What kind of corporate governance do we need

By Wang Wei an Chinese entrepreneur

The author, during years he spent in Sinochem International (Shareholding) Corporation ("Sinochem International") as the exclusive director, has experienced the company's active practice in the improvement of the corporate governance structure. In particular, he has participated in the grading to the company's corporate governance, carried on by S&P, a international rating agency, for two times from 2003 to 2005. Since it is not so common for Chinese listed companies to accept evaluation based on international standards, and the result has also got multi-meanings for taking references from not just by Sinochem International itself, the author decides to propose some of his initial consideration over the establishments of the standards for corporate governance by taking the S&P grading as a starting point.

What has Sinochem International got from the two times of grading?

According to the S&P standards, Sinochem International got a five plus and six in 2004 and 2005 respectively, up to the medium and above level of global standards.

There are four parts of the basic structure of S&P's evaluation on corporate governance. The main frame and index distribution of Sinochem International for two times are showed in table one.

What should be paid attention is that, this evaluation index system doesn't reflect general terms such as ideology of corporate governance and the corporate principle, etc. Leaders of Chinese enterprises always like to put the corporate governance so high to the level of corporate spirit and culture, that it can not be measured objectively or be compared with other enterprises, causing the short of foundation in the concrete implementation of improved measures.

Objectively speaking, Sinochem International has been enlightened a lot from the grading, and has been helped in defining the perspective of the observation over the company's corporate governance structure and the technical index to launch improvement. The table two shows part of the measures took by Sinochem International' board of directors in the reform in 2004. Many indexes, though appeared to be not that significant, are actually something to be misunderstood most often when those Chinese listed companies are analyzed from an international point of view.

The grading has certainly brought a lot positive changes to the company's corporate governance. First of all, the orientation of the board of directors is clearer, and all the directors participate out of their stands as shareholders, in the making of strategic decisions and formulating operational rules on equal footing. Contrasting other listed companies, exclusive directors of Sinochem International have more opportunities to join the decision-making and express their professional ideas. As a matter of fact, they have performed very active in almost all the important issues concerned by the board of directors. For example, they have denied the proposal of big shareholders and the management panel for many times, while more often, they were there improving and backing up the strategic decision of the company.

Secondly, significant business decisions made by management panel have got the board of directors and the board of supervision persistently informed and participated. From the nomination of crucial officials to the controlling over business risks and the remuneration inspiration, the management panel has got support and concern from the board of directors all the while in many aspects. Appropriate participation from the board of directors did no harm to the judgment and conduction of the management panel who are more familiar with market and commercial details. And the regular communications and discussion between the two parties, has established a basis of mutual trust and has also made directors more concerned to the company and more willing to take responsibilities.

Meanwhile, the social responsibility of the company has got understood better. The S&P grading has encouraged Sinochem International to measure up to the most excellent enterprises in the world, in terms of not just profits creating and core competitiveness building, but more in the social responsibility and the business moral. Sinochem International is among the few Chinese listed companies to have established environmental website and stressed the public interest ideology. The suggestions of international rating agency has been discussed at the directors meeting and the standards they used have become the training textbooks for the board of directors and administers of the company.

Lastly, the company's market status got enhanced. Having been incorporated into the SSE 50 index and evaluated as an excellent company in information disclosure, Sinochem International has also got its board of directors selected as the best by many media in 2004. As one of the second patch of pilots of equity disposal reform in 2005, Sinochem International proposed a consideration scheme, during the negotiation of which, many institutional investors have clearly expressed their satisfaction to the company s corporate governance and have accepted a certain premium of corporate governance from the non-tradable shareholders.

The differences between international standards and mainland ones

After giving full recognition to the positive meanings for Chinese listed companies to accept the test in light of international standards, we must also consider one issue, that is, how truly the so-called international standards is and to what kind of degrees they could be adopted directly in Chinese enterprises.

Through many times of discussion, we find out that Sinochem International has many differences from the standards proposed by S&P, which I individually have divided into three types:

The first is technical differences, which differ from each other due to different phases of the economic development, including aspects such as the way or degree of putting the information to the public, the establishment of exclusive directors system, the way of choosing intermediaries, etc. what should be made clear is that, many judgments have no strict catalogs due to their artificial and subjective features. Therefore, the judgment of the ebb and flow of corporate governance can not be made only on the basis of technical differences.

Secondly, social differences, which are differences caused by different social system and cultural background, such as the payment and transparency of payroll, the arrangement of equity inspiration, and the expression of professional ethics and enterprise morals, etc. Those kind of differences are results of long term accumulation of the social cultural background, with no basis of making comparisons and direct transferences. Even in the same economic environment, the characteristic pattern of corporate governance won't come into shape without constant communications and mutual compromises in multinationals' operations. Take Japanese lift-time employment security system and the American equity and high payroll inspiration system as examples, they have formed into an important shield for understanding in the cooperation between enterprises from the two countries.

The third one is differences in economic system, which means the differences resulted from various economic system, such as issues of big shareholders controlling, the appointment of directors and administers, and the choice of accounting system, etc. The fact that systemic differences, getting out of the controlling scope of individual companies, become the foundation of the corporate governance standards that are totally different, is worthy of close attention of Chinese enterprises. Although all the essential businesses of Chinese companies are all carried in the mainland without any demand of international finance, however in discussions, S&P still persisted that Sinochem International should employed international auditors and adopt international standards of accounting. Moreover, S&P always consider Sinochem International as the government and take suggestions from big shareholders as the intervention from the government. These differences are differ from each other in standing, which don't require consensus but mutual respect between the two sides.

