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With geopolitical tensions and slower economic dynamics, it is a difficult time to be a responsible company in mainland China. An amendment to the country’s legal order is unlikely to make things any easier this week.
China’s updated company law, effective Monday, expands the duties of boards of directors and “imposes additional obligations on directors, supervisors and executive officers,” according to a briefing by law firm Squire Patton Boggs. More broadly, it also affects capital contributions, shareholder rights and liquidations. The new law aims to further curb the conflicts of interest and misappropriation of capital that are sometimes associated with China’s rapidly evolving and expansive business environment.
But in an environment characterized by policy-making uncertainty, future directors, whose roles are often unpaid except for expenses in China, are thinking twice. “It’s always been a bit of a challenge to get people to agree to be officers or directors of Chinese companies, especially joint ventures,” said Daniel Roules, partner at Squire Patton Boggs in Shanghai. “We’re seeing more reluctance with the changes to the law.”
However, the amendments are a sign of Beijing’s desire to move towards “international practice”, adds Roules. They are part of a longer-term shift that returns to the emergence of the private sector from the ever-current communist model.
“Things have really changed,” says Stephane Grand, president of SJ Grand Financial and Tax Advisory and a member of the European Commission’s corporate governance program in Beijing for 20 years. “Contracts are much more reliable than they used to be [then].”
However, as the system continues to evolve, practices that may have previously been routine or overlooked become much greater vulnerabilities. One example emerged last week, when two employees left Adidas after an anonymous whistleblower investigation alleged senior staff in China were receiving kickbacks.
The amended law means that some small companies no longer need directors. But otherwise, it requires them to act in the best interests of the company, carefully controls capital contributions at incorporation, and makes them potentially liable for company losses if capital is illegally withdrawn by shareholders, according to Squire Patton Boggs. Lawyers say management should also take note. In China, the breadth of regulatory language can make it difficult to determine what has changed from previous legislation and how it will be implemented.
“You don’t know until six months to a year after the regulations go into effect how things are going to be implemented,” says Grand. State officials will be on the lookout for misapplication of the regulation, he adds, and may therefore enforce it strictly.
The risks of top-down pressures to achieve official targets are well known in China. In the 18th century, writer Pu Songling depicted a satirical world in which the emperor’s obsession with cricket runs down the ranks. Much to his dismay, the protagonist is appointed village chief, meaning it is his responsibility to collect the insects or risk punishment.
For today’s corporate directors, liability can also be something they want to avoid. The broader political environment in China, which includes an emphasis on fighting corruption during Xi Jinping’s third term, has contributed to a sense of caution in the private sector.
For any future foreign director, these problems are compounded by the mood in the US, where a Washington select committee closely monitors American business. Multinational companies, given the geopolitical pressures on supply chains, may now be more eager to launch internal investigations to preemptively prevent signs of wrongdoing emerging onshore. Their operations there will in many ways reflect the practices of a business culture that can often clash with conventions across the Pacific.
Despite these geopolitical tensions, China’s legislation is a striking reminder that there is still a shift towards international standards in certain areas. But in the particular case of directors, they also highlight an environment where the risks of liability are often seen as higher than the rewards.
“A lot of people who are currently financial supervisors of companies, [or] principals, trying to get out of work,” says Grand.
thomas.hale@ft.com