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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
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
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 companys 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.
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
(SOA) oversees public company audits and reports to the SEC. The Act requires that a majority of the members of
the board of directors should be independent of management. Other provisions are addressed below.

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Sarbanes-Oxley Act
1. All members of the audit committee should be independent of management.
2. One member of the audit committee must possess financial expertise.
3. The audit committee appoints the external auditors, reviews and resolves differences between the auditors and
management, reviews internal controls, and reviews major changes in accounting methods.
4. Under Section 302 of the Act, the CEO and CFO must certify in a statement that accompanies the audit report the
appropriateness of the financial statements and disclosures and that they fairly present, in all material respects, the
operations and financial condition of the company. A violation of this provision must be knowing and intentional
to give rise to liability.
5. Under Section 404, management should review internal controls and the auditors should independently assess its
operation and issue a report that is part of an integrated audit of the financial statements.

New York Stock Exchange Listing Requirements

Since the focus of this paper is the corporate development of entities in China and India, and some of these
entities are currently or will apply to be listed on the NYSE, it is important to use the listing requirements as part of
the comparative analysis. What follows are the final corporate governance rules of the New York Stock Exchange
(2003) approved by the SEC on November 4, 2003. Companies listed on the Exchange must comply with standards
regarding corporate governance as codified in Section 303A.
1. Listed companies must have a majority of independent directors.
2. To empower non-management directors to serve as a more effective check on management, they must meet at regularly scheduled
executive sessions without management. Non-management directors are all those who are not company officers and include
such directors who are not independent by virtue of a material relationship, former status or family membership, or for any other
3. Listed companies must have an audit committee with a minimum of three members all of whom are independent of management
and the entity.
4. The audit committee should meet separately, periodically, with management, internal auditors (or other personnel responsible for
the internal audit function) and independent auditors.
5. The committee should review with the independent auditor any audit problems or difficulties and managements response.
6. The committee should report regularly to the board of directors.
7. Each listed company must have an internal audit function.
8. Each listed company CEO must certify to the NYSE each year to not being aware of any violation by the company of NYSE
corporate governance listing standards.
9. Listed companies must adopt and disclose corporate governance guidelines.
10. Listed foreign private issuers must disclose significant differences in corporate governance practices from those followed by
domestic companies under NYSE listing standards.


In China, the traditional State-owned enterprise (SOE) has been undergoing a process of corporate
development since 1984 when these enterprises were encouraged to expand production and earn profits. Under the
State-owned Industrial Enterprises (SOEs) Law of China that was adopted in 1988, the traditional model of stateowned and state-managed enterprises became two-fold: state ownership of property with management rights in
SOEs separated out. Compared with traditional SOEs, the ownership structure of SOE-type corporations includes
better defined shareholder rights than its traditional counterpart along with increased efficiency and accountability.
In China today, the most important legal sources of corporate governance rules are two laws: The
Corporate Law (1993) and the Securities Law (1988). Corporate Law provides the legal foundation to transform
SOEs into different business corporations, including wholly State-owned corporations, closely held corporations,
and publicly held corporations. The focus of Chinas reform of SOEs shifted to corporate governance in 2003, after
designating a specified investor representing the rights of state-owned assets. The State-owned Assets Supervision
and Administration Commission of the State Council (SASAC) was established, serving as the investor of Chinas
then 189 major SOEs.
Governance Structures
The Chinese Securities Regulatory Commission (CSRC) carries out some of the same functions as the SEC
in the U.S. The CSRC Code of Corporate Governance for Listed Companies in China (CSRC 2001) provides a
measuring stick for corporate governance practices. The Company Law requires corporations to form three statutory
and indispensable corporate governing bodies: (1) the shareholders, acting as a body at the general meeting; (2) the
board of directors; and (3) the board of supervisors. The Law also provides for the positions of the chair of the
board of directors and the chief executive officer. Companies that seek a listing on a stock exchange are required to

The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009


adopt sound corporate governance practices, such as the inclusion of independent directors on the board.
Rajagopalan and Zhang (2008) point out that the Chinese government controls about 70 percent of the stakes of
publicly listed companies on these exchanges. The government still exerts considerable influence over the
operations of Chinese companies even as the country moves toward a western form of capitalism.
According to the China Corporate Governance Survey published by the Centre for Financial Market
Integrity (2007), a key component of Chinas corporate governance reform is the privatization of SOEs. More than
80 percent of the SOEs are being transformed into corporate entities under the Company Law to facilitate stock
exchange listing. SOEs consume close to 90 percent of 1,400 listed companies in China. The Survey notes the
following corporate governance challenges for SOEs that pursue privatization.
1. Management teams with continuing links to the Chinese government.
2. State-dominated decision-making that creates conflicts with private shareholders.
3. Overlapping bodies of control in the hands of the board of directors and board of supervisors.
4. Reporting practices that are more often focused on meeting the needs of the major shareholder (i.e., the State) rather than the needs
of investors.

