Asia’s best managed companies have come out of the financial crisis in better shape than their peers, and that’s no surprise: in most cases they went into it in better shape too. Prudent gearing, transparency, good governance and clear strategy have characterised these leaders, rewarded in this month’s Euromoney Asia’s Best Managed Companies poll, for years.

That’s not to say things have been easy for any of them. Take CapitaLand, for example. For many years the favourite Singapore blue chip among Asia portfolio managers, this time last year its whole approach to business was being questioned. “As global liquidity tightened and real estate transaction volumes dried up, analysts were raising concerns that our business model – which focuses on capital recycling and capital productivity – was broken,” recalls Olivier Lim, group chief financial officer at CapitaLand.

“What they forgot was that all real estate businesses need to recycle capital. We just articulate it and execute it diligently as a business strategy and this gives us more financial flexibility than others across market cycles.”

That was of little comfort when CapitaLand’s share price fell more than 70% from its highs in a shade over a year; its many listed satellites fared worse still. “Whilst we were very confident of our business model and viewed the dislocation as part of the cyclical nature of the real estate business – albeit more severe than a normal recession – it was difficult to convince the investment community,” says Lim. “Partly I suspect they were facing their own business model stresses with the loss of AUM from large redemptions and falls in portfolios values. They saw no light at the end of the tunnel during the crisis.”

But Lim and his team put the building blocks in place to weather the storm and flourish when it passed. Seeing trouble ahead it divested over S$9 billion of property assets and reinvested only S$4 billion over a two year period heading into the financial crisis. Some of this, such as the sale of an iconic tower in Beijing, looked like a forced or panicked sale at the time; in fact, it proved to be a great deal in that the price it raised would have been unthinkable only months later. By the time the crisis hit in earnest, CapitaLand had built up a cash reserve of over S$4 billion, with a low gearing ratio. It slowed business development; it bolstered itself with a S$1.3 billion long-dated convertible in mid 2008; it pulled in another S$1.8 billion in a pre-emptive rights offer in February 2009, heavily oversubscribed. And investors have continued to back it in the capital markets, first with a seven-year S$1.2 billion convertible in July, the largest and longest tenor convertible for an Asian listed issuer at the time.

And finally, in a move that would have seemed implausible a year ago, it launched an IPO of another listed satellite, CapitaMalls Asia, with a placement 2.5 times oversubscribed and a public offering 4.9 times subscribed. “We patiently built this capital-intensive business over the last seven years,” says Lim. “We polished it, and gave it its own access to the capital markets so it can aggressively take advantage of its first mover position in Asia.” The funds allow CapitaLand to recycle capital, rebalance the portfolio and put the money into business units.

At Infosys, the challenges were rather different. Infosys has no debt whatsoever: 60% of its balance sheet is cash and cash equivalents. So there was no need to navigate the perils of refinancing in debt or loan markets, or to keep bond investors happy. That clearly helped. “It was a lot of comfort for investors,” says V Balakrishnan, Infosys’s CFO, in Bangalore. “People realise cash is God in that kind of environment: companies with a lot of cash can fulfil their strategy much better than anyone else.”

But Infosys had other headaches to deal with. “Today, 98% of our revenues come from outside India: we are a global company based out of India,” says Balakrishnan. “The majority of our revenues [66%] come from North America. Anything happening in the large economies around the world will have an impact on our revenues.” Infosys guidance at the end of the last quarter forecast revenues could decline 1 to 1.3% year on year, although the company has been insulated by the growing interest in moving IT services offshore to countries like India, as a way of cutting costs: hence recession has in some measure helped part of Infosys’s business.

Infosys is perhaps known best for its efforts in corporate governance, taking the best ideas from around the world and implementing them at home. Ideas like independent boards, bifurcating roles for CEO and chairman, committees for investor relations and risk management, are more common in Asia now but they have been standard practice at Infosys from the start. “We clearly believe that we are not the owners of this company,” says Balakrishnan. “We are only managing the investors’ money. They are the owners.” Infosys has a long track record of getting bad news out early. “All the bad news has to get to the market. Good news can wait,” he says. Transparency is a by-word at Infosys, which gives its annual results against the GAAP requirements of six different countries, several in their local languages, as well as additional but un-required information such as land and human resource valuations.

Companies like Infosys say they thrive in the bad times because of good governance. “It helps a lot in difficult economic times, because in this environment what investors want is management who are credible, who are honest, so they won’t see any shocks like they saw with Enron.” India had its own equivalent of Enron this year with the fraud around software services group Satyam. “But it you look at Indian stocks on the day the news about Satyam broke, they all went down – except Infosys. Investors want good corporate governance.”

