The Influence Of Listing Abroad On Governance Mechanisms Finance Essay
This thesis investigates the economic consequence for Chinese firms’ cross-border listing. We argue that through listing abroad, firms can reduce its information asymmetry by adopting a higher disclosure standard, to improve governance mechanisms and optimize financial decisions. In the case of China Telecom is listed on the Hong Kong and New York stock exchanges. It first tests changes in governance structure before and after listing abroad, and through adopting a series of variables to examine the influence of listing abroad on China Telecom, we identify that: listing abroad have played an important role for the improvement of governance mechanism in China Telecom. Furthermore, by reading the performance indicators from its latest annual reports such as operating income, operating profit, EBITDA, ROA and ROE, and the refined financial decisions after its listing, we find China Telecom executes a better performance after its cross-listing. Last but not least, as the biggest Chinese state-owned enterprise has listed abroad, it might be a nice example followed by others, and it is expected to provide some reference to regulatory bodies and companies in China.
Definition of Corporate Governance
What is corporate governance?
The concept of corporate governance can hardly be defined because it actually contains different economic phenomena. As a result there are different definitions basically reflecting its special interest in the field. In this thesis, we defined corporate governance as a controlling system by which organizations are directed, controlled and monitored. It specifies the relationships and responsibilities between the board of directors, management, shareholders and other relevant stakeholders (e.g. employees) within a legal and regulatory framework. It forms the structure through which the company objectives are set, achieved and monitored.
Background of Chinese Firm’s Cross-listing
Practically, listing abroad has been the common experience in more than 100 countries of the world to enhance the efficiency of the national economy (mainly state- owned companies) since the 1970s. And in China, since Qingdao Beer listed in Hong Kong in 1993, more and more Chinese enterprises have gone abroad to seek development in overseas capital markets, creating a unique upsurge of H - shares  and Red – chips  . Till the end of December 2008, an overall number of cross-listed corporations is 242, while 197 of them were listed in Hong Kong Stock Exchange, 63 firms have listed in China and Hong Kong stock market at the same time, 46 listed in Hong Kong and U.S., 9 listed in Hong Kong and London, while 20 firms listed its shares in China and Singapore simultaneously. People believe that by applying a higher disclosure standard after listing abroad, firms commit themselves to reducing information asymmetry. As a result, firms are able to benefit from growth opportunities with less appropriated cash flow and lower cost of capital.
The History of Listing Abroad
Since 1980s, with the upsurge of world economic globalization, cross-border equity financing had increased tremendously (Henderson, Jegadeesh & Weisbach, 2006) and enterprises have listed abroad one after another. “In the 1990s, 40 percent of cross-listed enterprises were mainly from Asia and Latin America, such as Singapore, China, India, Chile, Mexico, etc. ” (Ana Paula Serra, 1999)
Almost at the same time, while the privatization policy pursued in the United Kingdom by the government of Great Britain, more than 100 countries have privatized state-owned enterprises. “It reduced the government’s role in the economy, financed shortfalls in the government’s budget and retired some of the public sector debt, improved firm’s performance and increased chances of survival.” (Megginson & Netter, 2001)
Since the first company Tsingtao beer had listed in Hong Kong in 1993, Chinese enterprises’ cross-border listing, have passed by fifteen years already, and its scale and speed show that the situation is expanding constantly. The following table shows the number and scale of Chinese cross-border listing enterprises:
Number of cross-listed firms
Issue scale (billion dollar)
See appendix 1 for the detail information of all Chinese firms which have listed abroad.
Argument and Remaining Questions
While more and more firms list their shares abroad, scholar criticizes that “Chinese enterprisers inspire too much enthusiasm for cross-listing but do not pay attention to how to improve their ability of survival in oversea financial markets.” (Li, Z.J., 2008) These markets have more advanced and developed control system. That is why listing abroad is always more costly than listing domestically.
In the economic world, to what extend does cross-border listing influence a firm, does corporate governance improve by its listing, and what kind of Chinese firms are able to get benefits from listing abroad? In the following chapters, both theoretical methods and practical evidence will be applied.
The Advantages and Disadvantages of Listing Abroad
Set up an efficient off shore financing platform.
In the last several years, more and more Chinese firms are actively seeking oversea markets. As long as Chinese firms meet listing requirements and legal regulations, they could list their shares of stock or equity on those markets in according with the local legislation. After the successful Initial Public Offering (IPO), firms would like to increase the ability to raise additional capital, they could also refinance through issuing rights offers, seasoned equity offers and convertible bonds.
