighted, or a close-up of the speaker filling the screen. Alternatively, the screen may show a chart, a bullet-point list, or some pictures, rather than the meeting participants.
The tone of the meeting can vary from that of a lecture with occasional questions, to a formal business meeting working through an agenda, or to just an ad hoc discussion between friends. Just like a face-to-face meeting, the number of participants affects the type of interaction: beyond about eight people, it becomes difficult to facilitate a discussion that involves everyone present.
Implicitly, the control of a virtual meeting is in the hands of the person who convened the meeting, sometimes called the ‘facilitator’ or ‘host.’ This may, or may not, be the formal chair of that group. If appropriate procedures for running the meeting are not established and followed, opportunities for ‘game-playing’ can arise. If it is not clear who is running the meeting, who may speak and when, who can summarize¬—in essence, who is in charge—some game-playing is inevitable. Although the ‘host’ does have the facility to ‘mute’ a participant considered out of order.
Virtual meetings have become an important component of corporate governance communication. Just like face-to-face meetings, successful virtual meetings need careful planning and skilful leadership, as well as responsive participants. Running virtual meetings requires new skills that can be learned.

Planning virtual meetings

Virtual meetings are easy to set up, yet they are more difficult to run professionally. Among the things that need to be considered are:

  • What is the purpose of the meeting? Is the topic clear? Is there an agenda?
  • Who will be invited to this virtual meeting? Do they all have access to the internet and the virtual conferencing facility we shall use? Do we have an email address or smart phone number to send the link or code for this meeting?
  • Will there be a lead speaker?
  • When is the most appropriate date and time to hold the meeting?
  • How long will the meeting run? If over, say, half an hour, are planned breaks necessary?
  •  Who is to be the facilitator, host, or chair for the meeting? Do they have the confidence and experience to do this well?
  • How is the virtual meeting to be announced and promoted, and how will invitations be extended? Is this notice adequate?
  • Are charts or other materials to be presented? if so, is the necessary equipment available and tested? Who will operate it?
  • Are the proceedings to be recorded? Who is to have subsequent access to this link? Will any other minutes or summary be made—if so by whom? Strict adherence to privacy and data protection rules must be observed.
  • How will success of the visual meeting be measured?
  • Depending on which communication platform is used, will there be a participant-number or time-based cost? Whose budget will be charged?

Running virtual meetings

Unless the meeting is to be an ad hoc, informal discussion between a few people, a moderator (facilitator, host, chair) will be needed. This is a specialized and demanding task, requiring personality, experience, and, possibly, training.
A protocol for running the virtual meeting is vital. The moderator should explain these at the start of the meeting. They should cover:

  • the agenda or the focus, and the purpose of the meeting, with anticipated outcomes
  • the planned structure and length of the meeting
  • the protocol for participation:
    o is this to be a lecture or talk, followed by questions?
    o are participants expected to contribute during the meeting?
    o if so, how should they indicate their wish to contribute?
    o if decisions are to be taken, how will choices be registered?
  • will there be subsequent access to the recording of the meeting?
  • will there be a summary or minutes?

Minutes of virtual meetings

The organizer can use the virtual conferencing software to record proceedings, to replace conventional written minutes. Participants, as well as those who didn’t attend the meeting, could be given a link to this record. However, some organizers prefer to have a summary or minutes, particularly when decisions have been taken. Such a written record can also record those present and the existence of any necessary quorum. For official company meetings, the company secretary should ensure that recording and note-taking is in place.
A link to the recording of the meeting indicates, of course, what people really said, how the discussion progressed, and what conclusions were actually reached; not just what a minute-writer subsequently remembers.

Participating in virtual meetings

The virtual medium can prove challenging. Participants may appear on-screen in close-up. Every smile, frown, grimace, enthusiastic nod or shake of the head may be caught. Emotions may be more visible than in close-up. Of course, just as in normal meetings, some participants will show more convincing presentation skills in a virtual meeting.
It seems likely that, in the future, speakers in important meetings, such as the AGMs of major companies, will have specific training in television presentation skills. In the future, this may be as important as the skill that goes into the design of a published annual report.
Close-ups also show the background behind the participant; consequently, experienced participants ensure that their background projects their image¬—an office, a library, or perhaps an armchair—and does not make them appear as though they have horns on their head, as happened in an Oxford webinar recently.

