Poor corporate governance, inferior quality of earnings, serious accounting issues, and low overall ratings are just a few of the charges leveled by a forensic research firm at several major New York Stock Exchange traded Chinese companies .
The study, conducted by RateFinancials, Inc., a New York-based research firm, also found that the 10 largest NYSE-listed Chinese companies are ultimately controlled by the People’s Republic of China (PRC), engage in related-party transactions, make strategic decisions without proper diligence and testing, and tolerate significant conflicts of interest.
“Investing in publicly traded Chinese companies at the end of the day is a crapshoot that requires blind and unfounded faith that the PRC will ultimately put the best interests of shareholders ahead of political and other considerations,” Victor Germack, founder and president of RateFinancials, said in a statement announcing the results.
Germack said the companies are “government-controlled enterprises masquerading as independent public companies,” leaving it virtually impossible to adequately assess their financial condition given their poor level of disclosures.
“Investing in publicly traded Chinese companies at the end of the day is a crapshoot.”
–Victor Germack, founder and president of RateFinancials
In May, two executives of Glass Lewis, a major U.S. proxy advisory firm, left the company over questionable corporate governance practices by its Chinese parent firm Xinhua Finance Media, which is listed on the Nasdaq stock exchange, citing the company’s conduct and background as specific reasons (see related stories on GL).
Meanwhile, Chinese companies listed on the NYSE are exempt from the Exchange’s standard corporate-governance requirements because of a loophole provision for corporations who are “foreign issuers,” or companies allowed to follow home country practices in lieu of key corporate practices that U.S. companies on the exchange are required to follow.
As a result, the “foreign issuers” practices differ in some major areas from those followed by U.S. companies trading on the NYSE. And when more than 50 percent of shareholder voting power lies within a single entity–the “Controlled Company Exclusion”–a company does not need to comply with certain NYSE listing requirements.
Germack said to protect its already superior reputation for governance and quality of its listed companies, the NYSE should close its “controlled company” loophole provision and urge foreign issuers to comply with higher corporate standards.