Improve firms’ corporate governance.
The corporate image, the market value, as well as the possibility of financing are highly depending on the evaluation of the capital market. Not like most Chinese investors  , the investors in overseas markets are mainly institutional investors. These professional investment institutions are very strict when they evaluate a corporation. Listing in a market with superior regulations needs an improvement of firm’s governance structure and managerial level. Moreover, a cross-listed firm requires a professional management team which is fully qualified for international corporate governance. The members of the board of directors must include operating expert, professional financialist, securities lawyers, accountants and, so on.
Improve corporate image and optimize firms’ international development strategy
Listing abroad can enhance firms’ international reputation, prestige and visibility, which will help enterprises to promote their products in the international market, and raise the possibility to get concessions and benefits from others.
To facilitate the establishment of employee incentive system
Cross-listed companies can offer employee stock options, build up employee incentive system at a relatively low cost, which is also helpful to attract talented managers and technical professionals in the workforce.
The exit mechanism in overseas capital market is attractive
There is no difference between legal shares and circulating shares in overseas market, so investors can sell their equity at a high premium price after the lockup period  ends.
Every coin has two sides. Listing abroad is not an exception. Enterprises must think carefully about the costs and risks of listing abroad.
The relatively high cost of listing abroad
Listing abroad involves a variety of costs. These costs are not only direct costs such as listing charges and fees for professional advises, but also indirect costs for complying with IAS (International accounting standard) or U.S. GAAP accounting standard and the risk of lawsuits. (Fanto and Karmel, 1997) Those costs are much more than the costs of listing in domestic market.
The costs of overseas listing differ according to the different locations and issue policies. They generally contain the following sections:
The professional fees for a cross-border listed company are: consultancy fees, underwriting costs, auditing fees, lawyer fees, assessment costs and public relation costs, etc.
The other costs of listing broad include: referral fees, printing costs, bank fees, IPO (Initial Public Offering) costs and transaction fees, etc.
The following is an average listing costs of local U.S. companies on NASDAQ, which were regarding the NASDAQ standard:
Total issue amount: ＄25,000,000
Total stock issue: 5,880,000 shares
Underwriting costs: ＄1,750,000
Charge for SEC (US Securities and Exchange Commission): ＄9,914
Charge for STA (Security Traders Association): ＄3,375
Printing costs: ＄100,000
Auditing fees: ＄160,000
Lawyer fees: ＄200,000
Charge for states: ＄25,000
Other expenses: ＄34,200
IPO (Initial Public Offering) costs on the NASDAQ: ＄63,725
Annual fees paid to the NASDAQ: ＄11,960
Transaction fees and commission fees: ＄5,000
Total costs: ＄2，363，174
(Source: Governance improvement and value creation for companies listed abroad by Li, Zhi Jie, 2008)
For Chinese companies, the costs of listing on NASDAQ will be slightly higher than for U.S. companies. The incremental costs occur because of the higher auditing and accountant fees.
Difficult to be recognized by the overseas market
For most of cross-listed Chinese firms, the problem is they are difficult to be recognized by investors. As an unknown foreign corporation, how to attract investors depends highly on their performance and reputation.
Increased reporting and disclosure requirements
By selecting a tightly regulated foreign capital market, a firm pre-commits to adhere to high standards of information disclosure. However, it is quite a challenge for most Chinese firms to survive in such a Western capital market since the regulatory system in China is less strict. Many firms could not get used to it, so after one or two years’ suffering, they removed their stocks from oversea stock exchange  .
Review of Corporate Governance and Private Benefits
Previously in chapter 1, we have defined corporate governance is a controlling system by which organizations are directed, controlled and monitored. The original idea about corporate governance can be traced back as far as Adam Smith in 1776 when he proposed agency theory: when ownership and control of corporations are not coincident, the potential conflict of interests is raised between owners (shareholders) and controllers (managers). The conflict of interests can ultimately result an unfavorable effect on corporations.
His ideas formed the basis research on corporate governance. In present, the risk involved in corporate governance is that managers and controlling shareholders may abuse the capital into a bad project or even steal it (A. Shleifer and R.W. Vishny). Then they enjoy the so called private benefits of control at the expense of minority shareholders. Reducing managers’ and controlling shareholders’ ability to take private benefits from their corporations is an important aspect of corporate governance.