Regulating virtual meetings


Technical problems during an important virtual meeting, such as a formal shareholders’ meeting, would be unfortunate and could result in adverse media comment and reputational loss. The robustness of the hardware, software, and power supplies involved need to be considered, with stand-by, backup facilities, relevant to the significance of the meeting.


The security of the entire communication network for a virtual meeting needs to be considered, in relation to the importance of that meeting. Potential challenges include:

  • a breakdown in the service providing the meeting
  • a blackout in the centre hosting the meeting
  • a loss of communication anywhere in the networks connecting the meeting to its participants
  • unintentional interference in the network
  • malicious interference in the network, including eavesdropping for fraud, manipulation, or commercial espionage, blocking communications, inserting undesirable content


Many corporate governance meetings involve sensitive discussions and confidential information. In a face-to-face meeting, everyone can see who is there. Those present trust the others to adopt appropriate levels of secrecy. But in a virtual meeting, no one knows who might be behind a participant but out of camera shot. Trust, the essential foundation of corporate governance, then becomes even more vital.
Similarly, communications on corporate governance issues, including emails and their attachments, memos, letters, and telephone calls, can contain information that needs to be protected.
Consequently, every corporate entity should consider the levels of confidentiality that need to be associated with their corporate governance communications. For small organizations, this may be simple; for others it is an important task that can be overlooked. The following list suggests some different levels of confidentiality:


1. Open – corporate information intentionally in the public domain (e.g. press releases, corporate governance reports filed with government agencies, corporate advertising)
2. Members only – information intended for the members of that organization (e.g. shareholder announcements in a listed company intended for existing members and the stock market, reports to members in a cooperative society)
3. Private and personal – communication to named persons only (minutes of the last meeting sent to each participant)
4. Restricted – information and participation by named persons only with low levels of security (e.g. discussions about customer complaints)
5. Confidential – information for and participation by named persons with reasonable levels of security (e.g. meetings of the governing body of a corporate entity)
6. Secret – information and participation by named persons with security clearance (e.g. approval of the final accounts of a public, listed company prior to publication)
7. Top-secret – information and participation by named persons with top level security (e.g. discussions about responses to a major lawsuit)
8. Top-secret secure – face-to-face exchange between named persons, held in a secure location, with no records written or electronic allowed (e.g. discussions about a proposed hostile takeover bid)

Some organizations seem to give little thought to levels of security. Others take security matters to levels adopted by government security agencies, including sweeping rooms for listening devices or building intruder-soundproof meeting rooms. Every organization should consider whether their current levels of information confidentiality reflect the potential risks.
These categories above are not enshrined in law, but might help organizations review their current practices. They were derived from my experience, many years ago, as an officer in the Royal Navy.

Legal aspects of virtual meetings

Laws and regulations surrounding the governance of corporate entities, in most advanced jurisdictions, now provide for the disclosure of legally required reports to members and regulators to be made electronically. Similarly, as long as permitted by the entity’s legal constitution, electronic voting by members is allowed. Prior to the coronavirus, this was in addition to holding an actual meeting. Following Covid-19, however, some jurisdictions allowed the entire process to be held online.
Given the likely extension of virtual meetings and electronic reporting, further legislation may be needed covering, for example, the legal standing of virtual meetings, electronic records of such meetings, and the viability of decisions taken, to ensure equity and compliance.

Game playing in virtual meetings

Leadership emerges in every meeting, sometimes explicitly through an appointed chair, sometimes implicitly through the personality or position of a dominant participant. In the textbook, I describe some ‘games that directors play’ – a light-hearted, but realistic, look at ways used to manipulate situations to exert power. Just as people seek to influence, orchestrate, or dominate face-to-face meetings, they can do the same in virtual meetings, although the virtual medium provides them with new opportunities. Consider a few of them:

  • Taking over the argument
    Unless the facilitator is alert, it is not difficult to take a discussion in a new direction. One ploy is to agree with a previous speaker, but add a new idea, even though it has nothing to do with what the previous speaker was saying. (‘I totally agree with the finance director’s assessment of cash flow, but we do need to consider our policy on the cap on dividends…’) In this way, the subject and the focus of the meeting can be switched.
    Questioning the minutes of a previous meeting or referring to a recording of that meeting can also be used to reintroduce topics that were discussed previously and finalised.
  • Challenging the agenda
    This attempt to influence the meeting might suggest that an item on the agenda is less important than the alternative now proposed. The ultimate in this game is to offer a new agenda for the meeting.
  • Taking over the meeting
    If the facilitation is weak, attempts to dominate the meeting might involve questioning the meeting protocol, the role of the facilitator, or the time allowed for participants to speak, suggesting alternatives.
  • Calling your own meeting
    The ultimate challenge to an existing virtual meeting is to call another meeting with the same, or similar, membership. Anyone with access to the ZOOM app can call a meeting and invite participants to join.

