The system of corporate governance of China is different from the other corporate governance around the world. The reason for this difference is due to the varying economic structure of the country. In particular, the large organizations were state-owned, implying that firm management were responsible to both state-owned objectives and other normal business. The target of the state, as the real shareholder, were additionally applicable. The firm’s Communist Party Committee additionally had critical control over key areas, for example, strategic planning.
The consideration for the change in the corporate governance began after the launch of two stock exchanges is Shanghai and Shenzhen. The Chinese Securities Regulatory Commission (CSRC) took initiatives to make changes in the corporate governance. The CSRC set out to ‘supervise the behavior of listed companies and their shareholders who are liable for relevant information disclosure in securities markets’.
The regulation on the State-Owned Assets of Enterprises was declared to protect the country’s essential economic framework, to set and add to the state-owned division, fortify the security of state-owned firms, permit the state-owned segment to assume a predominant part in the China’s economy, and progress the advancement of a normal business sector economy. The regulation represents the basis that performs the capacity of economic specialist, undertakings with trusts from the state, the choice administrators of endeavors financed by the state and the evaluation of their execution, critical matters bearing on the rights and premiums of the speculator of state-claimed resources, operational plans of state-owned firms, management of state-owned assets and lawful liabilities.
The major difference between the US system of corporate governance and SOE is that the US system is based on the single tier governance. This means that each company has a single Board that includes executive directors who are either employed by the company or have significant ties to corporate management, together with non-executive directors who have no direct relationship with the company or its management.
Unlike the Chinese corporate governance system, US systems allows the leadership duality. The company CEOs are empowered to serve as Chair of their corporate Board, which is prohibited in two-tier governance systems. Depending upon the viewpoint, this either increase board responsiveness to corporate concerns or reduces Board independence.
Moreover, the US system consists of standing committees that create permanent committees such as Audit, Compensation and Nomination. Minority shareholder rights are the special regulatory provisions of the US corporate governance system. Further, this system has comprehensive disclosure requirements across a wide range of information and a complex, well-regulated system for shareholder communications.
The chairman Zhang claims that the position of the government in China Netcom Case Study Solution Help is very similar to that of a majority shareholder in a US corporation. It is agreeable that all share ought to convey the same rights. All investors ought to have the capacity to acquire information about the rights joined to all purchase and classes of offer before they buy. Any changes in voting rights ought to be liable to support by those classes of offer that are adversely influenced.
While the corporate governance issues arising from the part of the State as an owned shareholder are a sub situated of the more extensive issues that emerges from the part of a owned Shareholder in dispossessing minority shareholder rights in an organization, there is one central contrast between the position of minority shareholders in a State owned enterprise (SOE) when contrasted with the position of minority shareholders in an ordinary business venture.
It can be possibly contended that the minor demonstration of posting of a SOE does not transform them into an industrialist element whose sole point turns into that of amplifying the estimation of the enterprise; the inalienable clash between more extensive “national interest” (sought after by the State) and the “minority interest” (sought after by the minority shareholders) frequently proceeds in a SOE prompting a vital essential issue between two arrangements of shareholders who may have diverse targets.
The China Netcom Case Study Solution Help went through planned reorganizations in order to get listed on overseas stock exchanges. It was listed on Hong Kong and New York Stock Exchanges in November 2004. The total capital it raised was about 1.14 billion US dollars in two offerings, whereas it raised about 52.3 million US dollars from its listing in New York Stock Exchange.
The listed assets of the company on the stock exchange included the wire line telecommunications operating system in six provinces in Northern China. The company was listed on the foreign stock exchanges mainly due to the reason that company wants to raise capital from the international markets such as New York and Hong Kong. In this regard the company is able to raise enough capital from their listing.
However, as a consequence the company faced several different rules and regulations for being listen on two major stock exchanges. This increased the company’s requirements to comply with the corporate governance laws, as being exposed to the global capital markets.
Firstly, knowing that it had to follow strict rules it began to change its corporate governance policy and separated the role of Chief Executive Officer (CEO) and Chairman of the company. Furthermore, it created separate committees under the board of directors, including the Corporate Governance Committee, Strategic Planning Committee, Audit Committee and Compensation Committee.
The formation of these committees in order to comply with the stock exchange regulations have increased the basis of compliance significantly due to being listed on two stock exchanges, to which the Chairman Zhang claimed that the company’s position of government is similar to that of majority shareholders in US Corporations. These can be seen as costly as compliance requires series of administration requirements and extensive reporting will surely lead to higher costs implications.
Moreover, due to dual listing the company’s labor income fell as the company could not pay them the additional welfare generated by its non-core businesses. Along with this, the company concentrated more on its core telecom business and many other profitable cash generating businesses were dropped such as, travel agencies, schools, hotels, etc.
China Netcom Case Study Solution Help was going through the problems due to weaknesses in their corporate governance. The main governance problems that inspire the company to proceed with the governance change are majorly these weaknesses. Firstly, high concentration of government ownership and its influence in the company which deterred the decision making of the company as well as strategy, because of the government having different objectives as compared to a corporate entity.
Secondly, the corporate ownership structures are not transparent within Chinese companies as compared to that of other economies, which contributed towards increased compliance for the company.
Thirdly, the problems with the execution of shareholder rights within the company, this might be a problem for due to opaque ownership structures of the company. Other than this, there was also lower levels of compliance with financial accounting principles and disclosures which may lead to further implications that will reduce the credibility of the company’s financial statements and lack of shareholder trust, and hence the company’s image.