In China, the largest corporations are mostly state-owned, so controlling shareholder often simply refers to Chinese government. The individuals and private companies are minority shareholders. The Chinese firms’ listing abroad means minority stockholders’ benefits are protected by the improved regulation and governance system.
Private benefits could be non-pecuniary and pecuniary benefits. Non-pecuniary benefits include “the ability to direct company’s resources to a cause one agrees with, a preference for glamorous projects, or the use of a position for the enhancement of one’s human capital” (E. Benos and M.S. Weisbach, 2004). Alternatively and more substantially “private benefits can have enormous direct financial effect on minority shareholders, through transactions that divert corporate resources to other companies owned by the managers or their families” (E. Benos and M.S. Weisbach, 2004).
The existing fact of private benefits brings harmful consequence to corporations. La Porta, etc (1997) claims that private benefits restrict a firm’s access to external capital, especially equity capital. He found a positive relationship between the strength of minority shareholders’ legal rights in a country and the ability of corporations in this country to raise capital: the positive or negative relationship between minority shareholders directed corporate governance, which is the level of private benefits of control. Restricted access to external finance implies that company cannot realize some investment projects with positive net present value. “The private benefits he enjoys prevent him from accessing capital market, and hence from reaping the positive net present value of the project. If he could somehow commit to forgo taking private benefits personally (and convince potential investors of his commitment), he could then undertake the project and reap his share of the net present value. By this logic, if the project were sufficiently valuable, then it would make sense for managers to ‘bond’ themselves to avoid taking private benefits” (Benos and Weisbach, 2004).
Jeffrey Gordon (1988) found that if a solution to a firm with bonding desire is not available in the domestic market, it will seek an external capital market where it can make a promise of lower private benefits and more minority shareholder friendly governance. Coffee and Stulz (1999) also claimed that bonding is one of the reasons for firms to listing abroad.
Important Theory and Hypothesis
Information asymmetry refers to a situation in which one party in a transaction has situation because one party can take advantage of the other party’s lack of knowledge. For instance, managers know more about a firm than does the stockholders, because manager always participates in the firm’s daily operation (e.g. decision making) while others do not.
There are some existing literatures suggest that a firm’s asymmetric information environment has an important impact on corporate governance mechanisms. Demsetz and Lehn (1985), Gillan, Hartzell and Starks (2003) had proved that the intensity of board monitoring should decrease with the extent of asymmetric information.
A competing hypothesis: bonding hypothesis is support by the empirical evidence afterwards. Coffee claims that bonding is refer to a mechanism by which firms incorporated in a jurisdiction with weak protection of minority rights or poor enforcement mechanisms can voluntarily subject themselves to higher disclosure standards and stricter enforcement in order to attract investors who would otherwise be reluctant to invest (or who would discount such stocks to reflect the risk of minority expropriation) (Coffee 1999).
There are so called legal bonding and reputational bonding. Legal bonding involves rule set by stock exchange and market regulators. Reputational bonding occurs through the monitoring by investors, equity analysts, credit rating agencies, consultants, auditors and others.
A lot of recent researches have tested the bonding hypothesis: Stulz (1999) found that cross-listing increases the expected cash flows by strengthen the monitoring of managers and controlling shareholders. Reese and Weisbach (2001) found that non-US firms list in the United States to protect minority shareholders.
Case of China Telecom’s Listing Abroad
Brief Introduction of China Telecom and Its Listing Abroad
China Telecommunications Corporation is a large state-owned telecom enterprise organized according to the so-called “China's telecom industry reforming program”. With a registered capital 158 billion Yuan, China Telecom is the biggest telecom enterprise and the greatest basic telecom operator, owns the global largest fixed-line telephone network that covers all the cities and the rural areas of China. Subunits of China Telecom include 31 provincial enterprises which provide telecom services nationwide.
In 2002, China Telecom accomplished the restructuring of the telecom business assets and the telecom system reform. On 10 September 2002, China Telecom Corporation Limited (China Telecom) was established as the subsidiary company of China Telecommunications Corporation. On 14 and 15 November 2002, China Telecom successfully completed its initial public offering (IPO) at New York (Ticker symbol: CHA) and Hong Kong stock exchanges (Ticker symbol: 728)
One year after listing in New York and Hong Kong, in December 2003, China Telecom Corporation Limited acquired the telecom assets in Anhui and other five provincial corporations of China Telecom. In July 2004 again, it acquired the assets in Hubei and other nine China Telecom’s provincial corporations. Since the acquisitions, the businesses and service of China Telecom Corporation Limited have covered 20 provincial regions.
