Q1

1. Definition: SOEs are wholly state-funded firms: state-owned

enterprises refers to business entities established by central and local
governments, and whose supervisory officials are from the government
(OECD, 2009).
CNC was established by the Chinese government in 1999
(Wikipedia)
2. Interconnectedness of Chinese SOEs

Exist through concentrated shareholding, cross-shareholding &

interlocking directorates which generates mutual relationships.

Through China Network Communications Group Corporation, the

government holds a majority shareholding, see Exhibit 5

3. Supervisory Board

Supervisory board & Employee representation: Chinese SOEs have

a two tier board where the supervisory board consist of members
who are either shareholder or labor representatives, ex Chinese
Company Act.

Supervisors have also a workers relationship and some supervisors are also
executive directors, see Exhibit 1.
6. Stakeholder approach: Similar to Japanese-German model (Liao, 2009)

Stakeholder accountability arrangements, long term focus on

economic development, long term productivity and profitability are
important.

Government focuses on the long term plans with respect to

economic development and technological transformation.

Workers have strong position by their voice-position. They can

influence decision making process and the management is
supported in long-term-contracts.

CNC provides 30% of the domestic wireline capacity. SASAC was created
to help China toward a market economy; approved SOEs strategic plans,
see Exhibit 3.
Most of the workers have a long history with the China Netcom Group and
prior to that they have been working for the MPT, see Exhibit 1.
7. Supervised by the PRC State Owned Assets Supervision and Administration
Commission (SASAC) which ensured that the firms under control of the
government retain their value, see Exhibit 3.

 CNC is supervised by the SASAC, see Exhibit 5.

SOE: (Insider Type)

Creation

Anglo-Saxon Model (Open

type)

Wholly state funded;

Privatly funded
Government is the majority
shareholder

Control

Based on long term

Based on law, contracts and selfrelations and mutual
responsibility; Exit mechanism.
reliance
(Interconnectedness); voice
mechanism

Board structure

Two tier; Stable

management &
employment

One tier; incentive mechanism

works for managers

Monitoring

Government; main bank

Various kinds of monitors

Transparancy

Insufficient disclosure

Sufficient disclosure

Decision making

Stakeholder approach

Shareholder approach

Market control

No M&A market due to

Active M&A market
concentrated-shareholding;
less foreign investors

Q2 Differences

Shareholder

Market
position

CNC
U.S. system
Government through
SASAC. SASAC has
Majority shareholders are
strategic linkages to other
equally divided between
business groups (all other corporation and individuals and
Chinese SOEs),
are typically both directors and
governmental organs and
officers.
the state party.
Creates law; ability to
Limited by law; no abilitity to
create barriers and affect
distort competition
competition

Vulnerability

No market pressure;
backed up by the
government

Affected by market conditions

Corporate
control
change

No change in control

Change in control, because of

the M&A market

Appointment
of
Management

Management is appointed
by the Government;
merely based on political
relations

Management is appointed
based on their merits

Position
Management

No threath of hostile
takeover; no threath of
bankruptcy; no personal
wealth at stake

Threats of hostile takeover,

bankruptcy in case of
insolvent, personal wealth at
stake

Investment
perspective

Political; long term; social

goals

Economical; short term; profit

maximization

Similarities

Both having major financial stake in the company

Both can exercise control as having a majority percentage of the shares

and/or voting rights

Q3
MAIN REASONS FOR LISTING IN HONG KONG AND NEW YORK OVER
LISTING IN CHINA
The following reasons were taken into account when deciding to list in Hong Kong
and New York and not in China.

International visibility

Attract more global investors and capital

Higher number of offerings

More diversified investors who are willing to pay a higher price

Higher average first-day returns

Better reputation among businesses

Stronger currency

CONSEQUENCES OF LISTING IN HONG KONG AND NEW YORK

The following consequences derive from the decision to list in Hong Kong and
New York.

