Archive for the ‘China’ Tag
Commentators frequently mention the importance of culture in corporate governance. They recognize that the ‘comply or explain’ regime of adherence to corporate governance codes does not capture the reality of corporate behaviour, But there seems to be some confusion about what is meant by culture and why it is really relevant to corporate governance.
What is culture?
Culture can be thought of as the beliefs, expectations and values that people share. Like the skins of an onion, culture has many layers – national cultures, regional cultures, the culture of a company, and the culture in a board room.
The culture of a country is influenced by its social, economic and political heritage, its geography, and its religion. Culture is moulded by situations that affect relations between individuals, institutions, and states. Culture is influenced by law, is reflected in the language, and is passed on by experience in families, schools, and organizations. It is culture that determines what is thought of as acceptable, important, and right or wrong. Culture affects how people think and act. It is fundamental to understanding corporate governance.
In the late twentieth century, when ideas about corporate governance began to be discussed, much of the thinking and practice was influenced by countries that shared Anglo-American cultures – a belief in the rule of law; the importance of the rights of individuals to personal freedom and the ownership of property, in the context of accountable, democratic institutions, including an independent judiciary.
In the United States, corporate governance practices stemmed from the rule of company law laid down by state jurisdictions and at the Federal level by regulation from the US Securities and Exchange Commission.
In the UK, and subsequently in most Commonwealth countries associated with the UK, the governance of companies was determined by Companies Acts and, for listed companies, by corporate governance codes, reinforced by Stock Exchange rules, which required companies to report compliance with the code or explain why they had not.
The influence of religion on corporate governance
Religious beliefs are part of the culture of every country and affect personal values, relationships, and attitudes to authority. They influence morality, ethical standards, and what business behaviour is considered acceptable. Under-pinning beliefs are reflected in the way business decisions are made, corporate entities operate, and corporate governance practices develop in different countries.
The United States was founded by Puritans seeking religious freedom. The founding fathers, the majority of whom were lawyers, placed great emphasis on their constitution, the rule of law, and democratic rights. Those same traits are reflected in the governance of American companies to this day. Legal contracts, litigation, and shareholder rights are still at the forefront of business issues.
In the United Kingdom, on the other hand, the approach to corporate governance was more flexible, less rule-based and litigious, reflecting the broader traditions of Britain’s religious inheritance. The Church of England, rejecting control from Rome, established a freedom of expression and tolerated other non-conformist religious traditions, which became embedded in British culture. The voluntary approach to corporate governance – ‘conform or explain why not’ – reflects this more flexible, voluntary approach.
Other countries influenced by Britain during the days of the British Empire (including Australia, Canada, South Africa, other countries in Africa and the West Indies, as well as Hong Kong and Singapore, shared these corporate governance influences.
In Germany, the teachings of Martin Luther, 500 years ago, shaped the country’s language and changed its way of life. Luther influenced belief in the moral imperative to seek principle and order, to be prudent with money, and to avoid debt. Southern European nations, on the other hand, influenced by Roman Catholicism, took a less austere approach: a distinction that is still being played out among the nations that adopted the Euro as their national currency.
Northern European nations were also affected by the teaching of John Calvin, which emphasized the importance of working for the community, not just for their families and themselves. Germany’s co-determination laws view companies as partnerships between labour and capital. In the two-tier board governance structure, the supervisory board contains representatives of workers as well as investors.
The influence of religion on corporate governance practices can be seen strikingly in Japan. Buddhism and Shinto, the national religion, have been dominant religious influences. Even though relatively few Japanese now identify with either religion, belief in spirits is widespread. Shrines to spirit deities are commonplace. Social cohesion is a dominant feature of Japanese business life, with high levels of unity throughout the organization, non-adversarial relationships, lifetime employment, enterprise unions, personnel policies emphasizing commitment, initiation into the corporate family, decision-making by consensus, cross- functional training, and with promotion based on loyalty and social compatibility as well as performance.
