Why investors in China houses shouldn’t throw stones; Lack of accountability and transparency is growing in the west

Why investors in China houses shouldn’t throw stones

By Paul J Davies in Hong Kong

In dealing with China, companies and politicians have often overlooked its shortcomings in human and democratic rights and problems with corruption. Financiers and investors in Asia, in fact, even admire the way in which the dominant one-party regime “gets stuff done” in contrast to India’s chaotic democracy – it is one of the biggest arguments against a hard landing, or policy paralysis for the economy.

Two current corporate stories highlight how efficacy and control are valued more highly in China than accountability.

They involve very different companies that each dominates its sphere: Bloomberg, the US-based financial data and news service, and Alibaba, the Chinese e-commerce group.

At Bloomberg, publishers and executives made a call late last year not to run a major political story related to the Chinese leadership. A number of reporters and editors have since left the group. Then, last month, Bloomberg’s chairman, Peter Grauer, said the group “should have rethought” investigative articles about China because of the potential harm to its data operations in the country.

One former editor, Ben Richardson, who left Bloomberg recently, summed up the dangers last week in an interview with Atlantic. “Lack of transparency and accountability fuel rampant corruption, human rights abuses and environmental crimes,” he said. “As China goes global, those values and practices are in danger of gaining currency elsewhere.”

A lack of accountability and transparency, rather than corruption, has loomed large in the story of Alibaba’s multibillion-dollar listing due this year.

Ironically, it was a place that has never known democracy, Hong Kong, that turned down the e-commerce group’s attempt to list with an unusual management controlled board structure. Many in the city’s financial establishment saw Alibaba’s governance style as undermining the core principle of shareholder democracy – “one share, one vote” – that it sees as paramount in guarding the rights of investors.

Alibaba, however, is being welcomed with open arms in the US, which, in spite of the country’s claims to be the leading light of democratic freedom, has some deeply unaccountable corporate governance.

Alibaba investors in the US will get to vote intermittently for board candidates that have been pre-vetted by a vanguard of Alibaba’s management – the self-styled Partnership that runs the group. This kind of tightly controlled democracy is somewhat better than what China offers its own people, but it limits accountability.

Western investors may look proudly at their own democratic freedoms in politics, but when it comes to corporate control they should be less comfortable with what is happening at home. US investors are already prepared to forgive much on the accountability side in the hope of good returns.

Most commentary on this points to other technology companies with an entrepreneurial or radically inventive leader. The example par excellence is Google. Amazingly, it is about to add a third class of share to its existing A and B shares, which will let its founders retain control with ever less economic interest.

Dual class shares have existed in the US for years even as other markets have outlawed them, or turned down opportunities to introduce them.

But the US has even more radical examples of shareholders letting go of their democratic rights. The huge listed private equity companies, KKR and Blackstone, are both structured as a kind of trust that means investors – or unit holders – are unable to influence the managing partners or decisions about the businesses. These groups are vast conglomerates that employ hundreds of thousands of people and yet only a small handful of top managers will ever have the power to decide how these are run.

Lawyers say that managers at many more kinds of companies are examining whether or how they might be able to win such levels of control for themselves.

Investors big and small in the US and elsewhere should be careful. The fashion for tech companies having dual-class stock and the complete control of private equity-run conglomerates is taking more businesses away from shareholder control even as they own them.

China may look like the most unaccountable economy in the world, but the US has already given away more democratic rights for investors than many people realise, and other countries may find it hard to resist the example of the world’s biggest economies.