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THE CHALLENGE FOR CHINA


Corporate governance the key to business success


While Chinese firms have exhibited extremely strong performance in real sectors, their status in the USA and other developed countries’ stock markets has dropped, with investors’ confidence levels under the stigma of poor corporate governance practices. However, China business intelligence specialist CEBEX says that a good corporate governance model built on effective checks and balances will ensure that the rapidly growing number of overseas-listed Chinese firms experience greater success in an expanding global market.


C


hina’s control-based business model is rooted in the country’s institutional structure, but is detrimental to the further development of Chinese companies on overseas exchanges.


The controlling shareholder – the state – employs various governance mechanisms to tightly control listed firms. This concentrated ownership creates an entrenchment issue in which controlling owners’ self- dealings go largely unchallenged both internally by boards of directors and externally by takeover markets.


Lawsuits on the rise As more Chinese companies have gained a foothold in US and other developed capital markets, they have acquired far more experience. They have become more sensitive in their external relations, revealing increasingly more mature risk-communicating capabilities. Despite this, over the past year, Chinese companies have been the focus of close scrutiny from US Securities and Exchange Commission investigators and from investors concerned with their business practices. The number of Chinese companies accused of corporate fraud continues to increase – lawsuits that have recently been filed in the US owing to misleading statements or


omissions include: ƒ A company that failed to fully disclose the conditions of its main operating assets, and also made inaccurate statements, claiming that the possibility of facing legal action or recourse was non-existent. ƒ A company that claimed its income had increased


24 FAMILY OFFICE: ASIA TOMORROW


significantly and its supply of raw materials was abundant. However, during its initial public offering, the prospectus failed to disclose that the company had faced difficulties in acquiring a sufficient supply of raw materials that might cause a negative influence on corporate revenue in the short term. ƒ A company lacked a historical income and revenue. Therefore, it decided to use its internal forecasts and estimates, disappointing investors and triggering a lawsuit. ƒ The prospectus of one company contained false and misleading statements related to data from 2003, 2004 and 2005; however, it was not found in the original internal control portion of the financial report, and thus had to be restated afterwards. ƒ A company failed to sign effective employment contracts with its main executives before its initial public offering. To retain these executives, negotiations of million-dollar remuneration packages dragged on, and the increased salary expenses had a substantial influence on the company’s future financial situation. Therefore, its post-IPO financial results were vastly different from the prospectus that had been originally provided. ƒ A listed company whose share price fell drastically was accused of not decreasing its book value in time according to its intangible assets or decreased credit rating. ƒ A listed company was sued for not properly disclosing related party transactions.


Poor corporate governance Worldwide interest in corporate governance issues has intensified greatly in the wake of several large corporate scandals such as Enron and WorldCom. Businesses


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