Chinese Firms Under Fire For Opaqueness, Secrecy
I had to smile when I read a new report that levels harsh criticism at Chinese firms for their lack of transparency, since anyone who lives and works in China knows that this kind of opaqueness is rampant in China’s secretive corporate culture. It’s interesting to note that the report takes aim at China’s state-run corporate sector, where transparency is almost a dirty word and publicly traded giants like China Mobile (HKEx: 941; NYSE: CHL) and PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) justify their stance by hiding behind their powerful and well-connected state-owned parents. But China’s publicly listed companies that come from the private sector are also often guilty of similar sins, with company founders often using their firms as personal fiefdoms.
The most amusing part of the report from Transparency International came when I read that struggling automaker Chery was one of 2 Chinese companies that received a score of zero out of 10 for their lack of transparency. (English article) A company spokesman noted that Chery is a private company, even though its bond obligations require it to make limited financial disclosures. But I can say with certainty that Chery comes from exactly the kind of state-run background that many Chinese firms feel entitles them to keep all their information secret. That veil of secrecy is even thicker for struggling companies like Chery, which are understandably reluctant to openly discuss their problems.
The report also levels broader criticism of Chinese companies, which performed the worst of the 5 BRICS countries in the survey. The report said that Chinese companies were among the worst performers in almost every area, scoring an average of just 20 percent in the survey. Other lowlights for China included the fact that Chinese companies accounted for 8 of the report’s 10 worst-performers. Nine of 11 companies that received a zero for their organizational transparency were also Chinese. Indian firms fared the best in the report, with special praise given to the Tata family of companies that have some of the longest exposure to western business practices.
As a longtime follower of these big state-run behemoths, none of this comes as a huge surprise to me. Big companies like China Mobile, PetroChina and ICBC (HKEx: 1398; Shanghai: 601398) regularly see their leaders moved like chess pieces between their rivals, presumably under directives from the central government that is their major stakeholder. Those same companies also often shuffle assets back and forth with their state-controlled parents, with little or no explanation given about the internal wheeling and dealing.
While China’s big state-owned companies are most guilty of such opaque business practices, the nation’s fast-rising private sector is often guilty of similar behavior. I attribute such behavior to China’s broader corporate culture, where founders often believe they have the right to use their companies as personal empires, even when other stakeholders might not agree with some of their big decisions.
Online gaming firm Giant Interactive (NYSE: GA) came under the spotlight in 2011 when investors discovered a strange foray by the company into the insurance sector; and former solar high-flyer Suntech (NYSE: STP) also came under fire last year when investors learned that the company was recording big revenue by selling its panels to a company that it controlled. (previous post)
Some of China’s largest companies are trying hard to become more western in their transparency, and many big privately owned names like PC giant Lenovo (HKEx: 992) and Internet leaders Baidu (Nasdaq: BIDU) and Alibaba are leading that campaign in a bid to win more trust and respect from foreign investors. But as this latest report shows, the road to transparency could be a long and difficult one for many Chinese firms, especially big state-owned enterprises where opaqueness and secrecy are engrained parts of the corporate culture.
Bottom line: Opaqueness and secrecy are engrained elements in China’s corporate culture, though big private-sector firms are making moves to improve their transparency.
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