Company secretaries may need to establish protocols, rules, and reporting requirements for convening, running, and reporting virtual meetings, and to monitor compliance.

Implications of virtual meetings for the chair

The chair of the governing body of every corporate entity has a vital role, not only to chair meetings, but to be its leader, creating its culture, and setting its moral compass. In a virtual meeting, the chair could see this role undermined by the meeting facilitator. But such new challenges also bring new opportunities for leadership. Skilled leaders use virtual meetings to unite their colleagues, advance their vision for the future for the enterprise, and enhance their authority.

Interaction between directors and management

Virtual meetings can enable non-executive directors to interact with the chief executive or other members of senior management. Properly handled, this can increase the information available to outside directors, improving their knowledge of the organisation, and thus their contribution to the board.
However, there are potential dangers: outside directors might interfere in management, trying to micro-manage executive decisions, thus usurping the legitimate responsibilities of the chief executive officer. All interactions between outside directors and management should be consistent with the culture of that organisation and accepted by the CEO.

Interaction with shareholders

Many listed companies are already using the internet to inform their shareholders and improve shareholder relations. Virtual meetings provide an opportunity to build on this experience. In addition to providing shareholders with access to formal shareholder meetings, ad hoc meetings could provide information on significant corporate changes, strategic decisions, or product and market developments. Statements by, or interviews with, the board chair, the CEO, or senior executives can be used, supported by appropriate video content.
But this can be a two-edged sword: ad hoc shareholder meetings may improve shareholder relations and stock market standing, but insider-dealing rules insist that all shareholders have access to the same material at the same time. This may not be easy in virtual meetings, if shareholders have the opportunity to interact, unless all shareholders can be present.


Meetings of members, governing bodies, board committees, and between directors and management are unlikely ever to be quite the same again. Virtual meetings are here to stay. So it is vital that they are well managed, appropriately controlled, and used to advance professional corporate governance. The resultant improvement of communication between all those involved in the governance process will be beneficial, whist reinforcing power where it rightly belongs.


Bob Tricker, July 2020

Spotlight on independent auditors

In January 2020, the UK FRC (Financial Reporting Council) updated its International Standard on Auditing (UK) 200 [1], which covers the overall objectives of the independent auditor and the conduct of an audit in accordance with international standards on auditing (UK).

Independent audit is a fundamental tenet of corporate governance policy and practice for companies in almost all countries. In the United States, it is enshrined in law (Sarbanes and Oxley Act, 2002).  In the United Kingdom and most Commonwealth countries, independent audit is required by companies acts and corporate governance codes. In Roman law countries, it is also required by company law.  Although, in some jurisdictions, private company shareholders acting together can opt out of mandatory independent audit. Corporate entities, other than limited-liability companies, are also typically required to have an independent audit by their constitutions or incorporating legislation.

The profession of independent auditors dates from the 19th century. The English Institute of Chartered Accountants was founded in 1880: the Scottish Institute predated it in 1854. The American Institute of Certified Public Accountants were founded in 1887.  An early mention of the outside auditor can be found in the audit committee report of the London-based Great Western Railway Company dated 22 February 1872: ‘Mr. Deloitte, [2] a name now enshrined in the great names of the audit profession, ‘attended the meeting.’

Today, the independent audits of almost all companies listed on the world’s stock exchanges are carried out by just four international accountancy firms. The outcome of amalgamations between firms over the years, they are now known by initials recognised globally like BA or KFC:


(the result of a merger between Ernst and Whiney and Arthur Young in 1989 became Ernst and Young)


(Klynveld, Peat Marwick, Goerdeler was formed from Peat Marwick International – previously Peat, Marwick, Mitchell – and Klynveld Main Goerdeler)


(Price Waterhouse and Coopers)

The only firm still known by its founder’s name is Deloitte, which grew from the activities of Mr. Deloitte, previously mentioned and now comprises Deloitte, Touche, and Tohmatsu.


