Chinese Listed Firms Need Better Equity Structure

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Last updated at: (Beijing Time) Wednesday, August 28, 2002

Chinese Listed Firms Need Better Equity Structure

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While looking for their independent directors, Chinese listed companies are shifting their eyesight away from the mere halos over the head of such social celebrities as pundits, professors and renowned entrepreneurs.

They now favor more those who have got some true know-how of corporate operation and are capable of fully acting their designated roles, for example charted public accountants (CPA) or lawyers.

By this change, Chinese listed companies seem to be more pragmatic in their choice of independent directors and are hailed to move another step forward in bettering their corporate governance.

According to the Beijing-based China Securities Journal, there have 25 independent directors of 22 listed firms resigned their posts so far this year. Of the resigned, over 60 percent are popular academics, professors and social activists, three are experts of the industries in which their firms do business. Only six of the 25 are of CPA and/or law service background.

The career tracks of their successors are quite different, however.

Of the 26 independent directors engaged, or intended to be engaged, by 21 of the aforementioned 22 listed firms, 18 have ever been CPAs and lawyers. Only two persons can be categorized as known economists or celebrities, the remaining six being experts of relevant industries, according to the newspaper.

Moreover, these newly picked or candidates are younger, with an average age of 44.6, and a peak age of 62 instead of their predecessors' 52 and 74.

The pubic reasons, the newspaper said, for the former independent directors' resignation mainly include: First, they are too busy with their own research or academic work, therefore unable to spare more energy to their responsibility as listed firms' independent directors; second, some have to temporarily terminate their current duties, because they have been otherwise engaged, for instance going abroad as visiting scholars; and third, some have to quit because their present roles have clashed with their other social identities, making their independence problematic.

All these sound quite plausible and encouraging.

But there is another unmentioned but deeper reason: The mounting pressure from small investors forces listed firms to reconsider their option of independent directors.

The original purpose in opening the slots of independent directors is to establish a sounder check-and-balance mechanism in the corporate governance of Chinese listed firms.

But when listed firms focus their eyes simply on celebrities, they are actually making show-off rather than protecting deliberately investors', especially small ones', interests.

Anyhow, those social celebrities do not know too much about what is going on in the listed companies, even though they hope to play full their roles.

As a matter of fact, quite a few so-called independent directors know so well that they are, in most sense, simply display pieces at the directors' board that they only occasionally show up at the directors' meeting.

Then, will the CPAs and lawyers work? - Hardly, I'm afraid.

In fact, there is, in all listed companies, a supervision committee, whose function, in accordance with the Company Law, is to oversee executives and ensure them to carry out directors' board decisions and protect investors', including of course small ones', interests.

But the supervision committee has turned out to be ineffectual in fulfilling its designed mission.

A natural question is: Can the independent directors, despite their vocational background as CPAs or lawyers, make any difference where the supervision committee has failed?

When one cat fails to catch a mouse, it might not always be for the cat's incompetence. The cat's paws might have been injured or simply tied up.

The root cause of all ills in Chinese listed companies is, above all, its faulty equity structure.

When the lion's share of the listed companies' equity is controlled by only one or two owners, for example the government, it's very hard for others to have a say in their management, although they are CPAs or anyone else.

By PD Online staff Forest Lee

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