Exposed to additional regulations of capital markets

Exposed to additional corporate governance procedures

Improved evaluation of management performance

Implementing a controlling body responsible for ao appointment of

independent and external boards and management

Creation of various committees (for strategy, planning, audit,

compensation) independent from boards

Change of culture; employees work for shareholders and nor for the state

More involvement of employees

Profitable non-core business disappears

Changed role of the labor union

Q4
MCKINSEYS KEY OBJECTIVES TO CHINA NETCOM

Comply with HK and NY regulations and meet best practices

Transparency for rational investment decision making

Balanced interest of all stakeholders (majority and minority stakeholders,

employees)

Pro-actively implement governance framework

MCKINSEYS MAIN ISSUES WITH GOVERNANCE (A)

AND SUGGESTIONS TO RESOLVE (B)
1.A Improper and not independent decision making
1.B Build a board with non-executives, separate role of Chairman and
establish independent board committee

CEO,

2.A Insufficient focus on directors and executives performance,

compensation package including stock option program
2.B Establish a dedicated compensation committee
3.A Insufficient selection criteria for board and executives, improper overseeing
company governance structure, not optimal composition and expertise of board
3.B Establish a nominating and corporate governance committee
4.A Insufficient protection of all shareholders
4.B Establish a supervision committee, design code of ethics and
code of
conduct, ensure compliance to laws and
regulations to the benefit of interest
of all shareholders
5.A Risk of not meeting listing rules including reporting requirements
5.B Establish audit committee with independent members, appoint
firm

new audit

6.A Unclear policies (rules, process, tools)

6.B Implement guidelines and rules for board and committees, decision making
of major initiatives should be formalized,
implement strategic planning
process, implement tool for transaction flows to document proposals, reviews
and approvals, implement other tools and make
outcome transparent for
relevant parties
ADDITIONAL MEASURES

Regulated financial reporting (SOX)

to achieve more transparency

and accountability

Improve training and education to ensure

proper implementation of all
McKinseys recommendations

Q5
Corporate Governance should be taken into account to determine the
price:
Corporate Governance focuses inter alia on control rights which leads to agency
problems (La Porta et al., 1999);
Large controlling shareholders will keep control and steel a fraction of the cash
flow rights. Thus, they have the incentive to extract private benefits of control to
the detriment of minority shareholders. The consequences is that the agency
costs are increasing;
Investors are willing to pay premiums of 1214% on average in both for bettergoverned companies (Lombardo and Pagano, 2000);
Companies with good governance will perform better over time, because good
governance have less likelihood of agency problems or if problems arise it will
rebound more quickly) (La Porta et al., 2002);
Thus, the quality of governance increases the cost of the diversion of
the controlling shareholder with the result that less diversion occurs
and the value of the company is higher.
Voluntary disclosure of governance variables plays an important role in reducing
information asymmetry in markets where governance mechanisms are low
(Saanoun, Tohmai & Arab, 2013).
Concentrated ownership is a feature of French firms, which are often controlled
by large shareholders through different control-enhancing mechanisms (Faccio
and Lang, 2002);
France does not have strong legal protections of shareholders (La Porta et al.,
1998).
Tunneling is likely to happen in companies having weak corporate governance
(La Porta et al., 2002);
In the case of LOccitane en Provence there is a dominant controlling shareholder,
mr. Geigner who owns a fraction () (52,08% before the IPO) of the equity;
When the firms invest in a project the profit will equal cash*rate of return (I*R);
However, if Geigner decides to divert a fraction (s) before he distributes the
dividend, then costs-of-theft (c) will occur;
If investor protection (k) improves and the fraction of profits diverted gets bigger,
the costs of tunneling c(k,s) increases;
The controlling shareholder will select s to maximize: *(1-s)*R*I+(sc(k,s))*R*I;

If s increase by 1%, the the dividend will decrease by (*0.01*profits) & the
private benefits increase by 0.01*Profits-c*Profits;
If s changes, then for each $ the benefit from the s is: (1- )* s- c(k,s);
The controlling shareholder will adjust s untill [(1- )* s]- c(k,s)=0 which
will give the optimal level of steeling;
Thus, the controlling shareholder will have less incentives to tunnel if
(1) Alpha effect ( is high, because he would steel from himself); and/or
(2) Legal protection effect (legal protection is high in a country (k)) occurs.
(3) Thus, the result that better investor protection is associated with higher
valuation is measured with the Tobins Q.
(4) Tobins Q
(5) U.S./ France = 3.0815/1.2728 = 2.4210
(6) Thus, we argue that the company should be listed on NYSE, the company
would have a higher value.