Chinas two-tier structure of board governance is patterned after the German governance system, with a
board of directors and a supervisory board. The board of directors is the main decision-making authority and its
members work closely with management on the day-to-day operations of the company. Conversely, the supervisory
board is an independent board that monitors the executive management and the board of directors. The Centre for
Financial Market Integrity (2007) identifies the roles of the board of directors and the supervisory board as follows:
1. The board of director responsibilities follow the Anglo-Saxon model of corporate governance, where the board oversees and aids
management decision making.
2. Similar to practices followed in the UK and the U.S., guidelines issued by the CSRC require that at least one-third of the directors
on the board be independent.
3. The board of directors is the main decision-making authority, with the supervisory board designated with legal powers to overturn
decisions made by the board of directors.

Lu (2003) notes in a survey conducted for the Chinese Center for Corporate Governance that the factors
affecting the independence of board members in China differ from those in the U.S. Many directors find it difficult
to stick by their positions for fear of upsetting others in the governance process. Because the overwhelming majority
of independent directors are recommended by major stockholders or executive directors, it is unlikely that
independent directors will oppose major shareholder or executive director positions. In China where personal
relationships are treasured it is essential for most independent directors to maintain these relationships to honor
their obligations. These findings tend to justify existing doubts about the independence of independent directors in
The board is accountable to the shareholders and should carry out its responsibilities in accordance with the
law. The members of the board of directors in the U.S. also are accountable to the stockholders but mostly as a
formality since it is difficult for the shareholders to propose an alternative slate of directors. However, institutional
investors often act to represent individual shareholder interests. In China, institutional investor participation in
corporate governance is lacking and an increased role might help to strengthen corporate governance practices and
enhance investor confidence.
Independence of board members is emphasized not only from management, but also from controlling
shareholders. The overlapping responsibilities of the board of directors and supervisory board make it difficult to
maintain the appearance of independence. Moreover, there is no requirement for non-management directors to meet
separately without management perhaps because of cultural considerations that might imply a level of mistrust.
Rajagopalan and Zhang (2008) point out that listed companies in China should have a board of supervisors
with 33 percent employee representation. The authors note that because employee members of the board of
supervisors have reporting relationships with senior managers who conduct performance evaluations and make
promotion and remuneration decisions, it is difficult for these members to play an independent role.
Xiao et al. (2004) report their findings of a study of Chinese listed companies to determine the role of the
supervisory board. The board performs one of four roles: an honored guest, a friendly adviser, a censored watchdog,
or an independent watchdog. The role depends on a variety of factors including characteristics of the board, power
relations between the board of directors and the supervisory board, shareholding structure, the influence of the

