Understanding Corporate
Governance in China

Bob Tricker and Gregg Li
Hong Kong University Press, Hong Kong

 

Unlike the West, which sees corporate governance
as a necessary way to regulate business, China sees corporate governance as the means to economic growth for the benefit of the people and the State.

 

When Gregg Li and I worked together in Hong Kong, around twenty-five  years ago, we did not imagine that within a couple of decades, China would:

•  become the second largest economy in the world

•  have some of the most significant companies on the New York Stock
Exchange board

•  create an affluent, car-owning middle class able to travel to Hong Kong, Europe, and North America, with their the children of some of them being educated in English public (i.e. private) schools

•  build smart cities using information technology to run activities in a virtually cashless  society

•  develop a modern transport network of motorways and railways

•  launch a ‘belt and road’ strategy to link China with Europe by sea an land.

In the 1980’s, the Chinese authorities decided to create a modern enterprise system, leading to a market economy. A new companies’ law was enacted in 1994 permitting the formation of companies.  Many state owned enterprises (SOEs) were corporatized and some floated a minority of their shares on the stock market.  New companies were created; some family firms, others reflecting national, provincial, or local interests.

Experts from Hong Kong and the Organization for Economic Co-operation and Development (OECD) helped to produce corporate governance guidelines.  Inevitably, OECD drew on corporate governance experience in countries in the West. But these countries are democracies with independent judiciaries, and a culture of business integrity.

Individual accountability, transparency, governance regulations or code with regulatory bodies ready to cite non-compliance, which are taken for granted in the West, were not the norm in China.  The Chinese culture is one of collective and shared accountability.   Opaqueness had been the norm for many SOEs.

The Chinese Government is an oligarchy, exercising significant central control with the judiciary serving the state.  Nevertheless, the Peoples’ Republic has developed an innovative corporate governance regime, with supervisory boards reflecting the German two-tier board model, but also boards of directors with independent outside directors, more like the US and UK unitary board model.

For years governance was left to companies, under the overall supervision of the State-Owned Assets Supervision and Administration Commission (SASAC) and the China Securities Regulatory Commission (CSRC).  State involvement at a higher level tended to be distant.  Some felt that the Communist Party’s leadership had been undermined so central authorities have recently sought to reassert party influence over the SOEs.

However, corporate governance involves more than company law, governance guidelines, and the rules of the stock exchanges and regulatory authorities. Culture and ethics lie at the core of corporate governance – the culture of the country, each company and every board.  In China, the corporate governance culture is still emerging; the ethics underpinning business activity are evolving; and relations  between business and government continue to change.

The roots of corporate governance in Hong Kong, by contrast were different.  Under the British influence, Hong Kong developed its own legislature, an independent judiciary based on UK-style common law, and its own currency linked to the US$.  The Hong Kong Stock Exchange dates from 1891.  Institutions for company registration and regulation were created, and strong professions were formed – legal, audit, accountancy, finance, and company secretarial.  This infrastructure and these institutions remained after 1997, when Hong Kong became a Special Administrative Region of China, after two hundred years as a British Protectorate.

To reach its present economic and political significance in the world, mainland China has travelled a unique road.  This historical and cultural context means that China has developed corporate governance with a distinct ‘Chinese face.’  Exploring and understanding the special features of corporate governance in China and the challenges ahead is the rationale for this book  The intention is to provide a practical guide to current corporate governance issues and practices in mainland China and Hong Kong, with an insight into possible futures.

China recognized, at the outset, that corporate governance was fundamental to economic development.  Corporate governance systems are experimental and evolving.  Unlike the West, which sees corporate governance as a necessary way to regulate business, China sees corporate governance as the means to economic growth for the benefit of the people and the State.  This book tells that story.