Corporate Governance in China - Case Study Example

CORPORATE GOVERNANCE IN CHINA Introduction China is one of the countries in the world that has been experiencing a booming economic growth in the world. This has come with the growth in economic opportunities especially in the business world that has at last embraced the notion of an open economy. As a result there have been many issues in business practices that have been critical importance in the business world of china. Corporate governance is an aspect in the management of organizations that involves the way the organization carries along its relationship in the organization with the workers and outside the organization with the investors and the community around including its customers. In china, corporate governance has received much attention in the recent years and there have been debates on how china can develop an effective corporate governance system that can improve the number of listed companies in the country. The issue of corporate governance finds its roots and effect in the stock market which is responsible for listing companies. Before a company is listed in the stock market, it usually undergoes a rigorous process of scrutiny on issue of corporate governance. (Berle and Mean 2003, p. 286) This paper will look closely at the corporate governance in china and relate the practices to one of the company, Sainsbury PLC to see how it can adopt such measure and to look at the extent in which it has been able to integrate such measures in its operation. It will first start by looking at the corporate governance in china and later look at Sainsbury PLC and how the aspect of corporate governance can be implemented in the company. Let us first look at the corporate governance landscape in china. Corporate governance practices in China The mandate to improve corporate governance in china has been one of the aims of the government for along time. It started with the making of the stock market which came into being after the opening of the economy about one and a half decade ago. The need to improve the corporate governance landscape has been one of the mandates that the government has taken in developing a financial market that serves the country and the business community alike. In recent past, china has made great strides towards the issue of corporate governance which has been through the relationship of the government and the players in the private sector. Government agencies that have been handling this issue have given various laws, rules, regulation and standard that are aimed at putting in place a firm foundation and a framework for corporate governance in the country. (Kim and Giles 2003, P. 51) In order to understand practice of corporate governance in china, we have to accept that china has been undergoing through a transition process which has seen the development of market-oriented economy from a planned economy although this pace of transition has varied with various sectors. But the biggest challenge that the country has been facing has been on the ground that it has taken to development of the concept when most of the important functioning financial market structures like a well defined legal system, regulatory agencies and others have not been put in place or have not been functioning to the required standards. (Clarke 2003, p. 53) Reports coming from survey on Corporate governance (CG ) in the country shows that there have been marked willingness by many companies in china and many businessmen to develop accepted standard of CG not only for the domestic market but also they have been casting their sights higher than the domestic market. They have shown willingness to improve CG practices like shareholder rights, environmental control, improved level of transparency, empowering of boards, and other practices which are aimed at improving the business landscape of the country. There has been a general recognition that improved CG makes an organization more attractive to the investors and more profitable. Let us look at some of CG practices in china and the recent efforts by the government to improve the practices. One of the key components of the CG reforms in china has been the efforts by the government to privatize the state owned enterprises (SOES) which took root in the 1980s and more that 80 percent of the SOEs have been transferred to the private firms under the company law in order to be listed in the stock exchange. One of the practices has been the conversion of non-tradable shares into freely tradable shares. This is a new practice that is expected to provide ground rules to allow for the conversion of the shares. The completion of the transformation requires a two third approval of majority for outstanding tradable shares. The minister of finance has come up with new basic accounting standards for business enterprises (ASBE) which consist of standards applied to all Chinese listed companies. This is aimed at facilitating further development of a market-like economic in the country raise the quality of financial information and also to raise the confidence of the investors. This is aimed at bringing accounting practices in china to be in line with IFRS which are accepted as international standard. (Allen and Wong 2000, p. 4) Another practice evident in the Chinese market is quarterly reporting. In 2003, there was move that issue directives on quarterly reporting which was an improvement over the 2001 version. This new directive is more focused on the contents of the reports of listed companies and stipulates the acceptable time of reporting. These reports should include profit and loss date, assets and net from of cash from the operation of an organization. (Claessens and Fan 2002, P. 32) The other has been qualified foreign institutional investor program which is expected to raise the level of investment in the country. It gives the investors the right to invest in A-shares, treasuries, convertible boards and in corporate boards. Let us look at financial disclosure and transparency. There have been the amendments of company law which comes with procedures fro entering into related party transactions in which shareholders approval is required before an organization can give security of a major shareholder in which case it is seen as the controlling party. Companies are also encouraged to disclose information on timely bases and disclose adequate information to shareholders. All publicly listed companies are supposed to disclose information on quarterly bases. On the issue of board composition, china adopts a quasi two-tier structure with a board of director and a supervisory board. The board of directors is the main decision making body while the supervisory board is an independent body monitoring the management and board of directors. Some board committees don't exist in china like nominating and compensation committees. The CG practice also provides for an independent director with more power in the board. In many companies the chairman of the board is also the chief executive officer of the company which is not common in major markets. (Liu 2006, p. 70) Let us look at the CG practices in Sainsbury and how they align with the system in china. CG in Sainsbury PLC In its CG practice, Sainsbury has a board of directors which is responsible for the operation of the company. The board is given the responsibility on overseeing the system of internal controls which include risk management in the company. However there are various board committees that work closely with the board of directors. The board delegates most of these responsibilities to the board committees including the nomination, remuneration, corporate responsibility, and audit committees. Hence unlike the landscape that we find in china where some of the most important committees like remuneration are absent, there is a board committee on remuneration in Sainsbury. The nomination committee is supposed to oversee nomination of board officials while the audit committees look into the issue of auditing. The system of internal control in the company is reviewed and monitored by the audit committee including the financial, operational and compliance controls and risk management. These are duties that are delegated to the committed by the board. (J Sainsbury PLC, 2008) On the practice of disclosure, Sainsbury PLC ensures that it has disclosed company information on quarterly bases. This is in order to keep the shareholders more informed of the operation of the company. Financial disclosure is one of the most important practices that the board and board committees works on. (J Sainsbury PLC, 2008) The company has also ensured that it plays a part of its corporate social responsibility. The company has been involved in various activities that are aimed at improving the lives of the community. It has taken steps to make the working condition at the company some of the best in the world. These include practice of providing the best food and health, making a difference in the community through various activities, sourcing with integrity through a supply chain that ensure ethics in trading, and a respect for the environment which ensure that it streamlines its operation with the current environment issues. (J Sainsbury PLC, 2008) To maintain positive relationship with shareholders, the company has put in place a system of electronic communication with shareholder which is through online shareholder services and email news services. This ensures that shareholders get the required information with time. Therefore we can say that the company has worked closely to the CR practices of china. Reference: Allen, F. & Wong, T. (2000): Law, Finance, and economy in china Journal of Accounting, Vol. 38, Issue 2, p. 4 Berle, A. & Mean, G. (2003): Modern Corporation, Macmillan, New York Claessens, S. & Fan, J (2002): Corporate governance in Asia. International Review of Finance, Issue 3 Clarke, D. (2003): Corporate governance in China, China Economic Review, Issue 5 J Sainsbury PLC, 2008, Our approach to CR: Our Principles Kim, Y. & Giles, M 2003, Developing institutional investors in China, World Bank Country Study Paper. Liu, Q 2006, Corporate Governance in china: Practices, CESifo Economic Studies, Vol. 52, Issue 2, p. 34-75 Read More