The corporate structure was illustrated as the following table:
Comparison Before and After China Telecom’s Listing Abroad
First of all, to examine the influence of listing abroad on China Telecom, several variables should be selected. Li Zhijie (Governance improvement and value creation for companies listed abroad, 2008) have listed the most important variables for corporate governance:
Does CEO holds a concurrent position as chairman of the board
Percentage of external board members
Number of external board members/Number of board members
Shares holding proportion for the biggest shareholder
Shares hold by the biggest shareholder/Total shares
Shares holding proportion for the two highest top managers
Shares hold by the two highest shareholder/Total shares
Does the corporation have a parent company or not
Do they list their share in a more developed market
Is the firm a state-owned enterprise or private-owned
State owned=1, Private owned =0
After study on China Telecom’s annual reports (from 1999-2005), I found five of variables have changed significantly. They are A, B, C, E and F. In according to the fact that China Telecom is a subsidiary company which was established by China Telecommunications Corporation, there are no A and E before its establishment, so three variables are actually changed significantly before and after the firm’s listing abroad: B, C and F. After the cross-border listing, the percentage of external board members are increased from 21% up to 40%, meanwhile shares holding proportion for the biggest shareholder declined from 100% till 72%; F is changed from 0 to 1 because China Telecom have listed their shares in a more developed market which has better regulatory system with higher information disclosure levels. Before its cross-listing, China Telecom is a state-owned company without a board of directors. The governance structure is incomplete and imperfect. By increase the scale of external board members and minority shareholders after its cross-listing, a more developed and complete governance mechanism was built up step by step, to promote the company towards the direction of firm value maximization.
The following table indicated the change of corporate governance before and after listing abroad:
Data source: Annual reports from China Telecom Co., Ltd over the years
More into detail, the internal corporate governance is improved with following aspects after China Telecom’s listing:
China Telecom was authorized by China Telecommunications Corporation to manage its parent company in order to protect its own interests.
All employees of parent company are reassigned to China Telecom after its overseas listing, meanwhile, accepted a commission to manage its parent company, China Telecommunications Corporation, and therefore avoid so-called “controlling shareholders’ tunneling”  , and looked after the interests of China Telecom and minority shareholders.
2. Reform and optimize the internal corporate governance structure
The former corporate structure before China Telecom’s listing aboard:
Meeting of party committee
As the graph above shows, before China Telecom’s corporate governance restructuring, there are no Shareholders’ Meetings and Board of Directors. The party of committee, corporate with the worker’s congress and the Labour Union, played an important role in governing and controlling the state-owned corporation. Two years before China Telecom’s cross-listing, the corporate governance restructuring was carried out, and China Telecom applied the corporate governance mechanism of European and American style.
The new corporate structure after China Telecom’s listing is showed below:
Board of Directors
Board of Supervisors
The Board of Directors is responsible for crucial managerial decision making and supervises top managers’ daily operation and management. Supervisory Committee supervises the duty behavior of Board of Directors and Supervisory Committee.
As a company which is registered in China mainland, and listing its shares both in Hong Kong and New York stock exchanges, China Telecom made a lot of research on how to adapt to an advanced capital market environment and meet their regulations.
By comparing the corporate structure before and after China Telecom’s listing abroad, we found that China Telecom abandoned their undeveloped governance mechanism, and reformed by adopting the western corporate structure and managing their corporation in western way.
People argue that since China Telecom, and all the other state-owned firms actually, are still state-owned corporation after their reform of state-owned enterprises because most of the share stocks are still held by government. The reform is not complete.
China Telecom’s refined corporate structure
After China Telecom’s cross-listing, Shareholders’ Meeting is playing a more and more important role in corporation’s operating decisions. A Shareholders’ Meeting is authorized to: determine the firm’s operation principle and investment plan; elect and replace board members, and process issues related with directors’ remuneration; elect, dismiss, and replace supervisors who are represented by shareholders and determine their remuneration; deliberate and approve reports from the Board of Directors and Supervisory Committee; deliberate and approve the annual financial budget plan, final account of revenue expenditure, profit-sharing plan and deficit coverage plan; make decision to increase or decrease registered capital; execute and acknowledge the possible issues such as firm’s merger, acquisition, dissolution or liquidation; appoint or dismiss public accounting firm; modify firm’s business scope and rules of governance.