The company that swept the board in this poll was China Telecom, winning not just in its own country but most regional titles too. Part of the increase in voter support for China Telecom may be because of its realisation of a long-term strategic goal. “Near the end of 2008, we successfully completed the acquisition of a mobile business in China and became a full service operator,” says chairman Wang Xiaochu. Wang talks of integration synergies between mobile, wireline and internet services, while rapidly expanding the mobile business. “Although these have brought short term pressure to our profitability, we firmly believe that they will significantly enhance the company’s future sustainable development and value creation.”

Bringing a strategy to fruition is one thing, but investors want to be kept up to date with it too. Wang says the company has frequently updated investors on the strategy and its progress, and thinks this is one reason investors have trusted and supported the company despite short term profitability pressure.

Alongside this, China Telecom has been a standard bearer for corporate governance and investor relations in China. Listed in both Hong Kong and New York, it has to adhere to requirements such as the Sarbanes Oxley Act and COSO Internal Control Framework, and uses these international standards “as our foundation of corporate governance,” Wang says. Five of the 14-strong board are independent, and the standing board committees only comprise independents. “We strongly believe that sound corporate governance can ensure management effectiveness, prosperous corporate culture, successful business development and a sustainable increase in shareholder value,” Wang says.

Other moves that have appealed to investors include holding the annual shareholder meeting in Hong Kong in 2005, despite being a mainland incorporated company, to have direct communication with public shareholders; monthly disclosure of operating metrics and quarterly disclosure of financials; and regular investor and press conferences.

China Telecom had a few advantages in the crisis. For one thing, China’s debt markets were basically fine throughout. “Given our solid fundamentals and the abundant capital liquidity in the domestic Chinese market, we did not experience funding challenges during the global financial crisis,” says Wang. This year it issued a RMB10 billion three-year corporate note. Additionally, Chinese telecoms was not one of the world’s danger areas in the financial crisis, although it did affect customer demand for services, especially on long distance voice service and business customers. Consequently the company shifted development emphasis to broadband and value added services, and promoted bundled services.

While most companies that featured well in our survey consider themselves innately conservative in their approach to risk, good management also means knowing when to act decisively. In the middle of the financial crisis, Fubon Financial bought ING’s Taiwan life insurance subsidiary, concluding the deal in February 2009. “We took advantage of the financial crisis by buying into some assets at a very reasonable price,” says Victor Kung, president of Fubon Financial. “That has given us the opportunity to emerge out of this crisis stronger than at the beginning.” But at the same time, Fubon knew when to stay away: it considered accessing the capital markets in support of a bid for Nan Shan, AIG’s Taiwanese unit, before deciding the pricing was too high (the business was bought by Primus instead). Investors will need to continue to trust Fubon’s judgement as it takes the lead in trying to take advantage of thawed relations with mainland China. “That is our main strategic focus right now,” Kung says.

The best companies learn from the bad times. “We learned a lot during the crisis,” says Kung. “We further strengthened our risk management systems and we have come out of this stronger than we used to be.” Like others who have been rewarded in this survey, Fubon has looked out for investors by getting bad news out quickly: Kung says it was the first Taiwanese institution to write down the value of its investment in Taiwan’s troubled high speed railway. Others have had to follow. “That boosted confidence in our investors, that we are serious about being transparent,” he says. “All this demonstrates to investors that they can have confidence in the management of the company: that we are working hard to make sure their investment is well taken care of.”

China’s companies have begun to branch out over the last 10 years, taking stakes in foreign enterprises or bidding to acquire them outright. They’re likely to do so much more in the years ahead: many of China’s biggest companies are cash rich at a time when western companies have seen their valuations slashed and are in many cases desperate for capital.

This trend has implications for governance practices both inside China and at the acquired companies. It brings into focus cultural differences and the learning curve Chinese companies must go up about accepted practices overseas.

But before one even gets to that, there is a broader problem of perception, chiefly a political concern. Many western countries have reacted with suspicion and distrust when Chinese companies have sought to buy assets in their countries. CNOOC’s attempt to buy Unocal is one of the clearest examples of this: see the interview for CEO and chairman Fu Chengyu’s thoughts on this. But one sees it again in Australia today with the reaction to bids for OzMinerals and Rio Tinto assets by China Minmetals and Chinalco respectively: many politicians voice very strong objections to these assets being sold to companies controlled by the Chinese state.

“For many years, the West has viewed China’s state-owned enterprises in black or white,” notes Jonathan Woetzel, a director at McKinsey in Shanghai. “In one portrayal, they are infiltrators to be viewed with suspicion.” He cites Chinalco’s bid for a stake in Rio Tinto, which raised fears about just what China was up to in trying to acquire Australian resources, as example. “The other version sees state-owned companies as muscle-bound goons: without the smarts of a private company, but with plenty of brawn. In this characterization, they are relics of a failed economic experiment that still dominate the national economy, controlling natural resources, utilities, and many other vital sectors. Their power and influence – particularly their links to the ruling Communist Party and government – give partners and competitors pause.”

