Chinese boards’ structure ‘leads to confusion’

By Tom Mitchell in Hong Kong

Published: April 2 2008 18:43 | Last updated: April 2 2008 18:43

Board structures at Chinese companies can lead to “confusion, ambiguity and potentially ... undermine the board of directors”, according to a study of the corporate governance risks faced by investors in China.

The report by Risk Metrics, which advises more than 2,000 institutional investor clients, said factors including China’s two-tier boards and a well-crafted but untested regulatory regime continue to make the country a risky destination for overseas investors, especially when compared with Hong Kong.

China’s company law requires Chinese companies to establish a “board of supervisors”, usually chaired by an employee representative from the All China Federation of Trade Unions, the country’s only government-sanctioned union.

Other members of the supervisory board typically include an official from the company’s internal Chinese Communist party committee and at least one other person elected by shareholders. Company directors and other senior managers are not allowed to sit on the board of supervisors.

“Recent company law developments ... have clarified and added weight to [the supervisory board’s] role,” Risk Metrics said.

“These changes emphasise its monitoring role and charge it with ensuring the company’s stability.

“Specifically, the board of supervisors is charged with reviewing the company’s finances [and] supervising the board of directors and senior management ... In and of itself, this financial oversight role can create confusion.”

The role and influence of ACFTU branches and party committees at Chinese state-owned companies is even more vague. It is also not uncommon for senior executives suspected of corruption to be detained – without explanation – by the party’s disciplinary inspection committee before reappearing months or years later in a criminal court.

Risk Metrics noted minority shareholders in the two jurisdictions do face some common risks. The state’s firm grip over China’s largest industrial and financial companies is mirrored in Hong Kong by the influence of tycoons and their families

The Chinese government typically holds stakes of 65 per cent or more in large state companies. Hong Kong tycoons exercise similar control through 51 per cent shareholdings.

“There is a cohort of investors who feel comfortable [with] what they don’t know in Hong Kong,” said Dean Paatsch of Risk Metric’s governance division. “It’s very hard to get your arms around what you don’t know in China.”

Copyright The Financial Times Limited 2008