New Report Assesses Corporate Governance in China’s State-owned Enterprises

SAN FRANCISCO, October 24, 2018 – Amid concerns about China’s long-term economic outlook, a new report by Asia Society Northern California and the Rhodium Group highlights a major opportunity for Beijing to lift confidence: upgrading state-owned enterprises (SOEs) corporate governance. Better corporate governance would boost SOE performance and valuation, promote GDP growth broadly, and attract private and international capital. These reforms face serious obstacles, but practical steps are within reach.

The new report “Missing Link: Corporate Governance in China’s State Sector” applies original data and new sources to illuminate how China’s SOEs are governed. It examines state firms in the context of China’s economic and political system, summarizes the past and present of SOE corporate governance, and analyzes key players in China’s government and at the company level—boards of directors, Party committees, and top executives. The report outlines concrete steps forward to advance reform and identifies the obstacles that these efforts face.

“New data on how governance works in China allowed us to investigate how SOEs are evolving and analyze how these companies are operating today. We point to ways Chinese authorities can move forward even in the current political environment,” said Margaret Conley, executive director of Asia Society Northern California.

While corporate governance in Chinese SOEs has made advances over past decades, concerns remain about transparency, the effectiveness of internal monitoring, and the role of political influence.

“SOEs absorb more capital than any other sector in China, and how they run sets the marketplace tone today and in the future. China’s leaders recognize the importance of corporate governance for sustaining growth at home and preparing China’s firms for a new era abroad and open competition. There has never been a better time to show the world where China intends to go,” said lead author Daniel Rosen of Rhodium Group.

The stakes involved in improving SOE corporate governance are high not only for China, but for international investors, joint venture partners, and the growing number of foreign countries where Chinese SOEs operate. Governance reform requires limiting the influence of political forces on corporate behavior, and accepting the trade off between control and efficiency. This will be challenging, since in the short term markets can produce less stable conditions. But any strategy for efficiency and better relations with advanced economies must address this necessity.

Some highlights from the report include:

● Boards of directors in Chinese SOEs are not yet authorized to fully perform their defined functions. Although boards exercise significant influence over enterprise governance, they lack critical powers concerning personnel selection, assessment, compensation, and standard setting.

● The Chinese government’s influence on SOE corporate governance persists through multiple mechanisms: ongoing efforts to institutionalize the Chinese Communist Party’s “leadership role,” significant overlap between the membership of boards of directors and Party committees, and the joint appointment of board chairmen as Party secretaries.

● Improving SOE corporate governance at the group company level is crucial, because this where the locus of decision-making ultimately resides. However, the corporate governance of unlisted SOE group companies remains highly opaque and consistently lags far behind that of their publicly-listed subsidiaries.

● Possible steps toward better SOE corporate governance include: limiting structural overlap between boards of directors and Party committees, clearly delineating the Party’s role in commercial decision-making, increasing transparency of SOE group companies’ corporate governance, and further prioritizing the appointment of directors with international and private sector experience.

Asia Society Northern California and Rhodium Group will launch the report with a public discussion on November 5 at the Bechtel Conference Center, San Francisco. The discussion will feature:

● Daniel H. Rosen, Partner, Rhodium Group

● Jack Wadsworth, Honorary Chairman, Asia Society Northern California

● Kenneth P. Wilcox, Chairman, Asia Society Northern California Advisory Board

● Victor Shih, Professor, School of Global Policy and Strategy at UC San Diego

● Marsha Vande Berg, Senior Executive, Expert on the Asia Pacific

● Edith Yeung, Partner, 500 Startups

● Hongbin Li, James Liang Director of the China Program, Stanford Center on Global Poverty and Development

● Mark Cohen, Senior Fellow, UC Berkeley School of Law

Asia Society Northern California and Rhodium Group will also host a Roundtable briefing on the report with President Circle members on November 6 in Silicon Valley.

For more information on the launch of the report, please contact Melissa La Bouff at mlabouff@asiasociety.org

About Asia Society 

Founded in 1956 by John D. Rockefeller 3rd, Asia Society is a nonpartisan, nonprofit organization that works to address a range of challenges facing Asia and the rest of the world. Asia Society has cultural centers and public buildings in New York, Hong Kong, and Houston, and offices in Los Angeles, Manila, Melbourne, Mumbai, Tokyo, San Francisco, Seoul, Shanghai, Sydney & Melbourne, Washington, D.C., and Zurich. Across the fields of arts, business, culture, education, and policy, Asia Society provides insight, generates ideas, and promotes collaboration between Asia and the world.

About Asia Society Northern California  

The Asia Society Northern California center is uniquely positioned on the edge of the Pacific and at the entrance to Silicon Valley. Established in 1998, the center connects the San Francisco Bay Area’s diverse local community with a wide network of leaders and visionaries in the fields of policy, business, arts & culture, and technology/innovation. Through in-depth conferences, panel discussions and debates, cultural programs, exclusive roundtable briefings, and larger networking events, the center presents timely and relevant forums for educating and engaging the public about the critical issues facing the United States, Asia, and the world.

About Rhodium Group

Rhodium Group (RHG) is an economic research firm that combines policy experience, quantitative economic tools and on-the-ground research to analyze disruptive global trends.