The Japanese Keiretsu networks connect groups of Japanese companies through cross-holdings and interlocking directorships, Chairmen and senior directors of companies in the keiretsu have close, informal relationships. Although the paternalistic relationship between company and lifetime ‘salary-man’ is under economic pressure, boards still tend to be decision-ratifying bodies rather than Western style decision-making forums.
Although there have been recent efforts to require independent non-executive directors, as in the Western corporate governance model, Japanese top management remains rather sceptical. Many Japanese do not see the need for such intervention ‘from the outside’. Indeed, they have difficulty in understanding how outside directors function. ‘How can outsiders possibly know enough about the company to make a contribution,’ they wonder, when they themselves have spent their lives working for it? How can an outsider be sensitive to the ingrained corporate culture?
Of course, the cultural significance of religion does not mean that religion or religious organizations played a part in the development of corporate governance norms. Indeed in some countries, the UK, China, and Japan for example, many people no longer claim any religious affiliation. But the religious culture provided the ethical context, the moral influence in creating law, running business, and influencing approaches to corporate governance.
Culture and the future of corporate governance
When corporate governance norms were first discussed in the 1980s, many thought that corporate governance in countries around the world would gradually converge with Western practices. They believed that because these countries needed to raise capital, trade in securities, and do business globally they would adopt Western practices. Institutions such as the World Bank and the OECD put considerable effort into advising developing countries about modern corporate governance practice.
Globalization became a dominant feature in world trade because some countries offered significantly lower costs to developed markets. Some thought that globalization of the movement of goods, services, money, people, ideas and information, would inevitably lead to a convergence of intellectual insights, politics, and ideology. Such arguments are seldom heard these days. Capital can be raised in the East as well as the West. Securities can be traded on many stock exchanges. The notion, which might be termed ‘globalism,’ seems unlikely to survive. Attempts by countries to protect their own industry and labour markets, control the flow of people, money, and information across their borders challenge the onrush of globalization.
Now, as the 21st century moves forward, discussion about corporate governance increasingly recognizes the significance of culture – national, regional, corporate, and board-level – to successful corporate governance.. The governance of companies within a country needs to be consistent with that country’s culture.
 The material in this blog has been adapted from: Corporate Governance in Modern China – principles, practices, and challenges; Bob Tricker and Gregg Li, to be published next year
 the Organisation for Economic Co-operation and Development
 The stock exchanges of Singapore and Hong Kong now rank third and fourth in significance after London and New York
State-owned enterprises (SOEs) remain central to China’s economy. They include vast companies in the oil, telecoms, steel, finance, and other major sectors. In many cases a minority of their shares have been floated on the Hong Kong, Shenzen, or Shanghai stock exchanges.
The corporate governance of these enterprises has been significantly influenced by Western experience. For decades governance has been left to company’s boards of supervisors and boards of directors, under the supervision of the State-owned Assets Supervision and Administration Commission (SASAC) and the China Securities Regulatory Commission (CSRC). State involvement at a higher level had tended to be distant. Some felt that the Communist Party had been pushed aside and the party’s leadership undermined.
Not any longer. In October 2016, China’s President, Xi Jin Ping, asserted that ‘the ultimate bosses of China’s state-owned enterprises must be China’s Communist Party organs’, according to the South China Morning Post (12 October 2016). The President told a high-profile conference of top officials and SOE executives that ‘after decades of fading into the background, Communist Party’s leadership must be boosted in SOEs’. The message was clear: the party will reassert its grip on the state sector.
The two-day work conference concluded that the Communist Party must increase its role, especially in ideology, oversight of personnel, and key decisions in the country’s biggest industrial and financial enterprises.
‘Leadership by the party was the root and soul and a unique advantage of China’s state firms, and any weakening, fading, blurring or marginalization of party leadership in state firms will not be tolerated’, Xi is quoted as saying. ‘We must unswervingly uphold the party’s leadership in state-owned enterprises, and fully play the role of party organs in leadership and political affairs. We must ensure that wherever our enterprises go, party-building work will follow’.
This was the first time that the country’s leadership had addressed a meeting specifically on the Communist Party’s leadership in state businesses; the first time in fact that they had shown any interest in corporate governance. Xi said that China’s state firms had to remain loyal to the party’s course to be ‘a reliable force that the party and the nation can trust’ and ‘an important force in firm implementation of the central leadership’s decisions’.
