China's corporate governance--in theory and practice.

• Author: Thompson, Mike
• Position: GLOBAL BOARDROOM

Ed. Note: Mike Thompson is professor of management practice at China Europe International Business School (www.ceibs.edu). CEIBS was established in 1994 with a mission to educate responsible leaders versed in 'China Depth, Global Breadth' by offering its students a thorough understanding of the latest international management knowledge and practices. For most of his career Thompson has worked with entrepreneurs and entrepreneurial boards as well as serving on a number of boards of U.K. companies, including the U.K.'s largest independent toy retailer. For many years he was CEO of Good Brand, a European strategic consultancy in sustainable enterprise, which serves some of the world's leading food and beverage brands. Thompson joined the CEIBS faculty in 2010 and also serves as director of the school's Centre for Leadership and Responsibility. His areas of focus include sustainable strategy, responsible leadership, and corporate governance. He can be contacted at mthompson@ceibs.edu.

The idea of boards and directors acting primarily on behalf of their many shareholders is not generally practiced as a priority in the Chinese securities market.

When China opened its two stock markets in Shenzhen (1990) and Shanghai (1991), they were primarily designed to raise money for the state and state-owned enterprises (SOEs). Newly listed firms used a "split-share structure" in which two classes of stock were publicly traded and two classes were not. By the end of 2006, non-tradeable shares accounted for 63% of the total shares in the market But following the Gugai reform of 2005, the Chinese law allowed for state and provincially controlled non-tradeable shares to become tradeable. Since 2007 there has been a gradual decline in state and provincial share ownership to approximately half of all shares in the Chinese market.

However, the reality is that for those companies with even a minority state ownership, the chairman is nominated by the state-owned parent, with a heavy influence from the regional Communist party. Top executive appointments in strategic industries such as utilities, banking, energy, transportation, and telcos are made directly by the Central Organization Department in Beijing.

[ILLUSTRATION OMITTED]

Whether the large blockholder in a company is a state-related body or a private holding company, Chinese investors are still attracted by the investment opportunities and are familiar with both the upsides and downsides of state involvement...