With a legal basis in both Chinese company law and the constitution of the Communist Party of China, the role played by party organisations, or POs, remains murky to many foreign investors.
Still others don't even know that they exist.
That is the upshot of a report published on Tuesday by the Asian Corporate Governance Association (ACGA), which showed fewer than 3% of 152 foreign investors surveyed felt POs had a clear and accountable role in listed companies.
Perhaps more worryingly, more than a fifth didn't even know that they existed.
Sitting above the Board of Directors, these POs are embedded into Chinese management structures and officially represent the party co-founded by Mao Zedong that has ruled China since 1949. All companies with any state ownership must have them, but they are also common -- somewhat peculiarly, at least to the uninitiated -- among Chinese private enterprises.
Even more unnervingly, the Chinese government wants foreign-owned businesses in China to have them too.
But recent policy initiatives have reaffirmed the leadership role of POs in state and private enterprises and their status above the board in the business decision-making chain. And whether it makes for good governance and best protects investor interests is questionable
There is usually a high degree of overlap between the PO and the board of directors, supervisory board and senior management. Since most party members serve on the board of directors too, an inner group of directors will have often discussed key issues before any board meeting.
That could lead to shortened board meetings and reduce the contribution of non-executive directors, especially independent directors, on major decisions. In this way, the key job independent board members are supposed to have to hold the board accountable for major decisions is severely diminished, and with it a lack of accountability to shareholders.
REACTIONS
The reaction from investors and multinationals has so far been mixed.
“In our view specifying the Party committee’s (PO’s) roles and responsibilities in the articles [of association] will improve transparency to this key aspect of Chinese corporate governance,” Jenn-Hui Tan, head of capital markets and corporate governance Asia Pacific for Fidelity International Singapore, said in the report.
But the European Union Chamber of Commerce in China (EUCCC) objected to the formal extension of the PO role in the governance of joint ventures in China.
“The corporate governance requirements under the Company Law and the Equity Joint Venture (JV) Law are clear," it declared in a statement in November. "The board of directors is the highest authority of an equity JV and responsible for all key matters of the JV.”
And for H-shares -- mainland Chinese companies listed on the Hong Kong Stock Exchange -- the ACGA report echoes the concerns raised by the EUCCC.
It said there were grounds for the role of the PO to be disclosed more fully under the listing rules of Hong Kong Exchanges and Clearing (HKEX), which states the following under its corporate governance code: “An issuer should be headed by an effective board which should assume responsibility for its leadership and control and be collectively responsible for promoting its success by directing and supervising its affairs”.
To be sure, the lid on the role and importance of POs in Chinese enterprises has been prised open. But it may take a while longer for their true value and influence in Chinese boardrooms to become fully apparent to investors. Whether they end up liking what they see is another matter.