These firms are typically referred to as ‘the big four’. There used to be the ‘big five’ until Arthur Anderson collapsed, following the debacle of the Enron Corporation in the United States. (See cases of Enron and Arthur Anderson [1]).  Fundamental criticisms of this situation include the lack of competition, threat of market domination, the over-familiarity of audit personnel with the client’s financial staff, and the exploitation of the position of auditor to sell non-audit services such as consultancy. Regulators have attempted to overcome some of these challenges by requiring the clear separation of consulting services from audit, routine changing of the audit partner responsible for a client and requiring a periodic change of audit firm. Suggestions are also occasionally heard about other ways to open the global audit market to wider competition.

Some recent audit failures have drawn attention to the work of the big four. In India, both Deloitte and KPMG were suspended from audit work by the government, following alleged unsatisfactory audit work. In Britain, all big four firms were found to have done unsatisfactory work at the failed Carillion company, a major government contractor. In Malaysia, Deloitte was investigated about alleged frauds in a state-development fund. In South Africa, KPMG lost clients after allegations about its work for the influential Gupta family.

Nevertheless, the ‘big four’ continue to play a vital role in corporate governance worldwide.  Their websites[2] provide links to useful information on the subject.  As I have previously suggested to both tutors and students, the Internet can provide access to insights and updates on corporate governance, if it is used carefully.


Bob Tricker

January 2020


[1] https://www.frc.org.uk/getattachment/34c335dd-d191-462c-9214-e59a31c33349/ISA-(UK)-200_Revised-June-2016_Updated-January-2020_final-With-Covers.pdf

[2] Tricker, R.I (1978) The Independent Director – a study of the non-executive director and the audit committee, Tolley. London

[3] Tricker, Bob (edition 4, 2019), Corporate Governance – Principles, Policies, and Practices, Oxford University Press

[4] Deloitte https://www2.deloitte.com/uk/en.html.  EY https://www.ey.com/en_uk  KPMG https://home.kpmg/uk/en/home.html    PWC https://www.pwc.co.uk/


Update to Tricker Corporate Governance 4e

In some copies of the fourth edition of Bob Tricker’s Corporate Governance – Principles, Policies, and Practices, Figure 2.1 is incomplete.

This diagram shows the complete text.

Figure 2.1 CG4E FINAL



The Corporate Governance of Huawei

When the Huawei case was written last year, for the fourth edition of Corporate Governance – Principles, Polices, and Practices, we did not anticipate the headlines that the company was about to attract. The original case was short, setting the scene for some interesting questions about corporate governance in China.


Case study 6.3 The Huawei Group

Huawei was founded in 1987 by Ren Zhengfei, a former electronics engineer in the People’s Liberation Army (PLA). During the 1980s and ’90s, the Chinese government saw the need to modernize telecommunications thought the country. Telephone exchange equipment needed electronics. Some companies in the industry negotiated joint ventures to link with foreign companies that had the technology: but they proved reluctant to divulge the latest technology. Ren took a different approach: his company obtained foreign hardware with its software, and then reverse engineered it to discover its secrets and replicate them.

In 1994, Huawei agreed to build a telecommunication system for the PLA; a relatively small project but crucial in political connections. Ren Zhengfei met Premier Jiang Zemin and convinced him that electronic switching-equipment technology was related to national security and that a nation that did not have its own switching equipment was like one that lacked its own military. Jiang agreed. In 1996, the government decided to support domestic telecommunications manufacturers and restrict access to foreign investors. The Huawei Group thrived and became a leading force in China’s creation of ‘smart cities’, bypassing the personal computer experience of Western nations and adopting smart phone technology as the basis for internet transactions and communication. Huawei became the largest manufacturer of telecommunications equipment in the world, overtaking the US-based Ericsson in 2012.[1]

Huawei was also expanding outside mainland China. In 1997, it signed a contract with Hong Kong’s Hutchinson Whampoa to provide a fixed-line network. In 1999, it opened an R&D centre in Bangalore, India, and in 2001 it opened four R&D centres in the USA. By 2005, Huawei’s international contracts exceeded domestic sales.

Huawei refers to itself as a private company and calls itself a ‘collective’, being owned by its employees. The nature of that ownership and the government’s continuing relationship with the company remain unclear.


Subsequent developments

Huawei is installing its technology in countries around the world. But concerns have been raised about the security of such systems, which could include software to obtain information and might prove a security risk. The fear was that since every Chinese company was subject to the Chinese judiciary system, which is not independent of the state, companies could be given orders by government officials.