Meanwhile, after China Telecom’s listing abroad minority shareholders of China Telecom are authorized to vote in shareholders’ meeting, in order to protect their own interests and avoid controlling shareholders’ tunneling.
Board of Directors
Since beginning of 2003, the scales and structure of China Telecom’s Board of Directors are changing and optimizing in order to comply with the international legislation. According to listing rules of Hong Kong, minimal three independent directors are required. China Telecom’s new Board includes fifteen directors, and five of them are independent directors, which also meet the regulation of New York Stock Exchange. In year 2005, after the general election, the Board of Directors is constructed by nine executive directors, one non-executive director, and five independent non-executive directors. One third of board members are independent, so it ensures the effectiveness and independence of China Telecom’s Board.
The Board of Directors is playing an increasingly important role in China Telecom’s operation, budgeting, decision making, supervision and internal control. For example, in 2005 the Board of Directors has held more than 10 times conferences to deliberate and settle issues about annual financial report, assets evaluation report, issuing short-term bond, financial budget plan, etc.
The authority of independent directors is enhanced also. When the board of director makes some decisions related to company’s business operation, those decisions are only valid after independent non-executive directors’ approval.
Audit Committee and Nomination Committee
The Audit Committee of China Telecom was established in 2002. Recently, there are four committee members who are also in a position as independent non-executive director and the office term is three years. The Audit Committee is responsible to supervising and investigating the authenticity and completeness of financial report, the effectiveness and completeness of the internal corporate system and risk management system, and in charge of hire or dismiss external auditor. Audit Committee is also authorized to establish a Whistleblower Policy and handle complains and anonymously reports.
Remuneration Committee and Nomination Committee
Remuneration and Nomination Committee was established in 2005, with eight committee members who are also in position as independent non-executive director and the office term is three years. They are authorized by the Board to investigate any activity within its terms of reference. It is authorized to seek any information it requires from any employee and all employees are directed to co-operate with any request made by the Committee.
The responsibilities of Remuneration and Nomination Committee are: examines and endorses proposals about the remuneration of senior executive staff and ombudsmen; provides advice about the policy for, and scope of, pension arrangements for all staff; Review and note annually the remuneration trends; Advise on any proposals for major changes to employee benefit structures; Regularly review the structure, size and composition required of the Board and make recommendations to the Board with regard to any changes; Give full consideration to succession planning for board members and the chief ombudsman; responsible for identifying and nominating candidates to fill board vacancies if it is necessary.
Supervisory Committee of China Telecom was appointed by Board of Directors in 2002. There are five members, one of them is external independent supervisor, and the others are employee committee members. The committee is responsible for: establish and maintain effective internal controls to achieve the China Telecom’s financial reporting objectives; prepare accounting records and financial reports to accurately reflect operations and results; administer relevant plans, policies, and control procedures established by the Board of Director; establish policies and control procedures that safeguard against error, carelessness, conflict of interest, self-dealing and fraud.
The improved risk management system
In order to improve form’s internal governance, hedge firm’s risk, risk management was deep-going studied and implied to daily operation. China Telecom treats risk management as a continuing task and shall be improved day by day after its cross-border listing.
Information disclosure mechanism
In March of 2003, China Telecom’s Board of Director approved “Information Disclosure Regulation of China Telecom Corporation Limited”, and coordinated with other related rules and regulations, an information disclosure mechanism is formed. Since 2004, Shareholder’s Meeting holds yearly in Hong Kong, instead of in Beijing; since 2005, China Telecom disclosed service business data and income statement quarterly; in 2006, they disclosed their customer quantity monthly; the annual and interim reports, China Telecom has established and maintain the informative channel to communicate with both controlling and minority shareholders. By holding telephone conferences with investors, public presentations, and investment analysis conferences, China Telecom provides variable communication channels for global investors in order to reduce information asymmetry.
Recognition and rewards after listing abroad
In 2005, China Telecom was awarded by the Euromoney, an international reputable financial magazine, "The Best Managed Telecommunications Company in China" in its "Asia's Best Managed Companies" ranking; in its evaluation for Asia investor relations, the Institutional Investor selected Wang Xiaochu, Chairman and Chief Executive Officer of China Telecom Corporation Limited as "The Best CEO in China 2005"; With revenue of 21,561 million US dollars, China Telecom was ranked the 262th in Fortune Global 500 largest Corporations and 4th in Chinese top 100 listed corporations by Fortune.
