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
“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.