In the United States, President Trump issued an order prohibiting Huawei from selling its systems in America. He subsequently prohibited US companies from supplying Huawei with electronic components. However, the British Prime Minister, Teresa May, approved the use of Huawei technology in the UK’s 5g network, having been advised that Britain had the counter-intelligence capability to meet any subversive interference in telecommunications.

In another issue of international interest, Huawei’s Deputy Chair and Finance Director, Meng Wanzhou, was arrested in Canada on a United States extradition warrant, which alleged that Huawei had broken various US laws. Meng is the daughter of Huawei founder Ren Zhengfei.

In an interview with CNN, Ren Zhengfei, speaking in Putonghua,[2] defended his company’s record, claiming that the United States boycott was because Huawei was now the largest telecommunications company in the world and its technology had outstripped American rivals. He claimed that Huawei was independent of the Chinese Government and made decisions on a commercial basis. Asked about his daughter, still under arrest in Canada, he said, that she was under house arrest and studying for her PhD. He claimed that the Canadian arrest was unlawful.



Viewing corporate governance as the way power is exercised over corporate entities, the Huawei case emphasizes the significance of the cultural context. Huawei is subject to Chinese company law and must provide information to relevant government authorities, in the same way that companies in the West must meet similar obligations. However, Chinese law and its law courts are not independent of the state but exist to ‘serve the people,’ which typically means the interests of the governing authorities, ultimately the Politburo of the Communist Party of China.

Nevertheless, although China is a one-party state, its economy is market-based, producing prodigious economic growth over the past twenty years. This has enabled the building of a major rail and motorway system; the creation of large new ‘smart cities based on information technology; and the launch of a ‘belt and road’ strategy to link China with trading partners throughout the Middle East and Europe.

Contrary to classical Communist doctrine, China permits the creation of corporate entities, recognizes private property, and has two highly successful stock exchanges (three if you include Hong Kong). A few Chinese companies are quoted in New York. Moreover, China now has an affluent, car-owning middle class.

Despite being the world’s largest telecommunications company, Huawei is privately owned. So it is not required publicly to disclose its ownership, which remains obscure. The company describes itself as a ‘collective;’ suggesting that employees own shares, although there is no evidence that they have any shareholder rights. The probability is that ownership is in the hands of the founder, his family and friends, senior executives, and possibly government agencies which have provided funding, including the People’s Liberation Army. In a recent interview, Ren said that the company had a management succession plan, which recognizes the need to provide for succession beyond the founder.

To appreciate the corporate governance of large private companies in China, the cultural context[3] is fundamental. It is different from the West. Since opening its economy to market forces, China has published a Companies Act, liaised with Western advisers on corporate governance, and produced a governance regime which reflects some aspects of Western approaches but includes aspects that are uniquely Chinese. Corporate governance with Chinese characteristics reflects the way business is done in China. Responsibility for decisions is often unclear, so is subsequent accountability. Personal relationships are very important. No one should lose face, even though everyone knows the situation. Control by the authorities is exercised less by clear mandated instruction, more by influence exercised quietly ‘through the window.’ The lack of clear job descriptions, with little written down, can be anathema to Westerners. Yet the incredible growth of the Chinese economy suggests that it works.

The Chinese Government recognized, when they launched the market-driven reforms, that corporate governance was vital. But unlike the West, where corporate governance tends to be seen as the means of regulating companies and controlling unacceptable behaviour, the Chinese see corporate governance as a means to economic growth and long-term success.


[1] www.forbes.com/sites/moorinsights/2017/12/04/ericsson-vs-huawei-whos-winning-the-5g-   race/#6821666a8aa5

[2] Putonghua is the official language of China, a version of classical Mandarin. The Chinese have many different dialects. In Hong Kong, for example, Cantonese is spoken, which is virtually unintelligible to Mandarin speakers; although written script is common to all.

[3] To delve more deeply into the cultural context see Tricker, Bob and Gregg L ,(2019), Understanding Corporate Governance in China, Hong Kong University Press, Hong Kong

Pay Ratios


Interest by the media, the public, and shareholders in the pay of CEOs has never been higher, and governments have increasingly taken notice of this in recent years. It is perceived as inequitable and often unjustifiable as to why there should be such large discrepancies between the pay of CEOs and of the employees in their companies. Recent legislation in some countries, and proposed legislation in others, has sought to address this concern by ensuring that companies disclose the ratio of CEO pay and the median employee’s pay in their company.

