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Corporate governance in China leaves much to be desired
Jul 9th 2016 | SHANGHAI
WANG SHI (pictured) is not a man who gives up easily. The chairman of Vanke,
one of China s biggest property firms, cut his teeth in the People s Liberation
Army and climbed Everest at the age of 52. When bombers attacked the Boston
marathon in 2013, Mr Wang stayed at the scene and posted dispatches on social
media. CCTV, China s official broadcaster, called him its front-line
correspondent .
This steely temperament was again evident this week, as Mr Wang gained the
upper hand in his battle against a corporate raider attempting to seize control
of his listed company. Baoneng, a private Chinese conglomerate, fired the first
salvo last year by raising its stake in Vanke to more than 24%. That made its
holding bigger than the one held by China Resources, a state-owned enterprise
which has long backed the firm s leadership, and set the stage for a takeover
bid.
Declaring Yao Zhenhua, Baoneng s boss, an unwelcome barbarian, Mr Wang asked
for trading in Vanke s shares to be suspended on December 18th and tried to
organise an alternative investor to outflank Baoneng. In March he unveiled a
convoluted plan to acquire properties held by Shenzhen Metro, a government
entity. In return, he planned to issue new shares and grant the state outfit a
stake in his company that would be bigger than Baoneng s. But China Resources,
unhappy that its stake would also be diluted, opposed this plan.
Sensing weakness, Baoneng in late June demanded an extraordinary shareholder
meeting to oust Mr Wang and his board. With China Resources no longer at his
side, Mr Wang looked as if he might be toppled. But on July 3rd Vanke notified
regulators that the firm s board had officially rejected Baoneng s demand.
Baoneng responded on July 5th by purchasing more of Vanke s shares, taking its
holding to just below 25%.
Yan Yuejin of E-house, a property-research firm, warns that the public
boardroom brawl was such a joke that it will prompt regulatory scrutiny.
Whatever the outcome, the affair has revealed the sad state of corporate
governance in China. Hostile takeovers are extremely rare on the mainland,
especially of firms this large. (Vanke s revenues last year were over $30
billion.) Most private-sector firms are controlled by a dominant shareholder or
group, which makes it hard for raiders to seize control by purchasing shares
openly.
But Vanke was unusually exposed to raiders. In 1988 Mr Wang took the decision
not to keep a tight grip on Vanke, but rather to donate his shares to charity.
In a speech in 2014 he professed his faith in good governance, arguing that he
would rather win the trust of his board through his performance than control it
through a dominant shareholding.
Alas, those sentiments were quickly forgotten when a hostile raider emerged.
Chen Shimin of the China Europe International Business School in Shanghai sees
a lapse in corporate governance . Instead of rejecting the bid from Baoneng
out of hand and working stealthily to find a white knight, Vanke should have
convened a board meeting immediately to discuss a potential takeover. Asked
this week for comment, Vanke responded: We are not in a position to comment on
our own corporate governance.
Vanke s failings are more public than those of other Chinese companies, but
they are not more egregious. Firms regularly flout rules about the independence
of directors by, for example, packing boards with cronies of the chairman.
Moreover, the rules and regulations about company behaviour are themselves
often vague, and arbitrarily enforced. The Asian Corporate Governance
Association, an independent body, rates China s performance on such matters
among the worst in Asia. If Mr Wang wants a task more challenging than climbing
Everest, he should rally Chinese business leaders behind the cause of better
corporate governance.