Woetzel finds those stereotypes inappropriate, and says that using out-of-date impressions of Chinese state owned companies “masks both opportunities and threats facing multinationals. A more current view would, for example, have them consider more favourably the value that certain state-owned companies might bring to a global partnership.”

Lawyers and companies who work in China find western attitudes towards their companies curious. They argue that when Chinese companies acquire overseas they will be at pains to understand management and governance practices in those countries and will mirror them accordingly.

“For any Chinese company when they go overseas, it terms of corporate governance it will be much better for sure,” says Guy Cui, managing director at Hopu Investment in Beijing. “They are going to a new country, they have less experience, so before they go out they’re going to carefully study the laws and regulations in that country and make sure everything complies.

“China generally does not have a lot of experience internationally: it’s only opened 30 something years ago and very few people understand foreign countries,” he adds. “So if China acquires a company let’s say in Australia, this company will be the same as all other Australian companies: they will make sure they use a company lawyer, for example, whereas in China they might not.”

Jane Jiang at Allen & Overy in Beijing agrees. “Chinese clients before they go overseas are well aware they need to understand the legal regime wherever they go, and that will include the corporate governance requirements,” she says. “I think the local management of Chinese companies when they go overseas are pretty professional and well prepared for the changes they have to go through.”

Chinese acquisitions overseas have run into criticism, but so far it has rarely been for governance issues. One of the real landmark transactions was Lenovo’s purchase of the home computer division of IBM in 2004. This transformed the company into a truly global player and was an indisputable landmark for Chinese corporate development. Today the company runs two headquarters, in Beijing and in the USA, and its board structures look much like boards do in the west. (Chinese boards do tend to have a lot more people on them – for one thing, there’s one regular board of directors and another supervisory board – but while that differs from the US model, for example, it is very common in other western markets such as Germany.) Lenovo had to accept some restrictions as a result of American political concerns in order to get the deal through.

Chinese corporate structures tend to come down to state-owned or private sector. And then there’s Haier. The Qingdao-based white goods heavyweight is something different again. “We are not a private company and we are not a public company,” says Philip Carmichael, President of Haier Pacific and the company’s most senior non-Chinese executive.

Haier is a cooperative enterprise, whose original foundation was as a municipality cooperative venture back in the early 1980s. It does have listings in both Hong Kong and Shanghai, “but they are only very thin slices of individual product categories so we’re not really a listed company,” says Carmichael. It’s a large and powerful presence despite that: Haier’s renveues in 2008  reached US$17.5 billion, 70 to 80% of it from China.

So where does governance and transparency fit in a company like this? There’s no quarterly reports, just annual figures, and even then only consolidated revenue and profitability percentages, with growth rates on a year on year basis. The statutory requirements that come with the Hong Kong and Shanghai listings are met, but “it’s very difficult to extrapolate that to the whole company,” he says. “It’s very complicated. The form we started as no longer actually exists in China today. We’re a legacy of something that’s been changed.”

Structurally, the management takes the model of a strategic thinker CEO, and a COO who executes that vision. A complicated matrix system separates the various businesses. While that doesn’t seem much of a corporate governance model to follow, on the other hand an internal audit department is run by a Korean 30-year Samsung veteran “who looks at all our overseas subsidiaries pretty much the same way as you would see any other internal auditor do anywhere in the world. Although we don’t have an outside board of directors, we do have very tight controls internally and they are consistent with GAAP.”

Like many Chinese companies Haier has been closely involved in corporate giving, and it made a striking promise ahead of the Beijing Olympics: that for every gold medal won by a Chinese, Haier would build a new primary school in the earthquake-hit areas of Sichuan. That’s over 80 schools.

Carmichael has a remarkable finding that sheds some light on the challenges Chinese companies sometimes have when acquiring or growing overseas. Haier’s financial department conducted some research indicating that Chinese companies operating outside China have a 10 times greater problem with uncollectible receivables from their customers overseas than the average in any particular country. “If you want to say it in a less polite way, it seems there are people who try to take advantage of these guys from China because they think we are less sophisticated.”

“Sometimes people in the west don’t realise the degree of sophistication here because it doesn’t come through in the translation,” Carmichael says. “To borrow a phrase from a former Chinese leader, we think of ourselves as a Chinese company with international characteristics.”

This article was one of several chapters in a detailed guide to corporate governance in China published with the June 2009 edition of Euromoney

Fu Chengyu is chairman, chief executive officer and executive director of CNOOC Ltd, the Hong Kong and New York-listed arm of China National Offshore Oil Corp. He talks to Euromoney about CNOOC’s approach to corporate governance and social responsibility.

Euromoney: Tell me firstly what corporate and social responsibility means to you and to CNOOC.

With globalisation in the economy, social responsibility has become very important not only for enterprises themselves but the areas they operate in. We have focused on further integrating CSR into our management system. It has become a philosophy of how we run our business, both for the management and for the employees.