In 2006, China Telecom ranked 279th by revenue and 178th by profit in "Fortune Global 500" for the year 2006; It was accredited with "The 1st Capital Outstanding China Enterprise Awards - Telecommunications" by Hong Kong renowned financial journal Capital and awarded with the "Best Commitment to Strong Dividend Payment 2006 - China" by FinanceAsia.
In 2007, China Telecom Corporation Limited has been awarded "Asia's Best Managed Fixed Telecom Company" in the "Asia's Best Managed Companies 2008" ranking by Euromoney, and being accredited again as the "World's Most Admired Companies" by Fortune. Last but not least, it ranked the 181st in "The Forbes Global 2000".
In 2008, in accrediting Asia's Best Companies 2008 by FinanceAsia, China Telecom was ranked the top in the "Best Managed Company - China". In addition, the company was awarded as the "Best Corporate Governance - China", the "Best Investor Relations - China" and the "Most Committed to a Strong Dividend Policy - China". Furthermore, it ranked 168th in "The Forbes Global 2000" for the Year 2008.
Successful Financing and outstanding achievement made by China Telecom after its cross-listing:
The following table indicates that through its cross-listing, China Telecom had successfully financed from New York and Hong Kong Exchanges, with a total amount of a hundred billion Yuan.
By comparing several performance indicators and which were measured before and after its overseas listing in 2002, which had generated an increasingly firm value, we could say China Telecom made a wise decision without a doubt:
And refer to China Telecom’s share prices in Hong Kong exchange, if we despite the tremendous decrease since the impact of subprime mortgage crisis in January of 2008, it has a overall increase and from 1.4 HK dollar to 6.5 HK dollar.
Recent Problems of Minority Shareholders in China
In China, for most of the State-owned enterprises, the state is the first and the largest shareholder. For our case company, the state as the first shareholder owns 70% shares of China Telecom. The rest of shares are owned by minority shareholders. Minority shareholders are normally considered as “public shareholders” in China; this is to distinguish them from the only majority shareholder: the state. (Tomasic, Roman and Neil Andrews, 2007) In China’s regulatory system, the protection of minority shareholders is officially and theoretically considered to control the securities market and Chinese listed companies. However, in practice, the minority shareholders are not well protected.
As we could see in “articles of association of China Telecom Corporation Limited”, article 51, all the shareholders of the Company (no matter controlling or minority shareholders) shall enjoy the following rights:
The right to receive dividends and other distributions in proportion to the number of shares held;
The right to attend or appoint a proxy to attend shareholders' general meetings and to vote thereat;
The right of supervisory management over the Company's business operations and the right to present proposals or to raise queries;
The right to transfer shares in accordance with laws, administrative regulations and provisions of the Company's Articles of Association;
The right to obtain relevant information in accordance with the provisions of the Company's Articles of Association, including:
The right to obtain a copy of the Company's Articles of Association, subject to payment of costs;
The right to inspect and copy, subject to payment of a reasonable fee.
In the event of the termination or liquidation of the Company, the right to participate in the distribution of surplus assets of the Company in accordance with the number of shares held;
Other rights conferred by laws, administrative regulations and the Company's Articles of Association.
Theoretically, there is no difference between majority and minority shareholders. Every shareholder has the equal rights and the interests of all shareholders should be put into the first place. But in reality, the majority shareholders always get priority, and the rights of minority shareholders are ignored. For instance, sometimes the government may want a state-owned firm to run start a project, which will benefit the government itself but not the corporation. Then the benefits and advantages are taken by the government from the minority shareholders because of its absolute power. This problem still remains and they happened not only in China Telecom, but also other Chinese state-owned companies.
Compare with China, a state-owned company's shareholders in the West are more like the owners who keep a certain distance in active decision making in corporate governance system. However in China, controlling shareholders are so powerful and minority shareholders find that is helpless to against them. Under Chinese company law, the primary shareholders could easily exercise their powers during shareholders' meetings, which give them absolute control over corporate affairs, and that is the reason at most of Chinese companies, when the interests of controlling shareholders do not coincide with the minority shareholders, they will use their powers and the power of their control votes to influence the final decision making and then obtain extra benefits for themselves. Especially where the controlling shareholder is the government, it might sacrifice the interest of minority shareholders to attain a public objective. For example, a corporation is asked by the government to increase their employment, even though the company does not want to. The government is pleased by the increased employment status, while the company may be hurt by the idle workforce.