The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009


Communist Party of China and government, the role of the independent directors, and the requirements of the
corporate law. The authors conclude that a useful supervisory board is one that serves as an independent watchdog.
However, in most of the surveyed companies the board played one of the other three roles.
The Chinese Corporate Code (CRSC 2001) provides that audit committees should (1) recommend the
engagement or replacement of the external auditor; (2) review the internal audit system; (3) oversee the interaction
between the companys internal and external auditors; (4) oversee the financial information and disclosures; and (5)
monitor the companys internal controls. There is no requirement for an internal control report by management or
separate meetings between the audit committee and management or the external auditors. Otherwise, the role and
responsibilities of the audit committee in corporate governance of Chinese companies is similar to that under the
SOA except that the overall responsibility for the oversight of corporate governance mechanisms is not unified in
one committee but divided instead among shareholders and the board of directors.
Reforms of Governance Systems in China
Schipani and Lui (2002) identify the key issues in building sound corporate governance and corporate
autonomy such as disassociating business corporations from government agencies, reducing government
intervention in business affairs, and substantially liberalizing corporate business activities from government control.
As agents of the State shareholder, government agencies should be permitted to exercise shareholders rights on
behalf of the State shareholder but should not interfere in the daily corporate management or intervene in a lawful
corporate decision-making process. Eventually, government agencies should fully disassociate themselves from the
SOE corporations under their control. This may be the most difficult goal to accomplish in China as state
involvement in enterprise management has been embedded in the culture for many years. However, it is a crucial
step if China is to move more toward a truly market-oriented economy.
The CRSC Code requires listed companies to include all information that might affect decision-making by
shareholders and stakeholders. This includes information on the composition of the board of directors and
supervisory board and controlling shareholders interests. There is a comply or explain rule in the CRSC Code
similar to the comply or explain requirement in the European Union (EU). The rule attempts to reconcile the
objective of promoting good corporate governance practices in the market with the need to ensure the necessary
flexibility for companies. The CRSC rule requires all listed companies to disclose the gap between their existing
practices and the recommendations in the Code, reasons for any gap, and plans to close the gap. However, there is
no penalty for failing to disclose the gap or requirement that the company must do so.
RateFinancials Inc (2007), an independent research firm, studied corporate governance in publicly-traded
Chinese companies whose American Depository Shares are traded on the NYSE and found that the ten largest
Chinese companies by market capitalization received Poor or Very Poor ratings for their accounting, quality of
earnings, and governance. These results are not surprising given the continued role of the government in corporate
affairs as reflected by the position of the State shareholder and the overlapping responsibilities of executives, the
board of directors, and board of supervisors. Moreover, while sound corporate governance principles exist in China,
implementation and effectiveness is lacking.
Corporate governance gained importance as Indian companies started raising funds in foreign markets in
the 1990s. Unlike China where corporate governance rules were a result of the Corporate Code, the corporate
governance rules in India were first introduced by a series of committees set up by the Securities and Exchange
Board of India (SEBI), the Central Bank of India, and the Ministry of Finance. The goal was to make the rules
mandatory by changing the Companies Act of 1956 and the listing agreements of the stock exchanges.
The first set of governance provisions were set out in the Confederation of Indian Industry (CII) Handbook
Corporate Governance: A Code (1998). These provisions were voluntary and include recommendations for
independent non-executive directors (NEDs) and an audit committee. It was also suggested that CEOs and CFOs
should sign a compliance certificate related to the financial statements, making them responsible for the accuracy of
the financial statements. The following discussions of committee reports reflect actions taken by the Indian
government to introduce corporate governance regulations.

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Corporate Governance Regulations

The Kumar Mangalam Birla Committee on Corporate Governance (2000) made mandatory and nonmandatory suggestions including that one half of the Board must be comprised of independent NEDs. The
committee also recommends that a qualified and independent audit committee should be set up by the board. The
audit committee should have a minimum of three NEDs with the majority being independent, and at least one
director should have accounting and financial knowledge. There is no requirement for the audit committee to meet
with management or the external auditors. The Birla report makes Management Discussion and Analysis (MD&A)
mandatory in financial reports and it calls for an internal control report. However, there is no requirement for the
external auditors to review the report and make an independent assessment as required by the SOA. An important
suggestion is that there should be a separate section on corporate governance compliance in the annual report
highlighting non-compliance with any of the mandatory recommendations and the reasons thereof. The auditors
should also attest to the compliance of the corporate governance recommendations and issue a certificate to the
relevant stock exchange.
The Narayana Moorthy Committee (2003) was set up by the SEBI to help implement the recommendations
of the Birla Committee by developing amendments to the listing agreements of companies with stock exchanges.
The report of the Committee resulted in the amendment of Clause 49 of the listing agreements in 2003. The Naresh
Chandra Committee (2003) issued a report on the role of external auditors and whether an organization such as the
PCAOB is needed in India. The Committee recommends that the annual accounts have to be certified by the CEO
and CFO.
The JJ Irani Committee Report (2005) suggests major amendments to the Companies Act 1956 including a
definition for independent director. An independent director is defined as a non-executive director of the company
who does not have any material financial or transactional relationship with the company, its promoters,
management, holding company or any associate company. None of the directors relatives can also have any such
relationship. The director or his relatives cannot be employees of the company, the statutory audit firm, internal
audit firm or consulting firm. They cannot hold more than 2 percent of the shares of the company.
Clause 49 requires that if the chairman is not independent (executive chairman), then 50 percent of the
board should be independent. If the chairman is a non-executive, then only one-third of the board members need to
be independent. The Irani Report suggests that it is acceptable for one-third of the board members to be independent
regardless of the independence of the chairman. There is no requirement for non-management directors to meet
without management.
Implementation of Corporate Governance Standards
Though the corporate governance recommendations by all the committees were impressive and
significantly increased voluntary standards in India, there are serious problems in implementation. The CII
Handbook is voluntary and has not been adopted by many companies. The process of implementation began when
the listing agreements were amended. Listed companies have to follow Clause 49 of the listing agreement that was
phased in between 2001 and 2005. The Birla Committee recommendations for an independent board of directors,
audit committees, and CEO/CFO certifications have been incorporated into Clause 49. Companies now file a
corporate governance compliance report with the stock exchanges. Currently, the JJ Irani Report on the amendment
of the Companies Act is being discussed. The government of India has set up a National Foundation for Corporate
Governance to provide a framework for best practices and foster a culture for promoting good governance.
In its report on corporate governance codes in 30 countries titled Report on the Observance of Standards
and Codes (ROSC), the World Bank (2004) notes that a significant problem with corporate governance in India is
the institutional framework resulting in regulatory overlap that weakens enforcement. The report suggests a more
streamlined approach and increased fines for violations that would deter fraud. Also, the report documents major
gaps and lapses in the implementation of governance rules.
Indian companies such as Infosys Technologies Reliance Industries have voluntarily implemented most of
the recommendations of the various Committees. Notably, these companies have a strong international presence and
are listed on the NYSE. The NYSE requires that listed international companies should follow the same corporate
governance standards imposed on U.S. companies. Therefore, it is not surprising to find the larger Indian companies
moving in this direction. However, The Financial Express (2007) quotes a SEBI finding that a lack of compliance
with clause 49 exists thereby preventing compliance with listing requirements.

