Corporate Finance and Governance

Corporate Finance and Governance

Describe the corporate governance system in the Chinese SOE’s? What are the main differences with the US system?

The corporate governance system in the Chinese SOEs had been difficult due to the country’s economic structure. Major large corporations were owned by the government of the People’s Republic of China thus implying that the managers of these companies were liable for both the state policies, goals, and business matters. The government had a significant power and control of critical decisions made such as strategic planning among many others. The state-owned enterprises (SOEs) followed a two-tiered approach that incorporated a supervisory board and a board of directors where the board was responsible for running the company, and the supervisory board was in charge of supervising the of directors. When these SEOs went public, the government remained the major shareholder of the enterprises.

The system of the Chinese State Owned Enterprises differed with that of the United States in many ways. Whereas in the state-owned companies in the Chinese economy, decision making was majorly impacted by the state or the government, the United States governance system relies on the board of directors as its primary organ for decision making. Voted in by shareholders, the board of Chairman safeguards the shareholders’ interests by overseeing management and board selection, reviewing the financial performance of the company and allocation of funds to ensure that the corporation acts in a legal and socially responsible manner.

Another difference is that the American boards do not mirror a company’s close commercial or financial relationships as it is often in China where the boards were majorly comprised of the company insiders and in most cases, the supervisory board passed the decisions of the board in most areas of business management.

The chairman Zhang claims that the position of the government in China Netcom is very similar to that of a majority shareholder in a US corporation. Do you agree with this claim? What are similarities and differences between the position of the Chinese government and a majority shareholder in a US Corporation?

            I disagree with this statement because the position of the government in the case of China’s Netcom is not similar to that of the majority shareholder in the case of United States Corporation. The government influenced most of the decision making in the case of SOEs in China because both the two boards i.e. the board of directors and the supervisory board had representatives from the state and in many cases, these representatives were company insiders hence they typically seconded the decisions of the board in many areas of business management. In the case of the United States, the largest shareholder did not have much influence in the decision-making process and the decisions agreed upon by the board. This is because membership in most American boards does not reflect a company’s close commercial or financial relationships .the board composition in the United States reflects a tendency for the corporations to source outside board members and directors or people with no direct affiliation to the management. Often preferring to take a passive role in corporate governance and decision making, large shareholders are absent from the decision-making boards.

What were the main reasons for China Netcom to list on the Hong Kong and New York stock exchanges rather than to list in China? What were the consequences of this choice?

            China Netcom went through a series of reorganizations and restructuring that lead to its listing in the global market in the year 2004.The main reasons for China Netcom listing on the global stock markets were Chairman Zhang and China Netcom’s own efforts to modernize its corporate governance procedures to be the same with the corporate governance strategies of other world leaders. Although the state embraced the process of corporate restructuring, its main aim was to ensure the SOEs under its control were able to retain their value and promote their image on the world map. This lead to the formation of State-owned Assets Supervision and Administration Commission (SASAC) t which was a state corporation tasked with reforming the SOEs.Hence the listing of China Netcom on the global listings on the New York Stock Exchange and the Hong Kong and not in the local listing.

            The listing of China Netcom on the New York and the Hong Kong stock markets exposed it to regulations of the global market. Since China Netcom knew the rules were going to very strict, the company began establishing some corporate governance changes. The company separated the roles of the chairman and the chief executive officer. Also, it leads to the creation of many other committees such as Strategy and planning committee, compensation committee among many others. Also the listing lead to the company adding a greater proportion of independent directors to its board. These first changes in its governance structure after its listing impressed many analysts, investors and also its board members.

 McKinsey suggested a path for improved governance within the firm. What were the main governance problems which inspired this management change? What are the suggestions made by McKinsey to resolve these issues? Do you think they will solve the problems? Would you suggest something else?

            The main governance problem which inspired the change within the China Netcom company was how to maintain international best practices brought about by its listing on the global stock markets like New York and Hong Kong while at the same time recognizing the state’s position as a majority shareholder and all it entailed.McKinsey and his counterpart from the University of Tsinghua, China determined that the development of its corporate governance program would be carried out in a phased approach.McKinsey identified these issues as one that required immediate resolution. The role and responsibility of the corporate party and the role and the responsibility of the labor unions as the major issues. The first suggestion was to clarify the role of the corporate party committee within the corporation. Another suggestion was to define the role of the labor unions.

            McKinsey found china Netcom’s board structure consistent with the requirements of overseas listing but suggested some important areas for further improvement.one recommendation was to integrate the nominating and corporate governance committees and create a dedicated compensation committee. This change was meant to improve efficiency and allow representatives to be major on their broad responsibilities.

            These suggestions by McKinsey would solve these problems and make the China Netcom a global brand company since the McKinsey evaluated China Netcom’s current corporate governance interviewing executives, directors, and staff. China Netcom needed to comply with the regulations from the Hong Kong and New York where it was listed and to meet the best practices in those areas. Another improvement was to be transparent to all shareholders and the public to allow for rational investment and decision-making process. Furthermore, the governance improvement program needed to balance the interests of all stakeholders including majority and minority stakeholders, creditors and employees. Also, all parties had to agree to be proactive in their pursuit of improved governance strategies and their implementation.

When considering the financial information for the company provided below, in what ways the corporate governance reforms would affect the value of China Netcom?

Corporate governance in Chinese SOEs suffers from several shortcomings, all of which reflect conflicts of interests among the various groups involved in management and control. First, there is a conflict of interests between shareholders and managers. As a representative of the state, the SASAC authorizes SOE executives to run the business in a way that increases the value of state-owned assets and advances national goal. These endless conflicts affect the value of China Netcom’s value in the global position.

There is a conflict of interests between SOEs executives and the general staff. Under China’s previously centralized economic system, all SOEs employees could regard themselves as the owners of the corporations. However, following the economic reform and shift to a market-oriented system, SOE executives were granted the right to operate the corporations, while the majority of the workers were now hired as ordinary employees. This has created an employer-employee relationship between the executives and general staff and has given rise to a continuously growing imbalance between them.

References

Abrami, R. M., Kirby, W. C., McFarlan, F. W., Xiangdong, N., & Manty, T. (2007). China           Netcom: Corporate Governance in China (A).

Lightfoot, R. (1991). Note on corporate governance systems: the United States, Japan, and           Germany. Boston: Harvard Business School Case, (292-012).