Thursday, May 31, 2007

Corporate (Non) Governance

This was originally a post on the China business Blog,by jeremy Gordon. It explains the risk of doing business in China and getting caught up in the corruption that is notorious with China. it gives specific examples to clarify.

The risks of doing business in China range from intellectual property rights abuses and lack of enforcement of court awards, to fraud and theft (to name a few). I have covered corruption before, but for investors seeking to share in the spoils of China’s economic success story, corporate governance (or lack of it) is also something to watch out for.

Forbes highlights some recent cases:

  • Shanghai Electric, a Hong Kong-traded, state-controlled company making power equipment, was suspended after reports of a director taking US$400 million in illegal loans.
  • Ocean Grand Holding, a Hong Kong-listed chemical company with interests in China, was reported to be missing $100 from its accounts.
  • Skyworth Digital Holdings, a big television makers, had its founder sentenced to six years in prison for theft of $9 million of company funds.
  • Guangdong Kelon, the refrigerator maker, reported a loss of around $400 million following fraud investigations into its former Chairman.
  • Beijing Capital Land, a major developer, lost its chairman after corruption investigations.
    Part of the problem is that many Chinese companies have a very flat management structure (the boss / founder at the top, and everyone else below), and that major shareholders (other than the boss in question) are either unengaged (e.g. state shareholders) or under the direct influence of the boss.

Stephen Green also points to other problems:

  • Large amounts of cash from IPOs provide opportunity and incentive for theft (or theft disguised as loans).
  • Political connections often mean that firms can avoid legal or bankruptcy issues, so they have little incentive to use funds efficiently.
  • There are no effective institutions to monitor or discipline the legal person shareholders.

To view the entire article at its original location click on the title of this post.

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