Little coverage has been devoted so far to the microeconomic impact of China's World Trade Organization (WTO) membership and the effect it will have on the management of Chinese companies.

But academics at Beijing's University of International Business and Economics and Victoria University in Melbourne, Australia hope to redress the balance with a joint project entitled Corporate Governance in Post-WTO China.

Chinese companies and regulators first became aware of corporate governance in the mid-1990s, when some Chinese firms sought to meet requirements in order to get listed on overseas stock exchanges.

As China's economic policy makers and regulators decided to expose Chinese companies to international competition which will certainly become more intense as a result of China's joining of the WTO they see good corporate governance as being linked to the confidence of investors to invest in Chinese companies.

The regulators therefore attempted to align Chinese corporate governance practices more closely with international standards.

Academics participating in the project agree that China's joining of the WTO will serve as a catalyst for improving Chinese enterprises' corporate governance.

But this improvement will only be evolutionary, not revolutionary, they said.

Roman Tomasic of Victoria University said China joined the WTO when many business practices and related laws were converging in different parts of the world.

This convergence was often attributed to the effects of globalization and the growth of international financial and trading markets, he said.

It is common for firms to stick to a series of internationally accepted standards when they act globally, Tomasic said.

The principles of corporate governance issued by the Organization for Economic Co-operation and Development (OECD) are a good example of this type of global convergence.

Tomasic said that there are many respects in which Chinese corporate governance practices are becoming indistinguishable from foreign models that may sometimes be used in China.

The pace of change of China's economic and legal changes following WTO entry lends some support to the hope that corporate governance principles and practices will be embedded to a great extent in corporations, he said.

Chinese companies' adoption of corporate governance principles is likely to be accelerated by the forces of globalization and the listing of Chinese companies on a variety of exchanges in different parts of the world, he added.

But this global convergence does not mean the total unification of business practice laws.

This convergence may be superficial in some respects, and more deeply based in others, Tomasic said.

Many historical, cultural and political factors could prevent a full convergence or coalescence from occurring, he said. In addition, it is unrealistic to expect complete and inflexible compliance with its codes and principles.

"This has not happened in Australia or the United States and it is unrealistic to expect that it should occur in China," Tomasic said.

"In China, the existence of the Confucian and planned economy traditions have left deep impressions in the social fabric and on the economic landscape."

In fact, China has its version of codes.

Corporate governance codes issued by the China Securities Regulatory Commission are in the same spirit as the OECD principles.

Many difficulties will naturally be encountered when the rules are being implemented in a transitional economy like China.

However, self interest rather than social responsibility or punitive measures will ultimately drive the implementation of such codes and it is necessary to develop economic incentives to ensure that such codes are adopted and that they are meaningful, Tomasic said.

Independent directors

A study of the required introduction of independent directors by Chinese listed companies can serve as an example of the difficulties in the implementation of the codes.

The appointment of independent directors is one way in which corporate governance can be improved in China.

Listed companies are already obliged to hire independent directors, this means that they do not own shares in the companies they work for and do not have any other responsibility in the companies.

Their role is to consider the overall interests of the company and the shareholders, rather than any sectional interest.

In order to prevent those owning and controlling the corporation the directors and managers from acting for their own private benefit at the expense of the shareholders, independent directors were introduced as a means of providing "checks and balances" to the conduct of executive directors. In addition, it also prevents a situation where a majority of shareholders are able to dominate the decision-making process of the directors can abuse their power and position to the detriment of minority shareholders.

But implementation of the guidelines has not been easy.

Difficulties include a lack of qualified independent directors, an inability to introduce "external" directors to sit on the board of family companies and independent directors unable to perform their jobs properly.

In addition, as directors are not remunerated highly for the responsibilities they have and the fact the fine can be more than twice as high as their annual income, it is little wonder that people are reluctant to take up such positions.

A heavy monitoring burden is placed on the shoulders of these individuals who, at the end of the day, may be largely symbolic figures.

Margaret Wang, also from Victoria University, said the independent director system will only gradually become effective. To achieve this, independent directors' remuneration needs to be increased, more training should be provided for them, and some foreign independent directors may need to be fired.

Independent directors may look like symbolic figures today.

However, "we should not ignore symbols as they may point the way forward," Tomasic said.

(China Daily May 31, 2004)