Since the 18th party congress four years ago, the leadership has called for SOEs to be companies ‘with Chinese characteristics’, which means ultimate leadership by the party. In the published comments, the president did not specifically mention boards of directors. He said the Communist Party’s should be ‘embedded’ in corporate governance. He also said the leaders of China’s state firms should be seen as communist cadres, serving party interests in the economic realm.
Why has China’s leadership chosen to reassert their ultimate control over SOEs? A number of reasons come to mind:
- To reinforce the President’s sweeping anti-corruption campaign. Corrupt officials in SOEs, as well as the military and the government, have already been accused, but corruption remains endemic.
- To reverse the slide towards Western capitalist thinking and reassert Communist values.
- To improve performance of the SOEs and spur innovation as the country faces falling economic returns after many years of double digit growth. The government also launched a 200bn yuan (US$ 30bn) venture capital fund to foster SOE reform and spur innovation.
- To build party loyalty and improve control over a huge population, whose relatively affluent middle class now has aspirations to greater independent thought. The existing control over the media, the internet, and public discussion would be reinforced if SOE management supported party ideals. Calls for independence from young people in Hong Kong cannot have improved this challenge.
Bob Tricker October 2016.
 For more on the corporate governance system for SOEs see Tricker 3e pages 297-303.
Recent developments in corporate governance policies and practices
Since the third edition of Tricker – Corporate Governance: Principles, Policies, and Practices published in February 2015, the subject has continued to evolve in regulation, policy, and practice. Some of the more significant developments include: Corporate governance in China
I lived in Hong Kong (now a special administrative region of China) for 14 years and have been visiting regularly since 1982. Over that time, China has changed from an essentially agrarian economy, through massive labour-intensive, low-tech manufacturing, to become the world’s second largest economy, second only to the United States. A substantial car and property owning middle class are now moving the economy from an industrial towards a consumer and service orientated society. Nevertheless, China remains a key manufacturer, increasingly in high-tech fields, backed by R&D. The double-digit economic growth seen in recent years was clearly not sustainable indefinitely, but the economic slow-down has produced some interesting corporate governance issues.
The two Chinese stock markets, in Shenzen (just across the border from Hong Kong) and Shanghai, are predominantly retail markets – institutional investors such as pension funds are relatively new. The markets are also relatively small compared with stock markets in Europe and North America. Seeing dramatic increases in share values and believing government assurances, many individuals borrowed to fund their investments. When the market began to fall, reflecting a slowing economy, and crashed in July 2015 with many shares suspended, the government panicked. In fact, the market had only fallen back to the levels of a year earlier. Yet the government tried to slow the fall by ill-judged interference – prohibiting initial public offerings and providing funds to buy-back shares in an attempt to prop up the market. An unanticipated devaluation of the currency by 2% compounded the problem by triggering panic selling of the yuan around the world.
State-owned enterprises (SOEs) still play a fundamental role in China, even though some of them are partially privatised and quoted on the stock market (3E, p297). The government maintains a tight control over industries which it feels are strategically important, such as oil, steel, and communications. Control is exercised through enmeshed relationships between government and party officials at every level: from the approval of strategic developments, the appointment and remuneration of senior executives, and the oversight of finances at the state or province level, down to Communist party cells in each plant at the employee level. Bureaucracy can hinder corporate development.
Private companies play an increasingly important role in China; for example, the e-business firm Alibaba, the vast conglomerate Dalian Holdings, and computer company Lenovo, (although Lenovo is a subsidiary of Legend Holdings, a conglomerate with SOE characteristics). In such firms, the founding entrepreneurs and top executives, working with shareholders, play the dominant role in setting strategic direction, the appointment of top management, and financial oversight. Private firms have more freedom than SOEs to innovate, respond to market opportunities, and stimulate change. Nevertheless, relationships with the state and party (the often mentioned guanxi) remain essential if a private firm is to prosper.
