Inside China's Boardrooms

Although most are still majority-owned by the government, many mainland companies have gone public recently and corporate governance is a hot topic

A study by Institutional Shareholder Services of more than 300 global institutional investors found corporate governance was considered more important in China—and likely to increase in importance over the next three years—than in any other country studied. Wayne Chen, managing director for the Greater China region at Hay Group, shared his insights on corporate governance in China (, 3/6/08) gained from his work with many of the largest companies in China over the past eight years. Edited excerpts of our conversation follow:

Why is corporate governance such a hot topic in China?

Many large state-owned enterprises have gone public in recent years, and while many of them are still majority-owned by the government, they nonetheless need to have boards and effective governance systems just like any other public company. In addition to the large state-owned companies, there are many private Chinese companies that are also doing IPOs and that will require them to implement governance systems.

The government has been the primary driver of corporate governance in China because of the corporate governance regulations that they now require for Chinese companies. But I think the interest in corporate governance goes beyond simply complying with regulations. Many Chinese companies aspire to be truly world-class and already some, such as China Life, are interlisting on foreign stock exchanges, such as the NYSE (NYX).

How does listing on foreign exchanges change things for companies?

Companies doing that recognize that this will require them to have world-class corporate governance if they are to compete with other major global companies. It will be important not only from the standpoint of attracting investment, but also because companies that use their boards effectively find the board can help them strategically to become more competitive. In particular, good corporate governance can provide a significant advantage in the area of risk management.

How would you compare Chinese and U.S. board structures?

Chinese and U.S. boards are not really structured that differently. The average size of U.S. boards is about 10 directors, vs. 9 in China. Chinese companies are starting to develop the same board committees that you see in the U.S.: audit committees, compensation committees, and to a lesser extent, nominating committees. One of the only structural differences is that Chinese companies have a supervisory board somewhat analogous to the German two-tiered board model—whereas U.S. boards have a one-tiered structure.

One of the most significant differences between Chinese and U.S. corporate governance is the fact that U.S. boards appoint the chief executive officer—in fact, most consider the hiring and firing of the CEO to be the board's single most important responsibility—whereas in China, the CEO is typically appointed by the Party and not by the board. This has to create a very different type of dynamic between the CEO and the board than we see in the U.S. Can you share your thoughts on this?

While I have never worked with the board of a U.S. company, I don't doubt that there is a very different relationship between the board and the CEO when the board has the power to appoint and dismiss the CEO, which is not the system we currently have in China other than, perhaps, for some of our private companies.

However, I don't think this necessarily means the board can't play an important role in company oversight and putting into place practices relative to risk management, leadership development, and other areas that are critical to making sure the company is being managed effectively.

I understand one of the major challenges in China is finding experienced executives and experienced directors to serve on the boards of Chinese companies. How are you addressing that issue?

Until the last few years, we did not have public companies so there are very few people in China who have board experience. Similarly, there are not many people who have run public companies in China until recently. It is critically important for us to focus on both leadership development and governance education to accelerate the development of high-potential executives and board members in China to fill this void as rapidly as possible.

We are studying different governance systems and practices around the world to determine which of these we can adopt or modify to fit well with Chinese culture and within our economic system. Hay Group recently conducted a study of 40 Chinese CEOs to provide a baseline of key capabilities needed for success in leadership that can be used for leadership development within our country. As in the U.S., we believe that leadership and governance can be important strategic assets for any company, and we need to focus on developing our talent in these areas so that we can be competitive as quickly as possible with other major global companies.

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