Walter Hutchens’ Blog

The London Times has a good story here (originally from the Wall Street Journal) about China Netcom and its efforts to reform its corporate governance.

I like the story, but its headline way over-states what the captioned article really says about Netcom, and it certainly over-states the reality in China generally.

The headline reads, “China turns to western-style governance“

Netcom is a company; that I suppose does reflect China’s turn towards Western economic models (it could instead still be a state-owned monopoly).

Moreover, Netcom is listed on a foreign stock market. That makes it subject to “Western-style” disclosure rules.

Netcom also has seven outside directors on its 13-member board. One of them is John Thornton, a former Goldman Sachs banker.

The article begins with an anecdote about a time Thorton disagreed with Netcom’s CEO Zhang Chunjiang. The article describes their boardroom disagreement as “something extraordinary” and quotes CEO Zhang saying, “This was the first time I had ever encountered opposition[.]”

Thorton won Zhang over on the particular issue (a procedural one about how Netcom should choose which investment bank would advise it on an asset transfer involving Netcom’s parent), and Netcom later hired outside consultants to help it, in the words of CEO Zhang, “develop a corporate-governance system that could let investors relax.”

Under the new system, 2/3 of Netcom’s board (as noted, a majority of whom are outside directors) must approve certain major changes.

That’s all lovely. Really. Netcom has done a lot. And nobody denies that China has for nearly thirty years been moving in a new overall direction. The world acknowledges the results have generally been fantastic.

But this article’s headline suggests China (not just a few firms like Netcom) is adopting Western-style practices of governance.

Surely they lacked space to insert (or thought the context supplied) the word corporate governance. Western style governance, in a general sense, relies on independent courts, multi-party democracy and individual freedoms that don’t exist in China.

In terms of adopting Western-style corporate governance, the text of the article notes:

1. The PRC government owns 75% of Netcom.

2. The Netcom CEO is the secretary of the Communist Party within Netcom.
3. The Party has authority to make key corporate decisions.
4. Before being appointed to head Netcom, CEO Zhang was a career government officer.

If this is turning towards Western-style corporate governance, it is like a smoker turning towards quitting by trying to smoke less or change brands.

Netcom has adopted a veneer of Western-style corporate practices, but governance, in the sense of ultimate power, remains in the Party’s hands.

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