CORPORATE GOVERNANCE China’s Governance Buy Up

Professor Jean-Christophe Iseux, Beijing-based Chinese economic expert, thinks commentators have got the significance of Lenovo Group’s purchase of IBM’s PC business all wrong. “They think it is about China acquiring an immediate five percent slice of the world PC market. It is of course but,” according to Iseux, “it is more about China’s desire to enhance the management and governance skills of its senior executives and directors.”
Iseux, Frenchman who has been resident in Beijing for the past eight years, was in New Zealand last month to brief New Zealand business leaders on the trade potential of China’s decision to begin free-trade talks with this country. And for the past two or three years he has been researching book on China’s corporate governance and management model.
Most Chinese companies are supervised by the State Asset Supervision Administration Commission (SASAC) in the sense that SASAC takes shareholding in strategic businesses. China’s ‘going out’ policy has them acquiring companies to “enhance the management and governance skills of their directors and managers as well as enhancing their worldwide market share of key industry sectors”, he says.
The deal to buy IBM’s PC business satisfied both goals, but in particular it satisfied China’s desire to make directors and senior executives “more aware of how other companies in the world are behaving in respect of their internal management”, says Iseux.
“The Chinese believe that true and efficient corporate governance will lead their top firms to be very competitive in the world. That is an interesting internal view – not an external view. It is also an assessment they have of the way in which Chinese companies are now run and that they are not run effectively.”
As consultant to the Chinese government, Iseux has an insider’s understanding of the way in which China views the world economy and its evolving place in it. And, he says, there is no question that it wants to enhance its management and governance performance.
“The question is; how do we do that? The first way is by physically training their top people by sending them to the National School of Administration and attending lectures by professors from abroad such as myself,” he says. “Second, by sending people abroad to universities and lectures from academics in other countries or by visiting other firms.
“But they don’t feel that this is enough. The Chinese already realise that the only way you can change corporate culture and change ways of managing companies to make them more efficient is to have physical, practical, direct relationship with an organisation that is used to operating in the world outside China.”
Joint ventures are one option. But, says Iseux, “when you have two entities, one Chinese and one foreign and you encourage them to build up new company to run the business you need to have different people working together to achieve learning. That often leads to conflicting views and perhaps deadlock over how to approach an issue and enhance management.
“Consequently – and I was an adviser – we considered acquiring foreign firms outright as another way to achieve the knowledge and experience. For China, this is more winning way because they are not achieving their goal through conflict but rather by integration. This is very much the Chinese way.”
The issue then becomes how to integrate the learning? It is not sufficient to simply apply and adopt America’s approach to corporate governance. It is case of applying what can be useful. “This can only be done pragmatically, step-by-step after the acquisition and little-by-little taking things that can be effectively used in the Chinese [organisational] environment,” says Iseux.
There are, obviously, many differences between the US and the Chinese corporate environments? “The Chinese corporate governance model is organised as matrix level of management and direction which includes an element of the military and the [communist] party in the equation. The US governance and management model is based on market orientation that is alien to the Chinese.”
What is interesting about IBM, according to Iseux, is its Harvard Business School structure of corporate governance where, in some respects, there is an element of matrix management and governance approach. “It is more likely that [IBM’s] structure can be better adapted to the China case. IBM is more matrix structured than most global enterprises.”
China is already “very market driven economy”, says Iseux. “Only five percent of the Chinese economy is centrally planned. The rest is market driven. They are very competitive; otherwise they would never be able to run with prices that are so low. Competition in China is much more harsh than it is in say Europe for example.”
But their competitiveness is, says Iseux, within China environment. “What China is now searching for is to be [more] competitive abroad. This is the difference and the critical issue.”
Evidence suggests that in some sectors China is already globally very competitive and winning an increasing market share in sectors such as electrical appliances where, Iseux says, it has already won about 14 percent market share. “But they are determined to be more competitive outside China and they think better management and governance practices are part of the key to enhanced performance.
“This is the reason they are moving slowly,” he says. “They think they need to examine the concept that if they adopt some aspects of Western management and governance they might, in turn, create organisations that are globally even more competitive [than they are now].”
Iseux believes the strategy will lead China to greater understanding of how the Western world’s business model works and how it delivers competitiveness at micro economic level. “It will also help the rest of the world to wake up to what China can deliver,” he adds.
“For the past 20 years the Western world in particular has been sleeping. The club of Fortune 500 companies has been quite stable and relatively unchanged or challenged over that time. This is not healthy. The world has been sliding away from its competitive commitments,” he says. “The old and wealthy countries need to get back onto the track of competitiveness – alternatively the [commercial] decadence of Europe will go further and the US will follow.”
Iseux thinks it is good for the world that China is “finally emerging as globally competitive country”. He calls it “extremely positive” but warns many Western (read US and European) companies will suffer. “But I think that is healthy for the world in the long term,” he adds.
China will, in his opinion, learn rapidly about world economics now that it has decided it wants to be global player. It will learn faster than the West will respond. But, says Iseuz, “the world will adapt and respond and be more competitive again”.
Iseux also suggests that if China were still in its inward-looking communist-managed phase, the world’s economy would now be in, or headed for recession. China has, he says, “adopted this amazing policy in the past 25 years of turning itself into an economic growth country. That approach is now driving Asia and it will in turn be driving the world. China’s approach [to economic management] is recipe for not having any serious economic downturn,” he says, pointing to the way in which China kept it currency steady to help other Asian nations through the last major economic downturn in the late 1990s. If China had cut its currency free of the US dollar and devalued it would have “devastated” other struggling Asian economies.
Iseux thinks China has presented New Zealand with “golden [trade] opportunity” by selecting us as its first free trade partner.
“New Zealand’s relationship with China is very benign,” he says. “New Zealand can bring lot of issues, like sustainable development, to the table. Sustainable development is ultimately critical to China. China will listen to

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