US Companies

In 2015 the SEC adopted amendments to Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, on pay ratio disclosure such that companies have to provide details of the relationship of the annual total compensation of their employees and the annual total compensation of their Chief Executive Officer (CEO), i.e. the ratio of the CEO pay to the median of the annual total compensation of all employees. This applies to companies’ for their first fiscal year beginning on or after 1st January 2017.

Honeywell International, a large multinational corporation, was the first major U.S. public company to disclose its ratio of CEO pay to that of the median employee with a pay ratio of 333:1.

The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) highlights that in the S&P 500, Mattel had the highest ratio of CEO pay to median worker pay with a ratio of 4987:1. They reported a higher ratio still in the Russell 3000 where Weight Watchers International had a pay ratio of 5908:1. More detail is available at:


UK Companies

In the UK, listed companies with more than 250 UK employees will legally be required to annually publish and justify the pay difference between chief executives and their staff for the first time. The regulations governing pay ratios will, subject to Parliamentary approval, come into effect from 1 January 2019 with companies reporting their pay ratios in 2020.

The disclosure of pay ratios is part of a move to hold larger companies more accountable for CEO pay and will provide helpful insights into the difference between CEO pay and average employee pay in different sectors and in individual larger companies in the UK.




Japan is a country whose CEOs have traditionally earned less than their global peers and where the ratio of CEO pay to that of the average employee has been lower than in countries such as the US. Part of this is attributable to the culture of Japan where very high pay ratios between CEO pay and average employee pay would not be viewed favourably.

It will be interesting to see what the impact of the disclosure of pay ratios in the US and other countries will be in the coming years.  Already shareholder revolts over executive pay during 2018 are growing and high pay ratios of CEO pay to the average employee’s pay could increase shareholders’ dissent on this issue.


Chris Mallin

June 2018


Succession Planning

Why is succession planning important?

Succession planning is seen as crucial to ensuring that a successor is in place to carry on the work of key individuals in a business should they leave the company in either a planned manner (e.g. retirement, job move, generational succession, or ownership changes) or an unplanned manner (e.g. fatal accident, unplanned removal from post). Sometimes the immediate successor is seen as a safe pair of hands, ready and waiting to carry on the work pending the appointment of another individual, whilst at other times there has been more time to search for a successor.

Investors are keen to know that a succession plan is in place for key directors to help ensure the ongoing smooth running of the business, its strategy going forward, and to maintain a steady steer at the helm, thus retaining investor and market confidence. The successor may also be appointed for their new ideas on strategy, whether that is to take the business forward into new spheres or to concentrate more on a few core sectors which may be more appropriate for the company at that time.


Corporate Governance Codes

Corporate governance codes mention succession planning in different degrees of detail.  Looking at a few of these, the UK, Japan, and Italy, illustrates this.

The UK

The current UK Corporate Governance Code (2016) mentions succession planning in the context of the role of non-executive directors, they ‘have a prime role in appointing and, where necessary, removing executive directors, and in succession planning,’ (A.4, Non-executive Directors, Supporting principle, UK Corporate Governance Code 2016, Financial Reporting Council); and in the context of Appointments to the Board ‘The board should satisfy itself that plans are in place for orderly succession for appointments to  the  board  and to  senior  management,  so  as  to  maintain  an  appropriate  balance  of skills and experience within the company and on the board and to ensure progressive refreshing of the board (B2 Appointments to the Board, Supporting principle, UK Corporate Governance Code 2016, Financial Reporting Council) https://www.frc.org.uk/getattachment/ca7e94c4-b9a9-49e2-a824-ad76a322873c/UK-Corporate-Governance-Code-April-2016.pdf

However the proposed revisions to the UK Corporate Governance Code (2017) cover succession planning in more detail.  Section 3 is headed ‘Composition, succession and evaluation’, and its Principle J states ‘Appointments to the board should be subject to a  formal, rigorous and transparent  procedure, and an  effective succession  plan  should  be in  place for board and senior management. Both appointments and succession plans should be based on merit and objective criteria, and promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.’ Provision 17 states that ‘The board should  establish a nomination committee that should lead the process for appointments, ensure plans are in place for orderly succession to both the board and senior management positions, and oversee the development of a diverse pipeline for succession.  A majority of   members of the committee should be independent non-executive directors, with a minimum membership of three. The chair of the board should not chair the committee when it is dealing with the appointment of their successor,’ (December 2017, Proposed Revisions to the UK Corporate Governance Code Appendix A – Revised UK Corporate Governance Code) https://www.frc.org.uk/getattachment/bff48ee6-4fce-4593-9768-77914dbf0b86/Proposed-Revisions-to-the-UK-Corporate-Governance-Code-Appendix-A-Dec-2017.pdf


