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Financial firms lead on corporate governance

By Bi Xiaoning (China Daily)
Updated: 2009-05-04 07:45

Several Chinese financial institutions have introduced measures, meant to weather the global economic downturn, that have turned them into some of the best-governed corporations in China, according to a recent report.

China Merchants Bank was crowned the best corporate governance performer among the top 100 Chinese listed companies and was one of 13 financial companies in the top 20 in a report co-released by the global risk management consultancy Protiviti, the Chinese Academy of Social Sciences and the National School of Administration.

The top 100 companies, based on market value as of June 30, 2008, came from 11 industries, including finance, petrochemical, steel, real estate, telecommunication and aviation.

"Corporate governance in the financial service industry in China started relatively late but has matched international corporate governance standards in a short period of time," said Christopher Low, president of Protiviti Greater China.

Listing procedure reforms over the last three years help spur change in State-owned banks. Regulators also introduced measures to prevent over-liberalization and abusive use of derivatives, which will help the Chinese financial service industry get through the global financial crisis, the report said.

There were 20 financial companies in the list of top 100 companies, including 13 banks, three insurance companies and four securities firms. These financial companies outperformed non-financial companies in all sections of the assessment, which included information disclosure and transparency, responsibilities of the board of directors, responsibilities of the board of supervisors, role of stakeholders, shareholders' rights and fairness to shareholders.

Petrochemical companies scored the highest marks in role of stakeholders and responsibilities of the board of directors categories. Real estate companies had significantly higher scores in the shareholders' rights category.

Telecommunication companies lagged behind in almost all categories, usually scoring about 30 percent lower than the top financial companies.

"China's monopolistic companies are weak on corporate governance since they have little pressure from competition. It's necessary to promote market competition to increase corporate governance standards," said Lu Tong, a professor with the Chinese Academy of Social Sciences.

According to the report, highly concentrated shareholdings remain a hindrance to improving corporate governance.

Limited protection of minority shareholders' interests and an immature capital market mean there is no effective market monitoring system to keep senior management remuneration in check at many listed Chinese companies, the report said.

"The board of directors will play an increasingly important role, at many listed companies, in developing incentive-based remuneration plans that ensure a proper alignment of risks and rewards and focus more on long-term performance than short-term benefits," said Lu.

In May 2008, Chinese policymarkers released the country's first guidelines on corporate governance, the Basic Standard for Enterprise Internal Control. It takes effect July 1 this year.

"The standard laid an important milestone in the development of China's capital markets. Listed Chinese companies have just started establishing internal control systems. Putting them into practice is the next important step towards enhancing corporate governance," said Low.