A recent IMF report in August 2015 calls for a transition in China from slower to better growth. It notes growth slowing as vulnerabilities, particularly credit growth, are reined in, and calls for policies calibrated to ensure orderly slowdown, and structural reforms to create new sources of growth (www.imf.org/external/pubs/ft/survey/so/2015/CAR081415B.htm).
Bob Tricker, January 2016
In September 2011, the Corporate Secretaries International Association (CSIA) hosted an international corporate governance conference in Shanghai, jointly with the Shanghai Stock Exchange. CSIA represents over 100,000 governance practitioners worldwide through its 14 company secretarial member organizations. Speakers and panellists from Africa, Australia, mainland China, Hong Kong SAR, India, the UK and the US plus delegates from the 14 CSIA member countries discussed the cultural dependence of corporate governance. For more information on CSIA see http://www.csiaorg.com
The conference considered whether corporate governance principles and practices around the world were converging. Would a set of world-wide, generally-accepted corporate governance principles eventually emerge? Or was differentiation between corporate governance practices inevitable because of fundamental differences in country cultures?
Speaking at the conference the writer of this blog suggested that:
“A decade or so ago, it was widely thought that corporate governance practices around the world would gradually converge on the United States model. After all, the US Securities and Exchange Commission had existed since 1934, sound corporate regulation and reporting practices had evolved, and American governance practices were being promulgated globally by institutional investors. But that was before the collapse of Enron, Arthur Andersen, the sub-prime financial catastrophe, and the ongoing global economic crisis. A decade ago it was also believed that the world would converge with US practices because the world needed access to American capital. That is no longer the case. So the convergence or differentiation question remains unanswered.
Forces for convergence
“Consider first some forces that are leading corporate governance practices around the world to convergence.
Corporate governance codes of good practice around the world have a striking similarity, which is not surprising given the way they influence each other. Though different in detail, all emphasise corporate transparency, accountability, reporting, and the independence of the governing body from management, and many now include strategic risk assessment and corporate social responsibility. The codes published by international bodies, such as the World Bank, the Commonwealth of Nations, and OECD, clearly encourage convergence. The corporate governance policies and practices of major corporations operating around the world also influence convergence.
Securities regulations for the world’s listed companies are certainly converging. The International Organisation of Securities Commissions (IOSCO), which now has the bulk of the world’s securities regulatory bodies in membership, encourages convergence. For example, its members have agreed to exchange information on unusual trades, thus making the activities of global insider trading more hazardous.
International accounting standards are also leading towards convergence. The International Accounting Standards Committee (IASC) and the International Auditing Practices Committee (IPAC) have close links with IOSCO and are further forces working towards international harmonization and standardization of financial reporting and auditing standards. US General Accepted Accounting Principles (GAAP), though some way from harmonization, are clearly moving in that direction.
In 2007, The US Securities and Exchange Commission announced that US companies could adopt international accounting standards in lieu of US GAAPs. However, American accountants and regulators are accustomed to a rule-based regime and international standards are principles-based requiring judgement rather than adherence to prescriptive regulations.
Global concentration of audit for major companies in just four firms, since the demise of Arthur Andersen, encourages convergence. Major corporations in most countries, wanting to have the name of one of the four principal firms on their audit reports, are then inevitably locked into that firm’s world-wide audit, risk analysis and other governance practices.
Globalisation of companies is also, obviously, a force for convergence. Firms that are truly global in strategic outlook, with world-wide production, service provision, added-value chain, markets and customers, which call on international sources of finance, whose investors are located around the world, are moving towards common governance practices.
Raising capital on overseas stock exchanges, also encourages convergence as listing companies are required to conform to the listing rules of that market. Although the governance requirements of stock exchanges around the world differ in detail, they are moving towards internationally accepted norms through IOSCO.
International institutional investors, such as CalPers, have explicitly demanded various corporate governance practices if they are to invest in a specific country or company. Institutional investors with an international portfolio have been an important force for convergence. Of course, as developing and transitional countries grow, generate and plough back their own funds, the call for inward investment will decline, along with the influence of the overseas institutions.
