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Zheng Zhigang: War of words at Gree highlights need to fix governance

2016-12-07

Source: Global Times    Published: 2016-12-6

 

Experts said elevating the role of independent directors could address the issue of corporate governance at some of China`s listed companies with dispersed ownership, following heated exchanges between new shareholders and top management executives.


On Saturday, Dong Mingzhu, icon of Made in China and executive at Chinese State-owned conglomerate Gree, said the company will not be affected by outside capital, the 21st Century Business Herald reported Tuesday. And if these investors become the destroyers of Made in China, they will be sinners, Dong said.


On the same day, China`s securities regulator sent a warning to domestic financial capital. Liu Shiyu, head of the China Securities Regulatory Commission, said that some acquirers have become "robber barons" and this is intolerable, domestic media reported.


Dong stepped down from the post of chairwoman of Gree Group on November 11. The group`s electronics arm, Gree Electric Appliances Inc, is a Forbes 500 company.


Dong`s comments were directed toward Foresea Life Insurance, which has recently been buying Gree shares. Foresea is a subsidiary of the financial conglomerate Baoneng Group.


There have been several recent skirmishes between company executives and new shareholders.


Notable cases include China`s largest real estate developer Vanke, its chairman Wang Shi, and Baoneng Group, as well as the clash between Ge Wenyao, former chairman of Shanghai Jahwa United Co and his successor, who was appointed by the new board after an ownership shakeup.


Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times on Tuesday that the conflicts between new shareholders and entrepreneurs stem from their different values.


"The goal of the shareholders, representing financial capital, is to get a short-term return, while the entrepreneurs, representing industrial capital, attach more importance to a company`s` long-term development. The two sides often lack `common language` when they negotiate," Dong said.


"In many countries, financial and industrial capital have been smoothly integrated. But in China, when the stock markets are immature, and the acquisition market has just taken off, it`s very hard to solve those conflicts effectively during a short period," Dong noted.


"To solve these conflicts, regulators should strengthen the management of financial capital. Also, the new shareholders should give more support and respect to the entrepreneurs, and shouldn`t force them to change their management methods," said Dong.


Zheng Zhigang, a finance professor at Renmin University of China, argued that independent directors can play a bigger role in mediating the conflicts between executives and new shareholders, but the system needs to be improved.


Zheng also pointed out for a system of independent directors to work, small shareholders must know how to exert their own influence.


"For companies where ownership is spread thinly among a large number of shareholders, a good example in corporate governance is to have a board full of independent directors and one director who is also CEO," Zheng told the Global Times Tuesday.


That will strike a balance so that the CEO can push his strategy while the interests of shareholders are protected by independent directors, noted Zheng.


However, reforms are needed as the independent directors in Chinese companies are just figureheads.


There`s little at stake for them, and there are not enough incentives in place to give them any stake, according to Zheng.


Foresea aims to fix universal life business by December


Foresea Life Insurance, a subsidiary of the financial conglomerate Baoneng Group, said on Tuesday that it aims to reform its suspended universal life insurance business by the end of this month so that it complies with government regulations, domestic media reported.


Foresea`s statement came a day after the China Insurance Regulatory Commission (CIRC) ordered the company to suspend sales of universal life insurance.


Foresea Life Insurance, set up in February 2012, is a financial insurance company based in the China (Guangdong) Pilot Free Trade Zone.


According to the statement, Foresea has suspended the business and put together a special work group to spin off its universal life insurance accounts before December 30.


Universal life insurance is a type of coverage for which policyholders pay into an investment fund whose earnings cover the premiums on their term life insurance policies.


According to a report by the Shanghai Securities News on Tuesday, the CIRC investigated Foresea`s universal life insurance business from May to July and found that the company had problems managing universal life insurance accounts and verifying the authenticity of their policyholders` personal information.


The CIRC had asked Foresea to rectify these problems, but a regulatory follow-up on December 1 found that the company had not yet finished. The regulator had asked the company to manage their universal life insurance accounts independently, strengthen risk management and make other improvements.


The CIRC`s investigation was part of a wider probe into China`s universal life insurance industry. From May to August, it looked into the business at as many as nine companies.


This year, the regulator enacted regulations to standardize the scale and management of the universal life insurance industry to ensure policies were not being used as a low-cost financing tool.

 

Zheng Zhigang is a senior fellow at Chongyang Institute for Financial Studies, Renmin Unversity of China.

Key Words: Gree   market   regulation   Zheng Zhigang  

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