For years, we have valued social responsibility as important to shareholder returns. Optimising profitability is no more important than corporate social responsibility. So, when we tell our employees to maximise returns to shareholders, it is based on social responsibility. Whatever we do, we will see whether or not we can meet the requirements from society, from the community, and from the customer. If we satisfy that requirement, then we maximise profitability.

As an energy enterprise we emphasise environmental protection, especially climate change. We have done many things to actively respond to climate change: environmental issues in China are presenting a great concern both to the government and the people. As an energy company the first priority for us, when we’re talking about corporate or social responsibility, is to try to have less emissions, provide more clean energy, and provide technology for businesses who use the energy. We have done a lot in these areas in the last few years.

Euromoney: That’s your philosophy. Could you give me some examples of what you’ve done?

Fu: We set higher standards in environmental protection than the government requires. For example, in water production, the government standard is 30 PPM discharge. Our standard has been 25 PPM, but now we are asking for zero discharge, even though this will cost more.

Second, we have introduced the recycling philosophy in the business. Whatever we can reuse, recycle, we do, and in the refineries and our chemicals business our criteria are a lot stricter than the government requires.

We also try to be good to the local community. For years we have run community environment programmes, particularly supporting the poor. This includes our programme in Tibet [the Tibet Aid policy]. We have a 10-year programme for the whole country for infrastructure; we have training and education programmes, helping students from poor families who lack financial support. Every year in the last 10 years we have a programme that totals from RMB100 million to 200 million per year supporting poor families in poor areas, for education, natural disaster relief, clean water projects or whatever is required by the local community. This lets people understand what we are doing. Our production is not just about physical materials or physical wealth, but distributing wealth and helping the local people.

Euromoney: How have you tried to implement strong corporate governance standards at CNOOC?

This is a very important area for the sustainable growth of the company. On the first day the company was listed, we adopted the listing rules from New York and Hong Kong to set up a corporate board. The members of the board are mainly from outside the company. And we have a lot of expats on our board, mainly from Hong Kong. Those board members are very responsible and have high requirements for the company, especially on the governance side.

Within the board we have committees, including one that looks at governance. As chairman, after every board meeting I will have separate meetings with the independent directors to see if they have other recommendations for the company which might be something they want to discuss separately from the board meeting. They make a lot of recommendations, most importantly to make sure the company follows the listing rules, especially in the area of public information release. This is important to make sure the public feels this is a transparent company. I don’t want investors to be guessing about the company, I want them to have all the information so they can judge for themselves.

We benefit from this. We have a lot of pressure from it too – because of transparency any single mistake is immediately noticed – but the good side is, when people know the company, they will pay a higher price for your stock, because they know what the risks are. If you make them feel uncertainty, they will pay less. In past years you will see our stock has always outperformed the market. 

When foreign multinationals started taking strategic stakes in China’s biggest blue chip companies, they brought with them a new phenomenon: the foreign non-executive director.

These days, many of China’s biggest companies have at least foreigner on the board as a non-executive. Some are not independents, instead representing a major foreign shareholder. An example is Clive Bannister, a non-executive director at Ping An; Bannister is also group managing director of insurance at HSBC Holdings, reflecting HSBC’s shareholding in Ping An. Similarly Christopher Cole, a senior Goldman Sachs banker, serves on the ICBC board, reflecting Goldman’s stake in and partnership with the Chinese bank. Another is Nicholas Read, Vodafone’s regional CEO for Asia Pacific, who became a non-executive director of China Mobile in March: Read follows other Vodafone executives who have served on the China Mobile board, among them Chris Gent.

Other companies, both private and state-owned, have gone further and sought out independent non-executives from overseas: perhaps because of industry expertise, perhaps because of political nouse outside of China, perhaps because it looks good. Two prominent examples of this trend are Jenny Shipley, the former New Zealand prime minister, who serves on the board of China Construction Bank; and Gene Michael Bennett, who serves as a director on three separate private Chinese companies: China Shen Zhou Mining & Resources, China Agritech, and China Pharma.

Shipley joined the CCB board in November 2007 and is one of two foreign independent non-executives on its board, the other being Elaine LaRoche, the CEO of Salisbury Pharmacy and formerly Morgan Stanley’s seconded CEO to CICC from 1998 to 2000. Shipley had a long-standing involvement with China, dating back to before her prime ministership, which ran from 1997 to 1999; during that tenure she visited both as prime minister and as chairman of APEC in 1999, and also hosted then-president Zhu Rongji in New Zealand. “There was a strong political interest and understanding that grew during that period,” she says; among the things that came from it were free trade talks.

After leaving government she continued to visit China for private sector companies and provinces, spoke at the BoAo forum and became involved in its projects. A combination of these elements brought her to the attention of China Construction Bank, which was also well aware she had served as New Zealand’s Minister of State-Owned Enterprises, highly relevant to a Chinese company making the same transition.

