Despite the vestiges of communism, investor relations is practiced in China much like it is throughout the rest of the world. Roadshows, conference calls and electronic communication are all the norm, investors are keen to meet management face-to-face and, as most within the industry will appreciate, Chinese IROs are working hard to gain more respect in the boardroom.
‘I don’t think Chinese companies behave very differently compared to other countries’ companies. There’s not much difference in terms of what’s implemented, day in day out,’ says Jessica Cohen from Ogilvy & Mather China. She believes investors should be confident that the management approach in many Chinese companies is not that different to their counterparts in the West. ‘There’s a continual focus on shareholder value, and on ensuring all shareholders feel important,’ she says.
The advent of strategic partnerships between Chinese companies and companies from the West, increasing numbers of dual listings and support for more westernized business processes from the China Securities Regulatory Commission (CSRC) have all helped bring Chinese IR practices pretty much up to speed with practices in other parts of the world. In addition, China’s ongoing commitment to work with the International Accounting Standards Board (IASB) should give investors confidence in the financial statements of Chinese firms.
Brave new world
But it hasn’t always been this way. It’s only in the past ten years that China has had a modern equities market, and it’s important to remember that China is still communist. Working within the confines of this system means Chinese IROs have to cope with a host of idiosyncrasies IROs in other parts of the world do not. One of the biggest differences is the large size of many Chinese companies.
‘Some companies are huge in terms of geographical size and staff numbers, which can make investors concerned about how accurate figures really are,’ says Denise Maguire, managing director of Hill & Knowlton Hong Kong. ‘There are also concerns about improving efficiencies when there is a huge number of staff. IROs have to explain to investors how their company plans to tackle these problems,’ she says.
Another major difference is the state’s position as the largest shareholder in most companies in China. Recognizing the need for China to enter the world economy, the state has in the past ten years been more and more supportive of western business ways. Although Mao probably wouldn’t approve, the government has turned its back on using a system of production quotas as the only measure of business performance and now recognizes – indeed relies on – the profit-oriented performance measures that appeal to foreign investors. Much of this change has been driven by the CSRC.
‘The CSRC is doing a great job of fine-tuning the rules and the system but it’s still going to take time because, unlike other regulators, they don’t have years of history to draw on,’ says Paul Zimmerman, an 18-year veteran of Asian markets and a partner at the Investor Experience. Zimmerman believes much of the success the CSRC has already had can be attributed to having recruited some of the best people from the former Stock Exchange of Hong Kong and the Hong Kong Futures Exchange.
There is, however, still much work to be done, says Grant Zhang, who manages IR at Datang Power. ‘The CSRC has to make regulations to force companies to strengthen transparency and to educate companies and investors,’ he asserts.
Chinese business culture
The power of ‘guanxi’, loosely translated as business connections or business networks, is a unique characteristic of the Chinese business culture and investor relations officers can find it tricky to explain to investors. Unlike the capitalist system, which awards business on the basis of a tender process whereby a contract is given to the company whose proposal offers the best business case for the company, under the guanxi system business is awarded on the basis of established business relationships. This doesn’t necessarily sit easily with shareholders, who would rather see contracts awarded on the merits of what’s best for delivering growth and shareholder value.
‘[Guanxi is] still a strong part of the culture, but there’s a growing appreciation now of doing good by shareholders. Companies are also putting in place performance-based management systems which has made a difference to attitudes,’ says H&K’s Maguire.
There is almost a complete absence of a culture of mergers and acquisitions in China, which can impinge on the attractiveness of an investment, particularly for foreign shareholders. ‘There are very few takeovers at the moment, but that will change eventually,’ says Huang Wensheng, IR manager at petroleum conglomerate Sinopec.
The catalyst for change, argues Zimmerman, will be the maturing of the Chinese market. ‘If you look at large listed companies around the world, a lot of them are quite old, and there’s value in breaking them up. In China, companies are quite new,’ he points out, adding that with the state as the largest shareholder, hostile takeovers are pretty much impossible.
Soliciting support for a takeover is also hard given how difficult it is to conduct shareholder analysis in China. ‘You usually know the institutional investors, but there’s very little way of knowing private investors,’ says Zimmerman, who advises one way to work around this is to keep an eye on the way shares are sold during the initial listing.
Working with foreign investors
Working with foreign investors brings its own challenges for Chinese IROs. ‘In general, investors seem to buy the China growth story. With some economies not performing, China continues to do well,’ says Maguire. ‘The China story still needs explaining, although fund managers don’t need so much general education anymore – they want to know specifically what a company will do,’ she says.
Investors are becoming more discerning about which Chinese companies they invest in. A couple of years ago, investors were willing to throw money at anything Chinese. Now, they are asking questions about corporate governance such as the number of independent directors on the board, and are demanding comparative information about other companies in the same sector. Which is why, says Cohen, it’s important that activities like roadshows are conducted regularly.
‘Being able to meet management face-to-face builds trust,’ she says. But this can often be reasonably challenging given that an international roadshow might be the first time some members of the management team have been out of China.
Given China’s former reputation as a hotbed of corruption, Chinese companies have more of a challenge than, say, US or UK companies in attracting investment capital, so they need to do even more in terms of reaching out to investors. People are shy of emerging markets – shareholders have been burnt in the past investing in Chinese companies where they can’t meet with management face-to-face, and it takes courage to invest in an emerging market. To get over this, management needs to outline – and stick to – a well articulated business strategy. Being very accessible is also crucial.
The future
In the last decade, China has finally fulfilled Mao’s dream of a great leap forward – although not quite in the way he had originally intended. The next ten years should move China toward a western business model. For investors and investor relations officers, the real sign of a mature, liquid market will come when most Chinese companies are truly transparent and are run purely on economic principles.
The incidence of foreign investment in China will grow dramatically and may drive much of this change. The announcement in 2002 that qualified foreign investors (QFIs) can now access A shares in the Chinese markets (previously foreign investors could only access the relatively illiquid B shares) will play a huge role.
‘Smaller companies will also start coming to market,’ says Maguire, who believes that the Chinese government will start looking at privatizing sectors such as power generation.
The way in which the Chinese and Hong Kong markets will work together in the future will also help determine the future shape of China’s markets. ‘There is political pressure in Beijing to position Hong Kong as the financial market for China,’ says Zimmerman. ‘I think we’ll see a decision on that at some stage,’ he says.
The continuing development of China’s markets should also mean plenty of growth in its investor relations industry, with opportunities opening up for IROs keen on getting some experience in China. For IROs interested in working in China, Denise Maguire has some advice: ‘There are a lot of changes for companies to get used to – you can’t take [western] business processes for granted. People need time to adjust and what seems obvious in another market is not necessarily obvious in China’.