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A survey by Balasubramanium et al. (2008) indicates that many of the governance requirements need to be
better implemented but enforcement of international compliance is weak and Indian companies are only now starting
to conform. The Business Standard (2009) India news service points out that the current scandal at Satyam
Computers has forced the SEBI to review Clause 49 with a view to increase the powers of independent directors and
disclosure requirements. Though the company was compliant with the governance requirements, the NEDs did not
seem to question any actions of management.
The profile of investors and their participation in assessing management in Indian companies is quite
different from those in the U.S. or China. Institutional investors in India do not have a significant role in assessing
management of a company since they lack industry knowledge and typically are not held responsible for the
performance of a portfolio. Unlike the U.S., India does not have huge pension funds that are activist shareholders
independent of management. In recent years, foreign institutional investors and private investor groups have been
more successful in placing their nominees on the board of directors, although this is due more to negotiations with
management rather than representing general shareholders.
An important issue in India is the lack of independent members of the board of directors in practice,
notwithstanding requirements to the contrary. Many companies are traditionally owned by families whose members
are part of management as well as the board of directors, making it difficult to have a level of independence that
serves as a check on management behavior. According to Rajagopalan and Zhang (2008), 45 percent of all Indian
companies are family controlled.
Table 1 presents a summary of corporate governance provisions in the U.S. that are used as a basis for
comparison with those in China and India. We focus the discussion on differences in these provisions.
Applicability of
corporate governance
Shareholders and
institutional investors

Table 1 Governance Structures in the U.S., China and India

Sarbanes Oxley Act (SOA), SEC, and
Corporate Law 1993, Securities Law
NYSE listing requirements
1998, CSRC
Public companies
Publicly held corporations that can be
listed or non-listed.
Individuals and companies; important
role for institutional investors.

State investor in SOEs; some outside

shareholder ownership; institutional
investors lacking.

Board of Directors
and Supervisors

Majority of independent directors.

Non-management directors meet
without management.

Audit Committee

At least 3 independent directors. Meet

separately with management and
independent auditors. Resolve
disagreements between management
and auditors on accounting issues.
Review internal controls.
Certification required by CEOs and

At least 33% independent directors.

No requirement for non-management
directors to meet without
management. Supervisory Board can
overturn director decisions.
Majority of independent directors
including the chair. Committee
reviews internal audit and controls and
oversees financial disclosures.
Not required to meet separately with
management or auditors.
Does not address this issue.

Certification of
financial statements by
Internal control report
Corporate governance

Prepared by management; auditors

independently assess report.
Disclosure of corporate governance
guidelines; CEO certification. Listed
foreign companies must disclose
practices that do not comply with U.S.

Not addressed by regulations.

Comply or explain gaps between
existing practices and
recommendations in the Code; no
penalty for failing to do so.