Lastly, insufficient independence of board of directors and as a result their effectiveness, as well as lack of shareholder activism as signs of great threat to the company’s corporate governance. That is why McKinsey was inspired to suggest a path for improving corporate governance of the company.
In order to evaluate and improve the corporate governance structure, McKinsey interviewed the executives, directors, and staff. He then analyzed that the company would have to comply with the regulations provided by the New York Stock Exchange and Hong Kong Stock Exchanges where it was listed. The process improvements should be transparent and open to all shareholders and general public to allow for rational decision making. The program improvements should balance the interest of all stakeholders of the company and all parties should agree to be proactive in order to achieve the improvements in governance strategies and their implementation.
Although McKinsey praised the corporate governance structure of the company, however, he suggested areas of improvements to be made mainly in two different perspectives, i.e. ‘hardware’ and ‘software’. Board hardware was related to the structure entities and committees that contribute to the corporate governance structure of the organization. Whereas, board ‘software’ was related to the responsibilities and processes of the entity under this structure.
First suggestion made by McKinsey was the integration of the nominating and corporate governance committees in order to create a dedicated compensation committee. This change was meant to improve efficiency and to promote these committees to put greater emphasis on their broader responsibilities.
Secondly, a separate compensation committee would focus on developing processes for assessment of the directors and senior management’s performance. This will include reviewing and approving performance based compensation for directors and senior management, with the recommendations provided by the non-executive directors.
In addition to this, a stock option program and allocation of the options, as well as collaboration to board of compensation for all directors and executives. China Netcom Case Study Solution Help will also have to contend with the changes in US regulatory environment under the new law passed, such as, the Sarbanes Oxley Act (SOX), leading to greater compliance requirements for US listed companies.
Moving towards board software improvements McKinsey suggested that the design of Netcom’s corporate governance policies were key focus of its governance problems. ‘Software’ was defined as the rules ant steps in the process and tools that may be used to implement the new governance policies. These mainly includes the following improvements.
Firstly, the guidelines for the board of directors of how to pass new policy and what will be the procedures. This will be followed by the procedural rules for the board and board committees that must be followed in order to comply with the effective corporate governance rules. Thirdly, the terms of reference of the board and guidelines to be designed that can be referred to whenever making out new policies and taking new steps.
Code of ethics were also proposed for the directors which will measure the performance and evaluate directors of the company. Additionally, formulation and implementation of the rules for succession planning of the senior executives of the company. He also proposed the interim measures to be formulated for performance evaluation of senior executives and of management. Furthermore, the interim measures for the joint meetings between the board and chairman of the staff congress, as well as the measures governing the attendance of staff representative on the meeting of BODs and committees.
The suggestions given by McKinsey might solve the problems faced by the company, in relation to its corporate governance structure, to greater extent of what it was currently facing. However, other improvements might also be made in order to comply with the corporate governance laws to the fullest. Such as, the number of board of directors both executive and non-executive, the company secretary, the services that can be taken from the company’s auditor, etc. in accordance with the US corporate governance laws that are way stricter than any other country.
The change in value with regard to the implementation of the corporate governance policy is calculated in the Excel based on several assumptions. The weighted average cost of capital is calculated based on few assumptions about the market. However, the market capitalization is taken from the year 2005 for the evaluation purpose.
Equity beta is considered to be 0.72, representing slightly lower risk than the market is having at the current moment. Moreover, the risk free rate is assumed to be 5% whereas, the market premium is assumed at 4%. Having this data, we have calculated the equity beta for China Netcom Case Study Solution Help which is equal to the 9%.
The free cash flow has been taken for the valuation purpose. The free cash flow for the years 2005 and 2006 is provided in the annual report of the China Netcom Case Study Solution Help. The figures are $7476 and $6236 for each of the years 2006 and 2005 respectively. For the valuation purpose, the terminal value of the company is calculated in each of the two years assuming that the corporate governance policies are implemented in China Netcom Case Study Solution Help.
Implementing those corporate governance policies let the company attain more benefits financially and non-financially. However, when a company implement more comprehensive corporate governance policies, non-financial benefits are more than that of financial ones. But on a longer term, these non-financial benefits assets the financial side of the company hence giving rise to profitability and improved financial position in the market.
From the revenues of 2005 and 2006, we can calculate the growth rate between these years so as to find out the terminal value. The growth was however slow with only 1.234% increase in the revenue from 2005 and 2006 but this can be used for the valuation purpose. Combining the terminal value with the year’s free cash flow, we have calculate the value of China Netcom Case Study Solution Help as $99753 million in 2006 and $83207 million in 2005.
This clearly indicates that the valuation of the company has increased following the implementation of the corporate governance policy. There is an increase of $16545 million in the valuation of the company. This increase can be considered as the significant and can form part of our revaluation that the implementation of corporate governance has given rise to the company as whole.
Assuming that the 2006 financial data does not incorporate potential benefits from improved corporate governance mechanism yet, the valuation of the company would be $99753 million. However, if we assume that the corporate governance policies would be implemented following the year 2006, we can say that the valuation of the company would then be $116298 million ($99753 +$16545).
Whereas, the assumptions remained the same as the basis of this valuation. Other qualitative factor could also be available but we cannot incorporate those factors into the numerical data but those factors can work as an assistance to the financial factors. Incorporating new corporate governance policies would give rise to the profitability of the company but also would make the management of the company more efficient that would eventually benefit the company as whole.