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Chinese Private Companies Begin to Realize Benefits from Improved Corporate Governance


Hong Kong
Desmond Dodd

Phone: +(852) 2509 8183

Email:
ddodd@ifc.org

Beijing

Wenqin Zhu

Phone: +8610 6505 8686

Email:
wzhu@ifc.org


Hong Kong, April 26, 2005—Corporate governance is still a new concept for most Chinese private sector companies and financial institutions, yet some that have improved practices are realizing commercial benefits, according to a report released by the International Finance Corporation today. The report, Step by Step: Corporate Governance Models in China, highlights IFC’s approach to corporate governance and provides IFC case studies in sectors as diverse as banking, chemicals, forestry, and insurance. The report, along with a new speech by IFC East Asia and Pacific Director Javed Hamid on corporate governance at Chinese banks, can be accessed online at www.ifc.org/eastasia.

Corporate governance refers to the structures and processes for directing and controlling companies. These constitute a set of rules that govern the relationships among management, company shareholders, and other stakeholders. Many Chinese managers and boards remain unaware of basic governance procedures, often confusing governance with general management. The immature corporate structures reflect the newness of the private sector and other factors in local business culture. But a desire to attract private investors or raise capital through public markets is strengthening the case for adopting improved practices.


“Weak corporate governance practices are at odds with the fact the Chinese business leaders are setting their sights high,” said Mr. Hamid. “Entrepreneurs and managers want to learn more about international norms and standards. But too often they don’t know where to start.” Under such circumstances, IFC works with companies to build a common understanding of the value that can be created through improved practices. “Changes don’t happen overnight. You have to prioritize and make the transition gradually,” observed IFC Associate Director Karin Finkelston.


Among the case studies cited in the report is Chengdu Huarong Chemical Company. The New Hope Group purchased the state owned enterprise in 2000 and set about building a strong business with IFC’s support. “We needed guidance on attaining international standards. We learned what to consider when working with an international partner. We need to form more detailed business plans and comply with international standards,” said New Hope Chairman Liu Yonghao. New Hope was already an experienced local manager of successful companies but Chengdu Huarong required more long term planning and board decisions than its other companies. New Hope improved board practices and enhanced the role of directors. Management considered the changes as a contributing factor to good business performance during a period of rapid growth. New Hope expanded the use of such practices to some other new investments.


Another case involved Plantation Timber Products, where IFC supported plants in Sichuan and Hubei. The company grew rapidly over the last decade. IFC encouraged transparent management accountability, which added requirements to the development of systems and reporting. The additional work to meet the new standards proved worth the effort. When the company’s founders began seeking new shareholders, their operations were viewed differently by the international investment community from most other Chinese companies. Good accounting practices, audited financial statements, and a good governance regime that included independent directors resulted were valued by banks eager to represent the company . The company was sold to a foreign strategic investor in 2004. “Certainly the transparency we established in the company made us far more attractive,” said former CEO Daniel Spitzer.


Other case studies in the report include Bank of Shanghai, New China Life and Chengdu Small Enterprise Credit Guarantee Corporation. The report provides further information on IFC support for an effective regulatory framework and background on other studies and experiences in supporting improved corporate governance in China.


IFC is the private sector arm of the World Bank Group. IFC has invested approximately $1.8 billion in more than 80 Chinese companies between 1985 and the end of its 2004 fiscal year. Its outstanding China portfolio was approaching $800 million.


The mission of IFC (
www.ifc.org) is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people’s lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, helps clients improve social and environmental sustainability, and provides technical assistance and advice to governments and businesses. From its founding in 1956 through FY04, IFC has committed more than $44 billion of its own funds and arranged $23 billion in syndications for 3,143 companies in 140 developing countries. IFC’s worldwide committed portfolio as of FY04 was $17.9 billion for its own account and $5.5 billion held for participants in loan syndications.