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Companies Act 1956, Listing
Agreements with Stock Exchanges
Listed companies
Part family, part financial institution
ownership; government ownership in
key sectors; some public ownership;
lack of significant role for institutional
Between 33%-50% independent
directors. No requirement for separate
meeting of non-management directors.
Family-owned businesses influence
Majority of independent directors. At
least 3 non-executive directors. Chair
an independent director and oversees
the financial reporting. Not required to
meet separately with management or
CEOs and CFOs sign a compliance
statement making them responsible for
the accuracy of the statements;
certification recommended.
Part of MD&A but no requirement for
auditor assessment.
Comply or explain noncompliance
with mandatory recommendations.
External auditors issue a certificate of
assessment of compliance with
corporate governance rules.



China vs. U.S.
It may appear on the surface that many similarities exist between the U.S. and Chinese systems. China
has instituted some of the same reforms that are required in the U.S. by the SOA. However, significant
differences still exist including:
1.The role of the State (SASAC) as an investor in Chinas corporate SOEs.
2.Institutional shareholders do not have an important role in governance.
3.Two-tier system of oversight with overlapping responsibilities of both the supervisory board and the board of directors, and the
board of directors and management.
4.No requirement for separate meetings of non-management directors without management or for the audit committee to meet
separately with management and the external auditors.
5.All audit committee members should be independent in the U.S.; only the chair need be independent in China with a majority of
independent directors on the committee.
6.No required certification of financial statements by management.
7.No requirement for an internal control report.
8.Comply or explain gaps between existing corporate governance practices and recommendations in the Corporate Code; no penalty
for failing to do so. In the U.S., CEOs must certify compliance with corporate governance guidelines of the NYSE.

The most significant issue with respect to corporate governance in China is enforcement of the many
provisions that already exist in the law. Even though China has adopted many of the principles of corporate
governance followed in the U.S. and EU, there is no guarantee that SOEs and public companies will implement
them in the best interests of investors given the critical role of the state representative-shareholders and the
India vs. U.S.
There are many similarities between corporate governance systems in the U.S. and India, probably due to
the long-standing influence of the UK in India. Some corporate governance recommendations in India go further
than those in the U.S. including the need for a corporate governance report and the comply or explain requirement
with corporate governance provisions in Clause 49. The following are differences that exist between the two sets of
1. Overlapping committee recommendations and requirements that are being incorporated into listing agreements makes for an
unwieldy institutional framework.
2. More diverse share ownership including family and some government-ownership.
3. Institutional investors do not have a significant role in governance.
4. Only between 33 percent and 50 percent of directors need to be independent whereas a majority is required in the U.S.
5. Independence of directors can be problematic due to the influence of family businesses.
6. No requirement for separate meetings of non-management directors without management or for the audit committee to meet
separately with management and the external auditors.
7. While the MD&A addresses the internal control report, it does not require auditor assessment.
8. Comply or explain noncompliance with mandatory recommendations. In the U.S., CEOs must certify compliance with corporate
governance guidelines of the NYSE.

The Birla Committee in India has recognized the need for active and independent non-executive directors
to serve as a check on the actions of top management. This mirrors the requirement in the U.S. for greater
independence of the board of directors and that all members of the audit committee should be independent. The
recommendation for financial statement certification, similar to Section 302 of the SOA, also demonstrates the
advanced nature of reform efforts in India when compared with China.
India has modernized its corporate governance system more than China and many of its practices are
consistent with U.S. requirements. The key for India now is to ensure the recommendations of the Committees and
listing requirements in Clause 49 are implemented and enforced by the SEBI.
This paper compares corporate governance systems in China and India to the U.S. using the SOA and
NYSE listing requirements as the basis for comparison. We also assess recent advances in governance in China and
India and what is needed to strengthen governance systems in the future.

The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009


The role of non-management directors and the audit committee in both China and India is weaker than in
the U.S. where the NYSE requires separate meetings of non-management directors without management and for the
audit committee to meet separately with management and the external auditors. The comply or explain
requirement in China and India goes one step further than in the U.S. that calls for CEO certification with corporate
governance provisions but no explanation of any differences. 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.
The main issue for China now is to convince foreign investors that state-owned enterprises and state
interference will not impede the efforts of multinationals to operate in that country. For India, it is more a matter of
creating the mechanisms to enforce good governance practice as already embodied in various committee reports. In
this way, both countries will gain the confidence of international investors and continue to develop financially and
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The Business Review, Cambridge * Vol. 13 * Num. 1 * Summer * 2009


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