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Friday, 22 May 2009
Governance: S-chips not inferior to small caps
S-chips have been the epicentre of recent corporate scandals but they are not inferior to other small caps when it comes to corporate governance, a study shows.
They had similar scores on governance and transparency to non-Chinese listings with a market cap of less than $50 million or below $300 million. But S-chips are more likely to have busy directors sitting on their boards.
These facts emerged after a more in-depth study by NUS Corporate Governance and Financial Reporting Centre (CGFRC) on the Governance and Transparency Index (GTI).
The GTI database contains 136 S-chips as some companies may not have released an updated annual report at the time of scoring. Each firm can score up to 100 points in the core corporate governance (CG) index.
The mean CG score for 136 S-chips was 36.89, close to the mean score of 36.52 among 300 non-Chinese listings with a market cap of less than $50 million, and not far away from the mean score of 37.26 among 453 non-Chinese listings with a market cap below $300 million.
All three categories of companies have the same median score of 37.
Similarly, there were no major statistical differences on how S-chips scored on board matters compared to small non-Chinese listings with a market cap of less than $50 million or those below $300 million.
Under board matters, S-chips have a mean score of 13.52 versus 13.43 for non-Chinese listings below $50 million in market cap, and 13.8 for those below market cap of $300 million.
In areas of ‘remuneration’ and ‘accountability and audit’, S-chips also scored similarly as the typical small caps, with the same median score of 5 and 11 respectively.
S-chips scored a higher mean of 7.79 for transparency and investor relationships, compared to non-Chinese small caps with market values below $50 million that scored a mean of 7.76, but still lower than the mean of 8.12 among non-Chinese stocks with a market cap below $300 million.
But in most categories of the GTI, the maximum scores of S-chips tend to be lower than other small caps. The GTI scores do not capture the robustness of the business model, the governance and management ‘culture’, ethics, and of course the economic conditions.
Some 47.8 per cent of S-chips have at least one busy director (holding at least six directorships), while the proportion of other small caps with such board profile is about 37 per cent. Those with ‘busy’ directors include China Aviation Oil, China Essence, China Sky, China Yongsheng and Ocean International.
‘To build trust and confidence, particularly amidst the problems involving a disproportionate number of S-chips, S-chips may need to do more - not just do as much as the other smaller companies,’ said Mak Yuen Teen, co-director of CGFRC and regional research director for Asia-Pacific at Watson Wyatt.
Prof Mak noted that the biggest change needed may be a mindset change on the part of controlling shareholders to set the tone from the top and to welcome good independent directors (IDs) who are truly able to contribute and challenge their thinking.
‘I think trying to get one very good ID would be a good start, and this ID should be given an instrumental role . . . to try to bring about culture change and improvements in those other areas,’ he added. ‘But the reality is that better directors will need convincing to sit on S-chip boards.’
Market talk has it that some S-chips that have fallen into negative spotlight have difficulties in getting new directors on board.
A case in point is Zhonghui Holdings, which defaulted on a loan and where special accountant PricewaterhouseCoopers found an advance payment of 50 million yuan (S$10.7 million) for an acquisition made without board approval.
Its last ID quit last month, citing difficulty in discharging his duty due to a lack of accurate, timely and complete information from management. No replacements have been appointed so far.
‘Companies need to examine who are the members of the audit committee and whether they have the time to make that commitment because they need the time and effort to continually educate the companies on corporate governance,’ said Robson Lee, partner at Shook Lin & Bok LLP.
But Mr. Lee, who sits on board seven listed companies including Youcan and Qian Hu as an ID, noted that ‘busy’ is a relative thing.
It is more important that companies bring in directors with the experience of dealing with Chinese companies and an understanding of their culture and way of doing things, instead of a novice who may not add value to the company, he said.
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Governance: S-chips not inferior to small caps
By LYNETTE KHOO
22 May 2009
They had similar scores on governance and transparency to non-Chinese listings with a market cap of less than $50 million or below $300 million. But S-chips are more likely to have busy directors sitting on their boards.
These facts emerged after a more in-depth study by NUS Corporate Governance and Financial Reporting Centre (CGFRC) on the Governance and Transparency Index (GTI).
The GTI database contains 136 S-chips as some companies may not have released an updated annual report at the time of scoring. Each firm can score up to 100 points in the core corporate governance (CG) index.
The mean CG score for 136 S-chips was 36.89, close to the mean score of 36.52 among 300 non-Chinese listings with a market cap of less than $50 million, and not far away from the mean score of 37.26 among 453 non-Chinese listings with a market cap below $300 million.
All three categories of companies have the same median score of 37.
Similarly, there were no major statistical differences on how S-chips scored on board matters compared to small non-Chinese listings with a market cap of less than $50 million or those below $300 million.
Under board matters, S-chips have a mean score of 13.52 versus 13.43 for non-Chinese listings below $50 million in market cap, and 13.8 for those below market cap of $300 million.
In areas of ‘remuneration’ and ‘accountability and audit’, S-chips also scored similarly as the typical small caps, with the same median score of 5 and 11 respectively.
S-chips scored a higher mean of 7.79 for transparency and investor relationships, compared to non-Chinese small caps with market values below $50 million that scored a mean of 7.76, but still lower than the mean of 8.12 among non-Chinese stocks with a market cap below $300 million.
But in most categories of the GTI, the maximum scores of S-chips tend to be lower than other small caps. The GTI scores do not capture the robustness of the business model, the governance and management ‘culture’, ethics, and of course the economic conditions.
Some 47.8 per cent of S-chips have at least one busy director (holding at least six directorships), while the proportion of other small caps with such board profile is about 37 per cent. Those with ‘busy’ directors include China Aviation Oil, China Essence, China Sky, China Yongsheng and Ocean International.
‘To build trust and confidence, particularly amidst the problems involving a disproportionate number of S-chips, S-chips may need to do more - not just do as much as the other smaller companies,’ said Mak Yuen Teen, co-director of CGFRC and regional research director for Asia-Pacific at Watson Wyatt.
Prof Mak noted that the biggest change needed may be a mindset change on the part of controlling shareholders to set the tone from the top and to welcome good independent directors (IDs) who are truly able to contribute and challenge their thinking.
‘I think trying to get one very good ID would be a good start, and this ID should be given an instrumental role . . . to try to bring about culture change and improvements in those other areas,’ he added. ‘But the reality is that better directors will need convincing to sit on S-chip boards.’
Market talk has it that some S-chips that have fallen into negative spotlight have difficulties in getting new directors on board.
A case in point is Zhonghui Holdings, which defaulted on a loan and where special accountant PricewaterhouseCoopers found an advance payment of 50 million yuan (S$10.7 million) for an acquisition made without board approval.
Its last ID quit last month, citing difficulty in discharging his duty due to a lack of accurate, timely and complete information from management. No replacements have been appointed so far.
‘Companies need to examine who are the members of the audit committee and whether they have the time to make that commitment because they need the time and effort to continually educate the companies on corporate governance,’ said Robson Lee, partner at Shook Lin & Bok LLP.
But Mr. Lee, who sits on board seven listed companies including Youcan and Qian Hu as an ID, noted that ‘busy’ is a relative thing.
It is more important that companies bring in directors with the experience of dealing with Chinese companies and an understanding of their culture and way of doing things, instead of a novice who may not add value to the company, he said.
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