She describes her experience on the board in very positive terms. “The independent non-executive directors have been invited to share our experiences in terms of international best practice, and both individually and as a group we most certainly do just that,” she says. “And it is as lively and interesting as any board I sit on in that respect.” She notes that the boards, with a separate board of supervisors and a board of directors, are large – “while the function of the directors is clear, there is a larger number of people present than would perhaps be the case on the commercial board of a similar international corporate” – and cites other points of difference. “There are things like: you do not appoint a chairman or president. That is quite a significant difference. But when you accept these appointments you are quite aware of how these things function and you should not accept a role if you are not aware.” In any event she describes those individuals as “highly competent people, and I frankly could not criticise their role or diligence in their oversight of the bank. They are equally as good as people in similar roles I have observed.”

Shipley says she sees “enormous interest in the idea of corporate governance” in China. “You can’t help but be struck by the fact that in every formal and informal conversation you have with the executive members of the management team, they are constantly searching for ideas and strategies. They are very quick to pick up ideas.” CCB’s senior executives, she says, often try to meet the independent directors informally between the official meetings to share ideas. “As for the officials that advise, like every board that’s variable. But they take good independent advice, and when we ask for additional information I have never had cause not to be satisfied.”

The legal framework for corporate governance in China has taken shape at a rapid pace through the last decade. In fact, every piece of legislation relevant to corporate governance today has either been passed into law or amended since the turn of the century.

One of the first significant documents came in January 2001 when the China Securities Regulatory Commission launched a Code of Corporate Governance for Listed Companies to go alongside the Securities Law and Company Law as they stood at that time. It covered shareholder rights, shareholder meetings, related party transactions, the behaviour of controlling shareholders, procedures for directors and boards, supervisory boards, performance assessments and incentives, and transparency.

Subsequently, the Companies Law and Securities Law would be amended to enshrine some of these principles in their own right. “The earliest legislation development, if you want to trace it back, was the Company Law issued in 2003,” recalls Ji Zou, a corporate partner at Allen & Overy in Shanghai. “The reason I mention that is because that was the first legislation to lay down the role of the board and the shareholders meetings. It introduced the concept of supervisor and defined the role of management. That was quite significant, because in the past most of the corporations were controlled by the state, so the functions of the board, shareholders meetings and management were not that clear.”

The Company Law was revised again in 2005, taking effect in 2006, with the Securities Law revised at the same time. Much of these changes had to do with corporate governance. For example, the revisions to the Company Law made these changes, among others:

• The role of the chairman. Previously, the chairman of the board of directors was the sole legal representative of a company, a status that could make it difficult to make corporate decisions. “For example, if the chairman failed to convene a board meeting, other directors generally would not dare to do so themselves,” say lawyers Thompson Hine in a practice note from the time. The new law allowed a managing director or manager to serve as the company’s legal representative, and allowed the vice-chairman to convene and preside at a board meeting if the chairman failed to do so.
• The concept of “duty of care” and “fiduciary duties” came into legal form with these revisions, aimed at directors, supervisors and senior management, albeit without definitions.
• Several measures sought to protect minority shareholders’ rights. The law allowed companies to adopt voting methods not based on shareholders’ contributions. For example, it allowed cumulative voting (allowing a shareholder to multiply their votes by the number of directors to be elected) in the election of directors and supervisors. It brought in the right to revoke shareholder and board resolutions, the right to petition for liquidation, the right to sell shares for non-payment of dividends, the right to bring derivative action and the right to inspect a company’s account books and minutes of board and shareholders meetings.
• This law also introduced the concept of piercing the corporate veil – a method of allowing the courts to look behind the principle of limited liability if the shareholders of a company appeared to be abusing the separate legal person status of company, perhaps in order to evade liabilities. This change meant the shareholder would be liable to the creditors. This provision perhaps aroused the greatest interest in the west, since it brought into effect a concept that had long been a feature of the corporate law of capitalist countries. The Yale Law Review wrote at the time: “While this change is welcome, China’s new company law fails to address important questions about the veil-piercing doctrine.” It highlighted ambiguity for creditors who lacked certainty about when they could expect to recover from a bankrupt debtor, and a lack of guidance for shareholders about what constitutes abuses of the corporate form.
• The law also removed strict requirements for listing a company’s securities – companies were from then on no longer required to have equity capital of RMB 50 million, three years of operating history and profit for three consecutive years before being able to list their securities on an exchange.

The Securities Law, too, brought major changes designed to protect shareholders. Coming on the heels of a stock market decline, it was designed to address the poor quality of listed companies, irregularities of securities companies, the protection of investors’ interests, the improvement of issuance system, and the trade and registration of stocks. In particular,

For many years now, Chinese companies have been seeking a home away from home. Investors can access Chinese companies listed in Hong Kong, Singapore and the United States, making these companies open to investors the world over.

