CHINA - The two-tier nature of Chinese company boards and the role of majority shareholders in electing independent directors that may be beholden to their electors are two major governance risk factors to minority shareholders invested in Chinese companies, according to a newly released research paper.
In China, companies have two tiers of boards - a board of directors and a board of supervisors that sits above the board of directors, and is composed of representatives of company employees and shareholders. The board of supervisor's role has been clarified in recent adjustments to company law, but it is difficult to know whom to engage on governance issues.
"How shareholders would go about engaging directors, and which ones, is something we're going to find out about over the next couple of years as shareholder engagement steps up," Smith said. "There is a degree of ambiguity to the two boards. It is also relatively untested in terms of a time of crisis - when we see a major negative corporate surprise, how do the two boards respond?"
While the RiskMetrics Group research paper found Chinese regulators had made great strides in improving shareholder rights, there were key areas of difference between China and Hong Kong's regimes, and both regimes hade differences to Western-style shareholder laws. The report comparedcorporate governance structures in China and Hong Kong because Chinese companies listed on the exchanges in both places, and concluded that the Hong Kong regimes were more advantageous to shareholder rights.
However, this situation is evolving, with some Chinese companies beginning to emphasise strong governance practices as a selling point to offshore investors.
"Anecdotally, we have seen in the last year to 18 months that some companies in China are putting forward in their prospectuses a heavy emphasis on corporate governance," Smith noted.
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