Corporate Governance and Foreign Investment in China
Corporate governance is no longer a foreign concept in China. The country has come a long way since all manufacturing entities were known simply as "factories", owned by the state and managed by government appointed officials or cadres. Today, China has embraced the corporation as the major form of a business entity. China's emerging corporate governance scheme, however, continues to draw criticism from reform-minded people in both the academic and the business worlds, and particularly since China's celebrated entry to the WTO.
Entities that have morphed from state-owned enterprises (SOEs) into limited liability or joint stock companies but remain wholly or majority owned by the state still suffer from a lack of accountability. Despite the changed governance structure, such an entity is often controlled and managed with a view less to maximizing profit for the shareholder (who in the case of the state is an abstract concept embodying the aggregate of dispersed individuals who really have no say in the running of the company) than to advancing certain state policies having little to do with profit maximization, or worse still, the interest of certain individuals. A listed but majority state-owned company often sustains losses at the expense of minority shareholders.
Lack of a wholesome corporate culture is a prevalent problem in China. One reflection of this is the absence of any specific requirements in the law relating to fiduciary duty, which would considerably restrain a director or officer from conduct involving any conflicts of interest between him or her and the company, or the duty of care, which would impose a minimum level of care in the performance of his or her duty for the company. Although the PRC Company Law imposes restrictions on directors with respect to certain obvious self-seeking behaviour, and requires the offending director to compensate the company in the event of harm caused to the company by such behaviour, shareholder action against such a director is not yet permitted under Chinese law. Nor has China established a complete law enforcement system for the securities market.
One widely recognized advantage of foreign investment in China, and especially foreign direct investment and M&A activity, is the introduction of western-style management with its emphasis on transparency and accountability to shareholders. However, until late 2002 the PRC authorities' attitude towards foreign investors' acquisition of PRC firms could perhaps be best reflected in its on-again, off-again approach to foreign investment in listed PRC companies. It was little wonder that, while China has surpassed the US as the leading recipient of foreign direct investment, a very low percentage of such investment is in the form of M&A.
With China's accession to the WTO at the end of 2001 and especially since the second half of 2002, the authorities have issued a series of regulations that could be interpreted as encouraging foreign investors to acquire Chinese companies. Most recently, the Third Plenary Session of the 16th Central Committee of the Communist Party Congress called for reforming the public ownership structure for many of China's SOEs. By encouraging "diversified forms" of public ownership and endorsing shareholding structures that "absorb investment from various types of investors [that] should be the major form of public ownership", the authorities may be signalling that most SOEs will in due time be transformed into shareholding companies. As the state gradually sheds its equity holdings in various enterprises, foreign-related M&A activities are bound to rise.
Print 
Email Article 
Favorite Font
Size: 
