The supervisor is considering the feasibility of introducing institutional investors into the boards of listed companies, an endeavor to optimize the management structure of those companies, according to yesterday's Shanghai Securities News.

 

The unified guidelines are impending, based on the Shanghai and Shenzhen bourses' guidelines for their members to strengthen inner management.

 

Currently, the inner supervisory system of China's enterprise is comprised of the supervisory board, and independent board director, and internal censorship. They are in charge of examining, supervising and assessing the effect and efficiency of "the board, the managing group, and the employees in acting enterprise inner management."

 

However, the absence of effective supervisory mechanisms has led to defective central management. The Shanghai and Shenzhen bourses have already required their listed firms to engage certificated public accountants in an effort to evaluate their financial management.

 

"To bring institutional investors onto the board will generate more direct effect in improving management", said Ding Shengyuan, deputy principal of China Galaxy Securities Co Ltd's research center, "the pressure from public individual investors on the institutional investors will be transferred to listed companies once they are on those companies' boards."

 

Ding added that most mature European markets applied this approach, by which the institutional investors with integrated influence from individual investors counterbalanced the dominant shareholders.

 

"Institutional investors can play a role as independent board directors in terms of constraining certain board directors from trampling shareholders' interests." Ding suggested.

 

On the contrary, some insiders doubted the actual effect of allowing institutional investors access to listed companies board. The current circulating market value is no more than 40 percent of the total market value in China. As a result, institutional investors are rather limited in their influence.

 

Specifically in funds, Hu Lifeng, the chief analyst for China Galaxy Securities Co Ltd, pointed out that amongst securities investment funds, fund holders, fund management firms, and trusted banks, representing institutional investors, getting a seat on the board can be difficult.

 

Institutional investors are greenhorns in the business of managing companies, and they have to be careful of sinking into the trivialities involved in managing companies rather than sticking to their core business—investment, Hu warned.

 

(Chinadaily.com.cn November 7, 2007)