Foreign investors will need more clarity on role of Communist Party organisations in listed firms, says report

Relationship between the board of a company and party organisations not clearly laid out in revised governance code, says Hong Kong non-profit organisation chief

PUBLISHED : Wednesday, 25 July, 2018, 6:02am
UPDATED : Wednesday, 25 July, 2018, 6:46am

Foreign institutional investors will need more clarity on the role of the Communist Party in China’s listed companies, according to a report published by the Asia Corporate Governance Association, a Hong Kong-based non-profit organisation, on Tuesday.

About 61 per cent of the 152 foreign fund managers surveyed by the organisation in the third quarter of 2017 said they did not think the party had a “clear and accountable” role in listed companies. Only 3 per cent said otherwise, while 15 per cent considered it “somewhat” clear and accountable, and 21 per cent were not aware of its existence.

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“Most foreign institutional investors would welcome more explanation and clearer lines of accountability around party organisations,” said the organisation, which has been around for 19 years.

Details such as membership, structure and activities of party organisations could be included in a “report from the party organisation”, similar to those written by boards of directors and supervisory boards, the association said, in addition to how these party organisations make decisions on important issues, hire and fire important cadres and approve important projects and other major budget items.

The role of Communist Party organisations in listed companies finds mention in China’s corporate governance code, which is undergoing consultation for its first revision since 2002. The China Securities and Regulatory Commission last month issued a draft of the revised governance code for public comment, and one of the new clauses states listed companies must provide the necessary conditions for the setting up of party organisations.

As most party organisation members also serve on the board and often hold senior executive positions, and party bosses are supposed to have discussed and agreed upon key issues before putting them to the board for approval, this has raised concerns that it could limit contribution from board directors, especially independent ones, said Jamie Allen, the association’s secretary general.

“The board and party committee’s relations have not been clearly laid out,” he said. “This is important as it could limit the role of the board.”

The legal basis of allowing party entities to operate in state and non-state companies can be found in the Communist Party’s constitution and company law. Communist Party entities had been set up in 91 per cent of listed companies in mainland China, and 68 per cent of non-listed ones, by the end of 2016, according to the report.

Most foreign institutional investors would welcome more explanation and clearer lines of accountability
Asia Corporate Governance Association

Chinese listed companies have been amending their articles of association to incorporate party organisations since late 2015, at the behest of Beijing, to strengthen the party’s leadership role in the corporate sector and help combat corruption.

The European Chamber of Commerce in China issued a statement in November last year objecting to the extension of party organisations into the governance of Sino-foreign joint ventures, while the German Chamber of Commerce raised concerns from its members that party organisations would interfere with the operations of their wholly foreign-owned companies.

But John Law, currently an independent director and formerly a board director of the International Finance Corporation, a sister organisation of the World Bank, said the policy merely made unclear things transparent.

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“Previously, companies did not admit that the party committee made decisions … in future the committee moves in front of the curtain,” he was quoted as saying in the report. “It will be more transparent. At least, we could find a [way] to speak to the committee.”

The survey also found about half of the respondents disagreed with US stock indices compiler MSCI’s decision to include the shares of 233 large mainland-listed companies in its emerging markets index with a 5 per cent initial weighting in May, which has resulted in more pension money being poured into the stocks.

Other clauses added to the revised governance code include a mandatory dividend distribution policy, to be added to listed companies’ articles of association.

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A section on institutional investors’ role in corporate governance was also added, in which they are encouraged to exercise the rights to “question, vote and make suggestions”, while investment banks, law firms and accounting firms should also “actively” monitor these companies.

Corporate responsibilities towards stakeholders such as creditors, employees, customers, suppliers and communities were also written into the draft code for the first time.