China: Party shows penchant for cosmetic reform

In late 2008, international investors were greeted with news that the top managers of China's three largest state-controlled airlines had been reshuffled without warning or explanation.

China Eastern Airlines replaced its chairman with the chairman of China Southern Airlines and also appointed a senior official from Air China as its president and executive director, while the man he replaced went to work for Air China in what appeared to be a straight swap.

All three airlines are listed on the Hong Kong stock exchange and have boards of directors and other trappings of modern corporate governance structures.

But this game of musical chairs had nothing to do with that.

The decision to rotate the top executives of the airlines was made by the highly secretive and largely unaccountable Organisation Department of the Communist Party of China Central Committee.

"We are all under the leadership of the party and it is up to the Organisation Department to make these decisions," one official from China Southern told the Financial Times at the time.

For international investors who have been around China for a while, this kind of shake-up is familiar and recognised as a sign that Beijing is planning a wave of reforms and consolidation in a particular sector.

Similar reshuffles of executives at state-owned companies that are supposedly keen competitors have occurred in numerous industries in recent years, most prominently in the telecommunications and banking sectors.

This type of exercise largely makes a mockery of the modern, western-style governance structures that have gradually been put in place at many state-owned enterprises over the past 15 years.

While it has receded into the shadows and built up the facade of modern corporate governance, the Communist party retains the final say in all big strategic decisions of these companies.

The chief executives and chairmen of most leading enterprises often consider themselves career politicians as well as captains of industry, and the party is just as likely to send them to be governor of a far-flung province as shift them to head a rival company.

In fact, the top officials at the largest state-owned enterprises are granted minister-level status in the Communist party while the heads of other important companies, including the largest state banks, hold vice-minister rank.

Which company chiefs hold minister status is a secret but according to people with knowledge of the matter, there are five of them and they include energy giants Sinopec, PetroChina and China National Nuclear Corporation.

The level of secrecy surrounding something as trivial as this provides a clear example of how far behind China is when it comes to creating a transparent and open governance environment.

A recent report co-written by CLSA, the Hong Kong-based brokerage, and the Asian Corporate Governance Association, ranks China second to last in Asia in terms of "corporate governance culture", ahead of only the Philippines.

The report notes that the country's governance culture and enforcement of laws and regulations significantly lag behind regional neighbours, in a region that considerably lags behind the rest of the world.

"Corporate governance standards have improved in Asia over the past decade but even the best markets remain far from international best practice," the report concluded.

China is not ranked as one of the best markets.

Even the Chinese translation for corporate governance - gongsi zhili - implies official government control and regulation of companies rather than a system of transparent and independent checks and balances that protect the interests of all stakeholders.

Many experts who have studied Chinese corporate governance structures conclude the reforms implemented in recent years to introduce international standards have often been largely window dressing - a necessary precondition to listing on offshore stock exchanges and attracting foreign capital.

According to Amar Gill, CLSA's head of thematic research, the global financial crisis of 2008 was a wasted opportunity for Beijing and other governments in the region.

"Rather than use it to push reform forward, most governments have taken a complacent view, happy that the crisis this time did not start in Asia," Mr Gill says.

"Not enough has been invested to make best practices work and the negative trends we see may lead to a build-up of governance risk for the coming years."

The penchant for cosmetic rather than substantive governance reform in China appears to be behind the recent rush by many large companies to produce glossy documents outlining their contributions and achievements in the field of Corporate Social Responsibility.

According to CLSA's report: "Even Chinese companies are encouraged to publish CSR reports to improve the country's branding and competitiveness."

Although the Communist party is encouraging its companies to introduce the trappings of modern governance structures, it continues jealously to guard the main levers of power and shows little sign of giving them up in the future.

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