Indian companies with global ambitions are better governed than their Chinese counterparts, a Harvard professor says. But in competition, it may not matter
Indian companies aspiring to become world-spanning multinationals demonstrate better corporate governance than their Chinese rivals, says Tarun Khanna, a professor at Harvard Business School and author of a new book, Billions of Entrepreneurs: How China and India Are Reshaping Their Future and Yours. But Chinese companies may not need world-class governance to emerge as fierce competitors, says Khanna. Here are edited excerpts from a recent conversation:
Much as their societies and political systems are different, are Indian and Chinese companies complete opposites when it comes to corporate governance?
Absolutely. Indian companies are so much better governed. India is sort of a noisier version of the U.S. system, which is that you have to be accountable to shareholders and all the other stakeholders. The principles are the same, but the information acquisition is a little bit more problematic in India compared to the U.S. It's not so easy to figure out everything you need to. But there's a very vibrant, credible business media. No opinion is forbidden to be expressed. Information is noisy and unbiased—no one is willfully distorting the truth.
China is the opposite—it's noise-free but biased. You get a clean story but the story isn't always right. There are views that cannot be expressed.
Which country has more independent boards of directors?
In India, there is a spectrum of companies, such as Infosys (INFY), which on some dimensions is better governed than companies in the West in terms of how quickly it discloses things and how quickly it complies with Nasdaq norms. At the other end of the spectrum you have companies that are still the fiefdoms of families, many of which are badly governed. But even those companies are accountable to the market. Market pressures will force them to clean up their act to some extent. The equity markets function so well that it's hard to believe you could be a continuous violator of norms of good governance and still have access to the equity markets.
And what about China?
None of that matters in China because the financial markets still don't work in the sense that we think of them working in the U.S. In China, all stock prices move together. They move up on a given day or they move down. There is no company-specific information embodied in the stock price. You can't possibly decide that a company is good or bad because the market isn't working in that sense. What you see is aggregate enthusiasm, or lack thereof, for China Inc. The market is not putting pressure on managers to behave in ways that approximate corporate governance in the West.
Do the Chinese have boards with independent directors?
There are many boards that are beginning to look like Western boards—some independent directors. For sure, there is an internal struggle on the boards in which the newcomers are trying to educate and coax the older guard to begin to adhere to some norms. In my book, I talk about the attempted Chinese takeover of Unocal. Two things were interesting. One is the naïveté and inexperience that the Chinese displayed on cross-border mergers and acquisitions. But when it came to an acquisition of a stake in Rio Tinto (RTP) recently, they were much, much smarter. You know there is something positive happening—the internal dynamic of the board is moving in the right direction.
That said, most of the boards are still answering to the Communist Party. The question arises, "What happens when there is a conflict of interest between an outside shareholder and the Party?" I suspect the Party wins.
Is there any political interference on Indian boards?
Not in the private sector. No more than there would be in the U.S. In the state-owned enterprises, yes, there would be political influence. Holstein is an independent business journalist and author in New York. info@goliveideas4.com >> http://www.goliveideas4.com
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