Transparency drive could fail without better governance at scandal-hit firm 'Encourage innovation, forgive failures, reject mediocrity', urges a sign hanging in one of Guangdong Kelon Electrical Holdings factories in its hometown Shunde in Guangdong province. The Chinese government and shareholders may have forgiven China's largest refrigerator maker for two financial scandals that have rocked the firm in the past five years, but several former executives, including chairman Gu Chujun, could not avoid arrest in connection with a fraud investigation earlier this year. The Hong Kong and Shenzhen-listed firm went all out to put its troubles behind it in a ceremony on Monday marking its takeover from Mr Gu by Qingdao Hisense Air-Conditioner. Amid much fanfare, roads in Shunde - where the firm employs more than 20,000 people - were festooned with pennants bearing its logo. Under an auspicious red banner proclaiming 'A New Kelon', new president Tang Yeguo was upbeat at the ceremony. 'Production is recovering. Orders are coming back. Kelon's operating environment has turned around with support from the State Council, the Guangdong government and Shunde government,' Mr Tang said. Indeed, the substantial presence of mainland media was a sign Hisense's acquisition of Kelon was blessed at the highest levels of the government. After all, its parent firm, Hisense Group, is a large state-owned group under the indirect control of the State Council. Outlining Kelon's new strategy, Mr Tang, a former Hisense Air-Conditioner executive, declared: 'Financial health is more important than profits, and profits are more important than growth.' Kelon vice-president Lin Lan said: 'If a company is not financially healthy, profitability is not sustainable. If a firm is not profitable, it cannot increase production volume.' It can also be argued that a company cannot be financially healthy without strong corporate governance. Kelon has already been embroiled in two financial upheavals, with this year's problems eerily similar to those in 2001. Fraud and embezzlement, accompanied by opaque connected transactions, were uncovered in 2001, after which Mr Gu took control of Kelon from Guangdong Kelon (Rongsheng) Group in 2002. This year, Mr Gu was dismissed as chairman in August and arrested by mainland police in September on suspicion of embezzlement accompanied by connected transactions not disclosed as required by Hong Kong stock exchange rules. Kelon has come full circle, with control passing from Rongsheng, a company related to the Shunde government, to Mr Gu, a private businessman, and now to Hisense Group, a larger and better politically connected state-owned firm. Though Hisense may be an honest firm, the question must be asked: Is Kelon out of the woods? To prevent fraud, Kelon would increase transparency by publicly announcing its connected transactions, Mr Lin said. And it will have substantial connected transactions in future. Hisense plans to inject its refrigerator and air-conditioner units into Kelon within a year. Chinese University of Hong Kong associate professor Raymond So Wai-man said, 'If a company relies a lot on connected transactions, something may be wrong. [Such] transactions should be minimised to avoid conflicts of interest.' The risks in Kelon were 'not low', as it relied on a powerful parent and connected transactions but lacked an adequate system of checks and balances, Mr So said. In contrast, firms listed in the US were more answerable to market mechanisms, where they risked low credit ratings if corporate governance was poor, he said. 'This can be a life-and-death issue.' 'Chinese companies may be delisted in the worst case, but it will be the shareholders who suffer, not the powerful parent,' he said.