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A Simple Idea on Corporate Governance for China

Dear Sir,
I'm not sure whether this is the right email address I should post and address this idea to. However, I'll try anyway hoping that it will reach the right party eventually.

Corporate governance has become a big issue facing China's leadership today. This issue has long been troubling China's body corporate and the Government and if not handled correctly and soon, could cause much damage to China's economy not only in the long term but also short term as well. Now, to be sure, corporate governance is also a much talked about issue and problem in Western developed economies as well highlighted recently by events at the likes of Enron and WorldCom just to name a few. However, due to the existence of such body corporate as the SOEs, this issue takes on a peculiar significance in China. Anyway, I'm not here to go into a long discussion on corporate governance but rather to suggest a time-tested simple idea to at least partially address this issue.

Rather than introducing laws, rules and regulations to directly address the issue, which can still be subject to much human abuse, here, I'm talking about the Central Government introducing an efficient taxation regime to encourage the practice of high corporate dividend policies by body corporate in general - perhaps as high as a 90-95 percent payout ratio, to address the issue. In other words, I'm suggesting that the Central Government should look into giving or creating tax incentives to corporations that commit to undertake to distribute most of their unallocated surplus earnings or profits as dividends to their investors be they shareholders or stakeholders. Please note that I'm talking about unallocated earnings. For example, corporate tax can be waived or much reduced for corporations committed to payout most of their profits as dividends. This has the following ramifications:

1) All allocated surplus profits (which is not distributed and allocated for capital expenditures or working capitals etc.) must now be vetted, justified and approved by shareholders in advance and fully supported by detailed capital and/or expenditure budgets. This has the effect of preventing bad or improper governance practices, abuses as well as wasteful expenditures by management. More importantly, this will also promote better and more efficient utilization of resources thus giving investors a better return.

2) Unallocated profits are to be distributed. This will benefit investors or shareholders and also allow for better and more efficient investment allocations, thus benefiting the economy as a whole in the long run.

3) More tax revenue for the Government in the long run due to more efficient resource allocations and a more efficient economy. Higher individual consumption or potential consumption will also mean more tax revenue for the Central Government.

4) Promotes investors, stakeholders and shareholders participation and democracy, allowing for better supervision, checks and balances. The important thing to mention here is that this is all done in the name of self-interest through the market mechanism rather than due to any dictate from authorities.

5) Promotes transparency of corporate affairs and management practices allowing for better investment decisions and judgments by investors as well as lenders.

6) Promotes overall corporate efficiency and employee/employer relationship. The fact that management (and indirectly also employees) must justify each year fund allocations will greatly enhance corporate efficiency.

7) Other obvious collateral benefits as well.

Now the idea does have its problems too. The funding process for practicing corporations will be cumbersome thus resulting in higher funding costs. It may entail certain inconveniences and inflexibilities on the part of management. So the idea is not for everybody such as start-ups, innovative techno-ventures that call for rapid expansion etc. However, overall the benefits should far outweigh the concerns in the long term. The fact that it forces management to practice far stricter corporate discipline and planning and saves the Central Government huge resources in disciplinary actions should benefit society at large.

The above is a simple idea but I believe workable and easy to implement.
Yours truly,
Fred Wu

(China.org.cn April 2, 2004)

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