Corporate governance in China : a study on S-chips

In July 2012 alone, there were a total of nine S-Chip companies under investigation for suspected fraud. Thus, this report was commissioned to examine the increasing trend of S-Chips defaulting. Literature reviews were conducted to uncover situational factors that encourage fraud to take place. For fraud to occur, three conditions must be present in a Fraud Triangle: existence of pressure or incentive, opportunities for fraud to take place and attitude or rationalization of an individual in committing fraud. Other literature reviews were also conducted to determine the cultural factors in China that result in S-Chips’ prevalent poor corporate governance. It was discovered that the poor corporate governance culture was mainly due to: 1) The lack of enforcement by external (banks and government regulators) and internal (independent directors and the internal audit department) regulators; 2) Managerial mechanisms that lacked linkage between performance and compensation; 3) The concentrated ownership structure and 4) Inefficient stock markets. Subsequently, three in-depth case studies were examined to gain a better understanding of the common underlying problems that resulted in the S-Chips’ poor corporate governance. Pertaining to these problems uncovered, several key recommendations were outlined for internal and external regulators. For internal regulators, it is recommended that all S-Chips adhere to the Corporate Governance Code by ensuring that the recommended number of Independent Directors are present on the Board, using bank guarantees to provide disincentives for fraud and limiting the authority of legal representatives. For external regulators, it is recommended that ratings of corporate governance of S-chip companies be conducted and for government authorities to allow the entry of negative research firms in Singapore.BUSINES