The Ugly Truth

Can a well designed corporate governance structure completely guarantee a well run company?

In China, the answer is no.

Look at a major player in China’s life insurance market.

It is a big company, with asset of RMB 94 billion, about $12 billion. It collected RMB 26 billion (about $3.3 billion) premium in 2006 and it enjoys a above average growth rate at 20% to 30% in the past 11 years.

It also looks like a company with a nice governance structure, at least in paper. It has a balanced shareholding structure: 15 shareholders present a nice mix; a little less than 50% of which are private enterprises; 20% of which are big state owned companies; 25% of which are foreign insurance giants.

It has a sound board with 15 directors, including 10 shareholder with above 5% stake gets representation and 5 independent directors with solid background . Everything is nice?

No.

If you look closer, it is a mess.

First, the The chairman of this company is a fraud. He has channeled about RMB10 billion(about $1.28 billion ) into outside investments profiting not the company but himself, RMB2.7biilion ($ 340 million) of which are not yet paid back. The company has a simple way out: fire him, call the regulators, and let the police do the rest. Why not?

On the contrary, no Board of Directors took action.

Why?

Because the board’s legitimacy itself is in question.

If you look closer, you find:

The current board of directors should have expired before the end of 2005. It remains because the key shareholders has different opinion on how to elect a new board during a 18 month deadlock.

So why the current board does not rebel against the chairman?

Because it is a manipulated board.

First, The board is being dominated by chairman’s cronies. Even more important, several key shareholders are secretly owned by the Chairman, with the fund channeled out of the insurance company.

Second, the big state owned companies and the foreign insurance companies, though own nearly 50% of the company, have only 3 seats. Their protests were ignored.

What about the independent directors? Did they speak out?

The independent directors named by the chairman himself are largely silent.
Finaly, the regulators took action.They summoned a a meeting of senior management , declared that a “routine on-site check” is going on, demanded the chairman transfer all his responsibility to the president and fired him two months later.

All that the regulators have done are not supposed to be done by the regulators but the justice is served. It looks the regulators intervene exceedingly heavy handed in one way, but not really tough enough in the other way.

For example, they tried hard to downplay the crisis, using “routing on-site check” to avoid public recognition. The regulators also try to arrange a paid back deadline for the chairman. But it is not working. After 6 months since the regulators involved in, there is still RMB 2.7 billion ($340 million) not paid back. So the deadline had to be rescheduled again and again.

Most surprising, there is no business crime investigation involved so far.

Whaterver a nice governance structure it looks like, it may simply do not work.

And that is why media is so important.

If , like in this case, the board of directors, the shareholders, the regulators, are not doing their job or doing their job well, we news media can tell the ugly truth, a nightmare to investors, but a fascinating and illuminating story.

Click the link and read the story:
English: http://www.caijing.com.cn/newcn/English/Cover/2007-05-30/20875.shtml

Chinese: http://www.caijing.com.cn/coverstory/2007-05-26/20527.shtml