Inside China's board-level revolution

John Thornton went from being president of Goldman Sachs to becoming one of the few westerners to sit on the board of two of China's biggest state-owned companies.

by The McKinsey Quarterly
Last Updated: 23 Jul 2013

In an interview for the McKinsey Quarterly he talked about the challenges and progress of governance reform in China.

As a director of Ford Motor, Intel and News Corporation Thornton brings inside knowledge of blue-chip western businesses to his work in China. He is not merely preaching western ways, however, but hoping to bring the best of western governance practice into a Chinese setting and make it work within the Chinese state-led model.

Thornton started a leadership programme at Beijing's elite Tsinghua University, and from there developed contacts with government officials and the country's emerging business elite. He now sits on the board of China Network Communications (China Netcom) and the Industrial and Commercial Bank of China (ICBC), which in October completed a $21.9 billion initial public offering.

At China Netcom he initiated the creation of a corporate governance committee, the first at a major state-owned Chinese enterprise. This puts the company at the forefront of China's transition to a modern, market economy while at the same time preserving the leading role of the state in the country's major enterprises. Thornton believes the development of corporate governance can play a key role in ensuring that "managers of the economy's core enterprises are focused on the right issues".

The 'big 163' state-owned enterprises are meant to act as models for many smaller state-owned enterprises in terms of corporate governance. Thornton points out that the joint venture and Western subsidiaries are already "doing more or less what Western companies do anywhere in the world".

He says Chinese government officials know that they need a system of corporate governance that will meet the standards required when they float these companies in Hong Kong, New York or London. They are also aware that better governance leads to better business results and wealth creation. What they lack is experience or even a frame of reference for how to go about implementing governance arrangements.

It is easy to forget that even today the Chinese government controls nearly all the largest companies. "And that's not going to change anytime soon," says Thornton. "We could conceptualise the government as the majority shareholder in all these companies." The Communist party is not going to give this up, but it wants corporate governance within this reality.

At Netcom, fewer than half the board members are party appointees and Thornton helped give authority to nominate and approve CEO and CFO candidates back to the board. They also set up formal channels for appropriate involvement of stakeholders such as unions, and taking into account minority interests. "While it is still very much a work in progress, we are making headway on changing the perceptions of people - not only at the top, but throughout Netcom - so they understand that a well-functioning board can be a real asset."

The nominating committee of the board is now comprised of three party designates and two who are external. "The chairman of Netcom likes to say that he does not see a contradiction between party influence and the protection of minority interests because the goals of the two are the same - the success of Netcom as a business."

In the case of ICBC - China's largest commercial bank - "a board meeting can feel almost more like an internal operating meeting than a Western board of directors meeting", explains Thornton. The topics discussed, detail and honest interchange are "impressive". The atmosphere is informal and arguments are frank and full.

Thornton notes the trend toward a reluctance among Chinese companies to list in the US because of Sarbanes-Oxley, which brings a legal, statute-based approach to governance unlike the approach in Hong Kong and London, which implement the "spirit" rather than the letter of the rules.

Corporate governance in China depends on having people who can actually make these things happen, which in turn depends on internal company training, university education in China, and the way westerners operate there, not just trying to impose their own conceptual framework. "I'm very sympathetic to the Chinese desire to build a system that works for them, because I think we have to acknowledge from experience, especially over the last few years, that there is no one system that's perfect," says Thornton.

Review by Joe Gill

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