What do you know? 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 FT reports on Thursday.
The report by Riskmetrics, which says it advises more than 2,000 institutional investor clients, notes that 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.
“Risky destination” is one thing. But a glance at the key points of Chinese corporate governance and board structures - or lack thereof - makes it seem more, in parts, like a Monty Python sketch.
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, says the report.
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, says Riskmetrics. “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”.
Adding to the confusion, the role and influence of ACFTU branches and party committees at Chinese state-owned companies is even more vague, according to the report. “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.”
If you want more of this, Riskmetrics will be running a webcast on April 8 about its latest findings on the opaque world of Chinese corporate governance.