Doing so has a number of advantages for Chinese companies. Most obviously, it provides an additional source of capital, increasing dramatically the potential investor base. But in addition, the fact that these markets are known for their long and respected track record and their regulatory stringency gives a sense of legitimacy to Chinese companies in the eyes of international investors.

Hong Kong is the most obvious and natural home for these companies. They come in two main forms. H-shares are mainland companies who are listed on the Hong Kong Stock Exchange. Red chips are those that are Hong Kong companies but with majority ownership by shareholders within China. According to Hong Kong Stock Exchange, by the end of March there were 150 H shares and 96 red chips. A further category, non-H share mainland private enterprises, constitute a further 224 stocks typically smaller than those in the other categories; between the three groups they represented 37% of the 1266 companies listed on the exchange.

In fact, China’s dominance of the Hong Kong market is bigger still than that, since many H-shares are extremely large, such as China Mobile. In fact, they account for 60% of Hong Kong’s total market cap, and they’re also the most actively traded stocks: 70% of total equity turnover value as of March.

The march to Hong Kong can be clearly seen by comparing the picture to five years earlier. There were 264 mainland companies listed then, accounting for 25% of listed companies and 30% of market cap.

Singapore has built its own niche in attracting Chinese companies, in particular private sector enterprises that are typically smaller than the big state-owned behemoths that have traditionally gravitated to Hong Kong. Some of these private companies feel they would be lost among the state-owned giants in Hong Kong, and consequently hope they can get more investor attention in Singapore. There are over 100 of these S-chips listed on Singapore Exchange.

Still more have opted to launch American depositary receipt listings on the New York Stock Exchange, or to list on Nasdaq or the American Stock Exchange. The Halter USX China Index, which only tracks Chinese companies with a market capitalisation of more than US$50 million with listings on NYSE or Nasdaq, and even then only subject to selection committee approval, tracks 100 stocks on its own. Bigger examples include CNOOC, China Telecom, China Unicom and Sinopec.

How big a leap is it for Chinese companies to meet the disclosure and corporate governance requirements of big exchanges like Hong Kong? “It varies,” says HKEx in detailed written responses to questions from Euromoney. “It is probably easier for a larger mainland enterprise that has senior management and advisers with a lot of Hong Kong market experience to meet the listing requirements than it is for a small Hong Kong-based company with less experienced staff and advisers. Generally, it has probably become easier for mainland enterprises to meet the Hong Kong listing requirements than it was 15 years ago since there are more people with Hong Kong market experience working at mainland enterprises and advising them now than there were in 1994.”

This is almost certainly true: after all, the laws that Chinese enterprises operate under have changed dramatically in that timeframe, as described in an earlier chapter. HKEx notes this too. “Mainland authorities have made great efforts to align mainland law and regulation with international standards,” it says, citing the Basic Standard for Enterprise Internal Control, released in June 2008 and effective from July 1 this year, as an example. (See the earlier chapter for more on this.)

For some companies this means that international compliance is not such a big stretch. Ping An, for example, is listed in Hong Kong, has a level one ADR issue in New York (so not a full listing but a method of reaching institutional investors), and a POWL listing in Japan, requiring it to be compliant with all three sets of regulations. “We believe the regulatory environment is quite similar,” says Jin Shaoliang, head of the group board of directors office at Ping An in Shenzhen. “Of course there are differences between the Hong Kong and Shanghai stock exchanges, but for our company we have clear rules and we follow the most stringent ones no matter what the differences between the exchanges.”

Remarkable things are happening in the legislative framework around corporate and social responsibility in China. If some of the guidelines coming out of key Chinese agencies become law, China will have a more stringent and progressive environment for CSR than many western countries.

Anyone who has spent time in China can see what the most vital element of social responsibility is in the country today: the environment. Pollution is an immense and growing problem and in recent years China has sought to address it with legislation. Key examples along the way have included the Circular on Enhancing the Environmental Monitoring of Export Enterprises, in December 2007, and the PRC Law on the Prevention and Control of Water Pollution in May 2008.

The most comprehensive legislation was passed by the Standing Committee of the 11^th National People’s Congress in August, and took effect in January this year. Entitled the Circular Economy Promotion Law, the word ‘circular’ roughly equates to terms like sustainable or green in the west, and many of the provisions relate to more efficient use of resources, environmental protection and sustainable development. It defines circular economy as “reducing, reusing and recycling activities conducted in the process of production, circulation and consumption”, and makes a very clear explanation of how it wants these principles to find their way into practice: “Propelled by the government, led by the market, effected by enterprises and participated in by the public.” According to lawyers Faegre & Benson, from whose practice note that translation is sourced, “that mandate is to be factored into industrial, economic and social planning at every level of government.”

