HONG KONG -- The idea of two competing, publicly listed companies swapping chairmen might seem strange to most people. But for China's state-owned enterprises, where top personnel changes are just part of the large Communist Party apparatus, it is not all that unusual.
Around noon on Aug. 24, 2015, China Telecom and China Unicom (Hong Kong) each announced the resignation of its top leader. Wang Xiaochu of Telecom and Chang Xiaobing of Unicom were to step down as chairman and CEO of their respective companies, simultaneously, effective that day. Later, both companies confirmed that the two men would swap jobs.
The switch happened because the Communist Party decreed it, without specifying its reasons. On the same morning, Wang Jingqing, deputy director of the party's organization department, had announced the move at internal meetings of the two telecommunications providers' respective parent companies -- China Telecommunications Corp. and China United Network Communications Group, or China Unicom Group.
Though similarly named as their listed subsidiaries, the two parent companies are themselves unlisted. They are fully owned by the State-owned Assets Supervision and Administration Commission, or SASAC, a cabinet-level organization within the Chinese government. As the entity controlling the government, the Communist Party is the ultimate owner of these state-owned enterprises, or SOEs.
Also, in each case, the same person concurrently holds the top position at both the parent and the subsidiary. The change of chairmen at the parent companies was copied by the subsidiaries and later ratified by the board at each company.
Because Wang Xiaochu used to be vice president at China Mobile Communications Corp., he wound up in the top management of all three carriers. Chang, meanwhile, lost his new position when the Party's Central Commission for Discipline Inspection, the most powerful investigative organization in the country, placed him under custody and, on July 11, officially stripped him of his party membership amid claims of fraud and corruption.
In May 2015, a top personnel reshuffle at China's three biggest oil companies was announced in a similar fashion by the party's organization department -- putting Wang Yilin, then chairman of CNOOC, in the same position at PetroChina.
"What this basically shows is that the board of directors of SOEs does not call the shots," said Jamie Allen, secretary general of the Asian Corporate Governance Association. "The basic concept around the world that the board appoints the chairman and CEO, oversees the management, makes major strategic decisions, or works closely with the management -- that doesn't hold in SOEs in China."
In fact, Chinese law substantially requires companies to establish party organizations and to "provide necessary conditions" for them to operate in accordance with the party's constitution.
New guidelines, revealed last September by the party and the government, to "deepen reforms of SOEs" stipulated further enhancement of these corporate party cells. The "comprehensive demands" from the party ought to be written into the company's articles of association in order to "make clear the legal status of the party organization's position in the corporate governance structure of the SOEs." According to the directive, the new requirements were put in place because the function of the party cells at some companies had been "weakened."
Wu Jinglian, a reform-minded octogenarian Chinese economist, spoke out against this system at a forum in Shenzhen in April this year, implying companies' boards -- not the SASAC and the party -- should make decisions.
On top of such inherent structural problems under one-party rule, the principle of letting the stock market discipline listed companies is not quite operational. A recent example is voluntary trade suspensions, which came under the spotlight last summer when the market crashed. At one point, well over half of the shares became untradeable.
MSCI cited this as a factor in declining, once again, to include Chinese companies' yuan-denominated A-shares in its emerging markets index, a benchmark for institutional investors globally, citing "liquidity risk."
"The China A-share market practice remains unique not only for emerging markets but for all markets covered by MSCI," Chin Ping Chia, MSCI's head of research for the Asia-Pacific region, said on a conference call following the announcement in June.
The rare proxy fight in China over China Vanke, the country's largest residential property developer, may become a test for corporate governance. The possibility of being taken over may theoretically put pressure on management to strive for better administration and may become a lesson for others -- but here again, voluntary suspension was used while management looked for a "white knight."
Vanke was able to suspend trading of its Shenzhen-listed A-shares for more than half a year, but it was only allowed to suspend its Hong Kong-listed H-shares for less than a month. When the suspension of A-shares was lifted on July 4, they dropped by the 10% daily limit -- while the H-shares jumped 7%, as more recent developments had been reflected in the price.
Allen of the Asian Corporate Governance Association said one of the lessons from this case is Vanke's decision to suspend its A-shares for such a long time. "That is not necessarily great for minority shareholders, because you get stuck with a suspended company," he said.
In a survey of institutional investors by the U.S.-based proxy adviser Institutional Shareholder Services, none of the respondents viewed corporate governance in China favorably. In the anonymous online query, conducted in March 2014, the top reason not to invest in China was "concerns about corporate governance practices."
Among all the corporate governance concerns, lack of transparency topped the list, followed by items such as abusive related-party transactions. One of the respondents was quoted as saying, "Our biggest concern on abusive related-party transactions is made worse by the lack of transparency."
Since the stock market was reopened in Shanghai in December 1990, China's equity market has indeed come a long way. The market capitalization of Shanghai and Shenzhen combined has surpassed both Tokyo and Hong Kong. Eight of the top 10 Asian companies by market capitalization are Chinese, and six of them are state-owned -- China Mobile, PetroChina and the four major banks.
Still, questions about corporate governance remain.
Speaking in April, Wu, the economist, said the same thing he has been saying for the past two decades: "China's stock market is like a casino without rules."