In contrast, minority shareholders in China have almost no chance to be heard. For instance, firms do not always provide detailed information on the agenda to minority shareholders before the meeting, so they have little time and resources to learn the issues and are therefore unable to ask the board members pertinent questions. However, the controlling shareholders have first-hand knowledge of the issues because they make corporate policy, and their representatives are always professionals. This is a typical example of information asymmetry as we have seen in chapter 2.3.1.
According to the current situation, minority shareholders in China absolutely need more rights and protection. Actually, Chinese government encourages local firms to list abroad in recent years, so it made some regulatory rules to improve its minority shareholder protection. For example, Chapter 1 of the Code of Corporate Governance for Listed Companies in China issued in 2001 by the China Securities Regulatory Commission (CSRC) claims several general principles regarding the protection of minority shareholders in listed companies, such as: “a listed company shall establish a corporate governance structure sufficient for ensuring the full exercise of shareholders’ rights; the corporate governance structure of a company shall ensure fair treatment toward all shareholders, especially minority shareholders. All shareholders are to enjoy equal rights and to bear the corresponding duties based on the shares they hold; Shareholders shall have the right to know about and the right to participate in major matters of the company set forth in the laws; Shareholders shall have the right to protect their interests and rights through civil litigation or other legal means in accordance with laws and administrative regulations.”
In addition, in order to restrict the abuse of power by majority shareholders in China’s listed companies, the Code of CSRC also proclaimed that: “The controlling shareholders owe a duty of good faith toward the listed company and other shareholders. The controlling shareholders of a listed company shall strictly comply with laws and regulations while exercising their rights as investors, and shall be prevented from damaging the listed companies’ or other shareholders’ legal rights and interests, through means such as assets restructuring, or from taking advantage of their privileged position to gain additional benefit.”
In general, since the state-owned corporation has listed abroad, the protection of minority shareholder in China Telecom is improved into a certain level. However, like most of other Chinese state-owned companies, China Telecom’s controlling shareholder is, and still will be the Communist Party of China. Under this situation, its cross-border listing could accelerate and optimize the reform of the governance mechanism to some extent, but not inherently.
Conclusion and Recommendations
In the thesis, we have assessed that through listing its shares abroad, China Telecom have regenerated by commit itself to a market which has a more strict regulatory system and higher level of information disclosure. In addition, by drawing on the experience of western countries, China Telecom constructs a brand new corporate structure and refines its governance mechanism: The Shareholders’ Meeting and the Board of Directors have replaced the Party Committee, the Workers’ Congress and the Labour Union, and it provides a relatively better protection on the interests for minority shareholders.
China Telecom’s cross-listing improves its reputation in foreign exchange markets and increase investors’ confidence. Through optimizing its financing strategy, China Telecom gathered abundant capitals and assets from internationally. Those capitals and assets provide powerful support for the development of new telecommunication products and services.
However, as we have investigated China Telecom’s new corporate structure, we found that China Telecom is still a state-owned because the government holds more than 70 percent shares of stock. The major shareholder is the state. So there is an argument about in what extend China Telecom, or better to say Chinese state-owned enterprises could implement their so-called “reform of corporate governance of state-owned property”, as long as the government holds the absolute control on a firm. Through China Telecom’s overseas listing and its governance reform, we have seen its ambition and determination to be successful on international telecommunication market. But in the next ten or twenty years or more, listing abroad will only improve the corporate governance and firm’s performance in a certain extent. So I would conclude that even though China Telecom’s performance and reputation are improved rapidly, it not the time for other Chinese enterprise to follow. The problem is there are too many firms are trying to list their shares on oversea markets, no matter the costs and potential risks. Compare with enterprises with larger business scale such as China Telecom, it is much more expensive for small firms because their corporate governance mechanism is normally worse. In addition, although listing abroad could increase firm’s reputation, those small firms could hardly attract oversea investment. Furthermore, because of the impact of economic crisis and fund shortage in all industries, listing abroad might no longer an absolute wise decision for all Chinese enterprises, especially the ones without remarkable business strength.
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