Private equity funding is changing the investment scene. Owners of significant private companies may decide not to list in the first place. Major investors in public companies may find an incentive to privatise. Overall the existence of private equity funds challenges boards of listed companies by sharpening the market for corporate control.
Cross-border mergers of stock markets could also have an impact on country-centric investment dealing and could influence corporate governance expectations; as could the development of electronic trading in stocks by promoting international securities trading.
Research publications, international conferences and professional journals can also be significant contributors to the convergence of corporate governance thinking and practice.
Forces for differentiation
“However, despite all these forces pushing towards convergence, consider others which, if not direct factors for divergence, at least cause differentiation between countries, jurisdictions and financial markets.
Legal differences in company law, contract law and bankruptcy law between jurisdictions affect corporate governance practices. Differences between the case law traditions of the US, UK and Commonwealth countries and the codified law of Continental Europe, Japan, Latin America and China distinguish corporate governance outcomes.
Standards in legal processes, too, can differ. Some countries have weak judicial systems. Their courts may have limited powers and be unreliable. Not all judiciaries are independent of the legislature. The state and political activities can be involved in jurisprudence. In some countries bringing a company law case can be difficult and, even with a favourable judgement, obtaining satisfaction may be well nigh impossible.
Stock market differences in market capitalisation, liquidity, and markets for corporate control affect governance practices. Obviously, financial markets vary significantly in their scale and sophistication, affecting their governance influence.
Ownership structures also vary between countries, with some countries having predominantly family-based firms, others have blocks of external investors who may act together, whilst some adopt complex networked, leveraged chains, or pyramid structures.
History, culture and ethnic groupings have produced different board structures and governance practices. Contrasts between corporate governance in Japan with her keiretsu, Continental European countries, with the two-tier board structures and worker co-determination, and the family domination of overseas Chinese, even in listed companies in countries throughout the Far East, emphasise such differences. Views differ on ownership rights and the basis of shareholder power.
The concept of the company was Western, rooted in the notion of shareholder democracy, the stewardship of directors, and trust – the belief that directors recognise a fiduciary duty to their company. But today’s corporate structures have outgrown that simple notion. The corporate concept is now rooted in law, and the legitimacy of the corporate entity rests on regulation and litigation. The Western world has created the most expensive and litigious corporate regulatory regime the world has yet seen. This is not the only approach; and certainly not necessarily the best. The Asian reliance on relationships and trust in governing the enterprise may be closer to the original concept. There is a need to rethink the underlying idea of the corporation, contingent with the reality of power that can (or could) be wielded. Such a concept would need to be built on a pluralistic, rather than an ethnocentric, foundation if it is to be applicable to the corporate groups and strategic alliance networks that are now emerging as the basis of the business world of the future.
Around the world, the Anglo-Saxon model is far from the norm. A truly global model of corporate governance would need to recognise alternative concepts including:
- the networks of influence in the Japanese keiretsu
- the governance of state-owned enterprises in China, where the China Securities and Regulatory Commission (CSRC) and the State-owned Assets Supervision and Administration Commission (SASAC) can override economic objectives, acting in the interests of the people, the party, and the state, to influence strategies, determine prices, and appoint chief executives
- the partnership between labour and capital in Germany’s co-determination rules
- the financially-leveraged chains of corporate ownership in Italy, Hong Kong and elsewhere
- the power of investment block-holders in some European countries
- the traditional powers of family-owned and state-owned companies in Brazil
- the domination of spheres of listed companies in Sweden, through successive generations of a family, preserved in power by dual-class shares
- the paternalistic familial leadership in companies created throughout Southeast Asia by successive Diaspora from mainland China
- the governance power of the dominant families in the South Korean chaebol, and
- the need to overcome the paralysis of corruption from shop floor, through boardroom, to government officials in the BRIC and other nations.
The forces for convergence in corporate governance are strong. At a high level of abstraction some fundamental concepts have already emerged, including the need to separate governance from management, the importance of accountability to legitimate stakeholders, and the responsibility to recognize strategic risk. These could be more widely promulgated and adopted. But a global convergence of corporate governance systems at any greater depth would need a convergence of cultures and that seems a long way away.