Corporate governance in China: key takeaways for investors

The opening of the capital markets to foreign investors has ushered a new era of investor stewardship in China. However, corporate governance (CG) issues continue to be a sticking point. A large number of companies with concentrated and controlling shareholders, and whose boards operate in an opaque manner, are creating unique challenges for investors.

In a recent webinar, ‘Corporate Governance in China: what investors need to know’, co-hosted by the Asian Corporate Governance Association (ACGA) and PRI on 11 March 2021, a panel of experts explored the nuances of the CG framework in China. They talked about divergence from international practices and provided strategies for investors to drive progress. Here are three key takeaways from the discussion:

1. China’s corporate governance is improving, but structural issues remain

ACGA’s upcoming CG Watch 2020 Report, which ranks 12 markets on their CG performance in the Asia-Pacific region, finds that China’s score has slightly improved over the last couple of years.

‘However, there is still an issue with the fundamental structure of CG in China, and the role of independent directors remains a key theme’, according to Jamie Allen, Secretary General of ACGA.

Karine Hirn, a partner at East Capital noted that while independent directors may be professional and competent, they tend to lack business experience and may not be perceived as champions of minority rights. She also expressed concern about the state of gender diversity on Chinese boards despite a sizeable pool of talented women within management ranks. While the panellists viewed strengthening regulation, for e.g., on the credentials and fees of auditing firms as a positive trend, they argued that companies’ ownership structures are still too often opaque, and the influence of the state via Party committees remains unclear. Nana Li, ACGA Research and Project Director for China, reflected that the revisions to the CG code in 2018 had brought limited assurance to investors, leaving open questions on how boards and management interact with Party committees, and the level of influence they exert on strategic decisions.

2. Engaging with PRC companies is a long game

Companies in China are improving their engagement practices, but they have further to go, according to Wilson Wei, an ESG Analyst at Chinese asset manager E Fund. Many firms still view CG as a compliance issue and are not incentivised to engage beyond what the rules demand. However, he finds that companies are more responsive when they understand the rationale and the objectives of engagement tasks. He encouraged investors to persevere to drive meaningful shifts; in his experience it takes time to build up a rapport with companies. Meanwhile, from the international investor’s perspective, Karine Hirn emphasised the need for investors to understand the realities that Chinese companies face ‘on the ground’ – and warned against imposing expectations without regard to the local context. She also welcomed opportunities for collaboration between local and foreign investors to better navigate cultural issues, share insights on governance developments and accelerate the pace of progress in the market.

3. AGMs and COVID-19: relatively smooth sailing

The speakers were of the view that Chinese companies largely escaped the problems that their Western counterparts encountered with holding annual general meetings (AGMs) during the pandemic. Due to China’s effective control of COVID-19, AGMs were held in-person as required by law. While domestic investors embraced e-voting, Nana Li pointed to increased difficulties faced by foreign investors to access on e-voting platforms and receive voting confirmations. Ying Zeng, a partner at Chinese voting-services firm ZD Proxy, observed that COVID-19 influenced some of the key themes in the 2020 voting season. For instance, resolutions on private placement became relatively common due to the increased demand for financing following the economic downturn, while more companies adopted stock-based incentive plans to retain staff. 

Overall, the speakers expressed optimism about the evolving CG trends in China. There was a broad consensus that more investors are now moving the market by exercising their stewardship rights, and there are opportunities for investors to work with PRC regulators to reinforce better alignment on sustainability governance in ESG guidelines, CG and stewardship codes.

You can access the recording of the webinar here. The next joint PRI-ACGA webinar in the series will look at corporate governance in South East Asia in late May.

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