Corporate governance takes back seat in musical chairs
How do you spell corporate governance? Some of the mainland's state-owned enterprises seem to be a bit slow to remedy a potential conflict of interest.
On April 3, state media reported that Su Shulin, chairman of China Petroleum and Chemical Corp (Sinopec), moved to Fujian as the province's party head. On April 8, the organisation department of the Communist Party announced more changes. Fu Chengyu, chairman of China National Offshore Oil Corp (CNOOC), had replaced Su at Sinopec; and Wang Yilin, the No3 at China National Petroleum Corp (CNPC), the parent of PetroChina, has filled Fu's seat at CNOOC.
Overnight, in a game of musical chairs, these top oil officials had switched jobs to their rivals. That's the life of the country's civil-servant-cum-manager.
What's the big deal for investors? The problem is while changing jobs at the parent level, they kept their old positions at the listed subsidiaries. Given the conflict of interest, one would have expected immediate resignations. But it took them at least a week to resign and they did so after this columnist sent them questions about the potential conflict.
Fu was chairman at CNOOC and now is head of Sinopec, but he remained chairman of CNOOC Limited, the Hong Kong-listed subsidiary, until he resigned yesterday afternoon. Wang was a top executive at CNPC and now is the chairman of CNOOC. But, until he resigned late on Thursday, he was director of PetroChina, CNPC's listed subsidiary.
How could they continue to be officers at the listed subsidiaries of their competitors? Their jobs include masterminding battles for market share and foreign assets.
Full disclosure here: this columnist owns shares in CNOOC Limited.
Anyone with a fair understanding of corporate governance will find this conflict disturbing. Don't the listing rules say directors should not engage in business in direct competition with their firms?
Many shareholders would not have known about these changes. In fact, none of the three listed vehicles made any immediate announcement of the job switches. PetroChina waited until Thursday, while CNOOC Limited's notice did not appear until yesterday.
The listing rules say a company should make public significant changes in the jobs of its directors. They also say a company should disclose price-sensitive information.
Following the replacement of Fu by outsider Wang, at the parent level, CNOOC Limited's share price fell for five consecutive days. By yesterday, that was a 5.95 per cent loss against a 1.12 per cent drop in the Hang Seng Index.
Defenders of this neglect of corporate governance might say that the top officials of listed state-owned enterprises normally have to undergo party procedures before they can resign.
But responsible independent directors should do something to guard a company's interests during a transition. Will the chairman or director who is leaving be too busy to perform his duties? Will the outgoing leaders be barred from disclosing commercial secrets? Should the company continue to pay them? What mechanism is in place in case of a leadership void?
Where was the disclosure and why were the independent directors silent?
Responsible independent directors would have pressed the controlling shareholder - the state in this case - to ask for the reason for the reshuffle and its implications for the corporation.
Is the change in leadership a preparation for a future re-organisation, say, to redistribute the assets of the companies, as Beijing did in the telecommunications industry?
So far, the companies have been silent. Mind you, we are talking about a bunch of independent directors who are not average people.
The independent directors of these three oil companies include a retired Chinese University vice-chancellor; a former Hong Kong exchange chairman; a retired minister of statistics; a retired chairman of the China Securities Regulatory Commission; and a former executive partner of a Big Four accounting firm. Questions filed to them through the company have not been answered.
'There is a good chance that the independent directors don't have a clue,' said an independent director of one listed, state-owned bank. 'They probably read about the change on the same day as you and me.'
He is probably right. CNOOC published a circular seeking re-election for Fu on April 7. That was a day before the party announced Fu's new job.
'After all, it's a state decision,' said the director.
He was saying two things: one, the state calls the shots and there is not much the board of directors can do about it; two, these companies and managers serve the same master. These moves are simply a reshuffle of department heads within the same company.
We have seen similar abuse of corporate governance in management reshuffles among the mainland telecommunications and banking giants, though they involved less senior staff. And we will continue to see more in the future.
The choice is, however, ours. Do we embrace this corporate governance 'with Chinese characteristics', put aside our rules and regulations and enjoy the glow that comes from being part of the growing Chinese financial market?
Or do we stand by the integrity of our regulatory regime and plea for corporate governance; push for answers and explanations; and strive to be an international financial centre within China?
So far, the regulators have not proven that they are all for the latter. They may have appeared strong in the face of some privately owned enterprises, but it is our treatment of the big fish that sends the message.
It is not just about getting a corporation to follow the rules but, more importantly, for the government officials above to obey them. In reality, the independent directors know the rules, but there is little they can do. They need a pushy foreign regulator with no fear to apply some pressure. Then the government may respond.
But when an outright abuse of corporate governance is tolerated, any new rule concerning independent directors is just another piece of paper.