A Comparision of Corporate Governance in China and India

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A Comparison of Corporate Governance in China and India With the U.S. Dr. Steven Mintz, California Polytechnic State University, San Luis Obispo, CA Dr. Sudha Krishnan, California State University, Long Beach, CA ABSTRACT We examine corporate governance systems in China and India and compare them to provisions of the Sarbanes-Oxley Act and NYSE listing requirements in the U.S. In China, the influence of the State as the primary investor in state-owned enterprises restricts the degree to which the board of directors can be independent decisionmakers and the board has overlapping responsibilities with the board of supervisors. China needs to convince foreign investors that state-owned enterprises and state interference will not impede the efforts of multinationals to operate in that country. In India, the influence of individual shareholders is muted because of the importance of family-owned businesses and government influence in key sectors. Unlike the U.S., in China and India the nonmanagement directors are not required to meet separately with management and the audit committee does not have to meet separately with management or the external auditors. The requirement in China and India to “comply or explain” deviations from corporate governance provisions is stronger than in the U.S. which only has a compliance certification requirement. However, in both China and India the implementation and enforcement of corporate governance provisions has been restrained due to overlapping responsibilities of regulatory authorities and a lack of enforcement. INTRODUCTION Corporate governance plays an essential role in promoting confidence in international markets. The globalization of business and need for access to international markets create a demand for strong corporate governance systems. According to a 2002 McKinsey investor opinion survey, investors who were open to paying premiums for shares were, on average, willing to pay a 25 percent premium for well-governed Chinese firms and a 23 percent premium for well-governed Indian firms (Barton et al., 2004). To be effective, corporate governance principles should emphasize conducting business and managing the company in a manner that promotes ethical and honest behavior, compliance with applicable laws and regulations, effective management of the company’s resources and risks, and accountability of persons within the organization. The role of the board of directors and executive officers once they have agreed on the principles is to set the appropriate ethical tone for the company and communicate these principles throughout the organization. Without an ethical organization culture, it is unlikely that the corporate governance systems will be effective. This paper examines corporate governance changes in China and India. China and India were chosen for this study because of their rapid economic development and need for strong corporate governance systems to support international investment. The purpose of this paper is to compare corporate governance systems in China and India with regulations in the U.S. under the Sarbanes-Oxley Act of 2002 (SOA) and New York Stock Exchange (NYSE) listing requirements, and to identify differences in systems. We also evaluate the usefulness of recent changes in China and India and identify the implications for the continued growth and development of market economies in these countries. CORPORATE GOVERNANCE IN THE U.S. The corporate governance rules in the U.S. are designed to protect the interests of shareholders that may include individual owners of stock, companies owning and/or controlling corporate entities, and institutional investors such as the California Public Retirement System (CalPERS). The Securities and Exchange Commission (SEC) establishes accounting and financial reporting rules for publicly-owned companies in the U.S. while the Public Company Accounting Oversight Board (PCAOB) that was established by the Sarbanes-Oxley Act of 2002...
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