While this is welcome, some of the developments in other areas of CSR in China are perhaps more socially significant and, to western eyes, surprising. Few in the west have heard, for example, of the Guideline on Fulfilling Social Responsibility by Central Enterprises, issued by the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC). And, true, it’s not law. But in Chinese terms it is a landmark.

This guidelines aim to “promote scientific development, facilitate central enterprises in fulfilling social responsibility in the course of building socialism with Chinese characteristics, and to realise the harmonious and sustainable development of enterprises, society and the environment.” And if that seems a grand statement, consider a few of these lines in the guidelines: “Fulfilling social responsibility is a requirement by the entire society… not only the mission and responsibility of central enterprises, it is also an expectation and requirement by the entire society.” Or, “central enterprises shall take responsibility in energy saving and pollution reduction, develop energy-saving industry…” Or “Central enterprises shall sign employment contracts with employees according to relevant laws and regulations… they shall respect employees, treat them fairly, and fight against all forms of discriminations due to the difference of sex, nationality, religion, age, among others.” There are clauses on community welfare, legal operations on the basis of honesty and credit, and corporate governance. Granted, it is light on specific detail, and on mechanisms for censure, since it is not law. But guidelines do tend to be enshrined in legislation in time (and are generally just as important for enterprises to follow given that the people who issue the guidelines are government bodies or regulators) and it is remarkable to see such strident language on employee equality and social behaviour from an arm of the Chinese state.

For Clare Pearson, a CSR lawyer at DLA Piper in Beijing, developments like these reflect the fact that “Corporate governance and CSR is on the up in China. 2008 was designated as the year for CSR, but 2009 is when nice words are going to turn into legislative action.”

Pearson believes the Sichuan earthquake was a catalyst for what is happening in China today. She was struck not only by the sincerity of response in China, and the level of corporate and individual giving, but also the micro level at which individual attitudes towards companies were shaped by their response to the earthquake. She recalls seeing Coca-Cola taken out of office fridges and local brands put in, reflecting what was seen as the local companies’ greater financial commitment to earthquake relief. As an advisor to western businesses, she could also see that western responses were being watched closely too. A colleague told her a Chinese saying: “The longest race finds the strongest horse.” “It’s not about when times are good but when the chips are down,” she says. “It’s not about how much you sponsored the Olympics, but how your company contributed to the earthquake relief. You have to see the bigger picture in this country, and when you align your corporate interests with earthquake repatriation you are likely to see benefits for your company.”

Chinese companies talk more and more about the importance of CSR. But what are they doing exactly? This is a review of China’s biggest companies and the CSR pledges they refer to in their annual and CSR reports

BANK OF CHINA

Its 76-page CSR report for 2008 highlights the bank’s earthquake response after the Sichuan quake – including heroics at BOC’s Sichuan branch, where the bank says staff saved 21 lives. It established ‘tent banks’ in order to keep emergency financial services moving. The bank says it also set up credit channels to provide loans for rebuilding infrastructure and rescheduled debt for people affected. The bank and its staff donated RMB150 million. The bank also highlights its role as sole banking partner for the Beijing Olympics; its increase of effective credit through the global financial crisis; and the CSR management system it is implementing.

CHINA CONSTRUCTION BANK

2008 interim report details CCB’s response to the earthquake: RMB136 million donations from staff, RMB52 million from the bank (to victims of the earthquake and the vicious snowstorm in 2008), green channels  for financial services, grace periods on loan repayments and free remittances for donations.

ICBC

Its CSR report published in March was the first to be prepared with reference to the 2006 Sustainability Guidelines of the Global Reporting Initiative, with an independent third party appointed for verification. Donated RMB142 million to earthquake relief and provided relief loans. It provided financial support to enterprises “with good fundamentals” that had got into financial difficulties. It is promoting a green credit policy and has imposed limitations on loans to industries with high energy consumption or high pollution, and increased support for environmentally friendly industries. As at end 2008 more than 99% of outstanding loans were to borrowers that meet China’s environmental policy.

SINOPEC

2008 sustainable development report says that 26.8% of Sinopec’s RMB107.3 billion capex in 2008 was devoted to the development and production of cleaner energy. It passed and issued the Employees Code of Conduct “to bolster the level of civilization among employees and promote corporate culture.” Says in the last three years its energy intensity, industrial water demand and COD in discharged water decreased by more than 12% apiece. Supports public welfare and charity programs in Tibet and border areas, sponsoring educational undertakings and poverty alleviation. Donated RMB300 million in earthquake relief. Says it cured 30,000 cataract sufferers through Health Express.

PETROCHINA

Among the most controversial companies in CSR terms because of its involvement in Sudan, Petrochina has published a CSR report since 2006 in accordance with the GRI initiative. It describes its policy as “energize, harmonize, realize”. Implemented an emergency response plan after the earthquake, distributing and transporting 1.038 million tons of refined products to the region in two months. Implemented a “Foundation year of safety and environmental protection” campaign and implemented a new accountability system on safety and environmental protection. Implemented 10 energy saving projects and 10 anti-pollution projects.