Japan’s Corporate Governance Code (2015) states that ‘Based on the company objectives (business  principles, etc.) and specific business  strategies, the board should engage in the  appropriate oversight of succession planning for the CEO and other top executives,’ (4.1.3, Japan Corporate Governance Code, Seeking Sustainable Corporate Growth and Increased Corporate Value  over the Mid- to Long-Term (2015), Tokyo Stock Exchange) http://www.ecgi.global/sites/default/files/codes/documents/japan_cg_code_1jun15_en.pdf


Italy’s Corporate Governance Code (2015) refers to the fact that ‘The Board of Directors shall evaluate whether to adopt a plan for the succession of executive directors. In the event of adoption of such a plan, the issuer shall disclose it in the Corporate Governance Report. The review on the preparation  of  the  above  mentioned  plan  shall  be  carried  out  by  the nomination committee or by another committee established within the Board of Directors in charge of this task.  Should the issuer adopt a succession plan, the Corporate Governance Report shall disclose whether specific  mechanisms are set forth in the succession plan  in  case  of  early  replacement, the corporate bodies and the persons in charge of the preparation of the plan as well as the manners and timing of its review.  As far  as the succession  procedures  are  concerned, the Committee believes that these procedures shall clearly define their scope, instruments and timing, providing both for the involvement of the Board of Directors and for a clear allocation of tasks, also with regard to the preliminary stage of the procedure,’ Appointment of directors, 5.C.2. Corporate Governance Code (2015) http://www.ecgi.global/sites/default/files/codes/documents/cg_code_italy_15july2015_en.pdf

Also in Italy in 2017, the Corporate Governance Principles for Unlisted Family-Controlled Companies were issued. Article 9 relates to Planning and Succession Plans going into some detail. On this issue, there are two Principles: 9.P.1. ‘Being  aware  of  the  differences  that  the  company  size  and  ownership  structure  involve,  it  seems appropriate for the members and the Board of Directors to ensure the continuity of corporate governance and  management  of  the  company  by  defining  precise  regulations  for  effectively  addressing  generational transitions or ownership changes.’ Also 9.P.2. ‘For  the  purposes  of  administration  of  the  company,  succession  plans  must  be  appropriately established  in  advance,  taking into  account  the  specific  conditions  of  the  company,  the  Group  and possibly the currently controlling family.’

Five application criteria are then listed which provide guidance on the process to be followed including the timeliness of establishing the process and having it ready in good time. Corporate Governance Principles for Unlisted Family-Controlled Companies 2017 http://www.ecgi.global/sites/default/files/codes/documents/principi_per_il_governo_delle_societa_non_quotate_a_controllo_familiare._codice_di_autodisciplina%202017%20English_0.pdf


Examples of succession issues in practice

For many family firms – large and small – succession planning is a real issue when either the next generation doesn’t want to take on the mantle of the founder, or there is no obvious successor.  Leo Lewis in his article ‘New prescription’ about Takeuchi Optical, a Japanese glasses manufacturer, highlights that ‘thousands of family-owned businesses in Japan face uncertain futures due to a lack of heirs,’  (Financial Times, 5th April 2018, page 9). Whilst Japan has a rapidly ageing society, similarly, other countries also face succession planning issues.

In South Korea, for example, Lee Jae-yong, vice-Chairman of Samsung Electronics and grandson of the group’s founder, was arrested in February 2017 on charges relating to bribery and corruption connected to a nationwide political scandal. Lee Jae-yong was convicted and sentenced to five years in prison on corruption charges. However in February 2018, he was freed on appeal with his original sentence being halved and suspended for four years. In April 2018, Samsung Electronics announced that it would split the roles of CEO and Chair but there will continue to be three co-CEOs with ultimate power still residing with Lee Jae-yong as vice-chairman. However Elliott Management, the activist institutional hedge fund, is seeking a change in the company’s corporate governance to limit the power of the family successor in waiting, Lee Jae-yong.

Chris Mallin

April 2018