Issue 16, February 2009

| English | | | UGC | RGC
Postgraduate Research Fellowship Scheme
Risk Management and Corporate Governance Practices of Listed Chinese Companies
Modeling Default Correlation Using Credit Contagion Approach
Margin Setting Methodologies Under a Constraint of
Change Frequencies
A Longitudinal Study of Parental Control in Early Adolescence in
Hong Kong
Demographic Analysis of Healthy Longevity in China
Chess for those Playing From The Heart
RGC Public Lectures - Cancer Research

Sound corporate governance principles are increasingly being recognised as the foundation upon which the trust of investors is built and risk management can be assessed. Acknowledging the importance of good corporate governance among Mainland Chinese listed companies has been the focus of a research project undertaken by Professor Stephen Yan-leung Cheung, at the City University of Hong Kong Department of Economics and Finance.

"As corporate governance is now a key factor in investment decisions, it acts as a mode of brand differentiation. Corporate governance therefore has far-reaching implications, not only to a particular company and investors but also to the market or economy as a whole," said Professor Cheung, whose research results have been published in the China Economic Review and European Financial Management.

He said statistical evidence revealed a positive relationship between shareholders of listed companies that implement strong corporate governance strategies. "It became clear from our research work that many Mainland listed companies have made significant strides toward improving their corporate governance strategies during the time we started our analysis in 2004," revealed the Professor. "The message we want to provide to companies is corporate governance needs to be an integral part of their activities because the market and investors are watching."

The Professor said one of the areas the research team wanted to explore was whether investors cared about risk factors -- a key area of corporate governance. "Over a four year period we discovered there are positive correlation between stock returns and sound corporate governance," said Professor Cheung.

Using a specially developed Corporate Governance Index (CGI) based on a template devised from the Organization for Economic Cooperation and Development (OECD) standards, in conjunction with the Chinese Centre for Corporate Governance and Chinese Academy of Social Sciences, Professor Cheung conducted research to assess the quality of corporate governance practices of Mainland Chinese listed companies including finance and non-financial companies. "In the age of globalisation and cross border transaction, corporate governance has never been more important," said Professor Cheung.

For rating purposes, evaluation was based on five OECD categories. These include rights of shareholders, equitable treatment of shareholders, role of shareholders, disclosure and transparency and board responsibilities and composition.

Research was based on the perspective of outside shareholders information publicly available when making investment decisions. Data sources included annual reports, articles of association, memorandums of association, notices to call shareholder meetings, annual general meeting minutes, company websites, analyst reports and other sources available to the general public. Professor Cheung and his team also set out to establish how many independent non-executive directors sat on company boards.

He said high profile corporate scandals across the globe have highlighted the importance of effective corporate governance – the policies and practices that determine how a corporation is operated and governed.

Professor Cheung's research differed from other corporate governance reviews by specifically adding quantitive elements in order to access the amount and quality of information available. Each company was rated twice by different raters with the final results crosschecked by an audit team.

Further research revealed overseas-listed Chinese companies tend to focus more on stakeholder relationships, transparency and discloser than non-overseas listed companies. "Fairness, transparency, accountability and responsibility are the fundamental pillars that underline good corporate governance. Taking this a step further, good corporate governance translates to timely, truthful and reliable disclosure on companies’ financial position, performance and the way they mitigate risk," said Professor Cheung.

"In terms of disclosure and transparency investors have become more demanding. Today, investors and companies around the world look beyond their shores for investments and capital. As such, companies, markets and even economies are being benchmarked against international standards and investors' demand that these standards be met before they invest in these markets.

Professor Stephen Yan-leung Cheung
Department of Economics and Finance
City University of Hong Kong