CNOOC

Also active after the earthquake, dispatching 14 helicopters for disaster relief alongside reconstruction donations. CSR report discloses management performance in relation to health, safety and the environment under a measurement system set up in 2002. It also details the pollutant prevention measures and management procedures, and discloses the results of a detailed examination of pollution discharge by offshore oilfields. Reducing emissions by re-injecting production water. Has been running a poverty alleviation programme in Tibet’s Nima Country for several years and makes educational donations, including hope schools and a student exchange programme with the Chinese University of Hong Kong.

CHINA LIFE

China Life’s 2008 annual report like many others focuses on disaster relief efforts. It provided free short-term accident insurance to electricity and police staff working against the 2008 snowstorm; made a RMB16 million donation to earthquake relief then raised another RMB33 million through employees, and encouraged employees to make blood donations. It also donated accident insurance to rescue workers, and used its charity foundation to donate for basic living expenses of earthquake orphans until they reach 18. It also set up 69 claim service stations in the area to simplify claims. Elsewhere it is involved in a New Village Cooperative Medical Scheme in 90 counties, affecting around 30 million rural residents. It also established the China Life Volunteers Association

To understand corporate governance in China you first have to understand the nature of Chinese companies. China is still in the relatively early stages of privatisation of its major assets after decades in the hands of the state, and while the landscape has been completely transformed in recent years, the state still has a greater degree of ownership in blue chip companies than is the case in the west.

There are essentially three types of ownership structure in China.

• Wholly state-owned enterprises. This is how all Chinese enterprises looked before China started to open its doors to the world in 1979, but few of note still do: since privatisation and public listing of enterprises began in the late 1980s, many of the biggest corporate names have at least some public listing. One of the most prominent examples of a wholly state-owned enterprise in China today is the China Development Bank, a major policy bank under the direct jurisdiction of the State Council, and the only bank with a full minister as governor. Another is State Grid Corporation of China, while others – such as China National Offshore Oil Corporation – are wholly state-owned at the parent level but have listed subsidiaries.
• Listed state-owned enterprises. These are of greater interest to foreign investors, and they represent the largest part of the market – roughly 70% of Chinese listed stocks are controlled by a government of some sort, be it central, local or some quasi-governmental institution. People differ on their definitions, though. Some consider state-owned companies as those that report directly to the central government – that figure is about 150. Adding subsidiaries of those companies, or others owned by provincial and municipal governments, or with the state as a significant shareholder, adds many hundreds more. Big listed state-owned enterprises include three of the big four banks (Bank of China, China Construction Bank, and Industrial and Commercial Bank of China – soon to be joined by the fourth, Agricultural Bank of China), as well as resource companies and telcos. All of these biggest names are also listed outside China, typically in Hong Kong and often also in New York through American Depositary Receipt programmes.
• Private enterprises. These generally refer to those companies in which the state is not the majority shareholder. Typically they have been built by entrepreneurs and generally one person, or perhaps a family, is the controlling shareholder. The most well-known private company in China, with no state ownership, is probably the insurer Ping An.

The distinctions between state-owned and private companies are becoming less clear. “As the Chinese economy evolves, it is no longer so easy or desirable to pigeonhole state-owned enterprises,” argues Jonathan Woetzel, a director at McKinsey in Shanghai. “The line between them and private-sector companies has blurred considerably. Over the next five years, as the economy and business climate continue to shift, the ownership structure of state-owned companies will matter much less than the degree of openness they show in their business practices and management – that is, their transparency and receptiveness to new ideas.”

It’s also outdated thinking to assume that a company that has evolved out of the private sector will have automatically have more dynamic or sophisticated management than one with heavy state ownership.  “A company’s ownership structure is no longer a legitimate test of its merit,” says Woetzel. “Lenovo and the chemical producer China National BlueStar, a subsidiary of China National Chemical (ChemChina), for example, both have significant state shareholdings but are nonetheless valuable partners for suppliers and customers, as well as astute managers. And in China as everywhere else, private-sector ownership is no guarantee of success: D’Long International Strategic Investment, one of China’s largest private-sector conglomerates, had to be rescued from the brink of collapse in 2004, when the state intervened.”

Besides, the model of heavy state ownership in national companies is hardly unusual, even in the west. Jenny Shipley is an independent non-executive director at China Construction Bank and is also the former prime minister, and before that minister of state owned enterprises, of New Zealand; she has been closely involved in the privatisation of New Zealand’s companies. “You couldn’t single out China in that respect,” she says. “This bank [CCB] does have significant shareholding in terms of the government interest, and directors who represent that interest are on the board. But from my point of view I don’t feel constrained by that at all: the boards act democratically and the majority view prevails in the end. Sometimes it’s made clear what the public line is but that doesn’t stop these things being properly explored.”