Nowadays, turning into the major battlefield of global economy, China offers sufficient opportunities and motivations to the establishment of corporate governance standards. Only in the environment of market competition can a set of proper standards of corporate governance be set up. It is our hope that supervision authorities, academe and non-governmental commercial companies could create an atmosphere of cooperative competition, in order to establish Chinese mainland standards.

In addition, we should realize the limitation of corporate governance, which is just a path to enhance a company's competitive edge instead of the business aim. The cause of the grading on the corporate governance is far more important than the result of it. Just as the fact that the best resource allocation is beneficial to the improvement of efficiency, to fresh the allocation of various factors of corporate governance may enhance the inner and outer value of the company in terms of strategy and operational system to a large degree. Further, it is also in the common interests of the global economy to have a large group of farsighted local enterprises trying to gear to the international standards of corporate governance, concerning social responsibility, environment and welfare system, and working hard to promote the harmonious social development, while creating profits and fortunes, thusly promoting a sound and sustainable development of China.

Four useful governance ideologies

Generally speaking, corporate governance is the arrangement pattern and execution mechanism of the company's system in the special economic system. All kinds of conflicts and compromises between shareholders, shareholders and management panel, and between the company and operational environment, are taking place in the frame or on the platform commonly recognized. The outer environment of a company just fundamentally defines the corporate governance structure and ideology, the understanding of which is the key of the establishment of standards and evaluation system. It is apparent misleading to just indiscriminately adopt the target system of corporate governance of some big western companies, when most of country still don't acknowledge that Chinese is running a market economic system. The recognition of Sinochem International to the S&P grading also results from the realization.

What kind of corporate governance ideology do we need? This is a controversial issue to be discussed with the participation of academe, supervision authorities and business circles altogether. Seeing from the perspective of practical operation, I think ideologies as follows should be taken into consideration:

corporate governance is to create and keep enhance the company's value.

If the corporate governance can not help a company to create value and keep sustainable development, it is just a pedantic view of art. If indexes such as the financial transparency, the restraining relationship among interest related groups, and the way of inspiration of management panel, which all bear direct connection with a company's value, can contribute in the creation of the company's value, then they are meaningful, or else the degree of concrete operation should be adjusted. In the final analysis, the enhancement of a company's value is the prerequisite of the forming and maintaining of the corporate governance. Therefore, we should not give top priority to corporate governance, especially in China, with a fledgling economy.

To be committed to enhancing on the basis of the understanding of historic pattern

Nowadays, non-governmental enterprises busy in dealing with market rules and State-owned enterprises trying hard to get rid of the administering intervention are both transferring to the platform of market economy, under the guidance of the corporate governance ideology and the encouragement from supervision authorities, which has won broad respects from business circles. But, it will only result in the repulsion of enterprises to commandingly judge the historic origin, just like to restrict youngsters' adolescent behaviors in light of adults' rules.

A feasible corporate governance ideology should tolerate the creation or even some compromises on the basis of development. For example, during the process when the government vigorously promote the revolution of listed companies' equity disposal problems, how can corporate governance face all the circumstances without being influenced, and purely adopt those fine academic indexes while putting accumulated historical problems aside? It is an important in making sound corporate governance that the board of directors and the management panel are brave enough to take actions and responsibilities. During the phase of market transition, it is more likely for them to make strategic decisions in an unpredictable environment. The corporate governance itself can never replace the market decision, but just offer necessary risks restriction terms. Though with significance, it is still only one of many factors of corporate value. The indexes of corporate governance should also follow the era. For example, indexes such as environmental protection, employment guaranty, women's right, a company's social responsibility, etc. will be gradually incorporated into the system of grading as China is getting stronger.

The coordination between corporate governance and public governance

Corporate governance is closely connected with the government administration or more comprehensively speaking, public governance. Only when the corporate rights are defined that can corporate responsibility be took, likewise, only when the government's duty is clarified can the government rights be really applied. As the function of government in planned economy and market economy differs a lot, it is a process for the company to learn the techniques of corporate governance and chess game controlling. It is unfair and unrealistic to just ask for the enhancement of corporate governance, without a fine government administration, the current level of which should be coordinated, when set up corporate governance standards, as we know it is impossible to have the coexistence of spring and snow in a business circle. Likewise, ever-changing adjustments made by the government should also be paid attention to, as it won't last long to be frequently taken to task. In a word, what is needed to establish a target system of corporate governance is by no means the technique of idle theorizing but long term evolution and coordination.

The global integration of corporate governance standards

Chinese enterprises are now working hard to learn experiences of corporate governance of enterprises from countries with mature market economy, and trying to establish the system of targets and evaluations with local characters. It should be pointed out that, we stress local characters is not because we refuse outer experiences or avoid progress, but because we have realized that, in China, this great developing country with such a market depth and growth rate there should be such a group of entrepreneurs to contribute their experiences for the global standards of corporate governance. Chinese enterprises should get themselves involved into the cause of the standards formulation so that their demand and expectation could be expressed. On the other hand, an real global corporate governance must absorb experiences of developing countries such as China, Russia and India, etc. A sustainable speedy economic development will bring faith and responsibility to Chinese business circle.

(the author is the President of Wanmeng Investment Management Co. Ltd.)

From: