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Monday, 3 November 2008
Signpost for dodging corporate minefield
A little over six years ago, two former top managers and an ex-chairman of listed retailer Zhengzhou Baiwen were handed suspended jail sentences and ordered to pay fines of up to 50,000 yuan (HK$56,700) for inflating the company’s profits.
A little over six years ago, two former top managers and an ex-chairman of listed retailer Zhengzhou Baiwen were handed suspended jail sentences and ordered to pay fines of up to 50,000 yuan (HK$56,700) for inflating the company’s profits.
The trio helped compile and release false financial reports to shareholders and the public, behaviour the Zhengzhou Intermediate People’s Court was quoted as saying seriously damaged the interests of shareholders.
The case was one of the rare instances at the time of listed company officials being found criminally guilty of accounting fraud and, according to Nankai University’s Li Weian, the author of Corporate Governance in China, an example of the kind of “window-dressing” that can occur when key executives have “insider’s control” or almost total say over decisions in a listed company.
Insider’s control is one of the governance problems Li says can beset a mainland-listed company and put the interests of managers and stakeholders out of alignment. Li insists that companies need to demonstrate good corporate governance if they are to remain competitive and create additional value. In this way, the quality of a firm’s checks and balances is a major factor in determining a company’s value, financial security and, ultimately, its survival.
But how can outsiders determine the health of those checks in any one firm? One option is to create an index that measures factors such as transparency, directorate independence and accountability and protection for minority shareholders. Li lists 10 or so approaches that have grown up elsewhere but says China needs its own assessment system because it has problems such as single shareholder domination that are not features of developed economies or other countries in transition.
He isolates indicators that form his Chinese corporate governance index and uses it to make a quantitative assessment of companies. His analysis covers the activities of controlling shareholders, directors and top management. He also looks at how well companies release information and involve stakeholders in governance.
Li says investors have become more concerned about the underlying value of companies and that the regular publication of a corporate governance index would go some way to bridging the information gap so that investors can act more rationally and less speculatively.
Trading in publicly listed companies is still a relatively young phenomenon - it was just 18 years ago that the Shenzhen Stock Exchange got off the ground - and the book is no doubt a valuable addition to analysis of this growing area. But the text is hard going for the general reader and it can be difficult to unpick the meaning of unnecessarily complicated sentences. The book could also do with a summary at the end.
That said, the book is best suited to a specialist audience of policymakers or people with an academic interest in the area. It is not for anybody unfamiliar with the terms “regression analysis”, “ceteris paribus” and “Tobin’s Q”.
1 comment:
Signpost for dodging corporate minefield
Samantha Kierath
3 November 2008
A little over six years ago, two former top managers and an ex-chairman of listed retailer Zhengzhou Baiwen were handed suspended jail sentences and ordered to pay fines of up to 50,000 yuan (HK$56,700) for inflating the company’s profits.
The trio helped compile and release false financial reports to shareholders and the public, behaviour the Zhengzhou Intermediate People’s Court was quoted as saying seriously damaged the interests of shareholders.
The case was one of the rare instances at the time of listed company officials being found criminally guilty of accounting fraud and, according to Nankai University’s Li Weian, the author of Corporate Governance in China, an example of the kind of “window-dressing” that can occur when key executives have “insider’s control” or almost total say over decisions in a listed company.
Insider’s control is one of the governance problems Li says can beset a mainland-listed company and put the interests of managers and stakeholders out of alignment. Li insists that companies need to demonstrate good corporate governance if they are to remain competitive and create additional value. In this way, the quality of a firm’s checks and balances is a major factor in determining a company’s value, financial security and, ultimately, its survival.
But how can outsiders determine the health of those checks in any one firm? One option is to create an index that measures factors such as transparency, directorate independence and accountability and protection for minority shareholders. Li lists 10 or so approaches that have grown up elsewhere but says China needs its own assessment system because it has problems such as single shareholder domination that are not features of developed economies or other countries in transition.
He isolates indicators that form his Chinese corporate governance index and uses it to make a quantitative assessment of companies. His analysis covers the activities of controlling shareholders, directors and top management. He also looks at how well companies release information and involve stakeholders in governance.
Li says investors have become more concerned about the underlying value of companies and that the regular publication of a corporate governance index would go some way to bridging the information gap so that investors can act more rationally and less speculatively.
Trading in publicly listed companies is still a relatively young phenomenon - it was just 18 years ago that the Shenzhen Stock Exchange got off the ground - and the book is no doubt a valuable addition to analysis of this growing area. But the text is hard going for the general reader and it can be difficult to unpick the meaning of unnecessarily complicated sentences. The book could also do with a summary at the end.
That said, the book is best suited to a specialist audience of policymakers or people with an academic interest in the area. It is not for anybody unfamiliar with the terms “regression analysis”, “ceteris paribus” and “Tobin’s Q”.
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