Improving China’s Corporate Governance within the Big Data Era – Integration of Knowledge Management and Data Governance

Improving China’s Corporate Governance within the Big Data Era – Integration of
Knowledge Management and Data Governance
Peggy Mei Lan Ng1, Man Fung Lo, Ellesmere Choy2
1School of Professional Education & Executive Development, The Hong Kong Polytechnic
University, China
[e-mail], [e-mail]
2 The University of Newcastle, Australia
[e-mail]
Abstract: Several literature examined different ways in improving China’s corporate
governance such as floating on non-tradable shares, executive compensation, strengthening
independent board of directors and supervisory board; however, there is a lack of existing
research addressing the important role of knowledge management (KM) and data
governance in China’s corporate governance within the big data era. Knowledge
management and data governance have become a major factor for improving corporate
governance for international success. Therefore, this study is designed to develop a
conceptual framework integrating KM strategy and data governance in improving corporate
governance in China. We suggest that a KM-based approach to corporate governance
provides a valid perspective. Both KM governance and data governance are indicative in
improving corporate governance in China within the big data era. Devising appropriate KM
mechanism and data governance helps ensure efficient and sound decision making from
board of directors and stakeholders of organizations; minimizing falsification of accounting
information among stakeholders.
Keywords: corporate governance, knowledge management, data governance, big data,
China
1. Introduction
Since China began its economic reform in the late 1970s and the economic reform keep
going to today, the economic growth of China has been gradually increased over the past
two decades with substantial GDP growth rate (See Figure 1). The real GDP growth rate has
been shown to be an average rate of 9.5% since 2000. In addition, Chinese stock markets
have also been developing and growing rapidly. By 2003, China’s stock market has grown
to become “one of the largest in Asia with market capitalization close to US$500 billion” (Liu,
2006). By 2009, the volume of equity market capitalization totaled US$4000 billion, ranking
the third place in the world (Li, 2010). In order to develop a well-organized stock market in
China, using a comprehensive and structured corporate governance is necessary to help
reform China’s financial system (Liu et al., 2012; Jiang and Kim, 2014).
Figure 1: Economic Growth of China
Source: Thomson Reuters Datastream (2014)
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1.1 The Importance of Corporate Governance in China
It is evident that China is underperformed in the area of corporate governance.
According to Asian Corporate Governance Association (2014), China’s corporate
governance market score was 45 in 2014 and its performance was worse and
below to other Asian economies such as Hong Kong, Singapore and Japan. The
under-performance of China’s corporate governance is due to the key issues of
ownership structure, fraud of accounting information, functions of supervisory
board, independent board of directors and external corporate governance (Chen
et al., 2006; Lin, 2004; He, 2011; Yang, 2011).
Table 1: Corporate Governance Watch Market Score 2014
Source: Asian Corporate Governance Association (2014)
2. Key issues of Corporate Governance in China
There are key problems of corporate governance in China and it generally places them into
two groups which are internal and external corporate governance. Internal governance is
about owner structure and inappropriate arrangement of board of directors and supervisory
board (Gillan et al., 2011; Erkens et al., 2012; Thomas et al., 2013). Moreover, external
corporate governance mainly comprises the state regulatory system as well as external
governance controls including “bank monitoring, legal infrastructure, market competition,
takeover activities and public release and assessment of financial statements” (Yang et al.,
2011). In fact, firms are required to obey the compliance with penalties for violations. The
following section identifies the key issues in both internal and external corporate
governance mechanisms in China.
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2.1 Ownership Structure
One key problem in China’s corporate governance is the arrangement of ownership
structure in listed Chinese companies. The large share of state holding in the listed firms in
China leads to ineffectiveness of corporate governance (Lin, 2004). Chen (2006) and Yang
(2011) cited a survey of Fan et al. (2007) in her journal that a typical Chinese listed firm has
on average 30% of state-owned shares (central government, its ministries and by city,
regional and local government) and 30% ‘legal person’ or legal entities shares. According to
He (2011), the total listed state-owned enterprises (SOE) account for more than 80% in total
stock market in which the listed SOE includes telecommunications, energy, transportation,
equipment, finance and aerospace industries. James (2001) thus argues that 80% of the
stock market’s problems can be solved once the split share structure issue is settled.
In order to enhance the healthy and great development of capital markets, the reform of
China’s SOE is necessary in the areas of organizational form, enterprise restructure and
governance structure strengthening, such as integration of knowledge management
governance (Zyngier et al., 2006).
2.2 Lack of Independent Board of Directors
The outcome of the highly concentrated ownership leads to the lack of independent board of
directors. Though China company law specifies that selecting or removing directors can be
done in shareholders’ general meeting but the company law does not clearly state that who
is responsible for nominating directors (Lin, 2004; Dalton and Dalton, 2011; Knyazeva et al.,
2013). The current practice of China listed firms is that the appointment of directors does
not require a shareholders meeting in which the election of chairman would be appointed by
the higher authorities (He, 2011). Lin (2004) also cited a report from China Daily in 1999
reporting that most company officials were still nominated by government departments and
that survey also reported that degree of independence of all directors was about 3.1%. Such
weak independent board of directors do not function optimally so as to protect shareholders’
best interest and to obtain the best returns to every of the shareholders including minority
shareholders. Also, the non-standardized establishment of board of directors makes
implementation of executive remuneration and company legislations more difficult, which
create monitoring difficulties as well (Clarke, 2003; Fang et al., 2013).
2.3 Weak Supervisory Board
The weak supervisory board in listed firm in China is one of the key problems in China’s
corporate governance (Dahya et al., 2002). In fact, board of directors is parallel to the
supervisory board in corporate enterprises. Under Company Law, firms are expected to
establish the board of supervisors with the function of monitoring the board of directors and
reporting to the general shareholder meeting (Yang et al., 2011). The composition of the
supervisory board would be labor union, party and major shareholder representatives;
however, the monitoring role is very loose as mentioned by Dimopoculos and Wagner (2012)
in terms of the role over the board of directors and managers. Prevezer et al. (2014) argue
that the board of supervisors has difficulty in performing their supervisory duties; also, the
authority of the supervisory board and the board of directors are duplicated in many firms in
China, confusing the corresponding responsibilities of the two-tier board.
2.4 Falsification of Accounting Information
Though listed companies need to publish financial information, some listed companies would
over value the company assets, leading to falsification of accounting information (Otussanya
and Uadiale, 2014). Due to the Company Law requirement, publishing the accurate and
timely accounting information is mandatory. Unfortunately, the practices of listed companies
in China are running in the opposite way. Management tends not to disclose timely and
accurate accounting information; however, management tends to over value the company
assets, minimizing the loss or exaggerate the annual profit (Abid and Ahmed, 2014).
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